Putting Cipro Meat on Actavis Bones: a Case Study in Filling in the Legal Gaps

• Publication year: 2015
• Author: By Jordan Elias

PUTTING CIPRO MEAT ON ACTAVIS BONES: A CASE STUDY IN FILLING IN THE LEGAL GAPS

By Jordan Elias¹

Justice Cardozo summed up the essential challenge of deciding cases with a single sentence: "There are gaps to be filled."² Gap-filling best describes the judicial function that a unanimous California Supreme Court performed this year in its major antitrust decision in the Cipro reverse payment litigation.³ Confronting spaces in the law left by the U.S. Supreme Court in its own recent reverse payment decision—FTC v. Actavis, Inc.⁴—the California court elaborated at length on why reverse payment agreements must be treated as suspect under the rule of reason and how a reverse payment trial under the Cartwright Act⁵ must be structured.

The California Supreme Court's Cipro decision is binding authority as to Cartwright Act claims in state and federal courts and, in my view, should also be persuasive authority for courts interpreting and applying Actavis. As one federal judge remarked, Cipro contains "one of the most thorough and thoughtful discussions of Actavis yet"; it explains "that 'the period of exclusion attributable to a patent is not its full life, but its expected life had enforcement been sought,' and that '[t]his expected life represents the baseline against which the competitive effects of any agreement must be measured.'"⁶

The authoritative guidance and reasoning in the Cipro decision should inform the prosecution, management and resolution of reverse payment claims, under California law and otherwise, for years to come.⁷ Where Actavis left questions, Cipro supplied answers grounded in existing antitrust principles and economic analysis, from the high court of the most populous state. And to the extent Cipro has a lasting effect on the contours of future reverse payment cases, and on antitrust law in general, it will be because the California Justices refused to dodge the issues that have made reverse payments such a conundrum.

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Few if any business developments over the past generation have produced as much consternation among antitrust practitioners and commentators as reverse payments. These are payments with which a brand manufacturer of a valuable prescription drug, whose patent comes under attack in the brand's own suit for infringement, settles with the defendant generic manufacturer. The settlement payment is known as "reverse" because the plaintiff in the patent infringement suit (the brand) is making it, and to a defendant with no counterclaim for damages. In exchange for dropping its legal challenge to the drug patent, the generic receives a chunk of the brand's profit stream over the life of the patent monopoly. Sometimes this payment can even surpass what the generic would have earned from selling the drug in a competitive market, giving the generic an incentive to accept the deal even if it is certain it can strike down the patent. Thus, where there was once a chance the patent would be declared void, with generic competition thereafter flooding the market to reduce prices, a reverse payment barricades the asserted patent monopoly and ensures high prescription drug prices for consumers and insurers alike, often for several years.

What made reverse payments—also known as "pay-for-delay" settlements—so perplexing as a matter of jurisprudence? The main factors, it is now apparent, were their novelty and courts' reluctance to engage with patent law issues.⁸ No other factors can explain why the pre-Actavis case law spanned the full range of antitrust standards in less than a decade. Pharmaceutical companies argued—for a time, with growing success—that the underlying patent must be presumed valid and there can be no violation if the payment excludes no more competition than the patent already excludes. They also raised the specter of the settled patent suit having to be reopened and tried within the confines of an antitrust suit. From 2003 to 2012, a line of federal cases constructed an immunity making that unappealing prospect unnecessary.⁹

But neither the U.S. Supreme Court analyzing the Sherman Act, nor the California Supreme Court analyzing the Cartwright Act, accepted these formalistic arguments or the speculative claims that subjecting reverse payments to scrutiny would dampen innovation or burden settlement of patent cases.¹⁰ Both courts instead held that the antitrust laws prohibit a payment to avoid even "the risk of competition,"¹¹ or, in the California court's refraining, to gain "freedom from the possibility of competition."¹² This is the key antitrust insight: the inherent uncertainty about how a fact finder would have decided the patent suit militates not against, but in favor of a subsequent antitrust suit over the payment that neutralized the simple threat of market entry. This insight, in turn, gives rise to a rule of reason with "bite" that should go a long way toward deterring this form of collusion among firms. Experience shows that drug patent cases under the Hatch-Waxman Act are perfectly capable of settling on procompetitive terms—for example, through licenses that account for the risk of invalidation by allowing generic entry before the patent is scheduled to expire.¹³

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In Actavis, the U.S. Supreme Court "left] to the lower courts the structuring" and operation of the rule of reason in the reverse payment setting.¹⁴ The California Supreme Court, for its part, held that although Actavis "is not dispositive" on issues of California law,¹⁵ "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."¹⁶

What characterizes the framework the California Justices put in place?

In three significant ways, without creating a conflict, the Justices built upon Actavis to settle expectations surrounding reverse payments.

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First, Actavis says nothing about reverse payments that do not take the form of cash. The omission matters because pharmaceutical companies have lately been camouflaging...