On December 8, 2021, a federal district court granted a preliminary injunction temporarily enjoining enforcement of the California state law Preserving Access to Affordable Drugs, which attempts to sanction reverse-payment patent settlement agreements. Judge Troy Nunley of the Eastern District of California held the plaintiff—a trade association of generic pharmaceutical companies—was likely to succeed in showing the California law violated the Dormant Commerce Clause because the law could reach conduct occurring wholly outside California. 

Background

AB-824, California’s reverse-payment statute, took effect on January 1, 2020, and was the first—and is still the only—statute in the United States specifically addressing reverse-payment settlements. The statute sanctions pharmaceutical and biopharmaceutical patent settlements in which the generic or biosimilar sponsor agrees to delay the launch of its product in return for “anything of value.” The Supreme Court ruled in Fed. Trade Comm’n v. Actavis, 570 U.S. 136 (2013) that the traditional rule of reason antitrust framework applies to settlement agreements with these types of reverse payments, rejecting the Federal Trade Commission’s proposal that reverse payments be deemed presumptively anticompetitive. AB-824 codifies the presumption that Actavis explicitly rejected. 

As detailed in our prior client alert, AB-824 not only makes reverse payments presumptively unlawful, but limits several defenses pharmaceutical and biopharmaceutical companies have successfully advanced in federal litigation, including the branded pharmaceutical or biopharmaceutical defendant’s ability to argue that it lacks monopoly power in a relevant market. Furthermore, the statute imposes strict limits on so-called litigation cost avoidance payments—payments to the generic or biosimilar that reflect the branded company’s saved litigation costs—which the Supreme Court explicitly held were permissible. In addition to creating these stricter standards of liability, the statute imposes a minimum $20 million penalty to any party that even “assists” in completing the alleged reverse payment. 

Legal Challenge

The present lawsuit is the plaintiff organization’s second attempt to challenge AB-824. The Association for Accessible Medicines (AAM) previously sued the California Attorney General in November 2019, before the law took effect. At the time, Judge Nunley denied AAM’s request for a preliminary injunction because AAM failed to show irreparable harm and a likelihood of success on the merits, but he allowed the litigation to move forward. On an interlocutory appeal, the Ninth Circuit vacated the district court’s order, holding that the association’s members failed to demonstrate Article III standing, and remanded with instructions to dismiss without prejudice. On August 25, 2020, the day Judge Nunley dismissed the case without prejudice, AAM filed the present lawsuit challenging AB-824, largely making the same arguments as before but with more evidentiary support.

This time, Judge Nunley held that AAM had standing based on a declaration from a member averring that it decided to abandon a proposed settlement due to the restrictions in AB-824. Having determined that AAM demonstrated associational standing, Judge Nunley then agreed with AAM that the law likely violated the Dormant Commerce Clause. Judge Nunley accepted AAM’s argument that AB-824 had the potential to reach settlement agreements among non-California-based entities entered into outside California. Judge Nunley found that AB-824 regulates commerce occurring wholly outside California and therefore violates the Dormant Commerce Clause. Judge Nunley was also persuaded by the fact that AB-824 did not carve out exceptions for settlement agreements that omitted California sales from the agreement. This distinguished AB-824 from other laws related to which Dormant Commerce Clause challenges have been rejected. 

Implications

Since its passage, AB-824 has created the prospect that patent settlement agreements that are permissible under federal law may nonetheless be sanctioned under California law. Judge Nunley’s granting of an injunction of AB-824 could signal that the California statute is in jeopardy and may not survive with all its provisions. The California Attorney General is likely to appeal the ruling, so the fate of AB-824 largely depends on the Ninth Circuit’s interpretation of the Dormant Commerce Clause, ripeness and standing issues. 

Although the preliminary injunction means the statute will not be enforced for the time being, the long-term status of AB-824—and whether it reaches settlement agreements occurring wholly outside California—remains unclear. Accordingly, AB-824 remains an important consideration in any pharmaceutical or biopharmaceutical patent settlement agreement.