Foreclosing the most promising non-federal venue for plaintiffs challenging “pay-for-delay” settlements, whereby branded drug makers pay generic companies to delay marketing of generic versions of branded medications, a California state appeals court affirmed summary judgment for defendants Bayer AG and Barr Pharmaceuticals in a “pay-for-delay” case brought under state antitrust law.   In re Cipro Cases I & II, Case No. D056361 (Cal. Ct. App., Oct. 31, 2011) (Nares, J.). 

Bayer’s patent on antibiotic Cipro was set to expire at the end of 2003.   In 1991, Barr challenged the validity of the patent pursuant to the Hatch-Waxman Act, which gives an incentive to the first drug manufacturer to successfully dispute a patent in the form of 180 days to exclusively market a generic version of the drug.   Bayer promptly sued Barr for patent infringement.  In 1997, the parties reached a settlement under which Bayer ultimately paid Barr $398 million to accept the validity of Bayer’s Cipro patent and to defer introducing a generic version of the drug for the duration of the patent. 

Following the settlement, Bayer filed a request for reexamination of the patent with the U.S. Patent and Trademark Office (USPTO), which confirmed the patent’s validity.  Bayer also successfully fought off several challenges to the patent from other generic drug makers.  In 2000 and 2001, direct and indirect purchasers of Cipro sued in federal district courts alleging that Bayer and Barr’s reverse payment settlement violated the antitrust laws.  The courts consolidated the cases as a Multidistrict Litigation in the U.S. District Court for the Eastern District of New York, and that court granted summary judgment to defendants, noting that the settlement had not prevented other generic drug companies from challenging the patent’s validity.  The U.S. Court of Appeals for the Federal Circuit (in the indirect purchaser case) and the U.S. Court of Appeals for the Second Circuit (in the direct purchaser case) affirmed because the competitive restraint was within the scope of the patent.  Since a patentee had the right to exclude all competition with its patent, it could choose to pay competitors to acquiesce in that exclusion.

Adopting the reasoning of the 2d Circuit and Federal Circuit in parallel federal litigation to the California case, the court concluded that as long as the patent was not procured by fraud and the enforcement suit was not objectively baseless, the settling parties could agree to restrain competition within the scope of the patent.  In applying California’s antitrust statutes, the Cartwright Act and Unfair Competition Law, the court found that the federal appellate courts that have upheld such reverse payment settlements to be more persuasive than the one federal appellate court that has not.  In siding with the Second and Federal Circuits, the Court distinguished a U.S. Court of Appeals for the Sixth Circuit case that found a reverse payment settlement involving the drug Cardizem to be illegalper se.  There, the generic drug maker had agreed not to market other bioequivalent or generic versions of the drug that were not at issue in the litigation and further agreed to not introduce a generic version during its 180-day exclusivity period.  The California court deemed such concessions to be beyond the scope of the patent and differentiated the cases on that basis.  The court further concluded that per se treatment was inappropriate because, among other reasons, judicial policy favored encouraging settlement.

Practice Note:   For now, the decision significantly bolsters the staying power of reverse-payment settlements.  The decision adds to the growing weight of authority supporting the validity of these settlements under antitrust law.  The court’s decision is binding only on state trial courts, however and not on subsequent panels of the state appellate courts.  The FTC, having lost a challenge to a similar pay-for-delay settlement in the U.S. Court of Appeals for the Eleventh Circuit, has recommended that Congress pass legislation banning the practice.  See note on the October 25, 2011 FTC report regarding this practice in this edition of IP Update.