By Meredith Boerschlein, Lauren Robinson, and John Livingstone

In the realm of pharmaceutical patent litigation, settlement agreements between branded and generic pharmaceutical companies are frequently used to resolve disputes before, during, and after trials in federal district courts. These settlements can provide predictability, conserve resources, and allow parties to resolve disputes without protracted litigation and appeals. However, when those agreements provide something of value to the generic pharmaceutical company, antitrust allegations may arise. For example, so-called “reverse payment” terms — payments from brand-name drug companies to generic manufacturers to provide certainty and avoid litigation expenses — should be carefully considered before entering into a settlement agreement to avoid allegations of antitrust violations.

California’s Assembly Bill No. 824 (AB 824), passed in 2019, addresses such “reverse payment” arrangements and presumes them illegal. AB 824 is styled as a consumer protection and competition-enhancing measure, but its enforcement has raised constitutional challenges, particularly in its extraterritorial reach. Since inception, federal courts have weighed in and provided some clarity—but also have left open several interpretive questions.

This article examines the scope of AB 824’s current enforceability in light of constitutional litigation, its practical implications for pharmaceutical companies engaged in settlement negotiations, and the broader nationwide legislative landscape regarding regulation of “reverse payment” agreements.

Pharmaceutical Patent Disputes

Pharmaceutical patent litigation between branded and generic drug companies almost exclusively takes place before the generic drug is marketed or sold. Patent disputes involving small molecule drugs generally proceed under the framework established in the Hatch-Waxman Act. A generic company can challenge patents covering the brand drug by certifying to the FDA that the patents are invalid, unenforceable, or will not be infringed by the generic drug and notifying the brand company and patent owner of its certification. Receipt of this notice by the brand company can and frequently does trigger a patent infringement lawsuit (21 U.S.C. § 355). Biologics patent disputes also can arise before a biosimilar drug is marketed, proceeding under the Biologics Price Competition and Innovation Act (BPCIA) (42 U.S.C § 262). However, infringement cases can occur outside these frameworks, and AB 824 applies broadly to any pharmaceutical patent settlement agreement, regardless of whether it involves Hatch-Waxman or BPCIA litigation (AB 824, §§134000 (d), (j)).

The Framework Of AB 824

Under AB 824, if a generic or biosimilar applicant receives “anything of value” in an agreement limiting or delaying for any period of time the research, development, manufacturing, marketing, or sales of the generic or biosimilar drug, the agreement is presumed anticompetitive (AB 824, § 134002 (a)(1)). Treatment of these agreements under AB 824 differs from the federal standard. Supreme Court precedent does not automatically consider “reverse payment” agreements to be anticompetitive. Instead, courts apply the rule of reason in analyzing agreements, weighing procompetitive and anticompetitive effects as established in FTC v. Actavis, Inc., 570 U.S. 136 (2013).

Critically, unlike the Actavis approach, AB 824 creates a statutory presumption that such agreements violate California’s antitrust laws. To rebut this presumption, the parties must show by a preponderance of the evidence that the agreement’s procompetitive benefits outweigh the anticompetitive harms. In practical terms, the burden shifts to the settling parties to justify the procompetitive nature of their agreement (AB 824, § 134002 (a)(3)(A)-(B)).

AB 824 does carve out exceptions. Agreements where the value exchanged relates solely to other legitimate transactions, such as payment for manufacturing services, or one of the other articulated exceptions to what is considered “anything of value,” may not be deemed anticompetitive (AB 824, §§ 134002 (a)(2), (a)(3)(A)). For example, AB 824 does not consider compensation for saved future litigation expenses to be “anything of value,” if reflected in budgets created at least six months before settlement. Terms contemplating this type of payment may exempt an agreement from application of the law (AB § 134002 (a)(2)(C)). Still, companies should be prepared to demonstrate that these exceptions apply with documented clarity and, therefore, should plan in advance to have necessary documents for the time periods required by certain exceptions.

AB 824 imposes a minimum civil penalty of $20 million for violations, with the possibility of higher fines up to three times the value received by a party that is reasonably attributable to the violation (AB 824, § 134002 (e)(1)). And while an award of penalties under AB 824 precludes additional penalties under California’s antitrust statute, unfair practices act, and unfair competition law, it does not foreclose damages or other relief available under these laws (AB 824, §§ 134002 (e)(2)-(3)).

Federal Litigation And Constitutional Challenges

Since its enactment, AB 824 has been mired in legal challenges centered on whether the law improperly regulates conduct beyond California’s borders, in violation of the dormant Commerce Clause of the U.S. Constitution. The first suit brought by the Association for Accessible Medicine (AAM), a trade group representing generic manufacturers, shortly after AB 824 was signed into law, was dismissed not on the merits, but for lack of standing (Ass’n for Accessible Medicines v. Becerra, 822 F. App’x 532, 534 (9th Cir. 2020); Ass’n for Accessible Medicines v. Becerra, Case No. 2:19-cv-02281-TLN-DB, ECF No. 48).

The same day the first case was dismissed, AAM refiled its challenge. The court granted AAM’s motion for a preliminary injunction, agreeing that AB 824 likely violated the dormant Commerce Clause (Ass’n for Accessible Medicines v. Bonta, Case No. 2:20-cv-01708-TLN-DB, ECF No. 42, 10-15, 18). In its reasoning, the court emphasized that AB 824 had the effect of regulating out-of-state conduct. For instance, the law could impose penalties on an agreement reached entirely between out-of-state entities concerning sales made exclusively outside California. This, the court reasoned, was likely unconstitutional.

The preliminary injunction broadly prohibited enforcement of AB 824 based on its violation of the Constitution. The court later modified the injunction and clarified its applicability in two important ways. The court granted California’s request to enforce AB 824 with respect to settlement agreements negotiated, completed, or entered into within California’s borders (Case No. 2:20-cv-01708-TLN-DB, ECF No. 47, 7-8). Notably, however, it denied the state’s request to allow enforcement of the law whenever a settlement agreement is made in connection with in-state pharmaceutical sales (Case No. 2:20-cv-01708-TLN-DB, ECF No. 47, 3-7). The court made an additional clarification to the injunction. Because of the language of AAM’s motion for preliminary injunction, the court clarified that the injunction only applies to AAM, its member entities, and their agents and licensees (Case No. 2:20-cv-01708-TLN-DB, ECF No. 47, 13-14).

In February of this year, the court converted the preliminary injunction into a permanent injunction with important caveats: AB 824 may be enforced against settlement agreements “negotiated, completed, or entered into within California’s borders.” Importantly, enforcement is barred against AAM, its member companies and their agents or licensees — except when an agreement falls within that California nexus (Case No. 2:20-cv-01708-TLN-DB, ECF No. 92, 21).

Unpacking The Contours Of The Injunction

For pharmaceutical companies currently engaged in or facing the prospect of patent litigation, understanding the circumstances in which AB 824 can and cannot be enforced may be an important factor in their settlement strategy.

Geographic Limits

Analysis of the court’s various orders provides some guidance about the geographic scope of the injunction, but questions remain. The court’s order makes clear that AB 824 is enforceable for settlement agreements that are “negotiated, completed, or entered into within California’s borders.” But the court did not elaborate on what circumstances qualify such that enforcement is appropriate. For instance, if a company has its principal place of business in California or is considered a California resident, does that render all its agreements subject to AB 824? The court left this question open. Similarly, if a single, in-person meeting took place in California as part of a broader, multi-jurisdictional negotiation, would that trigger the law’s application? For now, the answer remains unclear.

In its permanent injunction order, the court referenced a hypothetical from a precedential case that involved a California resident selling a sculpture entirely outside the state to explain the extraterritorial nature of an unconstitutional regulation. The implication from the court’s reliance on this case and its hypothetical is that residency alone is insufficient to trigger AB 824’s applicability (Case No. 2:20-cv-01708-TLN-DB, ECF No. 42, 12). Yet, in considering the ability to challenge AB 824, the court also implied that a principal place of business in California may have jurisdictional relevance (Case No. 2:20-cv-01708-TLN-DB, ECF No. 92, 6-10). Accordingly, pharmaceutical companies may need to analyze not only where agreements are executed, but where material elements of negotiation and performance take place, and where the parties to the agreement reside and operate.

Pharmaceutical Sales On California: Trigger or Not?

Another open question concerns whether AB 824 applies to settlements involving pharmaceutical sales within California, even if the agreement itself is negotiated elsewhere. During litigation, California requested that the court allow enforcement of AB 824 whenever a settlement affected in-state pharmaceutical sales. AAM countered that nearly every generic drug approved by the FDA is sold in California, given its status as the largest market in the nation. In modifying its preliminary injunction, the court declined to follow California’s rationale for enforcing AB 824 in such circumstances (Case No. 2:20-cv-01708-TLN-DB, ECF No. 47, 3-7).

Nevertheless, the court’s permanent injunction order contains language suggesting that sales in California might still be relevant in certain scenarios. In analyzing whether AB 824 violates the dormant Commerce Clause, the court referred back to its preliminary injunction order stating it had “already found AB 824 may reach a settlement agreement in which none of the parties, the agreement, or the pharmaceutical sales have any connection with California” (Case No. 2:20-cv-01708-TLN-DB, ECF No. 92, 15 (emphasis added); Case 2:20-cv-01708-TLN-DB, ECF No. 42, 15). This statement appears inconsistent, and the lack of clarity leaves open the possibility of future litigation on this issue.

These issues will likely arise and have to be addressed through the courts. In fact, both AAM and California appealed the district court’s ruling, so the fate of AB 824 is still somewhat uncertain. Until these legal questions are resolved, companies need to be vigilant as they consider settlement agreements that may fall within the purview of AB 824.

Who Is Bound By The Injunction?

The permanent injunction, as currently framed, is limited specifically to AAM, its members, and their agents and licensees. It seemingly does not apply to non-member pharmaceutical companies, which remain subject to potential enforcement by California’s Attorney General. However, the rationale underlying the court’s constitutional analysis is not limited to AAM. If California were to enforce AB 824 against a non-AAM member under similar out-of-state circumstances, that party could consider raising the same dormant Commerce Clause challenge. In short, while AAM and its members obtained relief, the constitutional protections under similar circumstances could extend to non-AAM member pharmaceutical companies. However, if a party or an agreement may have ties to California, whether AB 824 applies to a given agreement will have to be judged on a case-by-case basis.

Trends Beyond California

California is not acting in isolation. Legislative efforts to restrict “reverse payment” settlements are emerging at both state and federal levels. For example, earlier this year, the New York State Senate passed a bill requiring parties to notify the state attorney general of certain patent settlement agreements. Unlike AB 824, New York’s bill does not presume illegality and imposes no penalties. Still, it reflects increasing state-level scrutiny of pharmaceutical patent litigation settlement practices.

At the federal level, the Preserve Access to Affordable Generics and Biosimilars Act has been introduced in the U.S. Senate. The bill mirrors aspects of AB 824 by turning the Supreme Court’s Activis decision on its head and creating a rebuttable presumption that “reverse payment” settlement agreements are anticompetitive. It authorizes the FTC to pursue enforcement and seek penalties underscoring growing Congressional attention in this area.

Practical Takeaways

For the life sciences industry, AB 824 is more than a legal abstraction — it is a factor that should be considered when evaluating legal strategy and risk in settling patent litigation. The facts to which the permanent injunction in Association for Accessible Medicines v. Bonta appear to apply are narrow. Using the hypothetical the court used to analyze violation of the Dormant Commerce clause as guidance, those facts are that no parties reside in California, no sales have any connection with California, and the settlement agreement is not negotiated, completed, or entered into within California. But what if one or more of those facts are different, as they often are in nationwide settlement agreements? To minimize application of AB 824 or its kin, there are practical action points to consider:

• Assess Geographic Nexus: Carefully consider where settlement discussions occur, where agreements are signed, and where parties are incorporated, legally formed, or headquartered. These factors could determine AB 824’s applicability.
• Evaluate Member Status of Potential Parties to an Agreement: If a company is a member of AAM, the permanent injunction provides some protection — but not absolute immunity. Enforcement is still possible for California-based agreements.
• Document Procompetitive Rationale: When settlements include value transfers to generics, maintain records showing that the payments are justified by litigation costs, unrelated services, or other procompetitive reasons.
• Stay Informed on Legislative and Judicial Shifts: Monitor ongoing appeals and parallel legislation in other jurisdictions. California is not the only state that has considered regulating pharmaceutical patent settlement agreements. The legal landscape on a state-by-state and federal level is fluid, and further judicial or legislative developments could alter enforcement risk.

While courts have curtailed the scope of AB 824 through constitutional challenges, uncertainty remains, particularly around what constitutes an uncompetitive agreement under California law. Until further clarity emerges, evaluating how, when, and where patent litigation settlements are structured will likely be an important consideration for pharmaceutical companies.

About The Authors:

Meredith H. Boerschlein is an Associate at Finnegan, Henderson, Farabow, Garrett & Dunner. Meredith’s practice focuses on complex biotechnology and pharmaceutical patent and trade secret litigation in U.S. district courts and on advising clients on issues arising under the intersection of patent and FDA law.      

Lauren J. Robinson is a Partner at Finnegan, Henderson, Farabow, Garrett & Dunner. Lauren is experienced in intellectual property litigation and transactional matters. She focuses on complex patent litigation before U.S. district courts in the chemical and pharmaceutical fields.

John D. Livingston is a Partner at Finnegan, Henderson, Farabow, Garrett & Dunner. John is a nationally recognized first-chair trial lawyer focusing on complex pharmaceutical, chemical, and biotechnology patent litigation before Federal district and appeals courts.