California Supreme Court Permits Challenges to Pay-For-Delay Settlements

AudetLaw.com

In a unanimous opinion, the California Supreme Court held that pay-for-delay or reverse payment settlements are “not immune from scrutiny, even if they limit competition no more than a valid patent would have.” Accordingly, the Court concluded an illegal restraint of trade occurs when parties “privately agree to substitute consensual monopoly in place of potential competition that would have followed a finding of invalidity or noninfringement.”

The pay-for-delay settlement at issue involved Bayer AG and Bayer Corporation’s 1987 U.S. patent on ciprofloxacin hydrochloride, the active ingredient in Cipro, an antibiotic prescribed for the treatment of infections. In 1991, twelve years prior to the expiration date of Bayer’s patent, Barr Laboratories Inc. filed an application with the FDA to market and sell a generic, bioequivalent version of Cipro because it considered Bayer’s patent invalid and unenforceable. On January 16, 1992, pursuant to the Hatch-Waxman Act, Bayer filed a patent infringement action against Barr, and Barr counterclaimed for a judgment against Bayer.

Bayer and Barr resolved the patent dispute in 1997. Under the settlement, Bayer agreed to pay Barr $398.1 million in exchange for a protracted period in which Bayer could sell Cipro free from competition.

The plaintiffs in this antitrust action, consumers and third-party payers who bought Cipro, allege that Bayer and Barr’s pay-for-delay settlement violated California’s Cartwright Act, Unfair Competition Law, and common law prohibition on monopolies. In particular, the plaintiffs claim that the 1997 agreement allowed Bayer to maintain its market dominance and charge supracompetitive prices at the expense of consumers and Barr was able to share in the monopoly profits.

The California Supreme Court granted review of the matter to address the issue of what limits, if any, California antitrust law places on the ability of a patent holder to make agreements restricting competition during the life of its patent.

In reversing the decisions of the lower courts, the California Supreme Court articulated that the appropriate standard to review such agreements was the “structured rule of reason.” In so doing, the California Supreme Court took much of what the U.S. Supreme Court discussed in FTC v. Actavis, looked at the significant scholarly discourse on the subject, as well as the history and application of California’s Cartwright Act, and established a specific set of steps that must be undertaken by the parties to pay-for-delay litigation in order to establish whether or not an illegal restraint of trade has occurred. 

Dan Drachler of Zwerling, Schachter & Zwerling, LLP, co-lead counsel for the plaintiffs, commented: “The California Supreme Court’s decision emphasizes the important role the antitrust laws play in ensuring consumer welfare. The decision represents a significant milestone in our efforts to prevent pharmaceutical manufacturers from entering into unlawful agreements that keep affordable prescription drugs from consumers.”

The Case is: In re: Cipro Cases I & II, No. S198616 (Cal. Supreme Court).

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