California Antitrust and Unfair Competition Law Update: Substantive Law

• Publication year: 2016
• Author: By Thomas A. Papageorge

CALIFORNIA ANTITRUST AND UNFAIR COMPETITION LAW UPDATE: SUBSTANTIVE LAW

By Thomas A. Papageorge¹

I. INTRODUCTION

This Article provides a selection of litigation developments that may be of particular importance to members of the Antitrust and Unfair Competition Section, presenting cases that reflect recent California substantive law developments related to the Cartwright Act, the Unfair Practices Act, covenants not to compete, the Consumer Legal Remedies Act, the Unfair Competition Law, and false advertising law. Please consult other references for all of the developments that may be important to your practice.

II. CARTWRIGHT ACT2

A. California Supreme Court: "Reverse Payment" Patent Settlements Are Not Immune From Traditional Cartwright Act Scrutiny 1. In re Cipro Cases I & II³

On May 7, 2015, the California Supreme Court delivered its much-anticipated opinion in the In re Cipro Cases I & II Cartwright Act antitrust litigation, an important part of the high-stakes national debate over "reverse payment" patent settlements that has raised fundamental questions about the interaction between patent rights and antitrust principles.

The lengthy coordinated class action matter in In re Cipro Cases I & II involved plaintiffs' antitrust claims concerning ciprofloxafin (branded as "Cipro"), an antibiotic patented by Bayer Corporation. Plaintiffs alleged that Bayer and several generic drug manufacturers violated the Cartwright Act, the Unfair Competition Law, and common law monopolization principles by entering into a patent infringement settlement in which Bayer agreed to make payments (ultimately totaling $398 million) in exchange for the generic manufacturers' agreement not to manufacture the generic version of Cipro until the patent expired—an arrangement characterized by the plaintiffs as "pay-for-delay" monopolization and by the defendants as legitimate "reverse payments" to settle bona fide patent litigation.

The trial court granted defendants' summary judgment motion, ruling that the settlements were neither illegal per se under the Cartwright Act nor unreasonable under the rule of reason, and finding no triable issue as to whether the agreements produced "anticompetitive effects beyond the exclusionary scope of the patent itself."

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The Fourth District affirmed summary judgment for defendants, adopting defendants' proposed legal standard derived from In re Tamoxifen Citrate Antitrust Litigation,⁴ where the Second Circuit held that "in the absence of any plausible allegation that a patent infringement lawsuit [is] baseless or that the Settlement Agreement otherwise restrained competition beyond the scope of the . . . patent," the plaintiff's antitrust complaint fails to state a claim on which relief can be granted.⁵

The Fourth District rejected a per se analysis, and under the rule of reason found the agreements to be a "natural byproduct of patent litigation" that was consistent with federal and state policies favoring dispute resolution. The court summarized its version of the Tamoxifen rule: "Unless a patent was procured by fraud, or a suit for its enforcement was objectively baseless, a settlement of the enforcement suit does not violate the Cartwright Act if the settlement restrains competition only within the scope of the patent."⁶

The California Supreme Court granted plaintiffs' petition for review on February 15, 2012,⁷ and extensive amici participation followed, both before and after the United States Supreme Court's opinion in F.T.C. v. Actavis, Inc.,⁸ which held that the FTC's Section 5 unfair competition allegations in the AndroGel reverse payment matter were not forestalled by federal patent law principles.

In November 2013, plaintiffs and defendant Bayer reached a settlement of Bayer's portion of the matter, agreeing to a settlement pool of $74 million.⁹ The Supreme Court then dismissed the settling Bayer defendants from the pending review.¹⁰

On May 7, 2015, the California Supreme Court issued its unanimous opinion, authored by Justice Werdegar, clarifying the applicability of the Cartwright Act to such agreements and the legal standard to be applied in this analysis. The Court summarized its conclusion as follows:

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.¹¹

The Court also provided an instructive review of the contemporary state of Cartwright Act analysis as a whole, including the interactions between federal and state antitrust laws and between per se, rule of reason, and "quick look" forms of antitrust analysis.

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Construction of the Cartwright Act and Preemption Issues:

1. Because the Sherman Act and the Cartwright Act have different origins, "[i]nterpretations of federal antitrust law are at most instructive, not conclusive, when construing the Cartwright Act."¹²
2. A presumption against federal preemption applies to the Cartwright Act because "[s]tate antitrust law ordinarily is fully compatible with federal law . . . and federal law is intended only 'to supplement, not displace, state antitrust remedies.'" The "Cartwright Act is broader in range and deeper in reach than the Sherman Act," but "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," and state law is not preempted here.¹³
3. Although patent law is federal, patent law and its presumptions do not preempt California's Cartwright Act framework for analyzing the anticompetitive effects of reverse payment patent settlements: "[T]hat a settlement resolves a patent dispute does not immunize the agreement from antitrust attack" under the Cartwright Act.¹⁴

Forms of Cartwright Act Analysis:

1. Under the basic principle that "only unreasonable restraints of trade are prohibited," the United States and California Supreme Courts apply the rule of reason to antitrust allegations, which rule provides for an antitrust "inquiry limited to whether the challenged conduct promotes or suppresses competition" on balance.¹⁵
2. Both Supreme Courts also recognize "categories of agreements or practices that can be said to always lack redeeming value and thus qualify as per se illegal."¹⁶
3. The Court noted that modern federal and state antitrust analysis is better viewed as a "continuum" rather than a series of discrete tests. Thus, current antitrust analysis also employs a "quick look" approach with aspects of rule of reason and per se analyses. In the "quick look" process, when anticompetitive effects are readily apparent even to an untrained observer, then the "defendant may be asked to come forward with procompetitive justifications for a challenged restraint without the plaintiff having to introduce elaborate market analysis first."¹⁷
4. Further, as a proper function of contemporary rule of reason analysis, California 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."¹⁸

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Agreements to Monopolize and to Divide Markets:

1. "[A]greements to establish or maintain a monopoly are restraints of trade made unlawful by the Cartwright Act."¹⁹
2. Under the Cartwright Act, "businesses may not engage in a horizontal allocation of markets with would-be competitors dividing up territories or customers."²⁰

Proper Cartwright Act Antitrust Analysis of "Reverse Payment" Patent Settlements:

1. "Reverse payment" settlements that agree to treat a patent as valid are not immune from federal or state antitrust scrutiny. The United States Supreme Court decision in Actavis makes clear that "for antitrust purposes patents are no longer to be treated as presumptively ironclad," thus it was error for the lower courts to apply the "scope of the patent" test that is based on that presumption.²¹
2. Instead, "[u]nder the Cartwright Act, the baseline for measuring the procompetitive or anticompetitive effects of a settlement enforcing a challenged patent is not the patent's [ordinary] full life, but its expected life had enforcement been sought."²²
3. The Supreme Court also provided detailed instruction on the allocation of the burdens of proof and persuasion in such structured rule of reason inquiries.²³

Disposition:

Because "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," the trial and appellate court analyses were in error, necessitating reversal and remand for further proceedings consistent with this opinion.²⁴

B. Major League Baseball's Antitrust Exemption Also Bars Cartwright Act and UCL Claims 1. City of San Jose v. Office of the Commissioner of Baseball²⁵

The Ninth Circuit has held that the City of San Jose's claims under the Sherman Act, the Cartwright Act, and the Unfair Competition Law ("UCL") against Major League Baseball for blocking the Oakland A's proposed relocation to San Jose were barred by baseball's longstanding exemption from the antitrust laws under Flood v. Kuhn²⁶ and its predecessors.

After holding that professional baseball's anomalous Sherman Act exemption continues to apply to franchise relocation disputes, the Ninth Circuit further held that "San Jose's state antitrust claims necessarily fall with its federal claims," because "[b]aseball is an exception to the normal rule that 'federal antitrust laws supplement, not displace, state antitrust remedies.'"²⁷ This issue had been addressed in Flood, where the Supreme Court affirmed dismissal of the plaintiff's state law claims because "state antitrust regulation would conflict with federal policy and because national uniformity is required in any regulation of baseball."²⁸

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Citing Chavez v....