IN RE CIPRO CASES I & II

Respondent, Bayer Corporation, Answer Brief on the Merits

Cal.May 30, 2012

In the Supreme Court ofthe State of California S198616 SUPREME COURT JN RE CIPRO CASES I AND II FILED KARYN McGAUGHEY, et al., MAY 3 0 2nt2 . Petitioners, Frederick K. Ohirinn Clerk Deputy BAYER CORPORATION,et al., ' Respondents. California Court ofAppeal - Fourth Appellate District - Case No. D056361 Superior Court of San Diego County - Hon. Richard E.L. Strauss Case Nos. JCCP 4154 and JCCP 4220 SERVICE ONATTORNEY GENERALAND DISTRICTATTORNEY REQUIRED UNDER BUS. AND PROF. CODE§ 17209 AND CRD 8.29 ANSWERBRIEFOFRESPONDENT BAYER CORPORATION Peter B. Bensinger,Jr.* Charles A. Bird, SBN: 056566 BARTLIT BECK HERMAN PALENCHAR Christopher J. Healey, SBN: 105798 & Scott LLP Todd R. Kinnear, SBN: 208831 Courthouse Place, MCKENNALonG &ALDRIDGE LLP 54 West Hubbard Street, Suite 300 600 West Broadway, Suite 2600 Chicago, IL 60654 San Diego, CA 92101-3391 Telephone: (312) 494-4400 Telephone: (619) 236-1414 Facsimile: (312) 494-4440 Facsimile: (619) 645-5321 Kevin D. McDonald* JONES DAY 51 Louisiana Avenue, N.W. Washington, D.C. 20001 *Admittedpro hac vice Telephone: (202) 879-3939. Facsimile: (202) 626-1700 Attorneysfor Defendant-Respondent Bayer Corporation In the Supreme Court ofthe State of California S198616 IN RE CIPRO CASES I AND II KARYN McGAUGHEY, et al., Petitioners, v. BAYER CORPORATION,etal., Respondents. - California Court ofAppeal - Fourth Appellate District - Case No. D056361 Superior Court of San Diego County - Hon. Richard E.L. Strauss Case Nos. JCCP 4154 and JCCP 4220 SERVICE ONATTORNEY GENERALAND DISTRICT ATTORNEY REQUIRED UNDERBUS. AND PROF. CODE § 17209 AND CRD 8.29 ANSWERBRIEF OF RESPONDENT BAYER CORPORATION Peter B. Bensinger, Jr.* Charles A. Bird, SBN: 056566 BARTLIT BECK HERMAN PALENCHAR _ Christopher J. Healey, SBN: 105798 & ScoTT LLP Todd R. Kinnear, SBN: 208831 Courthouse Place, MCKENNALONG & ALDRIDGE LLP 54 West Hubbard Street, Suite 300 600 West Broadway, Suite 2600 Chicago, IL 60654 San Diego, CA 92101-3391 Telephone: (312) 494-4400 Telephone: (619) 236-1414 Facsimile: (312) 494-4440 Facsimile: (619) 645-5321 Kevin D. McDonald* JONES DAY 51 Louisiana Avenue, N.W. Washington, D.C. 20001 *Admittedpro hac vice Telephone: (202) 879-3939 Facsimile: (202) 626-1700 Attorneysfor Defendant-Respondent Bayer Corporation TABLE OF CONTENTS TABLE OF AUTHORITIES ili INTRODUCTIONAND SUMMARY 1 STATEMENTOFFACTS 7 ARGUMENT 11 I. UNDER CALIFORNIA LAW, A SETTLEMENT WITHIN THE SCOPE OF THE PATENT IS LAWFUL 11 A. California and Federal Law Reject Plaintiff's Attempt To Ignore Bayer’s Right To Exclude Infringing Competition 11 B. Plaintiffs’ Attempt To Rewrite California and Federal Law Is Without Merit 16 C. The Scopeof the Patent Rule Derives from Basic Principles of Antitrust and Patent Law.............ssccssssseeee 20 1. Antitrust Law: Plaintiffs Cannot Show that the Allegedly “Excluded” Competition Was Lawful 21 2. PatentLaw: A Patentee Hasthe Right To Settle Within the Scope of the Patent, Unless the Patent Suit Was Objectively Baseless............. 23 3. The Scope of the Patent Rule Is Completely Consistent with U.S. Supreme Court Precedent 27 D. The Court ofAppeal Correctly Applied the Scope of the Patent Rule To Affirm Summary Judgment........ 30 II. COURTS UNIFORMLY REJECT PER SE LIABILITY WHERE THE SETTLEMENT IS WITHIN THE SCOPE OF THE PATENT......... 32 A. Plaintiffs Do Not Attempt To Satisfy this Court’s Requirements for Per Se IHlegallity...............sssccsssecscessense 32 B. Plaintiffs Cannot Articulate a Theory of Harm to Lawful Competition Under the Rule of Reason............... 35 C. This Court Should Reject Plaintiffs’ Request To Engage in Judicial Legislation 39 Il. IV. VI. FEDERAL PATENT LAW WOULD PREEMPT ANY CALIFORNIA RULE THAT SETTLEMENTS WITHIN THE SCOPE OF A PATENT VIOLATE THE CARTWRIGHTACT........0-2000 41 A. B. C. Plaintiffs Misunderstand the Doctrine of Substantive Preemption 41 State Law May Not Addor Detract from the FundamentalRights of Patent Holderg..............scscceccsscses 43 Patent Law Preempts Liability Here Without Proof that the Patent Suit Was Objectively Baseless................ 45 ANY CALIFORNIA RULE OF LIABILITY BASED UPON ASSESSING THE “STRENGTH” OF THE PATENT WOULD BE SUBJECT TO EXCLUSIVE FEDERAL JURISDICTION.......:s0cecesscasenes 47 A. A State Law CauseofAction with an Embedded Federal Patent Issue MayStill Arise Under Patent Law 47 | A California Claim that Dependsfor Its Success on Evaluating Patent Strength Arises Under Patent Law yevaee 49 ANY PUTATIVE CLAIM THAT BAYER’S PATENT SUIT WAS OBJECTIVELY BASELESS FAILS FOR MULTIPLE OTHER REASONS 50 PLAINTIFFS HAVE WAIVED ANY ARGUMENT BASED UPON THE UCL OR EVIDENTIARY RULINGS 52 CONCLUSION 54 CERTIFICATE OF WORD COUNT 56 ii TABLE OF AUTHORITIES Page CASES Access Telecom, Inc. v. MCI Telecommunications Corp. (Sth Cir, 1999) 197 F.3d 694 woesecstcstecsscssssseccsceessscessecsssssessssserens 21 Additive Controls & Measurement Systems, Inc. y. Flowdata, Inc. (Fed.Cir. 1993) 986 F.2d 476...........sccsscsscssscsssessstcssescesscssecssecvessesscsasenes 47 Alfred E. Mann Foundationfor Scientific Research vy. Cochlear Corp. (Fed.Cir. 2010) 604 F.3d 1354.0... ccsscssssscsccsssstsscecessssecsaees 24, 25 American Well Works Co. v. Layne & Bowler Co. (1916) 241 US. 257...eecsscsccsscsscssecsesecscesssscessesccussseascescessersscenscacaces 48 Andrx Pharmaceuticals, Inc. v. Biovail Corp. Internat. (D.C. Cir. 2001) 256 F.3d 799...cceccscesccessssssesesscsssccsscsssscsesessceessenes 19 Arkansas Carpenters Health & Welfare Fund v. BayerAG (2d Cir. 2010) 604 F.3d 98, cert. denied (2011) 131 S.Ct. 1606.0...eeccrcsersecserecssesestceseessrens 1, 10, 15, 19, 33 Asahi Glass Co. v. Pentech Pharmaceuticals, Inc. (N.D.IIL. 2003) 289 F.Supp.2d 986..........ccccsessssesccseessesssesens 5, 23, 27, 36 Asahi Kasei PharmaCorp. v. CoTherix, Inc. (2012) 204 Cal.App.4th 1 uu...ecssessessssessssscsseresesecssessessssseverssessceesens 20 AT&TMobility LLC v. Concepcion (2011) 131 S.Ct. 1740...eesssscerssccesresrssscessssessssesseceessecssarcssesessnsnes 46 BayerAG andMiles, Inc. v. Barr Laboratories, Inc. (S.D.N.Y. No. 92 Civ. 0381) .......ccsccsccsessesscsssecceseeressessssscassessecssescrssens 7 BayerAG vy. Carlsbad Technologies, Inc. (S.D. Cal. June 7, 2002 and Aug. 7, 2002, No. 01CV0867-B)............ 2,9 BayerAG v. Schein Pharmaceuticals, Inc. (D.N.J. 2001) 129 F.Supp.2d 705,affd. (Fed.Cir. 2002) 301 F.3d 1306 ...........csccsssessesscsssssssscecevsessecesscersnssseees 2,9 Bement v. National Harrow Co. (1902) 186 U.S. 70..........ccscssecscsessssscessesscssceeseates 3, 12, 25, 26, 34, 44, 46 ili Page Biotechnology Industry Org. v. District ofColumbia (Fed.Cir.) 496 F.3d 1362, rehearing denied (2007) 505 F.3d 1343 oo.esccessccsecssssssenseeeseccscssecessesssessaceeseceesnees 24, 25, 44, 46 Blank v. Coffin (1942) 20 Cal.2d 457 ooo.eessssscesssesessssececcceccsesersecsessseessaccrssesssesserstsers 54 Bonito Boats, Inc. v. Thunder Craft Boats, Inc. (1989) 489 U.S. 14Dcccseseetctcccesesseceesssecseescsecssescensseerseeseseseess 44 Brunswick Corp. v. Riegel Textile Corp. (7th Cir. 1984) 752 F.2d 261 wu.eesseceescecsesscsecssesssessceesesessesseaserees 37 Buckman Co.v. 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(Fed.Cir. 1999) 182 F.3d 1340 ou...csssssccssscsesssesscecesessssesccceesesssserense 46 STATUTES U.S. Const. art I, § 8oeeessesessssseccecseccssscseressscsssssesersssassessecetarsesrenceees 23 21 U.S.C. § 355 oeeecsscessscccssesscsnssscstscssccsssacencecsscsrsssesssesscscessssssseneess 7, 10 28 U.S.C. § 1338 ciccscsscsssssssssossssssecssssscsssersecssssasesuccsecssassassecssecesecees 41,47, 49 35 U.S.C. § 154 wccesessessscsssececssssscssssccescsesstsscescesesssvsevssesssseesesescessaceacesens 19 35 U.S.C. § 271 weeeesssssscsesescscssssscersssessscecesssesssccersrsssssresssserssrsscesseccess 8, 36 35 U.S.C. § 282 oecscsseceseecscescesencsssncesssessesecescseseecessccssessssausstecaesaseacacs 23 ix Page Drug Price Competition and Patent Term Restoration Act Pub. L. No. 98-417, 98 Stat. 1585 0...esesssssscesesesessscressscssssessssnseseeees 7 OTHER AUTHORITIES 10A William Meade Fletcher (supp. 2012) Cyclopedia ofthe Law of Corporations § S027.......scscssccsessecsceccsncesssescssssscessescesoeensesssccsssssessesenees 17 XII Herbert Hovenkampetal. (2d ed. 1999) Antitrust Law 2040b........... 33 Kent S. Bernard & Willard K. Tom, Antitrust Treatment of Pharmaceutical Patent Settlements: The Needfor Context and Fidelity to First Principles (2006) ...........sscscsssscsccsrsssssseceseetsssssacesceneenees 37 Cal. Rules of Court, rule 8.204............c:cscsssssesssesscsecsecssesssesscosssssssesssessseres 53 Cal. Rules of Court, rule 8.520.u0.........c::ccccsssesssccseesssssesssssesssvssseesesescosseseses 52 Cal. Rules of Court, rule 8.504.............ccccccscecssecsssscssscnssecssccsssesssscsssssssevene 55 Bret Dickeyetal. (2010) 4 Preliminary Economic Analysis ofthe Budgetary Effects ofProposed Restrictions on ‘Reverse Payment?’ Settlement............sccssecercssevecsscssscsssevatssseseeesessesseseesceeessessees 39 Federal Trade Commission (2002) Generic Drug Entry Prior to Patent Expiration: An FTC Study........ssssssssssssssssssssssscssssssesessenseceseees 40 Federal Trade Commission (2010) Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions: An FTC StaffStudy.39, 40 Herbert Hovenkamp, Mark Janis, and Mark A. Lemley, Anticompetitive Settlement ofIntellectual Property Disputes (2003) 87 Minn.L.Rev. 1719 ou...eesssssescscersesesceserssescessstsessseeaceseass 34 Donald T. Hibner, Jr. & Heather M. Cooper, The Cartwright Act at 100—A History ofComplementary Antitrust Enforcement—A Celebration (Fall 2008) 17 Competition 81, 83-84 ............ecssscseeceere 20 PLR. 3995, 112th Cong. (2012)...eeeesececsssecssesessssscessscseassrenseeerensseees 40 S. 27, 112th Cong, (2011) ......... esssssssccsssssesssereceseseecessssessersrsssersssenesnsenente 40 INTRODUCTION AND SUMMARY The courts below and multiple federal circuit courts agree that a settlement within the exclusionary scopeofa patent is legal unless the patent owner committed fraud on the Patent Office or the patentlitigation was a sham. (E.g., Opn. 3; FTC v. Watson Pharmaceuticals, Inc. (1 ith Cir. 2012) 2012 WL 1427789 (Watson); In re Tamoxifen Citrate Antitrust Lit. (2d Cir. 2006) 466 F.3d 187 (Tamoxifen).) These holdingsreflect the long- standing California principle that the antitrust laws do notrestrict any “contract made ... in the exercise, and within the scope, ofthe rights given and the protection accorded bythe patent.” (Fruit Machinery Co. v. F.M. Ball & Co. (1953) 118 Cal.App.2d 748, 758 [emphasis added] (Fruit Machinery).) The Court of Appeal correctly held that defendants had no antitrust liability arising from the settlement of patent litigation concerning Bayer’s blockbuster antibiotic, Cipro. There is no dispute that the settlement was within the scope of Bayer’s patent, and plaintiffs did not allege that Bayer procuredits patent by fraud or engaged in shamlitigation. The opinion below is consistent with an unbroken line of federal appellate decisions applying the “scope ofthe patent” rule to Hatch-Waxman settlements. Indeed, two different federal circuits have rejected antitrust claims— including Cartwright Act and UCL claims—based on the same settlementat issue here. (In re Ciprofloxacin Hydrochloride Antitrust Lit. (Fed.Civr. 2008) 544 F.3d 1323, 1336 (Cipro-IZ [federal and California law]; Arkansas Carpenters Health & Welfare Fund v. BayerAG (2d Cir. 2010) 604 F.3d 98, 106 (Cipro-IV) [federal law].) 1 The essential facts of this case demonstrate why so many courts have reached the same conclusion: Bayer ownedthe patent on Cipro’s sole active ingredient, ciprofloxacin hydrochloride. (10AA 2340.) Becauseall generic drugs must use the pioneer drug’s active ingredient,all generic versions of Cipro infringed Bayer’s patent. (Opn. 4.) Thus, when Barr sought permission from the Food and Drug Administration (FDA) to market its generic version of Cipro and Bayer broughtan infringementsuit, Barr stipulated that its product would infringe. (2AA 244, $98.) Barr claimedinstead that the patent was invalid and unenforceable. (Opn.6.) Bayerand Barr later settled the patent suit. Barr agreed to honorthe patent, and Bayer granted Barr a license permitting competing entry six months before patent expiration. Bayer agreed to make settlement payments to Barr, which ultimately totaled $398 million. Those payments constituted only 6.5% of Bayer’s U.S. gross sales of Cipro tablets for the same period. (1RA 39, 93; 4AA 788 §4.01(a).) After the settlement, Bayer submitted its patent to the Patent and Trademark Office (“PTO”) for reexamination, and the PTO reaffirmed the Cipro claims. Subsequently, Bayer successfully defended the patent in three district court challenges, and in two appeals to the Federal Circuit. (See, e.g., 2AA 253 at 931; BayerAG v. Schein Pharmaceutical, Inc. (D.N.J. 2001) 129 F.Supp.2d 705, affd. (Fed.Cir. 2002) 301 F.3d 1306 (Schein); 1RA 181-227 [Bayer AG v. Carlsbad Technology, Inc. (S.D.Cal. June 7, 2002 and Aug. 7, 2002, No. 01CV0867-B) (Carlsbad)].) Plaintiffs do not, and cannot, dispute these facts. Nonetheless, they ask this Court to abandon both California and federal precedent and declare this settlementillegal per se. Plaintiffs’ theory suffers from two principal flaws. First, it is contrary to California law. Second, if accepted, it would be preempted by federal patent law. 1. The Cartwright Act. “The grant of a patent is the grant of a statutory monopoly.” (Sears, Roebuck & Co. v. Stiffel Co. (1963) 376 U.S. 225, 229 (Sears).) The Cipro patent thus gave Bayerthe rights associated with a patent, including “the right to exclude others from profiting by the _ patented invention.” (Dawson Chemical Co. v. Rohm & Haas, Co. (1979) 448 U.S. 176, 215 (Dawson).) In Fruit Machinery, the Court ofAppeal held that the Cartwright Act does not restrict agreements “within the scope” of the patent, and permits “conditionsof sale [that] are normally and reasonably adapted to secure pecuniary reward for the patentee’s monopoly.” (Fruit Machinery, supra, 118 Cal.App.2d at p.758.) As the U.S. Supreme Court stated long ago, “[t]he fact that the conditions in the contracts keep up the monopolyorfix prices does not render them illegal.” (Bement v. National Harrow Co. (1902) 186 U.S. 70, 91 (Bement).) Thelaw is therefore clear that Bayer’s patent rights may not be ignored,asplaintiffs urge. In California, as elsewhere, “the protection of the patent laws and the coverageofthe antitrust laws are not separate issues.” (U.S. v. Studiengesellschaft Kohle, m.b.H. (D.C. Cir. 1981) 670 F.2d 1120, 1128 (Studiengesellschaft).) Because antitrust law does not protect infringing competition,plaintiffs bear the burden of showingthat the generic competition they allege to have been excluded waslawful competition. Otherwise, they cannotsatisfy the first step of any Cartwright Act analysis—to show a “substantially adverse effect on competition in the relevant market.” (Exxon Corp. v. Superior Court (1997) 51 Cal.App.4th 1672, 1681 [citation omitted] (Exxon).) (See Part I.) Plaintiffs’ attempt to avoid this burden by invoking the per se rule cannot be supported. No court has applied sucha rule to an agreement within the scope of a patent, and no enforcement agency has advocated one. Plaintiffs make no attempt to meet California’s high standard for per se liability. (See Part II.A.) Plaintiffs have no choice but to rely on the perse rule, becauseit assumes the competitive harm that they cannot prove. In a dozen years of Hatch-Waxmanlitigation,no plaintiff has articulated a theory under which a settlement within the scope of a patent causes actual harm to lawful competition. Courts recognizethatplaintiffs’ arguments prove too much, because (1) all settlements involve consideration to both parties based on perceivedrisk and (2)all settlements “halt adversarialtesting” of the patent. (OB 25.) But neither the form of consideration norits amount changes the analysis of whether the “excluded” competition was within the patent’s scope. And no principle of law supportsplaintiffs’ insistence that patent disputes belitigated to the death. Indeed,plaintiffs’ attempt to ignore the patent holder’s right to exclude would render not just every settlement, but every patent license, per se illegal as well. The courts have correctly concludedthat plaintiffs’ theories are not simply wrong, but “would work a revolution in patent law.” (In re Ciprofloxacin Hydrochloride AntitrustLit. (E.D.N.Y. 2005) 363 F.Supp.2d 514, 529 (Cipro-I/).) (See Part II.B.) 2. Substantive Preemption. The secondflaw is thatplaintiffs’ theory would place California law in direct conflict with federal patent law. Any attempt by California to imposeliability for excluding competition within the scope of the patent would be preempted under the Supremacy Clause of the U.S. Constitution. The grant ofa patent bestows fundamentalrights on the patent holderto enter into patent agreements orto refuse to do so; to place restrictions as to time, location, price, and quantity on the sale of the patented invention;to assert the patent in the marketplace andin the courts; and to withdraw orsettle such suits. (E.g., Fruit Machinery, supra, 118 Cal.App.2d at pp.751-752; Asahi Glass Co. v. Pentech Pharmaceuticals, — Inc. (N.D.II1. 2003) 289 F.Supp.2d 986, 992-993 [Posner,J., by designation] (Asahi Glass).) Indeed, the rightto settle infringement litigation is so fundamental that courts useit to determine whethera party actually “owns”the patent. (See Part I.C.2.) Federal patent law protects the exercise ofthese fundamentalrights from state liability. As long as the patent was not procured by fraud andits assertion wasnot objectively baseless, “conduct permissible under the patent laws cannottrigger any liability under the antitrust laws.” (SCM Corp. v. Xerox Corp. (2d Cir. 1981) 645 F.2d 1195, 1206 (SCMCorp.).) State law may not adoptrules ofliability that “alter and substantially reduce the established scope ofthe patent monopoly.” (U.S. v. Westinghouse Electric Corp. (9th Cir. 1981) 648 F.2d 642, 647-648 (Westinghouse).) If it were to adopt a rule finding Bayerliable for entering an agreement no more exclusionary than the Cipro patent, this Court would be holding that “an antitrust violation may be found wherea patent holder doesprecisely that which the patent laws authorize.” (Westinghouse, supra, 648 F.2d at p.647.) That is a holding that federal patent law preempts. (See Part III.) Joeook While these two flawsin plaintiffs’ theories justify affirmance, there are manyothers. Part IV explains why the Court of Appeal correctly concludedthat, assumingplaintiffs had pled an “objectively baseless” claim, California courts would lack jurisdiction to hear it. Part V then addresses several additional grounds on which the Court of Appeal rejected plaintiffs’ attempt to satisfy the objectively baseless test. Finally, Part VI addressesplaintiffs’ waiver of any UCL and evidentiary issues. In the end,plaintiffs’ argument devolvesto a self-interested invocation of consumer“policy” that supposedly justifies limiting established patent rights. That policy assumesthat the interest of consumers who may pay lower generic prices in the short run trumpsthe interest of consumers who prefer newly discovered,life-saving drugsin the long run. The Cartwright Act, like the Sherman Act, does not take sidesin this debate. That is why the FTC and other disappointedplaintiffs have attempted since 2006 to have Congress pass a law banning “reverse payment”settlements. (See Part II.C.) Congress is where any “controversy” over these settlements should be resolved. The Court should reject plaintiffs’ invitation to engage in judicial legislation. STATEMENT OF FACTS This case arises from the settlement of federal patentlitigation in BayerAG v. Barr Laboratories, Inc. (S.D.N.Y. No. 92 Civ. 0381). The Regulatory Framework. The Drug Price Competition and Patent Term Restoration Act, commonly known asthe “Hatch-Waxman Act,” governs the interaction between patent protection and generic drugs. (Pub. L. No. 98-417, 98 Stat. 1585, as amended, 21 U.S.C. §355.) To obtain FDA approvalfor a generic drug under Hatch-Waxman,the manufacturer mustfile an Abbreviated New Drug Application (“ANDA”). To protect the rights ofthe pioneer drug manufacturer, a generic secking approvalprior to the expiration of any patentlisted with the FDA mustinclude a “Paragraph IV”certification that the patent ‘‘is invalid or ... will not be infringed by the ... the [generic] drug.” (21 U.S.C. §355()(2)(A)(vii)(IV).) The ANDAfiler must also show that the “active ingredientof [its proposed] new drug is the sameas thatofthe listed [or pioneer] drug.” (21 U.S.C. §355(G)(2)(A)Gi().) Bayer’s U.S. Patent. In 1987, the PTO granted U.S. Patent Number 4,670,444. Claim 12 of the patent covers Cipro’s active ingredient, the molecule ciprofloxacin hydrochloride. (2AA 243, 72.) Because any form of generic Cipro must contain the sameactive ingredient, it would infringe Bayer’s “compound”patent by definition. (Opn.4.) The PatentLitigation. In 1991, Barr filed an ANDAfor Cipro with a Paragraph IV certification. (2AA 243, 45.) Under Hatch-Waxman, Barr’s FDAfiling was a technicalact of infringement, even though Barr had madenosales subjecting it to infringement damages. (See 35 U.S.C. §271(e)(2); In re Ciprofloxacin Hydrochloride Antitrust Lit. (E.D.N.Y. 2003) 261 F.Supp.2d 187, 251 (Cipro-J).) On January 16, 1992, Bayer sued Barr for infringement, based on Barr’s ANDA. (2AA 346-50.) Barr stipulated that its ciprofloxacin product would infringe the patent, (2AA 244, 98), but asserted counterclaimsofinvalidity and unenforceability. (2AA 352-58.) Because Barr had madenoinfringing sales, Bayer lacked thetraditional leverage that a patent ownerhasagainstan alleged infringer—the threat of infringement damages. Barr’s only exposure wasthecost oflitigation. Bayer, in contrast, faced an enormousrisk:the loss ofits patent. In 1996, the patent court denied motions for summary judgment by both Bayer and Barr. (3AA 557-560.) In January 1997, the parties settled. (2AA 247, 17.) Barr agreed to a consent judgmentaffirmingthe validity of the Cipro patent. (2AA 248, 419.) Bayer agreed to supply Barr with ciprofloxacin for licensed resale at least six months before patent expiration. (See 4AA 770-774 §§3.01-3.03.) Bayer made settlement paymentsthat eventually totaled $398.1 million (2AA 251, 424), representing 6.5% of U.S. gross sales of Cipro tablets for the payment period. (1RA 39, 93; 4AA 788 §4.01(a).) Bayer’s Subsequent Patent Victories. After settling, Bayer submitted the Cipro patent to the PTO for reexamination, and presented the PTO with a roadmapofBarr’s invalidity arguments. (Compare 1RA 41-89 with IRA 91-168.) The PTO issued a reexamination certificate (2AA 252, 428) confirming “the validity of claim 12, which was not substantively amendedand whichall parties agree covers ciprofloxacin hydrochloride.” (Cipro-II, supra, 363 F.Supp.2dat p.519.) The settlement and reexamination did not prevent later ANDA challenges. Bayerfiled four Hatch-Waxman lawsuits against subsequent Cipro challengers (Ranbaxy, Schein, Mylan, and Carlsbad). (2AA 252, 429.) Bayer producedthe full discovery record from the Barr case to each challenger. (See, e.g., LRA 173, 2.) The Ranbaxychallenge was dismissed as moot following Ranbaxy’s withdrawal of its Paragraph IV certification. (LRA 231, {7.) Bayer defeated the validity challenges of Schein and Mylan on summary judgment, and the Federal Circuit affirmed. (See 2AA 253, 731; Schein, supra, 129 F.Supp.2d 705, affd. 301 F.3d 1306.) In Carlsbad, San Diego District Judge Brewster rejected Carlsbad’s validity challenge after a nine- day benchtrial. (See 2AA 254, 932; IRA 181-227 [Carlsbad, supra, No. 01CV0867-B].) Carlsbad did not appeal. Cipro Goes Generic. Barr began selling its ciprofloxacin product underthe settlement on June 9, 2003. (2ZAA 255, 934.) The Cipro patent expired on December9, 2003, but the FDA granted pediatric exclusivity to Bayeruntil June 9, 2004. (2AA 243, 993-4.) Barr thus entered a full year before any other generic was authorized to enter. (See 21 U.S.C. §355a(b)(2)(A)(ii).) Since June 2004, numerousother generic versions of Cipro have entered the market. (2AA 255, 935.) Procedural History. Beginning in 2000, variousprivate plaintiffs brought actions attacking the Cipro settlement. Twenty-six federal cases were consolidated in a multi-district litigation (MDL) before the Hon. David Trager. (See In re Ciprofloxacin Hydrochloride AntitrustLit. (E.D.N.Y. 2001) 166 F.Supp.2d 740.) The partieslitigated the state and federal cases in tandem, agreeing that discovery in each case would apply to the others. (E.g., 6AA 1253.) The operative amended complaintin this action wasfiled on April 9, 2003. (2RA 235.) . In March 2005, Judge Trager granted summary judgmentto the MDLdefendants, holding: “Unless and until the patent is shown to have been procured by fraud,or a suit for its enforcement is shown to be objectively baseless, there is no injury to the market cognizable under existing antitrust law, as long as competition is restrained only within the scope ofthe patent.” (Cipro-II, supra, 363 F.Supp.2d at p.535.) Plaintiffs then agreed to stay this action pending the MDL appeal. (1RA 12.) All MDLplaintiffs appealed to the Second Circuit, but the defendants movedto transfer the appeal to the Federal Circuit, which has exclusive jurisdiction of cases arising under patent law. (See Cipro-IV, supra, 604 F.3d at p.103, fn.10.) The Second Circuit transferred the appeal of the indirect purchasers, whose complaint alleged that Bayer committed fraud and inequitable conduct in obtaining the Cipro patent. bid.) The 10 Second Circuit retained the appeal of the direct purchasers, who made no such allegations. (/bid.) In 2008,the Federal Circuit affirmed Judge Trager’s rulings and stated that Bayer had not committed fraud on the PTO as a matterof law. (Cipro-Il, supra, 544 F.3d at pp.1336, 1341.) The Supreme Court denied certiorari. (Cipro-II (2009) 129 S.Ct. 2828.)! After the Federal Circuit’s affirmance, the California parties briefed summary judgment. (1RA 16.) In 2009, the superior court granted summary judgmentfor defendants because, inter alia, “California cases ... hold that conductfalling within the scopeofa patentis not an antitrust violation.” (11AA 2668.) In 2011, the Court ofAppeal unanimously affirmed. ARGUMENT 1. UNDER CALIFORNIA LAW, A SETTLEMENT WITHIN THE SCOPE OF THE PATENT IS LAWFUL A. California and Federal Law Reject Plaintiffs’ Attempt To Ignore Bayer’s Right To Exclude Infringing Competition California measures the legality of agreements related to patents by considering at the outset the patent holder’s right to exclude infringing competition. Most courts refer to this inquiry as determining “the scope” of the patent. (Fruit Machinery, supra, 118 Cal.App.2d at p.758.) The U.S. Supreme Court madethe point in 1902, whenit first considered a Sherman Act claim based on a patent agreement: “Thefirst important and most ' In 2010, the Second Circuit affirmed Judge Trager’s opinion as well. (See Part IA.) il material fact in considering this question is that the agreements concern articles protected by letters patent ....” (Bement, supra, 186 U.S.at p.88.) Asin Bement, when the agreements exclude no more competition than the patentitself, they do not restrain lawful competition. (/d. at p.91.) The Court subsequently confirmed that the rule applies evento setting prices under a license, whichis “the essence of that which secures proper reward to the patentee.” (U.S. v. General Electric Co. (1926) 272 U.S. 476, 490.) The first California decision applying the scopeofthe patentrule underthe Cartwright Act was Fruit Machinery, supra, 118 Cal.App.2d 748. There, a patentee sued a licensee for failure to pay royalties. The licensee contendedthat certain restrictions in the license restrained trade, making the license unenforceable. (/d. at p.750.) The licensee arguedthat the agreement reduced competition by allowing discriminatory royalties. (Id. at p.762.) Relying heavily on General Electric, the Fruit Machinery Court rejected these arguments,finding that the contract was “madebyplaintiff ... in the exercise, and within the scope,ofthe rights given and the protection accorded by the patent.” (118 Cal.App.2d at p.758.) The court distinguished several decisions upon whichthe licensee relied because there “the patentee or his assignee went beyond that which was necessary or incidental to the scope ofhispatent.” (Id. at p.763 [emphasis added].) Theprinciple guiding the court in Fruit Machinery was not new. In fact, this Court applied the scope of the patent rule well before the Cartwright Act existed, in Vulcan Powder Co. v. Hercules Powder Co. 12 (1892) 96 Cal. 510 (Vulcan Powder). Vulcan Powder concemeda contract between several dynamite producers setting the terms on which they would compete. (/d. at p.514.) Someofthe parties had patents on dynamite, but not on all grades. Nonetheless, the agreement covered all sales of dynamite, infringing or not. (/d. at p.516.) This Court voided the contract because it went beyond the scope ofthe patents. (Jbid. [“[T]he contract before us is not confined to dynamite produced underthe processes ofthe namedpatents.”) The two lower courtsin this case are not the only California courts to recognize that the same scope of the patent rule applies to a Hatch- Waxman settlement. (Schering-Plough Cartwright Act Cases (Ala.Cty.Super.Ct. Dec. 17, 2009) JCCP No. 4559,at *5 [“[O]nly restrictive conduct outside the scope ofthe patent grantwill give rise to an antitrust violation.” (emphasis added)].) The court in Schering-Plough confirmedthat a settlement “within the lawful scope ofthe patent” does not violate California law “even whenthe settlement involves a reverse paymentfrom the patent holderto the alleged infringer.” (/bid.) Federal Law. TheCalifornia decisionsare consistent with the longstanding federalrule that the antitrust analysis ofpatent agreements must begin with the exclusionary effect ofthe patent. (Mallinckrodt, Inc.v. Medipart, Inc. (Fed.Cir. 1992) 976 F.2d 700, 708 [“‘Should therestriction be found to be reasonably within... the scope of the patent claims, that ends the [antitrust] inquiry.”]; USMCorp. v. SPS Technologies, Inc. (7th Cir. 1982) 694 F.2d 505, 513 [Antitrust liability may lie “only upon proof of an 13 anticompetitive effect beyond that implicit in the grant of the patent.”] (USMCorp.); Studiengesellschaft, supra, 670 F.2d at p.1128 [“[T]he conductat issueis illegalif it threatens competition in areas other than those protected by the patent, and is otherwise legal.”]; SCMCorp., supra, 645 F.2d at p.1206 [“[W]here a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger [antitrust] liability.”].) Six federal appellate opinions have applied these principles to reject antitrust claims based on Hatch-Waxmansettlements within the patent’s exclusionary effects. The first was Valley Drug Co. v. Geneva Pharmaceuticals, Inc. (11th Cir. 2003) 344 F.3d 1294 (Valley Drug). There, the Eleventh Circuit reversed a district court decision finding a reverse paymentsettlement per se unlawful because the “court failed to consider the exclusionary power ofAbbott’s patentin its antitrust analysis.” (Ud. at p.1306.) The Eleventh Circuit subsequently applied that reasoning in Schering-Plough Corp. v. FTC (1 Ith Cir. 2005) 402 F.3d 1056(Schering- Plough), vacating a FTC order condemninga settlement with reverse payments. The FTC’s analysis had failed to consider properly whether“the challenged agreementsrestrict competition beyond the exclusionary effects of the ... patent.” (/d. at p.1068.) The Second Circuit decided Tamoxifen not long after Judge Trager granted summary judgmentto these defendants in Cipro-II. Tamoxifen cited Judge Trager’s opinions seventeen times, and adoptedhis description ofthe controlling rule: “[Absentfraud or a lawsuit that is] objectively 14 baseless, there is no injury to the market cognizable under existing antitrust law, as long as competitionis restrained only within the scopeofthe patent.” (Tamoxifen, supra, 466 F.3d at p.213 {quoting Cipro-H, supra, 363 F.Supp.2d at p.535].) The Federal Circuit then decided the first of the Cipro appeals, brought by a proposedclass of indirect purchasers that included California residents suing under California law. (Cipro-JII, supra, 544 F.3d 1323.) The Federal Circuit unanimously affirmed, confirming that “{t]he essence of the inquiry is whether the agreements restrict competition beyond the exclusionary zone of the patent.” (/d. at p.1336.) In 2010, the Second Circuit likewise upheld Judge Trager’s ruling in the direct purchasers’ Cipro appeal, finding that Tamoxifen controlled. (Cipro-IV, supra, 604 F.3d at p.105 [The Cipro settlements “fall within the terms ofthe exclusionary grant conferred by the branded manufacturer’s patent.”].) Most recently, the Eleventh Circuit reaffirmed the scope of the patentrule set forth in its prior decisions: “Our... decisions establish the rule that, absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so longasits anticompetitive effects fall within the scope ofthe exclusionarypotential of the patent.” (Watson, supra, 2012 WL 1427789 at *11 [emphasis added].) In sum, the California and federal appellate courts are in harmony. Indeed, every circuit court to consider “reverse payments”has cited Judge Trager’s analysis of this same Cipro settlement with approval. (E.g., Opn. 15 17-21, 38-42; Watson, supra, 2012 WL 1427789 at *12; Tamoxifen, supra, 466 F.3d at p.213; Schering-Plough, supra, 402 F.3d at p.1068; Valley Drug, supra, 344 F.3d at p.1306; In re Cardizem CD Antitrust Lit. (6th Cir. 2003) 332 F.3d 896, 908, fn.13 (Cardizem).) B. Plaintiffs’ Attempt To Rewrite California and Federal Law Fails Plaintiffs try to evade the impactofthese uniform decisions. They argue that the California cases do not mean whatthey say, and that the federal cases are inconsistent and conflicting. Plaintiffs are wrong. Though both lower courts in this case embraced Fruit Machinery, plaintiffs discuss it in a single paragraph. (OB 34-35.) They claim that, despite the court’s express language,it did not rely on the scope ofthe patent rule. The patentee prevailed, they argue, only “because the ‘differential in royalty rates’ bore ‘a reasonablerelationship to differences in costs andcapital risks.’” (Ibid) Plaintiffs misread Fruit Machinery. The court first observed that the discriminatory royalty allegation was untrue. (Fruit Machinery, supra, 118 Cal.App.2dat p.762 [notingthat the royalty “bears a reasonable relationship to [costs] ..., thus “not giving the canner-ownersthe ‘advantage’ which defendant asserts” (emphasis added)].) But the court then emphasized that nothingin its analysis implied that discriminatory royalties, even if “advantageous,” were beyond the scopeofthe patent: Wedo not meanthatit would be legally improper or incompetentfor the patentee, his exclusive licensee, and the latter’s sublicensees, by agreementsuchas these parties have made,to give themselves a commercial advantage overothers in industry. 16 (Ibid; accord USMCorp., supra, 694 F.2d at p.512 [“[T]hereis no antitrust prohibition against a patent owner’s using price discrimination to maximize his income from the patent.”].) Plaintiffs also argue that the court’s statementthat the patentee had both exercisedits patent rights and not “abused any rights” means that the scopeofthe patentrule was notdispositive. (OB 34-35.) Plaintiffs’ conclusion does not follow. There wasno dispute in Fruit Machinery that the patentee had therightto enter into licensing agreements. (118 Cal.App.2dat p.759 [“The patentee may make andgrant license to another....”].) The issue was whetherthe patentee had abused thatright by going beyondthe scope ofthe patent. Fruit Machinery’ s answer was no. (Id. at p.762.) Thus, the court rejected claimant’s caselaw solely becauseit involved conductthat “went beyond... the scope of[the] patent.” (Id. at p-763.) | As for Vulcan Powder, plaintiffs concede that the Court “notedthat the restraints at issue ... went beyond the technological scope ofthe patent.” (OB 33.) Nonetheless, they argue again that the scopeofthe patent wasnotdispositive. (Jbid.) This Court, however, was explicit: [T}he contract before us is not confined to dynamite produced under the processes ofthe namedpatents. It speaks ... of ‘dynamite’ generally, and [forbids sales] ... ‘in competition to the parties hereto’... (Vulcan Powder, supra, 96 Cal. at p.516 [emphasis added].) Contrary to plaintiffs’ argument, commentators read Vulcan Powderas applying the scope ofthe patent rule. (E.g., 10A William Meade Fletcher (supp. 2012) Cyclopedia ofthe Law ofCorporations §5027{citing Vulcan 17 Powderto hold that “patent laws do not confer ... immunity from the antitrust lawsas to acts not within the limited scope ofthe monopoly granted” (emphasis added)].) If plaintiffs’ interpretation were correct, this Court would have had no occasion to consider whether the contract was “confined” to the patented processes. It would havestated that the patent’s scope wasirrelevant. But the Court did not, because plaintiffs’ wishful reading is wrong. Plaintiffs’ assertion that federal courts have adopted multiple, inconsistent rules is equally flawed. Indeed, the Eleventh Circuit recently confirmedthatits rule is identical to that ofthe Second and Federal Circuits. The court rejected the very argumentplaintiffs make here, i.e., that legality in the Eleventh Circuit turns on “an analysis ofthe patent’s likely ability to exclude infringing use.” (OB 43.) On the contrary, “the potential exclusionary scope ofthe patent... is[] the exclusionary rights appearing on the patent’sface and not the underlying merits of the infringement claim.” (Watson, supra, 2012 WL 1427789 at *10,fn.8 [emphasis added].) | All of the circuits, moreover, reject plaintiffs’ assertion that the Sixth Circuit’s decision in Cardizem declared all reverse payments illegal perse. Every circuit to discuss Cardizem has observedthat the settlement at issue | imposed restraints beyond the exclusionary scope of the patent. (See, e.g., Cipro-III, supra, 544 F.3d at p.1335; Tamoxifen, supra, 466 F.3d at p.214; Valley-Drug, supra, 344 F.3d at p.1311, fn.26.) Indeed, Cardizem cited Judge Trager’s Cipro-I opinion rejecting a per se rule against payments 18 with approval. (Cardizem, supra, 332 F.3d at p.908, fn.13.) In Cardizem itself, the U.S. Solicitor General, the FTC, and the DOJall informed the Supreme Court that the circuit court did not adopta perse rule against payments. (Brief for the United States at 7, 12-15, Cardizem (2004) 543 U.S. 939 (No. 03-779) (Cardizem Br.).) Since then, the United States has twice more informed the U.S. Supreme Court that Cardizem does not representa circuit split. (Brief for United States at 16 n.7, Tamoxifen (2007) 551 U.S. 1144 (No. 06-830); Brief for the United States at 16-17, Schering-Plough (2006) 548 U.S. 919 (No. 05-273).)” And that court has denied certiorari in all six cases concerning Hatch-Waxman settlements (including both ofthe Cipro cases).° In sum, the Court of Appeal correctly concluded that “every reported decision to date addressing the legality of a reverse-paymentsettlement of Hatch-Waxman litigation that does not restrain competition beyondthe exclusionary scope ofthe patent has concludedthat the settlement does not violate antitrust law.” (Opn. 37-38.) * Plaintiffs’ reliance on Andrx Pharmaceuticals, Inc. v. Biovail Corp. Internat. (D.C. Cir. 2001) 256 F.3d 799 is unfounded. The D.C.Circuit did not addressthe legality of reverse payments, muchless hold them to be per se illegal. It assumedtheillegality ofthe agreement for purposes of determiningantitrust injury (id. at p.813), and it affirmed the dismissal of the complaint, but permitted repleading. (Jd. at p.801.) No court — not even Cardizem, which construed the samesettlement butfailed to mention Andrx — has read Andrx as containing a holding concerningthelegality of reverse payments. 3 Cipro-IV (2011) 131 S.Ct. 1306; Cipro-II (2009) 129 S.Ct. 2828; Tamoxifen (2007) 551 U.S. 1144; Schering-Plough (2006) 548 U.S. 919; Valley Drug (2004) 543 U.S. 939; Cardizem (2004) 543 U.S. 939. 19 C. The Scopeof the Patent Rule Derives from Basic Principles of Antitrust and Patent Law The California rule that governsthis caseis identical to the federal rule not because the federal cases are controlling, but because they are compelling. While this Court stated in California ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1168, that “the Sherman Acctis not... directly probative on interpretation ofthe Cartwright Act,”it also expressly rejected the assertion “that the Cartwright Act is somehow broader than the Sherman Act and the commonlaw.” (Ibid.) Indeed, because “the Cartwright Actis currently believed to be ‘not only harmonious’ with the Sherman Act, but sharesits ‘identical objectives,’ we may expect the two laws to move forward in the foreseeable future in a complementary fashion ....” (Donald T. Hibner, Jr. & Heather M. Cooper, The Cartwright Actat 100—A History ofComplementary Antitrust Enforcement—A Celebration (Fall 2008) 17 Competition 81, 83-84.) Thus, California courts routinely observe that “federal cases interpreting the Sherman Act[are] an aid in interpreting our own Cartwright Act.” (Asahi Kasei Pharma Corp.v. CoTherix, Inc. (2012) 204 Cal.App.4th 1, 12 [collecting cases].) Asboth lowercourts observed here, moreover,plaintiffs point to nothing in the Cartwright Act’s language or precedentthat calls fora different result from the federal cases on the issue in this appeal. Nor can they, because “whetherthe court beginsits analysis underantitrust law by applying a rule of reason approachto evaluate the anti-competitive effects, or underpatent law by analyzing theright to exclude afforded by the 20 patent,” Cipro-Il, supra, 544 F.3d at p.1336, the scope ofthe patent remainsthe essential inquiry. 1. AntitrustLaw: Plaintiffs Cannot Show that the Allegedly “Excluded” Competition Was Lawful Thefirst step in any rule of reason analysis is to show a “substantially adverse effect on competition in the relevant market.” (Exxon, supra, 51 Cal.App.4th at p.1681 [citation omitted].) By the time the Cartwright Act was passed in 1907, however,it was settled that “the public [is] not entitled to profit by competition amonginfringers.” (Rubber Tire Wheel Co. v. Milwaukee Rubber Works Co. (7th Cir. 1907) 154 F. 358, 364; see also Hynix Semiconductor Inc. v. Rambus, Inc. (N.D.Cal. 2007) 527 F.Supp.2d 1084, 1096 [“[A]n infringer”has “no legal right to be competing in the product market.”].) Thus, an antitrust plaintiff always has the burden of demonstratingthat the allegedly excluded competition would have been lawful. (See, e.g., In re Canadian Import AntitrustLit. (8th Cir. 2006) 470 F.3d 785, 790-792[no antitrust liability for conspiring to preclude the importationofillegal drugs]; Access Telecom, Inc. v. MCI Telecommunications Corp. (Sth Cir. 1999) 197 F.3d 694, 712 [“If thereis no legal U.S. export market ..., then there is no antitrust injury.”]; Jenkins v. GreyhoundLines, Inc. (N.D.Cal. 1971) 1971 WL 529 at *1 [no antitrust claim will “lie where the business... alleged to have been restrained ... was itself unlawful.”].) Because they have nottried to carry that burden here, plaintiffs fail at the rule of reason’s first step. (Cipro-III, supra, 544 F.3d at p.1332 [where “plaintiffs failed to meet their burden underthefirst step of 21 the rule of reason analysis,” it was not “necessary to consider the second or third steps of the analysis.”].) In other Hatch-Waxman cases,plaintiffs have soughtto satisfy the rule of reason’s first step with a showingless stringent than the “objectively baseless” test applied below. But the courts are clear that any lesser standard, such as having anantitrust jury choose a “likely” winner of the settled patent case, is unduly speculative. (Cipro-I, supra, 261 F.Supp.2d at pp-200-201 [A “legal theory dependent on predicting the outcomeofa specific lawsuit is unduly speculative.” (citing Whitmore v. Arkansas (1990) 495 U.S. 149, 159-160)]; Tamoxifen, supra, 466 F.3d at p.203 [“[I]t is just not possiblefora litigant to prove in advancethat the judicial system will lead to any particular result in his case.” (quotation omitted)].) The Eleventh Circuit rejected such inquiries into the patent merits only last month in Watson, supra, 2012 WL 1427789. The FTC arguedthat the patent should be deemedto have no exclusionary poweratall if the FTC could showthat “it is more likely than not that the patent would not have blocked generic entry.” (/d. at *11.) The Eleventh Circuit explained the fallacy in this view: The FTC’s position equatesa likely result (failure of an infringementclaim) with an actualresult, but it is simply not true that an infringement claim thatis “likely” to fail actually will fail. (Jbid.) Predicting the future is precariousat best; retroactively predicting from a past perspective a future that never occurred is even more perilous. Andit is too perilous an enterprise to serveas a basisfor antitrust liability and treble damages. See Valley Drug, 344 F.3d at 1308 (“Patentlitigation is too complex and the results too uncertain for parties to accurately 22 forecast whether enforcing the exclusionary right through settlement will expose them to treble damagesifthe patent immunity were destroyed by the mere invalidity of the patent.”) .... (Id. at *12.) Courts have thus concluded that only a showing of objective baselessnesswill suffice to meet the antitrust plaintiff's burden without undue speculation. Plaintiffs must show that no reasonable person could doubt that the generic would haveprevailedin the underlyinglitigation: A firm that has received a patent from the patentoffice (and notby fraud ...), and thus enjoys the presumptionofvalidity that attaches to an issued patent, 35 U.S.C. § 282, is entitled to defend the patent’s validity in court, to sue alleged infringers, and to settle with them, whateverits private doubts, unless a neutral observer would reasonably think either that the patent was almost certain to be declared invalid, or the defendants were almost certain to be found not to have infringedit, if the suit went to judgment. (Asahi Glass, supra, 289 F.Supp.2d at pp.992-993;id. at p.993 [patent litigation must be “objectively baseless”].) Unlessplaintiffs satisfy this test, there is no basis to conclude that lawful competition has been harmed. 2. PatentLaw: A Patentee Hasthe Right To Settle Within the Scope of the Patent, Unless the Patent Suit Was Objectively Baseless The same conclusion flowsif the analysis begins with the rights United States patents bestow on a patent owner for the constitutional purpose of“promot[ing] science and the useful arts.” (U.S. Const.art I, §8.) A granted patent, whichis statutorily presumed valid (35 U.S.C. §282), provides“the right to exclude others from profiting by the patented invention.” (Dawson, supra, 448 U.S. at p.215.) As the Court ofAppeal held in Fruit Machinery, that right necessarily entails “control over the 23 invention andprotection in the exercise ofthe rights accorded [the inventor] as patentee.” (Fruit Machinery, supra, 118 Cal.App.2dat p.762 [emphasis added].) Thus, a “patentis, in effect, a bundle of rights which maybe divided andassigned, or retained in whole orin part.” (Alfred E. Mann Foundationfor Scientific Research v. Cochlear Corp. (Fed.Cir. 2010) 604 F.3d 1354, 1360 [quotation omitted] (dann Foundation).) In the wordsofthis Court: [A]s a patent is a sort of monopoly, the owner may manufacture underit, or not, as he pleases, and may make either a partial or entire assignmentofit, and mayprotecthis assignee, not only by an agreementnot to usethe patent..., but by a covenantnotto interfere in any way with theprofits to be derived from the assignedpatent. (Vulcan Powder, supra, 96 Cal. at p.516; see, e.g., Studiengesellschaft, supra, 670 F.2d at p.1127 [describing array ofpatent rights].) Asthis list demonstrates, a patent’s exclusionary right includes not only the “stick” ofpatent enforcementsuits, but the “carrot” ofprofit from agreements that exploit that exclusivity. (E.g., King Instruments Corp.v. Perego (Fed.Cir. 1995) 65 F.3d 941, 950 [“The Act supplies a carrot in the form ofeconomic rewardsresulting from the right to exclude.”]; Biotechnology Industry Org. v. District ofColumbia (Fed.Cir. 2007) 496 F.3d 1362, 1372 (Biotechnology-I).) These principles do not change, but are emphasized, in the context of Hatch-Waxmanlitigation. But the right[to exclude] ... is not granted in a vacuum orfor its own sake.... [T]he primary mechanism by whichthe right to exclude promotes such innovationis by providing the patentee with the opportunity to obtain greaterprofits than it could have obtained without sucha right to exclude. The Hatch-WaxmanAct which extended the patent term for 24 pharmaceutical products to accountfor the costs and delays of the FDA approvalprocess,andits legislative history, make this link especially clear for patented drugs. (Biotechnology Industry Org. v. District ofColumbia (Fed.Cir. 2007) 505 F.3d 1343, 1346 [Gajarsa,J., concurring on rehearing denial] (Biotechnology-IN.) As the Eleventh Circuit recently observed, Only one in every 5,000 medicinestested for the potential to treat illness is eventually approved for patient use, and studies estimate that developing a new drug takes 10 to 15 years and costs more than $1.3 billion. No rational actor would take that kind of a risk over that period of time without the prospectofa big reward. (Watson, supra, 2012 WL 1427789at *1 [footnote omitted.) The law is equally clear that the “bundle” ofpatent rights includes the right to settle infringement suits. The agreements that the U.S. Supreme Court upheld in the first Sherman Act patent case in 1902 were settlement agreements. (Bement, supra, 186 U.S.at p.93 [“This execution ofthese contracts did in fact settle a large amountoflitigation regardingthe validity of manypatents .... This was a legitimate and desirable resultin itself.”.) Indeed,the right to settle infringementlitigation is so fundamentalthat courts useit as a test ofwhether a givenparty actually ownsthepatent. (See Sicom Systems Ltd. v. Agilent Technologies, Inc. (Fed.Cir. 2005) 427 F.3d 971, 979 [“Sicom... has failed to show thatit has all substantial rights underthe patent. For instance, Sicom doesnot havethe rightto settle litigation ....”]; Mann Foundation, supra, 604 F.3d at p.1361 [licensor’s right to sue is rendered “illusory” without the rightto settle].) As courts have recognized in Hatch-Waxmancases,settlementis a critical means by whichthe benefits ofpatentrights are realized: “There is simply no legal 25 basis forrestricting the rights of patentees to choose their enforcement vehicle (i.e., settlementversuslitigation).” (Cipro-II, supra, 363 F.Supp.2d at pp.531-532; Cipro-III, supra, 544 F.3d at p.1337[finding Bayer’s conduct “well within [its] rights as the patentee”].) Becausepatent law grants “protection in the exercise” ofthese fundamentalrights, (Fruit Machinery, supra, 118 Cal.App.2d at p.762), courts have longinterpreted the antitrust laws accordingly. (Bement, supra, 186 U.S.at p.92 [“But that statute clearly does notrefer to that kind of a restraint of interstate commerce which mayarise from reasonable and legal conditions imposed upon the assigneeorlicensee of a patent .... Such a construction of the [Sherman] act we have no doubt was never contemplated byits framers.”].) Courts thus reject the conclusion that “an antitrust violation may be found wherea patent holder doesprecisely that which the patent laws authorize.” (Westinghouse, supra, 648 F.2d at p.647.) Where,as here, the agreement does not extend the scopeofthe patent, the exercise oftraditional patent rights—including the right to settle—cannotbethe basis ofantitrustliability, as long as the patent is asserted in what the federal courts call “good faith.” (Duplan Corp.v. Deering Milliken, Inc. (4th Cir. 1976) 540 F.2d 1215, 1220 [‘‘It is only whensettlement agreements are entered into in bad faith andare utilized as part of a schemeto restrain or monopolize trade that antitrust violations may occur.’’| (Duplan).) Andbad faith in this contextis not a subjective test, but requires proof that the patent claim was objectively baseless. 26 (Globetrotter Software, Inc. v. Elan Computer Group, Inc. (Fed.Cir. 2004) 362 F.3d 1367, 1375 [“[T]he bad faith standard ... [cannot] be satisfied in the absence of a showing that the claims asserted were objectively baseless.”] (Globetrotter); SanDisk Corp. v. STMicroelectronics, Inc. (N.D.Cal. 2008) 2008 WL 4615605 at *10 [Federal patent law preempts claims for unfair competition under California law unless the case involves objectively baseless allegations of infringement.”].) The “objectively baseless”test is thus the standard in a Hatch-Waxmancase, because “i]t is not‘bad faith’ to assert patentrights that one is not certain will be upheld --. andto settle the suit to avoid risking the loss ofthe rights.” Asahi Glass, supra, 289 F.Supp.2dat p.993 [citation omitted].) 3. The Scope of the Patent Rule Is Completely Consistent with U.S. Supreme Court Precedent These fundamental principles ofpatent and antitrust law came together in Walker, Inc. v. FoodMachinery (1965) 382 U.S. 172 (Walker Process). Walker Process represents “[t]he only time the [U.S.] Supreme Court has addressed the circumstances under which the patent immunity from antitrustliability can be pierced” when the defendant’s conduct is within the scope of a patent. (Valley Drug, supra, 344 F.3d at p.1307.) Walker Process held that proofofactual fraud in securing a patent “wouldbe sufficient to strip [the patentee] ofits exemption from the antitrust laws,” and thusallow an antitrust claim for wrongful enforcement. (382 U.S.at p.177.) Beyond suchintentional misconductin obtaining the patent, however, the court stressed that the patentee’s “good faith would furnish a complete defense”to antitrust claims. (Ibid.) In his oft-cited 27 concurrence, Justice Harlan emphasizedthat antitrustliability does not attach merely on the basis ofinvalidity “under one or more ofthe numerous technicalities attending the issuanceofa patent,” but only on evidence of actual fraud. (/d. at p.180 [Harlan,J., concurring].) The Court ofAppeal was correctto find support in Walker Process. (Opn. 21-22 & 31.) The scopeofthe patentrule andits “objectively baseless” exception flow from the court’s admonition that “good faith” reliance on patent rights furnishes a “complete defense”to antitrust liability. (Walker Process, supra, 382 U.S.at p.177.) Basing an antitrust claim againstparties acting within the scopeofa patent on anything less than a sham patent claim would thus conflict with the express exclusion of private antitrust claims “showing no more than invalidity of the patent.” (id. at p.179 [Harlan,J., concurring].) The federal courts that have analyzed the Cipro settlement agree. Citing only Walker Process, the Federal Circuit stated that the scope ofthe patent rule “adopted by the Second andthe Eleventh Circuits [is] ... completely consistent with Supreme Court precedent.” (Cipro-I, supra, 544 F.3d at p.1336.) Judge Trager warnedthatplaintiffs’ theories “would overstep the bright-line rule adopted by the Supreme Court in Walker Process,... and relied upon bythe patent bar for the past forty years.” (Cipro-II, supra, 363 F.Supp.2dat p.530.) Plaintiffs mention Walker Process only once, in a footnote concedingthat they have notalleged that Bayer procuredits patent through fraud. (OB 57, fn.30.) Rather than discuss Walker Process,plaintiffs cite 28 various other U.S. Supreme Court cases, (OB 24-25, 3 1-35), none of which is germane. (See, e.g., United States v. Masonite Corp. (1942) 316 U.S. 265, 279 [doctrine ofpatent exhaustion’ rendered conduct beyond the scope ofthe patent by definition].) Plaintiffs’ reliance (OB 35) on the majority and concurring opinions in United States v. Singer Manufacturing Co. (1963) 374 U.S.174, is also misplaced. Singer condemneda horizontal conspiracy by U.S. and European competitors to refuse to license Japanese competitors, which included the aggregation of additional patents and unwritten agreements as to how and against whom they would be enforced. (id, at pp.194-196.) The concurrence, moreover, regarded a settlementofa patent interference proceeding as ordinarily “unexceptionable.” (Jd.at p.199 [White, J., concurring].) Justice White objected not to the settlement, butto “collusion amongapplicants to preventprior art from comingto ... [the PTO’s] attention.” (Jd. at p.200.) It is telling that the Indirect Purchaserplaintiffs in Cipro-JII did not cite any of these cases to the U.S. Supreme Court itselfwhen they sought certiorari. (Petition for Certiorari, Cipro-III, supra, (2009) 129 S.Ct. 2828 (No. 08-1194).) The cases are no more relevanthere. More fundamentally, however, plaintiffs’ conclusion from these cases that settlements are anticompetitive when they “halt adversarial testing” ofpatents (OB 25)is insupportable. Underthat view, every patent * “The longstanding doctrine ofpatent exhaustion provides that the initial authorized sale ofa patented item terminatesall patent rights to that item.” (Quanta Computer, Inc. v. LG Electronics, Inc. (2008) 553 U.S. 617, 625.) There is no claim that the exhaustion doctrine applies here. 29 settlement is anticompetitive—with or without “reverse” payments. Thatis not the law.“Where thereare legitimately conflicting [patent] claims or threatened interferences,a settlement by agreement, rather than litigation, is not precludedby the [antitrust laws].” (Standard Oil Co. v. U.S. (1931) 283 USS. 163, 171.) eeee oie oe ke oe oe In conclusion,the properanalysis of a Hatch-Waxman settlement, or any other patent agreement, flows from a single principle: Where a patent is present, “the protection of the patent laws and the coverageofthe antitrust laws are not separate issues.” (Studiengesellschaft, supra, 670 F.2d at p.1128.) The scopeofthe patent rule governs the analysis. D. The Court ofAppeal Correctly Applied the Scope of the Patent Rule To Affirm Summary Judgment Onthis appeal, application ofthe scope ofthe patentruleis straight- forwardbecauseplaintiffs concede the rule’s three essential elements: (1) Plaintiffs concede that the settlement was within the scope ofthe Cipro patent. (OB 36 (“That Respondents’ agreement was limited to the patent parameters says nothing about whetherthe patent actually supplied legitimate grounds for the monopoly.”]; OB 31 [“The Court ofAppeal [found] ...that the Cipro agreements’ terms... granted no exclusion other than what was already subsumedwithin its “exclusionary zone.’ This is not a virtue.”].) Even withoutthis concession,plaintiffs cannot dispute that Bayer’s patent was a compound patentthat by definition excludedall generic versionsofCipro forthe life of the patent. (Opn.4.) 30 (2) Plaintiffs concede that they make no claim for fraud on the PTO. (Opn. 43, fn.13 [Plaintiffs emphasize on appealthat they are notasserting a claim of fraud on the PTO.”]; OB 57, fn.30 [“Plaintiffs did not assert a fraud claim under Walker Process ....”].) It is noteworthy that the indirect purchaserplaintiffs in the MDLtried to provefraud andfailed. (Cipro-IT, supra, 544 F.3d at p.1341 [“[W]e agree[] that no fraud occurred.”].) (3) Plaintiffs concedethat they did not allege that Bayer’s patent suit against Barr wasobjectively baseless. (OB 59, fn.31 [acknowledging the absence ofany sham claim in the complaint, but asserting that“it is unreasonableto expect them to havepredicted the future.”].) Indeed, they did notallege patent invalidity or unenforceability atall. (2RA 235-282.) Theonly oneofthese concessions from whichplaintiffs try to shake free is the last one. Plaintiffs contend that, despite their pleadingfailure, they should have been allowed to argue on summaryjudgment that Bayer’s patent claim was objectively baseless due to inequitable conduct before the PTO. (OB 57-59 [discussing plaintiffs’ argumenton inequitable conduct].) As both lower courts held, however, California law precludes such gamesmanship when opposing summary judgment. (Opn. 40.) Onthis appeal, moreover,plaintiffs could notsatisfy the objectively baselesstest ifthey tried. Bayerassertedits patent in court and won on three separate occasions. Because“[a] winning lawsuitis by definition... not a sham,”(Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc. (1993) 508 U.S. 49, 60, fn.5), Bayer’s patent claim was not objectively baseless as a matter of law. (Opn. 41-42.) While these grounds 31 suffice to reject any claim that Bayer’s patent wasobjectively baseless, we show belowthat the claim would fail for several additional reasons. (Parts IV-V.) I. COURTS UNIFORMLY REJECT PER SE LIABILITY WHERE THE SETTLEMENTIS WITHIN THE SCOPE OF THE PATENT Plaintiffs seek to evade Bayer’s patent rights by ignoring them. Plaintiffs ask this Court to condemnthe Ciprosettlements as a perseillegal marketallocation. This is elementary error: If this case merely involved one firm making monthly payments to potential competitors in return for their exiting or refraining from entering the market, we would readily affirm the district court’s order. This is not such a case, however, becauseoneofthe parties owned a patent. (Valley Drug, supra, 344 F.3d at p.1304.) If one werefree to disregard the patent, virtually all patent licenses would be perse illegal. (XII Herbert Hovenkampetal. (2d ed. 1999) Antitrust Law 2040b,at 199 [“In the absence ofapatentlicense, these agreements wouldgenerally be classified as per se unlawful naked price fixing, or as per se unlawful naked horizontal market divisions.” (emphasis added)].) The patent makesall the difference. A. Plaintiffs Do Not Attempt To Satisfy this Court’s Requirementsfor Per Se Ilegality California law,like federal Sherman Actlaw,reserves per se treatment for “certain agreements or practices which becauseoftheir pernicious effect on competition and lack of any redeemingvirtue are conclusively presumed to be unreasonable and thereforeillegal.” (Marin County BoardofRealtors, Inc. v. Palsson (1976) 16 Cal.3d 920, 931 [quoting Sherman Act precedent].) “[I]t is only after considerable 32 experience with certain businessrelationshipsthat courts classify them as perse violations.” (Reynolds v. California Dental Service (1988) 200 Cal.App.3d 590, 597 [quotation omitted].) As shown in Part I.A, supra, California and federal courts have “considerable experience” with Hatch-Waxmansettlements, and not one has declared reverse payments to beillegal, muchless per se illegal. (E.g., Tamoxifen, supra, 466 F.3d at p.206; Valley Drug, supra, 344 F.3d at p.1309 [“To hold that an ostensibly reasonable settlement ofpatent litigation gives rise to per se antitrustliability if it involves any paymentby the patentee would obviously chill such settlements, thereby... decreasing the value ofpatent protection generally.”].) As shown in Part I.B, moreover, the Cardizem case on which plaintiffs rely did not adopta perse rule against settlement payments. Indeed, when the U.S. Solicitor General, the DOJ Antitrust Division, and the FTC explainedto the U.S. Supreme Court that Cardizem did “not deem illegal per se every settlement agreement that includes a reverse payment,” they also agreed that“[i]f construed in that manner, the court of appeals’ decision would be erroneous.” (Cardizem Br., supra, at p.12.) The current DOJ Antitrust Division agrees that “per se condemnation ofpatent settlements under the Sherman Acctis notjustified.” (Brief ofthe United States at 20, Cipro-IV, supra, 604 F.3d 98 (No. 05-2851).) Thus, the per se tule has been rejected not only by courts, but also by the same enforcement agencies and commentators on whomplaintiffs rely. (See Herbert Hovenkamp, Mark Janis, and Mark A. Lemley, Anticompetitive Settlement 33 ofIntellectual Property Disputes (2003) 87 Minn.L.Rev. 1719, 1725, 1749.) Theperserule is particularly inappropriate here, where the cumulative experience of Hatch-Waxmansettlements belies plaintiffs’ claim that they invariably cause consumer harm. On the contrary, in this case and Tamoxifen, generic entrants were excludedbythe patents themselves, which were validated multiple timesin subsequentlitigation. (Cipro-HI, supra, 363 F.Supp.2d at p.530, fn.14; Tamoxifen, supra, 466 F.3d at p.195.) But even in Cardizem, where the agreement was struck down for exceeding the scopeofthe patent, the FTC later foundthat the settlement had caused no delayed generic entry. (Jn re Hoechst Marion Roussel, Inc. (2001) 131 F.T.C. 925, 955 [“[I]t does not appear that there was any delay in the entry into the market ..., or that the conduct or agreementat issue delayed consumeraccess to a generic version ofCardizem CD.”].) In the settlementinvolving the branded-drug Hytrin, which also went beyond the scopeofthe patentbyrestricting non-infringing drugs, a jury subsequently found that the settlement caused nodelayin the availability of generic drugs. (Kaiser Foundation Health Plan, Inc. v. Abbott Laboratories, Inc. (9th Cir. 2009) 552 F.3d 1033, 1041 [jury verdict of $0 damages].) Finally, evenif a per se rule did apply, the logic ofthe scope ofthe patentrule still holds. The rule has its origins in cases decided well before 1911, whenthe U.S. Supreme Court first formulated the rule ofreason. (See Bement, supra, 186 U.S. at pp.88, 92 [noting in 1902 that the Sherman Act condemned“any restraint of commerce, whether reasonable ory 34 unreasonable”].) And this Court’s decision in Vulcan Powder was based on the (then) per se prohibition of former Section 1673 ofthe Civil Code. Yet, the Court went on to consider whether the agreements were nonetheless “confined”to the scope ofthe relevantpatents before striking them down. (96 Cal. at p.516.) Neither federal nor California courts have ever construedtherulesofantitrustliability, per se or otherwise, to limit the exercise oftraditional patentrights. B. Plaintiffs Cannot Articulate a Theory ofHarm to Lawful Competition Under the Rule of Reason Plaintiffs insist on a per se rule, which presumes competitive harm in every case, because they cannot demonstrate actual harm in this case. Despite attacking Hatch-Waxman settlements for over 12 years, the FTC and private plaintiffs have yetto articulate a credible theory ofharm to lawful competition under the rule of reason. The FTC hasrevisedits theories several times, but the courts remain unpersuaded. (See, e.g., Watson, supra, 2012 WL 1427789 at *13 [noting the inconsistency and “reject[ing] the FTC’s new approach”].) Like the courts below,the federal decisions have exposedthe flawsin plaintiffs’ arguments. First, plaintiffs ignore the incentives that Hatch-Waxman created. Underthe statute, an ANDAfilerinfringes simply byfilingits Paragraph IV certification. (35 U.S.C. §271(e)(2)(A).) The generic challenger, with no damages exposure from actualsales, thus “has relatively little to lose ... beyondlitigation costs,” while the innovator could “be stripped ofits patent monopoly.” (Tamoxifen, supra, 466 F.3d at pp.206-207.) Where the innovatorhas everything to lose, and the generic challenger has everything 35 to gain, consideration naturally flows from the innovatorto the challenger. (Ibid.; accord Asahi Glass, supra, 289 F.Supp.2d at p.994 [the generic challenger “would notsettle unless he had something to show for the settlement.”]; Cipro-I, supra, 261 F.Supp.2d at p.252 [“[S]o-called reverse payments are a natural by-product of the Hatch-Waxman process.”].) Second,plaintiffs cannot explain whythe antitrust analysis should change when the settlement’s consideration takes the form ofpayments. The presence ofpaymentsis not legally relevant becauseit is the “failure to produce the competing ... drug, rather than the payment of money,[that] is the exclusionary effect.” (Valley Drug, supra, 344 F.3d at p.1309.) No matter what the form of consideration, “if settlement negotiationsfell throughand the patentee wenton to win his suit, competition would be preventedto the same extent.” (Asahi Glass, supra, 289 F.Supp.2dat p.994.) Becauseall settlements are compromises that provide consideration to both sides, moreover, “any settlement agreement can be characterized as involving ‘compensation’to the [generic].” (Jbid.) Under Hatch-Waxman, therefore, “payments from the patent ownerto the infringer become explicit rather than implicit, but it does not change the underlying nature ofthe payments or make them moreanti-competitive.” (Kent S. Bernard & Willard K. Tom, Antitrust Treatment ofPharmaceutical Patent Settlements: The Needfor Context andFidelity to First Principles (2006) 15 Fed.Cir. B.J. 617, 621.) The courts have thus notedthatplaintiffs’ theory that consumersare always harmed by payments would apply equally to settlements with 36 licenses, “unlessthe license is royalty-free.” (Cipro-II, supra, 363 F.Supp.2d at p.533) As Judge Trager warned, however,“[t]o open royalty- bearing patentlicense agreementsto antitrust scrutiny simply because patents are often held invalid whentested in litigation would undermine the settled expectations of patentees andpotential infringers/licensees across countless industries.” (Jbid.)° Third, the courts also reject plaintiffs’ attempt to find legal significancein the size of the settlement payments. (Schering-Plough, supra, 402 F.3d at pp.1075-76 [“[T]he size ofthe payment, or the mere presence of a payment, should not dictate the availability of a settlement remedy.”}; Valley Drug, supra, 344 F.3d at p.1310 [The court “cannot confidently draw the conclusion, merely from the size ofthe payments,that there were no genuine disputes overthe validity ofthe patent.”].) Here, Bayer’s total payments ($398 million) represented a net present value of$280 million at the timeofthe settlement on a drug expected to generate over $4 billion in additional revenue. (See Cipro-II, supra, 363 F.Supp.2d at p.534, fn.16; 1AA 149.) In fact, Bayer’s payments constituted just over 6% of its revenue from Ciprotablet sales over the payment period. (See 1RA 39, §3.) The settlement thus made economic * Plaintiffs suggest that licenses are always more procompetitive than settlements,but thatis not true. A patent license may be wholly exclusive, allowing only oneseller charging the full monopoly price. (E.g., Studiengesellschaft, supra, 670 F.2d at p.1127; Brunswick Corp. v. Riegel Textile Corp. (7th Cir. 1984) 752 F.2d 261, 267 [“[T]here would not be more competition ifthe ‘competitors’ were constrained by the terms ofthe patent license to charge the monopolyprice.”].) 37 sense for Bayer evenifvictory wasvirtually certain. (Cipro-JI, supra, 363 F.Supp.2dat pp.540-541 [“The fact that Bayer paid what in absolute numbersis a handsomesum to Barr to settle its lawsuit does not necessarily reflect a lack of confidence in the 444 Patent, but rather the economic realities of what was at risk.”].) Fourth, the courts emphatically reject the idea that an antitrust court could determine,after the fact, whether the patent claim—even though not objectively baseless—was somehow too “weak”to permit settlement. (See Part I.B.) Although the FTC had once described such an exercise as legally inappropriate, it recently reversed course, asking the Eleventh Circuit to allow it—without success. (Watson, supra, 2012 WL 1427789 at *13 [“The FTC wasright then for the samereasonsit is wrong now.”].) Moreover, anypatent“strength” standard (OB 43-45) merely raises the question: howstrongis strong enoughto avoid antitrust liability? 70% chance of winning? 80%? 90%? And how can a layjury with no patent training determine those odds whentrained patent lawyers and judges cannot? (Valley Drug, supra, 344 F.3d at p.1308 [Patentlitigation is too complex and theresults too uncertain for parties to accurately forecast .».-”].) Moreover, “[t]he FTC’s retrospective predict-the-likely-outcome- that-never-came approach,” (Watson, supra, 2012 WL 1427789 at *13), removesall incentives for the partiesto settle in the first place, contrary to the public policy favoring settlements. (E.g., Flex-Foot, Inc. v. CRP, Inc. _(Fed.Cir. 2001) 238 F.3d 1362, 1370.) 38 Plaintiffs offer no answerto these objections. Instead, they would evade these issues by invokinga perse rule that every court rejects. This Court should reject it as well. C. This Court Should Reject Plaintiffs’ Request To Engage in Judicial Legislation Plaintiffs urge the Court to disregard settled law on grounds of “public policy.” Butplaintiffs invoke a strangely one-sided “policy’—one that assumes that consumersbenefit only when a patent holderlosesin court; one that assumesthat consumersalwaysprefer the short-term benefits of lower generic prices to the long-term benefits of newly discovered,life-saving drugs like Cipro. Plaintiffs fail to recognize that the exercise ofthe patentee’s right to exclude “serves a very positive function in our system of competition,i.e., the encouragement of investment based risk.” (Loctite Corp. v. Ultraseal Ltd. (Fed.Cir. 1985) 781 F.3d 861, 876 [quotation omitted].) In any event, plaintiffs support their policy arguments with unpersuasiveassertions based not on the record, but on public pronouncementsbyinterested third parties. For example,plaintiffs’ assertion that settlements cost consumers “billions” are based on a recent FTC “Study” whosetitle reflects its bias. (Federal Trade Commission (2010) Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions: An FTCStaffStudy.) Commentators have shown thatthe study is flawed andits central conclusion on consumer benefits “is not reliable.” (E.g., Bret Dickey etal. (2010) 4 Preliminary Economic Analysis ofthe Budgetary Effects ofProposedRestrictions on ‘Reverse Payment’ Settlements 2, available at 39 http://newsroom.law360.com/articlefiles/186893-Analysis.pdf.) And even the flawed study concedes that the consumerlossit claims could fall by over 82% if someofits (undisclosed) “assumptions,” were “varied.” (FTC Staff Study,at p.10.) Plaintiffs also claim that “three-quartersoflitigated pharmaceutical patents are struck down.” (OB 27.) This is simply wrong. In fact, thefirst studyplaintiffs cite is the American Intellectual Property Law Association Quarterly Journal, which foundthat three-quartersoflitigated pharmaceuticalpatents are held to be valid. (9AA 2077.) The FTC study that plaintiffs cite (6AA 1177) foundthat a generic prevailed in a final decision in twenty-two cases involving the first ANDA filer (29% ofthe sample). (Federal Trade Commission (2002) Generic DrugEntry Prior to Patent Expiration: An FTC Study 14-16.) Toarrive at the figure of 73%, the FTC ignoredall settled cases, and counted repeated winsfor the patent holder—such as Bayer’s three Cipro victories—onlyonce. (Id. at 1-2.) In the end,plaintiffs base their policy arguments on extra-judicial materials irrelevant to the legal issues presented here. For years, the FTC has supportedlegislation to ban reverse-paymentsettlements. Bills to that effect remain pending before Congress. (See, e.g., H.R. 3995, 112th Cong. (2012); S.27, 112th Cong.(2011).) Whatevertheir merit, plaintiffs’ policy arguments should be addressed toa legislature, not to this Court. 40 I. FEDERAL PATENT LAW WOULD PREEMPT ANY CALIFORNIA RULE THAT SETTLEMENTS WITHIN THE SCOPE OF THE PATENT VIOLATE THE CARTWRIGHT ACT Departing from the scope of the patent rule would do more than change California law. Such a ruling would interfere with one ofthe fundamentalattributes of the federal patentright, and thus be preempted by the Supremacy Clause of the U.S. Constitution. A. Plaintiffs Misunderstand the Doctrine of Substantive Preemption Plaintiffs argue that the Court ofAppeal foundtheir claimsto be substantively preempted. (OB 49.) Thatis not so. It is true that defendants raised and preserved their substantive preemption argument below. But because both courts correctly interpreted the Cartwright Act, neither had to resolve the substantive preemption issue that would havearisen if the court had departed from the scopeofthe patentrule. Onthe other hand, both courts did address the issue ofJurisdictional preemption in respondingto plaintiffs’ summaryjudgmentargumentthat Bayer’s patentsuit against Barr was objectively baseless due to inequitable conduct before the PTO. Both courts recognized that such a claim would arise under patent law and would haveto be dismissed for lack of subject- matter jurisdiction. (Opn. 44; L1AA 2270.) It is clear that the Court ofAppeal discussed only jurisdictional preemption: [W]e conclude that plaintiffs’ sham-litigation claim is preempted by federal patent law. “The district courts [ofthe United States] shall haveoriginal jurisdiction of anycivil action arising under any Act of Congressrelating to patents .” (28 U.S.C. § 1338(a).) 41 (Opn. 42-43; see Opn. 44 [[W]hetheralleged inequitable conduct in the procurementofa patent constitutes unfair competition is within the exclusive jurisdiction of the Federal Circuit Court of Appeals.”].) Nowhere in the opinion did the Court of Appeal analyze substantive preemption; nowhere did it address whether California law would conflict with federal patent law. Plaintiffs now takethe position that “[t]here is no such thing as ‘jurisdictional preemption.’” (Reply on Petition for Review 13, fn.12.) But plaintiffs are confused about California nomenclature: “Preemption cases maybedividedinto two types:substantive or jurisdictional.” (Screen Extras Guild, Inc. v. Superior Court (1990) 51 Cal.3d 1017, 1022 (Screen Extras).) In In re Jose C., this Court warned that “whether Congress has preemptedstate courtjurisdiction is not to be confused with whetherit has preempted [substantive] state /egislative action.” (In re Jose C. (2009) 45 Cal.4th 534, 546; id. at p.538.) Underthe heading “Substantive Preemption,” Jn re Jose also explained that there are four types: “express, conflict, obstacle, and field preemption.” (45 Cal.4th at pp.549-550.) Obstacle preemption occurs whenstate law conflicts with the “full purposes and objectives of Congress.” (Jbid. [quotation omitted].) The Court hasalso noted that “[w]e and the United States Supreme Court have often ... group[ed] conflict preemption and obstacle preemption togetherin a single category.” (Viva! Internat. Voicefor Animals v. Adidas Promotional Retail Operations, Inc. (2007) 41 Cal.4th 929, 933, fn.3 (Vival).) 42 Plaintiffs argue incorrectly that Viva! requires a presumption against preemptionin all cases. On the contrary, the Court stated that, when a case juxtaposesan areaoftraditional state regulation (there, wildlife management) with an area of special federal concern (there, foreign affairs), “no particular presumption applies.” (Vival, supra, 41 Cal.4th at p.937.) So, here,the state’s interest in regulating competitionis set against the uniquely federal interest in patentrights. In this case, as in any question of substantive preemption,“congressionalintentis the ultimate touchstone.” (Ibid. [quotation omitted].) If this Court rejects the extreme reading ofthe Cartwright Actthat plaintiffs advocate, and adheres to the scope ofthe patentrule, then it need notreach the question of substantive preemption. If, however, the Court were to hold that California law may imposeliability upon defendants for a settlement within the scope of the patent, then substantive preemption would becomecentralto this appeal. B. State Law May Not Addor Detract from the Fundamental Rights of Patent Holders This Court recognizesthat “[s]tate law is unquestionably preempted wherea valid act of Congressfairly interpretedis in actual conflict with the law ofthe State.” (Screen Extras, supra, 51 Cal.3d at p.1023 [quotation omitted].) Such conflict may exist even where compliance with both laws is possible, but the state law obstructs the federal purpose. (Jbid. [state wrongful discharge claim preempted by federal labor law]; accord Olszewski v. Scripps Health (2003) 30 Cal.4th 798[state statute allowing providerliens preempted by federal Medicaid regulations]; Grimesv. 43 Hoschler (1974) 12 Cal.3d 305 [law governingstate contractors preempted by federal bankruptcy law].) . Theseprinciples apply to the federal interest in patentrights. (Bonito Boats, Inc. v. Thunder Craft Boats, Inc. (1989) 489 U.S. 141, 152 [“[S]tate regulation of intellectual property must yield to the extentthatit clashes with the balance struck by Congressin our patent laws.”]; Sears, supra, 376 U.S. at p.231 [“[A State] cannot, under some other law, such as that forbidding unfair competition, give protection of a kind that clashes with the objectives of the federal patent laws.”].) The state may enact neutral regulations regarding safety, taxes, and other police powers,butit may not “alter and substantially reduce the established scope of the patent monopoly.” (Westinghouse, supra, 648 F.2d at p.648.) Accordingly, “[i]f a plaintiff basesits tort action on conductthatis protected or governedbyfederal patent law,” the state law remedy “must be preempted for conflict with federal patent law.” (Hunter Douglas, Inc. v. Harmonic Design, Inc. (Fed.Cir. 1998) 153 F.3d 1318, 1335 [emphasis added] (Hunter Douglas).) As shown in Part I.C.2, supra, the right of a patentee to enter agreements within the scopeofthepatentis fully protected by patent law. Whenwithin the patent’s scope,“any conditions [of a contract] which are notin their very nature illegal ... imposed by the patentee and agreedto by the licensee ... will be upheld by the courts.” (Bement, supra, 186 U.S.at p.91.) The Federal Circuit’s decisions in Biotechnology Industry Organization are instructive. There, the Federal Circuit found preempted a 44 District of Columbia ordinance prohibiting the sale ofpatented drugsat “an excessive price.” (Biotechnology-I, supra, 496 F.3d at p.1365.) The court acknowledged that“[t]here is no express provision in the patentstatute that prohibits states from regulating the price of patented goods.” (Id. at p.1372.) Nonetheless, the statute interfered with “Congress’s intention to provide ... pharmaceutical patent holders with the pecuniary reward that followsfrom the right to exclude.” (Jbid.) The District was, therefore, foreclosed from “diminishing the rewardto patentees in order to provide greater benefit to District drug consumers.” (Jd. at p.1374.) Congress’ clear purpose to spur innovation by providing a right to exclude can,thus, be obstructed not only by directly preventing an inventor from excludingothers, but also by systematically preventing a patentee from reaping the increased profits that would otherwise comefrom its exclusionary rights. (Biotechnology-II, supra, 505 F.3d at p.1346 [Gajarsa, J., concurring on rehearing denial].) Just as Congress did notintend for state juries to determine whena price charged for a patented productis “excessive,” it did not intend forjuries to decide when a patent claim broughtin good faith is nonetheless too “weak” to permit a settlement within the patent’s scope. Cc. Patent Law Preempts Liability Here Without Proofthat the Patent Suit Was Objectively Baseless As shown in Part I.C, supra, patent law protects the patentee’s exercise ofits bundleofpatent rights as long as its conduct does not go beyondthe scopeofthe patent. The law, however, requiresthat the patentee exercise thoserights in “goodfaith,” by not asserting a patent claim that is objectively baseless. (E.g., Duplan, supra, 540 F.2d at p.1220 45 [“It is only when settlement agreements are entered into in bad faith ... that antitrust violations may occur.”].) Thus, courts have repeatedly found California state claims preempted whenplaintiffs soughtto restrict the good faith exercise ofpatent rights. (Globetrotter, supra, 362 F.3d at p.1375 [California claims preempted unless suit was “objectively baseless.”); Golan v. Pingel Enterprise, Inc. (Fed.Cir. 2002) 310 F.3d 1360, 1363 [same; §17200 claims preempted]; Zenith Electronics Corp. v. Exzec, Inc. (Fed.Cir. 1999) 182 F.3d 1340, 1353 [*[B]adfaith is a prerequisite ...; withoutit, the claim is preempted....”].) Amongthe most fundamentalofpatentrights is the right to enter agreementsthat do not extend the patent’s scope. From the time ofBement (1902), good faith patent agreements have been shielded from antitrust liability. Like the agreements in Bement, the Cipro agreements here involved both a settlementanda license. Tobring a state claim attacking a Hatch-Waxmansettlement, therefore, courts are explicit that “bad faith mustbe alleged and ultimately proven.” (Jn re Tamoxifen Citrate Antitrust Lit. (E.D.N.Y. 2003) 277 F.Supp.2d 121, 139 [California unfair competition claims preempted where “the Complaintfails to allege... that [the defendants] acted in bad faith in settling their patentlitigation”].) If this Court allowed a lesser standard, it would be restricting one ofthe “fundamentalattributes” of the federal patent right. (See AT&TMobility LLC v. Concepcion (2011) 131 S.Ct. 1740, 1748 [preempting California rule mandatingclass arbitration becauseit “interferes with the fundamental attributes of arbitration”].) 46 Asplaintiffs concede, they made no allegation that Bayer’s patent suit was objectively baseless. Patent law thus prohibits California from imposingliability on this settlement, which was within the scope ofthe Cipro patent. IV. ANY CALIFORNIA RULE OF LIABILITY BASED UPON ASSESSING THE “STRENGTH” OF THE PATENT WOULD BE SUBJECT TO EXCLUSIVE FEDERAL JURISDICTION The issue of exclusive federal jurisdiction arose below because plaintiffs contendedforthe first time in opposing summary judgmentthat Bayer’s infringementsuit against Barr was objectively baseless. The Court of Appeal correctly concluded thatplaintiffs’ new contention would be subject to exclusive federal jurisdiction. (Opn. 38-43.) So, here,if this Court were to construeplaintiffs’ complaintas allowing proofthat the Bayer-Barr litigation was objectively baseless, or otherwise too weak to permitsettlement, the Court would have to dismiss it for lack of jurisdiction. A. A State Law CauseofAction with an Embedded Federal Patent Issue MayStill Arise Under Patent Law Federal courts have exclusive jurisdiction under 28 U.S.C. §1338in twocircumstances: (1) when “patentlaw creates the cause of action,” or (2) when“plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law.” (Christiansonv. Colt Industries Operating Corp. (1988) 486 U.S. 800, 809.) Under the secondstep ofthe Christiansontest, patent law questions may be “embedded”in claims created by state statutory or common law. (See Holiday Matinee, Inc.v. Rambus, Inc. (2004) 118 Cal.App.4th 1413, 1424-1425 [citing Additive 47 Controls & Measurement Systems, Inc. v. Flowdata, Inc. (Fed.Cir. 1993) 986 F.2d 476, 479] (Holiday Matinee).) Plaintiffs ignore this controlling standard and argue that exclusive jurisdiction turns on which sovereign created the causeofaction. (OB 56.) Plaintiffs rely on Mattel, Inc. v. Luce, Forward, Hamilton & Scripps (2002) 99 Cal.App.4th 1179 (Mattel), which held that federal jurisdiction did not lie solely because the causeof action was“a tort claim ‘arising under’ the commonlaw ofCalifornia.” (Jd. at p.1185.) Plaintiffs include (OB 56) a lengthy quotation from Justice Holmes in American Well Works Co.v. Layne & Bowler Co. (1916) 241 U.S. 257, 260 (American Well Works), a case in which he famouslyassertedthat “[a] suit arises under the law that creates the cause ofaction.” Plaintiffs’ argument is wrong becauseit reads the second step ofthe Christiansontest out ofthe law. Courts ultimately rejected Justice Holmes’s statement in American Well Works as incorrect. “The path- breaking opinionto this effect was Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921), pointedly rendered over a dissent by Mr. Justice Holmes, 255 U.S. at 213-215.” (.B. Harms Co.v. Eliscu (2d Cir. 1964) 339 F.2d 823, 827 [Friendly, J.]; accord Franchise Tax BoardofCal. v. Construction Laborers Vacation Trust (1983) 463 U.S. 1, 8-9 (“[E]ven the most ardent proponentofthe Holmestest has admitted that it has been rejected ....”].) The Mattel decision upon whichplaintiffs rely cites only pre- Christianson caselaw. Post-Christianson caseslike Holiday Matinee and 48 Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP (2010) 183 Cal.App.4th 238, 244 (Landmark Screens), refute Mattel’s analysis. After Christianson, a claim created by state law mayalso arise under patent law if its success depends on evaluating the scope andstrength of patent rights. (Landmark Screens, 183 Cal.App.4th at p.248 [evaluating “[t]he nature and extent ofthose patent rights present[s] a substantial issue of federal patent law.”].) B. A California Claim that Dependsfor Its Success on Evaluating Patent Strength Arises Under Patent Law Questionsofvalidity, enforceability, and infringementare “substantial” questions ofpatent law under §1338. (Hunter Douglas, supra, 153 F.3d at p.1330.) Here, the successofplaintiffs’ “objectively baseless” claim tumsonthe patent’s enforceability, and thus “depend[s] upontheresolution of a substantial question ofpatent law.” (Holiday Matinee, supra, 118 Cal.App.4th at p.1422.) In this case, moreover, where the settlement is concededly within scope ofthe patent, the enforceability of the patent would supply the only disputed issue of liability, and hence satisfy the requirement of Grable & Sons Metal Products, Inc. v. Darue Engineering & Mfg. (2005) 545 U.S.308, 314,that the patent issue be “actually disputed and substantial.” In this case, moreover,the jurisdictional questionis easily resolved becauseplaintiffs’ supposed state law claim turns on whetherthe patentee committed inequitable conduct. (Lockwoodv. Sheppard, Mullin, Richter & Hampton (2009) 173 Cal.App.4th 675, 686 [“[W]hetheralleged inequitable conductin prosecution ofa patent application constitutes unfair 49 competition is within exclusive jurisdiction of the Federal Circuit.” (citation omitted)] (Lockwood).) In Lockwood,plaintiff sued for malicious prosecution and otherstate law torts based on defendant’s inequitable conductduring a patent reexamination. (Jd. at p.687.) The court explained whyit lacked jurisdiction: Obviously, therefore, the court would be presented with substantial questions ofpatent law, effectively having to put itself in the position of a ‘reasonable’ patent examiner and determine whetherthe prior art would be considered importantin deciding the patentability ofLockwood’s patent claims. (Jbid.) Both courts below relied expressly on Lockwood. (Opn. 44; 11AA 2670.) Plaintiffs fail to cite it. In sum,plaintiffs cannot omit an attack on Bayer’s patent from the complaintto preserve state jurisdiction, but now requesta trial to show “the objective baselessness of Bayer’s suit,” i.e., “[w]hether Bayer purposefully mislead the PTO[.]” (OB 62.) The Court ofAppealcorrectly held that plaintiffs cannot have it both ways. (Opn. 43-45.) Vv. ANY PUTATIVE CLAIM THAT BAYER’S PATENT SUIT WAS OBJECTIVELY BASELESS FAILS FOR MULTIPLE OTHER REASONS Forseveral reasons beyondjurisdiction, the courts below rejected plaintiffs’ request to show that Bayer’s patent suit was objectively baseless duetoinequitable conductbefore the PTO. First, on a motion for summary judgment, “the opposing papers may notcreate issues outside of the pleadings.” (Mars v. Wedbush Morgan Securities, Inc. (1991) 231 Cal.App.3d 1608, 1613-14 [citation omitted].) In their petition for review,plaintiffs did not challenge the Court of 50 Appeal’s conclusion onthis issue, but now claim in a footnote that it was “error.” (OB 59, fn.31.) But the court was correct. Plaintiffs neither pleaded that the patent was infirm, nor sought leave to do so. (Oakland Raiders v. National Football League (2005) 131 Cal.App.4th 621, 648 [“A plaintiff wishing to rely upon unpleadedtheories to defeat summary judgment must moveto amend the complaint before the hearing.” (quotation omitted)].) Second, a claim based on inequitable conduct would also be substantively preempted. In the MDL proceedings, both Judge Trager and the Federal Circuit held that a Cartwright Act claim based on inequitable conduct was preempted. (Cipro-II, supra, 363 F.Supp.2d at pp.542-545, affd. Cipro-II, supra, 544 F.3d at pp.1340-1341 {citing, interalia, Semiconductor Energy Laboratory Co. v. Samsung Electronics Co. (Fed.Cir. 2000) 204 F.3d 1368, 1382 (A “state cause of action predicated so squarely on the acts of inequitable conduct would be contrary to Congress’ preemptive regulation in the area ofpatent law.” [quotation omitted])]; see also In re Netflix Antitrust Lit. (N.D.Cal. 2007) 506 F.Supp.2d 308, 319- 320 [“At most,[plaintiffs assert] ... a claim for inequitable conduct. Such claims are preemptedby federal patent law.”].)° * This is a form ofobstacle preemption that differs from that discussedin Part III, supra. The “obstacle” in Part III occurs whenever a state penalizes the exercise of fundamental patentrights within the patent’s scope. This preemption, however, is based on the need for uniformity in . federal standards governing PTO behavior. (See, e.g., Buckman Co.v. Plaintiffs’ Legal Committee (2001) 531 U.S. 341, 350 [claim alleging fraud on the FDA preempted because “complying with the FDA’s detailed 51 Third, none of the evidenceplaintiffs cite is sufficient to prove inequitable conduct. The Federal Circuit recently clarified that the standard for inequitable conduct now requires that the plaintiff show “butfor” materiality, i.e., that no valid patent would have issued butfor the misrepresentations. (Therasense, Inc. v. Becton, Dickinson & Co. (Fed.Cir. 2011) 649 F.3d 1279, 1291 [en banc].) Plaintiffs’ evidence made no attempt to meetthat standard here. Since the PTO affirmedthe patent’s Cipro claimsnot once but twice, and Bayer defeated three validity challenges in court, plaintiffs’ failure is not surprising.’ VI. PLAINTIFFS HAVE WAIVED ANY ARGUMENT BASED UPON THE UCL OR EVIDENTIARY RULINGS Plaintiffs’ opening briefpresents no substantive argument concerning the UCLorthe Superior Court’s evidentiary rulings. Indeed, plaintiffs made the conscious choice, despite Rule 8.520(b)(2)(B), to omit both topics from the brief’s statementof issues presented. (OB 1.) Where “{n]o substantial argument is advancedin support of[a] contention,” the regulatory regimein the shadow of50 States’ tort regimes” would impose “burdens not contemplated by Congress”].) ” Althoughlegally irrelevant, plaintiffs’ assertion that Bayer’s responseto the inequitable conduct claim was a so-called “insanity defense”is groundless. Plaintiffs’ inequitable conduct contentionis that Bayer withheld twoprior art German patent applications. (OB 9.) But the firstpage ofthe ‘444 patent confirmsthat the original PTO examiner reviewedthe U.S. counterparts to those applications. (10AA 2340.) These facts explain why the Federal Circuit found no fraud, (see Cipro-JII, supra, 544 F.3d at p.1337), and whyfourlater generic challengers—who remained free after the reexaminationto raise the same inequitable conductdefense, (Opn. 11)—considered the defense too weak to pursue. (Cipro-II, supra, 363 F.Supp.2d at p.530.) 52 “contention has been abandoned.” (Jersey MaidMilk Products Co.v. Brock (1939) 13 Cal.2d 620, 641.) The Rules now codify this principle, requiring a briefto “[s]tate each point under a separate headingor subheading summarizing the point, and support each point by argument and,ifpossible, by citation of authority.” (Cal. Rules of Court, Rule 8.204(a)(1)(B).) Plaintiffs have thus waived any argumentthat their UCL claim does notfall with the Cartwright Act claim. The sole overt reference to the UCL in the openingbriefoccurs in a footnote, with no argument, in a section entitled “The Cartwright Act Prohibits Payments Not to Compete, Like Those at Issue Here.” (OB 18 [emphasis added], 23 fn.12.) Plaintiffs also did notpresent argument concerning the UCLin their openingbriefto the Court of Appeal, nor any substantive argumentin their Petition. Anyindependenttheory ofliability under the UCL would fail for multiple reasons. First, federal patent law would preempt liability under the UCLforthe reasons explained in Part III concerning substantive preemption. Second,plaintiffs have not identified any conduct under the -UCL’s “unfairness” prong that would be distinct from the alleged “unlawfulness”ofthe Cartwright Act violation. (See Chavez v. Whirlpool Corp. (2001) 93 Cal.App.4th 363, 375.) Third, the UCL claim is also moot becausethe plaintiff class did not buy Cipro directly from Bayer, rendering restitutionary damages unavailable. (See Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1144.) Fourth, this Court should abstain from fashioning an ad hoc equitable remedy in an area of highly- 53 regulated economicpolicy determinations made by Congress and the FDA. (Harris v. Capital Growth Investors XIV (1991) 52 Cal.3d 1142, 1168, fn.15.) Finally, the ‘parallel’ Federal Trade Commission Act jurisprudence that this Court found persuasive under the UCL in Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 185, holds defendants’ conductto be lawful. (Watson, supra, 2012 WL 1427789 at *10-13,; Schering-Plough, supra, 402 F.3d 1056.) Dueto plaintiffs’ waiver, the UCL issues remain unaddressed bythebriefs and unanalyzed by the Court of Appeal. Asto the evidentiary rulings, plaintiffs made no showinghere or below “that the admission of any specific evidence constituted prejudicial error.” (Opn. 52; see Reid v. Google (2010) 50 Cal.4th 512, 534-535 [no reversible error, absent prejudice].) In addition, the evidence of Bayer’s subsequentvictories against three generic challengers was admissible to show that Bayer’s patent wasvalid at the time of the Bayer-Barr settlement. (Blank v. Coffin (1942) 20 Cal.2d 457, 463.) CONCLUSION For the reasonsstated above andin the brief of Bayer’s co- respondents (Cal. Rules of Court, Rule 8.504(e)(3)), the decision ofthe Court of Appeal shouldbeaffirmed. Mit Mil Mil Mil 54 Dated: May 29, 2012 Respectfully submitted, MCKENNALONG& ALDRIDGE LLP By: . Charles A. Bird Charles A. Bird, SBN: 056566 ChristopherJ. Healey, SBN: 105798 Todd R. Kinnear, SBN: 208831 MCKENNA LONG & ALDRIGE LLP 600 West Broadway, Suite 2600 San Diego, CA 92101-3391 Telephone: (619) 236-1414 Facsimile: (619) 645-5321 Peter B. Bensinger, Jr* BARTLIT BECK HERMAN PALENCHAR & Scott LLP 34 West HubbardStreet, Suite 300 Chicago,IL 60654 Telephone: 3193 494-4400 Facsimile: (312) 494-4440 Kevin D. McDonald* JONES DAY 51 Louisiana Avenue, N.W. Washington, D.C. 20001 Telephone: (202) 879-3939 Facsimile: (202) 626-1700 *AdmittedPro Hac Vice Attorneysfor Defendant-Respondent Bayer Corporation. 55 CERTIFICATE OF WORD COUNT I, Charles A. Bird, counselfor respondent Bayer Corporation,certify that the foregoingbrief is prepared in proportionally spaced Times New Roman 13 point type and, based on the word countofthe word processing system usedto preparethis brief, the brief is 13,997 words long. L072 Charles A. Bird 56 PROOFOF SERVICE In re Cipro Cases I & II, Case No. S198616 Atthe time ofservice, I was over 18 years of age and not a party to this action. I am employed in the County of San Diego, State of California. My business address is 600 West Broadway, Suite 2600, San Diego, California 92101-3372. On May 29, 2012, I served true copiesof the following document(s) described as: RESPONDENT BAYER CORPORATION’S ANSWER on theinterested parties in this action as follows: SEE ATTACHEDSERVICE LIST X_ BY MAIL: I enclosed the document(s) in a sealed envelope or package addressed to the persons at the addresses listed in the Service List and placed the envelope for collection and mailing, followingour ordinary business practices. I am readily familiar with McKenna, Long & Aldridge LLP's practice for collecting and processing correspondence for mailing. On the same day that the correspondenceis placed for collection and mailing,it is deposited in the ordinary course of business with the United States Postal Service, in a sealed envelope with postage fully prepaid. BY FAX TRANSMISSION:I faxed a copy ofthe document(s) to the personsat the fax numberslisted in the Service List. No error was reported by the fax machinethatI used. BY FEDEX: 1 enclosed said document(s) in an envelope or package provided by FedEx and addressed to the persons at the addresseslisted in the Service List. I placed the envelope or package for collection and overnight delivery at an office or a regularly utilized drop box of FedEx or delivered such document(s) to a courier or driver authorized by FedEx to receive documents. BY HAND DELIVERY:I caused such envelope(s) to be delivered by handto the office of the addressee(s). I declare under penalty ofperjury underthe laws ofthe United States of America that the foregoingis true and correct and that I am employed in the office of a member of the bar of this Court at whose direction the service was made. Executed on May 29, 2012, at San Diego, California. Lessa Bitting SERVICE LIST Party octet ee , Attorney Dan Drachler Plaintiff and Appellant: ZWERLING, SCHACTER & ZWERLING Kayrn McGaughey, Barbara 1904 Third Avenue, Suite 1030 Seattle, WA 98101 Ralph Botros Kalfayan KRAUSE, KALFAYAN, BENINK & SLAVENS, LLP 550 West C Street, Suite 530 San Diego, CA 92101 Joseph Richard Saveri Dean Michael Harvey ‘Eric BarmonFastiff Brendan Patrick Glackin Jordan S. Elias LIEFF CABRASER HEIMANN & BERNSTEIN LLP 275 Battery Street, 29" Floor ‘San Francisco, CA 94111 David E. Everson Heather S. Woodson Victoria L. Smith STINSON MORRISON HECKER LLP 1201 Walnut, Suite 2900 Kansas City, MO 64106 Kathryn E. Karcher 401 B Street, Suite 2450 San Diego, CA 92101 Joann F, Rezzo EDELSON & REZZO 402 West Broadway, Suite 2700 San Diego, CA 92101 HymesCohen, Deborah Patane, Donna Moore, IUOEStationary Engineers Local 39 Health & Welfare Plan, Sheet Metal Workers Health Plan of Southern California By U.S. Mail (1 copy of brief to each) ‘Defendant and Respondent: Hoechst Marion Roussel, Inc., The Rugby Group,Inc., Watson Pharmaceuticals,Inc. By U.S. Mail (1 copy of brief to each) Edwin John U Gregory Skidmore Karen N. Walker ‘KIRKLAND & ELLIS LLP 655 15th Street NW Washington, DC 20005 Defendant and Respondent:Barr Laboratories, Inc.By U.S. Mail(1 copy of brief to each) Jay P. Lefkowitz KIRKLAND & ELLIS LLP 601 Lexington Avenue New York, NY 10022 Kathryn E. Karcher 401 B Street, Suite 2450 ‘San Diego, CA 92101 Joann F. Rezzo EDELSON & REZZO 402 West Broadway, Suite 2700 San Diego, CA 92101 SERVICELIsT Judicial Council of California 455 Golden Gate Avenue, 6th Floor San Francisco, CA 94102 ‘Judicial Council: Office of the Attorney General San Diego Office 110 West “A”Street, Suite 1100 San Diego, CA 92101 By U.S. Mail Attn: Carlotta Tillman (1 copy ofbrief) Office of The District Attorney The People: San Diego County . 330 W. Broadway San Diego, CA 92101 By U.S. Mail (1 copy of brief to each) Superior Court of California Clerk of the San Diego Superior Court 330 W. Broadwa San Diego, CA 92101 By U.S. Mail(1 copy ofbrief)