IN RE CIPRO CASES I & II. [Nine Coordinated Cases*]
No. S198616
Supreme Court of California
May 7, 2015
116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135
WERDEGAR, J.
*McGaughey v. Bayer Corp. (Super. Ct. San Diego County, No. GIC752290); Relies v. Bayer Corp. (Super. Ct. L.A. County, No. BC239083); Samole v. Bayer AG (Super. Ct. S.F. City and County, No. 316349); Garber v. Bayer AG (Super. Ct. S.F. City and County, No. 316518); Lee v. Bayer AG (Super. Ct. S.F. City and County, No. 316670); Patane v. Bayer AG (Super. Ct. S.F. City and County, No. 318457); Moore v. Bayer Corp. (Super. Ct. Sonoma County, No. SCZ228356); Moore v. Bayer Corp. (Super. Ct. Sonoma County, No. 228384); Senior Action Network v. Bayer AG (Super. Ct. S.F. City and County, No. 400750).
Lieff, Cabraser, Heimann & Bernstein, Eric B. Fastiff, Brendan Glackin, Jordan Elias, Dean M. Harvey; Joseph Saveri Law Firm, Joseph R. Saveri, Lisa J. Leebove; Krause, Kalfayan, Benink & Slavens, Ralph B. Kalfayan; Zwerling, Schachter & Zwerling, Dan Drachler; Durie Tangri and Mark A. Lemley for Plaintiffs and Appellants.
The Kralowec Law Group and Kimberly A. Kralowec for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiffs and Appellants.
Michael A. Carrier; Zelle Hofmann Voelbel & Mason and Judith A. Zahid for 49 Professors as Amici Curiae on behalf of Plaintiffs and Appellants.
Mark A. Lemley for 78 Intellectual Property Law, Antitrust Law, Economics and Business Professors as Amici Curiae on behalf of Plaintiffs and Appellants.
Richard M. Brunell; Zelle Hofmann Voelbel & Mason and Judith A. Zahid for American Antitrust Institute as Amicus Curiae on behalf of Plaintiffs and Appellants.
Edleson & Rezzo, Joann F. Rezzo; Karcher Harmes, Kathryn E. Karcher; Stinson Morrison Hecker, Stinson Leonard Street, David E. Everson, Heather S. Woodson and Victoria L. Smith for Defendants and Respondents Hoechst Marion Roussel, Inc., The Rugby Group, Inc., and Watson Pharmaceuticals, Inc.
Luce, Forward, Hamilton & Scripps, McKenna Long & Aldridge, Charles A. Bird, Christopher J. Healey, Todd R. Kinnear; Jones Day, Kevin D. McDonald; Bartlit Beck Herman Palenchar & Schott and Peter B. Bensinger, Jr., for Defendant and Respondent Bayer Corporation.
Kirkland & Ellis, Jay P. Lefkowitz, Edwin John U, Karen N. Walker and Gregory L. Skidmore for Defendant and Respondent Barr Laboratories, Inc.
Richard A. Samp, Cory L. Andrews; Law Offices of Mark E. Foster and Mark E. Foster for Washington Legal Foundation as Amicus Curiae on behalf of Defendants and Respondents.
Munger, Tolles & Olson, Jeffrey I. Weinberger, Adam R. Lawton, Guha Krishnamurthi, Rohit K. Singla and Michelle T. Friedland for The Chamber of Commerce of the United States of America as Amicus Curiae on behalf of Defendants and Respondents.
Stevens & Lee, Joseph Wolfson; Duane Morris and Paul J. Killion for Generic Pharmaceutical Association as Amicus Curiae on behalf of Defendants and Respondents.
Kamala D. Harris, Attorney General, Edward C. DuMont, State Solicitor General, Kathleen E. Foote, Assistant Attorney General, Janill L. Richards, Deputy State Solicitor General, and Cheryl L. Johnson, Deputy Attorney General, for California Attorney General, as Amicus Curiae.
OPINION
WERDEGAR, J.—To protect competition in the marketplace, antitrust law prohibits agreements that create or perpetuate monopolies. Patent law, in
The answer to this is of special moment to the pharmaceutical industry, which has seen a raft of suits in which generic drug manufacturers (generics), seeking to introduce lower priced alternatives to patented brand-name drugs, raise patent invalidity as a defense to claims of infringement. With increasing frequency these cases have settled, with the plaintiff brand-name drug manufacturer (brand) making a “reverse payment” to the defendant generic in exchange for the generic dropping its patent challenge and consenting to stay out of the market. This case involves just such a settlement agreement.
Under federal antitrust law, these settlements are not immune from scrutiny, even if they limit competition no more than a valid patent would have. (FTC v. Actavis, Inc. (2013) 570 U.S. ___ [186 L.Ed.2d 343, 356, 133 S.Ct. 2223, 2230] (Actavis).) We conclude the same is true under state antitrust law. Some patents are valid; some are not. Sometimes competition would infringe; sometimes it would not. Parties illegally restrain trade when they privately agree to substitute consensual monopoly in place of potential competition that would have followed a finding of invalidity or noninfringement. The Court of Appeal ruled to the contrary; we reverse.
FACTUAL AND PROCEDURAL BACKGROUND
Bayer AG and Bayer Corporation (collectively Bayer) market Cipro, an antibiotic that has been among the most prescribed and best-selling drugs in the world. (Arkansas Carpenters Health & Welfare Fund v. Bayer AG (2d Cir. 2010) 604 F.3d 98, 100; In re Ciprofloxacin Hydrochloride Antitrust Litigation (E.D.N.Y. 2003) 261 F.Supp.2d 188, 194; In re Ciprofloxacin Hydrochloride Antitrust Litigation (E.D.N.Y. 2001) 166 F.Supp.2d 740, 743.) In 1987, Bayer was issued a United States patent on the active ingredient in Cipro, ciprofloxacin hydrochloride, a patent that expired in December 2003. (U.S. Patent No. 4,670,444, col. 22, ll. 32-34, claim 12 (the ‘444 patent); see In re Ciprofloxacin Hydrochloride Antitrust Litigation (Fed. Cir. 2008) 544 F.3d 1323, 1327-1328.) A subsidiary and licensee of Bayer obtained Food and Drug Administration (FDA) approval to market Cipro in the United States. (In re Ciprofloxacin Hydrochloride Antitrust Litigation, supra, 544 F.3d at p. 1328; In re Ciprofloxacin Hydrochloride Antitrust Litigation, supra,
At one time, pioneer drugs like Cipro and the generic drugs that followed them were governed by the same FDA approval process.1 Subjecting generic drugs to the same “cumbersome drug approval process [as pioneer drugs] delayed the entry of relatively inexpensive generic drugs into the market place,” at substantial cost to consumers and the government. (Mylan Pharmaceuticals, Inc. v. Shalala (D.D.C. 2000) 81 F.Supp.2d 30, 32; see H.R.Rep. No. 98-857, 2d Sess., pt. 1, p. 17 (1984), reprinted in 1984 U.S. Code Cong. & Admin. News, p. 2650.) To expedite the availability of low-cost generic drugs, Congress authorized an abbreviated approval process for drugs whose active ingredients had already been proven safe and effective in earlier clinical trials. (Drug Price Competition and Patent Term Restoration Act of 1984, Pub.L. No. 98-417, tit. I, §§ 101-106 (Sept. 24, 1984) 98 Stat. 1585, 1585-1597, codified as amended at
Under the Hatch-Waxman Act, a prospective generic drug manufacturer may file a streamlined application asserting the generic drug‘s bioequivalence with an existing pioneer drug, thus piggybacking on the safety and efficacy data already submitted to the FDA in connection with its approval of the original drug. (
In 1991, twelve years before the scheduled expiration of the ‘444 patent, defendant Barr Laboratories, Inc., filed an application to market a generic version of Cipro. (In re Ciprofloxacin Hydrochloride Antitrust Litigation, supra, 544 F.3d at p. 1328.) Barr‘s application included a paragraph IV certification that the ‘444 patent was invalid and unenforceable. (Arkansas Carpenters Health & Welfare Fund v. Bayer AG, supra, 604 F.3d at pp. 101-102; see
In early 1997, Bayer and Barr settled. Under the terms of the settlement, Barr agreed to postpone marketing a generic version of Cipro until the ‘444 patent expired. It also agreed to a consent judgment affirming the patent‘s validity and to modification of the certification in its FDA application from a paragraph IV certification, alleging invalidity, to a “paragraph III” certification, seeking to market a generic drug upon patent expiration. (Arkansas Carpenters Health & Welfare Fund v. Bayer AG, supra, 604 F.3d at p. 102; see
The 1997 settlement between Bayer and Barr produced a wave of state and federal antitrust suits. (Arkansas Carpenters Health & Welfare Fund v. Bayer AG, supra, 604 F.3d at p. 102.) This case arises from nine such coordinated class action suits brought by indirect purchasers of Cipro in California against Bayer and Barr. (See In re Cipro Cases I & II (2004) 121 Cal.App.4th 402, fn. *, 406-407 [17 Cal.Rptr.3d 1].) The operative complaint in these coordinated proceedings alleges the Bayer-Barr reverse payment settlement violated the Cartwright Act (
Following a Federal Circuit ruling in favor of Bayer and Barr on federal antitrust claims (In re Ciprofloxacin Hydrochloride Antitrust Litigation, supra, 544 F.3d 1323),3 the trial court granted a defense summary judgment. It found decisional law under the federal Sherman Act (
We granted review to resolve important unsettled issues of state antitrust law. While the case was pending before this court, we entered an order formalizing Bayer‘s dismissal from the proceedings pursuant to an approved settlement. Barr remains as respondent.
I. Reverse Payment Settlements Under the Hatch-Waxman Act
The Hatch-Waxman Act illustrates the law of unintended consequences. Congress wrote into the act a substantial incentive for generics to enter markets earlier by offering a 180-day exclusivity period to the first generic filer, and only that filer, to challenge a patent. (
This solution may well have encouraged more generics to file patent challenges, but not without creating a series of new problems. In other settings, a patentee might have little incentive to buy off a challenger in order to preserve its monopoly and continue reaping monopoly profits, for the simple reason that paying off the first challenger would simply encourage another challenger, and then another, and then another. (See Actavis, supra, 570 U.S. at pp. ___ [186 L.Ed.2d at pp. 361-362, 133 S.Ct. at p. 2235].) Two features of the Hatch-Waxman Act change this dynamic. First, the 180-day exclusivity period created a bottleneck; no one else could receive FDA approval until after its expiration. (
This legal regime means that, regardless of the degree of likely validity of a patent, the brand and first-filing generic have an incentive to effectively establish a cartel through a reverse payment settlement. (12 Areeda & Hovenkamp, Antitrust Law, supra, ¶ 2046, pp. 341-345; Hovenkamp, Anticompetitive Patent Settlements and the Supreme Court‘s Actavis Decision (2014) 15 Minn. J. L. Sci. & Tech. 3, 8-13; see Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, supra, 108 Mich. L.Rev. at p. 73 [under Hatch-Waxman, “[g]enerics have powerful incentives to file the first patent challenge but little incentive to pursue the litigation“].) Rather than expend litigation costs on either side, the brand and generic can reach a settlement that reflects the likely validity or invalidity of the patent (stronger patent, smaller settlement; weaker patent, bigger settlement), grants the generic a share of monopoly profits, and leaves the brand the sole manufacturer of the product. (Hovenkamp, Anticompetitive Patent Settlements and the Supreme Court‘s Actavis Decision, at pp. 12-13.)
It is likely for this reason that reverse payment settlements, practically unheard of before the Hatch-Waxman Act, have proliferated in the years since its enactment. (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2235]; Hovenkamp, Anticompetitive Patent Settlements and the Supreme Court‘s Actavis Decision, supra, 15 Minn. J. L. Sci. & Tech. at pp. 13-16; Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra, 109 Colum. L.Rev. at pp. 647-656.) This is probably not what Congress intended. (Actavis, at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2235] [the Hatch-Waxman Act‘s provisions have “no doubt unintentionally . . . created special incentives for collusion“]); 570 U.S. at p. ___ [186 L.Ed.2d at p. 360, 133 S.Ct. at p. 2234] [quoting remarks of Sen. Hatch and Rep. Waxman decrying as an unintended consequence of their legislation collusive agreements to delay competition].) The issue for us is what, if anything, state antitrust law has to say about these problems.
A. The Cartwright Act
The Legislature enacted the state‘s principal antitrust law, the Cartwright Act, to rein in the burgeoning power of monopolies and cartels. (Clayworth v. Pfizer, Inc. (2010) 49 Cal.4th 758, 772 [111 Cal.Rptr.3d 666, 233 P.3d 1066].) The act‘s principal goal is the preservation of consumer welfare. (Cianci v. Superior Court (1985) 40 Cal.3d 903, 918 [221 Cal.Rptr. 575, 710 P.2d 375]; Marin County Bd. of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 935 [130 Cal.Rptr. 1, 549 P.2d 833].) The act, like antitrust law in general, “rest[s] ‘on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.‘” (Marin County Bd., at p. 935; see National Soc. of Professional Engineers v. U. S. (1978) 435 U.S. 679, 695 [55 L.Ed.2d 637, 98 S.Ct. 1355].) At its heart is a prohibition against agreements that prevent the growth of healthy, competitive markets for goods and services and the establishment of prices through market forces. (See Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 44 [172 P.2d 867].) “The act ‘generally outlaws any combinations or agreements which restrain trade or competition or which fix or control prices’ [citation], and declares that, with certain exceptions, ‘every trust is unlawful, against public policy and void . . . .‘” (Pacific Gas & Electric Co. v. County of Stanislaus (1997) 16 Cal.4th 1143, 1147 [69 Cal.Rptr.2d 329, 947 P.2d 291].)
The “trust[s]” the act prohibits include any “combination . . . by two or more persons” to “create or carry out restrictions in trade or commerce” (
Though the Cartwright Act is written in absolute terms, in practice not every agreement within the four corners of its prohibitions has been deemed illegal. (Morrison v. Viacom, Inc. (1998) 66 Cal.App.4th 534, 540 [78 Cal.Rptr.2d 133].)
B. Patent Law
That difficulty is all the greater because antitrust law does not exist in a vacuum. The patent laws “are in pari materia with the antitrust laws and modify them pro tanto [(to that extent)].” (Simpson v. Union Oil Co. (1964) 377 U.S. 13, 24 [12 L.Ed.2d 98, 84 S.Ct. 1051].) To promote investment in invention and the public disclosure of new discoveries, Congress has seen fit to grant inventors limited statutory monopolies and the right to exclude competition in the manufacture, use, or sale of the patent‘s subject. (
At the extremes, this is easy. If a patent were known to be invalid, a private agreement nevertheless giving it effect would be plainly illegal. (See
III. The Scope of the Patent Test
A. The Court of Appeal and the Scope of the Patent Approach
The particular accommodation this case calls for arises from an issue of virtual first impression under the Cartwright Act: how to apply the statutory bar against restraints of trade to patent settlement agreements that limit competition, but no more broadly than an injunction enforcing the patent would have, had one been obtained. (Cf. In re Cardizem CD Antitrust Litigation (6th Cir. 2003) 332 F.3d 896, 904, fn. 8, 906-909 [deciding the issue under both federal law and the Cartwright Act, but without independently analyzing state law].) Rejecting plaintiffs’ argument that agreements of this sort should be deemed uniformly illegal, the Court of Appeal resolved the issue by adopting one of several competing approaches courts had developed
The federal cases the Court of Appeal followed identify three core rationales for concluding a patent litigation settlement restricting competition no more than a valid patent would is generally lawful. First, patents are presumed valid. (
Second, the fundamental purpose of patent law is to promote innovation and the disclosure of inventions so that ultimately new discoveries may benefit the public at large. (Bonito Boats, Inc., supra, 489 U.S. at pp. 150-151.) To subject exclusions within the scope of a patent to scrutiny and potential liability would, lower courts feared, chill innovation and give inventors pause in deciding whether to share their creations with the public. (See In re Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at p. 203; Schering-Plough Corp. v. FTC, supra, 402 F.3d at p. 1075; Valley Drug Co. v. Geneva Pharmaceuticals, supra, 344 F.3d at p. 1308.)
Third, there is a general policy in favor of settlement, perhaps more so in patent litigation. (In re Ciprofloxacin Hydrochloride Antitrust Litigation, supra, 544 F.3d at p. 1333; In re Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at p. 202; Schering-Plough Corp. v. FTC, supra, 402 F.3d at pp. 1072-1073.) Patent litigation settlements “may benefit the public by introducing a new rival into the market, facilitating competitive production,
B. Federal Trade Commission v. Actavis
The Court of Appeal‘s adoption of the scope of the patent test was the product not of an analysis of the Cartwright Act‘s text, policy, or history, but of an assessment of procedural and policy-based aspects of patent law. The soundness of its choice of test thus depends on the extent to which that patent law assessment was sound. In Actavis, supra, 570 U.S. 136 [186 L.Ed.2d 343, 133 S.Ct. 2223], issued after the Court of Appeal‘s decision and after our grant of review, the Supreme Court reversed a federal decision holding Hatch-Waxman reverse payment settlement agreements “‘immune from antitrust attack so long as [their] anticompetitive effects fall within the scope of the exclusionary potential of the patent.‘” (570 U.S. at p. 146 [186 L.Ed.2d at p. 353, 133 S.Ct. at p. 2227].) In the course of its opinion, the Supreme Court dismantled the underpinning of each of the cases the Court of Appeal had found persuasive.
First, the Supreme Court rejected the scope of the patent test‘s foundational presumption that the holder of a challenged patent enjoys all the rights attendant to ownership of a valid patent: “to refer . . . simply to what the holder of a valid patent could do does not by itself answer the antitrust question. The patent here may or may not be valid, and may or may not be infringed.” (Actavis, supra, 570 U.S. at pp. 151-152 [186 L.Ed.2d at p. 356, 133 S.Ct. at pp. 2230-2231].) To be sure, a valid patent allows the patentee to exclude others from the market, “[b]ut an invalidated patent carries with it no such right.” (Id. at p. 151 [186 L.Ed.2d at p. 356, 133 S.Ct. at p. 2231].) Patent litigation “put[s] the patent‘s validity at issue, as well as its actual preclusive scope“; simply because a settlement curtails testing and ultimate resolution of that issue, courts should not thereafter treat patent law and its presumptions as conclusively establishing the challenged patent‘s legitimate scope. (Id. at p. 152 [186 L.Ed.2d at p. 357, 133 S.Ct. at p. 2231].)
Second, the core policies underlying patent law are more nuanced than the cases applying a scope of the patent test had recognized, and the incentives to innovate far sturdier than those courts had feared. Patents carry with them a frequent cost—monopoly premiums the public must bear. (See Lear, Inc. v. Adkins (1969) 395 U.S. 653, 670 [23 L.Ed.2d 610, 89 S.Ct. 1902].) The willingness to pay that cost depends upon a quid pro quo: “[T]he public
Third, the Supreme Court explained that while the policy favoring settlement of patent litigation offers some support for limiting scrutiny of agreements restraining competition only within the scope of a patent, it ultimately is not dispositive. (Actavis, supra, 570 U.S. at pp. 154, 158 [186 L.Ed.2d at pp. 360, 364, 133 S.Ct. at pp. 2234, 2238].) Settlements are generally a positive good, but not always; settlements of the sort challenged in Actavis, the court observed, can amount to “payment in return for staying out of the market” and permit monopoly premiums still to be charged and simply divided up between the patent holder and patent challenger; “[t]he patentee and the challenger gain; the consumer loses.” (Id. at p. 154 [186 L.Ed.2d at p. 361, 133 S.Ct. at pp. 2234, 2235].) Such anticompetitive effects will not always be justified, and an antitrust action to test a settlement‘s legality may be warranted and feasible. (Id. at pp. 155-159 [186 L.Ed.2d at pp. 361-364, 133 S.Ct. at pp. 2235-2237].) Fears of chilling even legitimate settlements are overstated; all that allowing antitrust scrutiny does is remove the incentive to settle as a way to split monopoly profits. (Id. at p. 158 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2237].) Because the scope of the patent test overvalues the policies underlying patent law at the expense of the equally relevant policies underlying antitrust law, the court concluded, it cannot stand under federal law. (Id. at p. 152 [186 L.Ed.2d at p. 357, 133 S.Ct. at p. 2231].)
Barr contends Actavis is distinguishable because it involved a public prosecution under the
We agree Actavis is not dispositive on matters of state law. Indeed, even if Actavis had been a private Sherman Act case, its conclusions would not dictate how the Cartwright Act must be read. “Interpretations of federal antitrust law are at most instructive, not conclusive, when construing the Cartwright Act, given that the Cartwright Act was modeled not on federal antitrust statutes but instead on statutes enacted by California‘s sister states around the turn of the 20th century.” (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1195 [151 Cal.Rptr.3d 827, 292 P.3d 871]; see State of California ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1164 [252 Cal.Rptr. 221, 762 P.2d 385].) That said, nothing in the United States Supreme Court‘s discussion of the legal rules at the boundary between antitrust and patent law hinged on the happenstance that the case under review involved a public prosecutor. Accordingly, that circumstance neither adds to nor detracts from the persuasive force the discussion would otherwise have.
What does affect the weight to be accorded Actavis is the extent to which its analysis establishes the metes and bounds of patent law and policy. Patent law is federal law. (
Barr asserts Actavis is alternatively distinguishable on the ground the underlying patent there was far weaker than the underlying patent here.8 But
The uncertainty concerning a patent‘s validity is a by-product of the realities surrounding patent issuance and the legal regime Congress and the courts have established for patent enforcement. In the first instance, a patent “simply represents a legal conclusion reached by the Patent Office. Moreover, the legal conclusion is predicated on factors as to which reasonable men can differ widely. Yet the Patent Office is often obliged to reach its decision in an ex parte proceeding, without the aid of the arguments which could be advanced by parties interested in proving patent invalidity.” (Lear, Inc. v. Adkins, supra, 395 U.S. at p. 670.) That decision is constrained by time and resource pressures; facing an enormous backlog, patent examiners may average less than 20 hours spent on each application. (Ford, Patent Invalidity Versus Noninfringement, supra, 99 Cornell L.Rev. at pp. 87-89; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ. Persp. at p. 79; Lemley, Rational Ignorance at the Patent Office (2001) 95 Nw.U. L.Rev. 1495, 1499-1500.) Given this underlying reality, Congress has elected not to make the issuance of a patent conclusive but, rather, subject to validation or invalidation in court proceedings. (
The non-uniform application of collateral estoppel adds another layer of uncertainty. A finding that a patent is invalid operates in rem and estops the patentee from asserting validity against the world. (Blonder-Tongue v. University Foundation (1971) 402 U.S. 313, 349-350 [28 L.Ed.2d 788, 91 S.Ct. 1434]In re Swanson (Fed. Cir. 2008) 540 F.3d 1368, 1377; Ethicon, Inc. v. Quigg (Fed. Cir. 1988) 849 F.2d 1422, 1429, fn. 3 [“‘A patent is not held valid for all purposes but, rather, not invalid on the record before the court‘” and “‘simply remains valid until another challenger carries‘” the burden of showing invalidity].) Each case may show only that a patent has not been invalidated, yet.
If the assertion of patent rights leads to a court injunction excluding a competitor from the marketplace, there is no antitrust problem. If instead the assertion leads to a private settlement agreement, there is a potential antitrust problem. With a settlement, any restraint arises directly from the private agreement and only indirectly from the patent, which remains in the background, motivating the parties’ actions according to their assessments of its strength. That a patent has not (yet) been invalidated may allow some confidence about its fundamental enforceability, but does not allow a court to skip entirely an antitrust analysis of competitive restraints within the patent‘s scope on the assumption that its validity has been established. The scope of the patent test is flawed precisely because it assumes away whatever level of uncertainty a given patent—the ‘444 patent here, no less than the one at issue in Actavis—may be subject to.9
Aside from its attempts to distinguish Actavis, Barr argues a 1953 California decision predating the recent federal Hatch-Waxman Act decisions favors the scope of the patent test for Cartwright Act challenges to patent settlements. (See Fruit Machinery Co. v. F. M. Ball & Co. (1953) 118 Cal.App.2d 748, 758 [258 P.2d 852].) We do not read that opinion so broadly.
In Fruit Machinery, six canning companies formed a corporation and licensed to it rights under a fruit pitter patent owned by one of the companies. In turn, the licensee contracted with each of the six, sublicensing to them the right to build and own a specified number of pitters and to lease additional pitters in exchange for payment of royalties. A dispute over nonpayment of royalties arose between the licensee and one of the six companies. The company raised as a defense to payment that the contractual arrangements
Fruit Machinery does not stand for the proposition that any restraints of trade within the scope of a patent are valid. Rather, it recognizes trade restraints that exceed those authorized by a patent may be invalid and, moreover, that the “abuse[]” of patent rights may also run afoul of antitrust law. (Fruit Machinery Co. v. F. M. Ball & Co., supra, 118 Cal.App.2d at p. 762.) The court responded to the concern that the corporate licensee might use its exclusive patent rights to charge far higher royalties for leased than owned pitters not by saying such a differential would automatically be lawful, as within the scope of any patent rights, but by saying only “that such has not happened yet” and it would not presume a “[f]uture violation . . . of the antitrust laws.” (Ibid.)
No other California authority Barr has cited, nor any we have found, establishes the scope of the patent test is applicable under the Cartwright Act. Even if such precedent existed, we would be forced to reexamine it in light of Actavis. The scope of the patent test insulates from antitrust scrutiny virtually any agreement that restrains trade no more than the patent itself would have, if valid. State law must yield to federal, but we cannot under the guise of patent law carve into the Legislature‘s enactments a larger exception than federal law dictates, and Actavis shows such a broad exemption is not required. Accordingly, we conclude the scope of the patent test is inapplicable to Cartwright Act claims.
IV. Analysis of Reverse Payment Patent Settlements
Having joined the United States Supreme Court in rejecting the scope of the patent test, we consider what rubric courts should instead apply under state law to reverse payment patent settlements.
A. Antitrust Analysis Under the Cartwright Act
As discussed, although the prohibitions of the Cartwright Act are framed in superficially absolute language, deciding antitrust illegality is not as simple as
Under the traditional rule of reason, “inquiry is limited to whether the challenged conduct promotes or suppresses competition.” (Fisher v. City of Berkeley (1984) 37 Cal.3d 644, 672 [209 Cal.Rptr. 682, 693 P.2d 261], affd. sub nom. Fisher v. Berkeley (1986) 475 U.S. 260 [89 L.Ed.2d 206, 106 S.Ct. 1045].) To determine whether an agreement harms competition more than it helps, a court may consider “the facts peculiar to the business in which the restraint is applied, the nature of the restraint and its effects, and the history of the restraint and the reasons for its adoption.” (United States v. Topco Associates (1972) 405 U.S. 596, 607 [31 L.Ed.2d 515, 92 S.Ct. 1126]; see Corwin v. Los Angeles Newspaper Service Bureau, Inc., supra, 4 Cal.3d at p. 854.) In a typical case, this may entail expert testimony on such matters as the definition of the relevant market (Corwin, at p. 855) and the extent of a defendant‘s market power (Fisherman‘s Wharf Bay Cruise Corp. v. Superior Court (2003) 114 Cal.App.4th 309, 334-339 [7 Cal.Rptr.3d 628]; Roth v. Rhodes (1994) 25 Cal.App.4th 530, 542-543 [30 Cal.Rptr.2d 706]).
Rule of reason inquiry is not required in every case; we and the United States Supreme Court have partially simplified the analysis by identifying categories of agreements or practices that can be said to always lack redeeming value and thus qualify as per se illegal. (See Northern Pac. R. Co. v. United States (1958) 356 U.S. 1, 5 [2 L.Ed.2d 545, 78 S.Ct. 514]; Marin County Bd. of Realtors, Inc. v. Palsson, supra, 16 Cal.3d at pp. 930-931; Oakland-Alameda County Builders’ Exchange v. F. P. Lathrop Constr. Co. (1971) 4 Cal.3d 354, 360–362 [93 Cal.Rptr. 602, 482 P.2d 226].) “The per se rule reflects an irrebuttable presumption that, if the court were to subject the conduct in question to a full-blown inquiry, a violation would be found under the traditional rule of reason.” (Fisher v. City of Berkeley, supra, 37 Cal.3d at p. 666.)
More recently, a third category, quick look rule of reason analysis, has emerged. (California Dental Assn. v. FTC (1999) 526 U.S. 756, 769-770 [143 L.Ed.2d 935, 119 S.Ct. 1604]; see FTC v. Indiana Federation of Dentists (1986) 476 U.S. 447, 459-460 [90 L.Ed.2d 445, 106 S.Ct. 2009]; NCAA v. Board of Regents of Univ. of Okla. (1984) 468 U.S. 85, 109–110 [82 L.Ed.2d 70, 104 S.Ct. 2948].) Under the quick look approach, applicable to cases where “an observer with even a rudimentary understanding of economics
There was a time when this court and the United States Supreme Court treated the choice between per se and rule of reason analysis as a necessary threshold inquiry involving rigidly distinct analytic boxes. In more recent years, however, the Supreme Court has explained, “[t]he truth is that our categories of analysis of anticompetitive effect are less fixed than terms like ‘per se,’ ‘quick look,’ and ‘rule of reason’ tend to make them appear.” (California Dental Assn. v. FTC, supra, 526 U.S. at p. 779.) “[T]here is generally no categorical line to be drawn between restraints that give rise to an intuitively obvious inference of anticompetitive effect and those that call for more detailed treatment. What is required, rather, is an enquiry meet for the case, looking to the circumstances, details, and logic of a restraint.” (Id. at pp. 780-781.) The emergence of quick look rule of reason analysis did not signal the supplanting of the traditional per se/rule of reason dichotomy with a new trichotomy (Polygram Holding, Inc. v. FTC (D.C. Cir. 2005) 416 F.3d 29, 35), but rather a shift to “‘something of a sliding scale‘” in antitrust analysis. (Actavis, supra, 570 U.S. at p. 159 [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2237].)
This more nuanced approach makes equal sense for claims under the Cartwright Act. Like the federal antitrust statutes, nothing in the text of the Cartwright Act dictates the precise details of the per se and rule of reason approaches; these are but useful tools the courts have developed over time to carry out the broad purposes and give meaning to the general phrases of the antitrust statutes. (See National Soc. of Professional Engineers v. U. S., supra, 435 U.S. at p. 688.) It is consistent with the common law tradition at the root of our antitrust laws to describe, as the United States Supreme Court now has, the analytic approach as involving a continuum, with “the circumstances, details, and logic” of a particular restraint (California Dental Assn. v. FTC, supra, 526 U.S. at p. 781) dictating how the courts that confront the restraint should analyze it. In lieu of an undifferentiated one-size-fits-all rule of reason, courts may “devise rules . . . for offering proof, or even presumptions where justified, to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones.” (Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007) 551 U.S. 877, 898-899 [168 L.Ed.2d 623, 127 S.Ct. 2705]; see Fisher v. City of Berkeley, supra, 37 Cal.3d at pp. 671-677 [tailoring the rule of reason to account for differences between private and municipal government actions].)
B. The Competitive Harm from Purchasing an Extension of Monopoly
We begin with the proposition that agreements to establish or maintain a monopoly are restraints of trade made unlawful by the Cartwright Act. (Lowell v. Mother‘s Cake & Cookie Co. (1978) 79 Cal.App.3d 13, 23 [144 Cal.Rptr. 664]; Dimidowich v. Bell & Howell (9th Cir. 1986) 803 F.2d 1473, 1478.) Under general antitrust principles, a business may permissibly develop monopoly power, i.e., “the power to control prices or exclude competition” (United States v. du Pont & Co. (1956) 351 U.S. 377, 391 [100 L.Ed. 1264, 76 S.Ct. 994]), through the superiority of its product or business acumen. To acquire or maintain that power through agreement and combination with others, however, is quite a different matter. (United States v. Grinnell Corp. (1966) 384 U.S. 563, 570-571 [16 L.Ed.2d 778, 86 S.Ct. 1698].)
Pursuant to this rule, businesses may not engage in a horizontal allocation of markets, with would-be competitors dividing up territories or customers. (United States v. Topco Associates, supra, 405 U.S. at pp. 608, 612; Vulcan Powder Co. v. Hercules Powder Co., supra, 96 Cal. at pp. 514-515; Guild Wineries & Distilleries v. J. Sosnick & Son (1980) 102 Cal.App.3d 627, 633-635 [162 Cal.Rptr. 87].) Such allocations afford each participant an “enclave . . . free from the danger of outside incursions,” in which to exercise monopoly power and extract monopoly premiums. (United States v. Sealy, Inc. (1967) 388 U.S. 350, 356 [18 L.Ed.2d 1238, 87 S.Ct. 1847].)
Similarly, a firm may not “pay[] its only potential competitor not to compete in return for a share of the profits that firm can obtain by being a monopolist.” (Valley Drug Co. v. Geneva Pharmaceuticals, supra, 344 F.3d at p. 1304.) In Palmer v. BRG of Georgia, Inc. (1990) 498 U.S. 46 [112 L.Ed.2d 349, 111 S.Ct. 401], for example, two competing bar review course providers did just that. One provider agreed to withdraw from a particular state market in exchange for the second provider paying the withdrawing provider a share of subsequent profits and agreeing in return not to compete outside that state market. In a per curiam opinion, the United States Supreme Court summarily declared the agreement unlawful on its face. (Id. at pp. 49-50; see Getz Bros. & Co. v. Federal Salt Co. (1905) 147 Cal. 115, 119 [81 P. 416] [payment for
Second, these principles extend into the patent arena to prohibit a patentee‘s purchase of a potential competitor‘s consent to stay out of the market. Antitrust law condemns a patentee‘s payment “to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market.” (Actavis, supra, 570 U.S. at p. 158 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].) This is so even when the patent is likely valid: “The owner of a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment (if otherwise unexplained) likely seeks to prevent the risk of competition. And, as we have said, that consequence constitutes the relevant anticompetitive harm.” (Ibid.)
Actavis embraces the insights of Professor Carl Shapiro and others that the relevant benchmark in evaluating reverse payment patent settlements should be no different from the benchmark in evaluating any other challenged agreement: What would the state of competition have been without the agreement? In the case of a reverse payment settlement, the relevant comparison is with the average level of competition that would have obtained absent settlement, i.e., if the parties had litigated validity/invalidity and infringement/noninfringement to a judicial determination. (Shapiro, Antitrust limits to patent settlements, supra, 34 RAND J. Econ. at p. 396; see Addanki & Butler, Activating Actavis: Economic Issues in Applying the Rule of Reason to Reverse Payment Settlements (2014) 15 Minn. J. L. Sci. & Tech. 77, 93; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ. Persp. at p. 94; Willig & Bigelow, Antitrust policy toward agreements that settle patent litigation (2004) 49 Antitrust Bull. 655, 664, 677-679.) Consider a patent with a 50 percent chance of being upheld. After litigation, on average, consumers would be subject to a monopoly for half the remaining life of the patent. A settlement that allowed a generic market entry at the midpoint of the time remaining until expiration would replicate the expected level of competition; the period of exclusion would reflect the patent‘s strength. But a settlement that delayed entry still longer would extend the elimination of competition beyond what the patent‘s strength warranted; to the extent it did, the additional elimination of the possibility of competition would constitute cognizable anticompetitive harm. (See Actavis, supra, 570 U.S. at p. 158 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].)
Barr argues that the procompetitive or anticompetitive effects of a settlement must be measured by comparison to the entire remaining life of a patent. We disagree. Actavis makes clear that for antitrust purposes patents are no longer to be treated as presumptively ironclad. This means the period
This method of analysis, and of assessing anticompetitive harm, is not materially different from that applied in any other garden-variety antitrust case. Every case involves a comparison of a challenged agreement against a prediction about—a probabilistic assessment of—the expected competition that would have arisen in its absence. (Shapiro, Antitrust Analysis of Patent Settlements Between Rivals, supra, 17 Antitrust at p. 70.) Every restraint of trade condemned for suppressing market entry involves uncertainties about the extent to which competition would have come to pass. (Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra, 109 Colum. L.Rev. at p. 637.) No matter; as the leading antitrust treatise notes, “the law does not condone the purchase of protection from uncertain competition any more than it condones the elimination of actual competition.” (12 Areeda & Hovenkamp, Antitrust Law, supra, ¶ 2030b, p. 220; see U.S. v. Microsoft Corp. (D.C. Cir. 2001) 253 F.3d 34, 79 (en banc) [“it would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will . . .“].) The antitrust laws foreclose agreements eliminating “the risk of competition“—the competitive market that “might have been.” (Actavis, supra, 570 U.S. at p. 158 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].) Purchasing freedom from the possibility of competition, whether done by a patentee or anyone else, is illegal. 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.
We consider next how to identify whether the parties’ settlement agreement eliminates competition beyond the point at which competition would have been expected in the absence of an agreement. Only if the agreement limits competition beyond that point, the point the strength of the patent would have justified, is there an antitrust issue.
1. Plaintiff‘s Prima Facie Case
We conclude a third party plaintiff challenging a reverse payment patent settlement 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 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. We explain these elements in turn.
That a plaintiff challenging a reverse payment settlement must establish the settlement limits the challenging generic‘s entry is self-evident. If the settlement contains no component of delay and permits the generic to enter the market and compete fully and immediately, there is no restraint of trade and no potential for antitrust concern.
As well, a plaintiff must establish a reverse payment—financial consideration flowing from the brand to the generic challenger.11 In the absence of payment, one would expect rational parties that settle to select a market entry point roughly corresponding to their joint expectation as to when entry would have occurred, on average, if the patent‘s validity and infringement had been fully litigated. (Hovenkamp et al., Anticompetitive Settlement of Intellectual Property Disputes (2003) 87 Minn. L.Rev. 1719, 1762.) If market entry were substantially later than the generic thought it could obtain through litigation, the generic would be unwilling to settle and forgo the additional profits it thought it could earn from an earlier entry; conversely, if the entry were
Third, a plaintiff must establish the consideration to the generic challenger exceeds the value of any other collateral products or services provided by the generic to the brand. As the Supreme Court noted, the concern that a reverse payment raises will depend in part on “its independence from other services for which it might represent payment.” (Actavis, supra, 570 U.S. at p. 159 [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2237].) A “payment may reflect compensation for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item.” (Id. at p. 156 [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236].) If payment is no more than would be expected as compensation for additional products or services, then the agreement includes no additional consideration for delay and we can trust that any limit on competition is a legitimate consequence of the patent‘s strength and the contracting parties’ expectations concerning its exclusionary power.
Considerable caution is in order in evaluating settlements that include side agreements for generic products or services. Historically, it appears brands and generics have engaged in business dealings outside the settlement context far less often than in it. (Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra, 109 Colum. L.Rev. at pp. 663-668.) A side agreement involving difficult to value assets might conceivably be added to a patent settlement to provide cover for the purchase of additional freedom from competition. (Id. at pp. 632-633, 669; Bulow, The Gaming of Pharmaceutical Patents in 4 Innovation Policy and the Economy, supra, at pp. 169-171; Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, supra, 108 Mich. L.Rev. at p. 79.) This court long ago established that side deals should not be permitted to serve as fig leaves for agreements to eliminate competition. In Getz Bros. & Co. v. Federal Salt Co., supra, 147 Cal. 115, the parties entered an agreement to exchange money for (1) an agreement not to compete and to discourage competition in the salt trade and (2) more than 1,000 pounds of salt. Precisely how much of the payment was attributable to the actual provision of salt we could not say, but so long as any portion of the payment was attributable to the covenant not to compete—and we viewed it as “plain . . . that part of it, at least, was“—the deal as a whole was an illegal restraint of trade. (Id. at p. 118.)
We consider briefly the allocation of burdens of proof and production. Unless a challenged settlement agreement includes both a restraint on generic competition and a reverse payment to the generic in excess of both brand litigation costs and generic collateral products and services, there is no reason to assume the settlement includes any element of purchased freedom from competition, as opposed to a limit on competition flowing naturally, and lawfully, from the perceived strength of the brand‘s patent. Accordingly, the burden of proof as to these elements rests with the Cartwright Act plaintiff. (See Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 861 [107 Cal.Rptr.2d 841, 24 P.3d 493].)
The burden of producing evidence (see
We further conclude that 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. If a brand is willing to pay a generic more than the costs of continued litigation, and more than the value of any collateral benefits, in order to settle and keep the generic out of the market, there is cause to believe some portion of the consideration is payment for exclusion beyond the point that would have resulted, on average, from simply litigating the case to its conclusion. Otherwise, the brand would have had little incentive to settle at such a high price. Moreover, the larger the gap, the stronger the inference one can draw.
A wealth of economic scholarship and analysis supports this inference. Because the profit that can be earned under monopoly conditions is greater than the combined profit that can be earned under duopoly conditions,14 a brand and a generic have a substantial incentive to settle at the latest market entry date possible, with the brand paying a portion of monopoly profits to compensate the generic for what it would have earned with an earlier entry.15 If the parties can share monopoly profits through a reverse payment from the
Barr argues this degree of scrutiny will stifle innovation. But Congress was not authorized to, and did not, grant inventors eternal monopolies; instead, it approved a scheme that presumptively represents the appropriate balance between promoting innovation and allowing competition. Reverse payment patent settlements may enable the parties to extend the monopoly beyond that point. (Elhauge & Krueger, Solving the Patent Settlement Puzzle, supra, 91 Tex. L.Rev. at pp. 295-304; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ. Persp. at p. 93; Leffler & Leffler, Efficiency Trade-Offs in Patent Litigation Settlements: Analysis Gone Astray? (2004) 39 U.S.F. L.Rev. 33, 37-38; Shapiro, Antitrust Analysis of Patent Settlements Between Rivals, supra, 17 Antitrust at p. 73.) Indeed, insufficient scrutiny of such settlements has the potential to hamper innovation by allowing weak patents to offer the exact same exclusionary potential and monopoly possibilities as strong ones,16 thus steering innovator incentives away from more costly true innovation and toward cheaper, less socially valuable pseudoinnovation. (See Mungan, Reverse Payments, Perverse Incentives, supra, 27 Harv. J. Law & Tech. at pp. 42-44; Elhauge & Krueger, Solving the Patent Settlement Puzzle, at pp. 294-295.)
Finally, Barr argues that in some cases only a reverse payment can bridge the differences between the brand and the generic challenger and make settlement possible. Perhaps; but as the Supreme Court has made clear, ordinarily “the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.” (Actavis, supra, 570 U.S. at p. 158 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2237].) Parties can still use financial considerations to bridge small gaps arising from differing subjective perceptions of their probabilities of success in litigation; what they cannot do is use money to bridge their differences over the point when competitive entry is economically desirable, for that gap is not one antitrust law permits would-be competitors to bridge by agreement: “If the basic reason [the parties prefer a reverse payment settlement] is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.” (Ibid.) That some settlements might no longer be possible absent a payment in excess of litigation costs is no concern if the ones now barred would simply have facilitated the sharing of monopoly profits.
Barr relies on one commentary showing that some theoretically possible settlements involving payments exceeding the sum of expected litigation costs and the value of other products and services might enhance consumer welfare. (Harris et al., Activating Actavis: A More Complete Story (2014) 28 Antitrust 83.) The principal conclusion is that introducing brand risk aversion into the settlement model opens up a region of possible settlements involving supralitigation cost payments that nevertheless increase consumer welfare by enabling earlier generic market entry dates.17 What is not shown is that such
We also observe that the outlined prima facie showing will suffice, without more, to raise a presumption of the patentee‘s market power. Proving that a restraint has anticompetitive effects often requires the plaintiff to “‘delineate a relevant market and show that the defendant plays enough of a role in that market to impair competition significantly,‘” i.e., has market power. (Roth v. Rhodes, supra, 25 Cal.App.4th at p. 542.) Here, proof of a sufficiently large payment is a surrogate: “the ‘size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power‘—namely, the power to charge prices higher than the competitive level.” (Actavis, supra, 570 U.S. at p. 157 [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236]Ibid.) Consequently, proof of a reverse payment in excess of litigation costs and collateral products and services raises a presumption that the settling patentee has market power sufficient for the settlement to generate significant anticompetitive effects.
2. Defendants’ Rebuttal
Once a plaintiff has made out a prima facie case that a reverse payment patent settlement has anticompetitive effects, a court “must weigh these anticompetitive effects against the possible justifications” for the challenged restraint. (Marin County Bd. of Realtors, Inc. v. Palsson, supra, 16 Cal.3d at p. 937 evidence that the challenged settlement is in fact procompetitive. (See Bus. & Prof. Code, § 16725 [“[i]t is not unlawful to enter” an agreement “to promote, encourage or increase competition“]; Actavis, supra, 570 U.S. at p. 156 [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236] [“An antitrust defendant may show in the antitrust proceeding that legitimate justifications are present . . . .“].)18
Plaintiffs argue we should declare every reverse payment in excess of litigation costs and collateral products and services a per se violation of the Cartwright Act. We are unwilling to declare every settlement payment of a certain size illegal. Like the United States Supreme Court, we cannot say with reasonable certainty—yet—that we have posited every possible justification that might render a particular reverse payment settlement procompetitive. (See Actavis, supra, 570 U.S. at p. 156 [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236].) The theoretical possibility that a settlement in excess of litigation costs and collateral services could be procompetitive, while insufficient to alter the plaintiff‘s prima facie case, is nevertheless sufficient for us to reject a categorical rule and instead afford defendants the opportunity to demonstrate a given settlement is the exception.
This does not mean any justification will do. An antitrust defendant cannot argue a settlement is procompetitive simply because it allows competition earlier than would have occurred if the brand had won the patent action; as Actavis and our previous discussion make clear, the relevant baseline is the average period of competition that would have obtained in the absence of settlement. (Actavis, supra, 570 U.S. at p. 158 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].)19
Likewise, consideration of whether the agreement is justified as procompetitive will not turn on whether the patent would ultimately have been proved valid or invalid. Agreements must be assessed as of the time they are made (Valley Drug Co. v. Geneva Pharmaceuticals, supra, 344 F.3d at p. 1306), at which point the patent‘s validity is unknown and unknowable. Just as later invalidation of a patent does not prove an agreement when made was anticompetitive (id. at pp. 1306–1307), later evidence of validity will not
To determine whether such a settlement has occurred under state law, as under federal law, “it is normally not necessary to litigate patent validity . . . .” (Actavis, supra, 570 U.S. at p. 158 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].) “An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent‘s survival. And that fact, in turn, suggests that the payment‘s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market—the very anticompetitive consequence that underlies the claim of antitrust unlawfulness. . . . In a word, the size of the unexplained reverse payment can provide a workable surrogate for a patent‘s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” (Id. at pp. 158-159 [186 L.Ed.2d at p. 363, 133 S.Ct. at pp. 2236-2237].)
3. The Plaintiff‘s Ultimate Burden
The ultimate burden throughout rests with the plaintiff to show that a challenged settlement agreement is anticompetitive. (Bert G. Gianelli Distributing Co. v. Beck & Co. (1985) 172 Cal.App.3d 1020, 1048 [219 Cal.Rptr. 203].) Once the plaintiff has made out a prima facie case that a reverse payment patent settlement is anticompetitive, however, the plaintiff thereafter need only show that any procompetitive justifications proffered by the defendants are unsupportable. (See Polygram Holding, Inc. v. FTC, supra, 416 F.3d at pp. 37-38.)
The ultimate question in reverse payment settlement cases is whether an agreement involves “significant unjustified anticompetitive consequences.” (Actavis, supra, 570 U.S. at p. 159 [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2238].) The prima facie case requires the plaintiff to eliminate the possibility that litigation costs or other products or services could explain the consideration paid the generic. If a plaintiff does so and thereafter can dispel each additional justification the defendants put forward to explain the consideration, the conclusion follows that the settlement payment must include, in
***
We summarize the structure of the rule of reason applicable to reverse payment patent settlements. To make out a prima facie case that a challenged agreement is an unlawful restraint of trade, a plaintiff must show the agreement contains both a limit on the generic challenger‘s entry into the market and compensation from the patentee to the challenger. The defendants bear the burden of coming forward with evidence of litigation costs or valuable collateral products or services that might explain the compensation; if the defendants do so, the plaintiff has the burden of demonstrating the compensation exceeds the reasonable value of these. If a prima facie case has been made out, the defendants may come forward with additional justifications to demonstrate the settlement agreement nevertheless is procompetitive. A plaintiff who can dispel these justifications has carried the burden of demonstrating the settlement agreement is an unreasonable restraint of trade under the Cartwright Act.
D. Preemption
Barr argues federal preemption concerns narrowly constrain how reverse payment patent settlements must be analyzed under state law. According to Barr, any rule more stringent than the traditional, unstructured rule of reason would fall prey to obstacle preemption, which “arises when ‘under the circumstances of [a] particular case, [the challenged state law] stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’ ” (Viva! Internat. Voice for Animals v. Adidas Promotional Retail Operations, Inc. (2007) 41 Cal.4th 929, 936 [63 Cal.Rptr.3d 50, 162 P.3d 569].) We disagree; the rule we adopt is 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. (Actavis, supra, 570 U.S. at p. 159 [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2238].)
State antitrust law ordinarily is fully compatible with federal law. States have regulated against monopolies and unfair competition for longer than the federal government, and federal law is intended only “to supplement, not displace, state antitrust remedies.” (California v. ARC America Corp. (1989) 490 U.S. 93, 102 [104 L.Ed.2d 86, 109 S.Ct. 1661]; see id. at pp. 101-102 & fn. 4; Partee v. San Diego Chargers Football Co. (1983) 34 Cal.3d 378, 382 [194 Cal.Rptr. 367, 668 P.2d 674].) “[T]he Cartwright Act is broader in range and deeper in reach than the Sherman Act” (Cianci v. Superior Court, supra, 40 Cal.3d at p. 920); this greater domain has never been thought to pose supremacy clause problems. To the contrary, in light of the established state role, a presumption against preemption applies. (ARC America Corp., at p. 101.)
Barr argues that to avoid conflicting with federal patent law, state antitrust law must cohere with the federal rule that patents are presumed valid. (See
Additionally, Barr argues the rule we adopt must be no more favorable to reverse payment patent settlement challenges than would be the case under Actavis. The supposed rationale is that Actavis identifies precisely the accommodation patent law requires of antitrust law, such that deviation would pose an obstacle to congressional patent objectives.
If Actavis had established a special rule limiting antitrust scrutiny of reverse payment settlements in order to preserve the incentives created by the patent system, we might agree. But the lesson of Actavis is that nothing in the patent laws or the Hatch-Waxman Act dictates such a special rule; that a settlement resolves a patent dispute does not “immunize the agreement from antitrust attack.” (Actavis, supra, 570 U.S. at p. 147 [186 L.Ed.2d at p. 356, 133 S.Ct. at p. 2230].) Instead, such agreements may, like any other form of agreement restraining trade, be examined for unjustified anticompetitive effects. (Id. at p. 159 [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2238].) As for how such an examination is to be conducted, Actavis reverts solely to antitrust considerations. (Id. at pp. 158-160 [186 L.Ed.2d at p. 364, 133 S.Ct. at pp. 2237-2238].) In selecting a test to apply—to the extent the Supreme Court does, as opposed to “leav[ing] to the lower courts the structuring of the present rule-of-reason antitrust litigation” (id. at p. 160 [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2238])—the court looks to whether its experience with the economics of reverse payment settlements is sufficient to allow it, yet, to require particular modifications to rule of reason analysis (id. at p. 159 [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2237]).
We note as well that the structured rule of reason we adopt is consistent with, not an obstacle to, congressional patent and health care goals in two specific ways. First, considerable research and analysis suggests the broad availability of reverse payment settlements favors weak patents and channels investment resources toward suboptimal innovation prospects. (See ante, at p. 155.) To the extent careful scrutiny of such settlements promotes the very innovation the patent laws were intended to promote, it cannot stand as an obstacle to congressional objectives.
Second, a fundamental goal of the Hatch-Waxman Act is to enhance generic competition and thereby lower prices. Congress rued the “serious anti-competitive effects” of existing rules for generic drug approval, rules that resulted in “the practical extension of the monopoly position of the patent holder beyond the expiration of the patent.” (H.R.Rep. No. 98-857, 2d Sess., pt. 2, p. 4 (1984), reprinted in 1984 U.S. Code Cong. & Admin. News, p. 2688.) The substantial reworking of those rules to ease generic approval was designed to “make available more low cost generic drugs” (
E. Application
The trial court and Court of Appeal treated the ‘444 patent as ironclad and used the entire period until its expiration as the relevant
Barr argues we nevertheless should affirm because in the course of their respective opinions the trial court and Court of Appeal purported to apply the rule of reason in addition to the scope of the patent test. But the rule of reason these courts applied is not the structured rule of reason for reverse payment patent settlements we articulate today to effectuate the purposes of the Cartwright Act. Rather, in each instance 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. The same misapprehension underlying the lower courts’ scope of the patent analysis, that for antitrust purposes patents are ironclad, also underlay their rule of reason analysis. Accordingly, we must reverse.
V. Unfair Competition Law and Common Law Monopoly Claims
The trial court entered judgment against plaintiffs on their unfair competition and common law monopoly claims using the same reasoning it applied to the Cartwright Act claim. Because that reasoning was erroneous, we reverse on these claims as well.
DISPOSITION
We reverse the Court of Appeal‘s judgment and remand for further proceedings consistent with this opinion.
Cantil-Sakauye, C. J., Chin, J., Corrigan, J., Liu, J., Cuéllar, J., and Kruger, J., concurred.
The petition of respondent Watson Pharmaceuticals, Inc., for a rehearing was denied July 8, 2015.