Reverse Settlement Payments in Patent Disputes Come Under Scrutiny Under Both Federal Law and State Antitrust Law

On May 7, 2015, the California Supreme Court revived a class-action lawsuit against pharmaceutical giant, Bayer AG, in which it was accused of violating the state’s antitrust law.¹ A settlement agreement between Bayer and generic pharmaceutical, Barr Laboratories, is central to the dispute. In a 1997 agreement, Bayer paid Barr almost $400 million in cash, and Barr in turn withdrew its challenge on the validity of Bayer’s ciprofloxacin patent (i.e., U.S. Patent No. 4,670,444) and agreed to postpone marketing a generic version of Cipro until the patent expired. Ciprofloxacin was Bayer’s bestselling antibiotic, generating $6 billion in gross sales between 1997 and 2003. The 1997 settlement between Bayer and Barr produced a wave of state and federal antitrust suits. This appeal arose from nine such coordinated class action suits brought by indirect purchasers of Cipro in California against Bayer and Barr.²

The operative complaint in these coordinated proceedings brought by California consumers and insurance groups alleged that the Bayer-Barr reverse payment settlement violated California’s primary state antitrust law, the Cartwright Act, unfair competition law, and common law prohibition against monopolies.³ The gravamen of the complaint is that the 1997 agreement preserved Bayer’s monopoly and ability to charge supracompetitive prices at the expense of consumers, and Bayer in turn split these monopoly profits with Barr. Class certification was granted and upheld on appeal.⁴ Thereafter, the parties stayed this action pending resolution of consolidated federal challenges to the Bayer-Barr settlement.

The dispute involves the interplay between patent law and antitrust law. The lower courts in the case employed a “scope of the patent” test that presumes the patents’ validity in most cases. The California Supreme Court, however, rejected the “scope of the patent” test for giving “insufficient consideration to the concerns animating antitrust law” in its unanimous opinion. The Court instead structured a four-factor test for evaluating reverse-payment settlements under California’s antitrust law. A prima facie case of antitrust violation occurs when “(1) the settlement includes a limit on the settling generic challenger’s entry into the market; (2) the settlement includes cash or equivalent financial consideration flowing from the brand to the generic challenger; and the consideration exceeds (3) the value of goods and services other than any delay in market entry provided by the generic challenger to the brand, as well as (4) the brand’s expected remaining litigation costs absent settlement.”⁵

The Court applied the new test and found that settlement agreement violated state antitrust law, because it was essentially “purchasing freedom from the possibility of competition.”