IN RE CIPRO CASES I & II

Appellants’ Opening Brief on the Merits

Cal.March 27, 2012

te en y he In the Supreme Court ofthe State of California > Barr’s invalidity counterclaimsrested onthe priorart as well as allegations that the 444 patent did not satisfy 35 U.S.C. § 112, by virtue of its failure to describe the scientific process for making ciprofloxacin or one of its antecedent compounds—thepatent instead described a separate process (the Roger-Bellon Method)that did not actually produce ciprofloxacin. (3AA 364-68, 8AA 1808-13, 1854-55.) 2. Respondents’ Incentives to Settle. A finding of inequitable conduct bythe trial court supervising the patent case would have been disastrous to Bayer. In the summer of 1996, the court denied Bayer’s partial motion for summary judgment. (3AA 557— 61.) Bayer quickly sought litigation peace. It convened a “working group” of executives to consider the likelihood that Bayer would lose its Cipro monopoly and how such a setback would affect the company. (3AA 569— 70, 4AA 670-71.) Bayer estimated that generic drug makers would capture approximately 90 percent of the ciprofloxacin market within one year of entry.° Christopher Seaton, Bayer’s then-vice president ofplanning and business administration, highlighted Bayer’s incentive to buy off generic competitors: Thefirst point to make is that nothing will be able to offset the loss of margin that would occur if Cipro were to go generic quickly. . . . [T]here is no credible cost reduction strategy that would overcome such a massive hemorrhage. (6AA 1280, 1283.) Seaton sent this memorandum to David Ebsworth, then-president of the pharmaceutical division at Bayer’s U.S. subsidiary. (6AA 1289.) Ebsworth agreed with Seaton’s analysis. Hetestified that the introduction of generic ciprofloxacin in 1997 would have placed the ° Jennifer Stahl, Bayer’s director of the Cipro brand, wrote in an internal e- mail that generic market penetration would be “fast and furious.” (6AA 1266.) Leslie Noble, Bayer’s director of strategic contracting, operations, and trade relations, testified that Bayer anticipated the erosion of Cipro sales after Barr’s entry would be “very quick and very steep.” (6AA 1261.) Morespecifically, Carol D’Eugenio, Bayer’s deputy director of marketing research, admitted that “within 12 monthspost generic entrance. . . the generic form has eroded 90 percent of the total compound; they captured 90 percent share.” (6AA 1255.) This accords with the testimony of a Bayer consultant that other brand-nameantibiotics lost over 90 percentin sales within six months of generic market entry. (6AA 1271-72, 1274-77.) -10- viability of Bayer’s U.S. pharmaceutical business in jeopardy; Cipro was Bayer’s most profitable product by far.’ (6AA 1292-95.) Bayer’s Board of Directors was made painfully aware that losing the Bayer vy. Barr trial would result in the “destruction”of its Cipro patent and monopoly profits. (4AA 691.) The companyestimated it would lose $3.336 billion in sales: “Whilst a settlement may havea significant negative impact for our image, a loss would be much worse.” (7AA 1440; TAA 1434.) Atthe first settlement meeting in August 1996, HMR’s general counsel informed Bayer’s representative that Barr would prevail in invalidating the Cipro patent.® (3AA 579-600.) HMR proposed that Bayer license Cipro to Barr and HMR/Rugbytosettle thelitigation. GAA 599.) During subsequent meetings in the autumnof 1996, Barr reiterated this proposalto settle based on an early entry license. (3AA 607-08, 625.) Bayerrefused, instead offering Barr a cash payment of approximately $50 million. (3AA 602-04, 612-13.) Negotiations continued through December 1996, by which point Bayer had convinced Barr and HMR to accept large cash payments as the main consideration. (3AA 614-15.) With the trial date fast approaching, Bayer paid Barr $3 million solely for an agreementto delay the trial. (3AA 637, 641-42.) ” Ofall Bayer’s products, Cipro brought in the most revenue worldwide. (6AA 1305-07.) HMR’s settlement strategy proceeded from thatreality: “Focus on the size ofthe pie is key -- focus on the share of a smallerpie is a mistake.” (3AA 596.) 8 Barr, Rugby, and Rugby’s subsidiary HMRhad previously entered into an agreementto jointly manufacture, sell, and distribute generic ciprofloxacin. (3AA 385-496.) HMR and Rugby had agreedto help fund Barr’s litigation against Bayer. In exchange, Barr had agreed to provide Rugby and HMR with half of its generic ciprofloxacin profits, or half of any settlement paymentfrom Bayer. -ll- Twocharts shownto the Board on January 7, 1997, the day before the settlement, portray its economicrationale in black and white. Thefirst chart showed Bayer’s projected revenues from Cipro through December 31, 2003, at which point Bayer’s Cipro patent would expire and its Cipro revenues would fall sharply. Upon expiration, generic manufacturers would competeto sell ciprofloxacin, driving downtheprice. Business Model: salos/profits Base Case DCF-value: 1,614 Mlo, US$ Base Case: Patent valid until December 31, 2003 Base Case: Patent gilltig bie31.12.2003 e 8 8 8 8 8 a l e . * U m a s t e P B i T (M il o, U S $ ) - # 8 Ss 1a 1998 1999 2000 201 2002 2008 2& AeOseTTPTT, THe Set, Ok aoe rat” Done BCP4610054 (4AA 690.) The next chart projected Bayer’s revenues from Ciproafterit lost its lawsuit to Barr and generics began to compete in 1999 or 2000. The graph on the left assumed Bayer maintained its monopoly through 1998, with “patent destruction” in 1999; the graph on the right assumed Bayer maintained its monopoly through 1999 with destruction in 2000. Each graph showsa steep, rapid drop in Bayer’s revenue stream: -12- Sales / Profits development in case of patent destruction 1989, 2000 resp. Loss of Patent: untli December34, 1998 / until December 31, 1999 DCF-value (patent destruction In 1999): 712 Mio. USS DCF-value (patent destruction In 2600): 927 Mio. US$ m0 800 500 “a m0 7 500 oo 1 mi sit go) g 4 x 2” = t E™ fm 200 +00 pean 10 0 * a — + ; > 0% ; ‘ ‘ aoe Peete esses FEPER EE RZ |+Ursa erent125) Uvestr (Verkat 12.99} | —w—Patt (Verhnt 12:8) RIT {Verkat $2.99)) “ "pales “hosetists me eg toas Smeeee ahaa BCP4610055 (4AA 691.) It was therefore in Bayer’s interest to pay $398.1 million to obtain the Generic Defendants’ agreementto stay out of the Cipro market. It was also in Barr’s interest to accept the offer. Barr predictedit would earn only $148 million to $177 million selling generic ciprofloxacin in a competitive market through 2003. (6AA 1203, citing Barr documents at L1OAA 2353-75, 2377-2401.) The total profits Barr gained from the anticompetitive agreement were 3.3 to 4 times larger than the profits Barr could reasonably have expected to gain through competition. (6AA 1204.) -13- 3. The Cipro Agreements. Bayer, Barr, and the other Generic Defendants reached their settlement on January 8, 1997.2 3AA 616, 4AA 699-700.) Barr, HMR, Rugby, Apotex, and Bernard Sherman agreed to abandon any challenge to the validity or enforceability of Bayer’s ’444 patent for Cipro.’? In exchange, Bayer agreed to make total payments of $398.1 million to Barr, including an initial payment of $49.1 million and quarterly cash payments until December 2003. (4AA 703-04, 788.) Ifa litigant subsequently were to obtain a judgmentofinvalidity or unenforceability against the 444 patent, Bayer would stop making cash payments to Barr. (4AA 768, 788— 90.) Bayer and Barr authorized their counsel to file a two-page “Consent Judgment” endingtheir patentlitigation. (4AA 704-06.) The Consent Judgmentdisclosed no details of the settlement, nor did the parties ever provide them to the court supervising the Bayer v. Barrlitigation. ” The Cipro agreementsconsist of four documents: e Settlement Agreement and Mutual Release among Bayer AG, Bayer US andBarr Laboratories (4AA 702-33); e Settlement Agreement and Mutual Release among Bayer AG, Bayer US, HMRand Rugby (4AA 735-48); e Settlement Agreement and Mutual Release among Bayer AG, Bayer US, Bernard Sherman and Apotex, Inc. (4AA 750-60); and e Supply Agreement among Bayer AG, Bayer US, Barr and HMR (4AA 762-813). The Supply Agreement was amended on August 28, 2003, to extend the parties’ arrangementuntil the end of 2005. (4AA 830.) 'C HMR, Rugby, Apotex, and Mr. Sherman—non-partiesto the Bayerv. Barr \itigation—were well-established generic drug manufacturers, each of whom wascapable of winning FDA approvalto bring a generic version of Cipro to market at lower prices. Mr. Sherman wasthe majority controlling shareholder of Barr as well as the CEO and controlling shareholder of the Canadian generic drug company Apotex. Assuch, he wasprivy to the details of the Bayer v. Barr litigation that Bayer soughtto cloak in secrecy. .~14- Bayer paid Barr the entire amount. (4AA 847-48, 5AA 902-80.) 4. Bayer Passes the Cost of the Settlement to Purchasers. Bayer recouped these settlement payments and much more, by passing on the cost to purchasers. Beginning in 1997, Bayer raised Cipro prices at rates that were amongthe highest in the pharmaceuticalindustry, more than doublingits pre-settlement annualrate of price increase: “Measured as the percentage price increase over the entire period divided by the numberofyears in the period, Bayer increased the prices for the three major [Cipro] dosages 4.56%, 4.85% and 4.33% annually in the five yearsprior to the settlement agreements and 10.53%, 11.66% and 74.83% respectively for the seven years after the settlement agreements.” (6AA 1208.) The price of Cipro increased 16 percent from the beginning of 1997 to the end of 1998 alone. (6AA 1167.) During its monopoly period, a single Cipro pill cost consumers upwards of $5.30, whereas a genericpill would have cost only $1.10. (6AA 1093.) Between 1997 and 2003, Bayer gained revenues of $5.717 billion, and profits of approximately $4.859 billion, from sales of Cipro tablets. (6AA 1202.) Pursuant to the Supply Agreement, Barr began re-selling Bayer- manufactured Cipro in June 2003, six months before the ’444 patent was set to expire. (4AA 780.) Because the agreement required Barr to buy the Cipro from Bayerat 85 percent of its current price, Barr did not undercut Bayer’s price on the Cipro that it re-sold. (4AA 779-80.) Between June 2003 and December 2003, Barr sold Bayer-manufactured Cipro at prices that equaled or exceeded the prices Bayer charged for Cipro. (SAA 999, 1037, 6AA 1207-08.) -15- PROCEDURALHISTORY OF THIS CASE Petitioners filed their consolidated amended complaint on August5, 2002, alleging violations of the Cartwright Act, the Unfair Competition Law, and the commonlaw doctrine prohibiting monopolistic acts. Following removal, the federal district court remanded the case to the Superior Court. (See Jn re Ciprofloxacin Hydrochloride Antitrust Litig. (E.D.N.Y. 2001) 166 F.Supp.2d 740, 746-757.) The Superior Court overruled Respondents’ demurrerasto all claims on November26, 2002. Discovery commencedin January 2003. On November25, 2003, the Superior Court certified a class of the “hundreds of thousands”of California consumers and third-party payors who purchased Cipro during the Class Period, which began on January 9, 1997, and ended whenthe effects of Respondents’ illegal conduct ceased. (/n re Cipro Cases I and IT (2004) 121 Cal.App.4th 402, 408.) The Court of Appeal affirmedthe class certification order on July 21, 2004. (/bid.) On August 20, 2009, the Superior Court issued a tentative ruling granting summary judgment to Respondents. On August 21, 2009, the Superior Court heard oral argument. In an order dated that same day,the court granted the motions, finding federal authority “dispositive.” (Orderat p. 4 (11AA 2685).) The court summarily overruled all of Petitioners’ _ objections to the evidence submitted by Respondents. (See Order at p. 7 (11AA 2688).) Petitioners appealed. (11AA 2715.) Following briefing and argument, the Court of Appeal affirmed, in an opinion issued on October 31, 2011. Like the Superior Court, the Court ofAppeal found “the reasoning of the federal cases .. . regarding the legality of settlements of Hatch-Waxmanpatentlitigation to be sound and applicable to plaintiffs' cause of action under the Cartwright Act.” (Opinion at p. 33.) The Court of Appeal “conclude[d] that because the -16- Cipro agreements undisputedly did not restrain competition beyond the exclusionary scope of the °444 patent, they do not violate the Cartwright Act.” (Opinion at p. 38.) Unlike the Superior Court, the court also reached the federal preemption issue raised by Bayer and held the claims preempted. (See Opinion at pp. 42-45.) This Court granted review on February 15, 2012. STANDARD OF REVIEW This Court reviews a grant or denial of summary judgment de novo. (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 860.) At summary judgment, “a reviewing court must examine the evidence de novo and should draw reasonable inferences infavor ofthe nonmovingparty.” (Miller v. Department ofCorrections (2005) 36 Cal.4th 446, 470, italics in original.) Summary judgmentis not warranted unless Respondents can demonstrate “that one or more elements of the cause of action in question cannotbe established,or that there is a complete defense thereto.” (Aguilar, supra, 25 Cal.4th at p. 850, citation and quotation marks omitted.) ARGUMENT I. The Court of Appeal Erred in Holding that the Cartwright Act and the UCL Do Not Prohibit Respondents’ Market Exclusion Payment. The Cipro agreements violate California law because they constitute a naked payoff of $398.1 million from one horizontal competitor to other horizontal competitors to suppress competition. The agreements significantly harmed California purchasers by denying them the benefits of a competitive market and requiring them to pay higher prices. The assertion of a patent cannot immunize these agreements, which fall into a category that experience has shownlacks any redeeming value: covenants not to compete in an entire market. The case should go to a jury. -17- A, The Cipro Agreements Violate California Law Per Se. Oneofthe chief benefits of the per se rule of antitrust liability is the predictability it establishes. If applied here, as Petitioners submit the rule should be, it will set everyone’s expectations such that pharmaceutical companies, to avoid imposition ofper se liability, will stop reaching pay- for-delay settlements. As in the past, should they choosetosettle patent cases, they will employ other mechanismsthat do not violate California law, such as early entry licenses that provide some benefit to consumers— in contrast to the pernicious cash settlement at issue here. Pay-for-delay agreements are not necessary, either to settle patentlitigation or to promote innovation. The Court of Appeal’s superficial analysis of the patent’s presumed exclusionary effect is a distortion of antitrust and patent law, and disregards the record evidence—including the large exclusion payment— that casts serious doubt on the Cipro patent’s actual ability to exclude. Consistent with longstanding precedent, pay-for-delay agreements should be illegal per se under California antitrust law. 1. The Cartwright Act Prohibits Payments Not to Compete, Like Those at Issue Here. Bayer’s open paymentin restraint of trade secured an agreementto head off competition, violating the Cartwright Act. The Cartwright Act forbids any “tampering with prices; they must be determined, we have stated, by the ‘interplay of the economic forces of supply and demand.’ [Citation.]” (Mailand v. Burckle (1978) 20 Cal.3d 367, 377.) The Cartwright Act has long outlawed anticompetitive behavior in categorical terms—agreementsrestraining free competition are “absolutely void.” (Bus. & Prof. Code, § 16722.) The Act establishes specific categories of restraints that are illegal per se. Particularly relevant here,it bansall agreements between businesses “to pool, combineor directly or indirectly -18- unite any interests that they may have connected withthe sale or transportation of any sucharticle or commodity,that its price might in any mannerbeaffected.” (d., § 16720(e)(4).) In the application of these clear prohibitions, certain types of anticompetitive practices are “conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have causedor the business excusefor their use. [Citation.]” (B. WI. Custom Kitchen v. Owens-Illinois, Inc. (1987) 191 Cal.App.3d 1341, 1348.) California law condemns, as per se unlawful, conduct that has a “pernicious effect on competition and lack of any redeeming virtue[.]” (/bid., citation omitted.) Where a case involves such conduct, the jury need not weighits anticompetitive effects against any purportedjustifications. ([bid.) The Cipro agreements run afoul of California’s per se prohibition of business practices that monopolize a market. “The offense of monopoly involves the willful acquisition of the power to control prices or exclude competition from commercein a particular geographic area with respect to a specific product.” (Lowell v. Mother’s Cake & Cookie Co. (1978) 79 Cal.App.3d 13, 23.) At common law,this Court nullified contracts providing for payments to divide up markets or to block the entry of competing firms. “Contracts which goto the total restraint of trade, as that aman will not... carry on his business anywherein the State, are void, upon whatsoever consideration they may be made. [Citations.]” (Wrightv. Ryder (1868) 36 Cal. 342, 359, italics in original; see, e.g., Callahanv. Donnolly (1872) 45 Cal. 152, 153-154; Getz Bros. & Co. v. Federal Salt Co. (1905) 147 Cal. 115, 118 [condemning $10,000 payment madein exchange for a covenant “to refrain from purchasing salt from any other parties than the defendant, and to refrain from importing or causing to be imported, or in any way bringing anysalt to the Pacific Coast... other than -19- such as may be purchasedbythe defendant.”].) Such monopoly practices are per se illegal under California law. “Though notspecifically listed [in the Cartwright Act], monopoly is a prohibited restraint of trade.” (Mother’s Cake & Cookie, supra, 79 Cal.App.3d at p. 23 [needsfull cite]; see also Dimidowich v. Bell & Howell (9th Cir. 1986) 803 F.2d 1473, 1478 [“Combinations to monopolize would appearto fall within the general prohibitions of the Cartwright Act.”].) Similarly, horizontal agreements to allocate markets have long been held to violate the Cartwright Act per se. A leading case is Guild Wineries & Distilleries v. J. Sosnick & Son (1980) 102 Cal.App.3d 627. There, the defendant took over the operations of one of its wholesalers and tried to persuade another wholesaler not to compete withit, triggering per se liability. (/d. at p. 633.) The deleterious economiceffects of pay-for- delay settlements justify this categorical ban here. Respondents—horizontal competitors—do not dispute that they entered into the Cipro agreements for the purpose of eliminating competition with a reward funded by the same monopoly profits that Bayer gained throughits illegal agreement. Hence, Respondents pooledtheir interests to affect prices in violation of section 16720(e)(4). In fact, Bayer’s paymentviolates the Cartwright Act per se in multiple ways: it constitutes a monopoly practice, it secured an agreement not to compete, and it horizontally allocated the entire Cipro market to Bayer. The fact that Bayer and the Generics maximizedtheir profit through a horizontal agreementto eliminate competition, raise prices, and divide the market does not meantheir settlement is in the public interest. On the contrary, they extracted their extra profit directly from consumers, through higher Cipro prices. With its exclusion payment, Bayer bought assurance that its patent would not be invalidated, something the patent law does not - 20 - give and that the Hatch-WaxmanActintendedto prohibit. Bayer used someofthis extra monopolyprofit, obtained by avoiding Barr’s likely successful challenge, to pay Barr off." Incentives to Pay for Delay Pre-Generic Filing Competition Consumer Savings Exclusion Payment '! As Dr. Hartman found: “The incumbent and thefirst entrant coordinated their behavior andsettled their IP dispute to their mutual economic advantage; each ofthesettling parties (Bayer and Barr) was economically better off under the settlement than they were absent the settlement; and the settling parties optimized their combined economicself-interest to the disadvantage of the third group ofself-interested individuals (the consumers). These are classic characteristics of an agreementin restraint of trade rather than an agreementto mitigate thelitigation risk oftwo parties to an IP dispute.” (6AA 1210; see also LOAA 2251.) -21- Given these clear pernicious effects, the relative novelty of pay-for- delay settlements does not justify declining to enforce the per se ban. No court has ever held that the per se rule will not be applied simply because an agreement occurred within a certain economic sector or other courts declined to apply the rule in a similar situation. This circular reasoning would makethe per se rule a deadletter. In fact, the per se rule exists in order for the courts to make categorical judgments. It does not condemn specific agreements based on their particular languageordetails;it condemnsentire classes of agreements based on their nature and economic effects. (7 Philip E. Areeda & Herbert Hovenkamp,Antitrust Law: An Analysis ofAntitrust Principles and Their Application (3d ed. 2010) §{ 1509a, at pp. 440-441 [noting that “sometimes the reasonableness judgmentcan be generalized for a class of behavioror for a class of claimed defenses.”].) Economic analysis, not stare decisis alone, drives the inquiry. Ud., § 1509b, at p. 448 [explaining that the per se rule applies where“serious perniciouseffects are likely to result from mostofits concrete manifestations, and social benefits are likely to be absent or small or readily achievable in other ways.”]; see also Oakland-Alameda County Builders’ Exchangev. F. P. Lathrop Constr. Co. (1971) 4 Cal.3d 354, 361 [holding that the per se rule in California “does not denote an arbitrary rigid classification, but rather encompasses certain practices that normally tend to eliminate competition.”].) Thus, in 1972, no court had held simple market division to be per se illegal under the Sherman Act—a proposition we now takefor granted. (Eleanor M. Fox & Lawrence A.Sullivan, Cases and Materials on Antitrust (1989), at p. 344 [“Before 1972, although commentators often asserted that agreements by competitors to divide markets were, without more, per se unlawful, there was as yet no case explicitly so holding.”].) That did not -22- stop the United States Supreme Court from finding such a division to be per se unlawful in United States v. Topco Associates, Inc. (1972) 405 U.S. 596, even in the context of a then-noveljoint venture between supermarkets to create a generic brand. Similarly, novelty and the absenceofprior authority did not stop the Court from summarily reversing and granting summary judgmentto the plaintiffs in Palmer v. BRG ofGeorgia, Inc. (1990) 498 U.S. 46 (per curiam), despite the fact that the agreement to end competition occurred in the context of a licensing agreement. So, too, does the rule ofper se illegality apply to the Cipro agreements, as the California Attorney General recognizes.'” (See 1/10/12 AG AmicusLetter, at p. 3.) 2. The Court of Appeal’s Stated Reasons for Not Applying the Per Se Rule Are Insufficient. The Court of Appealerred in failing to apply the established per se rule. Citing to federal Eleventh Circuit authority, the court reasoned that the per se rule did not apply because,“[c]onsidering the important public policies [1] underlying patent law (Valley Drug, supra, 344 F.3d at pp. 1307-1308) and [2] favoring the settlement of patent litigation (Schering, supra, 402 F.3d at pp. 1074-1075), and [3] the fact that the Cipro agreements did not restrain competition outside the exclusionary zone of the '444 patent, we cannot view the Cipro agreementsas lacking any redeeming virtue.” (Opinion at p. 33.) Yet, pay-for-delay settlements do not promoteeither the policies of the Patent Act or settlement of patent cases—the only two “redeemingvirtues”cited by the lower court. Andthe limitation of the agreements to Cipro simply meansthey were not even more anticompetitive; it does not qualify as a “virtue.” 2 Under Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Company (1999) 20 Cal.4th 163, 180-181, the Cipro agreements violate the UCLin addition to the Cartwright Act. - 23 - a. Pay-for-Delay Settlements Do Not Promote the Policies of the Patent Act. Declining to apply the per se rule frustrates patent law rather than furthering it. The opinion below misunderstoodpatent law, allowing a private agreement surrounding an untested—andlikely unenforceable— patent to supply the same bulwark against competition as a fully litigated patent upheld on its merits. _ A cornerstone ofpatent policy is “the desirability of encouraging licensees to challenge the validity of patents, to further the strong federal policy that only inventions which meet the rigorous requirements of patentability shall be withdrawn from the public domain.” (Aronsonv. Quick Point Pencil Co. (1979) 440 U.S. 257, 265, italics added.) Patent law andpolicy strongly favorstriking illegitimate patents from the economy because they impede competition, innovation, andefficient licensing. “It is as important to the public that competition should not be repressed by worthless patents, as that the patentee ofa really valuable invention should be protected in his monopoly.” (United States v. Glaxo Group Ltd. (1973) 410 U.S. 52, 58, quoting Pope Mfg. Co. v. Gormully (1892) 144 U.S. 224, 234.) The public stands to gain from the lower aggregate prices that result from adversarial testing of vulnerable patents. Therefore, the law “encourage[s] authoritative testing of patent validity.” (Blonder-Tongue Labs., Inc. v. University ofIll. Found. (1971) 402 U.S. 313, 343-344, citing in part Precision Instrument Mfg. Co. v. Automotive Maint. Mach. Co. (1945) 324 U.S. 806, 816.) The United States Supreme Court has repeatedly “emphasiz[ed] the necessity of protecting our _ competitive economy by keeping open the way for interested persons to challenge the validity of patents which might be shownto be invalid,” to further the “often expressed policy that ‘It is the public interest whichis -24- dominant in the patent system,’ Mercoid Corp. v. Mid-Continent Investment Co. [1944] 320 U.S. 661, 665, and that the right to challenge ‘is not only a private right to the individual, but it is founded on public policy, whichis promoted by his making the defence, and contravened by his refusal to makeit.” Pope Mfg. Co. v. Gormully [1892] 144 U.S. 224, 235.” (Edward Katzinger Co. v. Chicago Metallic Mfg. Co. (1947) 329 U.S. 394, 400-401; see also United States v. Line Material Co. (1948) 333 U.S. 287, 319 (Line Material) (conc. opn. of Douglas, J.) [directing courts to condemn patent- based arrangements whichcreate ‘“‘a powerful inducement for the abandonment of competition, for the cessation of litigation concerning the validity of patents”’].) The Court ofAppeal’s ruling, contrary to this deeply-rooted policy, lets the ownerof an invalid pharmaceutical patent halt adversarialtesting, and avoid expected invalidity determinations, by offering up someofits monopoly profits to erstwhile challengers. Repudiating the faulty approach below will encourage the salutary patent testing that benefits the public by weeding out such weakpatents. But, it will not diminish the patent policy encouraging innovation. (Cf. Opinionat p. 20.) Not every extra dollar that goes to an inventor promotes innovation. It strains the imagination to think that a scientist’s decision to pursue a new line of research depends on whether, decadeslater, his or her employer will be able to pay a competitor not to challenge a patent obtained from that research. In reality, “patents are but one aspect of innovation policy... [and] innovation cannot be maximized without taking antitrust principles into account. A strong antitrust system is an important componentof a larger innovation policy becauseit provides a check on those forms of patent misconductthat also injure competition.” (Christopher R. Leslie, 25 - Antitrust and Patent Law as Component Parts ofInnovation Policy, 34 J. Corp. L. 1259, 1288 (2009).) A reverse exclusionary paymentis a form of patent misconduct, and it excludes the very generic competition that gives branded drug companies an addedincentive to develop new products. The Federal Trade Commission foundthat “[t]he generic competition spurred by Hatch-Waxmanhas forced brand-namefirms to come up with new products to replenish their revenue streams.”'> Reverse payments have precisely the opposite effect, stifling generic competition and thus undermining innovation. The Court of Appeal’s ruling cannot be excusedonthe basis of the procedural presumption of validity. Far from conferring any definite right, a patent reflects only an initial view by a patent examinerthat an invention is patentable; it requires a court-approved injunction to be enforced, and can be invalidated. (Lear, Inc. v. Adkins (1969) 395 U.S. 653, 670 (Lear); In re Etter (Fed.Cir. 1985) 756 F.2d 852, 856 (en banc) (Etter); Zenith Radio Corp. v. Hazeltine Research, Inc. (1969) 395 U.S. 100, 135 [“The heart of his legal monopolyis the right to invoke the State’s powerto prevent others from utilizing his discovery without his consent.”].) Thus, patents are not definitively valid but only presumptively so. (35 U.S.C. § 282.) And the rebuttable presumption ofvalidity is “a procedural device, not substantive law.” (Stratoflex, Inc. v. Aeroquip Corp. (Fed.Cir. 1983) 713 F.2d 1530, 1534.) The presumption merely assigns respective burdensto patent litigants and does not“acquire an independent evidentiary role in any proceeding.” (Etter, supra, 756 F.2d at p. 856.) Moreover,it applies only in a full adjudication on the merits. (See 3 (Federal Trade Commission, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy” (Oct. 2003), ch. 3, at p. 11, available at: http://www.ftc.gov/os/2003/10/innovationrpt.pdf.) - 26 - Nutrition 21 v, United States (Fed.Cir. 1991) 930 F.2d 867, 869.) Courts therefore have denied preliminary injunctions sought by patent holders on the groundsthat, at least until a court has ruled on patentvalidity, the alleged infringer has a “right to compete.” (See, e.g., [/linois Tool Works, Inc. v. Grip-Pak, Inc. (Fed.Cir. 1990) 906 F.2d 679, 684.) Onthe other hand,a rule that admittedly enables the holder of a “fatally weak” patent (Tamoxifen, supra, 466 F.3d at p. 212) to maintain and protect its monopoly by bribing the competition impairs “the efficient operation of the federal patent system [that] depends upon substantially free trade in publicly known, unpatented design andutilitarian conceptions.” (Bonito Boats, Inc. v. Thunder Craft Boats, Inc. (1989) 489 U.S. 141, 156.) Such a rule also abrogates California’s own “policy favoring free competition, dissemination of ideas and maximum utilization ofintellectual resources”—andit should be rejected for our State. (Sinclair v. Aquarius Elec., Inc. (1974) 42 Cal.App.3d 216, 224,citation omitted.) Asthe leading antitrust treatise observes: “The problematic thing about large exit payments to infringement defendants is that they raise a strong inference that the parties themselves believed the patents in question wereeither invalid or not infringed.” (12 Herbert Hovenkamp,Antitrust Law:An Analysis ofAntitrust Principles and Their Application (2d ed. 2005) § 2046c2.) The inference is particularly strong in this setting because about three-quarters oflitigated pharmaceutical patents are struck down. (6AA 1177, 9AA 2157, 2045-2136.) Indeed, challenges to prescription drug patents are of special importance. Pharmaceutical patent monopolies have led to skyrocketing prices, which deter patients from buying their -27- prescribed medicine.'* Largely for that reason, the American Medical Association urges courts “to stop ‘pay for delay’ arrangements by pharmaceutical companies.” (10OAA 2325.) b. Outlawing Pay-for-Delay Settlements Will Not Inhibit Settlement of Patent Cases. Just as holding pay-for-delay settlements per se unlawful will not dampen pharmaceutical innovation, such a holding will not prevent pharmaceutical patent cases from settling. Pharmaceutical companieslike Bayer, Barr and the other Respondents here are sophisticated businesses, '* Scientific studies included in this appellate record determined that many patients do not take someorall of their prescribed medicine whenit is too expensive and becomesunaffordable. (See Stephen B. Soumerai, etal., Cost-Related Medication Nonadherence Among Elderly and Disabled Medicare Beneficiaries, Archives of Internal Medicine, vol. 166, pp. 1831, 1834 (2006) (9QAA 1973, 1976) [finding that “concern about cost was the predominant reason reported (79.4 percent of [elderly and disabled] respondents) for not filling prescriptions,” and that “a substantial proportion of [Medicare] enrollees and almost one quarter of the disabled beneficiaries reported cutting back on basic needsto be able to afford their medications”]; Dawn Klein, et al., Elders Who Delay Medication Because ofCost: Health Insurance, Demographic, Health, and Financial Correlates, The Gerontologist, vol. 44, p. 785 (2004) (9AA 1985) [finding that “because of the high cost of some medications, patients may decide that the medication is too costly and that they do not really ‘need’ the medication, even if they can afford it. ... [N]oncompliance for any reason may contribute to emergency room visits, inpatient admissions, and overall health care costs.”]; Michael A. Steinman, M.D., et al., Self-Restriction of Medications Due to Cost in Seniors Without Prescription Coverage, Journal of General Internal Medicine, vol. 16, p. 797 (2001) GAA 1993) [finding that “[l]ow income and high out-of-pocket drug costs both play an important role in medication restriction, consistent with basic economic principles.”]; Emily R. Cox, et al., Medicare Beneficiaries’ Management of Capped Prescription Benefits, Medical Care, vol. 3, pp. 296, 298 (2001) (QAA 1997, 1999) [finding that 23.6 percent of Medicare beneficiaries who wereat risk of reaching their prescription cap took less than the prescribed amount of medication, 16.3 percent stopped using medications, and 14.7 percent went without food, clothing, or shelter].) - 28 - perfectly capable of settling patent disputes without exclusionary payments. Between 2000 and 2004—-whenpay-for-delay settlements were considered to be per se illegal under Jn re Cardizem CD Antitrust Litigation (6th Cir. 2003) 332 F.3d 896 (Cardizem)—‘notone of twenty reported agreements involved a brand firm paying a genericfiler to delay entering the market. Duringthis period, parties continued settling their disputes, but in ways less restrictive of competition, such as through licenses allowing early generic entry.” (Michael A. Carrier, Unsettling Drug Patent Settlements: A Frameworkfor Presumptive Illegality, 108 MICH. L. REV. 37, 75 (2009).) During this time when such agreements weretreatedasillegal, and pharmaceutical companiesacted accordingly, the patent system continued to operate, innovation did not lag, new products came to market and parties litigated their patent disputes in court, settling virtually all of them and at the same rate. Among other things, this history showsthat patent settlements can be negotiated for early entry alone, without pay-for-delay agreements.” In contrast, the retreat by certain federal courts from the per se approach of Cardizem has opened the pay-for-delay floodgates. Fourteen reverse-paymentdeals were reached in 2007, 16 in 2008, 19 in 2009, 31 in '’ Neither the Court of Appeal nor Respondents can demonstrate that scrutinizing reverse payments would chill patentlitigation itself. (Cf Opinion at pp. 35-36.) It would not. Under the Hatch-Waxman procedures, branded drug companies have an overwhelmingly strong incentive to sue generic applicants in order to secure an additional exclusivity period. (See 21 U.S.C. § 355(j)(5)(B)Gii).) Their inability to pay off generic challengers does notvitiate this incentive. Also, given the revenues at stake, generic drug companies willstill have every incentive to pursue invalidity judgments andarrive at reasonable settlements with the brands even absentthe possibility of gaining a windfall cash payment. -29- 2010, and 28 in 2011.'° No oneseriously disputes that such agreements are anticompetitive and lead to higher prices—pay-for-delay settlements confer no benefit on anyone, except the colluding drug companies. However, settling litigation does not provide carte blancheto violate the law. California law: does not allow a court to endorse or enforce a provision in a settlement agreementor stipulation which is illegal, contrary to public policy, or unjust. ... Consequently, even though there is a strong public policy favoring the settlementoflitigation, this policy does not excuse a contractual clause that is otherwise illegal or unjust. (Timney v. Lin (2003) 106 Cal.App.4th 1121, 1127; see, e.g., Union Pacific Corp. v. Wengert (2000) 79 Cal.App.4th 1444, 1446-1447 [reversing approvalof a settlement alleged to be “collusive and against public policy”].'”) Furthermore,third parties “whoseinterests are affected” by a settlement agreement can challenge the agreement to obtain a finding of illegality. (River Garden Farms, Inc. v. Super. Ct. (1972) 26 Cal.App.3d 986, 1000.) '® (See http://www.ftc.gov/os/2011/10/1110mmachart.pdf.) '’ The sponsors of the Hatch-Waxman Act havespecifically stated that pay- for-delay agreements violate the statutory intent. Senator Hatch has said he thinks such deals are “appalling,” and a Senate Judiciary Committee report denounced“pacts between big pharmaceutical firms and makers of generic versions of brand name drugs,that are intended to keep lower-cost drugs off the market. Agreeing with smaller rivals to delay or inhibit competition is anabuse....” (10OAA 2234, 2239, italics added.) According to Representative Waxman,“[t]he law has been turned on its head... . We were trying to encourage more generics and through different business arrangements, the reverse has happened.” (10AA 2224.) - 30 - c. Limitation of the Agreement to Cipro Is Not a Redeeming Virtue and Does Not Justify a Weakened Legal Standard. The Court of Appeal’s third stated reason for refusing to apply the per se rule was that the Cipro agreements’ terms, while allowing the patent to remain in effect, granted no exclusion other than what wasalready subsumedwithin its “exclusionary zone.” (Opinion at p. 33.) This is not a “virtue.” This reasoning mistakenly treats what is normally a sufficient condition for antitrust liability (restraints beyond the patent’s claims) as a necessary condition. In truth, a court is not absolved of the responsibility to scrutinize the underlying conduct when a patent holder has been sued underthe antitrust laws and the alleged restraint does not extend the patent. For a patent holder “may commit patent misuse in improper exploitation of the patent either by violating the antitrust laws or extending the patent beyondits lawful scope.” (Transitron Elec. Corp. v. Hughes Aircraft Co. (D. Mass. 1980) 487 F.Supp. 885, 893, italics added.) A pertinent example of the formersituation arose in United States v. Masonite Corporation (1942) 316 U.S. 265, where a patent owner (Masonite) sued its potential competitors for patent infringement and then resolved those disputes by licensing the competing firmsto sell its product at a price that it set. (/d. at pp. 267-273.) The Supreme Court held these agreements unlawful because Masonite eliminated potential competition by splitting its monopoly rents with its would-be competitors. (/d. at pp. 281- 282 [“The powerofthis type of combination to inflict the kind of public injury which the Sherman Act condemnsrendersit illegal per se.’”’].) Notably, the Court reversed the trial court’s finding that Masonite’s agreements were immune simply because they did not confer any “monopoly or restraint other than the monopolyorrestraint granted by the -3]- patents ....” (/d. at p. 276.) Thoughthe parallel with this caseis striking, the Court of Appeal did not cite or discuss Masonite. Several decisions have applied the per se antitrust rule to condemn exclusionary agreements taking the form of patent settlements. None of them turned onthe fact that the agreement exceeded the patent’s “exclusionary zone.” In Vulcan Powder Company v. Hercules Powder Company (1892) 96 Cal. 510 (Vulcan), this Court invalidated a horizontal marketallocation contract between competitors who claimed they were merely exchanging their patent rights to dynamite. The Court madeit clear that holding a patent does not give a companyfree rein to enter into | anticompetitive contracts, including market allocation contracts with competitors. (/d. at pp. 515-516 [“In some text-booksand decisions, it has been stated, generally, that the rule about contractsin restraint of trade being void does not apply to patent rights; but as applied in the adjudicated cases, it means only that a trader maysell a patent right, or a secret in his trade orart, and restrain himself generally from the use ofit, or from other acts which wouldlessen the value of the patent sold.”’].) The Vulcan Court foundit significant that the plaintiff and another party to the contract did not own a dynamite patent. The money these parties received did not result from a sale or exchangeofpatent rights— instead, they received it in exchangefor their agreement not to compete. (Vulcan, supra, 96 Cal. at p. 515.) The Court held the agreement void under California law, for ‘“‘no case has been cited in which it has been held that several persons or companies can legally enter into a business combination to control the manufacture,or sale, or price of a staple of commerce merely because someofthe contracting parties have letters patent for certain grades of that staple.” (Ud. at p. 516.) -32- The Court also noted that the restraints at issue, in purporting to affect the dynamite market, went beyond the technological scope of the patent at issue. However, far from being the linchpin of the decision, this wascited as an aggravating factor in the antitrust analysis. The Court first analyzed the contract independently of the patent issues, determining that the exclusionary provisions “are clearly in restraint of trade and against public policy; and this conclusion is too obvious to need argument, authorities, or elucidation.” (Vulcan, supra, 96 Cal. at p. 515.) The Court’s subsequent analysis focused on whether the patent holder was receiving consideration for someright it had obtained through the patent, and whether the consideration actually provided by the non-patent holders had any pro- competitive effects. The answer in each instance was no, supporting the conclusion that the provisions were facially unlawful. (Wd. at pp. 515-516 [“[I]t is obvious that the consideration moving from [the non-patent holders] was their covenantto refrain from competition in the dynamite business, and that they had no patent rights to ‘interchange.’”’].) The Cipro agreements, like the agreementin Vulcan,did not license patented rights. Bayer did notlicense its patent or receive any money from a license. Instead, it paid moneyto entities that had no patent right, in exchange for their agreement not to compete with the patented product. Patent licenses and other reciprocal business arrangements such as patent pools can have pro-competitive effects by expanding consumerchoice. Not so here. A generic drug company’s agreementto stay out of the market, like the agreementat issue here, and like the market allocation agreement struck down in Vulcan, has no pro-competitive effects. Under Vulcan, a naked payment from a patent holder to a non-patent holder to abandonits validity challenge and stay out of the market for the patented product, thus ensuringsupra-competitive prices, is subject to the rule that agreements not -33- to compete are perse illegal. (See also 12 Herbert Hovenkamp,Antitrust Law: An Analysis ofAntitrust Principles and Their Application (2d ed. 2005) 4 2046c,at p. 321 [Potentially anticompetitive IP settlements are entitled to deference when they involve the creation of IP licenses whose scope mustbe assessed against competitive risks. But when nolicenseis created, no such deference is needed. [Footnote.]”].) The Court of Appeal ignored Vulcan andits teachings entirely, while misconstruing another California precedent, Fruit Machinery Companyv. F. M. Ball & Company (1953) 118 Cal.-App.2d 748 (Fruit Machinery).) (See Opinion at pp. 34-35.) The divergent royalty rates challenged in Fruit Machinery survivedantitrust scrutiny, not because the licenses were restricted to the patented products, but because the “differential in royalty rates” bore “a reasonable relationship to differences in costs and capital risks between the two types of uses”at issue underthe licenses. (/d.atp. 762.) The court specifically noted that a patent holder can be subjected “to the proscriptions and penalties of the antitrust laws” when the circumstancesraise an inference of patent abuse or subversion of public interest.'® ([bid.) The Court ofAppeal in this case quoted Fruit Machinery’s disjunctive ruling without recognizing its true import: ‘Defendant has not shownthat the parties . . . exercised rights or powers '8 A royalty differential subjecting a patent holderto antitrustliability, presented as a hypothetical in Fruit Machinery, supra, 118 Cal.App.2dat p. 762, was foundto exist in subsequent cases involving disparate royalties in licenses for shrimp peeling equipment. (See La Peyre v. F.T.C. (Sth Cir. 1966) 366 F.2d 117; Peelers Co. v. Wendt (W.D.Wash. 1966) 260 F.Supp. 193; Laitram Corp. v. King Crab, Inc. (D. Alaska 1965) 244 F.Supp.9, modified, 245 F.Supp. 1019.) The contracts in these cases that were struck downas anticompetitive did not grant any rights other than those granted by the patents themselves. (See also Besser Mfg. Co. v. United States (1952) 343 U.S.444, 449 [listing “recognized remedies” underthe antitrust laws for “abuses of patent rights”’].) -34- not accorded them bythe patent law or abused any rights or powers accorded them bythat law.” (Opinion at p. 34, quoting Fruit Machinery, supra, 118 Cal.App.2d at p. 762, italics added.) | In addition, the Court of Appeal overlooked United States v. Singer Manufacturing Company (1963) 374 U.S. 174 (Singer). In Singer, American,Italian, and Swiss sewing machine companies agreedtosettle their various patent disputes, heading off patent challenges partly through a cross-licensing scheme,to collude against Japanese manufacturers. (/d.at pp. 180, 185.) Concurring, Justice White declared that the “patent laws do not authorize, and the Sherman Act does not permit,” arrangements “between business rivals to encroach upon the public domain and usurp it to themselves.” (/d. at p. 200 (conc. opn. of White, J.).) The defendants “agreed to settle an interference, at least in part, to prevent an open fight over validity. There is a public interest here, . .. which the partieshave subordinatedto their private ends... .” (/d. at p. 199,citations omitted.) According to Justice White, the Court vindicated a “public policy favor[ing] the exposure of invalid patent monopolies before the courts in order to free the public from their effects.” (/d. at p. 200, fn. 1.) In the aftermath of the landmark Singer decision, Congress amendedthe Patent Act to require parties wishing to settle a patent interference to submittheir settlement agreementto the PTO;that provision, 35 U.S.C. § 135(c), and the Singer decision, remain good law today. (See Christopher R.Leslie, Antitrust and Patent Law as Component Parts ofInnovation Policy, 34 J. Corp. L. 1259, 1276-1277 (2009).) Under Singer, Vulcan, and Masonite, the mere assertion of a patent that came underattack cannot immunize Respondents’ settlement agreementthat left Californians no choice but to pay monopolyprices for seven years. A patent holder “should not be permitted by legal devices to -35- impose an unjust charge upon the public in return for the useofit.” (Motion Picture Patents Co. v. Universal Film Mfg. Co. (1917) 243 US. 502, 513.) Contrary to the Court of Appeal’s discussion, the rule against restrictions on unrelated products does not logically imply that exclusionary agreementsrelating to a potentially invalid patent may nevergiverise to antitrustliability. “Rights conferred by patents are indeed very definite and extensive, but they do not give any more than other rights an universal license against positive prohibitions.” (Standard Sanitary Mfg. Co. v. United States (1912) 226 U.S. 20, 49.) “Nothing in the Patent Act authorizes a patentee to pay a rival simply to stay out of its market.” ~ (Herbert Hovenkamp,Antitrust and Innovation, 77 ANTITRUSTL.J. 749, 753 (2011).) Simply possessing a patent does not allow a companyto engage in any mannerofpernicious conduct within its scope, and a patentee that abandonspursuit of a verdict against an alleged infringer, using a large sum of moneyto buy the exclusion the patent evidently could not furnish, can no longer stake a credible claim to its full protection. That Respondents’ agreement waslimited to the patent parameters says nothing about whetherthe patent actually supplied legitimate grounds for the monopoly. However, the timing (on the eve ofthe patenttrial), size (enormous), and direction (from the patent holder to the patent challenger) of Bayer’s payment demonstrate that Respondents seriously doubted the patent’s actual ability to exclude. California law, as established in Vulcan and Fruit Machinery, supra, recognizes the distinction between legitimate patent use and the kind of actionable abuse presenthere. Thebasis for per se treatmentin this case is simple as well as sound. By allocating the entire Cipro market to Bayer, the Cipro agreements precluded generic drug entry, competition and free-market pricing. That the agreementssettled a patent dispute does not shield -36- Respondents’ conduct from scrutiny. Their wealth transfer forced California citizens to pay monopoly prices, denying patients and insurers the benefits of the competitive prices they otherwise would havereceived. Such a horizontal agreement preventing a competitor from entering a market violates California law onits face. B. The Court of Appeal Incorrectly Adopted a Faulty Federal Standard. In evaluating Cartwright Act claims, “federal precedents must be used with caution becausethe acts, although similar, are not coextensive.” (Freeman v. San Diego Ass’n ofRealtors (1999) 77 Cal.App.4th 171, 183, fn. 9, citing State ofCalif. ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1152-69; see Cianci v. Super. Ct. (1985) 40 Cal.3d 903, 919- 921 [finding “the Legislature intended to strike as broadly as it could in the Cartwright Act.”]; Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937, 948-950 [rejecting federal court’s attempt to create a “narrow-restraint” exception to California’s prohibition of noncompete agreements].) Here thetrial court and the Court of Appeal wrongly adopted the most permissive federal standard possible, the flawed Tamoxifen rule, as the law of California. Tamoxifen is not the only rule that can be adopted from the federal system. The Sixth and D.C. Circuits have properly held pay-for-delay settlements to be per se illegal, while the Eleventh Circuit’s Rule of Reason analysis looks to the size of the settlement payment in comparisonto the profits that the generic drug makerstood to earn. Federal law enforcementauthorities have advocated for a rule of presumptive illegality only slightly less stringent than the per se rule. As demonstrated below, the federal authorities are not monolithic; any ofthem is preferable to the standard adopted by the Court ofAppeal; and each would require reversal of its decision. -37- 1. The Sixth Circuit and the D.C. Circuit Correctly Hold Pay-for-Delay Agreements Per Se Unlawful. Consistent with basic principles of antitrust law, federal appellate courts have nothesitated to find that the terms of pay-for-delay settlements require per se liability. In Andrx Pharmaceuticals, Inc. v. Biovail Corporation International (D.C. Cir. 2001) 256 F.3d 799 (Biovail), the D.C. Circuit considered allegations that the brand-name company “HMRI paid Andrx 10 million dollars per quarter effectively not to enter the market”to settle Hatch-Waxmanlitigation over the patent to a hypertension drug. (/d. at p. 809.) “One can fairly infer from these facts, which were alleged in the counterclaim, that but for the Agreement, Andrx would have entered the market.” (/bid.) Thus, the restraint “could reasonably be viewed as an attemptto allocate market share and preserve monopolistic conditions”—languagethat clearly suggests the availability ofper se treatment. (/d. at p. 811.) Indeed, the Biovail court recognized that “[a] paymentflowing from the innovator to the challenging generic firm may suggest strongly the anticompetitive intent of the parties entering the agreementandthe rent-preserving effect of that agreement.” (/d. at p. 809, quoting David Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 FOOD & DRUG L.J. 321, 335 (2000).) The court found that HMRI may have “acted unlawfully when it agreed with a competitorto settle the dispute, suppress information and exclude others from the market.” (/d.at p. 813, fn. 15, citing Singer, supra, 374 U.S. at p. 196.) Therefore, the court remandedthe claim to allow the plaintiffs to replead it. In In re Cardizem CD Antitrust Litigation (6th Cir. 2003) 332 F.3d 896, the Sixth Circuit held the same pay-for-delay settlementillegal per se. (Id. at p. 907.) As the court concluded,“it is one thing to take advantage of a monopolythat naturally arises from a patent, but another thing altogether - 38 - to bolster the patent’s effectiveness in inhibiting competitors by paying the only potential competitor $40 million per year to stay out of the market.” (Id. at p. 908, fn. omitted.) Consumers paid “higher prices”for “drugs as a result of the contractually mandated absence of competition.” (/d. at p. 904.) The court acknowledged in footnotes 12 and 13 that an earlier district court decision in the federal Ciprolitigation had distinguished the Cardizem district court’s ruling on the groundsthat the Cardizem agreementrestrained trade beyond,as well as within, the scientific and technological scope of the patent. Nevertheless, the holding of the Sixth Circuit and the district court in Cardizem—like the conclusion reached in Vulcan, supra, 96 Cal. at pp. 515-516—did not depend onthe fact that the agreementalso restrained trade beyondthe patent’s scope. The appellate court in Cardizem appearedto view this fact as, if anything, a “plus” factor that madetheillegal deal even more suspect: the court neither qualified nor limited its holding based on the provisions extending the patent, but instead focused on the exclusion achieved in the marketfor the patented drug: There is simply no escaping the conclusion that the Agreement,all of its other conditions and provisions notwithstanding, was,at its core, a horizontal agreement to eliminate competition in the market for Cardizem CD throughout the entire United States, a classic example of aper se illegal restraint of trade.... The Agreement whereby HMRpaid Andrx $40 million per year not to enter the United States market for Cardizem CD andits generic equivalents is a horizontal market allocation agreementand,as such,is per se illegal under the Sherman Act and under the correspondingstate antitrust laws. '9 The state antitrust laws at issue in the Cardizem case included the Cartwright Act. (See In re Cardizem CD AntitrustLitig. (E.D.Mich. 2000) 105 F.Supp.2d 618, 625 & fn. 3.) -39 - (Id. at pp. 900, 908.) Notably, the court rejected a defense based on the challenged patent’s presumed exclusionary effects, recognizing that the patent’s validity had not been confirmed becausethe settlement had foreclosed such testing. (/d. at p. 915.) Per se liability in Cardizem resulted from the nature of the agreement and the fact that, “had [HMR] been confident of the independent durability of its patent and the validity of its infringementclaim, it would not have paid $89 million to effect what the patent and infringementsuit had already accomplished.” (/bid.) Analogously, Bayer paid its generic competitors an even bigger price—nearly $400 million—to keep out of the Cipro market. Bayer then did it again, settling a later infringement suit, against Ranbaxy, for $60 million. (7AA 1522-30, 1591-93.) These agreements between horizontal competitors produce a harmful effect—thetotal foreclosure of competition—and have no redeeming value. Here, Bayer sharply increased the price of Cipro and earned windfall monopoly profits for the remainder of the patent term. (See Factual Background, Section 4, supra.) 2. The Justice Department and the FTC Believe a Presumption of Illegality Is Warranted. Analternate rule deems pay-for-delay agreements presumptively unlawful but gives the drug companies the opportunity to rebutthis presumption, by, for example, offering evidence that the reverse payment did not greatly exceedlitigation costs—i.e., that it settled a nuisance lawsuit. (11AA 2576.) The United States Department of Justice supports this approach: Thereis no basis for a standard that treats the presumption of [patent] validity as virtually conclusive and allowsit to serve as a substantive basis to limit the application of the Sherman Act—particularly since manylitigated patents, notably in the Hatch-Waxman Act context, are held invalid. The resultis to treatall -40 - but the most obviously invalid patents as equally potent bulwarks against competition from generic drugs. This result seemsparticularly unacceptable when a substantial payment for an agreement to withdraw a patent validity challenge strongly implies that the payor recognized a significant risk of patent invalidation throughlitigation. (11AA 2572-73.) In the case of a paymentlike the $398.1 million provided for in the Cipro agreements, “[t]he exchange of money for continued market exclusivity is starkly apparent.” (11AA 2578.) “Absent another explanation for it, such a paymentis naturally viewed as consideration for the generic’s agreementto delay entry beyondthe point that would otherwise reflect the parties’ shared view ofthe likelihood that the patentee would ultimately prevail in the litigation. A payment in exchange for such additional exclusion is presumptively violative ....” (1LAA 2576.) The Federal Trade Commissiontakes the same position.”” Most recently, in a brief filed with the Third Circuit in the K-Dur pay-for-delay litigation, the FTC identified a pressing “need for a rule that protects consumers from collusive agreements to stifle generic entry. The most reliable way to effectuate those policies is to recognize a rule of presumptive illegality.” ' As the FTC pointed out, where a settlement includes a substantial payment,that payment must be a quidpro quo for something;if the challenger is offering a commitmentto stay out of the *0 (See 9AA 2011-14 [ETC foundthatthe “permissive approaches”ofthe Second Circuit and the Eleventh Circuit “are misguided and not supported by the law. These holdings disrupt the carefully balanced patent system by overprotecting weak and narrow patents; allowing patent holders to buy protection that their patents cannot provide; and ignoring consumers’ interests in competition safeguarded by the antitrust laws.”].) I (http://www.ftc.gov/os/2011/05/110518amicusbrief.pdf, at p. 27.) -A]- market for a specified time, it follows that the payment is to secure exclusion of a potential competitor. Because such an agreementclosely parallels market allocation arrangements universally recognized as unlawful, a presumption ofantitrust illegality is justified. Such a presumptionis bolstered by the policies of Hatch-Waxmanand by experience that showsthe vulnerability of many pharmaceutical patents, the weakest of which will be the mostlikely to result in exclusion-paymentsettlements.” Herbert Hovenkamp,authorof the leading treatise on antitrust law, similarly concluded that reverse payments to generic manufacturers substantially larger than the cost oflitigation “indicate that the parties harboredsignificant doubt that the patents in question were valid or infringed, which entails a significant possibility that, if pursued to a judicial outcome, generic competition would have entered the market. Such amounts are presumptively unreasonable, with the presumption defeated only by a showingthat alternative challengers are able, both legally and physically, to enter the market immediately.” (12 Herbert Hovenkamp, Antitrust Law: An Analysis ofAntitrust Principles and Their Application (2d ed. 2005) § 2046c4(B),at p. 333.) This DOJ-FTC-Hovenkamp approach constitutes a modified Rule of Reason. (Defendants bear the initial burden.) As such, if the Court were to adopt this approach as California law, these claims should be remandedfor trial. “Whethera restraint of trade is reasonable in the contextofthe Cartwright Act is a question of fact to be determinedattrial.” (Corwin v. Los Angeles Newspaper Service Bureau, Inc. (1971) 4 Cal.3d 842, 855.) That is because “motive and intent play leading roles” in “complex antitrust litigation” where “the proofis largely in the handsofthe alleged »? (http://www.fic.gov/os/2011/05/110518amicusbriefpdf, at pp. 13-14.) -42- conspirators ....It is only when the witnesses are present and subject to cross-examination that their credibility and the weight to be given their testimony can be appraised.” (/d. at p. 852, internal quotation marks and citation omitted.) 3. The Eleventh Circuit Applies the Rule of Reason. The Eleventh Circuit applied a more permissive legal standard in a pair of decisions, Valley Drug Co. v. Geneva Pharmaceuticals, Inc. (11th Cir. 2003) 344 F.3d 1294 (Valley Drug), and Schering-Plough Corp.v. F.T.C. (11th Cir. 2005) 402 F.3d 1056 (Schering-Plough). The Eleventh Circuit approachlooks to the “scope of the exclusionary potential of the patent” to determine whetherantitrust claims can proceed. (Valley Drug, supra, 344 F.3d at p. 1311.) This approach differs from Tamoxifen— discussed in Section I.B.4, infra—in that the concept of “exclusionary potential” incorporates an analysis of the patent’s likely ability to exclude infringing use,i.e., its strength as tested through patentlitigation. In Valley Drug, the Eleventh Circuit considered Abbott’s settlement payments of between $3 and $4.5 million per quarter in exchange for delayed generic sales of a prostate drug. (Valley Drug, supra, 344 F.3d at p. 1298.) The court rejected per se liability “merely” from the fact or size of a reverse payment. (/d. at p. 1309.) Instead, the court stressed the relevance of the economics of pay-for-delay agreements and the strength of the underlying patents: [I]n the instant case and giventhe state of the current record,it is difficult to infer from the size of the payments alone that the infringementsuits lacked merit. We do not know, for example, whatlost profits Abbott expectedfrom generic competition or what profits Geneva and Zenith expected to gainfrom entry, the risk of the defendants’ inability to satisfy a judgment,or the litigation costs each side expected to save from settlement. - 43 - (Id. at p. 1310,italics added.) The court’s next pay-for-delay decision upheld Schering-Plough’s $15 million settlement payment in exchange for delayed generic sales ofa drug used to treat high blood pressure. (Schering-Plough, supra, 402 F.3d at pp. 1058, 1061, fn. 8.) The court declined to apply the per se rule, not based on a soundinterpretation of antitrust or patent law, but as a matter of “policy.” (Ud. at p. 1076 [“Our conclusion, to a degree, and we hope the FTC is mindful ofthis, reflects policy.”].) Yet the court’s policy analysis ascribed undue importanceto protecting settlements in order to avoid the “problems associated with over-crowdedcourt dockets.” (/bid.) While the court attempted to depict the relatively small settlement at issue as harmless—a characterization manifestly at odds with the record here—none of the “policy”rationales it articulated diminish the force of the logic that (a) patent settlements can always be negotiated for early entry alone, because sophisticated firms like drug manufacturers know how to monetize time on the market, and (b) when a cash payment forms a majorpart ofthe consideration for dropping a patent challenge, there is no reason as a matter of economicsto be any less skeptical than one would be toward a naked paymentnot to compete outside the context ofpatentlitigation. Even so, these Eleventh Circuit decisions do not immunize pay-for- delay settlements from condemnation underthe antitrust laws, and cannot be reconciled with (and do not support) the more extreme opinion of the Court of Appeal. The federal district court handling the Valley Drug litigation on remand denied the defendants’ motion for summary judgment on the Sherman Act. (See Jn re Terazosin Hydrochloride AntitrustLitig. (S.D.Fla. 2005) 352 F.Supp.2d 1279.) As that court noted, the Eleventh Circuit “[r]ecogniz[ed] that the patentee’s exclusionary right cannot be exploited in every way... .” (/d. at p. 1292.) Moreover, “[t]he -44- exclusionary value of the patent”itself “cannot be defined by looking at the patent terms in a vacuum,”for “[t]he legitimate exclusion value of a pharmaceutical patent ... is the powerit actually confers over competition, whichis in turn a function of the scope of the patent andits chance of being held valid.” (/d. at p. 1296, citation omitted.) Afterall, “a patent does not give the patentee ‘the right to exclude,’ but rather the more limited ‘right to ¢ry to exclude’by asserting its patent in court.” (/bid., italics in original, citation omitted.) So a court applying the Eleventh Circuit approach should evaluate the “likely outcomesofthe patent litigation that was pendingat the time the parties entered into the Agreement” andassessthe risk that the patent would have been nullified. (Id. at pp. 1299-1301.) The $398.1 million paymentin this case is the largest pay-for-delay settlementof all time. (LOAA 2261.) The magnitude of the payment alone raises triable issues concerning the strength of the patent that the money wasspentto protect.*® Therecord here, unlike in Valley Drug, also contains Bayer’s internal financial projections that it would earn at least $1.614 billion in monopoly profits if it could continue to sell Cipro through December 2003 unhindered by competition. (4AA 690.) As for the Generics, the record reveals that the bribe they took constitutes more than three times what they expected to earn in a competitive Cipro marketafter 3 Ata Bayerv. Barrtrial, the original Cipro patent would almost certainly have been nullified. This is the only reasonable conclusionthetrier of fact could draw from all the record evidence, including Dr. Ivor R. Elrifi’s unrefuted testimony concerning Bayer’s deception in applying for the patent (8AA 1804-29; see also 8AA 1852-56), Bayer’s patent agents’ admissions that the companyhid prior art (3AA 1853), Bayer’s attempts to label them effectively insane (7AA 1479, 8AA 1917), and the fact that Bayer’s Board was advised the patentin all likelihood would be “destroyed” (4AA 691). -45.- winning the patent trial. (6AA 1204, citing Barr documents at 1OAA 2353— 75, 2377-2401.) 4, Tamoxifen, the Most Permissive Approach, Is Not Soundly Grounded in High Court Precedent and Does Not Adequately Protect ConsumerInterests. The unsettled nature of federal law multiplied when a 2-1 split decision by a Second Circuit panel approved a $21 million settlement of patentlitigation concerning the breast cancer drug Tamoxifen. (See In re Tamoxifen Citrate Antitrust Litig. (2d Cir. 2006) 466 F.3d 187.) The majority opinion instituted a rule of presumptive /egality that immunizes pay-for-delay settlements unless they: (1) involve a patent that was procured by fraud; (2) arise from a patent suit intentionally filed for improper purposes;or (3) contain provisions exceeding the patent’s scope. (Id. at pp. 208-09 & fn. 22.) The Court ofAppeal here adopted this rule. The Tamoxifen majority acknowledged the “troubling dynamic”of exclusion paymentsthat “inevitably protect patent monopoliesthatare, perhaps, undeserved.” (Tiamoxifen, supra, 466 F.3d at p. 211.) Further, “[t]here is something on the face ofit that does seem ‘suspicious’ about a patent holdersettling patent litigation against a potential generic manufacturer by paying that manufacturer morethan either party | anticipates the manufacturer would earn by winning the lawsuit and entering the newly competitive market in competition with the patent holder. Why, after all—viewing the settlement through an antitrust lens— should the potential competitor be permitted to receive such a windfall at the ultimate expense of drug purchasers? We think, however, that the suspicion abates uponreflection.” (/d. at p. 208.) But the majority never explained whyits suspicion abated, and hardly seemedsureofitself: “Perhaps it is unwise to protect patent monopolies that rest on such dubious patents. But even if large reverse payments indicate a patent holder’s lack - 46 - of confidence in its patent’s strength or breadth, we doubt the wisdom of deeming a patent effectively invalid on the basis of a patent holder’s fear of losing it.” Ud. at p. 210.) The majority’s ruminations and evident doubt about the propriety of its rule contrast with the clarity and force of Judge Pooler’s dissent. She pointed out that “consumers have noability to affect the settlement, which, in some cases, may benefit both parties beyond any expectation they could have from thelitigation itself while harming the consumer. There is a panglossian aspect to the majority’s tacit assumption that the settling parties will not act to injure the consumer or competition.” (/d. at p. 228, fn. 5 (dis. opn. of Pooler, J.).) The requirement that—unlessan antitrust plaintiff demonstrates that a settlement agreement exceeds the scope of the patent—it must showthat thesettled litigation was a sham,i.e., objectively baseless, before the settlement can be considered an antitrust violation is not soundly grounded in Supreme Court precedentandis insufficiently protective of the consumerinterests safeguarded by the Hatch-Waxman Act andthe antitrust laws. ... A more searching inquiry anda less stringent standard are required to properly protectall interests.~4 (Id. at pp. 224, 228.) A Federal Circuit panel applied Tamoxifen in evaluating federal indirect purchaserclaimsarising from the Cipro agreements. (See Jn re 4 Judge Pooler proposed a Rule of Reason analysis that “would rely primarily on the strength of the patentas it appeared at the time at which the parties settled and secondarily on (a) the amountthe patent holder paid to keep the generic manufacturer from marketing its product, (b) the amount the generic manufacturer stood to earn during its period of exclusivity, and (c) any ancillary anti-competitive effects of the agreement including the presence or absenceof a provision allowing the parties to manipulate the generic’s exclusivity period.” (/d. at p. 228.) -47 - Ciprofloxacin Hydrochloride Antitrust Litig. (Fed.Cir. 2008) 544 F.3d 1323.) The court cited Tamoxifen on nearly every pageof its opinion (see id. at pp. 1333, 1334, 1335, 1336, 1337, 1339)—notonceciting Singer, supra, 374 U.S. 174, and forgetting that a patent is affected with the public interest. (See Masonite, supra, 316 U.S. at p. 278 [“Whilst the remuneration of genius and useful ingenuity is a duty incumbentupon the public, the rights and welfare of the community mustbe fairly dealt with and effectually guarded. Considerations of individual emolument can never be permitted to operate to the injury of these.”], quoting Kendall v. Winsor (1859) 62 U.S. 322, 329; see also Line Material, supra, 333 U.S. at p. 316 (conc. opn. of Douglas, J.) [stating that the United States Supreme Court, “faithful to the standard of the Constitution, has recognized that the public interest comes first and reward to inventors second, and has refusedto let the self-interest of patentees comeinto the ascendency.”].) In 2010, the Second Circuit again addressed the pay-for-delay issue in connection with federal direct purchaser claimsarising from the Cipro agreements. Noting, amongotherthings, that “the United States hasitself urged us to repudiate Tamoxifen,” the court concluded “there are compelling reasonsto revisit Tamoxifen ....” (Arkansas Carpenters Health & Welfare Fund v. Bayer AG (2d Cir. 2010) 604 F.3d 98, 108-110.) That court, however, was boundbyits prior decision in Tamoxifen and thus unableto reach a different conclusion.”> (Id. at p. 108.) *> Theplaintiffs’ en banc petition was denied, over Judge Pooler’s dissent. (See Arkansas Carpenters Health & Welfare Fund v. Bayer AG (2d Cir. 2010) 625 F.3d 779.) Judge Pooler stated that her dissent reflected not just her views, but also those of “Senior Circuit Judges Jon O. Newman and Barrington D. Parker . . . [who] are not authorized to participate in the en banc poll....” (id. at p. 779, fn. 1.) - Ag - II. The Tamoxifen Interpretation of the Sherman Act Neither Preempts California Law Nor Deprives the California Courts of Jurisdiction to Enforce It. In the trial court below,Petitioners submitted evidence of the objective baselessness of Bayer’s defense ofits patent that satisfies even the faulty Tamoxifen standard. Respondents have in the past contended that the California courts lackjurisdiction to consider a claim framed in this fashion becauseit involves a substantial question of patent law—a position with which Petitioners strongly disagree. The Court of Appeal, however, went a step further, holding that federal law preempts any effort to establish sham litigation under the Cartwright Act if it were construed to embrace the faulty Tamoxifen standard.”® (See Opinionat p. 44 [concludingthat “plaintiffs’ claim that Bayer’s infringementsuit against Barr was objectively baseless due to inequitable conduct is preempted by federal patent law becauseit necessarily depends on resolution of a substantial question of patent law.”’].) The Court of Appeal confused the concepts of exclusive federal juridical jurisdiction and Supremacy Clause preemption, and in doing so issued a ruling that has the potential to wreak havocin the California *6 Absent the misplaced sham litigation requirement, the basis for the preemption holding falls away. Noerr-Pennington immunity and its sham litigation requirement have noplace in this analysis. The Noerr- Pennington antitrust doctrine safeguards the First Amendmentas well as comity between branches of government. Bayer’s payoff to a generic entrant simply does not implicate either of these important concerns. (Compare Blank v. Kirwan (1985) 39 Cal.3d 311, 320-328 [discussing the First Amendmentand comity interests that justify Noerr-Pennington antitrust immunity], with Tamoxifen, supra, 466 F.3d at p. 213 [importing a sham litigation requirement from Noerr-Pennington jurisprudence].) The different setting of First Amendmentpetitioning deserves a higher bar to liability than private agreements amongrivals not to compete. - 49 - courts.”’ Norationalinterpretation of California or federal preemption jurisprudence can support the lower court’s preemption holding. Furthermore, the federal courts do not gain exclusive jurisdiction over a Cartwright Act claim just becauseit involves issues of patent law, and a triable issue exists even under the Tamoxifen standard. Bayer’s subsequent “defenses” of a narrowed Cipro patent—one ofwhich involved yet another pay-for-delay settlement—are inadmissible, and cannot be used to foreclose this claim as a matter of law and with no examination ofthe factual record. A. The Cartwright Act and the UCL Are Not Preempted. To begin with, the eagerness of the Court of Appeal to deprive Californians ofthe protection of the Cartwright Act contrasts with this Court’s guidancethat there is a “strong presumption against preemption” of California law. Un re Farm Raised Salmon Cases (2008) 42 Cal.4th 1077, 1088 (Farm Raised Salmon); see also Elsworth v. Beech Aircraft Corp. (1984) 37 Cal.3d 540, 548 [California courts should be “reluctant to infer preemption”].) This presumption applies with “particular force”to statutes, such as the Cartwright Act and the UCL,that fall within the State’s historic police powers because they deter businesses from taking advantage of consumers. (Farm Raised Salmon, supra, 42 Cal.4th at p. 1088; see generally R.E. Spriggs Co. v. Adolph Coors Co. (1974) 37 Cal.App.3d 653, 664-666 (Spriggs); see, e.g., Paduano v. American Honda Motor Co., Inc. (2009) 169 Cal.App.4th 1453, 1473-1485 [following Farm Raised Salmon to hold a UCL claim not preempted].) The presumption applies with even *1 The court’s footnote 15 (see Opinionat p. 49) will provide little comfort to future litigants hoping to use California law to vindicate their rights in patent-related disputes. The footnote betrays the court’s recognition thatits overbroad preemption ruling will deny relief, at minimum,to any aggrieved party whose claim involves purportedly baseless litigation. - 50 - greater force in matters related to health and safety, which states have always regulated. (Medtronic, Inc. v. Lohr (1996) 518 U.S. 470, 485 [recognizing “the historic primacy of state regulation of matters of health and safety.”]; see, e.g., Physicians Committeefor Responsible Medicinev. McDonald’s Corp. (2010) 187 Cal.App.4th 554, 564-574 [reversing preemption of Proposition 65’s carcinogen disclosure requirement], review den., 2010 Cal. LEXIS 11033; see also Potvin v. Metropolitan Life Ins. Co. (2000) 22 Cal.4th 1060, 1070 [holding that health care occupies “‘a special moralstatus and therefore a particular public interest.’ [Citation.]”].) Whether federal law preempts California law “is fundamentally a question whether Congress has intended such a result. [Citations.] {The ‘starting presumption’ is that Congress has not so intended. [Citations.]” (Peatros v. Bank ofAm. (2000) 22 Cal.4th 147, 157; see also California Grocers Assn. v. City ofLos Angeles (2011) 52 Cal.4th 177, 197 [stating that “in any pre-emption analysis, the purpose of Congressis the ultimate touchstone.”], citation and internal quotation marks omitted; Black v. Financial Freedom Senior Funding Corp. (2001) 92 Cal.App.4th 917, 926 [reversing preemption determination given the absence of “clear and manifest” Congressional intent to displace the UCL].) In addition, “because preemption ofstate laws by federal law or regulation generally is not favored, the party claiming federal preemption . . . has the burden to show specific state law claims are preempted.” (Smith v. Wells Fargo Bank, N.A. (2005) 135 Cal.App.4th 1463, 1475.) Unless Congress signaled its intent to preempt an entire legislative field, a finding of implied preemption must be supported by an actual conflict of law—hypothetical or potential conflicts are insufficient. (Rice v. Norman Williams Co. (1982) 458 U.S. 654, 659.) “It is not...a mere possibility of inconvenience in the exercise of powers, but an immediate -5]- constitutional repugnancy that can by implication alienate and extinguish a preexisting right of [state] sovereignty.””® (Spriggs, supra, 37 Cal.App.3d at p. 666, quoting Goldstein v. California (1973) 412 U.S. 546, 554-555, quoting Hamilton, The Federalist No. 32.) The Court of Appealfailed to undertake the foregoing analysis in toto. It neglected to hold Respondentsto their burden.”It failed to presumethe California courts have leeway to resolve these California claims. It failed even to mention—muchless determine—Congressional intent. (See footnotes 4 and 17, supra.) Nor did the court recognize or apply this Court’s holdings that conflict preemption exists only when “simultaneous compliance with both state and federal directives is impossible” (Viva! Int’l Voice for Animals v. Adidas PromotionalRetail Operations, Inc. (2007) 41 Cal.4th 929, 936), or that California law “will 8 For example, in holding that federal narcotics laws do not displace California’s medical marijuana laws, the Court of Appeal observed: “It is true that California and the federal government have conflicting views of the potential health benefits of marijuana. But that does not mean the application of state and federal laws are in conflict.” (Qualified Patients Ass’n v. City ofAnaheim (2010) 187 Cal.App.4th 734, 759, review den., 2010 Cal. LEXIS 12082.) There, the court declined to find preemption as California’s laws decriminalizing medical marijuana “do not mandate conduct that federal law prohibits, nor pose an obstacle to federal enforcement... .” (/d. at p. 757.) ? Even Respondents did not advocate the flawed view of the Court of Appeal; the Generics did not argue for preemption, while Bayer argued that interpreting the Cartwright Act to be broader than the Sherman Act, by rejecting the Tamoxifen standard, would lead to an impermissible conflict with federal law. (See Bayer Appellate Br., at p. 59.) Nevertheless, California vy. ARC America Corporation (1989) 490 U.S. 93, clearly holds that Cartwright Act remedies may exceed those of the Sherman Act, and the rule of Tamoxifen and the federal Cipro decisions are interpretations of the Sherman Act, not of the Patent Act. -52- be displaced only when affirmative congressional action compels the conclusion it must be.” (dn re Jose C. (2009) 45 Cal.4th 534, 550.) The mere fact that a state law claim involves a patent or an allegation of sham infringementlitigation does nottrigger the Supremacy Clause. (Dow Chem. Co. v. Exxon Corp. (Fed.Cir. 1998) 139 F.3d 1470, 1471-1472, 1478 (Dow)[reversing preemption ofa state law, business competitor claim grounded in Exxon’s alleged threats to file a sham infringement case: “that the source ofproof of bad faith, just one element of the tort, was purported inequitable conduct before the PTO, does not makethis tort a patent issue preempted by federal law’’], italics added; see also Zenith Elecs. Corp. v. Exzec, Inc. (Fed.Cir. 1999) 182 F.3d 1340, 1351 [noting that the claim in Dow wasnot preempted even thoughit required proofthat the patent had been obtained through inequitable conduct, “because the state law causes of action did not clash with the objectives of the patent laws, and because they included additional elements not found in the patent law remedy.”].) No conflict exists between patent law, which forbids bad faith conduct in applying for a patent, and California antitrust law, which forbids the filing of sham cases to impede competition and requires showings of antitrust injury and damagesthat are not required by any patent law claim. The Cartwright Act and the UCL proscribe different wrongs, and provide for different relief, than patent law and, consequently, are not displaced. (See TruePosition, Inc. v. Andrew Corp. (D. Del. 2007) 507 F.Supp.2d 447, 461 [asserting exclusive federal jurisdiction yet refusing to find a UCL claim preempted, because “[f]ederal laws do not bar state law claims that address different wrongs than those proscribed by the patent laws andthat also provide for different formsofrelief.”], citing Dow, supra, 139 F.3d at p. 1477.) - 53 - The Court ofAppeal’s preemption decision is, respectfully, nonsensical. There is no conceivable conflict between the Cartwright Act and federal law even if the Cartwright Act is construed to be no broader than the most permissive interpretation of the Sherman Act—zi.e., if the Tamoxifen standard were to apply. Noris there any conflict if the Cartwright Act could be seen as broader than the Sherman Act because the traditional per se rule applies. (See California v. ARC America Corp. (1989) 490 U.S. 93, 101 [holding that the Sherman Act did not preempt the broader remedies of the Cartwright Act, finding “it is plain that this is an area traditionally regulated by the states,” and clarifying that state antitrust law may not be preempted absent the “clear and manifest purpose of Congress.”], citation omitted.) Congress has never suggested that federal law can preemptstate law claims against drug companiesthat transfer millions of dollars to perpetuate monopolies. B. The California Courts Can Properly Adjudicate These State Law Claims. Even if the Court of Appeal’s preemption holding were interpreted as resulting from a finding that the California courts lack jurisdiction, the holding wouldstill be erroneous. Just as the People of California have the right to regulate pay-for-delay settlements through the Cartwright Act, so do our courts have jurisdiction to enforce this law. Exclusive federal jurisdiction over patent-related claims doesnotlie except where the claims “aris[e] under” patent law itself. (28 U.S.C. § 1338(a).) Whether a claim “arises under” federal patent law “must be determined from what necessarily appears in the plaintiff's statement ofhis ownclaim in the bill or declaration, unaided by anything alleged in anticipation of avoidance of defenses which it is thought the defendant may interpose. [Citation.]” (Franchise Tax Board ofCalif. v. Constr. Laborers -54- Vacation Trust (1983) 463 U.S. 1, 10 (Franchise Tax Board).) This Court hasclarified that section 1338 “does not purport to coverall patent right ‘question[s]’ which mayarise in someother kind of an ‘action’ or ‘case’ such as one based upon commonlaw or equity;the latter actions manifestly are within the jurisdiction of the state courts.” (H. J. Heinz Co. v. Super. Ct. (1954) 42 Cal.2d 164, 172-173, quoting Pratt v. Paris Gas Light & Coke Co. (1897) 168 U.S. 255, 259.) Moreover, a claim “supported by alternative theories in the complaint may not form the basis for” exclusive federal jurisdiction under section 1338 “unless patent law is essential to each ofthose theories.” (Christianson vy. Colt Indus. Operating Corp. (1988) 486 U.S. 800, 810, italics added.) Petitioners assert no claim arising under patent law. Patent law is not essential to Petitioners’ theory that Respondents’ horizontal agreement violates the Cartwright Act per se because ofits anticompetitive intent and effect. Respondents’ sham litigation argument in defense cannot divest the California courts ofjurisdiction. (Franchise Tax Board, supra, 463 U.S. at p. 10.) It bears emphasis that these claims can be resolved without the need to determine whetherthe original Cipro patent was unenforceable. The per se rule makesany inquiry into the strength of the patent unnecessary, while the other possible rules, including Tamoxifen, do not require a finding of unenforceability. (See Dairy Foods Inc. v. Dairy Maid Prods. Co-op. (7th Cir. 1961) 297 F.2d 805, 809-810 [holding that an “adjudication that claimed patent rights are unenforceable is not an element prerequisite to the maintenance of an antitrust action for damagesor injunctive relief based on misuseofthe patent.”’], cited with approval in Classen v. Weller (1983) 145 Cal.App.3d 27, 38.) Given that unfair competition claims dependent upon patent validity determinations can proceedin California courts, it follows -55- that state law claims requiring an inquiry into the strength of a patent, but no actual finding of invalidity or unenforceability, also may proceedhere. An “antitrust action is basically a suit to recover ‘for a tort[.]’” (Associated General Contractors ofCalifornia, Inc. v. California State Council ofCarpenters (1983) 459 U.S. 519, 547,fn. 2, quoting Karseal Corp. v. Richfield Oil Corp. (9th Cir. 1955) 221 F.2d 358, 363.) It is settled that “[p]atent matters primarily concerned with . . . tortious wrongdoing maybetried in state courts and where such suit is brought, validity of a patentor its infringement may properly be consideredbya state court.” (Miller v. Lucas (1975) 51 Cal.App.3d 774, 776 (Miller).) Indeed, in California “there is broad state jurisdiction over matters affecting patents, the Supreme Court has clearly blessed such state power, and the federal courts have showna clear lack of concern with state adjudication of such matters.” (Mattel, Inc. v. Luce, Forward, Hamilton & Scripps (2002) 99 Cal.App.4th 1179, 1186, citing Miller, supra, 51 Cal.App.3dat p. 776, citing American Well Works Co. v. Layne & Bowler Co. (1916) 241 U.S. 257, 260 (Holmes,J.) [allowing a state law competitor claim to proceed wherethe defendantallegedly filed baseless patent infringementsuits for business advantage; explaining “t]he fact that the justification may involve the validity and infringementof a patent is no more material to the question under what law the suit is brought than it would be in an action of contract .... The State is master of the whole matter... .”]; see also Lear, supra, 395 U.S.at pp. 675-676 [remanding case to “the California Supreme Court ... to pass on the question of patentvalidity”].) In sum,Petitioners may police this conduct in California court. State jurisdiction exists because the claimsarise understate, not federal, law. The federal patent laws do not displace the Cartwright Act claims because these bodies of law do not conflict, but in fact complement one - 56 - another. Theytarget different conduct, impose different duties, and require different proof. Il. Triable Issues of Fact Exist Under the Tamoxifen Standard. Because the California courts have jurisdiction to hear these claims even under Tamoxifen, in the event this Court agrees with that standardit should consider whetherthe facts and the economics of the $398.1 million paymentcreate at least a triable question of fact on the question ofwhether Bayer’s infringementsuit against Barr was a sham. They do. Barr’s evidence of Bayer’s bad faith conduct was powerful and convincing. Michael Jester, a patent attorney of 30 years’ experience retained as an expert in this case, testified he had no doubt that Barr’s evidence would havesatisfied the clear and convincing standard for nullifying the Cipro patent. (8AA 1843-46.) Dr. Simon, Bayer’s German patent agent, admitted that the German °850 patent application constituted prior art and the company knew aboutit. (3AA 1853.) Bayer, however, deceived the PTO. It intentionally failed to disclose the German applications in over six years of prosecutingits claim to Cipro.’ (8AA 1804-29, 1852-56.) *° Although Petitioners did notassert a fraud claim under Walker Process Equipment, Inc. v. Food Machinery & Chemical Corporation (1965) 382 U.S. 172, the evidence in the record of Bayer’s bad faith—a subsetofthe evidence demonstrating the objective baselessness of its patent suit— generally correspondsto the evidence that would support an affirmative claim under Walker Process. That decision permitsa trier of fact to apply antitrust scrutiny to such evidence. (/d. at p. 177 [“Walker’s counterclaim alleged that Food Machinery obtained the patent by knowingly and willfully misrepresenting facts to the Patent Office. Proof of this assertion wouldbesufficient to strip Food Machinery ofits exemption from the antitrust laws. [Footnote.]’’].) -57- Bayer’s response to these admissions andthe other evidenceofits deceptionis telling. In effect, it mounted an insanity defense, claiming that its agent Dr. Simon suffered from “[d]epression serious enough to require treatment with tricyclic antidepressants,” which supposedly impaired his ability to perform his job as a lawyer in Bayer’s patent department. (7AA 1479.) Either the anti-depressants or some kind of “confused thinking,” Bayerattested, might explain the failure of its patent departmentto disclose the prior art. (7AA 1479.) Or perhaps the problem was Dr. Simon’s mental state when hetestified about Bayer’s bad faith. Bayer contended that the testimony of Dr. Simon,so extensively relied on by Barr, is irrelevant .... Dr. Simon was 72 years old and had beenretired for almost 10 years with health problems whenhetestified in deposition about events 14 years earlier. Dr. Simon had a cerebral hemorrhage after he retired which affected his memory and overall health. He wasnotable to give a full day of testimony because of these problems. (8AA 1917.) Asfor the other employees who should haveinsisted upon disclosing the prior art, Bayer claimed that they, too, suffered from incapacitating mental problems. For instance, another of Bayer’s patent lawyers, Joseph Kolodny,“suffered from Parkinson’s or a related degenerative disease involving extreme mental degeneration. Parkinson’s is a progressive disease and may have effects even before complete incapacitation results.” (7AA 1479.) In his expert report, Jester aptly described these contentions as “incredible and unbelievable. No person could perform such meticulous and complex legal work involving sophisticated pharmaceutical chemistry - 58 - over such an extended period of time without comprehending the consequencesofhis intended actions.” (8AA 1856.) Neither the trial court nor the Court of Appeal paid any attention to these facts. Rather, both found that Bayer’s successful resolution of subsequent lawsuits challenging the Cipro patent “forecloses any argument”on this point as a matter of law. (Opinion at p. 41.) The approach of both lower courts turns the summary judgmentstandard upside down: instead of considering the evidenceofPetitioners and drawingall reasonable inferences in their favor, both courts considered the (inadmissible) evidence of Respondents and gave no weightto Petitioners’ facts at all.°! (Compare,e.g., Truong v. Glasser (2009) 181 Cal.App.4th 102, 109-110 [court must “liberally construe the evidence in support of the party opposing summary judgment.. . and assess whetherthe evidence would,if credited, permitthe trier of fact to find in favor of the party opposing summary judgment underthe applicable legal standards.”’], italics 3! Citing Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, the Superior Court madethe absurd holding that it could not consider the evidence of Bayer’s sham litigation because Petitioners’ complaint did not set forth all of this evidence. (Order at p. 5 (1IAA 2686).) The Court of Appeal discussed this issue but avoided making a holding on it. (See Opinion at pp. 40-41.) The Superior Court’s holding is erroneous for at least four reasons: (1) it would improperly limit a summary judgmentopposition to the facts pleaded in the complaint— drafted before any discovery; (2) Petitioners did not submit counterdeclarations, assert different claims, or invoke new legal duties in opposing summary judgment, unlike the plaintiff in Oakland Raiders, supra, 131 Cal.App.4th at pp. 648-649; (3) Respondents were the ones who raised sham litigation for the first time, as an affirmative defense at summary judgment, and cannot complain that Petitioners cited record evidence to contravene the defense; (4) no appellate court had endorsed the sham litigation requirement of Tamoxifen when Petitioners filed their operative complaint, in August 2002, andit is unreasonable to expect them to have predicted the future. -59- added, citing Wiener v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142, and Aguilar, supra, 25 Cal.4th at p. 850.) Both lower courts ignored law submitted by Petitioners holding that the legality of an agreement under the antitrust laws must be evaluated as of the timeit is struck, not based on post-hoc rationalizationsforit. (See, e.g., International Travel Arrangers v. NWA, Inc. (8th Cir. 1993) 991 F.2d 1389, 1400 [holding that a governmentstudy ofairline competition was “properly excluded as irrelevant becauseit dealt with a time subsequentto the events involved in this case.”]; Reazin v. Blue Cross & Blue Shield ofKansas, Inc. (D. Kan. 1987) 663 F.Supp. 1360, 1433 [excluding a Federal Trade Commission decision because it was “rendered monthsafter” the challenged restraint].) This law includes the very pay-for-delay federal decisions relied on by Respondents and the lower courts. (See Valley Drug, supra, 344 F.3d at p. 1306 [“We begin with the proposition that the reasonableness of agreements underthe antitrust laws are to be judged at the time the agreementsare entered into.”’].) In disregarding this principle of antitrust law, the Court of Appeal simultaneously failed to hold the trial court to the directive in Reid v. Google, Inc. (2010) 50 Cal.4th 512, that each evidentiary objection must be separately addressed. In Reid, this Court held that “[t]he trial court must rule expressly on” evidentiary objections raised in connection with a motion for summary judgment. (/d. at p. 532.) The Court disapproved of Biljac Associates v. First Interstate Bank (1990) 218 Cal.App.3d 1410, “to the extent it permits the trial court to avoid ruling on specific evidentiary objections.” (Reid, supra, 50 Cal.4th at p. 532, fn. 8.) Petitioners filed 30 written objections prior to the summary judgment hearing and preserved several specific objections at the hearing. (LAA 233-41; Tr. ofAug. 21, 2009 Hearing, at p. 264:8—22.) Petitioners at - 60 - all times, for example, maintained a specific objection to the admission of evidence concerning Bayer’s defense of a narrowed Cipro patent in four post-1997 suits. (See Opening Br. at pp. 54-55; Reply Br. at pp. 22-23, 40-41; MSJ Opp.at p. 67 (LAA 215).) This evidence is inadmissible, as noted, because antitrust analysis considers whether an alleged restraint “promoted enterprise and productivity at the time it was adopted.” (Polk Bros., Inc. v. Forest City Enters., Inc. (7th Cir. 1985) 776 F.2d 185, 189.) Thetrial court overruled all of Petitioners’ objections with a one- line, blanket statement: “Plaintiffs’ evidentiary objections are overruled.” (11AA 2688.) The Court of Appeal avoided applying Reid by resorting to a false distinction between sustaining an objection and overruling it, excusing the Superior Court’s blanket ruling on the groundsthatit denied Petitioners’ objections to the evidence that Respondents submitted. (See Opinion at pp. 51-52.) This distinction has no legal basis and creates confusion around the holding in Reid. The Court of Appeal also seemed to miss the point of Petitioners’ objections to Bayer’s subsequent patent cases: “We do notfind the admission ofthis evidence to be prejudicial, . . . because the essential facts of those suits were established as undisputed by plaintiffs’ responses to Bayer’s separate statement of undisputed facts in support of its motion for summary judgment, Nos. 29-33.” (Opinionat p. 52, fn. 16, italics added.) However, Petitioners do not dispute whether the subsequent cases occurred but, rather, seek to exclude evidence of them as inadmissible and irrelevant. (See Opening Br. at pp. 54-55; Reply Br. at pp. 22-23.) The very responses that the Court of Appeal referenced set forth the legal basis for these objections. (2AA 253-54.) Finally, even if the facts surrounding the subsequent actions were admissible and relevant, they do not controvert or “foreclose”the facts -61- offered by Petitioners to show the objective baselessness of Bayer’s suit. (Opinion at p. 41.) Four other potential generic competitors—Ranbaxy, Schein, Mylan, and Carlsbad—challenged the validity of a narrowed, re- examined Cipro patentin actions filed after the Cipro agreements resolved the Bayer v. Barr litigation.” Whether Bayer purposely misled the PTO was not determinedin any of these suits. Bayer paid Ranbaxy over $60 million to abandon its Hatch-Waxmanchallenge before any issue was litigated to conclusion—protecting Cipro via yet another pay-for-delay settlement. (JAA 1522-30, 1583-84, 1586-1589, 1591-93.) Mylan withdrew its inequitable conduct defense because the company lacked sufficient time to litigate it before the 444 patent expired. (6AA 1365, 1368, 1398-99.) Neither Schein nor Carlsbad raised the defense or counterclaim of inequitable conduct. (JAA 1596, 1459, 1602.) The Court of Appeal speculated that it “seems highly unlikely”that subsequent challengers of the Cipro patent would have abandonedthe inequitable conduct issue had it been meritorious. (Opinion at p. 42.) This speculation runscontrary to the actual facts submitted by Petitioners that the challengers did notraise this issue because they lacked sufficient time to litigate it before the patent expired. (6AA 1365, 1368, 1399.) * On July 25, 1997, Bayer petitioned the PTOto re-examine the *444 Cipro patent. In its petition, Bayer voluntarily cancelled certain claims, narrowed other claims, added new claims, and belatedly disclosed the German ’070 and °850 applications that it had previously failed to disclose. (7AA 1471— 75, 1482-88.) Bayer thus “wasable to revise and strengthen the original ‘444 patent sothat the IP vulnerabilities identified by Barr in its original litigation were cured by Bayer.” (6AA 1173, 1209;see also Etter, supra, 756 F.2d at pp. 857-858 [petitions for reexamination focus “on curing defects” of “patents thought ‘doubtful.””’], quoting H.R. No. 66-1307, 96th Cong., 2d Sess., p. 3 (1980).) -62- CONCLUSION “Consumerwelfare is a principal, if not the sole, goal” of California’s antitrust laws. (Cianci v. Super. Ct. (1985) 40 Cal.3d 903, 918.) The Cartwright Act promotes the interests of consumers by ensuring free markets, open competition and lower prices, The federal courts whose deficient analysis the Court ofAppeal adopted do not share this Court’s duty to protectthe citizens of California. The lower court in this case misconstrued the Cartwright Act and the Unfair Competition Law.It imposed a new standard on California, frustrating the ability of theState and private citizens to obtain redress and vindicate their rights. The Court should correct the law, reverse the grant of summary judgment, and remand the claimsfortrial. Respectfully submitted, Dated: March 16, 2012 LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP Joseph RoSaveri JosepffR. Saveri (State Bar No. 130064) Eric B. Fastiff (State Bar No. 182260) Brendan Glackin (State Bar No. 199643) Jordan Elias (State Bar No. 228731) Dean M.Harvey (State Bar No. 250298) 275 Battery Street, 29th Floor San Francisco, CA 94111-3339 Telephone: (415) 956-1000 Facsimile: (415) 956-1008 By: - 63 - ZWERLING, SCHACHTER & ZWERLING, LLP B . Nea-Priéchler Dan Drachler (Pra Hac Vice) 1904 Third Avenue, Suite 1030 Seattle, WA 98101 Telephone: (206) 223-2053 Facsimile: (206) 343-9636 Class Counsel Ralph B. Kalfayan (State Bar No. 133464) KRAUSE, KALFAYAN, BENINK & SLAVENS 625 Broadway, Suite 635 San Diego, CA 92101 Telephone: (619) 232-0331 Facsimile: (619) 232-4019 Liaison Counsel Attorneysfor Plaintiffs, Appellants, and Petitioners - 64 - CERTIFICATE OF WORD COUNT [California Rule of Court 8.204(c)(1)] Counsel of Record herebycertifies that pursuant to the California Rules of Court, this Brief of Petitioners uses 13-point Roman type and contains 18,738 words, including footnotes, which is the amount ofwords requested in Petitioners’ Application for Leave to File an Oversized Brief, submitted herewith pursuant to Rule 8.204(c)(5). Counsel relies on the count of the computer program usedto preparethis Brief. Dated: March 16, 2012 LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP By: Cs Jordan Elias - 65 - State of California ) Proofof Service by: County of Los Angeles ) Y US Postal Service ) Federal Express ], Stephen Moore , declare that I am not a party to the action, am over 18 years of age and my business address is: 354 South Spring St., Suite 610, Los Angeles, California 90013. On 03/16/2012 declarant served the within: Opening Brief on the Merits upon: 1 Copies FedEx VV USPS 1 Copies FedEx ¥ USPS To each personlisted on the attached Office of the Clerk Service List. CALIFORNIA COURT OF APPEAL Fourth Appellate District, Division One Symphony Towers 750 B Street, Suite 300 San Diego,California 92101 Copies FedEx USPS Copies FedEx USPS the address(es) designated by said attorney(s) for that purpose by depositing the numberof copies indicated above, of same, enclosed in a postpaid properly addressed wrapperin a Post Office Mail Depository, under the exclusive custody and care of the United States Postal Service, within the State of California, or properly addressed wrapper in an Federal Express Official Depository, under the exclusive custody and care of Federal Express, within the State of California I further declare that this same day the original and copies has/have been hand delivered for filing ORthe original and 13 copies has/have beenfiled by ¥ third party commercialcarrier for next business day deli to: eu y Ceavery Office of the Clerk SUPREME COURT OF CALIFORNIA 350 McAllister Street San Francisco, California 94102-4797 I declare under penalty of perjury that the foregoing is true and correct: Signature: SERVICE LIST Charles A. Bird, Esq. Peter B. Bensinger, Esq. Todd R. Kinnear, Esq. Barlit Beck Herman Palenchar & Scott LLP and Christopher J. Healey, Esq. 54 West HubbardStreet, Suite 300 Luce, Forward, Hamilton & Scripps Chicago,Illinois 60654 600 West Broadway, Suite 2600 San Diego, California 92101 Kevin D. McDonald, Esq. Jones Day 51 Louisiana Avenue, NW Washington, D.C. 20001 Attorneysfor Defendant-Respondent Bayer Corporation Joann F. Rezzo, Esq. Kathryn E. Karcher, Esq. EDELSON & REZZO 401 B Street, Suite 2450 402 West Broadway, Suite 2700 San Diego, California 92101 San Diego, California 92101 Attorneysfor Defendants-Respondents Hoechst Marion Roussel, Inc., The Rugby Group, Inc., Barr Laboratories, Inc., and Watson Pharmaceuticals, Inc. Heather S. Woodson,Esq., David E. Everson, Esq. and Victoria Smith, Esq. Stinson Morrison Hecker LLP 1201 Walnut, Suite 2900 Kansas City, Missouri 64106 Attorneysfor Defendants-Respondents Hoechst Marion Roussel, Inc., The Rugby Group, Inc., and Watson Pharmaceuticals, Inc. Gregory Skidmore, Esq., Edwin John U., Esq. and Karen N. Walker, Esq. Kirkland & Ellis LLP 655 Fifteenth Street, NW Washington, D.C. 20005 Attorneysfor Defendant-Respondent Barr Laboratories, Inc. Clerk for Hon. Richard E. L. Strauss SUPERIOR COURT OF CALIFORNIA County of San Diego HALL OF JUSTICE 330 West Broadway San Diego, California 92101 Trial Court Kamala D. Harris, Esq. Cheryl L. Johnson, Esq. and Jonathan M. Eisenberg, Esq. State of California Attorney General’s Office 300 South Spring Street, Suite 1702 Los Angeles, California 90013 OFFICE OF THE ATTORNEY GENERAL STATE OF CALIFORNIA — SAN DIEGO OFFICE 110 West "A" Street, Suite 1100 San Diego, California 92186-5266 Appellate Division OFFICE OF THE DISTRICT ATTORNEY SAN DIEGO COUNTY 330 West Broadway San Diego, California 92101 Carlotta Tillman JUDICIAL COUNCIL OF CALIFORNIA ADMINISTRATIVE OFFICE OF THE COURTS 455 Golden Gate Avenue Sixth Floor San Francisco, California 94102