In re Cipro Cases (Cal. May 7, 2015).

In a class action case assessing the implications of antitrust law in a patent infringement and validity settlement agreement, the Supreme Court of California held that reverse payment settlements are not immune from antitrust scrutiny under state law. In re Cipro Cases I & II, No. S198616, 2015 WL 2125291 (Cal. May 7, 2015). The California Supreme Court held that parties that engage in these reverse payment settlements without legitimate justification illegally restrain trade under California law.

Bayer owns a patent on the active ingredient ciprofloxacin hydrochloride in the antibiotic Cipro®. It subsequently obtained approval from the U.S. Food and Drug Administration (FDA) to market the drug in the United States. In 1991, 12 years before the expiration of the patent, defendant Barr Laboratories applied to market a generic version of Cipro. In its abbreviated new drug application (ANDA), Barr made a Paragraph IV certification that Bayer’s patent is invalid or will not be infringed. In its certification, Barr contended that the patent was invalid double patent, was the product of inequitable conduct, and was obvious in light of prior art. Bayer responded with a patent infringement suit, and Barr counterclaimed for a declaratory judgment of patent invalidity.

In 1997, Bayer and Barr settled. As part of the settlement, Barr agreed to postpone marketing the generic version of Cipro until the patent expired and to a consent judgment affirming the patent’s validity. In return, Bayer agreed to pay significant sums to Barr and to supply Cipro for licensed resale six months before the patent expired. From 1997 to 2003, Bayer paid Barr $398.1 million. Bayer’s profits from Cipro exceed $1 billion.

The settlement sparked numerous state and federal antitrust suits. The plaintiffs here—buyers of the drug—alleged that the settlement violated the Cartwright Act, unfair competition law and common-law prohibition against monopolies. The California Court of Appeals affirmed the trial court’s grant of summary judgment in favor of Bayer. Since the settlement restrained Barr only within the “scope of the patent,” and the suit for its enforcement was not objectively baseless, the district court and Court of Appeals held the settlement lawful. This “scope of the patent” test presumes a patent’s validity unless it was procured by fraud. So long as an agreement does not extend the patentee’s monopoly beyond what the patent grants, the court concluded, the agreement survives antitrust scrutiny.

In reversing the lower courts’ holding, the California Supreme Court relied on the Supreme Court of the United States’ decision inFederal Trade Commission v. Actavis, Inc. In Actavis, the Supreme Court rejected the “scope of the patent” test under federal law. While a valid patent allows the patentee to exclude others, “an invalidated patent carries with it no such right.” Thus, a settlement which cuts short the resolution of a patent’s validity should not establish that patent’s legitimacy. The Supreme Court concluded in Actavis that, even if the terms of the reverse payment settlement falls within the patent’s potential exclusionary scope, the settlement is not immune from antitrust attack.

While Actavis is not dispositive on state law matters, “patent law is federal law.” The Supreme Court is the “final arbiter” of patent law matters and the extent to which antitrust law interpretations and patent law requirements co-exist. Accordingly, the California Supreme Court applied Actavis to similarly reject the “scope of the patent” test under state law. The court also extended principles of the Cartwright Act to the patent arena, explaining “purchasing freedom from the possibility of competition, whether done by a patentee or anyone else, is illegal.”

The court adopted the “quick look rule of reason analysis” to assess reverse payment settlements. To establish a prima facie case that a reverse payment patent settlement is anti-competitive under California law, a plaintiff must show four elements: (1) The settlement includes a limit on the settling generic challenger’s entry into the market; (2) the settlement includes cash or equivalent financial consideration flowing from the brand to the generic challenger; and the consideration exceeds (3) the value of goods and services otherthan any delay in market entry provided by the generic challenger to the brand, as well as (4) the brand’s expected remaining litigation costs absent settlement. The burden then shifts to the defendant to offer legitimate justifications that the settlement is pro-competitive. If the plaintiff can dispel each justification, then the settlement is “condemned by the Cartwright Act” and is “an unlawful restraint of trade.”