The California Supreme Court issued a decision today in the Cipro antitrust cases, concluding that the analysis set forth by the U.S. Supreme Court in FTC v. Actavis applies to alleged “pay-for-delay” pharmaceutical patent settlements brought under the state's antitrust act, the Cartwright Act. This is the first decision by a state supreme court addressing the application of Actavis to state antitrust claims, and may influence how future courts approach the issue.

In these cases, plaintiffs, purchasers of Cipro, had challenged the settlement of patent infringement litigations brought by Bayer Corporation against generic manufacturers of Cipro, an antibiotic medication, claiming that Bayer paid generic manufacturers $400 million to delay entry of their own version of the popular drug. Bayer, which settled with plaintiffs shortly after the Actavis decision came down, has been dismissed from the case.

The court rejected the view that Actavis, which involved prosecution under the Federal Trade Commission Act, was distinguishable on that ground. Rather, the court concluded that Actavis was the final word on the "metes and bounds of patent law and policy." Thus, California state courts are bound by the U.S. Supreme Court's conclusions on "the extent to which interpretations of antitrust law—whether state or federal—must accommodate patent law's requirements." In so holding, the California court also found that the relative strength or weakness of the underlying patent is also not a ground for distinguishing this case from Actavis because the Supreme Court's analysis was not contingent on a particular level of uncertainty around validity of a patent but rather recognized that any patent might be invalid.

Following the U.S. Supreme Court’s ruling in Actavis, the California Supreme Court concluded that the rule of reason analysis applies to alleged “reverse payment” settlements in the pharmaceutical context. In constructing the rule of reason analysis to apply under the Cartwright Act, the court emphasized that a one-size-fits-all approach was not appropriate. Rather, the particular context must be considered. The court held that the procompetitive and anticompetitive effects of a settlement must be measured against the expected life of the patent, not the entire remaining list of the patent. In other words, "if an agreement only replicates the likely average result of litigation, any exclusion is a function of the underlying patent strength; if it extends beyond that point, this further exclusion from the marketplace—and the attendant anticompetitive effect—is attributable to the agreement."

In sum, the court held that a plaintiff challenging a reverse payment must show four elements to make out a prima facie case: "(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 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." While the burden of proving these four elements rests on plaintiffs, the court explained that defendants have the burden of producing evidence pertaining to the third and fourth elements (i.e., their litigation costs and the value of any other products and services included in the settlement) because defendants are better positioned to have access to that information.

If plaintiffs are able to satisfy all four criteria, the court explained that the burden then shifts to defendants to prove that the settlement was procompetitive.

Finally, if defendants are able to demonstrate that the settlement has procompetitive benefits, the burden once again shifts to plaintiffs to demonstrate that the settlement is, on balance, anticompetitive. According to the court, plaintiffs can meet this burden by showing that the procompetitive justifications are “unsupportable.”

This decision has the potential to make California state courts the hotbed of future litigation in this area. Moreover, litigants in other states can be expected to rely on the analysis of the Cipro opinion to extent Actavis to their own state antitrust laws.

Attorneys in Ballard Spahr’s Antitrust Group will continue to monitor developments in these cases. If you have any questions, please contact Leslie E. John at 215.864.8212 or john@ballardspahr.com, Stephen J. Kastenberg at 215.864.8122 or kastenberg@ballardspahr.com, or Jessica M. Anthony at 215.864.8340 or anthonyj@ballardspahr.com.


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