Federal District Court holds that California's anti reverse payment law is enforceable, but only against settlements "negotiated, completed, or entered" in California

In February 2022, the US District Court for the Eastern District of California held that California Assembly Bill 824—which established a first-of-its kind presumption that certain pharmaceutical patent settlements are anticompetitive and which the California Attorney General had previously been enjoined from enforcing on constitutional grounds—is enforceable, but only "with respect to settlement agreements negotiated, completed, or entered into within California's borders." This recent development has significant implications for pharmaceutical companies with a presence in California or who may litigate patent disputes in California.

The legality of patent settlements has historically been governed by the US Supreme Court's 2013 Actavis decision. Settlements of pharmaceutical patent litigation that involve so-called "reverse payments" or "pay for delay" have long been scrutinized by the Federal Trade Commission, State Attorneys General, and class-action plaintiffs. Reverse payment claims generally allege that an innovator pharmaceutical company provided financial inducement to a potential generic competitor to settle patent litigation concerning the innovator's drug product, or to obtain a later settlement entry date than the generic company otherwise would have accepted, absent the innovator's financial inducement.¹

In 2013, the US Supreme Court resolved a circuit court split about whether reverse payments are presumptively unlawful. The majority opinion in Actavis rejected the deferential "scope of the patent" test, but the majority opinion likewise rejected the FTC's proposed "quick look" rule of presumptive unlawfulness. Instead, the Supreme Court charted a middle course, holding that "the FTC must prove its case as in other rule-of-reason cases."² In doing so, the Supreme Court expressly reserved an option for innovators to provide financial settlement consideration to generic companies beyond the value of early entry alone: "Where a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of noninfringement."³

CA Bill 824 sidestepped Actavis in 2019 and created a presumption of anticompetitiveness for certain patent settlements. Six years after Actavis, on October 7, 2019, California enacted a first-of-its-kind reverse payment law—California Assembly Bill 824—that deviates from Actavis by providing that certain alleged reverse payments are presumptively unlawful if (i) the generic manufacturer obtains "anything of value" out of the deal, and (ii) the generic manufacturer does not immediately attempt to sell its infringing product.⁴ AB 824 shifts the burden to pharmaceutical manufacturers to rebut the presumption of anticompetitiveness by showing that any value received by the generic manufacturer was fair compensation for goods or services, or that the settlement agreement generated procompetitive benefits.⁵ For a full analysis of AB 824, please see our client alert here.

A federal court enjoined the enforcement of CA Bill 824 as unconstitutional. In December 2021, Judge Troy L. Nunley of the Eastern District of California issued a preliminary injunction that blocked the enforcement of AB 824 on constitutional grounds. The court concluded that AB 824 could run afoul of the dormant Commerce Clause of the US Constitution—which precludes states from regulating commercial activity that occurs wholly outside of their borders—because the law could apply to settlements that have no connection to California.⁶

Now, CA Bill 824 is enforceable again, but only with respect to patent settlements negotiated, completed or entered into within California's borders. In January 2022, the California Attorney General asked the court to modify the injunction "to permit AB 824's in-state application and only prohibit the Attorney General from enforcing AB 824 against settlements with no connection to California."⁷

In February 2022, Judge Nunley held that California may only "enforce the provisions of AB 824 with respect to settlement agreements negotiated, completed, or entered into within California's borders."⁸ According to the court, "such agreements are compliant with the dormant Commerce Clause because they regulate conduct occurring wholly within California's borders."⁹

The district court, however, denied the Attorney General's request to "allow California to continue to enforce AB 824 whenever a settlement agreement is made in connection with in-state pharmaceutical sales if that agreement artificially distorts the pharmaceutical market in California."¹⁰ The court rejected the Attorney General's expansive interpretation that would have created risks for a much broader set of settlements because the "dormant Commerce Clause precludes the application of a state statute to commerce that takes place wholly outside of the State's boarders, whether or not the commerce has effects within the State, and the critical inquiry is whether the practical effect of the regulation is to control conduct beyond the boundaries of the State."¹¹

This recent development has significant implications for pharmaceutical companies doing business in California. While many questions about AB 824's validity and application remain, the Eastern District of California's February 2022 decision provides important guidance. Pharmaceutical companies should avoid negotiating, completing or entering into settlements within California's borders. For pharmaceutical companies with a presence in California, this may mean internally reassigning responsibilities related to settling patent litigation to employees in other states. Similarly, pharmaceutical companies should be cognizant of where their outside counsel who are litigating patent disputes are located. The application of AB 824 will remain an evolving area of law with significant implications for pharmaceutical companies and should be closely monitored.

_{1 See Eric Grannon, Adam Acosta, et al., United States: Pharmaceutical Antitrust, Americas Antitrust Review 2022, GLOBAL COMPETITION REV. (Oct. 12, 2021).
2 FTC v. Actavis, Inc., 570 US 136, 159 (2013).
3 Id. at 156.
4 CAL. HEALTH & SAFETY CODE § 134002(a)(1); see also Kristen O'Shaughnessy, et al., California's New Reverse Payment Law Departs from Supreme Court Standard in FTC v. Actavis, WHITE & CASE LLP (Oct. 17, 2019).
5 CAL. HEALTH & SAFETY CODE § 134002(a)(3).
6 Ass'n for Accessible Meds. v. Bonta, No. 2:20-cv-01708, 2021 US Dist. LEXIS 236387, at *14, 19, 24-25 (E.D. Cal. Dec. 9, 2021).
7 Def.'s Mem. Points and Authorities in Supp. Mot. Modify Prelim. Inj. at 1, Ass'n for Accessible Meds. v. Bonta, No. 2:20-cv-01708 (E.D. Cal. Jan. 6, 2022), ECF No. 43-1.
8 Ass'n for Accessible Meds. v. Bonta, No. 2:20-cv-01708, 2022 US Dist. LEXIS 27533, at *24 (E.D. Cal. Feb. 14, 2022).
9 Id. at *13.
10 Id. at *4, 11 (internal quotation marks omitted).
11 Id. at *11 (internal quotation marks and alterations omitted).}

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