In re Cipro Cases I & II

Filed 5/7/15

IN THE SUPREME COURT OF CALIFORNIA

IN RE CIPRO CASES I & II. ) S198616
) Ct.App. 4/1 D056361
) San Diego County
) Super. Ct. Nos.
) JCCP 4154/4220

To protect competition in the marketplace, antitrust law prohibits
agreements that create or perpetuate monopolies. Patent law, in contrast, grants
temporary monopolies to inventors to encourage the development of useful
innovations. We consider here a crucial question at the intersection of these two
bodies of law: what limits, if any, does antitrust law place on the ability of a patent
holder to make agreements restricting competition during the life of its patent? In
particular, when another entity tries to invalidate a patent and enter the
marketplace, can the patentee pay the would-be competitor to withdraw its
challenge and refrain from competing until at or near the natural expiration of the
potentially invalid patent‘s life?
The answer to this is of special moment to the pharmaceutical industry,
which has seen a raft of suits in which generic drug manufacturers (generics),
seeking to introduce lower priced alternatives to patented brand-name drugs, raise
patent invalidity as a defense to claims of infringement. With increasing
frequency these cases have settled, with the plaintiff brand-name drug
manufacturer (brand) making a ―reverse payment‖ to the defendant generic in
exchange for the generic dropping its patent challenge and consenting to stay out
of the market. This case involves just such a settlement agreement.
Under federal antitrust law, these settlements are not immune from
scrutiny, even if they limit competition no more than a valid patent would have.
(Federal Trade Commission v. Actavis, Inc. (2013) 570 U.S. ___, ___ [186
L.Ed.2d 343, 356, 133 S.Ct. 2223, 2230] (Actavis).) We conclude the same is true
under state antitrust law. Some patents are valid; some are not. Sometimes
competition would infringe; sometimes it would not. Parties illegally restrain
trade when they privately agree to substitute consensual monopoly in place of
potential competition that would have followed a finding of invalidity or
noninfringement. The Court of Appeal ruled to the contrary; we reverse.
FACTUAL AND PROCEDURAL BACKGROUND
Bayer AG and Bayer Corporation (collectively Bayer) market Cipro, an
antibiotic that has been among the most-prescribed and best-selling drugs in the
world. (Arkansas Carpenters Health and Welfare Fund v. Bayer AG (2d Cir.
2010) 604 F.3d 98, 100; In re Ciprofloxacin Hydrochloride Antitrust Lit.
(E.D.N.Y. 2003) 261 F.Supp.2d 188, 194; In re Ciprofloxacin Hydrochloride
Antitrust Lit. (E.D.N.Y. 2001) 166 F.Supp.2d 740, 743.) In 1987, Bayer was
issued a United States patent on the active ingredient in Cipro, ciprofloxacin
hydrochloride, a patent that expired in December 2003. (U.S. Patent No.
4,670,444, col. 22, ll. 32-34, claim 12 (the ‘444 patent); see In re Ciprofloxacin
Hydrochloride Antitrust Lit. (Fed. Cir. 2008) 544 F.3d 1323, 1327–1328.) A
subsidiary and licensee of Bayer obtained Food and Drug Administration (FDA)
approval to market Cipro in the United States. (In re Ciprofloxacin Hydrochloride
Antitrust Lit., supra, 544 F.3d at p. 1328; In re Ciprofloxacin Hydrochloride
Antitrust Lit., supra, 166 F.Supp.2d at p. 743.) Between 1987 and 2003, Bayer

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was the sole producer of Cipro in the United States and, between 1997 and 2003
alone, Cipro generated more than $6 billion in gross sales.
At one time, pioneer drugs like Cipro and the generic drugs that followed
them were governed by the same FDA approval process.1 Subjecting generic
drugs to the same ―cumbersome drug approval process [as pioneer drugs] delayed
the entry of relatively inexpensive generic drugs into the market place,‖ at
substantial cost to consumers and the government. (Mylan Pharmaceuticals, Inc.
v. Shalala (D.D.C. 2000) 81 F.Supp.2d 30, 32; see H.R.Rep. No. 98-857, 2d Sess.,
pt. 1, p. 17 (1984), reprinted in 1984 U.S. Code Cong. & Admin. News, at p.
2650.) To expedite the availability of low cost generic drugs, Congress authorized
an abbreviated approval process for drugs whose active ingredients had already
been proven safe and effective in earlier clinical trials. (Drug Price Competition &
Patent Term Restoration Act of 1984, Pub.L. No. 98-417, tit. I, §§ 101-106 (Sept.
24, 1984) 98 Stat. 1585, 1585–1597, codified as amended at 21 U.S.C. § 355 (the
Hatch-Waxman Act); see H.R.Rep. No. 98-857, 2d Sess., pt. 1, pp. 14, 16–17
(1984), reprinted in 1984 U.S. Code Cong. & Admin. News, pp. 2647, 2649–
2650.)
Under the Hatch-Waxman Act, a prospective generic drug manufacturer
may file a streamlined application asserting the generic drug‘s bioequivalence with
an existing pioneer drug, thus piggybacking on the safety and efficacy data already
submitted to the FDA in connection with its approval of the original drug. (21
U.S.C. § 355(j)(2)(A)(ii), (iv); see Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d

1 A generic drug is a drug designed to be identical to an already-FDA-
approved pioneer drug in active ingredients, safety, and efficacy, and thus
therapeutically equivalent to its brand-name counterpart. (See PLIVA, Inc. v.
Mensing (2011) 564 U.S. ___, ___, fn. 2 [180 L.Ed.2d 580, 588, fn. 2; 131 S.Ct.
2567, 2574, fn. 2].)

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at p. 354, 133 S.Ct. at p. 2228].) With respect to the patent implications of the
application, the generic drug manufacturer must make one of four certifications:
There is no patent for the underlying drug, the patent is expired, the patent will
expire, or (relevant here) the patent is invalid or will not be infringed by the
proposed manufacture and sale of the generic drug. (21 U.S.C.
§ 355(j)(2)(A)(vii); Actavis, at p. ___ [186 L.Ed.2d at pp. 353–354, 133 S.Ct. at
p. 2228].) An applicant that certifies the affected patent is invalid or will not be
infringed (a ―paragraph IV‖ certification) must give notice to all affected patent
owners. (21 U.S.C. § 355(j)(2)(B).) Submission of an application to manufacture
a generic version of a drug covered by a patent is a technical act of infringement
(35 U.S.C. § 271(e)(2)(A); Actavis, at p. ___ [186 L.Ed.2d at p. 354, 133 S.Ct. at
p. 2228]); to stay approval of the generic version, a patent owner must file an
infringement lawsuit against the generic drug manufacturer within 45 days (21
U.S.C. § 355(j)(5)(B)(iii)). To provide an incentive to assume the risks of
exposure to such litigation, the first generic manufacturer to file an application and
prevail is granted a potentially lucrative 180-day exclusivity window in which to
market its drug without competition from any other generic manufacturer. (21
U.S.C. § 355(j)(5)(B)(iv); Actavis, at p. ___ [186 L.Ed.2d at p. 354, 133 S.Ct. at
pp. 2228–2229.)
In 1991, twelve years before the scheduled expiration of the ‘444 patent,
defendant Barr Laboratories, Inc., filed an application to market a generic version
of Cipro. (In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d at
p. 1328.) Barr‘s application included a paragraph IV certification that the ‘444
patent was invalid and unenforceable. (Arkansas Carpenters Health and Welfare
Fund v. Bayer AG, supra, 604 F.3d at pp. 101–102; see 21 U.S.C.
§ 355(j)(2)(A)(vii)(IV).) Barr‘s statutory notice to Bayer contended Cipro‘s
derivation was obvious in light of prior art, the ‘444 patent was an invalid double

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patent, and the patent was the product of inequitable conduct based on Bayer‘s
withholding of information about preexisting patents from the patent examiner.
(See 35 U.S.C. §§ 102, 103; In re Longi (Fed. Cir. 1985) 759 F.2d 887, 892–893.)
Bayer responded with a patent infringement suit, staying FDA approval, and Barr
counterclaimed for a declaratory judgment that the ‘444 patent was invalid.2
In early 1997, Bayer and Barr settled. Under the terms of the settlement,
Barr agreed to postpone marketing a generic version of Cipro until the ‘444 patent
expired. It also agreed to a consent judgment affirming the patent‘s validity and to
modification of the certification in its FDA application from a paragraph IV
certification, alleging invalidity, to a ―paragraph III‖ certification, seeking to
market a generic drug upon patent expiration. (Arkansas Carpenters Health and
Welfare Fund v. Bayer AG, supra, 604 F.3d at p. 102; see 21 U.S.C.
§ 355(j)(2)(A)(vii)(III); 21 C.F.R. § 314.94(a)(12)(i)(A)(3) (2014).) In return,
Bayer agreed to make payments to Barr and to supply it with Cipro for licensed
resale beginning six months before patent expiration. (See In re Ciprofloxacin
Hydrochloride Antitrust Lit., supra, 544 F.3d at pp. 1328–1329.) This head start
mirrored the 180-day duopoly the Hatch-Waxman Act would have provided Barr
if it had succeeded in showing invalidity or noninfringement of Bayer‘s patent.

2 While the litigation was ongoing, Barr agreed to accept contribution to its
litigation costs from another generic drug manufacturer, defendant The Rugby
Group, Inc., a then-subsidiary of defendant Hoechst Marion Roussel, Inc., in
exchange for a share of the benefits of any settlement, judgment, or sale of generic
ciprofloxacin hydrochloride. (In re Ciprofloxacin Hydrochloride Antitrust Lit.,
supra, 544 F.3d at p. 1328.) In 1998, The Rugby Group, Inc. was acquired by
defendant Watson Pharmaceuticals, Inc. Generic defendants Barr Laboratories,
Inc., The Rugby Group, Inc., Watson, and Hoechst Marion Roussel, Inc., are
referred to collectively as Barr.

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(21 U.S.C. § 355(j)(5)(B)(iv).) Barr was to receive Cipro from Bayer at 85
percent of current price.
Pursuant to the settlement, between 1997 and 2003, Bayer paid Barr $398.1
million. In that same period, Bayer‘s profits from sales of Cipro exceeded
$1 billion. (In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 261
F.Supp.2d at p. 194.)
The 1997 settlement between Bayer and Barr produced a wave of state and
federal antitrust suits. (Arkansas Carpenters Health and Welfare Fund v. Bayer
AG, supra, 604 F.3d at p. 102.) This case arises from nine such coordinated class
action suits brought by indirect purchasers of Cipro in California against Bayer
and Barr. (See In re Cipro Cases I & II (2004) 121 Cal.App.4th 402, fn. *, 406–
407.) The operative complaint in these coordinated proceedings alleges the Bayer-
Barr reverse payment settlement violated the Cartwright Act (Bus. & Prof. Code,
§ 16700 et seq.), unfair competition law (id., § 17200 et seq.), and common law
prohibition against monopolies. 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. (In re Cipro
Cases I & II, at p. 418.) Thereafter, the parties stayed this action pending
resolution of consolidated federal challenges to the Bayer-Barr settlement.
Following a Federal Circuit ruling in favor of Bayer and Barr on federal
antitrust claims (In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544 F.3d
1323),3 the trial court granted a defense summary judgment. It found decisional

3 As discussed below, both In re Ciprofloxacin Hydrochloride Antitrust Lit.,
supra, 544 F.3d 1323 and a second decision rejecting a federal antitrust challenge
to the Cipro settlement, Arkansas Carpenters Health and Welfare Fund v. Bayer
(footnote continued on next page)

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law under the federal Sherman Act (15 U.S.C. § 1 et seq.) dispositive and held that
because the settlement agreement did not restrain competition longer than the
exclusionary scope of the ‘444 patent, it did not violate the Cartwright Act. The
Court of Appeal affirmed, holding that agreements restraining competition within
the scope of a patent are lawful unless the patent was procured by fraud or the suit
to enforce it was objectively baseless. The court held further that, even if there
were a disputed issue of material fact as to whether Bayer‘s suit to enforce the
‘444 patent was objectively baseless, litigation of that theory would be foreclosed
by exclusive federal court patent jurisdiction.
We granted review to resolve important unsettled issues of state antitrust
law. While the case was pending before this court, we entered an order
formalizing Bayer‘s dismissal from the proceedings pursuant to an approved
settlement. Barr remains as respondent.
DISCUSSION
I. Reverse Payment Settlements Under the Hatch-Waxman Act
The Hatch-Waxman Act illustrates the law of unintended consequences.
Congress wrote into the act a substantial incentive for generics to enter markets
earlier by offering a 180-day exclusivity period to the first generic filer, and only
that filer, to challenge a patent. (21 U.S.C. § 355(j)(5)(B)(iv); see Hemphill,
Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design
Problem (2006) 81 N.Y.U. L.Rev. 1553, 1566, 1578–1579, 1583.) The theory
was that a generic would be more likely to challenge dubious patents if offered the

(footnote continued from previous page)

AG, supra, 604 F.3d 98, were decided under principles later rejected by the United
States Supreme Court in Actavis, supra, 570 U.S. ___ [186 L.Ed.2d 343, 133 S.Ct.
2223].

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carrot of an enormously valuable six-month period in which only it and the brand
could produce a drug. (Carrier, Unsettling Drug Patent Settlements: A Framework
for Presumptive Illegality (2009) 108 Mich. L.Rev. 37, 47; Bulow, The Gaming of
Pharmaceutical Patents in 4 Innovation Policy and the Economy (Jaffe et al.
edits., 2004) 145, 163; Hemphill, An Aggregate Approach to Antitrust: Using
New Data and Rulemaking to Preserve Drug Competition (2009) 109 Colum.
L.Rev. 629, 651.) Otherwise, ―free rider‖ problems might arise: every generic
would have an incentive to hold back and let some other generic be the one to
shoulder the risk and litigation costs associated with challenging a patent.
(Lemley & Shapiro, Probabilistic Patents (2005) 19 J. Econ. Perspectives 75, 88;
Hemphill, Paying for Delay, at p. 1605.)
This solution may well have encouraged more generics to file patent
challenges, but not without creating a series of new problems. In other settings, a
patentee might have little incentive to buy off a challenger in order to preserve its
monopoly and continue reaping monopoly profits, for the simple reason that
paying off the first challenger would simply encourage another challenger, and
then another, and then another. (See Actavis, supra, 570 U.S. at p. ___ [186
L.Ed.2d at pp. 361–362, 133 S.Ct. at p. 2235].) Two features of the Hatch-
Waxman Act change this dynamic. First, the 180-day exclusivity period created a
bottleneck; no one else could receive FDA approval until after its expiration. (21
U.S.C. § 355(j)(5)(B)(iv)(I); Hemphill, Paying for Delay: Pharmaceutical Patent
Settlement as a Regulatory Design Problem, supra, 81 N.Y.U. L.Rev. at pp. 1560–
1561, 1586–1587.) Second, other generics tempted to challenge a patent in the
wake of a settlement with the first-filing generic would have to wait out an
automatic 30-month stay the brand could obtain just by opposing their requests for
FDA approval. (21 U.S.C. § 355(j)(5)(B)(iii); Actavis, at p. ___ [186 L.Ed.2d at
pp. 361–362, 133 S.Ct. at p. 2235]; Bulow, The Gaming of Pharmaceutical

8
Patents in 4 Innovation Policy and the Economy, supra, at p. 164.) As a result,
the brand could effectively pick off ― ‗the most motivated challenger, and the one
closest to introducing competition‘ ‖ (Actavis, at p. ___ [186 L.Ed.2d at pp. 361–
362, 133 S.Ct. at p. 2235], quoting Hemphill, Paying for Delay, at p. 1586), with
all others stuck in line behind that generic (Cotter, Refining the “Presumptive
Illegality” Approach to Settlements of Patent Disputes Involving Reverse
Payments: A Commentary on Hovenkamp, Janis & Lemley (2003) 87 Minn.
L.Rev. 1789, 1801).4
This legal regime means that, regardless of the degree of likely validity of a
patent, the brand and first-filing generic have an incentive to effectively establish a
cartel through a reverse payment settlement. (12 Areeda & Hovenkamp, Antitrust
Law, supra, ¶ 2046, pp. 341–345; Hovenkamp, Anticompetitive Patent Settlements
and the Supreme Court’s Actavis Decision (2014) 15 Minn. J. L. Sci. & Tech. 3,
8–13; see Carrier, Unsettling Drug Patent Settlements: A Framework for
Presumptive Illegality, supra, 108 Mich. L.Rev. at p. 73 [under Hatch-Waxman,
―[g]enerics have powerful incentives to file the first patent challenge but little
incentive to pursue the litigation‖].) Rather than expend litigation costs on either
side, the brand and generic can reach a settlement that reflects the likely validity or
invalidity of the patent (stronger patent, smaller settlement; weaker patent, bigger
settlement), grants the generic a share of monopoly profits, and leaves the brand

4 Amendments to the Hatch-Waxman Act postdating the settlement in this
case may have partially alleviated the complete bottleneck problem (Hemphill,
Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design
Problem, supra, 81 N.Y.U. L.Rev. at p. 1587), although not issues arising from the
30-month stay or the reduced incentives for other generics, without the carrot of
180 days of duopoly, to bring patent challenges (12 Areeda & Hovenkamp,
Antitrust Law (3d ed. 2012) ¶ 2046, p. 341).

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the sole manufacturer of the product. (Hovenkamp, Anticompetitive Patent
Settlements, at pp. 12–13.)
It is likely for this reason that reverse payment settlements, practically
unheard of before the Hatch-Waxman Act, have proliferated in the years since its
enactment. (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at
p. 2235]; Hovenkamp, Anticompetitive Patent Settlements, supra, 15 Minn. J. L.
Sci. & Tech. at pp. 13–16; Hemphill, An Aggregate Approach to Antitrust: Using
New Data and Rulemaking to Preserve Drug Competition, supra, 109 Colum.
L.Rev. at pp. 647–656.) This is probably not what Congress intended. (Actavis, at
p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2235] [the Hatch-Waxman Act‘s
provisions have ―no doubt unintentionally . . . created special incentives for
collusion‖]); id. at p. ___ [186 L.Ed.2d at p. 360, 133 S.Ct. at p. 2234] [quoting
remarks of Sen. Hatch and Rep. Waxman decrying as an unintended consequence
of their legislation collusive agreements to delay competition].) The issue for us is
what, if anything, state antitrust law has to say about these problems.
II. The Intersection Between Antitrust and Patent Law
A. The Cartwright Act
The Legislature enacted the state‘s principal antitrust law, the Cartwright
Act, to rein in the burgeoning power of monopolies and cartels. (Clayworth v.
Pfizer, Inc. (2010) 49 Cal.4th 758, 772.) The act‘s principal goal is the
preservation of consumer welfare. (Cianci v. Superior Court (1985) 40 Cal.3d
903, 918; Marin County Bd. of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920,
935.) The act, like antitrust law in general, ―rest[s] ‗on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices, the highest quality and the greatest material
progress, while at the same time providing an environment conducive to the
preservation of our democratic political and social institutions.‘ ‖ (Marin County

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Bd., at p. 935; see National Soc. of Professional Engineers v. United States (1978)
435 U.S. 679, 695.) At its heart is a prohibition against agreements that prevent
the growth of healthy, competitive markets for goods and services and the
establishment of prices through market forces. (See Speegle v. Board of Fire
Underwriters (1946) 29 Cal.2d 34, 44.) ―The act ‗generally outlaws any
combinations or agreements which restrain trade or competition or which fix or
control prices‘ [citation], and declares that, with certain exceptions, ‗every trust is
unlawful, against public policy and void.‘ ‖ (Pacific Gas & Electric Co. v. County
of Stanislaus (1997) 16 Cal.4th 1143, 1147.)
The ―trust[s]‖ the act prohibits include any ―combination . . . by two or
more persons‖ to ―create or carry out restrictions in trade or commerce‖ (Bus. &
Prof. Code, § 16720, subd. (a)) or to ―prevent competition in manufacturing,
making, transportation, sale or purchase of merchandise, produce or any
commodity‖ (id., subd. (c)). Also prohibited is any contract by which two or more
entities ―[a]gree to pool, combine or directly or indirectly unite any interests that
they may have connected with the sale . . . of any such article or commodity, that
its price might in any manner be affected.‖ (Id., subd. (e)(4).) Agreements in
violation of the act are ―absolutely void and . . . not enforceable at law or in
equity.‖ (Id., § 16722; see id., § 16726.)
Though the Cartwright Act is written in absolute terms, in practice not
every agreement within the four corners of its prohibitions has been deemed
illegal. (Morrison v. Viacom, Inc. (1998) 66 Cal.App.4th 534, 540.) Business and
Professions Code sections 16720, 16722, and 16726 draw upon the common law
prohibition against restraints of trade. (Corwin v. Los Angeles Newspaper Service
Bureau, Inc. (1971) 4 Cal.3d 842, 852; People v. Building Maintenance etc. Assn.
(1953) 41 Cal.2d 719, 727; Speegle v. Board of Fire Underwriters, supra, 29
Cal.2d at p. 44.) The earliest common law decisions imposed an absolute rule,

11
voiding ―all contracts . . . which in any degree tended to the restraint of trade.‖
(Wright v. Ryder (1868) 36 Cal. 342, 357.) But the common law rule was soon
modified and ―as relaxed, tolerated such [restraints of trade] as were restricted in
their operations within reasonable limits.‖ (Ibid.; see Vulcan Powder Co. v.
Hercules Powder Co. (1892) 96 Cal. 510, 512.) The United States Supreme Court
looked to the common law in embracing a rule of reason for determining which
agreements violate federal antitrust law (see Standard Oil Co. v. United States
(1911) 221 U.S. 1, 60), and this court thereafter followed suit: ―[I]t may be
assumed that the broad prohibitions of the Cartwright Act are subject to an implied
exception similar to the one that validates reasonable restraints of trade under the
federal Sherman Antitrust Act.‖ (Building Maintenance etc. Assn., at p. 727; see
Marin County Bd. of Realtors, Inc. v. Palsson, supra, 16 Cal.3d at p. 930; Corwin,
at p. 853.)5 What was true under the common law, however, is true today: ―the
difficulty lies in determining what are reasonable and what unreasonable
restrictions.‖ (Wright, at p. 358.)
B. Patent Law
That difficulty is all the greater because antitrust law does not exist in a
vacuum. The patent laws ―are in pari materia with the antitrust laws and modify
them pro tanto [to that extent].‖ (Simpson v. Union Oil Co. (1964) 377 U.S. 13,
24.) To promote investment in invention and the public disclosure of new
discoveries, Congress has seen fit to grant inventors limited statutory monopolies

5 As we noted in People v. Building Maintenance etc. Assn., supra, 41 Cal.2d
at pages 726–727, a separate section of the Cartwright Act effectively codifies this
principle: ―It is not unlawful to enter into agreements or form associations or
combinations, the purpose and effect of which is to promote, encourage or
increase competition in any trade or industry, or which are in furtherance of
trade.‖ (Bus. & Prof. Code, § 16725.)

12
and the right to exclude competition in the manufacture, use, or sale of the patent‘s
subject. (35 U.S.C. § 154(a); see Bonito Boats, Inc. v. Thunder Craft Boats, Inc.
(1989) 489 U.S. 141, 150–151; Dawson Chemical Co. v. Rohm & Haas Co.
(1980) 448 U.S. 176, 215; Sears, Roebuck & Co. v. Stiffel Co. (1964) 376 U.S.
225, 229.) Accordingly, the issuance of a federal patent creates ―an exception to
the general rule against monopolies and to the right of access to a free and open
market.‖ (Precision Co. v. Automotive Co. (1945) 324 U.S. 806, 816.) While
―[t]he limited monopolies granted to patent owners do not exempt them from the
prohibitions‖ of antitrust law (Standard Oil Co. v. United States (1931) 283 U.S.
163, 169; see United Shoe Mach. Co. v. United States (1922) 258 U.S. 451, 463–
464 [―the rights secured by a patent do not protect the making of contracts in
restraint of trade‖]), in a given case possession of a patent may provide a defense
to liability (United States v. Gen. Elec. Co. (1926) 272 U.S. 476, 488–490; Valley
Drug Co. v. Geneva Pharmaceuticals (11th Cir. 2003) 344 F.3d 1294, 1307).
Courts thus must reconcile the two bodies of law, making ―an adjustment between
the lawful restraint on trade of the patent monopoly and the illegal restraint
prohibited broadly by‖ antitrust law. (United States v. Line Material Co. (1948)
333 U.S. 287, 310.)
At the extremes, this is easy. If a patent were known to be invalid, a private
agreement nevertheless giving it effect would be plainly illegal. (See Bus. & Prof.
Code, §§ 16720, 16722, 16726.) Conversely, if a patent were known to be valid,
an agreement foreclosing competition no more than the statutory monopoly would
not restrain trade beyond what federal law permitted, and the rights patent law
affords the patentee would supersede any state law prohibition. Difficulties
emerge when we move from a hypothetical patent known to be determinately valid
or invalid to the real world, where validity may be unclear. When assessing the
antitrust implications of an agreement arising from a patent, the truth about the

13
patent‘s validity cannot always be known. The issue is how antitrust and patent
law should accommodate each other under these conditions of uncertainty.
III. The Scope of the Patent Test
A. The Court of Appeal and the Scope of the Patent Approach
The particular accommodation this case calls for arises from an issue of
virtual first impression under the Cartwright Act: how to apply the statutory bar
against restraints of trade to patent settlement agreements that limit competition,
but no more broadly than an injunction enforcing the patent would have, had one
been obtained. (Cf. In re Cardizem CD Antitrust Litigation (6th Cir. 2003) 332
F.3d 896, 904, fn. 8, 906–909 [deciding the issue under both federal law and the
Cartwright Act, but without independently analyzing state law].) Rejecting
plaintiffs‘ argument that agreements of this sort should be deemed uniformly
illegal, the Court of Appeal resolved the issue by adopting one of several
competing approaches courts had developed to solve the problem under federal
antitrust law, the scope of the patent test.6 Under that test, the Court of Appeal
held, ―a settlement of a lawsuit to enforce a patent does not violate the Cartwright
Act if the settlement restrains competition only within the scope of the patent,
unless the patent was procured by fraud or the suit for its enforcement was
objectively baseless.‖ The scope of the patent test thus gives wide effect to
patents by essentially presuming their validity in most cases. We conclude, as
more recent United States Supreme Court authority has now made clear, that this

6 See In re Tamoxifen Citrate Antitrust Litigation (2d Cir. 2006) 466 F.3d
187; cf. In re Cardizem CD Antitrust Litigation, supra, 332 F.3d at pp. 907–909
(adopting per se rule); In re K-Dur Antitrust Litigation (3d Cir. 2012) 686 F.3d
197 (adopting quick look rule of reason analysis).

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test accords excess weight to the policies motivating patent law, gives insufficient
consideration to the concerns animating antitrust law, and must be rejected.
The federal cases the Court of Appeal followed identify three core
rationales for concluding a patent litigation settlement restricting competition no
more than a valid patent would is generally lawful. First, patents are presumed
valid. (35 U.S.C. § 282(a).) Given this presumption, many lower federal courts
reasoned, an agreement that does not extend monopoly beyond what a patent
grants imposes no additional injury to competition and, in the absence of anti-
competitive effects, generally survives antitrust scrutiny. (See In re Ciprofloxacin
Hydrochloride Antitrust Lit., supra, 544 F.3d at p. 1337; In re Tamoxifen Citrate
Antitrust Litigation, supra, 466 F.3d at pp. 212–213; Schering-Plough Corp. v.
FTC (11th Cir. 2005) 402 F.3d 1056, 1066–1068.)
Second, the fundamental purpose of patent law is to promote innovation
and the disclosure of inventions so that ultimately new discoveries may benefit the
public at large. (Bonito Boats, Inc. v. Thunder Craft Boats, Inc., supra, 489 U.S.
at pp. 150–151.) To subject exclusions within the scope of a patent to scrutiny and
potential liability would, lower courts feared, chill innovation and give inventors
pause in deciding whether to share their creations with the public. (See In re
Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at p. 203; Schering-Plough
Corp. v. FTC, supra, 402 F.3d at p. 1075; Valley Drug Co. v. Geneva
Pharmaceuticals, supra, 344 F.3d at p. 1308.)
Third, there is a general policy in favor of settlement, perhaps more so in
patent litigation. (In re Ciprofloxacin Hydrochloride Antitrust Lit., supra, 544
F.3d at p. 1333; In re Tamoxifen Citrate Antitrust Litigation, supra, 466 F.3d at
p. 202; Schering-Plough Corp. v. FTC, supra, 402 F.3d at pp. 1072–1073.) Patent
litigation settlements ―may benefit the public by introducing a new rival into the
market, facilitating competitive production, and encouraging further innovation.‖

15
(Schering-Plough Corp., at p. 1075.) Conversely, a legal regime that hampers
settlement ―may actually decrease product innovation by amplifying the period of
uncertainty around a drug manufacturer‘s ability to research, develop, and market
the patented product or allegedly infringing product.‖ (Ibid.; see In re Tamoxifen
Citrate Antitrust Litigation, at p. 203.)
B. Federal Trade Commission v. Actavis
The Court of Appeal‘s adoption of the scope of the patent test was the
product not of an analysis of the Cartwright Act‘s text, policy, or history, but of an
assessment of procedural and policy-based aspects of patent law. The soundness
of its choice of test thus depends on the extent to which that patent law assessment
was sound. In Actavis, supra, 570 U.S. ___ [186 L.Ed.2d 343, 133 S.Ct. 2223],
issued after the Court of Appeal‘s decision and after our grant of review, the
Supreme Court reversed a federal decision holding Hatch-Waxman reverse
payment settlement agreements ― ‗immune from antitrust attack so long as [their]
anticompetitive effects fall within the scope of the exclusionary potential of the
patent.‘ ‖ (Id. at p. ___ [186 L.Ed.2d at p. 353, 133 S.Ct. at p. 2227].) In the
course of its opinion, the Supreme Court dismantled the underpinning of each of
the cases the Court of Appeal had found persuasive.
First, the Supreme Court rejected the scope of the patent test‘s foundational
presumption that the holder of a challenged patent enjoys all the rights attendant to
ownership of a valid patent: ―to refer . . . simply to what the holder of a valid
patent could do does not by itself answer the antitrust question. The patent here
may or may not be valid, and may or may not be infringed.‖ (Actavis, supra, 570
U.S. at p. ___ [186 L.Ed.2d at p. 356, 133 S.Ct. at pp. 2230–2231].) To be sure, a
valid patent allows the patentee to exclude others from the market, ―[b]ut an
invalidated patent carries with it no such right.‖ (Id. at p. ___ [186 L.Ed.2d at
p. 356, 133 S.Ct. at p. 2231].) Patent litigation ―put[s] the patent‘s validity at

16
issue, as well as its actual preclusive scope‖; simply because a settlement curtails
testing and ultimate resolution of that issue, courts should not thereafter treat
patent law and its presumptions as conclusively establishing the challenged
patent‘s legitimate scope. (Id. at p. ___ [186 L.Ed.2d at p. 357, 133 S.Ct. at
p. 2231].)
Second, the core policies underlying patent law are more nuanced than the
cases applying a scope of the patent test had recognized, and the incentives to
innovate far sturdier than those courts had feared. Patents carry with them a
frequent cost—monopoly premiums the public must bear. (See Lear, Inc. v.
Adkins (1969) 395 U.S. 653, 670.) The willingness to pay that cost depends upon
a quid pro quo: ― ‗the public interest in granting patent monopolies‘ exists only to
the extent that ‗the public is given a novel and useful invention‘ in ‗consideration
for its grant.‘ ‖ (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 358, 133
S.Ct. at p. 2232].) Accordingly, patent policy does not support unquestioned
protection of every inventor‘s rights, but instead favors ―eliminating unwarranted
patent grants so the public will not ‗continually be required to pay tribute to
would-be monopolists without need or justification.‘ ‖ (Id. at p. ___ [186 L.Ed.2d
at p. 359, 133 S.Ct. at p. 2233].) Vigorous testing for validity is thus desirable in
order to weed out patents that shield a monopoly without offering corresponding
public benefits. (See Aronson v. Quick Point Pencil Co. (1979) 440 U.S. 257,
264; United States v. Glaxo Group Ltd. (1973) 410 U.S. 52, 58; Edward Katzinger
Co. v. Chicago Mfg. Co. (1947) 329 U.S. 394, 400–401.)7

7 As commentators have noted, an excess of invalid patents is one of the
principal problems in modern patent law. (See Ford, Patent Invalidity Versus
Noninfringement (2013) 99 Cornell L.Rev. 71, 74 & fn. 11 [discussing substantial
scholarship on the point].) The pro-patent-challenge policy is particularly strong
in the Hatch-Waxman Act setting, given the 180-day exclusivity bounty Congress
(footnote continued on next page)

17
 Third, the Supreme Court explained that while the policy favoring
settlement of patent litigation offers some support for limiting scrutiny of
agreements restraining competition only within the scope of a patent, it ultimately
is not dispositive. (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at pp. 360,
364, 133 S.Ct. at pp. 2234, 2238].) Settlements are generally a positive good, but
not always; settlements of the sort challenged in Actavis, the court observed, can
amount to ―payment in return for staying out of the market‖ and permit monopoly
premiums still to be charged and simply divided up between the patent holder and
patent challenger; ―[t]he patentee and the challenger gain; the consumer loses.‖
(Id. at p. ___ [186 L.Ed.2d at p. 361, 133 S.Ct. at pp. 2234, 2235].) Such anti-
competitive effects will not always be justified, and an antitrust action to test a
settlement‘s legality may be warranted and feasible. (Id. at p. ___ [186 L.Ed.2d at
pp. 361–364, 133 S.Ct. at pp. 2235–2237].) Fears of chilling even legitimate
settlements are overstated; all that allowing antitrust scrutiny does is remove the
incentive to settle as a way to split monopoly profits. (Id. at p. ___ [186 L.Ed.2d
at p. 363, 133 S.Ct. at p. 2237].) Because the scope of the patent test overvalues
the policies underlying patent law at the expense of the equally relevant policies
underlying antitrust law, the court concluded, it cannot stand under federal law.
(Id. at p. ___ [186 L.Ed.2d at p. 357, 133 S.Ct. at p. 2231].)

(footnote continued from previous page)

adopted as an incentive to bring such challenges. (See 21 U.S.C.
§ 355(j)(5)(B)(iv); 12 Areeda & Hovenkamp, Antitrust Law, supra, ¶ 2046,
p. 340; Carrier, Unsettling Drug Patent Settlements: A Framework for
Presumptive Illegality, supra, 108 Mich. L.Rev. at pp. 43, 64; ante, pp. 7–8.)

18
 C. The Scope of the Patent Test’s Validity Under State Law
Barr contends Actavis is distinguishable because it involved a public
prosecution under the Federal Trade Commission Act (15 U.S.C. § 45 et seq.), not
a private antitrust suit, and this court should embrace the scope of the patent test as
a matter of state antitrust law.
We agree Actavis is not dispositive on matters of state law. Indeed, even if
Actavis had been a private Sherman Act case, its conclusions would not dictate
how the Cartwright Act must be read. ―Interpretations of federal antitrust law are
at most instructive, not conclusive, when construing the Cartwright Act, given that
the Cartwright Act was modeled not on federal antitrust statutes but instead on
statutes enacted by California‘s sister states around the turn of the 20th century.‖
(Aryeh v. Canon Business Solutions, Inc. (2013) 55 Cal.4th 1185, 1195; see State
of California ex rel. Van de Kamp v. Texaco, Inc. (1988) 46 Cal.3d 1147, 1164.)
That said, nothing in the United States Supreme Court‘s discussion of the legal
rules at the boundary between antitrust and patent law hinged on the happenstance
that the case under review involved a public prosecutor. Accordingly, that
circumstance neither adds to nor detracts from the persuasive force the discussion
would otherwise have.
What does affect the weight to be accorded Actavis is the extent to which
its analysis establishes the metes and bounds of patent law and policy. Patent law
is federal law. (U.S. Const., art. I, § 8, cl. 8; see Bonito Boats, Inc. v. Thunder
Craft Boats, Inc., supra, 489 U.S. at pp. 146–157.) The United States Supreme
Court is the final arbiter of questions of patent law and the extent to which
interpretations of antitrust law—whether state or federal—must accommodate
patent law‘s requirements, and Actavis is its latest word on the subject. If under
Actavis patent law demands extensive deference to patents‘ presumed validity and
the consecration of a broad range of agreements otherwise facially illegal under

19
state law, we must abide by that judgment. Conversely, if the accommodation
necessitated by patent policy is somewhat narrower than previously understood,
we again must treat that determination as conclusive and reconsider the proper
domain of state antitrust law in light of that cession of territory.
Barr asserts Actavis is alternatively distinguishable on the ground the
underlying patent there was far weaker than the underlying patent here.8 But
Actavis‘s analysis was not contingent on a particular level of uncertainty
surrounding the patent before it. Instead, the court simply recognized that any
patent might, or might not, be valid. (Actavis, supra, 570 U.S. at p. ___ [186
L.Ed.2d at p. 356, 133 S.Ct. at p. 2231]; see id. at p. ___ [186 L.Ed.2d at p. 367,
133 S.Ct. at p. 2240] (dis. opn. of Roberts, C.J.) [recognizing the problem ―that
we‘re not quite certain if the patent is actually valid, or if the competitor is
infringing it,‖ a problem ―that is always the case‖ in patent disputes].) Indeed, a
critical insight undergirding Actavis is that patents are in a sense probabilistic,
rather than ironclad: they grant their holders a potential but not certain right to
exclude.
The uncertainty concerning a patent‘s validity is a by-product of the
realities surrounding patent issuance and the legal regime Congress and the courts
have established for patent enforcement. In the first instance, a patent ―simply
represents a legal conclusion reached by the Patent Office. Moreover, the legal
conclusion is predicated on factors as to which reasonable men can differ widely.
Yet the Patent Office is often obliged to reach its decision in an ex parte

8 After the settlement, Bayer submitted the ‘444 patent to the Patent and
Trademark Office for reexamination and obtained reaffirmation that it was not
invalid. (See 35 U.S.C. § 302.) Later patent challenges by litigants other than
Barr were unsuccessful. (See In re Ciprofloxacin Hydrochloride Antitrust Lit.
(E.D.N.Y. 2005) 363 F.Supp.2d 514, 519–520.)

20
proceeding, without the aid of the arguments which could be advanced by parties
interested in proving patent invalidity.‖ (Lear, Inc. v. Adkins, supra, 395 U.S. at
p. 670.) That decision is constrained by time and resource pressures; facing an
enormous backlog, patent examiners may average less than 20 hours spent on each
application. (Ford, Patent Invalidity Versus Noninfringement, supra, 99 Cornell
L.Rev. at pp. 87–89; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ.
Perspectives at p. 79; Lemley, Rational Ignorance at the Patent Office (2001) 95
Nw.U. L.Rev. 1495, 1499–1500.) Given this underlying reality, Congress has
elected not to make the issuance of a patent conclusive but, rather, subject to
validation or invalidation in court proceedings. (35 U.S.C. § 282; see, e.g., Alice
Corp. Pty. Ltd. v. CLS Bank Int’l (2014) 573 U.S. ___ [189 L.Ed.2d 296, 134 S.Ct.
2347]; Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp.
(1965) 382 U.S. 172, 176.) A patent is, in effect, a right to ask the government to
exercise its power to keep others from using an invention without consent. (Zenith
Corp. v. Hazeltine (1969) 395 U.S. 100, 135.) Whether a court will do so—
whether it will issue an injunction—will depend on actual proof of validity.
The differential application of collateral estoppel adds another layer of
uncertainty. A finding that a patent is invalid operates in rem and estops the
patentee from asserting validity against the world. (Blonder-Tongue v. University
Foundation (1971) 402 U.S. 313, 349–350.) In contrast, a finding that a patent is
valid operates only on the parties and does not extend from one infringement case
to the next. A future challenger with new or better information may subsequently
raise, and succeed on, an invalidity defense to a charge of infringement. (In re
Swanson (Fed. Cir. 2008) 540 F.3d 1368, 1377; Ethicon, Inc. v. Quigg (Fed. Cir.
1988) 849 F.2d 1422, 1429, fn. 3 [― ‗A patent is not held valid for all purposes but,
rather, not invalid on the record before the court‘ ‖ and ― ‗simply remains valid

21
until another challenger carries‘ ‖ the burden of showing invalidity].) Each case
may show only that a patent has not been invalidated, yet.
If the assertion of patent rights leads to a court injunction excluding a
competitor from the marketplace, there is no antitrust problem. If instead the
assertion leads to a private settlement agreement, there is a potential antitrust
problem. With a settlement, any restraint arises directly from the private
agreement and only indirectly from the patent, which remains in the background,
motivating the parties‘ actions according to their assessments of its strength. That
a patent has not (yet) been invalidated may allow some confidence about its
fundamental enforceability, but does not allow a court to skip entirely an antitrust
analysis of competitive restraints within the patent‘s scope on the assumption that
its validity has been established. The scope of the patent test is flawed precisely
because it assumes away whatever level of uncertainty a given patent—the ‘444
patent here, no less than the one at issue in Actavis—may be subject to.9

9 The Actavis treatment of patents as in some sense probabilistic rests on a
substantial body of scholarship suggesting patents are best understood this way.
(See, e.g., Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ.
Perspectives at pp. 75–76, 95; Shapiro, Antitrust Analysis of Patent Settlements
Between Rivals (Summer 2003) 17 Antitrust 70, 75; Leffler & Leffler, The
Probabilistic Nature of Patent Rights (Summer 2003) 17 Antitrust 77; Shapiro,
Antitrust Limits to Patent Settlements (2003) 34 RAND J. Econ. 391, 395.)
Others, including the Actavis dissenters, have disagreed, insisting a patent
ultimately is always only valid or invalid, whether we know it yet or not. (Actavis,
supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 372, 133 S.Ct. at p. 2244] (dis. opn. of
Roberts, C.J.); Schildkraut, Patent-Splitting Settlements and the Reverse Payment
Fallacy (2004) 71 Antitrust L.J. 1033; McDonald, Hatch-Waxman Patent
Settlements and Antitrust: On “Probabilistic” Patent Rights and False Positives
(Spring 2003) 17 Antitrust 68.) The Supreme Court majority‘s views are
conclusive as to which side of this philosophical divide over the proper treatment
of patents is correct, and we follow them.

22
 Aside from its attempts to distinguish Actavis, Barr argues a 1953
California decision predating the recent federal Hatch-Waxman Act decisions
favors the scope of the patent test for Cartwright Act challenges to patent
settlements. (See Fruit Machinery Co. v. F.M. Ball & Co. (1953) 118 Cal.App.2d
748, 758.) We do not read that opinion so broadly.
In Fruit Machinery, six canning companies formed a corporation and
licensed to it rights under a fruit pitter patent owned by one of the companies. In
turn, the licensee contracted with each of the six, sublicensing to them the right to
build and own a specified number of pitters and to lease additional pitters in
exchange for payment of royalties. A dispute over nonpayment of royalties arose
between the licensee and one of the six companies. The company raised as a
defense to payment that the contractual arrangements gave the six companies an
unlawful monopoly on pitter ownership and were thus unenforceable. The Court
of Appeal found no antitrust violation, explaining: ―Defendant has not shown that
the parties, in executing and carrying out the sublicense agreement in suit,
exercised rights or powers not accorded them by the patent law or abused any
rights or powers accorded them by that law.‖ (Fruit Machinery Co. v. F.M. Ball
& Co., supra, 118 Cal.App.2d at p. 762, italics added.) The Court of Appeal
distinguished other cases involving antitrust violations as involving a ―patentee or
his assignee [who] went beyond that which was necessary or incidental to the
scope of his patent and brought himself within the proscription of the antitrust
laws.‖ (Id. at p. 763.)
Fruit Machinery does not stand for the proposition that any restraints of
trade within the scope of a patent are valid. Rather, it recognizes trade restraints
that exceed those authorized by a patent may be invalid and, moreover, that the
―abuse[]‖ of patent rights may also run afoul of antitrust law. (Fruit Machinery
Co. v. F.M. Ball & Co., supra, 118 Cal.App.2d at p. 762.) The court responded to

23
the concern that the corporate licensee might use its exclusive patent rights to
charge far higher royalties for leased than owned pitters not by saying such a
differential would automatically be lawful, as within the scope of any patent
rights, but by saying only ―that such has not happened yet‖ and it would not
presume a ―[f]uture violation . . . of the antitrust laws.‖ (Ibid.)
No other California authority Barr has cited, nor any we have found,
establishes the scope of the patent test is applicable under the Cartwright Act.
Even if such precedent existed, we would be forced to reexamine it in light of
Actavis. The scope of the patent test insulates from antitrust scrutiny virtually any
agreement that restrains trade no more than the patent itself would have, if valid.
State law must yield to federal, but we cannot under the guise of patent law carve
into the Legislature‘s enactments a larger exception than federal law dictates, and
Actavis shows such a broad exemption is not required. Accordingly, we conclude
the scope of the patent test is inapplicable to Cartwright Act claims.

IV. Analysis of Reverse Payment Patent Settlements
Having joined the United States Supreme Court in rejecting the scope of the
patent test, we consider what rubric courts should instead apply under state law to
reverse payment patent settlements.
A. Antitrust Analysis Under the Cartwright Act
As discussed, although the prohibitions of the Cartwright Act are framed in
superficially absolute language, deciding antitrust illegality is not as simple as
identifying whether a challenged agreement involves a restraint of trade. (See
Chicago Board of Trade v. United States (1918) 246 U.S. 231, 238 [pointing out
that ―[e]very agreement concerning trade . . . restrains‖ (italics added)].) Instead,
the Cartwright Act and Sherman Act carry forward the common law

24
understanding that ―only unreasonable restraints of trade are prohibited.‖ (Marin
County Bd. of Realtors, Inc. v. Palsson, supra, 16 Cal.3d at p. 930.)
Under the traditional rule of reason, ―inquiry is limited to whether the
challenged conduct promotes or suppresses competition.‖ (Fisher v. City of
Berkeley (1984) 37 Cal.3d 644, 672, affd. sub nom. Fisher v. Berkeley (1986) 475
U.S. 260.) To determine whether an agreement harms competition more than it
helps, a court may consider ―the facts peculiar to the business in which the
restraint is applied, the nature of the restraint and its effects, and the history of the
restraint and the reasons for its adoption.‖ (United States v. Topco Associates, Inc.
(1972) 405 U.S. 596, 607; see Corwin v. Los Angeles Newspaper Service Bureau,
Inc., supra, 4 Cal.3d at p. 854.) In a typical case, this may entail expert testimony
on such matters as the definition of the relevant market (Corwin, at p. 855) and the
extent of a defendant‘s market power (Fisherman’s Wharf Bay Cruise Corp. v.
Superior Court (2003) 114 Cal.App.4th 309, 334–339; Roth v. Rhodes (1994) 25
Cal.App.4th 530, 542–543).
Rule of reason inquiry is not required in every case; we and the United
States Supreme Court have partially simplified the analysis by identifying
categories of agreements or practices that can be said to always lack redeeming
value and thus qualify as per se illegal. (See Northern Pac. R. Co. v. United States
(1958) 356 U.S. 1, 5; Marin County Bd. of Realtors, Inc. v. Palsson, supra, 16
Cal.3d at pp. 930–931; Oakland-Alameda County Builders’ Exchange v. F. P.
Lathrop Constr. Co. (1971) 4 Cal.3d 354, 360–362.) ―The per se rule reflects an
irrebuttable presumption that, if the court were to subject the conduct in question
to a full-blown inquiry, a violation would be found under the traditional rule of
reason.‖ (Fisher v. City of Berkeley, supra, 37 Cal.3d at p. 666.)
More recently, a third category, quick look rule of reason analysis, has
emerged. (California Dental Assn. v. FTC (1999) 526 U.S. 756, 769–770; see

25
FTC v. Indiana Federation of Dentists (1986) 476 U.S. 447, 459–460; NCAA v.
Board of Regents of Univ. of Okla. (1984) 468 U.S. 85, 109–110.) Under the
quick look approach, applicable to cases where ―an observer with even a
rudimentary understanding of economics could conclude that the arrangements in
question would have an anticompetitive effect on customers and markets,‖ a
defendant may be asked to come forward with procompetitive justifications for a
challenged restraint without the plaintiff having to introduce elaborate market
analysis first. (California Dental Assn., at p. 770.)
There was a time when this court and the United States Supreme Court
treated the choice between per se and rule of reason analysis as a necessary
threshold inquiry involving rigidly distinct analytic boxes. In more recent years,
however, the Supreme Court has explained, ―[t]he truth is that our categories of
analysis of anticompetitive effect are less fixed than terms like ‗per se,‘ ‗quick
look,‘ and ‗rule of reason‘ tend to make them appear.‖ (California Dental Assn. v.
FTC, supra, 526 U.S. at p. 779.) ―[T]here is generally no categorical line to be
drawn between restraints that give rise to an intuitively obvious inference of
anticompetitive effect and those that call for more detailed treatment. What is
required, rather, is an enquiry meet for the case, looking to the circumstances,
details, and logic of a restraint.‖ (Id. at pp. 780–781.) The emergence of quick
look rule of reason analysis did not signal the supplanting of the traditional per
se/rule of reason dichotomy with a new trichotomy (Polygram Holding, Inc. v.
FTC (D.C. Cir. 2005) 416 F.3d 29, 35), but rather a shift to ― ‗ ―something of a
sliding scale‖ ‘ ‖ in antitrust analysis. (Actavis, supra, 570 U.S. at p. ___ [186
L.Ed.2d at p. 364, 133 S.Ct. at p. 2237].)
This more nuanced approach makes equal sense for claims under the
Cartwright Act. Like the federal antitrust statutes, nothing in the text of the
Cartwright Act dictates the precise details of the per se and rule of reason

26
approaches; these are but useful tools the courts have developed over time to carry
out the broad purposes and give meaning to the general phrases of the antitrust
statutes. (See National Soc. of Professional Engineers v. United States, supra, 435
U.S. at p. 688.) It is consistent with the common law tradition at the root of our
antitrust laws to describe, as the United States Supreme Court now has, the
analytic approach as involving a continuum, with the ―the circumstances, details,
and logic‖ of a particular restraint (California Dental Assn. v. FTC, supra, 526
U.S. at p. 781) dictating how the courts that confront the restraint should analyze
it. In lieu of an undifferentiated one-size-fits-all rule of reason, courts may
―devise rules . . . for offering proof, or even presumptions where justified, to make
the rule of reason a fair and efficient way to prohibit anticompetitive restraints and
to promote procompetitive ones.‖ (Leegin Creative Leather Products, Inc. v.
PSKS, Inc. (2007) 551 U.S. 877, 898–899; see Fisher v. City of Berkeley, supra,
37 Cal.3d at pp. 671–677 [tailoring the rule of reason to account for differences
between private and municipal government actions].)
It follows that we must consider not simply whether per se or rule of reason
analysis applies to reverse payment patent settlements. To the extent rule of
reason analysis applies, as we will conclude it does, we must also consider how
the analysis should be structured to most efficiently differentiate between
reasonable and unreasonable restraints of trade in this context. (See California
Dental Assn. v. FTC, supra, 526 U.S. at p. 781.)

B. The Competitive Harm from Purchasing an Extension of
Monopoly
We begin with the proposition that agreements to establish or maintain a
monopoly are restraints of trade made unlawful by the Cartwright Act. (Lowell v.
Mother’s Cake & Cookie Co. (1978) 79 Cal.App.3d 13, 23; Dimidowich v. Bell &
Howell (9th Cir. 1986) 803 F.2d 1473, 1478.) Under general antitrust principles, a

27
business may permissibly develop monopoly power, i.e., ―the power to control
prices or exclude competition‖ (United States v. DuPont & Co. (1956) 351 U.S.
377, 391), through the superiority of its product or business acumen. To acquire
or maintain that power through agreement and combination with others, however,
is quite a different matter. (United States v. Grinnell Corp. (1966) 384 U.S. 563,
570–571.)
Pursuant to this rule, businesses may not engage in a horizontal allocation
of markets, with would-be competitors dividing up territories or customers.
(United States v. Topco Associates, Inc., supra, 405 U.S. at pp. 608, 612; Vulcan
Powder Co. v. Hercules Powder Co., supra, 96 Cal. at pp. 514–515; Guild
Wineries & Distilleries v. J. Sosnick & Son (1980) 102 Cal.App.3d 627, 633–635.)
Such allocations afford each participant an ―enclave . . . , free from the danger of
outside incursions,‖ in which to exercise monopoly power and extract monopoly
premiums. (United States v. Sealy, Inc. (1967) 388 U.S. 350, 356.)
Similarly, a firm may not ―pay[] its only potential competitor not to
compete in return for a share of the profits that firm can obtain by being a
monopolist.‖ (Valley Drug Co. v. Geneva Pharmaceuticals, supra, 344 F.3d at
p. 1304.) In Palmer v. BRG of Ga., Inc. (1990) 498 U.S. 46, for example, two
competing bar review course providers did just that. One provider agreed to
withdraw from a particular state market in exchange for the second provider
paying the withdrawing provider a share of subsequent profits and agreeing in
return not to compete outside that state market. In a per curiam opinion, the
United States Supreme Court summarily declared the agreement unlawful on its
face. (Id. at pp. 49–50; see Getz Bros. & Co. v. Federal Salt Co. (1905) 147 Cal.
115, 119 [payment for agreement not to compete and to discourage others from
competing is illegal]; Wright v. Ryder, supra, 36 Cal. at p. 359 [agreement not to

28
compete in California market violates common law prohibition on restraints of
trade].)
Second, these principles extend into the patent arena to prohibit a patentee‘s
purchase of a potential competitor‘s consent to stay out of the market. Antitrust
law condemns a patentee‘s payment ―to maintain supracompetitive prices to be
shared among the patentee and the challenger rather than face what might have
been a competitive market.‖ (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at
p. 363, 133 S.Ct. at p. 2236].) This is so even when the patent is likely valid: ―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.‖ (Ibid.)
Actavis embraces the insights of Professor Carl Shapiro and others that the
relevant benchmark in evaluating reverse payment patent settlements should be no
different from the benchmark in evaluating any other challenged agreement: What
would the state of competition have been without the agreement? In the case of a
reverse payment settlement, the relevant comparison is with the average level of
competition that would have obtained absent settlement, i.e., if the parties had
litigated validity/invalidity and infringement/noninfringement to a judicial
determination. (Shapiro, Antitrust Limits to Patent Settlements, supra, 34 RAND
J. Econ. at p. 396; see Addanki & Butler, Activating Actavis: Economic Issues in
Applying the Rule of Reason to Reverse Payment Settlements (2014) 15 Minn. J. L.
Sci. & Tech. 77, 93; Lemley & Shapiro, Probabilistic Patents, supra, 19 J. Econ.
Perspectives at p. 94; Willig & Bigelow, Antitrust Policy Toward Agreements that
Settle Patent Litigation (2004) 49 Antitrust Bull. 655, 664, 677–679.) Consider a
patent with a 50 percent chance of being upheld. After litigation, on average,
consumers would be subject to a monopoly for half the remaining life of the

29
patent. A settlement that allowed a generic market entry at the midpoint of the
time remaining until expiration would replicate the expected level of competition;
the period of exclusion would reflect the patent‘s strength. But a settlement that
delayed entry still longer would extend the elimination of competition beyond
what the patent‘s strength warranted; to the extent it did, the additional elimination
of the possibility of competition would constitute cognizable anticompetitive
harm. (See Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at
p. 2236].)
Barr argues that the procompetitive or anticompetitive effects of a
settlement must be measured by comparison to the entire remaining life of a
patent. We disagree. Actavis makes clear that for antitrust purposes patents are no
longer to be treated as presumptively ironclad. This means the period of exclusion
attributable to a patent is not its full life, but its expected life had enforcement
been sought. This expected life represents the baseline against which the
competitive effects of any agreement must be measured.10 If an agreement only
replicates the likely average result of litigation, any exclusion is a function of the
underlying patent strength; if it extends exclusion beyond that point, this further
exclusion from the marketplace—and the attendant anticompetitive effect—is
attributable to the agreement. Actavis thus represents an application of the settled
principle that ―[t]he owner of a patent cannot extend his statutory grant by contract
or agreement. A patent affords no immunity for a monopoly not fairly or plainly

10 To be clear, because the relevant baseline is the result that would have
occurred in the absence of any agreement, it is not a cognizable harm simply to
show that the parties might have elected a different settlement agreement more
favorable to competition and consumers. There is no statutory right to have
parties enter the agreement most favorable to competition, only a prohibition
against entering agreements that harm competition.

30
within the grant.‖ (U.S. v. Masonite Corp. (1942) 316 U.S. 265, 277.) The
measure of the statutory grant, and the limit on the monopoly that may be
preserved by agreement, is the average expected duration that would have resulted
from judicial testing.
This method of analysis, and of assessing anticompetitive harm, is not
materially different from that applied in any other garden-variety antitrust case.
Every case involves a comparison of a challenged agreement against a prediction
about—a probabilistic assessment of—the expected competition that would have
arisen in its absence. (Shapiro, Antitrust Analysis of Patent Settlements Between
Rivals, supra, 17 Antitrust at p. 70.) Every restraint of trade condemned for
suppressing market entry involves uncertainties about the extent to which
competition would have come to pass. (Hemphill, An Aggregate Approach to
Antitrust: Using New Data and Rulemaking to Preserve Drug Competition, supra,
109 Colum. L.Rev. at p. 637.) No matter; as the leading antitrust treatise notes,
―the law does not condone the purchase of protection from uncertain competition
any more than it condones the elimination of actual competition.‖ (12 Areeda &
Hovenkamp, Antitrust Law, supra, ¶ 2030b, p. 220; see U.S. v. Microsoft Corp.
(D.C. Cir. 2001) 253 F.3d 34, 79 (en banc) [―it would be inimical to the purpose of
the Sherman Act to allow monopolists free reign to squash nascent, albeit
unproven, competitors at will‖].) The antitrust laws foreclose agreements
eliminating ―the risk of competition‖—the competitive market that ―might have
been.‖ (Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at
p. 2236].) Purchasing freedom from the possibility of competition, whether done
by a patentee or anyone else, is illegal. An agreement to exchange consideration
for elimination of any portion of the period of competition that would have been
expected had a patent been litigated is a violation of the Cartwright Act.

31
 C. The Structure of the Rule of Reason as Applied to Patent
Settlements
We consider next how to identify whether the parties‘ settlement agreement
eliminates competition beyond the point at which competition would have been
expected in the absence of an agreement. Only if the agreement limits competition
beyond that point, the point the strength of the patent would have justified, is there
an antitrust issue.
1. Plaintiff‘s Prima Facie Case
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.

2. Defendants‘ Rebuttal
Once a plaintiff has made out a prima facie case that a reverse payment
patent settlement has anticompetitive effects, a court ―must weigh these
anticompetitive effects against the possible justifications‖ for the challenged
restraint. (Marin County Bd. of Realtors, Inc. v. Palsson, supra, 16 Cal.3d at
p. 937.) At this point, we deem it appropriate to shift the burden to the defendants
to offer legitimate justifications and come forward with evidence that the
challenged settlement is in fact procompetitive. (See Bus. & Prof. Code, § 16725
[―[i]t is not unlawful to enter‖ an agreement ―to promote, encourage, or increase
competition‖]; Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct.

42
at p. 2236] [―An antitrust defendant may show in the antitrust proceeding that
legitimate justifications are present.‖].)18
Plaintiffs argue we should declare every reverse payment in excess of
litigation costs and collateral products and services a per se violation of the
Cartwright Act. We are unwilling to declare every settlement payment of a certain
size illegal. Like the United States Supreme Court, we cannot say with reasonable
certainty—yet—that we have posited every possible justification that might render
a particular reverse payment settlement procompetitive. (See Actavis, supra, 570
U.S. at p. ___ [186 L.Ed.2d at p. 362, 133 S.Ct. at p. 2236].) The theoretical
possibility that a settlement in excess of litigation costs and collateral services
could be procompetitive, while insufficient to alter the plaintiff‘s prima facie case,
is nevertheless sufficient for us to reject a categorical rule and instead afford
defendants the opportunity to demonstrate a given settlement is the exception.
This does not mean any justification will do. An antitrust defendant cannot
argue a settlement is procompetitive simply because it allows competition earlier
than would have occurred if the brand had won the patent action; as Actavis and
our previous discussion make clear, the relevant baseline is the average period of
competition that would have obtained in the absence of settlement. (See Actavis,
supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].)19

18 See also FTC v. Indiana Federation of Dentists, supra, 476 U.S. at
pages 459–461; National Soc. of Professional Engineers v. United States, supra,
435 U.S. at page 693; 7 Areeda & Hovenkamp, Antitrust Law (3d ed. 2010)
¶¶ 1504b, 1507c, pages 402–403, 430.
19 This point also addresses Barr‘s argument that causation is lacking in
reverse payment cases because absent a settlement, the parties would have
litigated, the patentee would likely or surely have won, and consumers would have
been no better off. At the time of settlement, the outcome of future litigation is
uncertain, and an agreement that ―seeks to prevent the risk of competition‖ causes,
(footnote continued on next page)

43
 Likewise, consideration of whether the agreement is justified as
procompetitive will not turn on whether the patent would ultimately have been
proved valid or invalid. Agreements must be assessed as of the time they are
made (Valley Drug Co. v. Geneva Pharmaceuticals, supra, 344 F.3d at p. 1306), at
which point the patent‘s validity is unknown and unknowable. Just as later
invalidation of a patent does not prove an agreement when made was
anticompetitive (id. at pp. 1306–1307), later evidence of validity will not
automatically demonstrate an agreement was procompetitive.20 Antitrust law
condemns the purchase of freedom from competition; what matters is whether a
settlement postpones market entry beyond the average point that would have been
expected at the time in the absence of agreement. (See In re Aggrenox Antitrust
Lit. (D. Conn., Mar. 23, 2015, No. 3:14-md-2516 (SRU)) __ F.Supp.3d __ [2015
U.S.Dist. Lexis 35634, *38] [―The salient question is not whether the fully-
litigated patent would ultimately be found valid or invalid—that may never be
known—but whether the settlement included a large and unjustified reverse
payment leading to the inference of profit-sharing to avoid the risk of
competition.‖].)
To determine whether such a settlement has occurred under state law, as
under federal law, ―it is normally not necessary to litigate patent validity.‖
(Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].)

(footnote continued from previous page)

i.e., has as a ―consequence . . . the relevant anticompetitive harm.‖ (Actavis,
supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2236].)
20 Some kinds of evidence may also be suspect: once a brand and generic
challenger settle, their incentives align in favor of arguing that the patent was
stronger and more clearly infringed than it may have appeared at the time.

44
―An unexplained large reverse payment itself would normally suggest that the
patentee has serious doubts about the patent‘s survival. And that fact, in turn,
suggests that the payment‘s objective is to maintain supracompetitive prices to be
shared among the patentee and the challenger rather than face what might have
been a competitive market—the very anticompetitive consequence that underlies
the claim of antitrust unlawfulness. . . . In a word, the size of the unexplained
reverse payment can provide a workable surrogate for a patent‘s weakness, all
without forcing a court to conduct a detailed exploration of the validity of the
patent itself.‖ (Id. at p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at pp. 2236–2237].)

3. The Plaintiff‘s Ultimate Burden
The ultimate burden throughout rests with the plaintiff to show that a
challenged settlement agreement is anticompetitive. (Bert G. Gianelli Distributing
Co. v. Beck & Co. (1985) 172 Cal.App.3d 1020, 1048.) Once the plaintiff has
made out a prima facie case that a reverse payment patent settlement is
anticompetitive, however, the plaintiff thereafter need only show that any
procompetitive justifications proffered by the defendants are unsupportable. (See
Polygram Holding, Inc. v. FTC, supra, 416 F.3d at pp. 37–38.)
The ultimate question in reverse payment settlement cases is whether an
agreement involves ―significant unjustified anticompetitive consequences.‖
(Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2238].)
The prima facie case requires the plaintiff to eliminate the possibility that litigation
costs or other products or services could explain the consideration paid the
generic. If a plaintiff does so and thereafter can dispel each additional justification
the defendants put forward to explain the consideration, the conclusion follows
that the settlement payment must include, in part, consideration for additional
delay in entering the market. That payment for delay is condemned by the

45
Cartwright Act, as by federal antitrust law, and its purchase as part of a settlement
agreement is an unlawful restraint of trade.
* * *
We summarize the structure of the rule of reason applicable to reverse
payment patent settlements. To make out a prima facie case that a challenged
agreement is an unlawful restraint of trade, a plaintiff must show the agreement
contains both a limit on the generic challenger‘s entry into the market and
compensation from the patentee to the challenger. The defendants bear the burden
of coming forward with evidence of litigation costs or valuable collateral products
or services that might explain the compensation; if the defendants do so, the
plaintiff has the burden of demonstrating the compensation exceeds the reasonable
value of these. If a prima facie case has been made out, the defendants may come
forward with additional justifications to demonstrate the settlement agreement
nevertheless is procompetitive. A plaintiff who can dispel these justifications has
carried the burden of demonstrating the settlement agreement is an unreasonable
restraint of trade under the Cartwright Act.

D. Preemption
Barr argues federal preemption concerns narrowly constrain how reverse
payment patent settlements must be analyzed under state law. According to Barr,
any rule more stringent than the traditional, unstructured rule of reason would fall
prey to obstacle preemption, which ―arises when ‗ ―under the circumstances of [a]
particular case, [the challenged state law] stands as an obstacle to the
accomplishment and execution of the full purposes and objectives of
Congress.‖ ‘ ‖ (Viva! Internat. Voice for Animals v. Adidas Promotional Retail
Operations, Inc. (2007) 41 Cal.4th 929, 936.) We disagree; the rule we adopt is in
harmony with Actavis, which offered only broad outlines and explicitly left to

46
other courts the task of developing a framework for analyzing the anticompetitive
effects of reverse payment patent settlements. (Actavis, supra, 570 U.S. at p. ___
[186 L.Ed.2d at p. 364, 133 S.Ct. at p. 2238].)
State antitrust law ordinarily is fully compatible with federal law. States
have regulated against monopolies and unfair competition for longer than the
federal government, and federal law is intended only ―to supplement, not displace,
state antitrust remedies.‖ (California v. ARC America Corp. (1989) 490 U.S. 93,
102; see id. at pp. 101–102 & fn. 4; Partee v. San Diego Chargers Football Co.
(1983) 34 Cal.3d 378, 382.) ―[T]he Cartwright Act is broader in range and deeper
in reach than the Sherman Act‖ (Cianci v. Superior Court, supra, 40 Cal.3d at
p. 920); this greater domain has never been thought to pose supremacy clause
problems. To the contrary, in light of the established state role, a presumption
against preemption applies. (ARC America Corp., at p. 101.)
Barr argues that to avoid conflicting with federal patent law, state antitrust
law must cohere with the federal rule that patents are presumed valid. (See 35
U.S.C. § 282.) But as we have discussed, the Patent Act‘s allocation of a burden
of proof is no more than a procedural device. It does not insulate settlements of
patent disputes from federal antitrust scrutiny (Actavis, supra, 570 U.S. at p. ___
[186 L.Ed.2d at p. 356, 133 S.Ct. at pp. 2230–2231]), nor does it insulate them
from state antitrust scrutiny. The agnostic stance toward patent validity our
structured rule of reason adopts is identical to that embraced by the United States
Supreme Court under federal antitrust law: a patent may or may not be valid or
infringed. (Ibid.) What matters instead is simply whether a payoff to eliminate
the possibility of competition has occurred. (Id. at p. ___ [186 L.Ed.2d at p. 363,
133 S.Ct. at p. 2236.) If federal antitrust law can conduct that inquiry without
offense to patent law, so too can the state antitrust law it was designed to
supplement.

47
 Additionally, Barr argues the rule we adopt must be no more favorable to
reverse payment patent settlement challenges than would be the case under
Actavis. The supposed rationale is that Actavis identifies precisely the
accommodation patent law requires of antitrust law, such that deviation would
pose an obstacle to congressional patent objectives.
If Actavis had established a special rule limiting antitrust scrutiny of reverse
payment settlements in order to preserve the incentives created by the patent
system, we might agree. But the lesson of Actavis is that nothing in the patent
laws or the Hatch-Waxman Act dictates such a special rule; that a settlement
resolves a patent dispute does not ―immunize the agreement from antitrust attack.‖
(Actavis, supra, 570 U.S. at p. ___ [186 L.Ed.2d at p. 356, 133 S.Ct. at p. 2230].)
Instead, such agreements may, like any other form of agreement restraining trade,
be examined for unjustified anticompetitive effects. (Id. at p. ___ [186 L.Ed.2d at
p. 364, 133 S.Ct. at p. 2238].) As for how such an examination is to be conducted,
Actavis reverts solely to antitrust considerations. (Id. at p. ___ [186 L.Ed.2d at
p. 364, 133 S.Ct. at pp. 2237–2238].) In selecting a test to apply—to the extent
the Supreme Court does, as opposed to ―leav[ing] to the lower courts the
structuring of the present rule-of-reason antitrust litigation‖ (id. at p. ___ [186
L.Ed.2d at p. 364, 133 S.Ct. at p. 2238])—the Court looks to whether its
experience with the economics of reverse payment settlements is sufficient to
allow it, yet, to require particular modifications to rule-of-reason analysis (id. at
p. ___ [186 L.Ed.2d at p. 363, 133 S.Ct. at p. 2237]).
Where the choice of a test rests solely on economic analysis, no patent law
preemption concerns arise. Instead, the issue reduces to a problem in the relation
between federal and state antitrust law, and there the Supreme Court has been
quite clear that states may depart from federal rules—or, here, accept an invitation
to develop a gap in the law explicitly left by the Supreme Court—absent evidence

48
of a clear congressional purpose to the contrary. (California v. ARC America
Corp., supra, 490 U.S. at p. 103.)
We note as well that the structured rule of reason we adopt is consistent
with, not an obstacle to, congressional patent and health care goals in two specific
ways. First, considerable research and analysis suggests the broad availability of
reverse payment settlements favors weak patents and channels investment
resources toward suboptimal innovation prospects. (See ante, pp. 38–39.) To the
extent careful scrutiny of such settlements promotes the very innovation the patent
laws were intended to promote, it cannot stand as an obstacle to congressional
objectives.
Second, a fundamental goal of the Hatch-Waxman Act is to enhance
generic competition and thereby lower prices. Congress rued the ―serious anti-
competitive effects‖ of existing rules for generic drug approval, rules that resulted
in ―the practical extension of the monopoly position of the patent holder beyond
the expiration of the patent.‖ (H.R.Rep. No. 98-857, 2d Sess., pt. 2, p. 4 (1984),
reprinted in 1984 U.S. Code Cong. & Admin. News, p. 2688.) The substantial
reworking of those rules to ease generic approval was designed to ―make available
more low cost generic drugs‖ (Id., pt. 1, p. 14, reprinted in 1984 U.S. Code Cong.
& Admin. News, p. 2647) and reduce costs for consumers and government-funded
health care alike (id. at p. 17, reprinted in 1984 U.S. Code Cong. & Admin. News,
p. 2650). By ferreting out anticompetitive agreements that limit generic market
entry and sustain costly monopolies, a structured rule of reason serves those goals
and poses no obstacle to congressional objectives.21

21 A second federalism concern raised by the Court of Appeal, that state
antitrust scrutiny would intrude on the exclusivity of federal court patent
jurisdiction (see 28 U.S.C. § 1338(a)), likewise presents no issue. This exclusive
(footnote continued on next page)

49
 E. Application
The trial court and Court of Appeal treated the ‘444 patent as ironclad and
used the entire period until its expiration as the relevant benchmark in order to
assess whether the parties‘ settlement agreement had anticompetitive effects. This
was error.
Barr argues we nevertheless should affirm because in the course of their
respective opinions the trial court and Court of Appeal purported to apply the rule
of reason in addition to the scope of the patent test. But the rule of reason these
courts applied is not the structured rule of reason for reverse payment patent
settlements we articulate today to effectuate the purposes of the Cartwright Act.
Rather, in each instance the courts simply concluded that because the agreement
did not exclude competition beyond what the ‘444 patent would have permitted
(assuming it were valid), the agreement necessarily had no anticompetitive effect
and was not unlawful under the rule of reason. The same misapprehension
underlying the lower courts‘ scope of the patent analysis, that for antitrust
purposes patents are ironclad, also underlay their rule of reason analysis.
Accordingly, we must reverse.

(footnote continued from previous page)

jurisdiction does not prevent state courts from deciding state law claims
incidentally touching on the validity of a patent. (Caldera Pharmaceuticals, Inc.
v. Regents of University of California (2012) 205 Cal.App.4th 338, 353–356.)
Moreover, the ―slim category‖ of state law claims subject to exclusive federal
patent jurisdiction includes only those that ― ‗necessarily raise‘ ‖ a federal patent
issue. (Gunn v. Minton (2013) 568 U.S. ___, ___ [185 L.Ed.2d 72, 79, 133 S.Ct.
1059, 1065].) As we have discussed, it is entirely possible to resolve an antitrust
challenge to a reverse payment patent settlement without adjudicating the patent‘s
validity.

50
 V. Unfair Competition Law and Common Law Monopoly Claims
The trial court entered judgment against plaintiffs on their unfair
competition and common law monopoly claims using the same reasoning it
applied to the Cartwright Act claim. Because that reasoning was erroneous, we
reverse on these claims as well.

51
 DISPOSITION
We reverse the Court of Appeal‘s judgment and remand for further
proceedings consistent with this opinion.
WERDEGAR, J.

WE CONCUR:

CANTIL-SAKAUYE, C. J.
CHIN, J.
CORRIGAN, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.

52
See last page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion In re Cipro Cases I & II
__________________________________________________________________________________

Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 200 Cal.App.4th 442
Rehearing Granted

__________________________________________________________________________________

Opinion No. S198616
Date Filed: May 7, 2015
__________________________________________________________________________________

Court: Superior
County: San Diego
Judge: Richard E. L. Strauss

__________________________________________________________________________________

Counsel:

Lieff, Cabraser, Heimann & Bernstein, Eric B. Fastiff, Brendan Glackin, Jordan Elias, Dean M. Harvey;
Joseph Saveri Law Firm, Joseph R. Saveri, Lisa J. Leebove; Krause, Kalfayan, Benink & Slavens, Ralph B.
Kalfayan; Zwerling, Schachter & Zwerling, Dan Drachler; Durie Tangri and Mark A. Lemley for Plaintiffs
and Appellants.

The Kralowec Law Group and Kimberly A. Kralowec for Consumer Attorneys of California as Amicus
Curiae on behalf or Plaintiffs and Appellants.

Michael A. Carrier; Zelle Hofmann Voelbel & Mason and Judith A. Zahid for 49 Professors as Amici
Curiae on behalf or Plaintiffs and Appellants.

Mark A. Lemley for 78 Intellectual Property Law, Antitrust Law, Economics and Business Professors as
Amici Curiae on behalf or Plaintiffs and Appellants.

Richard M. Brunell; Zelle Hofmann Voelbel & Mason and Judith A. Zahid for American Antitrust Institute
as Amicus Curiae on behalf or Plaintiffs and Appellants.

Edleson & Rezzo, Joann F. Rezzo; Karcher Harmes, Kathryn E. Karcher; Stinson Morrison Hecker,
Stinson Leonard Street, David E. Everson, Heather S. Woodson and Victoria L. Smith for Defendants and
Respondents Hoechst Marion Roussel, Inc., The Rugby Group, Inc., and Watson Pharmaceuticals, Inc.

Luce, Forward, Hamilton & Scripps, McKenna Long & Aldridge, Charles A. Bird, Christopher J. Healey,
Todd R. Kinnear; Jones Day, Kevin D. McDonald; Bartlit Beck Herman Palenchar & Schott and Peter B.
Bensinger, Jr., for Defendant and Respondent Bayer Corporation.

Kirkland & Ellis, Jay P. Lefkowitz, Edwin John U, Karen N. Walker and Gregory L. Skidmore for
Defendant and Respondent Barr Laboratories, Inc.

1
Page 2 – counsel continued – S198616

Counsel:

Richard A. Samp, Cory L. Andrews; Law Offices of Mark E. Foster and Mark E. foster for Washington
Legal Foundation as Amicus Curiae on behalf of Defendants and Respondents.

Munger , Tolles & Olson, Jeffrey I. Weinberger, Adam R. Lawton, Guha Krishnamurthi, Rohit K. Singla
and Michelle T. Friedland for The Chamber of Commerce of the United States of America as Amicus
Curiae on behalf of Defendants and Respondents.

Stevens & Lee, Joseph Wolfson; Duane Morris and Paul J. Killion for Generic Pharmaceutical Association
as Amicus Curiae on behalf of Defendants and Respondents.

Kamala D. Harris, Attorney General, Edward C. DuMont, State Solicitor General, Kathleen E. Foote,
Assistant Attorney General, Janill L. Richards, Deputy State Solicitor General, and Cheryl L. Johnson,
Deputy Attorney General, for California Attorney General, as Amicus Curiae.

2
Counsel who argued in Supreme Court (not intended for publication with opinion):

Mark A. Lemley
Durie Tangri
217 Leidesdorff Street
San Francisco, CA 94111
(415) 362-6666

Edwin John U
Kirkland & Ellis
655 Fifteenth Street, N.W.
Washington, D.C. 20005
(202) 879-5000

3