Dreamin’ of Entering a Patent Settlement Agreement in California? What to Know About California’s Reverse Payment Law

Over 5 years after California passed a first-of-its kind legislation—Assembly Bill 824 ("AB 824")—rendering certain kinds of pharmaceutical patent settlements presumptively illegal, a federal court has issued a permanent injunction barring it from being enforced with respect to settlement agreements outside of California. But the law is enforceable "with respect to settlement agreements negotiated, completed, or entered into within California's borders."¹

The implications are potentially significant for companies negotiating pharmaceutical patent settlements. How did we get here, and what does this mean for you?

AB 824 Passed in October 2019, Rendering Reverse Payment Settlements Presumptively Anticompetitive

In October of 2019, California passed AB 824 to regulate so-called "reverse payment" or "pay-for-delay" agreements between brand and generic pharmaceutical manufacturers settling patent litigation.² AB 824 lowers the bar for challenging such agreements, and raises the stakes for manufacturers entering into them. Notably, under AB 824:

• Reverse payment settlements are deemed presumptively anticompetitive if the generic receives anything of value and if the generic does not immediately launch its product. This is a stark departure from the framework outlined in the seminal Supreme Court case of FTC v. Actavis, under which the anticompetitive effects of an alleged reverse payment agreement must be proven, not presumed.³
• Courts must presume the relevant product market includes only the branded drug product and its AB-rated generic substitutes (in other words, every brand is presumed to be a monopolist); this is a stark departure from core antitrust law requiring an assessment of competing products to determine the relevant antitrust product market.
• Brand and generic manufacturers in violation of AB 824—as well as individuals who assist in the violation—are liable for penalties of up to three times the value of the alleged payment, or $20 million, whichever is greater.
• Parties in violation of AB 824 remain liable for damages available under California state antitrust and consumer protection laws.

For a full analysis of the enactment of AB 824, please see our prior client alert here.

AB 824 Challenged as Unconstitutional and Federal District Court Preliminary Enjoined California from Enforcing AB 824 as to Out-Of-State Agreements

Shortly after enactment, AB 824 was challenged as unconstitutional under the dormant Commerce Clause.⁴ On December 9, 2021, a federal court in the Eastern District of California granted a preliminary injunction, holding the plaintiff was likely to succeed on its dormant-commerce-clause claim, because it could be applied to activity (and settlement agreements) wholly outside of California's borders.⁵ On February 15, 2022, the court amended its preliminary injunction to allow that AB 824 could be enforced "with respect to settlement agreements negotiated, completed, or entered into within California's borders."⁶ For an accounting of that preliminary decision, please see our prior client alert here.

Federal District Court Affirms Its Prior Holdings in February 2025, Converting Its Preliminary Injunction to a Permanent Injunction

Subsequently, the parties proceeded through discovery and filed dueling summary judgment motions, resulting in the district court's February 13, 2025, order. In that order, the district court converted its prior preliminary injunction into a permanent injunction.⁷ The court reaffirmed its prior holding that enforcing AB 824 outside of California's borders is unconstitutional, because under the dormant Commerce Clause's extraterritoriality doctrine, states are prohibited from discriminating or unduly burdening interstate commercial activity.⁸ The district court emphasized that "AB 824 violates the dormant Commerce Clause to the extent it regulates settlement agreements in which none of the parties, the agreement, or the pharmaceutical sales have any connection with California."⁹ In reaching its holding, the district court struck down the State's arguments that:

• The Plaintiff's associational standing was insufficient because there must be an individualized inquiry to determine whether each trade association member would itself have standing;
• The recent Supreme Court decision in National Pork Producers Council v. Ross¹⁰ should change the court's analysis as to the dormant Commerce Clause and renders the statute constitutional; and
• The court should read an unexpressed limitation into the law such that it applied only to agreements concerning California pharmaceutical product sales, meaning the statute would not apply to "agreements with zero connection to California"¹¹ and therefore is constitutional. In rejecting the State's statutory interpretation argument, the district court explained that on its face, the statute is not so limited, and "[t]he Court therefore cannot read 'California sales' into the statute where it was not written by the State Legislature."¹²

Patent Settlement Agreements "Negotiated, Completed, or Entered" in California: You Can Check out Any Time You Like, but Can You Ever Leave?

What's on the road ahead for AB 824? How AB 824 will be enforced remains to be seen. For now, the scope is confined to California's borders. Pharmaceutical companies negotiating agreements, entering agreements, or completing agreements in California need to remain particularly vigilant about their compliance with AB 824 to avoid civil penalties. While the district court did not make a finding elaborating on the "negotiated, completed, or entered" requirement, the State implied that if one party to a settlement agreement has its principal place of business in California, then AB 824 may apply.¹³ Any pharmaceutical company with its principal place of business in California should be attentive, and brand and generic manufacturers outside of California engaged in patent litigation—and contemplating settlement—must be mindful about where the settlement activities are taking place.

_{1 Ass'n for Accessible Meds. v. Becerra, No. 20-CV-01708, 2025 U.S. Dist. LEXIS 26470, at *34 (E.D. Cal. Feb. 12, 2025) ("Permanent Injunction Order").
2 Cal. Health & Safety Code §§ 134000 et seq. (West).
3 See FTC v. Actavis, Inc., 570 US 136, 158-60 (2013).
4 That same trade association had previously filed a complaint challenging AB 824, which was ultimately dismissed without prejudice on standing grounds. See Permanent Injunction Order at *5–6.
5 Ass'n for Accessible Meds. v. Becerra, 562 F. Supp. 3d 973 (E.D. Cal. 2021), modified, No. 20-cv-01708, 2022 WL 463313 (E.D. Cal. Feb. 15, 2022).
6 Ass'n for Accessible Meds. v. Becerra, No. 20-cv-01708, 2022 US Dist. LEXIS 27533, at *24 (E.D. Cal. Feb. 14, 2022).
7 Permanent Injunction Order at *34.
8 Id. at *18–19.
9 Id. at *29.
10 598 U.S. 356 (2023).
11 Permanent Injunction Order at *30 (internal citations omitted).
12 Id. at *29–31.
13 Id. at *10–17.}

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