California Supreme Court Issues First Decision Extending FTC vs. Actavis to State Antitrust Laws

Activas CaseThe California Supreme Court has become the first court to issue a decision extending the U.S. Supreme Court’s holding in FTC vs. Actavis to state antitrust laws.  In its decision, the court concluded that the analysis set forth by the U.S. Supreme Court in FTC vs. Actavis applies to alleged “pay-for-delay” pharmaceutical patent settlements brought under the state’s antitrust act, the Cartwright Act.  The California Supreme Court’s decision may influence how future courts across the country approach the issue.

In the Cipro cases, plaintiffs, purchasers of Cipro, an antibiotic drug, challenged the settlement of patent infringement lawsuits brought by Bayer Corp. against generic manufacturers of Cipro.  The lawsuits claimed that Bayer paid generic manufacturers $400 million to delay the entry of their generic drug into the market.  Bayer, which settled with plaintiffs shortly after the Actavis decision came down, had already been dismissed from the case when the California Supreme Court issued its recent opinion.

In its opinion, the California Supreme Court rejected the view that Actavis, which involved prosecution under the FTC Act, was distinguishable based upon the fact it involved a federal prosecution.  Rather, the court concluded that Actavis was the final word on the “metes and bounds of patent law and policy.”  Thus, California state courts were 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.”  Furthermore, 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 on the grounds that 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.

Keeping in line with 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. Or put differently, “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 all, 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 extend Actavis to their own state antitrust laws.

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