The practice is known as “pay to delay” and can violate antitrust law, according to a 2013 U.S. Supreme Court decision.
The unanimous ruling by the state's highest court was aimed at a settlement reached by Bayer, the holder of a patent on Cipro, and Barr Laboratories Inc., which wanted to introduce a generic version of the popular antibiotic and challenged Bayer's patent.
Under the settlement, Bayer agreed to pay Barr $398.1 million, and Barr agreed to postpone the marketing of its generic.
That sparked several antitrust lawsuits, including nine class-action suits filed by California consumers.
In overturning lower-court decisions dismissing the suits, the California Supreme Court said “there is a potential antitrust problem” in so-called reverse-payment settlements.
“Reverse payment patent settlements may enable the parties to extend the monopoly” on a drug beyond what the law would have allowed, Justice Kathryn Mickle Werdegar wrote for the court.
“Insufficient scrutiny of such settlements has the potential to hamper innovation,” she wrote.
Challengers of such agreements must show that the settlement was designed to delay the generic drug's entry into the market, not merely to avoid the cost of litigation, the court said.
Bayer is no longer a party to the suits. It reached a settlement before Thursday's ruling. Barr is now owned by Teva Pharmaceutical Industries Ltd.