State high court readies answer for ‘rule of reason’ question

By John Roemer

Daily Journal Staff Writer

SAN FRANCISCO - Is antitrust law's "rule of reason" doctrine so unruly it's about
to be reined in? The state Supreme Court is set to supply an answer by the end of
May.

It's been a rough few decades for antitrust plaintiffs pressing restraint-of-trade
claims. Courts have increasingly narrowed their path to success by expanding the rule
of reason doctrine, encouraged by the Chicago School's law and economics proponents.

  <p/> 
  But a class action appeal currently under review by the state high court over a pharmaceutical
  company's pay-to-delay deal with rivals could begin to reverse that trend. <i>In re Cipro Cases I & II</i>, S198616. 
  <p/> 
  Lower courts granted summary judgment to defendant Bayer Corp. Class counsel appealed,
  contending anticompetitive agreements should not be shielded from antitrust law. 
  <p/> 
  It will be the first major state court decision to interpret a U.S. Supreme Court
  ruling for plaintiffs in a similar case over pay-to-delay agreements. The U.S. high
  court in 2013 in <i>FTC v. Actavis Inc. </i>invited lower courts to "structure" the rule of reason, likely by devising clear tests
  or assessments to clarify whether there have been restraints on trade.  
  <p/> 
  In its traditional unstructured form, the rule of reason doctrine hinders plaintiffs
  by requiring detailed economic analysis of alleged antitrust activity to demonstrate
  that it "unreasonably" restrains trade. 
  <p/> 
  It's an amorphous standard that plaintiffs often find impossible to meet.  
  <p/> 
  "The rule of reason has been the death knell for antitrust plaintiffs," said Robin
  C. Feldman, a UC Hastings College of the Law professor. "It is complex and burdensome
  on the courts and litigants. Common wisdom holds that an antitrust lawsuit is doomed
  unless the plaintiff can avoid rule of reason analysis." 
  <p/> 
  Feldman said that the Chicago School of law and economics has persuaded courts to
  create "extensive and complex economic tests that are impractical and unworkable"
  and that advantage defendants. 
  <p/> 
  <i>Cipro</i> pits a consumer class against generic drug companies that accepted nearly $400 million
  from Bayer AG to stay out of the lucrative ciprofloxacin antibiotic market for seven
  years. The payment was part of Bayer's settlement with the generics to drop a patent
  challenge. 
  <p/> 
  Bayer paid another $74 million in 2013 to settle the <i>Cipro </i>class action; the generic firms remain as defendants. 
  <p/> 
  The plaintiffs claim the deal strangled the market, forced consumers to pay higher
  prices and was illegally anticompetitive. Bayer's defense argues that the rule of
  reason defeats the plaintiffs' claims because there is no clear proof of competitive
  harm. 
  <p/> 
  At oral argument March 3, defense lawyer Edwin J. U of Kirkland & Ellis LLP contended
  there is no need for a structured rule of reason and held out for the traditional
  rule of reason analysis. 
  <p/> 
  Plaintiffs' counsel Mark A. Lemley of Durie Tangri pressed for the structured test
  suggested in <i>Actavis</i> for anticompetitive behavior in a pay-to-delay case. In the test, courts would look
  at the size of the deal, its scale relative to anticipated litigation costs, its independence
  from other services and the lack of any other convincing justification. 
  <p/> 
  <i>Actavis</i> also left the door ajar for courts to reject rule of reason analysis in favor of
  finding automatic or per se antitrust violations in pay-to-delay cases, especially
  under California's more consumer-friendly Cartwright Act, the state's analog to the
  federal Sherman Antitrust Act. 
  <p/> 
  Siding with the plaintiffs was Attorney General Kamala D. Harris, whose friend of
  the court brief argued that state law and public policy considerations should persuade
  the high court to make pay-to-delay deals illegal per se. 
  <p/> 
  An opinion is due by May 28.  
  <p/> 
  The lead plaintiffs' lawyer in <i>Cipro</i>, Joseph R. Saveri of San Francisco, is optimistic that antitrust law is poised to
  strike a more favorable balance between plaintiffs and defendants. 
  <p/> 
  "I see the pendulum swinging back, away from the Chicago School and Robert Bork,"
  he said, naming the late conservative legal scholar whose law and economics theorizing
  influenced courts to benefit antitrust defendants by finding efficiency justifications
  for mergers and other corporate agreements. 
  <p/> 
  Feldman concurred. "I agree the pendulum has begun to move ever so slightly but in
  very important ways," she said. <i>Actavis</i> may seem very small, but it is quite significant, and <i>Cipro</i> will be a critical early test of how courts will apply it." 
  <p/> 
  Kirkland & Ellis lawyers representing the <i>Cipro</i> generic drug defendants did not respond to a request for comment.  
  <p/> 
  In court papers, they denied that Actavis supports a "constrained" or structured rule
  of reason analysis or any per se illegality rule. 
  <p/> 
  The general counsel of the procompetition American Antitrust Institute, Richard Brunell,
  pointed out that the last five antitrust cases before the U.S. Supreme Court ended
  in plaintiff wins, including <i>Actavis</i>. Until then, there had not been a pro-plaintiff antitrust outcome at the high court
  since 1993.  
  <p/> 
  "The court seems to be taking a more mainstream approach," Brunell said. 
  <p/> 
  Antitrust authority George S. Georgiev, a professor at UCLA School of Law's Institute
  for Business Law and Policy, said the case is complicated because it involves the
  intersection of intellectual property law - stemming from the generics' patent case
  against Bayer - and antitrust law, which disfavors the kind of monopoly rights that
  patents bestow. 
  <p/> 
  But he added that <i>Actavis</i> put pay-to-delay deals on the ropes, possibly working in the <i>Cipro</i> plaintiffs' favor. 
  <p/> 
  The <i>Actavis</i> court "held that the analysis can't stop with examining whether the pay-for-delay
  settlement comports with patent law alone; instead, the settlement's effects on competition
  also need to be considered," he emailed.  
  <p/> 
  "The Court's reasoning has been criticized by some for muddying the waters between
  IP law and antitrust and for not providing workable guidance on how trial courts should
  conduct the rule of reason inquiry." 
  <p/> 
  It is that guidance, Georgiev and Feldman said, that the state Supreme Court might
  formulate. 
  <p/> 
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href="mailto:johnroemer@dailyjournal.com">johnroemer@dailyjournal.com

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