Off-label Use of the Cartwright Act: Will Cipro Require State Courts to Assess Federal Patent Validity in Pay-for-delay Cases?

• Publication year: 2015
• Author: By Dylan M. Carson and Avril G. Love, Tucker Ellis LLP

OFF-LABEL USE OF THE CARTWRIGHT ACT: WILL CIPRO REQUIRE STATE COURTS TO ASSESS FEDERAL PATENT VALIDITY IN PAY-FOR-DELAY CASES?

By Dylan M. Carson and Avril G. Love, Tucker Ellis LLP¹

I. INTRODUCTION

In FTC v. Actavis, Inc., the United States Supreme Court subjected so-called reverse payment settlements in pharmaceutical patent litigation to rule of reason antitrust analysis under Section 1 of the Sherman Act.² The Actavis decision, however, left it to lower courts to determine how best to perform that analysis. In May 2015, the California Supreme Court stepped into the breach with its decision in In re Cipro Cases I & II.³ The Cipro Court held that reverse payment settlements may be challenged under California's primary antitrust statute, the Cartwright Act. In doing so, it attempted to fill in some of the blanks left by the Actavis decision on how to conduct a rule of reason analysis of reverse payment settlements.

The Cipro Court established (i) a four-part test for plaintiffs to present a prima facie case, (ii) how defendants can rebut that prima facie showing, and (iii) what plaintiffs must ultimately demonstrate to carry their burden of persuasion. Given the discretion left by the United States Supreme Court's Actavis decision to formulate the applicable rule of reason test, it would not be surprising to see other courts use the Cipro decision to model their analysis in so-called pay-for-delay litigation under either federal or state antitrust law. What is more, given the relatively low burdens of proof and persuasion Cipro places on plaintiffs and the significant burdens it places on defendants, California courts are likely to become even more of a hotbed for antitrust litigation arising from disputes around pharmaceutical patents and generic market entry.

In Cipro, the California Supreme Court became the first state high court to apply to state antitrust law the Actavis Court's resolution of the developing conflict between patent and antitrust law in the pharmaceutical arena.⁴ In the process, the Cipro Court created new challenges for state courts analyzing reverse payment settlements. On its face, the Cipro decision requires fact finders to assess the strength of a federal patent—an invitation that further expands the growing scope of patent-related state law claims.⁵ Whether this is the proper role of a state court judge or jury in a Cartwright Act case will likely be the subject of dispute in the trial and appellate courts in the near future. How California state court judges and juries will apply the new rules articulated in Cipro is unclear. What is clear is that Cipro continued California's long history as a pioneer in expanding the boundaries of antitrust jurisprudence.⁶

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II. THE CONFLICT BETWEEN ANTITRUST LAW AND PATENT LAW

At the heart of pay-for-delay lawsuits is the tension between antitrust law and patent law. Antitrust and patent law are intended to coexist.⁷ Both are intended to promote innovation and competition. The patent laws provide an incentive to innovate by granting a limited right to exclude others from making, using, or selling a useful new product or invention.⁸ The antitrust laws, among other things, prohibit artificial barriers to competition and innovation. As a result, courts grapple with the tension between a patent's grant of the lawful right to exclude and antitrust law's proscription on exclusionary conduct.⁹

It is worth noting that the patent laws do not grant a monopoly in the antitrust sense.¹⁰ Monopoly power is the power to exclude competition or control prices in a relevant market. A patent grants the right to exclude some competition for a limited period of time and can provide a patent holder with a significant barrier to entry against potential competition.¹¹ But exclusion does not necessarily result in market power.¹² For example, reasonably interchangeable substitutes may exist for the patented invention.¹³

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A wide array of patent law activity implicates the antitrust laws, from industry standard setting¹⁴ and patent pools,¹⁵ to fighting patent assertion entities¹⁶ and settling patent infringement lawsuits.¹⁷ Recently, the latter category has created a veritable cottage industry of pay-for-delay litigation for government antitrust enforcers and both the plaintiff class action and defense bar in the pharmaceutical industry.

III. HATCH-WAXMAN AND THE RISE OF PARAGRAPH IV LITIGATION

An explosion of antitrust litigation has grown out of the settlements entered into between branded and generic manufacturers to resolve infringement litigation involving pharmaceutical patents. Such settlements grew rapidly since the 1984 passage of the Hatch-Waxman Act.¹⁸ The Hatch-Waxman Act seeks to expedite and encourage the entry of lower-cost generic pharmaceuticals into the market through a streamlined process for generic manufacturers whereby they are permitted to submit Abbreviated New Drug Applications ("ANDAs") to the Food and Drug Administration, which rely of the applications and information already filed by the branded companies.¹⁹

One type of ANDA certification permitted under Hatch-Waxman is a Paragraph IV certification, whereby the generic applicant assures the FDA that the branded manufacturer's patent is either invalid or will not be infringed by the proposed generic pharmaceutical.²⁰Because the generic manufacturer's submission is considered itselfan act of patent infringement, patent litigation is all but certain to follow most Paragraph IV certifications filed before a pharmaceutical patent has expired.²¹

To incentivize generic manufacturers to file such ANDAs and certifications (thereby committing infringement and inviting litigation), Hatch-Waxman provides a 180-day period during which the first ANDA filer has market exclusivity as the only approved generic.²² This exclusivity period can be very lucrative for a generic manufacturer when a branded drug reaches the "patent cliff," especially in states that have generic substitution laws requiring that prescriptions be filled with generic versions of branded pharmaceuticals.²³

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Once a potentially infringing ANDA and Paragraph IV certification is filed by a generic manufacturer, if the branded manufacturer files an infringement lawsuit within 45 days, the FDA must withhold approval of the application for two and a half years (unless the litigation resolves sooner than 30 months).²⁴

IV. A BRIEF HISTORY OF REVERSE PAYMENT PATENT LITIGATION

Given the competing incentives of branded and generic manufacturers, further spurred by the Hatch-Waxman Act and state substitution laws, significant patent litigation has arisen as generics have sought to take advantage of the six month exclusivity period. Pharmaceutical patent holders have the right to "enforce [their] patent rights against infringement or contributory infringement,"²⁵ and have done so often against would-be generic entrants. And, given the high cost of patent litigation, it was inevitable that the branded and generic manufacturers looked for ways to settle these lawsuits.

Some of those settlement agreements have prohibited the generics from entering the market for some agreed period oftime.²⁶ These settlements have also included a payment or transfer of some other value from the branded company to the generic. In the view of some enforcers and judges, the payment to resolve the litigation flowed counterintuitively: from the branded plaintiff to the allegedly infringing generic defendant.²⁷ As a result, they gained the moniker "reverse payments."²⁸

These settlements ultimately attracted the attention of both the Federal Trade Commission and the plaintiffs antitrust bar.²⁹ In the late 1990s, the FTC began investigating what it called "pay-for-delay" agreements whereby branded manufacturers paid generics companies to settle patent litigation and refrain from entering the market with generic products.³⁰ The FTC Staff described these agreements as a "win-win" for the companies because "brand-name pharmaceutical prices stay high, and the brand and generic share the benefits of the brand's monopoly profits," but a loss for consumers who do not see the benefits of dramatically reduced pricing after generic entry.³¹

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In 1998, the first of many antitrust lawsuits challenging an alleged pay-for-delay agreement was filed.³² In consolidated cases involving the hypertension medication Cardizem CD, several states and various direct and indirect purchasers challenged an agreement between the branded manufacturer and a generic that filed its ANDA and Paragraph IV certification seeking 180-day exclusivity.³³ In 2003, the Sixth Circuit held that the agreement paying the generic $40 million per year not to enter the market after the generic had received FDA approval was "a horizontal market allocation agreement and . . . per se illegal under the Sherman Act."³⁴

While litigation proliferated, several Courts of Appeal decisions changed the tenor of the debate towards one reflecting the general policy in both patent and antitrust law in favor of settlements. In 2005, the Eleventh Circuit ignored the Sixth Circuit's per se treatment and required an antitrust analysis reflecting "the need to evaluate the strength of the patent."³⁵ In Schering-Plough Corp. v. FTC, the court considered an appeal from an FTC order, which held that a Paragraph IV patent infringement litigation settlement involving a $60 million reverse payment to the generic defendant in exchange for a deferred entry date violated Section 1 of the Sherman Act and Section 5 of the FTC Act.³⁶ The court rejected the FTC's reliance on the rule of reason analysis and ruled that "[s]imply because a brand-name pharmaceutical company holding a patent paid its generic competitor money cannot be the sole basis for a violation of antitrust law."³⁷ The court rejected "a rule of law that would automatically invalidate any agreement where a patent-holding pharmaceutical manufacturer settles an infringement case by...