The California Supreme Court will review the legality of so-called “pay-for-delay” settlements, whereby brand-name pharmaceutical manufacturers pay other companies to delay release of a generic version of a patented drug. Although the California Supreme Court will be making its determination under state law, a decision finding all such agreements illegal would have a national impact.
The “pay-for-delay” agreement at issue here settled a patent infringement lawsuit filed by Bayer AG and its subsidiary after Barr Laboratories, Inc., sought to market a generic version of the antibiotic ciprofloxacin hydrochloride, commonly known as Cipro. Under the terms of the 1997 agreement, Barr agreed not to market a generic version of Cipro until after expiration of U.S. Patent No. 4,670,444, in return for which Bayer paid Barr almost $400 million. The ’444 patent, which claims the ciprofloxacin hydrochloride molecule, expired in 2003.
The settlement agreement was challenged as an antitrust violation under California’s Cartwright Act by a class of California consumers and third-party payor insurers. The trial court dismissed the lawsuit, and the California Court of Appeal in October 2011 affirmed that decision. Noting “the important public policies underlying patent law and favoring the settlement of patent litigation,” the appellate court concluded that “pay-for-delay” settlements are not by their very nature illegal. In particular, the Court of Appeal observed that a rule prohibiting such settlement agreements outright “could harm competition by reducing the incentive to challenge patents by reducing the challenger’s settlement options.” The California Court of Appeal instead called for a case-by-case approach, holding that a “pay-for-delay” settlement does not violate the Cartwright Act so long as it restrains competition within the scope of the patent — unless the patent was procured by fraud or the underlying patent infringement lawsuit was “objectively baseless.” The appellate court further concluded, however, that the question of whether the underlying infringement lawsuit was objectively baseless is preempted by federal patent law, thus terminating the state law inquiry.
In seeking review, the plaintiffs have asked the California Supreme Court to find all “pay-for-delay” settlements illegal, regardless of the circumstances under which they are reached. Should the California Supreme Court agree with the plaintiffs’ arguments, it will place California law in tension with federal antitrust law. The Second, Eleventh, and Federal Circuit Courts of Appeals have each declined to find “pay-for-delay” settlements per se illegal under federal antitrust law. And while the Sixth Circuit reached a contrary conclusion, the settlement agreement it considered restrained competition beyond the scope of the underlying patent by delaying the market entry of other generic manufacturers and encompassing non-infringing versions of the generic drug. Thus, despite the trend in federal courts, a decision by the California Supreme Court prohibiting “pay-for-delay” settlements would force brand-name and generic drug manufacturers to reassess the risks associated with entering such agreements.