Lieff Cabraser Civil Justice Blog

California Supreme Court Holds Big Pharma Has to Answer for Pay-for-Delay Settlements

California Supreme Court Holds Big Pharma Has to Answer for Pay-for-Delay Settlements

The California Supreme Court today resoundingly endorsed consumers’ right to challenge pharmaceutical pay-for-delay settlements under California competition law.

Reversing a grant of summary judgment to Bayer and Barr, whose $398.1 million deal blocked access to affordable generic versions of the widely prescribed antibiotic Cipro for nearly seven years, the Court held that “[p]arties illegally restrain trade when they privately agree to substitute consensual monopoly in place of potential competition.”

“Purchasing freedom from the possibility of competition, whether done by a patentee or anyone else, is illegal,” the Court declared. “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.”

Brendan Glackin, an attorney at Lieff Cabraser Heimann & Bernstein who represents the plaintiffs–consumer and third-party purchasers of Cipro, including labor unions and insurance companies–commented: “This opinion is a credit to the continued vitality of the Cartwright Act. The Court’s decision ensures that consumers and all purchasers will receive the benefits of a competitive marketplace, by stopping pharmaceutical companies from raking in massive profits through collusion to maintain high monopoly prices. Justice Werdegar and the other Justices articulate a clear standard for the lower courts that will protect California consumers going forward. Among the profusion of reverse-payment settlements, this is one of the very worst, and we look forward to bringing this matter before a jury of California citizens.”

The opinion by Justice Werdegar finds it immaterial that the defendants’ agreement settled patent litigation, because antitrust principles “prohibit a patentee’s purchase of a potential competitor’s consent to stay out of the market” — and “[t]his is so even when the patent is likely valid.”

The opinion accordingly repudiates the lower courts’ “scope of the patent” test, finding that it “accords excess weight to the policies motivating patent law, gives insufficient consideration to the concerns animating antitrust law, and must be rejected.”

Steeped in the history and policies of California antitrust law, the unanimous opinion delves into the concerns that had motivated this deferential test and finds them all illusory: “Fears of chilling even legitimate settlements are overstated; all that allowing antitrust scrutiny does is remove the incentive to settle as a way to split monopoly profits.”

The Court established a structured rule of reason for evaluating reverse-payment settlements under California’s Cartwright Act. Under this rule, antitrust plaintiffs make out a prima facie case by demonstrating four elements: “(1) the settlement includes a limit on the settling generic challenger’s entry into the market; (2) the settlement includes cash or equivalent financial consideration flowing from the brand to the generic challenger; and the consideration exceeds (3) the value of goods and services other than any delay in market entry provided by the generic challenger to the brand, as well as (4) the brand’s expected remaining litigation costs absent settlement.”

These four elements serve as a proxy for anticompetitive effect and market power as they collectively demonstrate that the brand manufacturer unlawfully “purchased freedom from competition, as opposed to a limit on competition flowing naturally, and lawfully, from the perceived strength of the brand’s patent.”

The antitrust defendants may then attempt to rebut this presumption of illegality under the Cartwright Act with evidence of procompetitive justifications.

While the Court did not say what those justifications might be, it said what they cannot be. First, the defendants cannot argue that the underlying patent was valid and would have been upheld had they not settled the patent case, because “[a]greements must be assessed as of the time they are made, at which point the patent’s validity is unknown and unknowable.” Second, the defendants cannot argue that their agreement “allows competition earlier than would have occurred if the brand had won the patent action.”

Importantly, the Court’s rule applies to collusive settlements involving non-cash consideration as well: “courts considering Cartwright Act claims should not let creative variations in the form of consideration result in the purchase of freedom from competition escaping detection.” And the opinion also warns pharmaceutical companies against masking anticompetitive restraints through side deals, which “should not be permitted to serve as fig leaves for agreements to eliminate competition.”

The plaintiffs are represented by Eric B. Fastiff, Brendan Glackin and Dean M. Harvey of Lieff Cabraser Heimann & Bernstein LLP; Dan Drachler of Zwerling Schachter & Zwerling LLP; Joseph R. Saveri of Joseph Saveri Law Firm; Mark Lemley of Durie Tangri LLP, and Ralph B. Kalfayan of Krause Kalfayan Benink & Slavens LLP.

Learn more about the Cipro case.