Patent Settlements Run into Antitrust Issues

The holding for In re Cipro Cases I & II, Case No. S198616 (May 7, 2015) established that just because a patent has a definite term does not mean that settlement agreements that include covenants not to sue do not have anti-trust issues.

The California Supreme Court held that the trial court and court of appeals erred in applying a “scope of the patent” test because the test presumes that the patent at issue is valid and that the remaining patent term is the relevant benchmark that results in no anticompetitive effects. 

The case involved a U.S. patent on the active ingredient in Cipro, ciprofloxacin hydrochloride, issued to Bayer in 1987.  Barr Laboratories, Inc., filed an application to market a generic version of Cipro in 1991, which was twelve years before the expiration of the patent. Consequently, Bayer sued Barr for patent infringement and Barr counterclaimed for a declaratory judgment that the Cipro patent was invalid.

Bayer and Barr were able to settle the case in 1997, wherein Barr agreed to drop its patent challenge and postpone marketing a generic version of Cipro until the Bayer patent expired while Bayer agreed to pay almost $400 million to Barr for the duration of the patent.

California consumers sued Bayer and Barr for allegedly violating the Cartwright Act, which covers unfair competition and antitrust law, based on the settlement agreement that splits the monopoly profits between Bayer and Barr at the expense of the consumers. 

The trial court granted summary judgment in favor of Bayer and Barr under the theory that the patent had a set time limit, competition was not restrained, and thus, the Cartwright Act was not violated.  The court of appeals affirmed under the theory that patent law carves out an exception to unfair competition unless the patent was procured by fraud or the suit to enforce it was objectively baseless.

The California Supreme Court reversed the lower courts’ holding because the court of appeals erroneously applied the so-called “scope of the patent” test that the U.S. Supreme Court addressed in Federal Trade Commission v. Actavis, Inc., 133 S.Ct. 2223 (2013).  In Actavis, the Court rejected the foundational presumption for the scope of the patent test, which presumed the challenged patent was valid and was infringed.  The Supreme Court explained that the scope of the patent test accorded patent law policies excess weight considerations while weakening that of antitrust law.

In re Cipro, the court concluded that in order to successfully challenge a reverse payment patent settlement, all of the following four elements must be met: (1) the settlement included a limit on the settling generic manufacturer’s entry into the market; (2) the settlement included case or equivalent financial consideration flow from the brand manufacturer to the generic manufacturer; (3) the consideration exceeds the value of any other collateral products or services provided by the generic to the brand; and (4) the consideration exceeds the brand’s expected remaining litigation costs absent settlement.

If all four elements are met, a trial court weighs the anticompetitive effects against any purported justifications for the changed restraint in which the manufacturers have the shifted burden to offer legitimate justifications that the settlement is not anticompetitive. Finally, the burden then shifts to the third-party plaintiffs to demonstrate that the justifications are unsupported.

In future litigation relating to reverse payment patent settlements, the key issue to consider is whether the settlement included a large one-sided and unjustified payment, inferring a profit-sharing arrangement to avoid the risk of competition.