Opinion ID: 2799318
Heading Depth: 3
Heading Rank: 1

Heading: Plaintiff‘s Prima Facie Case

Text: We conclude a third-party plaintiff challenging a reverse payment patent settlement must show four elements: (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. We explain these elements in turn. That a plaintiff challenging a reverse payment settlement must establish the settlement limits the challenging generic‘s entry is self-evident. If the settlement contains no component of delay and permits the generic to enter the market and compete fully and immediately, there is no restraint of trade and no potential for antitrust concern. As well, a plaintiff must establish a reverse payment—financial consideration flowing from the brand to the generic challenger.11 In the absence 11 To some extent, the settlement agreement challenged here is a relic. Cash reverse payments were not uncommon in the 1990s, but shortly thereafter brands and generics began using a wide range of other forms of consideration to accomplish reverse payment. (See Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra, (footnote continued on next page) 32 of payment, one would expect rational parties that settle to select a market entry point roughly corresponding to their joint expectation as to when entry would have occurred, on average, if the patent‘s validity and infringement had been fully litigated. (Hovenkamp et al., Anticompetitive Settlement of Intellectual Property Disputes (2003) 87 Minn. L.Rev. 1719, 1762.) If market entry were substantially later than the generic thought it could obtain through litigation, the generic would be unwilling to settle and forgo the additional profits it thought it could earn from an earlier entry; conversely, if the entry were substantially earlier than the brand thought it could obtain through litigation, the brand would not settle and forgo an additional period of monopoly. Absent payment, one can accept an agreement to postpone market entry as a fair approximation of the expected level of competition that would have obtained had the parties litigated; absent payment, any delay in entry may be attributed to the effective strength of the challenged patent, rather than the settlement agreement. (See ibid.; Carrier, Payment After Actavis (2014) 100 Iowa L.Rev. 7, 17.) Third, a plaintiff must establish the consideration to the generic challenger exceeds the value of any other collateral products or services provided by the generic to the brand. As the Supreme Court noted, the concern that a reverse payment raises will depend in part on ―its independence from other services for which it might represent payment.‖ (Actavis, supra, 570 U.S. at p. ___ [186 (footnote continued from previous page) 109 Colum. L.Rev. at pp. 647–658.) Because the Cipro settlement involved cash, we need not define precisely what noncash forms of consideration will qualify, but courts considering Cartwright Act claims should not let creative variations in the form of consideration result in the purchase of freedom from competition escaping detection. 33 L.Ed.2d at p. 364, 133 S.Ct. at p. 2237].) A ―payment may reflect compensation for other services that the generic has promised to perform—such as distributing the patented item or helping to develop a market for that item.‖ (Id. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236.) If payment is no more than would be expected as compensation for additional products or services, then the agreement includes no additional consideration for delay and we can trust that any limit on competition is a legitimate consequence of the patent‘s strength and the contracting parties‘ expectations concerning its exclusionary power. Considerable caution is in order in evaluating settlements that include side agreements for generic products or services. Historically, it appears brands and generics have engaged in business dealings outside the settlement context far less often than in it. (Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra, 109 Colum. L.Rev. at pp. 663–668.) A side agreement involving difficult-to-value assets might conceivably be added to a patent settlement to provide cover for the purchase of additional freedom from competition. (Id. at pp. 632–633, 669; Bulow, The Gaming of Pharmaceutical Patents in 4 Innovation Policy and the Economy, supra, at pp. 169–171; Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, supra, 108 Mich. L.Rev. at p. 79.) This court long ago established that side deals should not be permitted to serve as fig leaves for agreements to eliminate competition. In Getz Bros. & Co. v. Federal Salt Co., supra, 147 Cal. 115, the parties entered an agreement to exchange money for (1) an agreement not to compete and to discourage competition in the salt trade and (2) more than 1,000 pounds of salt. Precisely how much of the payment was attributable to the actual provision of salt we could not say, but so long as any portion of the payment was attributable to the covenant not to compete—and we 34 viewed it as ―plain . . . that part of it, at least, was‖—the deal as a whole was an illegal restraint of trade. (Id. at p. 118.) Fourth, a plaintiff must establish the amount of the payment, over and above the value of collateral products or services from the generic, also exceeds the brand‘s anticipated future litigation costs. In some cases, a ―reverse payment . . . may amount to no more than a rough approximation of the litigation expenses saved through the settlement. . . . Where a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement. In such cases, the parties may have provided for a reverse payment without having sought or brought about the anticompetitive consequences we mentioned above.‖ (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236].) A rational brand might be indifferent as between (1) actually litigating or (2) settling, with market entry at the point expected, on average, from asserting its patent in litigation and a payment to the generic in an amount up to what would have been spent in that litigation. It is thus necessary to evaluate the reverse payment‘s ―scale in relation to the payor‘s anticipated future litigation costs.‖ (Id. at p. ___ [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2237].) We consider briefly the allocation of burdens of proof and production. Unless a challenged settlement agreement includes both a restraint on generic competition and a reverse payment to the generic in excess of both brand litigation costs and generic collateral products and services, there is no reason to assume the settlement includes any element of purchased freedom from competition, as opposed to a limit on competition flowing naturally, and lawfully, from the perceived strength of the brand‘s patent. Accordingly, the burden of proof as to 35 these elements rests with the Cartwright Act plaintiff. (See Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 861.) The burden of producing evidence (see Evid. Code, §§ 110, 550) is a slightly different matter. ― ‗Where the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties, that party has the burden of going forward with the evidence on the issue although it is not the party asserting the claim.‘ ‖ (Sanchez v. Unemployment Ins. Appeals Bd. (1977) 20 Cal.3d 55, 71.) This is so with regard to both a settling party‘s own litigation costs and the existence and value of any collateral products or services provided as part of a patent settlement; these are matters about which the settling parties will necessarily have superior knowledge.12 Accordingly, once a plaintiff has shown an agreement involving a reverse payment and delay, the defendants have the burden of coming forward with evidence of litigation costs and the value of collateral products and services.13 If the defendants fail to do so, because, e.g., there was no side agreement or because they do not dispute the collective amounts fall short of any payment to the generic, the plaintiff has satisfied its burden on these points. If instead the defendants do so, the plaintiff must carry the ultimate burden of persuasion that any reverse payment exceeds litigation costs and the value of collateral products or services. 12 We do not suggest a defendant‘s testimony concerning the value conveyed in side agreements is entitled to any more weight than the plaintiff‘s, only that the defendants have the initial burden of introducing evidence of agreements for the purchase of other products or services sufficiently valuable to explain any payment. 13 Here, the brand, Bayer, settled out of the antitrust case, and Barr would not be in a superior position with regard to knowledge of Bayer‘s future patent litigation costs, so the burden of production on this point would remain with plaintiffs. 36 We further conclude that a showing of the above elements is not only necessary but also sufficient to make out a prima facie case that the settlement is anticompetitive. If a brand is willing to pay a generic more than the costs of continued litigation, and more than the value of any collateral benefits, in order to settle and keep the generic out of the market, there is cause to believe some portion of the consideration is payment for exclusion beyond the point that would have resulted, on average, from simply litigating the case to its conclusion. Otherwise, the brand would have had little incentive to settle at such a high price. Moreover, the larger the gap, the stronger the inference one can draw. A wealth of economic scholarship and analysis supports this inference. Because the profit that can be earned under monopoly conditions is greater than the combined profit that can be earned under duopoly conditions,14 a brand and generic have a substantial incentive to settle at the latest market entry date possible, with the brand paying a portion of monopoly profits to compensate the generic for what it would have earned with an earlier entry.15 If the parties can 14 While this is a broadly shared economic tenet, it has also been empirically demonstrated by the FDA in the current context. (See FDA, Center for Drug Evaluation and Research, Generic Competition and Drug Prices (2010) online at [last visited May 7, 2015].) Indeed, in its briefing Barr effectively concedes this is the case here: ―[E]ach day of early entry would have cost Bayer more given the price of its branded product than it would have benefitted Barr given the price of its generic product.‖ 15 Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at pp. 361–362, 133 S.Ct. at pp. 2234–2235]; see, e.g., Hovenkamp, Anticompetitive Patent Settlements and the Supreme Court’s Actavis Decision, supra, 15 Minn. J. L. Sci. & Tech. at pages 8–13; Mungan, Reverse Payments, Perverse Incentives (2013) 27 Harv. J. Law & Tech. 1, 5–6, 27, 34; Elhauge & Krueger, Solving the Patent Settlement Puzzle (2012) 91 Tex. L.Rev. 283, 289; Kades, Whistling Past the Graveyard: The Problem with the Per Se Legality Treatment of Pay-for-Delay Settlements (2009) 5 (footnote continued on next page) 37 share monopoly profits through a reverse payment from the brand to the generic, the generic no longer has motivation to hold out for its best estimate of the average entry point it could obtain through litigation. Instead, the parties‘ interests align in favor of maximizing their combined wealth by extending the monopoly for as long as possible. Once payment to the generic exceeds what the brand is otherwise receiving from it in products and services or would have spent to litigate, a court may fairly presume the settling parties have engaged in such conduct and should be put to the burden of coming forward with a procompetitive justification for their settlement. (Elhauge & Krueger, Solving the Patent Settlement Puzzle, supra, 91 Tex. L.Rev. at pp. 297–304; see Edlin et al., Activating Actavis (2013) 28 Antitrust 16, 22, appen.; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ. Perspectives at p. 93; Shapiro, Antitrust Limits to Patent Settlements, supra, 34 RAND J. Econ. at p. 408.) Barr argues this degree of scrutiny will stifle innovation. But Congress was not authorized to, and did not, grant inventors eternal monopolies; instead, it approved a scheme that presumptively represents the appropriate balance between promoting innovation and allowing competition. Reverse payment patent settlements may enable the parties to extend the monopoly beyond that point. (Elhauge & Krueger, Solving the Patent Settlement Puzzle, supra, 91 Tex. L.Rev. (footnote continued from previous page) Competition Policy Internat. 143, 148–150; Leffler & Leffler, Settling the Controversy over Patent Settlements in Antitrust Law and Economics (Kirkwood edit., 2004) 475, 480–484; Willig & Bigelow, Antitrust Policy Toward Agreements that Settle Patent Litigation, supra, 49 Antitrust Bull. at page 659; Bulow, The Gaming of Pharmaceutical Patents in 4 Innovation Policy and the Economy, supra, at page 166; Shapiro, Antitrust Limits to Patent Settlements, supra, 34 RAND J. Econ. at pages 394–395. 38 at pp. 295–304; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ. Perspectives at p. 93; Leffler & Leffler, Efficiency Trade-Offs in Patent Litigation Settlements: Analysis Gone Astray? (2004) 39 U.S.F. L.Rev. 33, 37–38; Shapiro, Antitrust Analysis of Patent Settlements Between Rivals, supra, 17 Antitrust at p. 73.) Indeed, insufficient scrutiny of such settlements has the potential to hamper innovation by allowing weak patents to offer the exact same exclusionary potential and monopoly possibilities as strong ones,16 thus steering innovator incentives away from more costly true innovation and toward cheaper, less socially valuable pseudoinnovation. (See Mungan, Reverse Payments, Perverse Incentives, supra, 27 Harv. J. Law & Tech. at pp. 42–44; Elhauge & Krueger, Solving the Patent Settlement Puzzle, at pp. 294–295.) Relatedly, Barr expresses concern that close scrutiny of reverse payment settlements will chill some generics from challenging patents, to the detriment of consumers. But any challenge that results in the brand simply paying the generic not to compete—a potentially common outcome absent scrutiny—does nothing to enhance competition, and deterring such challenges accordingly represents no loss to consumers. Moreover, standard economic theory suggests reducing unfettered access to reverse payment settlements would chill generic challenges to strong, 16 See In re Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at page 211 (noting the ―troubling dynamic‖ that ―[t]he less sound the patent or the less clear the infringement, and therefore the less justified the monopoly enjoyed by the patent holder, the more a rule permitting settlement is likely to benefit the patent holder by allowing it to retain the patent‖); Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra, 109 Colum. L.Rev. at page 638 (treating patents as conclusively valid until expiration ―produces the absurd result that an ironclad patent and a trivial patent have the same exclusionary force‖); Bulow, The Gaming of Pharmaceutical Patents in Innovation Policy and the Economy, Volume 4, supra, at page 167. 39 likely valid patents more than challenges to weak patents. The effect would be to increase the value of strong patents, while still leaving generics incentives to challenge weak patents. (Mungan, Reverse Payments, Perverse Incentives, supra, 27 Harv. J. Law & Tech. at p. 7.) This consequence presents no reason to scale back scrutiny of these settlements. Finally, Barr argues that in some cases only a reverse payment can bridge the differences between the brand and generic challenger and make settlement possible. Perhaps; but as the Supreme Court has made clear, ordinarily ―the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit.‖ (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2237].) Parties can still use financial considerations to bridge small gaps arising from differing subjective perceptions of their probabilities of success in litigation; what they cannot do is use money to bridge their differences over the point when competitive entry is economically desirable, for that gap is not one antitrust law permits would-be competitors to bridge by agreement: ―If the basic reason [the parties prefer a reverse payment settlement] is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.‖ (Ibid.) That some settlements might no longer be possible absent a payment in excess of litigation costs is no concern if the ones now barred would simply have facilitated the sharing of monopoly profits. Barr relies on one commentary showing that some theoretically possible settlements involving payments exceeding the sum of expected litigation costs and the value of other products and services might enhance consumer welfare. (Harris et al., Activating Actavis: A More Complete Story (2014) 28 Antitrust 83.) The principal conclusion is that introducing brand risk aversion into the settlement model opens up a region of possible settlements involving supralitigation cost 40 payments that nevertheless increase consumer welfare by enabling earlier generic market entry dates.17 What is not shown is that such settlements are at all likely in practice. Although a brand and generic may through payment of money be able to settle on an earlier entry date than would arise from litigation, their incentive (if left undeterred by the antitrust regime) remains to settle on a far later entry date for still larger sums of money, as even some of the leading economists highlighting the relevance of risk aversion recognize. (Willig & Bigelow, Antitrust Policy Toward Agreements that Settle Patent Litigation, supra, 49 Antitrust Bull. at p. 659.) Attempts to quantitatively estimate the frequency with which risk aversion would produce an efficient settlement despite payment in excess of litigation costs suggest such occurrences would be exceedingly rare. (Leffler & Leffler, The Probabilistic Nature of Patent Rights, supra, 17 Antitrust at pp. 79–80; Leffler & Leffler, Settling the Controversy over Patent Settlements in Antitrust Law and Economics, supra, at p. 504; see Bulow, The Gaming of Pharmaceutical Patents in 4 Innovation Policy and the Economy, supra, at p. 167.) Thus, while we do not discount the possibility, it affords no reason to expand plaintiff‘s prima facie case beyond the elements discussed. We also observe that the outlined prima facie showing will suffice, without more, to raise a presumption of the patentee‘s market power. Proving that a restraint has anticompetitive effects often requires the plaintiff to ― ‗delineate a 17 The Harris model also addresses the effects of asymmetric information, but different perspectives on the likelihood of success are unlikely to alone render it possible for a supralitigation-costs reverse payment settlement to be efficient. (Elhauge & Krueger, Solving the Patent Settlement Puzzle, supra, 91 Tex. L.Rev. at pp. 300–303, 325–329.) Money may be needed to bridge the gap between the parties‘ expectations, but a rational brand asked to pay more than its litigation costs to persuade a generic with different perceptions would, in the ordinary case, presumably just litigate. 41 relevant market and show that the defendant plays enough of a role in that market to impair competition significantly,‘ ‖ i.e., has market power. (Roth v. Rhodes, supra, 25 Cal.App.4th at p. 542.) Here, proof of a sufficiently large payment is a surrogate: ―the ‗size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power‘—namely, the power to charge prices higher than the competitive level.‖ (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236].) Logically, a patentee would not pay others to stay out of the market unless it had sufficient market power to recoup its payments through supracompetitive pricing. (Ibid.) Consequently, proof of a reverse payment in excess of litigation costs and collateral products and services raises a presumption that the settling patentee has market power sufficient for the settlement to generate significant anticompetitive effects.