S198616

IN THE SUPREME COURT OF CALIFORNIA

Coordination Proceeding Special Title (Rule 1550(b)):

CIPRO CASES I & II

Judicial Council Coordination Proceeding Nos. 4154 & 4220

After a Decision by the Court of Appeal, Fourth Appellate District, Division One

APPELLANTS’ ANSWER TO AMICUS CURIAE BRIEFS

Eric B. Fastiff (State Bar No. 182260) Brendan Glackin (State Bar No. 199643) Dean M. Harvey (State Bar No. 250298) Jordan Elias (State Bar No. 228731) LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP 275 Battery Street, 29th Floor San Francisco, CA 94111-3339 Telephone: (415) 956-1000 Facsimile: (415) 956-1008 Joseph R. Saveri (State Bar No. 130064) JOSEPH SAVERI LAW FIRM, INC. 505 Montgomery Street, Suite 625 San Francisco, CA 94111 Telephone: (415) 500-6800 Facsimile: (415) 395-9940

Dan Drachler (pro hac vice) ZWERLING, SCHACHTER & ZWERLING, LLP 1904 Third Avenue, Suite 1030 Seattle, WA 98101 Telephone: (206) 223-2053 Facsimile: (206) 343-9636 Ralph B. Kalfayan (State Bar No. 133464) KRAUSE, KALFAYAN, BENINK & SLAVENS 550 West C Street, Suite 530 San Diego, CA 92101 Telephone: (619) 232-0331 Facsimile: (619) 232-4019 Mark A. Lemley (State Bar No. 155830) DURIE TANGRI LLP 217 Leidesdorff Street San Francisco, CA 94111 Telephone: (415) 362-6666

Attorneys for Plaintiffs, Appellants and Petitioners

TABLE OF CONTENTS

Page

I. INTRODUCTION .............................................................................. 1

II. ARGUMENT ...................................................................................... 3

A. Amici Overwhelmingly Recognize the “Scope of the Patent” Test Is Dead and Actavis Supports Reversal. ................. 3

B. Amici Opposing Appellants Overlook Key Holdings of Actavis. ......................................................................................... 4

C. Amici Make Weak Policy and Doctrinal Arguments Against Appellants’ Position. ...................................................... 6

1. The Framework of Hatch-Waxman Does Not Encourage Reverse Payments. .......................................... 6

2. Sharing Monopoly Profits Is Not Good. ........................... 8

3. Reverse Payments Are Not Necessary to Settle Patent Litigation. ............................................................... 9

4. A Strict Rule Will Not Have Negative Effects in Other Legal Areas. .......................................................... 11

5. The Standard Advocated by Appellants and the Attorney General Does Not Violate Due Process. ......... 11

D. California Antitrust Law Is Not Preempted. .............................. 12

III. CONCLUSION ................................................................................. 17

CERTIFICATE OF WORD COUNT ........................................................ 20

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TABLE OF AUTHORITIES

Page

CASES

California v. ARC America Corp. (1989) 490 U.S. 93 ........................................................................ 2, 12, 13

Cianci v. Super. Ct. (1985) 40 Cal.3d 903 ............................................................................... 14

Edwards v. Arthur Andersen LLP (2008) 44 Cal.4th 937 ........................................................................ 14, 16

Freeman v. San Diego Assn. of Realtors (9th Cir. 2003) 322 F.3d 1133 ........................................................... 4, 8, 9

FTC v. Actavis, Inc. (2013) 570 U.S. __, 133 S.Ct. 2223 ................................................. passim

National Collegiate Athletic Assn. v. Board of Regents (1984) 468 U.S. 85 ................................................................................ 4, 9

National Soc’y of Prof’l Engineers v. United States (1978) 435 U.S. 679 .............................................................................. 4, 9

STATUTES

Bus. & Prof. Code § 16720(b) ..................................................................... 15 Bus. & Prof. Code § 16720(c) ..................................................................... 15 Bus. & Prof. Code § 16722 ......................................................................... 15 Bus. & Prof. Code § 16726 ......................................................................... 15

OTHER AUTHORITIES

1 Hovenkamp et al., IP and Antitrust (2013 Supp.) § 15.2a1[D] .......................................................................... 2

7 Areeda & Hovenkamp, Antitrust Law (2d ed. 2003) ¶ 1504c ................................................................................ 8

Bureau of Competition, FTC, Agreements Filed with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Summary of Agreements Filed in FY 2005 (2006) .................................. 10

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TABLE OF AUTHORITIES (continued)

Page

Carrier, Five Arguments Laid to Rest After Actavis

(2013) 13 Antitrust Source 1 ..................................................................... 2 Cotter, FTC v. Actavis, Inc.: When Is the Rule of Reason Not the Rule of

Reason? (2013) 15 Minn. J. L. Sci. & Tech. 41 ...................................................... 2

Davis, Applying Litigation Economics to Patent Settlements: Why Reverse Payments Should Be Per Se Illegal (2009) 41 Rutgers L.J. 255 ...................................................................... 10

Edlin, Hemphill, Hovenkamp, and Shapiro, Activating Actavis (2013) vol. 28, No. 1, Antitrust 16 ............................................................ 2

Statement of Chairman Robert Pitofsky and Commissioners Sheila F. Anthony, Mozelle W. Thompson, Orson Swindle, and Thomas B. Leary (Apr. 3, 2000) 65 Fed. Reg. 17506 .......................................................... 10

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I. INTRODUCTION

The amicus briefs confirm two crucial points. First, after FTC v.

Actavis, Inc. (2013) 570 U.S. __, 133 S.Ct. 2223 (Actavis), no plausible

case can be made for the “scope of the patent” test, and, accordingly, the

appellate court opinion in this case should be reversed. This point is

brought home most obviously by the briefs of the amici supporting

Appellants’ position, including that of the California Attorney General.

But, tellingly, the briefs of amici opposing Appellants’ position also tend to

confirm this conclusion: only one of those three briefs takes a clear stance

in favor of affirmance; the other two seem to recognize that position is no

longer tenable.

The second crucial point is that it is anticompetitive under antitrust

law for a brand drug manufacturer to make a reverse payment to avoid the

risk of competition. Several of the amici recognize the importance of this

holding of Actavis. It means there is no need to assess the validity of a

patent in determining whether a reverse payment is illegal. It also means

that any ruling on the validity—or invalidity—of a patent does not govern

the antitrust analysis. As several amici emphasize, what matters is whether

the brand drug manufacturer provided compensation to avoid the risk of a

successful challenge to its patent—rather than to avoid the costs of

litigation or to obtain independently valuable services. Whether the patent

should survive a challenge—or did survive a challenge by a party not

before the court in antitrust litigation—is irrelevant. The amici contesting

this conclusion fail to make sense of the Supreme Court’s statements that

the anticompetitive effect at issue is “seek[ing] to avoid the risk of

competition,” and “it is normally not necessary to litigate patent validity to

answer the antitrust question.” (Actavis, supra, 133 S.Ct. at p. 2236, italics

added.) These holdings cannot just be wished away.

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Amici opposing the position of Appellants make various other

arguments in urging this Court to impose a vague, all-things-considered

rule of reason analysis. None of them is persuasive. Those amici are

wrong to suggest that California law must tolerate anticompetitive conduct

simply because federal antitrust doctrine may do so. The Supreme Court

has long recognized that states may impose more stringent antitrust

standards than federal law. (California v. ARC America Corp. (1989)

490 U.S. 93, 101.) And, in any case, the Court in Actavis invited lower

federal courts to develop an appropriate standard for assessing reverse

payments, one that would not entail an unstructured rule of reason analysis.

Indeed, Actavis set significant limits on the rule of reason inquiry that

should be conducted. (See, e.g., 1 Hovenkamp et al., IP and Antitrust (2013

Supp.) § 15.2a1[D], pp. 15-40 to 15-47; Edlin, Hemphill, Hovenkamp, and

Shapiro, Activating Actavis (2013) vol. 28, No. 1, Antitrust 16.); Carrier,

Five Arguments Laid to Rest After Actavis (2013) 13 Antitrust Source 11;

Cotter, FTC v. Actavis, Inc.: When Is the Rule of Reason Not the Rule of

Reason? (2013) 15 Minn. J. L. Sci. & Tech. 41.2) Under well-established

precedent, California is free to do the same.

This Court should follow Actavis in rejecting the “scope of the

patent” test and prohibiting reverse payments as a means of avoiding the

risk of competition. And the Court should decline the invitation of some

amici—and Respondents—to leave the lower courts without any

meaningful guidance in assessing the legality of reverse payments under

California antitrust law. That approach would only make litigation more

1 Available at: http://www.americanbar.org/content/dam/aba/publishing/antitrust_source/oct13_carrier_10_29f.authcheckdam.pdf 2 Available at: http://mjlst.umn.edu/previousissues/Volume15Issue1/index.htm

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expensive and protracted and would hamper the ability of well-meaning

drug companies to conform their behavior to the law.

II. ARGUMENT

A. Amici Overwhelmingly Recognize the “Scope of the Patent” Test Is Dead and Actavis Supports Reversal.

Several amici recognize that: (1) the Court of Appeal decision here

relied on the “scope of the patent” test; (2) Actavis makes clear why that

test fails to balance antitrust and patent law properly; and (3) the appellate

court opinion below should be reversed. These amici include the California

Attorney General (Amicus Brief of the California Attorney General at pp.

4–5 (“Cal.Atty.Gen. Br.”)); forty-nine of the nation’s most respected and

knowledgeable professors in this area of law and economics (Brief of

Amici Curiae 49 Professors in Support of Petitioners at pp. 1–2 (“49

Professors Br.”)); and the American Antitrust Institute, a well-respected,

non-partisan think tank whose mission is to promote free and fair

competition. (Brief of Amicus Curiae American Antitrust Institute at p. 2

(“AAI Br.”).) The professors’ brief, in particular, provides a systematic

explanation of how the reasoning of Actavis demolishes six pillars that the

professors identify as the foundation for the “scope of the patent” test.

(49 Professors Br. at pp. 3–15.)

At least as revealing, the amici opposing Appellants’ position

respond with three standard strategies of an advocate faced with an

undeniably bad fact: never concede anything; be candid and try to limit the

damage; or ignore the problem. The Generic Pharmaceutical Association

pursues the bold—though indefensible—claim that Actavis supports

affirmance by this Court. (Amicus Curiae Brief of Generic Pharmaceutical

Association in Support of Respondents at p. 3 (“Gen. Pharma. Assn. Br.”).)

The Washington Legal Foundation attempts to protect its credibility by

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admitting that the appellate court’s decision “may have been affected by its

embrace of the ‘scope of the patent test’—a test rejected by Actavis”—and

by acknowledging, at least in the alternative, that reversal may be

appropriate. (Supplemental Letter Brief of Washington Legal Foundation

at p. 11 (“WLF Br.”).) Given the Foundation’s overall argument defending

reverse payments, this is tantamount to confessing the need for reversal.

Finally, the Chamber of Commerce takes no position whatsoever on

whether this Court should affirm or reverse. These splintered tactics—as

much as the strong arguments of the California AG, the respected

professors, and AAI—support reversal of the appellate court opinion.3

B. Amici Opposing Appellants Overlook Key Holdings of Actavis.

Actavis did not merely destroy the foundation of the “scope of the

patent” test. It also held that making a reverse payment to avoid the risk of

competition is itself anticompetitive. As Actavis explains, a payment that

“seeks to prevent the risk of competition” is what “constitutes the relevant

anticompetitive harm” in a reverse payment case. (Actavis, supra, 133

S.Ct. at p. 2236.) This position accords with a long line of precedent

forbidding antitrust defendants from attempting to justify their behavior by

arguing that competition is itself harmful. (National Collegiate Athletic

Assn. v. Board of Regents (1984) 468 U.S. 85, 116–117 (“NCAA”);

National Soc’y of Prof’l Engineers v. United States (1978) 435 U.S. 679,

693; Freeman v. San Diego Assn. of Realtors (9th Cir. 2003) 322 F.3d

1133, 1152.)

3 The Consumer Attorneys of California address only the specific issue of the proper interpretation of California’s Unfair Competition Law in consumer cases, and therefore understandably take no position on whether the appellate court’s interpretation of state antitrust law should be affirmed or reversed.

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Several of the amicus briefs recognize the significance of Actavis’s

clarification of the anticompetitive harm in reverse payment cases. AAI

notes that Actavis’s holding on avoiding the risk of competition explains

why patent invalidity should not be an element of an antitrust claim and

why patent validity offers no defense to such a claim. (AAI Br. at pp. 2, 4–

6.) AAI also recognizes that, for the same reason, “early” generic entry

does not somehow render a reverse payment legal, considering the payment

prevents even earlier entry and thereby restrains competition. (Id. at p. 5.)

The 49 professors similarly note that defendants cannot defend their

payments based on the merits of a patent, because avoiding the risk of

competition is the relevant anticompetitive harm.4 (49 Professors Br. at pp.

20–22.) The California Attorney General, too, recognizes this key Actavis

holding (Cal.Atty.Gen. Br. at pp. 17–18), and explains why under

California law an agreement to avoid the risk of competition should be

subject to per se condemnation (id. at pp. 9–12, 20–23).

As for the briefs of amici opposing Appellants’ position, most telling

is what they do not say. How do these amici contend with Actavis’s

pronouncement that avoiding the risk of competition is anticompetitive?

They ignore it. None of them addresses this central line of reasoning in

4 It would be particularly inappropriate in this case to take into account unrelated litigation addressing the validity of the patent at issue (after it was narrowed through a reexamination process), because Bayer’s $398.1 million reverse payment prevented key issues from being litigated and related evidence from coming to light. (See Appellants’ Supplemental Reply Br. at pp. 11–13 [explaining that key evidence was unavailable to subsequent Cipro patent challengers and that the Cipro patent at issue in those subsequent cases was different and substantially narrower than the patent at issue in this case]; see also Appellants’ Supplemental Br. at p. 11, fn. 8 [explaining why purchasers challenging a reverse payment are not bound by a finding of validity or infringement in patent litigation to which they were not parties].)

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Actavis. Instead, the Washington Legal Foundation goes so far as to

pretend that Actavis provides “few hints” about how lower courts should

evaluate reverse payments. (WLF Br. at p. 3.) Not so. The Supreme Court

in Actavis gave more than hints. It provided crucial guidance for assessing

reverse payments. Ignoring that guidance does not make it go away.

C. Amici Make Weak Policy and Doctrinal Arguments Against Appellants’ Position.

Amici opposing Appellants advance a series of dubious policy and

doctrinal arguments that should be rejected.

1. The Framework of Hatch-Waxman Does Not Encourage Reverse Payments.

According to the Generic Pharmaceutical Association, the Hatch-

Waxman Act encourages reverse payments in two ways. First, the

Association claims the Act alters the relative risks of patent litigation such

that “a patentee stands to lose substantially more than a generic challenger

from an adverse judgment.” (Gen. Pharma. Assn. Br. at p. 6.) This

“asymmetric risk” argument is hardly new; the Generics themselves have

offered it before. (Generics Answer Br. at pp. 45–47.) And Actavis flatly

rejected it:

The owner of a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment (if otherwise unexplained) likely seeks to prevent the risk of competition. And, as we have said, that consequence constitutes the relevant anticompetitive harm.

(Actavis, supra, 133 S.Ct. at p. 2236.) The fact that a patentee’s potential

risk may be large (and larger than the potential gains of a generic

challenger) provides no justification for paying the challenger to stay out of

its market. Avoiding that risk is anticompetitive. (Ibid.)

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Second, the Generic Pharmaceutical Association claims that reverse

payments serve Hatch-Waxman’s goal of promoting generic competition

because they encourage generic challenges. (Gen. Pharma. Assn. Br. at pp.

8, 10.) This argument is speculative. More important, it misses the point.

It assumes that a patent challenge, in and of itself, benefits consumers. But

a generic challenge that results in a reverse payment does just the opposite.

It blocks competition, preserves the brand company’s monopoly, and

encourages price increases. Consumers do not benefit when a brand drug

manufacturer shares some of its monopoly profits with a generic drug

manufacturer. Generic challenges promote consumer welfare only if they

succeed or produce an agreement allowing early generic entry and

competition that benefits consumers. Reverse payments impede both of

those outcomes. History shows that, given the opportunity, brand drug

companies would rather pay generic challengers than compete with them.

(See Actavis, supra, 133 S.Ct. at p. 2235 [“Indeed, there are indications that

patentees sometimes pay a generic challenger a sum even larger than what

the generic would gain in profits if it won the paragraph IV litigation and

entered the market.”].)

Finally, and more generally, the notion that Hatch-Waxman

encourages reverse payments is simply not true. Actavis confirms as

much—quoting statements from the legislative architects condemning such

collusion. (Id. at p. 2234.) Exit payments may be an unintended, perverse

byproduct of Hatch-Waxman (id. at p. 2236 [stating that certain Hatch-

Waxman provisions may have “created special incentives for collusion”],

citation omitted), but that does not provide a basis to immunize them from

antitrust liability.

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2. Sharing Monopoly Profits Is Not Good.

Another dubious argument is that consumers will benefit from

reverse payments because generic drug manufacturers will ultimately spend

the brand company’s monopoly profits—gained through a reverse

payment—on research and development. (See Gen. Pharma. Assn. Br. at p.

7 [asserting that reverse payments are “pro-competitive precisely because

they provide consideration to generic manufacturers. . . . Monetary and

other valuable consideration may permit settling generic drug companies to

conduct research and development of other generic products.”], bold in

original.)

This asserted procompetitive justification is factually implausible.

Allowing brand and generic drug manufacturers to share monopoly profits

would create an unhealthy dynamic. Generic drug companies would have

an incentive to develop additional generic products not to bring them to the

market but as a basis for seeking reverse payments. Brand drug

manufacturers would benefit not by pursuing real breakthroughs but by

obtaining weak patents that they can then protect through reverse payments.

Collusion would beget collusion. This would not lead to meaningful

innovation. That requires healthy competition. (See Appellants’ Opening

Merits Br. at pp. 25–26.)

Equally important, the argument is not even legally cognizable.

Courts have consistently rejected the argument that competition is itself

bad, or that allowing monopoly profits somehow benefits consumers. To

do otherwise would be to permit a justification for every form of price

fixing, bid rigging, and unlawful market allocation.

The antitrust laws categorically reject theories that “depend on

power over price for their efficacy.” (Freeman, supra, 322 F.3d at p. 1152,

citing 7 Areeda & Hovenkamp, Antitrust Law (2d ed. 2003) ¶ 1504c.) In

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National Society of Professional Engineers, supra, 435 U.S. at p. 696, the

Supreme Court rejected the contention that a ban on competitive bidding

was necessary because engineers would otherwise be tempted to submit

deceptively low bids. The Court noted, “The logic of this argument rests

on the assumption that the agreement will tend to maintain the price level;

if it had no such effect, it would not serve its intended purpose.” (Id. at p.

693.) That defense failed because the Sherman Act “does not support a

defense based on the assumption that competition itself is unreasonable.”

(Id. at p. 696; see also NCAA, supra, 468 U.S. at pp. 116–117 [rejecting

proffered justification on same grounds].) Instead, antitrust laws

“presume[] that competitive markets offer sufficient incentives and

resources for innovation, and that cartel pricing leads not to a dedication of

newfound wealth to the public good but to complacency and stagnation.”

(Freeman, supra, 322 F.3d at p. 1152.)

Accordingly, this Court should reject as categorically improper the

speculative claim that generic drug companies should be able to share in

monopoly profits because they might use the extra money benevolently.

That is in effect an argument that competition is itself unreasonable, an

argument that is anathema to the basic structure of antitrust doctrine.

3. Reverse Payments Are Not Necessary to Settle Patent Litigation.

Remarkably, despite the decision in Actavis, the Generic

Pharmaceutical Association still clings to the argument that reverse

payments are necessary to settle patent litigation. (See Gen. Pharma. Assn.

Br. at pp. 7–8.) As the Supreme Court made clear, however, “antitrust

liability does not prevent litigating parties from settling their lawsuit.”

(Actavis, supra, 133 S.Ct. at p. 2237.) The Association ignores the history

showing that drug patent suits will continue to settle in a regime that rejects

reverse payments. (See Davis, Applying Litigation Economics to Patent

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Settlements: Why Reverse Payments Should Be Per Se Illegal (2009) 41

Rutgers L.J. 255, 295–296 [comparing overall settlement rates of drug

patent cases when the FTC successfully deterred reverse-payment

agreements and when the FTC did not oppose them; finding that

settlements occurred as frequently when drug companies were unwilling to

risk a reverse payment].)

In 2000, the FTC announced it would challenge exclusion-payment

settlements. (Statement of Chairman Robert Pitofsky and Commissioners

Sheila F. Anthony, Mozelle W. Thompson, Orson Swindle, and Thomas B.

Leary (Apr. 3, 2000) 65 Fed. Reg. 17506.5) Over the next four years,

between 2000 and 2004, not one of twenty reported agreements involved a

brand firm paying a generic filer to delay entering the market. (Bureau of

Competition, FTC, Agreements Filed with the Federal Trade Commission

under the Medicare Prescription Drug, Improvement, and Modernization

Act of 2003: Summary of Agreements Filed in FY 2005 (2006) at p. 4.6)

During this period, parties continued settling their disputes, but in ways less

restrictive of competition, such as through licenses allowing early generic

entry without any exclusion payment to cause delay. Indeed, the FTC

Report identified 14 such settlements without exclusion payments in 2003

and 2004 alone. (Ibid.) The fact that drug companies can and do settle

litigation without exclusion payments shows that there is no need to tolerate

them.

5 Available at: http://www.ftc.gov/sites/default/files/documents/cases/2000/05/abbottgenevastatement.htm 6 Available at: http://www.ftc.gov/os/2006/04/fy2005drugsettlementsrpt.pdf

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4. A Strict Rule Will Not Have Negative Effects in Other Legal Areas.

The Chamber of Commerce worries that the ruling here could spill

over into areas of the law other than the Hatch-Waxman Act and, therefore,

the Court should proceed with caution. (Chamber of Commerce Amicus

Curiae Brief Supporting Respondents at pp. 16–17 (“Chamber Br.”).)

However, not only do reverse payments appear to be unique to Hatch-

Waxman litigation (see Actavis, supra, 133 S.Ct. at pp. 2227, 2235), but the

Court can readily limit its ruling to the Hatch-Waxman context.

5. The Standard Advocated by Appellants and the Attorney General Does Not Violate Due Process.

Finally, the Washington Legal Foundation claims that due process

guarantees the right to raise patent validity as a defense. (See WLF Br. at

pp. 9–10.) This argument fundamentally misunderstands the holding of

Actavis.

The Supreme Court held that a reverse payment made to “prevent

the risk of competition” suffices to give rise to antitrust liability. (See

Actavis, supra, 133 S.Ct. at p. 2236 [“[T]he payment (if otherwise

unexplained) likely seeks to prevent the risk of competition. And, as we

have said, that consequence constitutes the relevant anticompetitive

harm.”]; see also Cal.Atty.Gen. Br. at p. 28 [“As the Supreme Court in

Actavis found, there is nothing in these statutory patent rights—either

expressly or by fair implication—that endows a patentee with a right to pay

rivals not to compete.”], citing Actavis, supra, 133 S.Ct. at p. 2233.) A

reverse payment eliminates the risk of competition, regardless of how a

later court may rule on the validity of the patent at issue.

Moreover, if patent validity provided a defense to an antitrust claim,

defendants would raise it in all or virtually all reverse payment cases and it

would virtually always be necessary to litigate patent validity to answer the

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antitrust question. If this were the law, it would have made no sense for the

Supreme Court to pronounce that “it is normally not necessary to litigate

patent validity to answer the antitrust question.” (Actavis, supra, 133 S.Ct.

at p. 2236.)

In sum, it would not violate due process for this Court to adopt a

standard that provides no opportunity for defendants to raise a defense that

is not legally cognizable.

D. California Antitrust Law Is Not Preempted.

Some amici—including the California Attorney General—recognize

that Actavis balanced federal antitrust and patent law and held that reverse

payments are subject to antitrust scrutiny. In other words, the rights

conferred by a patent do not include a right to pay a potential competitor

not to mount a legal challenge to the patent. (See Cal.Atty.Gen. Br. at p. 28

[“As the Supreme Court in Actavis found, there is nothing in these statutory

patent rights—either expressly or by fair implication—that endows a

patentee with a right to pay rivals not to compete.”], citing Actavis, supra,

133 S.Ct. at p. 2233; see also 49 Professors Br. at pp. 24–25 [“And it is

hard to see how state antitrust law could create an obstacle to the

accomplishment of federal patent law objectives when the Supreme Court

recognized that federal antitrust restrictions on exclusion payments do not

conflict with the Patent Act.”], citing Actavis, supra, 133 S.Ct. at p. 2231.)

Thus, reverse payments create no exception to longstanding precedent

allowing California to apply its own antitrust laws. (ARC America, supra,

490 U.S. at p. 101.)

To be sure, as discussed above, the U.S. Supreme Court has set some

useful parameters for scrutinizing reverse payments. Notably, Actavis

made clear that patent law does not justify the “scope of the patent” test.

Similarly, Actavis ruled out as a procompetitive justification that a reverse

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payment allows a drug company to avoid the risk of litigation. But these

parameters do not mean that the Supreme Court articulated a precise

antitrust standard that all other American courts must follow.

Actavis left room for other courts to refine the antitrust analysis of

reverse payments. Of course, under longstanding precedent, states

generally may adopt different—and stricter—antitrust standards than those

embodied in federal antitrust law. (ARC America, supra, 490 U.S. at p.

101.) In addition, the Supreme Court specifically authorized lower federal

courts to structure the antitrust inquiry after Actavis: “[T]rial courts can

structure antitrust litigation so as to avoid, on the one hand, the use of

antitrust theories too abbreviated to permit proper analysis, and, on the

other, consideration of every possible fact or theory irrespective of the

minimal light it may shed on the basic question—that of the presence of

significant unjustified anticompetitive consequences.” (Actavis, supra, 133

S.Ct. at p. 2238.) That mandate to lower federal courts makes clear that the

Supreme Court did not mean to impose a precise test from which no other

courts may vary. To the contrary, the Court invited lower federal courts to

undertake the common-law process of developing the antitrust standard for

reverse payments. This Court, too, is free to impose a more stringent

analysis for reverse payments than did Actavis—including condemning as

per se illegal reverse payments that exceed anticipated litigation costs and

that are not in exchange for independent services, a per se rule the

California Attorney General strongly supports. (See generally

Cal.Atty.Gen. Br.)

Nevertheless, the Generic Pharmaceutical Association suggests that

this Court would create a “conflict between California and federal law” if it

were to impose a standard less permissive than the rule of reason. (Gen.

Pharma. Assn. Br. at p. 15.) The Washington Legal Foundation likewise

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contends that Actavis struck a precise “balance” between federal patent and

antitrust law such that any more restrictive state antitrust standard would be

preempted. (WLF Br. at p. 8.) This position misreads Actavis. It

overlooks that federal patent law does not confer a right to pay a rival not to

compete. Without such a right, there is no conflict. Nowhere in Actavis

did the Court hold that state courts must subject reverse payments to

exactly the same antitrust analysis as do federal courts. The Generic

Pharmaceutical Association also relies heavily on the presumption of patent

validity. (Gen. Pharma. Assn. Br. at p. 16.) But that presumption is purely

procedural, and has no bearing on whether a patent includes the right to pay

another firm not to challenge its validity.

The Chamber of Commerce is cagier. Rather than identifying an

actual conflict, it sounds alarm bells that a stricter California antitrust

standard would “raise serious preemption concerns,” that California should

“tread carefully,” and that a stricter standard would fail to show “respect to

federal courts that comity requires in our federal system.” (Chamber Br. at

pp. 15–16.) But none of these claims establishes that federal law actually

preempts state law. None overcomes this Court’s previously stated

commitment to impose the antitrust standards necessary to protect the

welfare of California consumers. (See, e.g., Edwards v. Arthur Andersen

LLP (2008) 44 Cal.4th 937; Cianci v. Super. Ct. (1985) 40 Cal.3d 903,

918–920.)

The Chamber also makes a creative argument for restraint by this

Court, an argument that it does not suggest any California court has ever

recognized. According to the Chamber, California courts tend to stray from

federal antitrust law only in narrow circumstances, such as when there is

clear text in a statute warranting such a departure, when a matter is

procedural rather than substantive, and when California antitrust law is

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narrower—not broader—than federal antitrust law. (Chamber Br. at pp.

17–19.) Significantly, the Chamber does not argue that such an approach is

required by preemption doctrine. The Chamber simply suggests a

heretofore unrecognized—and vaguely defined—pattern in California

antitrust law and presumes that this Court should hew to it.

Unfortunately for the Chamber, even if it were right about this

pattern—and even if the pattern could be binding—this Court would still

have a firm basis for refining the Actavis standard to protect California

consumers. As the California Attorney General points out, the language of

the Cartwright Act is much more explicit about the illegality of reverse

payments than the language of federal antitrust legislation, barring, as an

illegal “trust,” any market delay agreement that serves, inter alia, (1) “to

limit or reduce the production, or increase the price” of a drug; (2) “to

prevent competition in manufacturing, making, transportation, sale or

purchase” of a drug; and (3) to “directly or indirectly unite any interests . . .

connected with the sale or transportation” of a drug “that its price might in

any manner be affected.” (See Cal.Atty.Gen. Br. at p. 9, citing Bus. &

Prof. Code § 16720, subd. (b), (c).) Further, the Cartwright Act uses

unambiguous words to condemn “every” such practice, stating that they are

all “absolutely void” and “unlawful, against public policy and void.” (Id. at

p. 10, citing Bus. & Prof. Code §§ 16722, 16726.) No comparable

language is found in the federal antitrust statutes. To the extent the

Chamber demands a clear textual basis for the Attorney General’s per se

rule, the Cartwright Act provides it with respect to reverse-payment

agreements that pool corporate interests to affect price. And when there is

such clear text, California courts have not hesitated to impose different

substantive standards than exist in federal law, rejecting, for instance, a

reasonableness defense for covenants not to compete that is available under

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federal law. (See 49 Professors Br. at p. 19, citing Edwards v. Arthur

Andersen, supra, 44 Cal.4th at pp. 949–950.)

Finally, the Chamber attempts to frighten this Court into abandoning

its own view on how best to frame California law to protect our citizens

from anticompetitive conduct. The settlements at issue, the Chamber

argues, involve only federal litigation and federal law. (Chamber Br. at pp.

9–12.) And without a uniform national standard, the Chamber contends, a

patchwork of conflicting state standards may develop, rendering

settlements impossible. (Id. at pp. 12–15.) All of this argument is wrong,

unpersuasive, or both.

First, while federal law regulates various aspects of the

pharmaceutical industry, payments to avoid the risk of competition are a

matter of antitrust law, both state and federal. Actavis made that clear.

Second, the Chamber offers no concrete example of how different state

antitrust standards could make settlement of a patent dispute difficult, much

less impossible. The Chamber is vague for a good reason.

Notwithstanding its effort to induce panic, state laws will not conflict. No

state will require a reverse payment in resolving a patent dispute. If

California—or any other state of significant size—clarifies the holding of

Actavis in a way that discourages reverse payments, drug companies can

simply settle patent disputes without them. Instead of sharing monopoly

profits, they can, for example, compromise on a date of generic entry—an

earlier date than if the brand drug manufacturer were to win in patent

litigation—so long as consumer welfare is not harmed. After all, under

Actavis as well as California law, the principal purpose of antitrust law is to

promote consumer welfare. (See Appellants’ Supplemental Br. at pp. 4–5

[citing to both federal and California authority establishing same].) In that

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event, California consumers, together with consumers across the nation,

would benefit. That is not cause for anxiety. It is reason for celebration.

III. CONCLUSION

Actavis rejected the “scope of the patent” test. It concluded patent

law does not immunize reverse payments from antitrust scrutiny. The

Court of Appeal relied on the “scope of the patent” test. For that reason, its

ruling should be reversed. The amici confirm this conclusion, some by

embracing it explicitly and others by failing to contest it effectively.

Actavis also held that a reverse payment is anticompetitive if it

allows a drug manufacturer to avoid the risk of competition. Again, this

proposition finds support in the amicus briefs, some of them recognizing

the point and its significance, others ignoring it because they cannot explain

it away.

But Actavis neither sets an absolute standard nor precludes this

Court from defining one for California. Appellants respectfully request that

this Court set forth a clear framework for analyzing reverse payments under

California antitrust law. Such clarity would enhance the efficiency of

litigation over reverse payments, and would allow parties to conform their

behavior to the law.

Reverse exclusionary payments have been the subject of intense

scrutiny for over a decade. Scholars have overwhelmingly concluded

reverse payments rarely, if ever, serve procompetitive purposes, as reflected

in the amicus brief of the 49 professors. The California Attorney General

has reached the same conclusion, a position she has persuasively explained

in her amicus brief. A clear statement from this Court on when reverse

payments violate California antitrust law would go a long way toward

resolving this longstanding issue and protecting California consumers.

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