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From Antitrust Law Daily, May 7, 2015

Pay-for-delay agreements subject to Cartwright Act scrutiny

By Jody Coultas, J.D.

The California Supreme Court held that, like federal antitrust law, settlements between drug manufacturers are not immune from antitrust scrutiny, even if they limit competition no more than a valid patent would have. This was the first time the court had ruled on how to apply the Cartwright Act to reverse payment settlement agreements (In re Cipro Cases I & II, May 7, 2015, Werdegar, K.).

Bayer AG and Bayer Corporation market the antibiotic Cipro, one of the most-prescribed and best-selling drugs in the world, and held U.S. Patent No. 4,670,444 (the ‘444 patent) on the active ingredient in Cipro until it expired in December 2003.

After generic drug manufacturer Barr Laboratories, Inc. filed an application to market a generic version of Cipro and alleged that the ‘444 patent was invalid and unenforceable, the parties entered into a settlement agreement under which Bayer would pay Barr to delay marketing its generic Cipro. The agreement, generally referred to as a reverse payment settlement, resulted in nine coordinated class action suits brought by indirect purchasers of Cipro in California against Bayer and Barr alleging the agreement violated the California Cartwright Act, California Unfair Competition Law, and common law prohibition against monopolies.

After the Federal Circuit found in favor of Bayer and Barr on federal antitrust claims, a trial court granted Bayer and Barr summary judgment of the state lawsuit. An appellate court affirmed, holding that agreements restraining competition within the scope of a patent are lawful unless the patent was procured by fraud or the suit to enforce it was objectively baseless. The California Supreme Court granted review to determine what limits, if any, does antitrust law place on the ability of a patent holder to make agreements restricting competition during the life of its patent. Bayer was dismissed pursuant to an approved settlement.

At issue here was the intersection of federal patent law and the laws concerning drug applications with state and federal antitrust laws. The court noted that the Hatch-Waxman Act created an incentive for brand-name drug manufacturers and first-filing generic manufactures to effectively establish a cartel through a reverse payment settlement. The Cartwright Act generally prohibits any combinations or agreements which restrain trade or competition or which fix or control prices. Additionally, the Cartwright Act prohibits any contract by which two or more entities “[a]gree to pool, combine or directly or indirectly unite any interests that they may have connected with the sale . . . of any such article or commodity, that its price might in any manner be affected.” Contrary to antitrust law, patent law grants a monopoly and the right to exclude competition in the manufacture, use, or sale of the patent’s subject to patent holders.

Under antitrust laws, businesses may not engage in a horizontal allocation of markets, or pay its only potential competitor not to compete in return for a share of the profits that firm can obtain by being a monopolist. Antitrust law also condemns a patentee’s payment of a potential competitor to stay out of the market, even where the patent is valid.

The court rejected the scope of the patent test used by the appellate court. Based on the scope of the patent test, the appellate court held “a settlement of a lawsuit to enforce a patent does not violate the Cartwright Act if the settlement restrains competition only within the scope of the patent, unless the patent was procured by fraud or the suit for its enforcement was objectively baseless.” After the appellate court’s ruling, the Supreme Court in FTC v. Actavis, 570 U.S. ___ (2013) reversed a decision holding Hatch-Waxman reverse payment settlement agreements immune from antitrust attack so long as the anticompetitive effects fell within the scope of the patent. The Court rejected the scope of the patent test’s presumption that the holder of a challenged patent enjoys all rights associated with ownership of a valid patent. Reverse payment agreements must be evaluated as any other challenged agreement would, according to the holding in Actavis. Although not dispositive, the court held that Actavis correctly held that the scope of the patent test is flawed because it assumes away whatever level of uncertainty a given patent may be subject to.

An agreement to exchange consideration for elimination of any portion of the period of competition that would have been expected had a patent been litigated is a violation of the Cartwright Act, according to the court. In evaluating reverse payment settlements, the court must determine the average level of competition that would have been obtained absent settlement, i.e., if the parties had litigated validity/invalidity and infringement/noninfringement to a judicial determination. Under Actavis, the period of exclusion attributable to a patent is not its full life, but its expected life had enforcement been sought. This expected life represents the baseline against which the competitive effects of any agreement must be measured.

A third-party plaintiff challenging a reverse payment patent settlement must show: (1) the settlement included a limit on the settling generic challenger’s entry into the market; (2) the settlement included cash or equivalent financial consideration flowing from the brand to the generic challenger; and the consideration exceeded (3) the value of goods and services other than 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 of proof rests with the Cartwright Act plaintiff, then shifts to the defendants to offer legitimate justifications and evidence that the challenged settlement is procompetitive. A showing of the above elements is not only necessary but also sufficient to make out a prima facie case that the settlement is anticompetitive.

Because the trial court and appellate court used the entire period until the expiration of the ‘444 patent as the relevant benchmark in assessing whether the settlement agreement had anticompetitive effects, the rulings were reversed by the court. The rule of reason applied by the lower courts was contrary to the rule articulate above. Rather, the courts simply concluded that because the agreement did not exclude competition beyond what the ‘444 patent would have permitted (assuming it were valid), the agreement necessarily had no anticompetitive effect and was not unlawful under the rule of reason. Judgment against the plaintiffs on the unfair competition and common law monopoly claims was based on the same reasoning, and was thus reversed as well.

The court dismissed Barr’s contention that its ruling was preempted, stating that the rule adopted was in harmony with Actavis, which offered only broad outlines and explicitly left to other courts the task of developing a framework for analyzing the anticompetitive effects of reverse payment patent settlements. The federal rule that patents are presumed valid does not insulate settlements of patent disputes from federal or state antitrust scrutiny.

The case is No. S198616.

Attorneys: Joseph Richard Saveri (Joseph Saveri Law Firm) for Kayrn McGaughey, Barbara Hymes Cohen, Deborah Patane, Donna Moore, IUOE Stationary Engineers Local 39 Health & Welfare Plan, and Sheet Metal Workers Health Plan of Southern California. Charles Bird (McKenna Long & Aldridge, LLP) for Bayer Corp., Hoechst Marion Roussel, Inc., The Rugby Group, Inc., Barr Laboratories, Inc., and Watson Pharmaceuticals, Inc.

Companies: Bayer AG; Bayer Corporation; Barr Laboratories, Inc.

MainStory: TopStory Antitrust CaliforniaNews

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