In the supreme court of california

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Filed 5/7/15



) Ct.App. 4/1 D056361

) San Diego County

) Super. Ct. Nos.

) JCCP 4154/4220

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. ___, ___ [186 L.Ed.2d 343, 356, 133 S.Ct. 2223, 2230] (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 p. 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, 2649–2650.)

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. ___ [186 L.Ed.2d at p. 354, 133 S.Ct. at p. 2228].) 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. ___ [186 L.Ed.2d at pp. 353–354, 133 S.Ct. at p. 2228].) 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. ___ [186 L.Ed.2d at p. 354, 133 S.Ct. at p. 2228]); 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. ___ [186 L.Ed.2d at p. 354, 133 S.Ct. at pp. 2228–2229.)

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 a declaratory judgment that the ’444 patent was invalid.2

In early 1997, Bayer and Barr settled. Under the terms of the settlement, Barr agreed to postpone marketing a generic version of Cipro until the ’444 patent expired. It also agreed to a consent judgment affirming the patent’s validity and to modification of the certification in its FDA application from a paragraph IV certification, alleging invalidity, to a “paragraph III” certification, seeking to market a generic drug upon patent expiration. (Arkansas Carpenters Health and Welfare Fund v. Bayer AG, supra, 604 F.3d at p. 102; see 21 U.S.C. § 355(j)(2)(A)(vii)(III); 21 C.F.R. § 314.94(a)(12)(i)(A)(3) (2014).) In return, Bayer agreed to make payments to Barr and to supply it with Cipro for licensed resale beginning six months before patent expiration. (See In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d at pp. 1328–1329.) This head start mirrored the 180-day duopoly the Hatch-Waxman Act would have provided Barr if it had succeeded in showing invalidity or noninfringement of Bayer’s patent. (21 U.S.C. § 355(j)(5)(B)(iv).) Barr was to receive Cipro from Bayer at 85 percent of current price.

Pursuant to the settlement, between 1997 and 2003, Bayer paid Barr $398.1 million. In that same period, Bayer’s profits from sales of Cipro exceeded $1 billion. (In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 261 F.Supp.2d at p. 194.)

The 1997 settlement between Bayer and Barr produced a wave of state and federal antitrust suits. (Arkansas Carpenters Health and Welfare Fund v. Bayer AG, supra, 604 F.3d at p. 102.) This case arises from nine such coordinated class action suits brought by indirect purchasers of Cipro in California against Bayer and Barr. (See In re Cipro Cases I & II (2004) 121 Cal.App.4th 402, fn. *, 406–407.) The operative complaint in these coordinated proceedings alleges the Bayer-Barr reverse payment settlement violated the Cartwright Act (Bus. & Prof. Code, § 16700 et seq.), unfair competition law (id., § 17200 et seq.), and common law prohibition against monopolies. The gravamen of the complaint is that the 1997 agreement preserved Bayer’s monopoly and ability to charge supracompetitive prices at the expense of consumers, and Bayer in turn split these monopoly profits with Barr. Class certification was granted and upheld on appeal. (In re Cipro Cases I & II, at p. 418.) Thereafter, the parties stayed this action pending resolution of consolidated federal challenges to the Bayer-Barr settlement.

Following a Federal Circuit ruling in favor of Bayer and Barr on federal antitrust claims (In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d 1323),3 the trial court granted a defense summary judgment. It found decisional law under the federal Sherman Act (15 U.S.C. § 1 et seq.) dispositive and held that because the settlement agreement did not restrain competition longer than the exclusionary scope of the ’444 patent, it did not violate the Cartwright Act. The Court of Appeal affirmed, holding that agreements restraining competition within the scope of a patent are lawful unless the patent was procured by fraud or the suit to enforce it was objectively baseless. The court held further that, even if there were a disputed issue of material fact as to whether Bayer’s suit to enforce the ’444 patent was objectively baseless, litigation of that theory would be foreclosed by exclusive federal court patent jurisdiction.

We granted review to resolve important unsettled issues of state antitrust law. While the case was pending before this court, we entered an order formalizing Bayer’s dismissal from the proceedings pursuant to an approved settlement. Barr remains as respondent.


I. Reverse Payment Settlements Under the Hatch-Waxman Act

The Hatch-Waxman Act illustrates the law of unintended consequences. Congress wrote into the act a substantial incentive for generics to enter markets earlier by offering a 180-day exclusivity period to the first generic filer, and only that filer, to challenge a patent. (21 U.S.C. § 355(j)(5)(B)(iv); see Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem (2006) 81 N.Y.U. L.Rev. 1553, 1566, 1578–1579, 1583.) The theory was that a generic would be more likely to challenge dubious patents if offered the carrot of an enormously valuable six-month period in which only it and the brand could produce a drug. (Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality (2009) 108 Mich. L.Rev. 37, 47; Bulow, The Gaming of Pharmaceutical Patents in 4 Innovation Policy and the Economy (Jaffe et al. edits., 2004) 145, 163; Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition (2009) 109 Colum. L.Rev. 629, 651.) Otherwise, “free rider” problems might arise: every generic would have an incentive to hold back and let some other generic be the one to shoulder the risk and litigation costs associated with challenging a patent. (Lemley & Shapiro, Probabilistic Patents (2005) 19 J. Econ. Perspectives 75, 88; Hemphill, Paying for Delay, at p. 1605.)

This solution may well have encouraged more generics to file patent challenges, but not without creating a series of new problems. In other settings, a patentee might have little incentive to buy off a challenger in order to preserve its monopoly and continue reaping monopoly profits, for the simple reason that paying off the first challenger would simply encourage another challenger, and then another, and then another. (See Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at pp. 361–362, 133 S.Ct. at p. 2235].) Two features of the Hatch-Waxman Act change this dynamic. First, the 180-day exclusivity period created a bottleneck; no one else could receive FDA approval until after its expiration. (21 U.S.C. § 355(j)(5)(B)(iv)(I); Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, supra, 81 N.Y.U. L.Rev. at pp. 1560–1561, 1586–1587.) Second, other generics tempted to challenge a patent in the wake of a settlement with the first-filing generic would have to wait out an automatic 30-month stay the brand could obtain just by opposing their requests for FDA approval. (21 U.S.C. § 355(j)(5)(B)(iii); Actavis, at p. ___ [186 L.Ed.2d at pp. 361–362, 133 S.Ct. at p. 2235]; Bulow, The Gaming of Pharmaceutical Patents in 4 Innovation Policy and the Economy, supra, at p. 164.) As a result, the brand could effectively pick off “ ‘the most motivated challenger, and the one closest to introducing competition’ ” (Actavis, at p. ___ [186 L.Ed.2d at pp. 361–362, 133 S.Ct. at p. 2235], quoting Hemphill, Paying for Delay, at p. 1586), with all others stuck in line behind that generic (Cotter, Refining the “Presumptive Illegality” Approach to Settlements of Patent Disputes Involving Reverse Payments: A Commentary on Hovenkamp, Janis & Lemley (2003) 87 Minn. L.Rev. 1789, 1801).4

This legal regime means that, regardless of the degree of likely validity of a patent, the brand and first-filing generic have an incentive to effectively establish a cartel through a reverse payment settlement. (12 Areeda & Hovenkamp, Antitrust Law, supra, ¶ 2046, pp. 341–345; Hovenkamp, Anticompetitive Patent Settlements and the Supreme Court’s Actavis Decision (2014) 15 Minn. J. L. Sci. & Tech. 3, 8–13; see Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, supra, 108 Mich. L.Rev. at p. 73 [under Hatch-Waxman, “[g]enerics have powerful incentives to file the first patent challenge but little incentive to pursue the litigation”].) Rather than expend litigation costs on either side, the brand and generic can reach a settlement that reflects the likely validity or invalidity of the patent (stronger patent, smaller settlement; weaker patent, bigger settlement), grants the generic a share of monopoly profits, and leaves the brand the sole manufacturer of the product. (Hovenkamp, Anticompetitive Patent Settlements, at pp. 12–13.)

It is likely for this reason that reverse payment settlements, practically unheard of before the Hatch-Waxman Act, have proliferated in the years since its enactment. (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2235]; Hovenkamp, Anticompetitive Patent Settlements, supra, 15 Minn. J. L. Sci. & Tech. at pp. 13–16; Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra, 109 Colum. L.Rev. at pp. 647–656.) This is probably not what Congress intended. (Actavis, at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2235] [the Hatch-Waxman Act’s provisions have “no doubt unintentionally . . . created special incentives for collusion”]); id. at p. ___ [186 L.Ed.2d at p. 360, 133 S.Ct. at p. 2234] [quoting remarks of Sen. Hatch and Rep. Waxman decrying as an unintended consequence of their legislation collusive agreements to delay competition].) The issue for us is what, if anything, state antitrust law has to say about these problems.

II. The Intersection Between Antitrust and Patent Law

A. The Cartwright Act

The Legislature enacted the state’s principal antitrust law, the Cartwright Act, to rein in the burgeoning power of monopolies and cartels. (Clayworth v. Pfizer, Inc. (2010) 49 Cal.4th 758, 772.) The act’s principal goal is the preservation of consumer welfare. (Cianci v. Superior Court (1985) 40 Cal.3d 903, 918; Marin County Bd. of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 935.) The act, like antitrust law in general, “rest[s] ‘on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.’ ” (Marin County Bd., at p. 935; see National Soc. of Professional Engineers v. United States (1978) 435 U.S. 679, 695.) At its heart is a prohibition against agreements that prevent the growth of healthy, competitive markets for goods and services and the establishment of prices through market forces. (See Speegle v. Board of Fire Underwriters (1946) 29 Cal.2d 34, 44.) “The act ‘generally outlaws any combinations or agreements which restrain trade or competition or which fix or control prices’ [citation], and declares that, with certain exceptions, ‘every trust is unlawful, against public policy and void.’ ” (Pacific Gas & Electric Co. v. County of Stanislaus (1997) 16 Cal.4th 1143, 1147.)

The “trust[s]” the act prohibits include any “combination . . . by two or more persons” to “create or carry out restrictions in trade or commerce” (Bus. & Prof. Code, § 16720, subd. (a)) or to “prevent competition in manufacturing, making, transportation, sale or purchase of merchandise, produce or any commodity” (id., subd. (c)). Also prohibited is any contract by which two or more entities “[a]gree to pool, combine or directly or indirectly unite any interests that they may have connected with the sale . . . of any such article or commodity, that its price might in any manner be affected.” (Id., subd. (e)(4).) Agreements in violation of the act are “absolutely void and . . . not enforceable at law or in equity.” (Id., § 16722; see id., § 16726.)

Though the Cartwright Act is written in absolute terms, in practice not every agreement within the four corners of its prohibitions has been deemed illegal. (Morrison v. Viacom, Inc. (1998) 66 Cal.App.4th 534, 540.) Business and Professions Code sections 16720, 16722, and 16726 draw upon the common law prohibition against restraints of trade. (Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1971) 4 Cal.3d 842, 852; People v. Building Maintenance etc. Assn. (1953) 41 Cal.2d 719, 727; Speegle v. Board of Fire Underwriters, supra, 29 Cal.2d at p. 44.) The earliest common law decisions imposed an absolute rule, voiding “all contracts . . . which in any degree tended to the restraint of trade.” (Wright v. Ryder (1868) 36 Cal. 342, 357.) But the common law rule was soon modified and “as relaxed, tolerated such [restraints of trade] as were restricted in their operations within reasonable limits.” (Ibid.; see Vulcan Powder Co. v. Hercules Powder Co. (1892) 96 Cal. 510, 512.) The United States Supreme Court looked to the common law in embracing a rule of reason for determining which agreements violate federal antitrust law (see Standard Oil Co. v. United States (1911) 221 U.S. 1, 60), and this court thereafter followed suit: “[I]t may be assumed that the broad prohibitions of the Cartwright Act are subject to an implied exception similar to the one that validates reasonable restraints of trade under the federal Sherman Antitrust Act.” (Building Maintenance etc. Assn., at p. 727; see Marin County Bd. of Realtors, Inc. v. Palsson, supra, 16 Cal.3d at p. 930; Corwin, at p. 853.)5 What was true under the common law, however, is true today: “the difficulty lies in determining what are reasonable and what unreasonable restrictions.” (Wright, at p. 358.)

B. Patent Law

That difficulty is all the greater because antitrust law does not exist in a vacuum. The patent laws “are in pari materia with the antitrust laws and modify them pro tanto [to that extent].” (Simpson v. Union Oil Co. (1964) 377 U.S. 13, 24.) To promote investment in invention and the public disclosure of new discoveries, Congress has seen fit to grant inventors limited statutory monopolies and the right to exclude competition in the manufacture, use, or sale of the patent’s subject. (35 U.S.C. § 154(a); see Bonito Boats, Inc. v. Thunder Craft Boats, Inc. (1989) 489 U.S. 141, 150–151; Dawson Chemical Co. v. Rohm & Haas Co. (1980) 448 U.S. 176, 215; Sears, Roebuck & Co. v. Stiffel Co. (1964) 376 U.S. 225, 229.) Accordingly, the issuance of a federal patent creates “an exception to the general rule against monopolies and to the right of access to a free and open market.” (Precision Co. v. Automotive Co. (1945) 324 U.S. 806, 816.) While “[t]he limited monopolies granted to patent owners do not exempt them from the prohibitions” of antitrust law (Standard Oil Co. v. United States (1931) 283 U.S. 163, 169; see United Shoe Mach. Co. v. United States (1922) 258 U.S. 451, 463–464 [“the rights secured by a patent do not protect the making of contracts in restraint of trade”]), in a given case possession of a patent may provide a defense to liability (United States v. Gen. Elec. Co. (1926) 272 U.S. 476, 488–490; Valley Drug Co. v. Geneva Pharmaceuticals (11th Cir. 2003) 344 F.3d 1294, 1307). Courts thus must reconcile the two bodies of law, making “an adjustment between the lawful restraint on trade of the patent monopoly and the illegal restraint prohibited broadly by” antitrust law. (United States v. Line Material Co. (1948) 333 U.S. 287, 310.)

At the extremes, this is easy. If a patent were known to be invalid, a private agreement nevertheless giving it effect would be plainly illegal. (See Bus. & Prof. Code, §§ 16720, 16722, 16726.) Conversely, if a patent were known to be valid, an agreement foreclosing competition no more than the statutory monopoly would not restrain trade beyond what federal law permitted, and the rights patent law affords the patentee would supersede any state law prohibition. Difficulties emerge when we move from a hypothetical patent known to be determinately valid or invalid to the real world, where validity may be unclear. When assessing the antitrust implications of an agreement arising from a patent, the truth about the patent’s validity cannot always be known. The issue is how antitrust and patent law should accommodate each other under these conditions of uncertainty.

III. The Scope of the Patent Test

A. The Court of Appeal and the Scope of the Patent Approach

The particular accommodation this case calls for arises from an issue of virtual first impression under the Cartwright Act: how to apply the statutory bar against restraints of trade to patent settlement agreements that limit competition, but no more broadly than an injunction enforcing the patent would have, had one been obtained. (Cf. In re Cardizem CD Antitrust Litigation (6th Cir. 2003) 332 F.3d 896, 904, fn. 8, 906–909 [deciding the issue under both federal law and the Cartwright Act, but without independently analyzing state law].) Rejecting plaintiffs’ argument that agreements of this sort should be deemed uniformly illegal, the Court of Appeal resolved the issue by adopting one of several competing approaches courts had developed to solve the problem under federal antitrust law, the scope of the patent test.6 Under that test, the Court of Appeal held, “a settlement of a lawsuit to enforce a patent does not violate the Cartwright Act if the settlement restrains competition only within the scope of the patent, unless the patent was procured by fraud or the suit for its enforcement was objectively baseless.” The scope of the patent test thus gives wide effect to patents by essentially presuming their validity in most cases. We conclude, as more recent United States Supreme Court authority has now made clear, that this test accords excess weight to the policies motivating patent law, gives insufficient consideration to the concerns animating antitrust law, and must be rejected.

The federal cases the Court of Appeal followed identify three core rationales for concluding a patent litigation settlement restricting competition no more than a valid patent would is generally lawful. First, patents are presumed valid. (35 U.S.C. § 282(a).) Given this presumption, many lower federal courts reasoned, an agreement that does not extend monopoly beyond what a patent grants imposes no additional injury to competition and, in the absence of anti-competitive effects, generally survives antitrust scrutiny. (See In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d at p. 1337; In re Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at pp. 212–213; Schering-Plough Corp. v. FTC (11th Cir. 2005) 402 F.3d 1056, 1066–1068.)

Second, the fundamental purpose of patent law is to promote innovation and the disclosure of inventions so that ultimately new discoveries may benefit the public at large. (Bonito Boats, Inc. v. Thunder Craft Boats, Inc., supra, 489 U.S. at pp. 150–151.) To subject exclusions within the scope of a patent to scrutiny and potential liability would, lower courts feared, chill innovation and give inventors pause in deciding whether to share their creations with the public. (See In re Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at p. 203; Schering-Plough Corp. v. FTC, supra, 402 F.3d at p. 1075; Valley Drug Co. v. Geneva Pharmaceuticals, supra, 344 F.3d at p. 1308.)

Third, there is a general policy in favor of settlement, perhaps more so in patent litigation. (In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d at p. 1333; In re Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at p. 202; Schering-Plough Corp. v. FTC, supra, 402 F.3d at pp. 1072–1073.) Patent litigation settlements “may benefit the public by introducing a new rival into the market, facilitating competitive production, and encouraging further innovation.” (Schering-Plough Corp., at p. 1075.) Conversely, a legal regime that hampers settlement “may actually decrease product innovation by amplifying the period of uncertainty around a drug manufacturer’s ability to research, develop, and market the patented product or allegedly infringing product.” (Ibid.; see In re Tamoxifen Citrate Antitrust Litigation, at p. 203.)

B. Federal Trade Commission v. Actavis

The Court of Appeal’s adoption of the scope of the patent test was the product not of an analysis of the Cartwright Act’s text, policy, or history, but of an assessment of procedural and policy-based aspects of patent law. The soundness of its choice of test thus depends on the extent to which that patent law assessment was sound. In Actavis, supra, 570 U.S. ___ [186 L.Ed.2d 343, 133 S.Ct. 2223], issued after the Court of Appeal’s decision and after our grant of review, the Supreme Court reversed a federal decision holding Hatch-Waxman reverse payment settlement agreements “ ‘immune from antitrust attack so long as [their] anticompetitive effects fall within the scope of the exclusionary potential of the patent.’ ” (Id. at p. ___ [186 L.Ed.2d at p. 353, 133 S.Ct. at p. 2227].) In the course of its opinion, the Supreme Court dismantled the underpinning of each of the cases the Court of Appeal had found persuasive.

First, the Supreme Court rejected the scope of the patent test’s foundational presumption that the holder of a challenged patent enjoys all the rights attendant to ownership of a valid patent: “to refer . . . simply to what the holder of a valid patent could do does not by itself answer the antitrust question. The patent here may or may not be valid, and may or may not be infringed.” (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 356, 133 S.Ct. at pp. 2230–2231].) To be sure, a valid patent allows the patentee to exclude others from the market, “[b]ut an invalidated patent carries with it no such right.” (Id. at p. ___ [186 L.Ed.2d at p. 356, 133 S.Ct. at p. 2231].) Patent litigation “put[s] the patent’s validity at issue, as well as its actual preclusive scope”; simply because a settlement curtails testing and ultimate resolution of that issue, courts should not thereafter treat patent law and its presumptions as conclusively establishing the challenged patent’s legitimate scope. (Id. at p. ___ [186 L.Ed.2d at p. 357, 133 S.Ct. at p. 2231].)

Second, the core policies underlying patent law are more nuanced than the cases applying a scope of the patent test had recognized, and the incentives to innovate far sturdier than those courts had feared. Patents carry with them a frequent cost—monopoly premiums the public must bear. (See Lear, Inc. v. Adkins (1969) 395 U.S. 653, 670.) The willingness to pay that cost depends upon a quid pro quo: “ ‘the public interest in granting patent monopolies’ exists only to the extent that ‘the public is given a novel and useful invention’ in ‘consideration for its grant.’ ” (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 358, 133 S.Ct. at p. 2232].) Accordingly, patent policy does not support unquestioned protection of every inventor’s rights, but instead favors “eliminating unwarranted patent grants so the public will not ‘continually be required to pay tribute to would-be monopolists without need or justification.’ ” (Id. at p. ___ [186 L.Ed.2d at p. 359, 133 S.Ct. at p. 2233].) Vigorous testing for validity is thus desirable in order to weed out patents that shield a monopoly without offering corresponding public benefits. (See Aronson v. Quick Point Pencil Co. (1979) 440 U.S. 257, 264; United States v. Glaxo Group Ltd. (1973) 410 U.S. 52, 58; Edward Katzinger Co. v. Chicago Mfg. Co. (1947) 329 U.S. 394, 400–401.)7

Third, the Supreme Court explained that while the policy favoring settlement of patent litigation offers some support for limiting scrutiny of agreements restraining competition only within the scope of a patent, it ultimately is not dispositive. (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at pp. 360, 364, 133 S.Ct. at pp. 2234, 2238].) Settlements are generally a positive good, but not always; settlements of the sort challenged in Actavis, the court observed, can amount to “payment in return for staying out of the market” and permit monopoly premiums still to be charged and simply divided up between the patent holder and patent challenger; “[t]he patentee and the challenger gain; the consumer loses.” (Id. at p. ___ [186 L.Ed.2d at p. 361, 133 S.Ct. at pp. 2234, 2235].) Such anti-competitive effects will not always be justified, and an antitrust action to test a settlement’s legality may be warranted and feasible. (Id. at p. ___ [186 L.Ed.2d at pp. 361–364, 133 S.Ct. at pp. 2235–2237].) 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. (Id. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2237].) Because the scope of the patent test overvalues the policies underlying patent law at the expense of the equally relevant policies underlying antitrust law, the court concluded, it cannot stand under federal law. (Id. at p. ___ [186 L.Ed.2d at p. 357, 133 S.Ct. at p. 2231].)

C. The Scope of the Patent Test’s Validity Under State Law

Barr contends Actavis is distinguishable because it involved a public prosecution under the Federal Trade Commission Act (15 U.S.C. § 45 et seq.), not a private antitrust suit, and this court should embrace the scope of the patent test as a matter of state antitrust law.

We agree Actavis is not dispositive on matters of state law. Indeed, even if Actavis had been a private Sherman Act case, its conclusions would not dictate how the Cartwright Act must be read. “Interpretations of federal antitrust law are at most instructive, not conclusive, when construing the Cartwright Act, given that the Cartwright Act was modeled not on federal antitrust statutes but instead on statutes enacted by California’s sister states around the turn of the 20th century.” (Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1195; see State of California ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1164.) That said, nothing in the United States Supreme Court’s discussion of the legal rules at the boundary between antitrust and patent law hinged on the happenstance that the case under review involved a public prosecutor. Accordingly, that circumstance neither adds to nor detracts from the persuasive force the discussion would otherwise have.

What does affect the weight to be accorded Actavis is the extent to which its analysis establishes the metes and bounds of patent law and policy. Patent law is federal law. (U.S. Const., art. I, § 8, cl. 8; see Bonito Boats, Inc. v. Thunder Craft Boats, Inc., supra, 489 U.S. at pp. 146–157.) The United States Supreme Court is the final arbiter of questions of patent law and the extent to which interpretations of antitrust law—whether state or federal—must accommodate patent law’s requirements, and Actavis is its latest word on the subject. If under Actavis patent law demands extensive deference to patents’ presumed validity and the consecration of a broad range of agreements otherwise facially illegal under state law, we must abide by that judgment. Conversely, if the accommodation necessitated by patent policy is somewhat narrower than previously understood, we again must treat that determination as conclusive and reconsider the proper domain of state antitrust law in light of that cession of territory.

Barr asserts Actavis is alternatively distinguishable on the ground the underlying patent there was far weaker than the underlying patent here.8 But Actavis’s analysis was not contingent on a particular level of uncertainty surrounding the patent before it. Instead, the court simply recognized that any patent might, or might not, be valid. (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 356, 133 S.Ct. at p. 2231]; see id. at p. ___ [186 L.Ed.2d at p. 367, 133 S.Ct. at p. 2240] (dis. opn. of Roberts, C.J.) [recognizing the problem “that we’re not quite certain if the patent is actually valid, or if the competitor is infringing it,” a problem “that is always the case” in patent disputes].) Indeed, a critical insight undergirding Actavis is that patents are in a sense probabilistic, rather than ironclad: they grant their holders a potential but not certain right to exclude.

The uncertainty concerning a patent’s validity is a by-product of the realities surrounding patent issuance and the legal regime Congress and the courts have established for patent enforcement. In the first instance, a patent “simply represents a legal conclusion reached by the Patent Office. Moreover, the legal conclusion is predicated on factors as to which reasonable men can differ widely. Yet the Patent Office is often obliged to reach its decision in an ex parte proceeding, without the aid of the arguments which could be advanced by parties interested in proving patent invalidity.” (Lear, Inc. v. Adkins, supra, 395 U.S. at p. 670.) That decision is constrained by time and resource pressures; facing an enormous backlog, patent examiners may average less than 20 hours spent on each application. (Ford, Patent Invalidity Versus Noninfringement, supra, 99 Cornell L.Rev. at pp. 87–89; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ. Perspectives at p. 79; Lemley, Rational Ignorance at the Patent Office (2001) 95 Nw.U. L.Rev. 1495, 1499–1500.) Given this underlying reality, Congress has elected not to make the issuance of a patent conclusive but, rather, subject to validation or invalidation in court proceedings. (35 U.S.C. § 282; see, e.g., Alice Corp. Pty. Ltd. v. CLS Bank Int’l (2014) 573 U.S. ___ [189 L.Ed.2d 296, 134 S.Ct. 2347]; Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp. (1965) 382 U.S. 172, 176.) A patent is, in effect, a right to ask the government to exercise its power to keep others from using an invention without consent. (Zenith Corp. v. Hazeltine (1969) 395 U.S. 100, 135.) Whether a court will do so—whether it will issue an injunction—will depend on actual proof of validity.

The differential application of collateral estoppel adds another layer of uncertainty. A finding that a patent is invalid operates in rem and estops the patentee from asserting validity against the world. (Blonder-Tongue v. University Foundation (1971) 402 U.S. 313, 349–350.) In contrast, a finding that a patent is valid operates only on the parties and does not extend from one infringement case to the next. A future challenger with new or better information may subsequently raise, and succeed on, an invalidity defense to a charge of infringement. (In re Swanson (Fed. Cir. 2008) 540 F.3d 1368, 1377; Ethicon, Inc. v. Quigg (Fed. Cir. 1988) 849 F.2d 1422, 1429, fn. 3 [“ ‘A patent is not held valid for all purposes but, rather, not invalid on the record before the court’ ” and “ ‘simply remains valid until another challenger carries’ ” the burden of showing invalidity].) Each case may show only that a patent has not been invalidated, yet.

If the assertion of patent rights leads to a court injunction excluding a competitor from the marketplace, there is no antitrust problem. If instead the assertion leads to a private settlement agreement, there is a potential antitrust problem. With a settlement, any restraint arises directly from the private agreement and only indirectly from the patent, which remains in the background, motivating the parties’ actions according to their assessments of its strength. That a patent has not (yet) been invalidated may allow some confidence about its fundamental enforceability, but does not allow a court to skip entirely an antitrust analysis of competitive restraints within the patent’s scope on the assumption that its validity has been established. The scope of the patent test is flawed precisely because it assumes away whatever level of uncertainty a given patent—the ’444 patent here, no less than the one at issue in Actavis—may be subject to.9

Aside from its attempts to distinguish Actavis, Barr argues a 1953 California decision predating the recent federal Hatch-Waxman Act decisions favors the scope of the patent test for Cartwright Act challenges to patent settlements. (See Fruit Machinery Co. v. F.M. Ball & Co. (1953) 118 Cal.App.2d 748, 758.) We do not read that opinion so broadly.

In Fruit Machinery, six canning companies formed a corporation and licensed to it rights under a fruit pitter patent owned by one of the companies. In turn, the licensee contracted with each of the six, sublicensing to them the right to build and own a specified number of pitters and to lease additional pitters in exchange for payment of royalties. A dispute over nonpayment of royalties arose between the licensee and one of the six companies. The company raised as a defense to payment that the contractual arrangements gave the six companies an unlawful monopoly on pitter ownership and were thus unenforceable. The Court of Appeal found no antitrust violation, explaining: “Defendant has not shown that the parties, in executing and carrying out the sublicense agreement in suit, exercised rights or powers not accorded them by the patent law or abused any rights or powers accorded them by that law.” (Fruit Machinery Co. v. F.M. Ball & Co., supra, 118 Cal.App.2d at p. 762, italics added.) The Court of Appeal distinguished other cases involving antitrust violations as involving a “patentee or his assignee [who] went beyond that which was necessary or incidental to the scope of his patent and brought himself within the proscription of the antitrust laws.” (Id. at p. 763.)

Fruit Machinery does not stand for the proposition that any restraints of trade within the scope of a patent are valid. Rather, it recognizes trade restraints that exceed those authorized by a patent may be invalid and, moreover, that the “abuse[]” of patent rights may also run afoul of antitrust law. (Fruit Machinery Co. v. F.M. Ball & Co., supra, 118 Cal.App.2d at p. 762.) The court responded to the concern that the corporate licensee might use its exclusive patent rights to charge far higher royalties for leased than owned pitters not by saying such a differential would automatically be lawful, as within the scope of any patent rights, but by saying only “that such has not happened yet” and it would not presume a “[f]uture violation . . . of the antitrust laws.” (Ibid.)

No other California authority Barr has cited, nor any we have found, establishes the scope of the patent test is applicable under the Cartwright Act. Even if such precedent existed, we would be forced to reexamine it in light of Actavis. The scope of the patent test insulates from antitrust scrutiny virtually any agreement that restrains trade no more than the patent itself would have, if valid. State law must yield to federal, but we cannot under the guise of patent law carve into the Legislature’s enactments a larger exception than federal law dictates, and Actavis shows such a broad exemption is not required. Accordingly, we conclude the scope of the patent test is inapplicable to Cartwright Act claims.

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