In re Cipro Cases I & II

• Decision Date: 07 May 2015
• Docket Number: No. S198616.,S198616.
• Court: California Supreme Court
• Parties: In re CIPRO CASES I & II.

61 Cal.4th 116

348 P.3d 845

187 Cal.Rptr.3d 632

In re CIPRO CASES I & II.

No. S198616.

Supreme Court of California

May 7, 2015.

Lieff, Cabraser, Heimann & Bernstein, San Francisco, Eric B. Fastiff, Brendan Glackin, Jordan Elias, Dean M. Harvey ; Joseph Saveri Law Firm, Joseph R. Saveri, Lisa J. Leebove ; Krause, Kalfayan, Benink & Slavens, Ralph B. Kalfayan ; Zwerling, Schachter & Zwerling, Dan Drachler ; Durie Tangri and Mark A. Lemley, Stanford, for Plaintiffs and Appellants.

The Kralowec Law Group and Kimberly A. Kralowec, San Francisco, for Consumer Attorneys of California as Amicus Curiae on behalf or Plaintiffs and Appellants.

Michael A. Carrier; Zelle Hofmann Voelbel & Mason and Judith A. Zahid, San Francisco, for 49 Professors as Amici Curiae on behalf or Plaintiffs and Appellants.

Mark A. Lemley, Stanford, for 78 Intellectual Property Law, Antitrust Law, Economics and Business Professors as Amici Curiae on behalf or Plaintiffs and Appellants.

Richard M. Brunell ; Zelle Hofmann Voelbel & Mason and Judith A. Zahid, San Francisco, for American Antitrust Institute as Amicus Curiae on behalf or Plaintiffs and Appellants.

Edleson & Rezzo, Joann F. Rezzo ; Karcher Harmes, Kathryn E. Karcher ; Stinson Morrison Hecker, Stinson Leonard Street, David E. Everson, Heather S. Woodson and Victoria L. Smith for Defendants and Respondents Hoechst Marion Roussel, Inc., The Rugby Group, Inc., and Watson Pharmaceuticals, Inc.

Luce, Forward, Hamilton & Scripps, McKenna Long & Aldridge, Charles A. Bird, Christopher J. Healey, Todd R. Kinnear, San Diego; Jones Day, Kevin D. McDonald ; Bartlit Beck Herman Palenchar & Schott and Peter B. Bensinger, Jr., for Defendant and Respondent Bayer Corporation.

Kirkland & Ellis, Jay P. Lefkowitz, Edwin John U, Karen N. Walker and Gregory L. Skidmore for Defendant and Respondent Barr Laboratories, Inc.

Richard A. Samp, Cory L. Andrews ; Law Offices of Mark E. Foster and Mark E. Foster, San Jose, for Washington Legal Foundation as Amicus Curiae on behalf of Defendants and Respondents.

Munger, Tolles & Olson, Jeffrey I. Weinberger, Adam R. Lawton, Guha Krishnamurthi, Los Angeles, Rohit K. Singla, San Francisco, and Michelle T. Friedland for The Chamber of Commerce of the United States of America as Amicus Curiae on behalf of Defendants and Respondents.

Stevens & Lee, Joseph Wolfson ; Duane Morris and Paul J. Killion, San Francisco, for Generic Pharmaceutical Association as Amicus Curiae on behalf of Defendants and Respondents.

Kamala D. Harris, Attorney General, Edward C. DuMont, State Solicitor General, Kathleen E. Foote, Assistant Attorney General, Janill L. Richards, Deputy State Solicitor General, and Cheryl L. Johnson, Deputy Attorney General, for California Attorney General, as Amicus Curiae.

WERDEGAR, J.

To protect competition in the marketplace, antitrust law prohibits agreements that create or perpetuate monopolies. Patent law, in contrast, grants temporary monopolies to inventors to encourage the development of useful innovations. We consider here a crucial question at the intersection of these two bodies of law: what limits, if any, does antitrust law place on the ability of a patent holder to make agreements restricting competition during the life of its patent? In particular, when another entity tries to invalidate a patent and enter the marketplace, can the patentee pay the would-be competitor to withdraw its challenge and refrain from competing until at or near the natural expiration of the potentially invalid patent's life?

The answer to this is of special moment to the pharmaceutical industry, which has seen a raft of suits in which generic drug manufacturers (generics), seeking to introduce lower priced alternatives to patented brand-name drugs, raise patent invalidity as a defense to claims of infringement. With increasing frequency these cases have settled, with the plaintiff brand-name drug manufacturer (brand) making a "reverse payment" to the defendant generic in exchange for the generic dropping its patent challenge and consenting to stay out of the market. This case involves just such a settlement agreement.

Under federal antitrust law, these settlements are not immune from scrutiny, even if they limit competition no more than a valid patent would have. ( Federal Trade Commission v. Actavis, Inc. (2013) 570 U.S. ––––, ––––, 133 S.Ct. 2223, 2230, 186 L.Ed.2d 343, 356 (Actavis ).) We conclude the same is true under state antitrust law. Some patents are valid; some are not. Sometimes competition would infringe; sometimes it would not. Parties illegally restrain trade when they privately agree to substitute consensual monopoly in place of potential competition that would have followed a finding of invalidity or noninfringement. The Court of Appeal ruled to the contrary; we reverse.

Factual and Procedural Background

Bayer AG and Bayer Corporation (collectively Bayer) market Cipro, an antibiotic that has been among the most-prescribed and best-selling drugs in the world. ( Arkansas Carpenters Health and Welfare Fund v. Bayer AG (2d Cir.2010) 604 F.3d 98, 100 ; In re Ciprofloxacin Hydrochloride Antitrust Lit. (E.D.N.Y.2003) 261 F.Supp.2d 188, 194 ; In re Ciprofloxacin Hydrochloride Antitrust Lit. (E.D.N.Y.2001) 166 F.Supp.2d 740, 743.) In 1987, Bayer was issued a United States patent on the active ingredient in Cipro, ciprofloxacin hydrochloride, a patent that expired in December 2003. ( U.S. Patent No. 4,670,444, col. 22, ll. 32–34, claim 12 (the ' 444 patent ); see In re Ciprofloxacin Hydrochloride Antitrust Lit. (Fed.Cir.2008) 544 F.3d 1323, 1327–1328.) A subsidiary and licensee of Bayer obtained Food and Drug Administration (FDA) approval to market Cipro in the United States. ( In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d at p. 1328 ; In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 166 F.Supp.2d at p. 743.)

Between 1987 and 2003, Bayer was the sole producer of Cipro in the United States and, between 1997 and 2003 alone, Cipro generated more than $6 billion in gross sales.

At one time, pioneer drugs like Cipro and the generic drugs that followed them were governed by the same FDA approval process.¹ Subjecting generic drugs to the same "cumbersome drug approval process [as pioneer drugs] delayed the entry of relatively inexpensive generic drugs into the market place," at substantial cost to consumers and the government. ( Mylan Pharmaceuticals, Inc. v. Shalala (D.D.C.2000) 81 F.Supp.2d 30, 32 ; see H.R.Rep. No. 98–857, 2d Sess., pt. 1, p. 17 (1984), reprinted in 1984 U.S.Code Cong. & Admin. News, at pp. 2647, 2650.) To expedite the availability of low cost generic drugs, Congress authorized an abbreviated approval process for drugs whose active ingredients had already been proven safe and effective in earlier clinical trials. (Drug Price Competition & Patent Term Restoration Act of 1984, Pub.L. No. 98–417, tit. I, §§ 101–106 (Sept. 24, 1984) 98 Stat. 1585, 1585–1597, codified as amended at 21 U.S.C. § 355 (the Hatch–Waxman Act); see H.R.Rep. No. 98–857, 2d Sess., pt. 1, pp. 14, 16–17 (1984), reprinted in 1984 U.S.Code Cong. & Admin. News, pp. 2647, 2648–2650.)

Under the Hatch–Waxman Act, a prospective generic drug manufacturer may file a streamlined application asserting the generic drug's bioequivalence with an existing pioneer drug, thus piggybacking on the safety and efficacy data already submitted to the FDA in connection with its approval of the original drug. ( 21 U.S.C. § 355(j)(2)(A)(ii), (iv) ; see Actavis, supra, 570 U.S. at p. ––––, 133 S.Ct. at p. 2228, 186 L.Ed.2d at p. 354.) With respect to the patent implications of the application, the generic drug manufacturer must make one of four certifications: There is no patent for the underlying drug, the patent is expired, the patent will expire, or (relevant here) the patent is invalid or will not be infringed by the proposed manufacture and sale of the generic drug. ( 21 U.S.C. § 355(j)(2)(A)(vii) ; Actavis, at p. ––––, 133 S.Ct. at p. 2228, 186 L.Ed.2d at pp. 353–354.) An applicant that certifies the affected patent is invalid or will not be infringed (a "paragraph IV" certification) must give notice to all affected patent owners. ( 21 U.S.C. § 355(j)(2)(B).) Submission of an application to manufacture a generic version of a drug covered by a patent is a technical act of infringement ( 35 U.S.C. § 271(e)(2)(A) ; Actavis, at p. ––––, 133 S.Ct. at p. 2228, 186 L.Ed.2d at p. 354 ); to stay approval of the generic version, a patent owner must file an infringement lawsuit against the generic drug manufacturer within 45 days ( 21 U.S.C. § 355(j)(5)(B)(iii) ). To provide an incentive to assume the risks of exposure to such litigation, the first generic manufacturer to file an application and prevail is granted a potentially lucrative 180–day exclusivity window in which to market its drug without competition from any other generic manufacturer. ( 21 U.S.C. § 355(j)(5)(B) (iv) ; Actavis, at p. ––––, 133 S.Ct. at pp. 2228–2229, 186 L.Ed.2d at p. 354.)

In 1991, twelve years before the scheduled expiration of the ' 444 patent, defendant Barr Laboratories, Inc., filed an application to market a generic version of Cipro. ( In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d at p. 1328.) Barr's application included a paragraph IV certification that the ' 444 patent was invalid and unenforceable. ( Arkansas Carpenters Health and Welfare Fund v. Bayer AG, supra, 604 F.3d at pp. 101–102 ; see 21 U.S.C. § 355(j)(2)(A)(vii)(IV).) Barr's statutory notice to Bayer contended Cipro's derivation was obvious in light of prior art, the ' 444 patent was an invalid double patent, and the patent was the product of inequitable conduct based on Bayer's withholding of information about preexisting patents from the patent examiner. (See 35 U.S.C. §§ 102, 103 ; In re Longi (Fed.Cir.1985) 759 F.2d 887, 892–893.) Bayer responded with a patent infringement suit, staying FDA approval, and Barr counterclaimed for...