What Does State Law Say About Drug Patent Settlements? The California Supreme Court's Cipro Case

Abstract

In Federal Trade Commission v. Actavis, the U.S. Supreme Court held that a brand-name drug company’s payment to a generic firm to settle patent litigation and delay entering the market could violate the antitrust laws. After the decision, the federal courts and litigants have wrestled with numerous issues. But one issue that has not received sufficient attention is the role that Actavis will play in state courts’ consideration of the issue.

The California Supreme Court is poised to issue a ruling in In re Cipro Cases I & II (Cipro). In a decision that preceded Actavis, the California Court of Appeal had applied a deferential analysis that relied on the “scope of the patent” in upholding a settlement by which the brand paid the generic $398 million to delay its entry until six months before the end of the patent term. The California Supreme Court is considering how such “reverse-payment” settlements should be analyzed.

The California Supreme Court’s decision in Cipro will be critical. The decision, obviously, will provide a historic ruling on state law. The Court’s application of a level of scrutiny (either per se illegality or (more likely) a structured Rule of Reason) above Actavis would offer a strong foundation on which future courts could build in developing a justifiable framework for these agreements.

But even beyond the effect on state law, the Cipro decision promises to have spillover effects on federal law. District courts confronted with Actavis’s instruction to flesh out the framework have not been clear as to how precisely they should decide questions such as the role of the patent merits, what constitutes payment, how to structure their analysis, and whether there are thresholds plaintiffs must clear even before reaching the Rule of Reason. The Cipro decision can shed light on these determinations.

On behalf of 49 professors, I submitted a brief in the case supporting the plaintiff petitioners. This article summarizes the arguments in the brief. It first shows how six pillars of support underlying the California Court of Appeal’s decision were undercut by Actavis. Second, it shows how, after Actavis, California antitrust law must apply a more robust analysis than that articulated in the pre-Actavis California Court of Appeal decision. Third, it shows how federal law does not preempt a state cause of action challenging reverse-payment settlements.

Keywords: patent, antitrust, drugs, pharmaceuticals, settlements, reverse payments, exclusion payments, Cipro, Hatch Waxman Act, Cartwright Act

JEL Classification: I18, K21, L40, L41, L43, L65, O34, O38