California Antitrust and Unfair Competition Law Update: Substantive Law

• Publication year: 2020
• Author: By Thomas A. Papageorge

CALIFORNIA ANTITRUST AND UNFAIR COMPETITION LAW UPDATE: SUBSTANTIVE LAW

By Thomas A. Papageorge¹

I. INTRODUCTION

This outline provides a selection of substantive litigation developments that may be of particular interest to members of the Antitrust, UCL and Privacy Section. These developments include cases brought under the Cartwright Act, the Unfair Practices Act, the Consumer Legal Remedies Act, the Unfair Competition Law and False Advertising Law, California privacy laws, as well as related developments regarding covenants not to complete and public enforcement actions.

II. CARTWRIGHT ACT (BUSINESS AND PROFESSIONS CODE § 16720 ET SEQ.)

A. California Antitrust Legislation Increases Scrutiny of Drug Patent Settlements²

On October 21, 2019, Governor Newsom signed into law AB 824 (Wood), strengthening state antitrust scrutiny of patent infringement settlements between branded and generic drug companies. The legislature passed AB 824 in response to the continuing antitrust controversy over "pay for delay" agreements and similar patent settlements that have forestalled entry into pharmaceutical markets by price-competitive generic drugs.³

Overview. AB 824, codified as Health & Safety Code section 13400 et seq., creates a presumption for Cartwright Act antitrust claims regarding the anticompetitive effects of certain pharmaceutical patent settlement agreements. The new standard establishes a legal presumption that a drug patent settlement where a generic drug maker receives "anything of value" from the manufacturer of a branded drug has anticompetitive effects and violates the Cartwright Act and California's other competition laws, absent specified conditions and exceptions.

The California Office of Legislative Counsel summarized the new standard:

"This bill would provide that an agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a pharmaceutical product, is to be presumed to have anticompetitive effects if a nonreference drug filer [i.e., generic drug maker] receives anything of value, as defined, from another company asserting patent infringement and if the nonreference drug filer agrees to limit or forego research, development, manufacturing, marketing, or sales of the nonreference drug filer's product for any period of time, as specified."

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Exceptions. The new legislation provides several exceptions from this presumption of anticompetitive effects. These apply where a defendant can demonstrate: (1) the settlement value received was only for other unrelated goods or services; (2) the agreement's procompetitive benefits outweigh its anticompetitive effects; (3) the agreement allows entry of the generic product before the patent expires; or (4) the agreement is only to refrain from suing or to compensate for reasonable litigation costs.⁴

Remedies. In addition to other remedies provided by the Cartwright Act, the Unfair Practices Act and the UCL, the new law provides for civil penalties where a defendant received value from a violation of up to three times the valued received or $20 million, whichever is greater, and where a defendant did not receive such value, of up to three times the value to other parties or $20 million, whichever is greater.⁵ However, if penalties are recovered under this new provision, the State may not obtain other penalties under the Cartwright Act, UPA or UCL, although other relief or damages may be recovered.⁶

Conclusion. AB 824 alters California antitrust law to reverse a key aspect of FTC v. Actavis, which requires federal courts to evaluate these settlement agreements under the rule of reason and imposes on plaintiffs the difficult burden of demonstrating actual or likely anticompetitive effects. California's standard now directs that the defendants in Cartwright Act cases involving such agreements must meet the burden of rebutting this anticompetitive presumption. Thus, this legislation creates yet another significant difference between California antitrust law and federal Sherman Act law.

B. California Attorney General Obtains Stipulated Judgments Against Drug Makers for Patent Settlements Allegedly Violating the Cartwright Act California ex rel. Becerra v. Allergan PLC⁷ and similar settlements

In mid-2019, the Antitrust Law Section of the California Attorney General's Office settled multiple antitrust actions it had brought under the Cartwright Act and Unfair Competition Law, inter alia, against manufacturers of branded pharmaceuticals for settlement agreements with generic drug makers that allegedly forestalled or delayed the entry of price-competitive generic drugs into the California marketplace. The stipulated judgments imposed permanent injunctions prohibiting "pay for delay" settlement conduct in the generic pharmaceuticals marketplace and together provided for the payment of an aggregated total of nearly $70 million in monetary relief. See also discussion of AB 824, supra. For example, in Becerra v. Allergan PLC, 2019 WL 3251470 (N.D. Cal. 2019), the AG's complaint alleged that defendant Allergan engaged in violations of the Sherman Act, the Cartwright Act and the Unfair Competition Law by entering an agreement that foreclosed competition from generic equivalents of the brand-name drug Lidoderm and later reduced competition between sellers of generic lidocaine patches. Without admitting liability, the defendant entered into a stipulated final judgment permanently enjoining the alleged anticompetitive conduct and providing for the payment of $760,000 in monetary relief.

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C. Consumers Who Bought Apps from Apple Are "Direct Purchasers" For Antitrust Standing Purposes Apple, Inc. v. Pepper⁸

State antitrust laws, including the California Cartwright Act, have often been in tension with federal standing rules under the principles of Illinois Brick Co v. Illinois⁹, which bars recovery by antitrust plaintiffs of damages suffered at the hands of defendants removed from the plaintiffs in the chain of distribution. The applicability of the Illinois Brick "indirect purchaser" doctrine has been superseded in California and other states by virtue of explicit "Illinois Brick repealer" legislation.

The California legislature amended the Cartwright Act after Illinois Brick in order to restore standing under California law for persons injured "regardless of whether such injured person[s] dealt directly or indirectly with defendant."¹⁰ In 1989, California's indirect purchaser provision was upheld as a valid exercise of state police powers by the Supreme Court in California v. ARC America Corp.¹¹

In Pepper, the U.S. Supreme Court has again addressed the indirect purchaser doctrine and the proper application of federal and state antitrust laws to these marketplace relationships. The Court summarized federal indirect purchaser doctrine and held that consumers who bought software applications from manufacturer's electronic retail store were "direct purchasers" who could sue manufacturer for alleged monopolization (and thus would not have to rely on state indirect purchaser standing conferred by Illinois Brick repealer legislation).

The Court concluded: "The bright-line rule of Illinois Brick . . . means that indirect purchasers who are two or more steps removed from the antitrust violation in a distribution chain may not sue. By contrast, direct purchasers—that is, those who are the 'immediate buyers from the alleged antitrust violators—may sue . . . . The iPhone owners pay the alleged overcharge directly to Apple . . . Under Illinois Brick, the iPhone owners are direct purchasers from Apple and are proper plaintiffs to maintain this antitrust suit."¹²

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D. Cartwright Act Suit Against Medical Marijuana Dispensary Was Not a SLAPP Action Richmond Compassionate Care Collective v. 7 Stars Holistic Foundation, Inc.¹³

Plaintiff, a medical marijuana collective, sued a medical marijuana dispensary and its owner for Cartwright Act restraints of trade, alleging the defendants colluded with other dispensaries to prevent the collective from opening a new business location. The trial court denied defendants' anti-SLAPP motion. On appeal, the First Appellate District held that the Collective's Cartwright Act action against the dispensary and its principal was not a SLAPP.

The First District concluded: "The essence of [plaintiff's complaint] was the private actions the group took to restrain trade and monopolize the medical marijuana market . . . That was the gravamen, the thrust, of the cause of action. Whatever the protected activity, it was at the most incidental."¹⁴

E. Allegations of Wage Suppression Conspiracy Fail in Sherman Act/Cartwright Act Lawsuit Kelsey K. v. NFL Enterprises, LLC¹⁵

A professional cheerleader for NFL football teams brought a putative class action against the teams for violations of the Sherman Act and California's Cartwright Act based on an alleged conspiracy to suppress wages and prevent cheerleader recruitment. The district court dismissed the action for failure to state a claim. The Ninth Circuit considered both the Sherman Act and the Cartwright Act claims in sustaining the dismissal, holding the NFL cheerleader failed to allege conspiracy sufficiently to state claims under either law for alleged wage suppression by professional football teams.

With regard to the Cartwright Act, the Ninth Circuit held: "Kelsey's claim under California's Cartwright Act fails for the same reasons because the requirements to plead a claim under California's Cartwright Act are "patterned after section 1 of the Sherman Act."¹⁶ Accordingly, we affirm the district court's ruling that the complaint fails to plausibly allege conspiracy under the Cartwright Act."¹⁷

III. UNFAIR PRACTICES ACT (UPA) (BUSINESS AND PROFESSIONS CODE § 17000 ET SEQ.)

Competitive Disadvantage Alone Is Insufficient Pleading of Required Injury: In re Dealer Management Systems Antitrust Litigation¹⁸

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In a class action brought in part under California's...