IN RE CIPRO CASES I & IIAppellants’ Letter BriefCal.January 24, 2014 SUPREME COURT FILED 5198616 JAN 2 4 2014 IN THE SUPREME COURT OF CALIFORNIA Erank A. McGuire Clerk a Deputy Coordination Proceeding Special Title (Rule 1550(b)): CIPRO CASES I & Il Judicial Council Coordination Proceeding Nos. 4154 & 4220 After a Decision by the Court of Appeal, Fourth Appellate District, Division One SUPPLEMENTAL LETTER BRIEF OF APPELLANTS ADDRESSING THE RELEVANCEOF FTC V. ACTAVIS, INC. Eric B. Fastiff (State Bar No. 182260) Dan Drachler (Pro hac vice) Brendan Glackin (State Bar No. 199643) ZWERLING, SCHACHTER & Dean M.Harvey (State Bar No. 250298) =ZWERLING, LLP Jordan Elias (State Bar No. 228731) 1904 Third Avenue, Suite 1030 LIEFF, CABRASER, HEIMANN & Seattle, WA 98101 BERNSTEIN, LLP Telephone: (206) 223-2053 275 Battery Street, 29th Floor Facsimile: (206) 343-9636 San Francisco, CA 94111-3339 Telephone: (415) 956-1000 Ralph B. Kalfayan (State Bar No. 133464) Facsimile: (415) 956-1008 KRAUSE, KALFAYAN, BENINK & SLAVENS Joseph R. Saveri (State Bar No. 130064) 550 West C Street, Suite 530 JOSEPH SAVERI LAW FIRM,INC. San Diego, CA 92101 505 Montgomery Street, Suite 625 Telephone: (619) 232-0331 San Francisco, CA 94111 Facsimile: (619) 232-4019 Telephone: (415) 500-6800 - Facsimile: (415) 395-9940 Mark A. Lemley (State Bar No. 155830) DURIE TANGRI LLP 217 Leidesdorff Street San Francisco, CA 94111 Telephone: (415) 362-6666 Attorneysfor Plaintiffs, Appellants and Petitioners TABLE OF CONTENTS Page I. PRELIMINARY STATEMENT..............:2:ccsscesceesseesssensssssersnenseceees 1 Il. THE UNITED STATES SUPREME COURT REJECTED THE LEGAL STANDARD ADOPTED BELOW..........cccescesseeseeees 2 A. Actavis Makes Clear That the Determinations Below Should Not Stand..........cccccccssscsseceeesscersseesenssseeresestesenerersseseessenees 4 B. Actavis Supports a Constrained Rule of Reason Analysis........., 7 1. Actavis Recognizes Only Two Justifications, and Business Certainty Is Not One of Them...............:.::e 7 2. The Size of the Reverse Payment May Demonstrate Anticompetitive Intent and Effect. ...........ccscsecseneeeees 8 3. It Is Not Necessary to Litigate Patent Validity to Determine Antitrust Liability. 0.0.0.0... cescscsseseereeetenes 10 C. Actavis Supports a Focused Per Se Ban on Reverse PayMeMts.........ccscccceeseceeceseesesesceneescesenereraesesrenentenersnsassscenessaneeanes 11 D. This Court Should Clarify the Law to Deter Reverse Payments That Harm Californians. .........-..0::seesesseceeeeeeeetertees 12 Ill. ACTAVIS SHOWS THAT THE CLAIMS ARE NOT PREEMPTED........:cscccccescessesescesseeeserenceesecsaseeassessensssesseeseesessersaaee® 13 TV. CONCLUSION.000...ceecccccceceenenececeseeeeneecessseesceseetaaeeseesneeeeaneeeteeeeeens 16 CERTIFICATE OF WORD COUNT........0.eccecccecsesceeseeneecenesennseeeetnepeeneees 18 TABLE OF AUTHORITIES Page CASES Blonder-Tongue Labs. v. Univ. ofIll. Found. (1971) 402 US. 313oeeeesseeeeeestessesssenetseeserensessceaseedensceneseeessesdeseesnsenensensgs iat California v. ARC America Corp. (1989) . 490 U.S. 93 ooo eeccceeesceesceacssencesssssceneeecesnaecnsessenassceanecneneceesessenssereeseaeeceess 14 Cianci v. Super. Ct. (1985) 40 Cal.3d 903 occeccessceesseseeeccsenencessessronsceestessseneesuseneessesneseceeeeeaeenas 5, 12 Corwin v. Los Angeles Newspaper Serv. Bureau, Inc. (1971) A Cal3d 842 ooo. ccccccccssssssscsscesssnesncesnesenessceseseeecesssseeaceesseaeesrseeeseeseteaeees 6 Freeman v. San Diego Assn. ofRealtors (1999) 77 Cal.App.4th 171 oo... eseccecccsececceneeeeeeceaseeceseaucassasessseseenssessessonseesea 12 FTC vy. Actavis, Inc. (2013) 570 U.S. [133 S.Ct. 2223] one eeeeceeesseeeceecseeceetensenceseeseeseeseeeneeepassim Guild Wineries & Distilleries v. J. Sosnick & Son (1980) 102 Cal.App.3d 627.......ceseeaceaesersaneecsseneseecersseesusseeserenessensesesensaeeseseeseasees 5 Gunn v. Minton (2013) 568 US. [133 S.Ct. 1059]oeeens 14 In re Cipro Cases I and IT (2011) 200 Cal.App.4th 442 oo...ccssecceseesseeesceeneseessetdensgesenseeeeesersseeratees 2, 13 In re Nexium Antitrust Litig. (D.Mass. Sept. 11, 2013) No. 12-md-02409, 2013 U.S. Dist. LEXIS 129696...eeeseven In re Swanson (Fed.Cir. 2008) 540 F.3d 1368.00... eeeeeseeeeccseeecenerenecsseseceeseesesseesseeseseeseessessuesessnenseesees 11 In re Tamoxifen Citrate Antitrust Litigation (2d Cir. 2006) . 466 F.3d 187 oo. cceccccesecseeececeeseeseseceesessecsaeecesseneeesereccsanesaeesessseesetsseaserenes ] Lear, Inc. v. Adkins (1969) 395 U.S. 653 oo ceecccccccesescseesecensesecnnesseesseersceceesnesessneeanseseneseesasaneeesersase 15 Lockwoody. Sheppard, Mullin, Richter & Hampton (2009) 173 Cal.App.4th 675 0... ceeecscseseescesceaeeceneesessesceesecassesassecessssessesneneneees 14 Marin County Bd. ofRealtors, Inc. v. Palsson (1976) 16 Cal.3d 920 oo. .cecceccccccccecsescesseesesenessnsesevaeceeseceeessesseeeaseseseasnateneessceeseees 5 McKell v. Washington Mut., Inc. (2006) 142 CalApp.4th 1497 o.oo cescscssseceseestesseeessencerseessaepesecsasenssesssenen 14 -ii- TABLE OF AUTHORITIES (continued) Page Oakland-Alameda County Builders’ Exchange v. F. P. Lathrop Constr. Co. (1971) A Cal.3d 354 wo.ccceccecsscscesssscescccsnesteneesesseesecaecassanensensenecsesnessssenesseenseeneses 12 Roth v. Rhodes (1994) 25 Cab.App.4th 530 20... cceseeesesscenesssecceececesecscesesersccessesscneesesensacensaseesees ] United States v. Singer Mfg. Co. (1963) 374 US. VT cccccccssetcsecscssescsecessessestersecescessesseesecseeaceseeascsessesenaeesenseaenseeees 4 STATUTES Bus. & Prof. Code § 16720, et S€q..0.eeecesescesseeesstsescsenssonssseunsseaseesseeseeeae I Bus. & Prof. Code § 16720, subd. (€)(4) 0...eesseccteecsseneseeseenseseseesnnenees 1] Bus. & Prof. Code § 16722 .......cccccccecccscsssseseesseecseeeseeescensuseneestseeseseeaaees 11 OTHER AUTHORITIES 1 Herbert Hovenkamp,efal. (2013 Supplement) IP and Antitrust § 15.2a 1 oo...cecceseesecessteeecseeeesnsecseseeeseeesssaneeneneneneees 5 C. Scott Hemphill, Payingfor Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem (2006) BL NLY.U. L. Rev. 1553 oie ceecceeececeeseseceeccaeeecenseecesesepeassensesssensessetenees 10 Edlin, Hemphill, Hovenkamp, and Shapiro, Activating Actavis (2013) vol. 28, No. 1, Antitrust 16.00.0000. cece ccscescesssceseeseesessseeeececenseressens 4,5, 10 Joshua P. Davis, Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should Be Per Se Illegal (2009) Al Rutgers LJ. 255 ooocececesneeceeceereeescseesescesesseeenscereeenseseseessieersees 7 Michael A. Carrier, Unsettling Drug Patent Settlements: A Frameworkfor Presumptive Illegality (2009) 108 Mich. L. Rev. 37 woe ececesseescsseeeseenesceerseseeeacecensescaneresaescssseeeseseseneses 4 Thomas Cotter, FTC v. Actavis, Inc.: When Is the Rule ofReason Not the Rule ofReason? (2013) 15 Minn. J.L. Sci. & Tech. eeeeeesccsscseeseeeeassesseessnseseneease 9,11 - iil - L PRELIMINARY STATEMENT In accordance with the Court’s Order dated December 11, 2013, Appellants respectfully submit this supplemental brief addressing the relevance ofFTC v. Actavis, Inc. (2013) 570 U.S. __ [133 S.Ct. 2223]. Actavis showsthat the lower courts’ determinations in this action, and Respondents’position before this Court, cannotstand. Actavis rejects the “scope of the patent”test established in Jn re Tamoxifen Citrate Antitrust Litigation (2d Cir. 2006) 466 F.3d 187, adopted below and advocated by Respondents. Instead, Actavis supports application of a constrained rule of reason analysis to reverse paymentsor, in the alternative, a precisely formulated per se illegality rule. Actavis also confirmsthat federal law does not preempt Appellants’ claims. The remaining Respondentsare the generic pharmaceutical companies(the “Generics”) that accepted a $398.1 million payment from Bayerin exchange for their agreement to drop their litigation challenge to Bayer’s Cipro patent.’ The Generics received this reverse paymentas consideration for their agreementto stay out of the Cipro market. The paymentsubstantially exceeded the profits the Generics stood to earn in a competitive market, and ensured high monopoly pricesofa vital prescription drug for more than seven years. Such anticompetitive agreements violate California law. Actavis rejects the legal standard applied by the lower courts in this case, a Standard that grants virtual—and unjustified—immunity to an ' On November 18, 2013, the Superior Court of San Diego granted final approvalto the $74 million class action settlement between Appellants and Bayer, releasing the claims against Bayer. The Generics are jointly and severally liable for the entirety ofthe harm to the California class. (Bus. & Prof. Code § 16720, et seq.; Roth v. Rhodes (1994) 25 Cal.App.4th 530, 544.) anticompetitive settlement. Just as Actavis found that standard too weak to protect consumers, so should this Court institute a rule that follows the Cartwright Act’s pro-consumerpurpose. Actavis supports adoption ofwhat may be termedeither (a) a constrainedrule of reason analysis, or (b) a per se ban on reverse payments where they exceed the patentee’s avoided litigation costs and the value of any goodsand services obtained through the agreement. Importantly, Actavis does not narrow the broader reach of California law, which holds that agreementsrestraining free competition and affecting the prices paid by consumersare perse illegal. (See Sections ILA & ILC, infra.) Finally, recent United States Supreme Court decisions show that federal law does not preempt Appellants’ claims. To the contrary, restrictions on reverse payments under California antitrust law are consistent with federal Jaw after Actavis. I. THE UNITED STATES SUPREME COURT REJECTED THE LEGAL STANDARD ADOPTED BELOW The decisions below rested on two propositions that do not survive Actavis: that within the physical and temporal scopeofa patent, (1) a patentee should receive near complete deferencein its efforts to restrain competition, and (2) the policy favoring settlement should override concernsabout harm to competition. (/n re Cipro Cases I and IT (2011) 200 Cal.App.4th 442, 467-468.) Actavis rejects these groundsfor “near- automatic antitrust immunity” for pharmaceutical pay-for-delay settlements like the one at issue here. (Actavis, supra, 133 S.Ct. at p. 2237.) Actavis instead holds that cash payments from a patentee to settle a patent dispute may “provide strong evidence that the patentee seeks to induce the generic challenger to abandonits claim with a share of its monopoly profits that would otherwise belost in the competitive market.” (/d. at p. 2235.) Antitrust law—notthe “scope of the patent” test—applies to agreements under which a pharmaceutical company “waiks away with money simply so it will stay away from the patentee’s market.” (/d. at p. 2233.) While the Generics have defended the summary judgment order on the basis that their acceptance of a payoff did not affect commerce beyond the “exclusionary potential of the Cipro patent” (Generics Br. at p. 15), the Court in Actavis held that a patent’s mere potential to exclude infringing use is insufficient to justify an agreementthat allows the patentee to avoid the risk of competition. (Actavis, supra, 133 S.Ct. at p. 2236.) As such,it is clear that Actavis renders the decisions below unsustainable. Indeed, the $398.1 million reverse payment in this case is just the sort Actavis condemns: a “payment[that] in effect amounts to a purchase by the patentee of the exclusive rightto sell its product, a right it already claims but would loseif the patentlitigation were to continue and the patent were held invalid or not infringed ....” (Actavis, supra, 133 S.Ct. at p. 2234.) This type of “unexplained Jarge reverse paymentitselfwould normally suggest that the patentee has serious doubts about the patent’s survival.” (/d. at p. 2236, italics added.) Especially under these circumstances, the patent’s formal parameters do not override the traditional antitrust concerns aboutthe stifling of free competition and the barricading ofmonopoly prices. (/d. at pp. 2230-2231.) Furthermore, as Actavis holds, patent law does not authorize reverse payments from patent holders to patent challengers, and in fact strongly favors the adversarial testing such payments foreclose. (/d. at p. 2233.) Therefore, whether a reverse payment agreement“lies ‘beyond the limits of the patent monopoly’ is a conclusion that flows from [the] analysis and not ... its starting point.” (/d. at pp. 2231-2232.) Nordoesthe general policy favoring settlement translate into immunity for this species of payments not to compete. Precedents “make clear that patent-related settlement agreements can sometimesviolate the antitrust laws.” (/d. at pp. 2232—2233, citing, inter alia, United Statesv. Singer Mfg. Co. (1963) 374 U.S. 174; cf. Appellants’ Opening Br.at p. 35 [discussing Singer]; Appellants’ Reply Br. at pp. 36-37 [same].)” Moreover, those contesting patent rights commonly use less harmful ways to settle. (See Michael A. Carrier, Unsettling Drug Patent Settlements: A Frameworkfor Presumptive Illegality (2009) 108 Mich. L. Rev. 37, 74— 75.) A. Actavis Makes Clear That the Determinations Below ‘Should Not Stand. The key premise ofActavis has firm support in California law. Actavis recognizes that federal antitrust law mainly promotes consumer welfare. (See Actavis, supra, 133 S.Ct. at p. 2235 [focusing on harm to “the consumer” who “loses” when reverse payments are made]; see also Edlin, Hemphill, Hovenkamp,and Shapiro, Activating Actavis (2013) vol. 28, No. 1, Antitrust 16, 17 [describing how both the majority and dissenting opinions take “a consumer welfare approach”to liability].)° California law provides an even clearer commitment to consumers. This Court has * Actavis, like Appellants here, also quoted on-the-record statements from the legislative architects of the Hatch-Waxman Act condemning reverse payments, and notingthatthis sort of collusion was notthe intended Congressional result. (Compare Actavis, supra, 133 S.Ct. at p. 2234, with Appellants’ Reply Br. at pp. 40-42.) } Appellants respectfully submit that this article by Edlin, Hemphill, Hovenkamp,and Shapiro merits close attention as it was authored by nationally recognized scholars whose work the Court in Actavis cited extensively, in particular the scholarship of Herbert HovenkampandC. Scott Hemphill. (See Actavis, supra, 133 S.Ct. at pp. 2227, 2229, 2235.) consistently held that protecting consumersis the principal or sole aim of ourState’s antitrust laws. (See Marin County Bd. ofRealtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 935 [“. . . designed primarily to aid the consumer.”]; Cianci v. Super. Ct. (1985) 40 Cal.3d 903, 918 (“Consumer welfare is a principal, if not the sole, goal .. . .”].) Muchofthe reasoning in Actavis proceeds from a commitment to protect consumer welfare. The harm the Court identifies from reverse payments is that a brand drug companywill pay a large sum ofmoney to a generic drug companyto avoid the risk of competition, allowing the two companiesinstead to divide the monopoly profits. (Actavis, supra, 133 S.Ct. at p. 2235; cf. Marin County, supra, 16 Cal.3d at p. 935 [an arrangementto limit market entry by competitors violates the Cartwright Act]; Guild Wineries & Distilleries v. J. Sosnick & Son (1980) 102 Cal.App.3d 627, 633 [an agreementnot to competeisillegal per se].) As the Actavis Court explained, with a typical reverse payment, “[t]he patentee and the challenger gain; the consumerloses.” (Actavis, supra, 133 S.Ct. at p. 2235.) But consumersbenefit if the patentee and challengertest the patent’s validity (or infringement) or compromise only over the date of generic entry. Hence, Actavis emphasized that “the relevant anticompetitive harm” is the effort “to prevent the risk of competition.” (/d. at p. 2236.) Ifthe patent holder wishesto resolve the challenge, it can avoid this risk only through a settlement that redoundsto the benefit of consumers. (See Edlin, et al, supra, at p. 17 [Actavis frowns upon settlements that “reduce[] competition in expectation, thereby depriving consumers of someofthe benefits from competition.”]; 1 Herbert Hovenkamp,et a/. (2013 Supplement) IP and Antitrust § 15.2a1 [Actavis recognizes that a patent holder is willing to settle for more than the cost oflitigation “precisely because the settlement will permit it to exclude competition from the market, whereasif it wentto trial there is a chancethat the patent would be held invalid or not infringed and the market would become competitive”; thus the Court “does not intend the rule of reason to be unboundedor to allow settling parties to justify their conduct on the groundthat it acquired certainty.”].) The reverse paymenthere had precisely the sort of adverse effect on consumersthat Actavis seeks to prevent. The record evidence showsthat Bayer paid nearly $400 million to avoid the risk of competition, and then raised prices to unprecedented levels and kept them there for nearly seven years. (6AA 1167, 1169.) Starting in 1997, Bayer raised Cipro pricesat rates amongthe highest in the entire pharmaceutical industry: “Measured as the percentage price increase over the entire period divided by the number of years in the period, Bayer increased the prices for the three major [Cipro] dosages 4.56%, 4.85% and 4.33% annually in the five years prior to the settlement agreements and 10.53%, 11.66% and 74.83% respectively for the seven years after the setthement agreements.” (6AA 1208.) The price of Cipro increased 16% from the beginning of 1997 to the end of 1998 alone. (6AA 1167.) During the monopoly period, a single Cipro pill cost consumers upwards of $5.30, whereas a generic pill would have cost only $1.10. (SAA 1093.) To deter such conduct, promote consumerhealth and welfare, and ensure that injured purchasers can be made whole, Actavis supports application of either a constrained rule of reason analysis or a per se ban on most reverse payments. Under California law, some business combinations maybe judged by reference to their economic reasonableness (see Corwin v. Los Angeles Newspaper Serv. Bureau, Inc. (1971) 4 Cal.3d 842, 854—855), while a deep pool ofauthority forbids agreements among actual or potential horizontal competitors to divide markets, fix prices, or otherwise restrict competition (see Appellants’ Opening Br. at pp. 18-23; Appellants’ Reply Br. at pp. 4-7). B. Actavis Supports a Constrained Rule of Reason Analysis. Were the Court to adopt a constrained rule of reason analysis for reverse payments, the specific constraints are worth setting out clearly: first, the justifications for reverse payments are limited and do not include a brand drug manufacturer’s desire to avoid the risk of an adverse result in patentlitigation; second, a large reverse paymentbyitself can establish an antitrust violation, including by demonstrating anticompetitive effects and market power; and third, no inquiry into a patent’s merit is necessary to assess an alleged reverse paymentviolation. 1. Actavis Recognizes Only Two Justifications, and Business Certainty Is Not One of Them. First, the legal justifications for reverse payments are few. To be sure, Actavis finds that some procompetitive justifications may exist. A reverse payment, for example, could in theory amount to nothing more than avoidedlitigation costs.’ (Actavis, supra, 133 8.Ct. at p. 2236.) Ora reverse payment might be offered for additional or enhanced goodsor services from the generic drug manufacturer, rather than for delayed entry. * Eventhis justification for a reverse payment is weak. It assumes the brand drug manufacturer, effectively giving the generic a windfall, would forfeit its anticipated litigation costs in a settlement payment even though the generic drug manufacturer would also save its costs. The more realistic view is that both companieswill look to save their respective costs by settling, and that any reverse payment will delay generic entry beyond the entry date of a genuinely procompetitive compromise. (See Joshua P. Davis, Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should Be Per Se Illegal (2009) 41 Rutgers L.J. 255, 304-305.) (Ibid.) Actavis envisions no other possibilities, though it does not rule them out. (/bid.) What Actavis does foreclose is reliance on the patentee’s desire to avoid the risk of a competitive marketplace. Thus, a reverse paymentis anticompetitive where a patentee is “using its monopoly profits to avoid the risk ofpatent invalidation or a finding ofnoninfringement.” (/d. at p. 2236, italics added.) The patentee therefore cannot defend a reverse paymentas a meansto avoid even the small chancethat a strong patent might be held invalid. (/bid.) That proffered justification fails because it “suggests that the payment’s objective is to maintain supracompetitive prices to be shared amongthe patentee and the challenger rather than face what might have been a competitive market—the very anticompetitive consequence that underlies the claim of antitrust unlawfulness.” ([bid.) 2. The Size of the Reverse Payment May Demonstrate Anticompetitive Intent and Effect. Second, a large reverse paymentitself goes a long way toward establishing an antitrust violation. An outsized payment cannot plausibly be attributed to avoidedlitigation costs (and usually will outstrip any ancillary goods or services provided by the challenger). As a result, such a reverse payment normally will have anticompetitive effects without any countervailing benefit. (/bid.) For when a brand manufacturer makes a settlement payment that exceeds any consideration it may legitimately receive in return, the only reasonable inference is that the money was paid to avoid risking an adverse outcomein patent litigation.” The paymenthere of almost $400 million is a prime example. > “An unexplainedlarge reverse paymentitself would normally suggest that the patentee has serious doubts aboutthe patent’s survival”and its intentis Footnote continueson next page. A large paymentalso provides strong evidence that the brand drug company possessessignificant market power. (Ibid.; see In re Nexium Antitrust Litig. (D.Mass. Sept. 11, 2013) No. 12-md-02409, 2013 U.S. Dist. LEXIS 129696, at *51-52.) It makeslittle sense for the patent holder to pay a substantial sum to prevent generic competition unlessthis competition would decrease the brand’s prices or market share (or both), deprivingit of profits. (Actavis, supra, 133 S.Ct. at p. 2236; see also Thomas Cotter, FTC v. Actavis, Inc.: When Is the Rule ofReason Notthe Rule ofReason? (2013) 15 Minn. J. L. Sci. & Tech. _§ {under Actavis, a large reverse paymentcreates a presumption of market power and anticompetitive consequences].) These points gain added weight when, as here, a brand manufacturer pays generic manufacturers substantially more than the generics’ profits were they to come to marketafter winning a patent challenge.’ In this circumstance, the obviousintent and effect of the paymentis to inflate and maintain pricing. (Actavis, supra, 133 S.Ct. at p. 2235 [“Indeed, there are indications that patentees sometimes pay a generic challenger a sum even larger than what the generic would gain in profits if it won the paragraph IV litigation and entered the market.”], citing C. Scott Hemphill, Payingfor “to maintain supracompetitive prices to be shared amongthe patentee and the challenger rather than face what might have been a competitive market. ... The ownerof a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment(if otherwise unexplained) likely seeks to prevent the risk of competition.” (/bid.) ° Available at: http://mjlst.umn.edu/upcomingissue/home.html. ” The $398.1 million bribe the Generics took constitutes more than twice the profits they would have earned had they defeated the patent and _ competed with Cipro. (6AA 1203-04; 1OAA 2353-75, 2377-2401.) Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem (2006) 81 N.Y.U. L. Rev. 1553, 1581.) 3. It Is Not Necessary to Litigate Patent Validity to Determine Antitrust Liability. Third, no inquiry into the merits of the patent at issue is necessary or relevant. (/d. at p. 2236.) What matters is that the patentee has paid to avoid the risk of competition. A patentee cannot “us[e] its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement.” (/bid., italics added.) And a large reverse payment unexplained by avoidedlitigation costs, side consideration, or other factors demonstrates that the patentee shared its monopoly profits to avoid the business risk posed by a competitive market—whichis “the relevant anticompetitive harm.” (bid., italics added.) Forbidding a patent holder to avoid the risk from a patent challenge explains the Actavis Court’s statement that “it is normally not necessary to litigate patent validity to answerthe antitrust question.” (/bid.) After all, if the holder of a patent could defend a reverse payment simply by defending the patent, it would virtually always be necessary to consider the patent to judge an antitrust claim. Patent holders would then routinely invoke validity as a defense. That is inconsistent with Actavis. For this reason, Edlin, Hemphill, Hovenkamp, and Shapiro proposeajury instruction that states, “You may not consider the validity of the patent as a defense.” (Edlin, et al., supra, at p. 21.) Accordingly, the antitrust fact finder evaluates the circumstances as of the time of the reverse payment agreement, not the time ofany later -10- ruling on validity or infringement.® It is at the time of the agreementthat the patentee avoidsthe risk ofa challenge to its patent rights. C. Actavis Supports a Focused Per Se Ban on Reverse Payments. Actavis also supports a focused ban on reverse payments. The ban would apply not to all reverse payments but rather only to those that cannot be attributedto litigation costs or services provided.” Under these circumstances, proof of the payment would suffice to establish a violation of California antitrust law. Subjecting reverse payments to a focused per se rule finds ample support in California law. The Cartwright Act declares agreements that restrain trade “absolutely void” and prohibits businesses from pooling their interests, whether “directly or indirectly[,]” such that price “might in any manner”be affected. (Bus. & Prof. Code §§ 16722, 16720, subd. (e)(4).) Appellants have previously explained why standard per se treatmentof this horizontal restraint would provide California consumers with the maximal protection to which they are entitled under California law. (See Appellants’ Opening Br. at pp. 18-23; Appellants’ Reply Br. at pp. 4—14; see also ® The preclusive effects of patentlitigation are notably asymmetrical. A finding of invalidity or noninfringement may subject a patent holder to non- mutualcollateral estoppel in subsequentlitigation. (Blonder-Tongue Labs. v. Univ. ofIll. Found. (1971) 402 U.S. 313, 350.) A finding of validity or infringement, however, does not preclude later patent challenges for entities not involved in that litigation. (/n re Swanson (Fed.Cir. 2008) 540 F.3d 1368, 1377, citations omitted.) As a result, consumers or other purchasers challenging a reverse payment would not be boundbya finding ofvalidity or infringementin patent litigation to which they were notparties. ” Although the Actavis Court did not frameits rule as a per se ban, the Court’s reasoning supports that label given the limited justifications stated. (See generally Cotter, supra [arguing Actavis in effect held reverse payments are presumptively illegal].) -{l- Oakland-Alameda County Builders’ Exchange v. F. P. Lathrop Constr. Co. (1971) 4 Cal.3d 354, 361 [as it applies to claims under California law, the per se rule “encompassescertain practices that normally tend to eliminate competition.”].) This Court is, of course, free to apply the per se rule even if it does not read Actavis as in effect doing so. Considering “the Legislature intendedto strike as broadly as it could in the Cartwright Act,” federal precedents “must be used with caution” in applying and defining the bounds of California’s own antitrust law. (Cianci, supra, 40 Cal.3d at pp. 919-921; Freeman v. San Diego Assn. ofRealtors (1999) 77 Cal.App.4th 171, 183 n.9, citation omitted.) D. This Court Should Clarify the Law to Deter Reverse Payments That Harm Californians. In light of the above points, the reverse paymentat issue here is plainly unlawful. It is far too large—almost $400 million—to be explained away as avoidedlitigation costs. Nor were there even any pretextual services provided in exchange. This was a naked noncompetition payment.'° Bayer never would have paid almost $400 million unlessit benefited (and consumerssuffered) from its consequent consolidation of market power. The Generics also benefited, receiving a share of the ' The side license agreement between Bayer and Barr gaverise to no meaningful competition. Underthe limited license covering a six-month period in 2003, Barr was contractually bound to pay 85% of Bayer’s list price for Cipro during the prior fiscal quarter. (4AA 780.) When the license finally took effect after more than six years of monopoly, Barr not only matched Bayer’s price increases but sold Bayer-manufactured Cipro at prices 5S—10% higher than Bayer’s own supracompetitive prices. (SAA 997, 1037; 6AA 1207-08.) Any claim by the Generics to a procompetitive effect from Barr’s Cipro sales at a price similar to Bayer’s would be “laughable,” Dr. Hartman concluded. (6AA 1207-08, SAA 1037.) -12- unlawful gain that far surpassed their expected profits and therefore removedtheir incentive to continue their challenge no matter how sure they were they would invalidate the patent. After Actavis, drug manufacturers will continueto test the limits of the antitrust laws and the mettle of antitrust enforcers. They may do so by masking their conduct, at times by offering a payoff in some form less transparent than money,at times by pretending a generic companyis receiving funds only for valuable goods or services whenitis not. Regardless of the particular conduct, determining the appropriate standard would help to guide future antitrust reverse paymentlitigation. Il. ACTAVIS SHOWS THAT THE CLAIMS ARE NOT . PREEMPTED Actavis further demonstrates the Court of Appeal’s error in holding these California claims preempted. Having embraced the now-defunct “scope ofthe patent”test, the Court ofAppeal proceeded to reject Appellants’ position that triable issues of fact exist as to whether Bayer’s infringementsuit was a sham underthat test. The Court ofAppeal held the sham litigation issue preempted on the groundsthat federal courts would have exclusive jurisdiction. (See Cipro Cases I & IT, supra, 200 Cal.App.4th at p. 473 [holding that the objective baselessness of Bayer’s suit “necessarily depends on resolution of a substantial question of federal patent law—1.e., whether Bayer engagedin inequitable conductin the procurementof its patent.”].) Actavis eliminates the underpinning ofthis preemption ruling byrejecting the “scope of the patent” test and its sham litigation prong. The Generics maybe held liable for colluding with Bayer even though their agreement did not purport to extend the Cipro patent, and ! without the need to make a showing of sham litigation that the Court of Appealheld would be preempted. -13- California courts have jurisdiction over these state claims. Patent law issues are, at most, incidental to this case and “‘it is normally not necessary to litigate patent validity to answer the antitrust question... .” (Actavis, supra, 133 S.Ct. at p. 2236.) Moreover, even werethe analysis to require some consideration ofpatent strength, the claims would not involve a “substantial” patent law question. While the Court of Appeal relied on the legal malpractice case Lockwood v. Sheppard, Mullin, Richter & Hampton (2009) 173 Cal.App.4th 675, that case has been severely undermined by Gunn v. Minton (2013) 568 U.S. _—«[133. S.Ct. 1059], which reversed a judgmentofthe Texas Supreme Court and held that federal courts do not have exclusive jurisdiction over a state law legal malpractice claim arising from a patent dispute. (/d. at p. 1068.) Despite the same potential as in Lockwoodfor a “case within a case” on patent issues, the U.S. Supreme Court held the federal issues insufficiently substantial to divest the Texas courts of subject matter jurisdiction. (Gunn, supra, 133 S.Ct. at pp. 1066-1068.) There can be no conflict of law where both federal and state law treat the same category of restraint as actionable. (See Actavis, supra, 133 S.Ct. 2223 [reverse payments subject to federal antitrust scrutiny}.) Rather than conflicting, the two antitrust regimes complementone another to foster procompetitive results. (See California v. ARC America Corp. (1989) 490 U.S. 93, 101 [the Sherman Act does not preempt the broader Cartwright Act remedies].) Here, if anything, the Generics’ violation of federal law as clarified in Actavis is a further predicate for their UCL liability. (See McKell v. Washington Mut., Inc. (2006) 142 Cal._App.4th 1457, 1485-1486 {the UCL confers a remedy for federal law violations, and when a state law ~14- as applied “provides a meansofenforcing federal requirements,”it “is the type of state law not preempted by federal law.”’].) There is no conflict with patent law either. Actavis finds that nothing in the Patent Act authorizes collusion in the form of reverse payments to prop up patent rights. As the opinion of the Court noted, “The dissent doesnot identify any patent statute that it understands to grant such a right to a patentee, whether expressly or by fair implication.” (Actavis, supra, 133 S.Ct. at p. 2233.) In fact, a finding that a patent-related restraint violates antitrust law yields the “conclusion”that the restraint “lies ‘beyond the limits of the patent monopoly[.]’ ” (Ud. at pp. 2231-2232.) Absent any federal patent right to burden, state law enforcement here presents no conflict. Noris there implied obstacle preemption. (See Appellants’ Reply Br. at pp. 48-50.) When it comes to anticompetitive reverse payments, there is no “patent law policy [that] offsets the antitrust law policy strongly favoring competition.” (Actavis, supra, 133 S.Ct. at p. 2233.) On the other hand, Actavis holds that reverse payments short-circuit “the patent-related policy of eliminating unwarranted patent grants so the public will not ‘continually be required to pay tribute to would-be monopolists without need orjustification.” ” (Actavis, supra, 133 S.Ct. at p. 2233, quoting Lear, Inc. v. Adkins (1969) 395 U.S. 653, 670.) Actavis, therefore, makes clear that reversal here accords with federal law andpolicy. -15- IV. CONCLUSION The Actavis decision overwhelmingly supports Appellants’ position that this Court should reverse the grant of summary judgment, clarify the legal standard for purposes of the Cartwright Act and the UCL, and remand these claimsfortrial. Dated: January 24, 2014 Respectfully submitted, LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP wy Ge SF Eric B. Fastiff (State Bar No. 182260) Eric B. Fastiff Brendan Glackin (State Bar No. 199643) Dean M.Harvey (State Bar No. 250298) Jordan Elias (State Bar No. 228731) 275 Battery Street, 29th Floor San Francisco, CA 94111-3339 Telephone: (415) 956-1000 Facsimile: (415) 956-1008 ZWERLING, SCHACHTER & ZWERLING, LLP Ne Cy: "DanDrachtér a, Dan Drachler (pro hac vice) 1904 Third Avenue, Suite 1030 Seattle, WA 98101 Telephone: (206) 223-2053 Facsimile: (206) 343-9636 Class Counsel -16- JOSEPH SAVERI LAW FIRM,INC. By: Joseph R. Saveri Josepli R. Saveri (State Bar No. 130064) JOSEPH SAVERI LAW FIRM,INC. 505 Montgomery Street, Suite 625 San Francisco, CA 94111 Telephone: (415) 500-6800 Facsimile: (415) 395-9940 Mark A. Lemley (State Bar No. 155830) DURIE TANGRI LLP 217 LeidesdorffStreet San Francisco, CA 94111 Telephone: (415) 362-6666 Ralph B. Kalfayan (State Bar No. 133464) KRAUSE, KALFAYAN, BENINK & SLAVENS 550 West C Street, Suite 530 San Diego, CA 92101 Telephone: (619) 232-0331 Facsimile: (619) 232-4019 Attorneysfor Plaintiffs, Appellants and Petitioners ~-17- CERTIFICATE OF WORD COUNT [California Rule of Court 8.204(c)(1)] Pursuant to the California Rules of Court and this Court’s Order of December 11, 2013, counsel of record certifies that this Supplemental Brief uses 13-point Roman type and contains 4,516 words, including footnotes. Counsel relies on the count of the computer program used to prepare this Brief. Dated: January 24, 2014 LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP Y Jordan Elias -18- No. $198616 Supreme Court State of California IN RE CIPRO CASES I AND II CALIFORNIA COURT OFAPPEAL — FOURTH APPELLATEDISTRICT — NO. D056361 SUPERIOR COURT OF SAN DIEGO — HON. RICHARD E.L. STRAUSS NOS. JCCP 4154 AND JCCP 4220 PROOF OF SERVICE ERIc B. FASTIFF, ESQ. (182260) BRENDAN GLACKIN,Esq. (199643) DEAN M. HARVEY,ESQ. (250298) JORDAN ELIAS, ESQ. (228731) LJEFF CABRASER HEIMANN & BERNSTEIN, LLP 275 Battery Street, 29th Floor San Francisco, California 94111-3339 (415) 956-1000 Telephone JOSEPH R. SAVERI, Esq. (130064) JOSEPH SAVERI LAW FIRM,INC. 505 Montgomery Street, Suite 625 San Francisco, California 94111 (415) 500-6800 Telephone. DAN DRACHLER,ESQ.(pro hac vice) ZWERLING, SCHACHTER & ZWERLING, LLP 1904 Third Avenue, Suite 1030 Seattle, Washington 98101 (206) 223-2053 Telephone RALPH B. KALFAYAN,Esq. (133464) KRAUSE KALFAYAN BENINK & SLAVENS, LLP 550 West C Street, Suite 530 San Diego, California, 92101 (619) 232-0331 Telephone Mark A. Lemley, ESQ. (155830) DURIE TANGRI LLP 217 Leidesdorff Street San Francisco, Ca 94111 (415) 362-6666 Telephone _ Attorneysfor Plaintiffs-Appellants andall others similarly situated SERVICE LIST Charles A. Bird Christopher J. Healey McKENNA LONG & ALDRIDGE LLP 600 West Broadway, Suite 2600 San Diego, CA 92101-3391 Phillip A. Proger Kevin D. McDonald JONES DAY 51 Louisiana Avenue, N.W. Washington, D.C. 20001 Peter B. Bensinger, Jr. BARTLIT BECK HERMAN PALENCHAR & SCOTT LLP Courthouse Place, 54 West Hubbard Street, Suite 300 Chicago, IL 60654 Attorneys for Defendant and Respondent Bayer Corporation Joann F. Rezzo EDELSON & REZZO 402 West Broadway, Suite 2700 San Diego, CA -92101 David E. Everson Victoria L. Smith Heather S. Woodson STINSON LEONARD STREET LLP 1201 Walnut Street, Suite 2900 Kansas City, MO64106-2178 Jay P. Lefkowitz Karen N. Walker Edwin John U Gregory L. Skidmore KIRKLAND & ELLIS LLP 655 Fifteenth Street, N.W. Washington, DC 20005 Kathryn E. Karcher KARCHER HARMESPS 401 B Street, Suite 2450 San Diego, CA 92101 Attorneys for Defendants and Respondents: Hoechst Marion Roussel; The Rugby Group,Inc.; Barr Laboratories, Inc.; and Watson Pharmaceuticals, Inc.
