California Rest In Peace: Pharmaceutical Companies, Keep Your Settlement Talks Out Of California | Haug Partners LLP

For nearly a decade, the Supreme Court FTC v Actavis ruling has guided litigators and pharma advisers exploring the antitrust risks inherent in settling pharmaceutical patent litigation, particularly where such settlements could be seen to include large and unwarranted payments to an alleged ANDA registrant (or biosimilar manufacturer) in infraction. But settlements that touch sunny California — those negotiated, completed, or entered into within Golden State boundaries — are now governed by a different, more restrictive standard that may impose individual liability, under Bill 824. of the Assembly (“AB 824”). While a federal district court previously barred the law insofar as it sought nationwide application, AB 824 still governs all “settlement agreements Pharmaceuticals Negotiated, Concluded, or Concluded within the California Borders”.[,]» modifying the calculation of all future pharmaceutical payments.


For more than two decades, Hatch-Waxman litigation settlements in which the patent holder pays the alleged infringer in exchange for the infringer’s agreement to “delay” market entry have been targeted as anti-competitive. Such settlements, generally referred to as “reverse payment” or “payment for delay”, more broadly involve a brand manufacturer or NDA holder providing something of value (beyond an early entry date) to a registrant Generic ANDA to remain off the market until a later date. These payments have been labeled “reverse” because, unlike traditional patent settlements where the alleged infringer compensates the patentee for a release of infringement damages, these payments flow the other way from the patentee to the infringer.

After years of legal uncertainty and split appellate rulings regarding the legality of reverse payment settlements, the Supreme Court took the split and issued its landmark decision, FTC v Actavis, 2013.1 In, Actavis, the Court ruled that reverse payment settlements could violate antitrust laws. The Court adopted neither the “quick look” analysis proposed by the Federal Trade Commission nor the “scope of the patent test” of the defendants, which effectively presumed that patent regulations were lawful if they did not affect not compete in products not covered by the patent. Rather, the Court held that “a reverse payment, where large and unjustifiedmay lead to the risk of significant anti-competitive effects.2 The Court also held that such challenges must be assessed under the rule of reason factual analysis.3 The Court left it to the lower courts to specify how exactly to apply the rule of reason in weighing pro- and anti-completion effects.4 But the Supreme Court gave lower courts some guidelines, focusing on the requirement that a reverse payment must be “material” and “unexplained” to trigger scrutiny.5 According to the Supreme Court, whether the payment is anti-competitive is not simply a question of whether it is reversed, but “depends on its magnitude, its magnitude in relation to future legal costs expected by the payer, its independence from other services for which it might represent payment, and the absence of any other compelling justification.6

California law

On October 7, 2019, California signed into law AB 824.7 By enacting AB 824, California became the first state in the country to ban reverse payment agreements, separate and in addition to the general restriction imposed by Actavis.

As Actavis, AB 824 is intended to reduce anti-competitive reverse payment settlement agreements. But AB 824 defines “reverse payments” much more broadly than the Supreme Court did. Specifically, while the landmark Supreme Court ruling applies to “large and unjustified payments,” California law applies to payments of any size, subject to specified exceptions.8 One of those exceptions is for legal costs saved, but rather than allowing an assumed amount, like the $7 million that the FTC and the courts say is presumed too low to trigger scrutiny.9—AB 824 requires direct evidence of cost savings from contemporary litigation budgets.ten This aspect alone creates risk for many settlements that include a few small payments of spared litigation costs.

The Act is tougher than federal law in many other respects. While Actavis argues that such reverse payment settlements should be analyzed under the rule of reason, with courts weighing the potential benefits of agreements against competitive harms, AB 824 pushes the envelope, presuming that agreements are anti-competitive unless the companies can prove otherwise (as the FTC had originally argued). Indeed, under AB 824, any settlement where a generic drug manufacturer accepts something of value or agrees not to compete for a period of time will be assumed be anti-competitive.11 AB 824 also permits treble damages against those involved in such settlements, with a minimum fine of $20 million, in addition to traditional damages available under any other existing California law (such as the overcharge resulting from purchase of brand name drugs during a generic delay period).12

Injunction and modification

The Association for Accessible Medicines (“AAM”) – a trade organization of generic manufacturers – has sought to ban AB 824.13 He made both the historic defense of the Reverse Payments Settlement – that the Hatch Waxman settlements allow generics to enter the market sooner than they would in the absence of the agreements, providing options at lower cost to consumers earlier, but also argued that AB 824 is unconstitutional because it seeks to regulate out-of-state commerce, in violation of the Constitution’s dormant Commerce Clause.

U.S. District Judge Troy L. Nunley partially agreed with the AAM, granting a preliminary injunction and finding that AB 824 affects colonies unrelated to California.14 “The court therefore finds persuasive plaintiff’s hypothesis: ‘If two parties settle a lawsuit in Delaware on terms that AB 824 deems illegal, the parties to the settlement (and anyone who merely assist) would be subject to severe penalties under California law.”15 Judge Nunley also challenged the penalty provision of AB 824, finding that AB 824 “could be used to impose substantial civil penalties on parties unconnected with California” and could “hypothetically reaching an officer of a Delaware company entering into a settlement agreement with another Delaware company regarding pharmaceutical sales only in Delaware[.]”16

The California AG sought to amend the injunction it said went too far and asked the court to allow California to enforce the law with respect to patent settlement agreements directly related to sales of pharmaceuticals in California and settlements negotiated, made or entered into in California. Judge Nunley agreed, in part, and lifted the injunction as California sought to regulate settlements reached in California, finding that even the AAM does not dispute “whether the state can enforce AB 824 with respect to settlement agreements negotiated, made or entered into”. within the borders of California[.]”17 As such activity is “consistent with the Dormant Commerce Clause as it regulates conduct occurring entirely within the borders of California[,]”18 Judge Nunley preserved the law.

Judge Nunley, however, denied the AG’s request that California be allowed to enter into these settlements which were signed elsewhere and which only impact drug sales in California.19 Such a decision, Judge Nunley found, would effectively void the injunction in its entirety, given that California is the nation’s largest drug market and all FDA-approved generic drugs are sold in the state. which goes against the dormant commerce clause.20

With Judge Nunley’s preliminary law injunction now in place and further litigation to come (as well as the possibility of additional legislation), life sciences companies would be advised to both comply with the California and to stay out of California in all respects. , when negotiating and resolving these disputes.

First, parties should be aware of the requirements of AB 824, including some that require action before or during litigation (for example, contemporary litigation budgets) and before settlement discussions. The freedom to include small payments up to the amount of litigation cost savings provides settling parties flexibility that is still possible under AB 824 with proper planning.

Second, the best way to avoid the teeth of AB 824 is for all parties negotiating a settlement to stay away from California while engaging in any work or communications related to the settlement or negotiations, if possible. There will likely be ongoing litigation to determine what it means to “negotiate, make, or complete” a settlement in California, but the mantra going forward, where possible, should channel the Red Hot Chili Peppers Dani California“California, rest in peace.”

1 FTC v Actavis, Inc., 570 US 136 (2013)
2 Id. at 158 ​​(emphasis added).
3 Id. at 158-60.
4 ID at 160.
5 Id. at 157-58.
6 ID at 159.
7 Drug Price Competition and Patent Term Restoration Act (codified as 21 USC §§ 355 & 360cc).
8 AB 824 § 134002(a)(3)(A).
9 See, for example, FTC v. Cephalon, Inc., No. 08-2141, 2015 US Dist. LEXIS 92709, at *10 (ED Pa. Jun 17, 2015) (excluding the definition of “payment” “compensation for future legal costs saved shall not exceed a maximum limit, which is initially set at seven million dollars” by ANDA declarant); So, Now, and Later: Trends in Pharmaceutical Patent Settlements after the FTC v. Actavis, Fed. Trade Comm’n (May 28, 2019), (“The FTC consent settlements often include an exception for avoided litigation expense payments of less than $7 million.”).
10 Id. at § 134002 (a)(2)(C)(ii)(I-II).
11 Id. at § 134002(a)(1)(A) and (B).
12 Id. at § 134002(e)(1)(A)(i).
13 AMA c. Bonta, No. 20-01708 (ED Cal.).
14 AMA c. Bonta, No. 20-01708, 2021 US Dist. LEXIS 236387 (ED Cal. Dec. 8, 2021).
15 ID at *24.
16 ID at *25.
17 AMA c. Bonta, No. 20-01708, 2022 US Dist. LEXIS 27533, at *12-13 (ED Cal. February 14, 2022).
18 Id.
19 Id. at 9 a.m.
20 Id.