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.
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