In re Cipro Cases I & Ii.[nine Coordinated Cases *]

200 Cal.App.4th 442

134 Cal.Rptr.3d 165

11 Cal. Daily Op. Serv. 13,504

In re CIPRO CASES I & II.[Nine coordinated cases *]

No. D056361.

Court of Appeal, Fourth District, Division 1, California.

Oct. 31, 2011.

OPINION TEXT STARTS HERESee Cal. Jur. 3d, Monopolies and Restraints of Trade, §§ 33, 35, 36, 45; Cal. Civil Practice (Thomson Reuters 2011) Business Litigation, § 63:22; 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 591 et seq.

Lieff, Cabraser, Heimann & Bernstein, San Francisco, Joseph R. Saveri, Eric B. Fastiff, Brendan Glackin, Jordan Elias, Dean M. Harvey; Krause, Kalfayan, Benink & Slavens, San Diego, Ralph B. Kalfayan; Zwerling, Schachter & Zwerling and Dan Drachler for Plaintiffs and Appellants.Mark A. Lemley, Stanford, for 78 Law, Economics, Business and Public Policy Professors as Amici Curiae on behalf or Plaintiffs and Appellants.Edleson & Rezzo, San Diego, Joann F. Rezzo; and Kathryn E. Karcher for Defendants and Respondents.Luce, Forward, Hamilton & Scripps, San Diego, Charles A. Bird, Christopher J. Healey, Todd R. Kinnear; Jones Day, Kevin D. McDonald; Bartlit Beck Herman Palencher & Schott and Peter B. Bensinger, Jr., for Defendant and Respondent Bayer Corporation.

Stinson, Morrison, Hecker, David E. Everson, Heather S. Woodson and Victoria Smith for Defendants and Respondents Hoechst Marion Roussel, Inc., The Rugby Group, Inc., and Watson Pharmaceuticals, Inc.Kirkland and Ellis, Edwin John U, Karen N. Walker, and Gregory Skidmore for Defendant and Respondent Barr Laboratories, Inc.NARES, J.

The plaintiffs in this coordinated class action proceeding sued brand-name drug manufacturer Bayer AG and its subsidiary Bayer Corporation (collectively Bayer); generic drug manufacturers Barr Laboratories, Inc. (Barr), Hoechst Marion Roussel, Inc. (HMR), and HMR's former subsidiary The Rugby Group, Inc. (Rugby) (collectively the generic defendants); and Watson Pharmaceuticals, Inc. (Watson), which purchased Rugby from HMR. Bayer manufactures and markets Cipro, the brand name for ciprofloxacin hydrochloride (ciprofloxacin), an antibiotic prescribed for the treatment of infections. Bayer owned U.S. Patent No. 4,670,444 (the ' 444 patent), which claimed the ciprofloxacin hydrochloride molecule, until the patent expired in December 2003. Plaintiffs asserted causes of action against all defendants for violation of the Cartwright Act (Bus. & Prof.Code, § 16720 et seq.); violation of the Unfair Competition Law (UCL) (Bus. & Prof.Code, § 17200 et seq.); and common law monopolization, arising from an agreement settling litigation between Bayer and Barr concerning the validity of Bayer's '444 patent and related agreements involving the other defendants (collectively, the Cipro agreements or Cipro settlement). Plaintiffs appeal from a judgment entered in favor of defendants after the court granted summary judgment motions filed by Bayer, the generic defendants, and Watson.

Plaintiffs contend (1) the court erred by not ruling that the Cipro agreements are unlawful per se; (2) if the Cipro agreements are not unlawful per se, there is a triable issue of fact as to whether they violate the Cartwright Act under the “rule of reason applied in antitrust cases;” (3) the court followed incorrectly decided federal court decisions in ruling that the Cipro agreements were lawful because they did not restrict competition outside the exclusionary zone of the '444 patent; (4) there is a triable issue of fact under the case law the court followed; (5) the court erred in ruling that it did not have jurisdiction to determine whether Bayer engaged in fraud or inequitable conduct in obtaining the '444 patent because that determination involves substantial questions of patent law; (6) the court erred in granting Watson's motion for summary judgment; and (7) the court erred by not providing any explanation for overruling all of plaintiffs' evidentiary objections.

We hold that 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. Because the Cipro agreements undisputedly did not restrain competition beyond the exclusionary scope of the '444 patent, we conclude they do not violate the Cartwright Act. We further conclude that plaintiffs' claim that Bayer's infringement suit against Barr was objectively baseless due to Bayer's inequitable conduct before the U.S. Patent and Trademark Office (PTO) in procuring the patent is preempted by federal patent law because plaintiffs' right to relief on that claim necessarily depends on resolution of a substantial question of federal patent law. Accordingly, we affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

A. The '444 Patent

Bayer's '444 patent covers or “claims” the ciprofloxacin hydrochloride molecule, which is the active ingredient in Cipro. The ' 444 patent expired in December 2003, but the United States Food and Drug Administration (FDA) granted Cipro pediatric exclusivity until June 9, 2004. Consequently, no generic ciprofloxacin product could be lawfully marketed before June 9, 2004, under federal law. (21 U.S.C. § 355a.)

B. Hatch–Waxman Act

In 1991 Barr sought FDA approval of a generic version of Cipro under the federal Drug Price Competition and Patent Term Restoration Act of 1984 (the Hatch–Waxman Act) (21 U.S.C. § 355). The Hatch–Waxman Act streamlined the process of obtaining approval of generic versions of branded drugs by allowing a generic manufacturer to file an abbreviated new drug application (ANDA) under 21 United States Code section 355(j). ( Merck KGaA v. Integra Lifesciences I, Ltd. (2005) 545 U.S. 193, 196, fn. 1, 125 S.Ct. 2372, 162 L.Ed.2d 160.) The generic manufacturer does not have to make an independent showing that the generic drug is safe and effective; it need only show that the drug contains the same active ingredients as, and is bioequivalent to, the branded drug. ( Ibid., citing 21 U.S.C. § 355(j)(2)(A)(ii) & (iv); § 355(j)(8)(B).)

Regarding any patents that claim the branded drug, the generic manufacturer's ANDA must certify one of the following: “(I) that such patent information has not been filed, [¶] (II) that such patent has expired, [¶] (III) ... the date on which such patent will expire, or [¶] (IV) that such patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted.” (21 U.S.C. § 355(j)(2)(A)(vii).)

A generic manufacturer that files a paragraph IV certification (ANDA IV) must give notice of the certification to any affected patent owners. (21 U.S.C. § 355(j)(2)(B).) The service of the ANDA IV gives an affected patent owner 45 days to file a patent infringement lawsuit against the generic manufacturer. (21 U.S.C. § 355(j)(2)(B)(iii).) If the patent owner files an infringement suit within the 45–day period, FDA approval of the generic manufacturer's ANDA is stayed for 30 months or until a federal district court enters a decision that patent is invalid or not infringed. (21 U.S.C. § 355(j)(2)(B)(iii)(I); In re Ciprofloxacin Hydrochloride Antitrust Litigation (E.D.N.Y.2003) 261 F.Supp.2d 188, 193 ( Cipro I ).)

As an incentive for generic manufacturers to file ANDA IV certifications and challenge patents on brand-name drugs, the first ANDA IV filer has the right to exclusively market its generic version of the branded drug for 180 days from the date it begins to commercially market the drug or the date of a final court decision finding the branded drug's patent to be invalid or not infringed. (21 U.S.C. § 355(j)(5)(B)(iv); 21 C.F.R. § 314.07(c)(1) (2009); Cipro I, supra, 261 F.Supp.2d at p. 193.)

C. Barr's ANDA and the Ensuing Patent Litigation

In October 1991 Barr filed an ANDA for a generic version of Cipro with an ANDA IV certification asserting that Bayer's '444 patent was invalid or would not be infringed by the manufacture, use or sale of Barr's generic ciprofloxacin. After receiving notice of Barr's ANDA IV, Bayer filed a patent infringement suit against Barr in the United States District Court for the Southern District of New York. Barr filed affirmative defenses and counterclaims alleging that the '444 patent was invalid and unenforceable due to Bayer's inequitable conduct before the U.S. Patent and Trademark Office (PTO) in procuring the patent.

In March 1996 Barr and Rugby entered into an agreement under which Rugby agreed to finance a portion of the cost of Barr's patent litigation and Barr agreed to provide Rugby half of the profits from its sale of generic ciprofloxacin. In December 1996 Barr, Rugby, and HMR executed an amendment to that agreement providing that HMR succeeded to all of the rights and obligations of Rugby under the agreement.

D. The Cipro Agreements

In January 1997, after the district court in the patent litigation had denied cross-motions for partial summary judgment filed by Bayer and Barr and the case had been set for trial, Bayer settled the patent litigation with Barr and other generic drug manufacturers by entering into the Cipro agreements, which consisted of three separate settlement agreements—one with Barr, one with nonparties HMR and Rugby, and one with nonparties Bernard Sherman (Sherman) and Apotex, Inc. (Apotex)—and a “supply agreement” with Barr and HMR.

Under the settlement agreements, Barr, HMR, Rugby, Sherman, and Apotex acknowledged the validity of the '444 patent and related patents held by Bayer. In the settlement agreement between Bayer and Barr, Barr agreed to amend its ANDA to change its ANDA IV certification to an ANDA III certification, precluding Barr from obtaining FDA approval to market generic Cipro until the '444 patent expired. The agreement also provided for an immediate payment of $49.1 million from Bayer to a “Barr Escrow Account.”

Under the supply agreement, Barr and HMR agreed not to manufacture...