Federal Court Limits Scope of California’s AB 824 Governing Reverse Payment Settlement Agreements

California’s Law Governing Reverse Payment Settlement Agreements

California’s Assembly Bill 824 (“AB 824”) was enacted in October 2019 to curb “reverse payment” settlements among pharmaceutical companies that are used to resolve or settle patent infringement claims. The law establishes a presumption that such settlement agreements, through which a brand-name manufacturer compensates a generic manufacturer to forego its patent challenges in exchange for an agreement to enter at a later date (but before the expiration of the branded company’s patents), are anticompetitive and unlawful. AB 824 imposes significant financial penalties, with violators facing civil fines of up to three times the value received from the agreement or $20 million, whichever is greater.

The Court’s Order, Its Limitations on AB 824, and Its Impact on Entities Outside California

The Association for Accessible Medicines challenged the law as unconstitutional under the Dormant Commerce Clause on August 25, 2020, and the court initially entered a preliminary injunction on December 9, 2021. Earlier this month, the court entered a final order in the case, granting summary judgment for plaintiff and issuing a final, permanent injunction governing application of the statute. In short, the court ruled that AB 824 could not be enforced against “settlement agreements negotiated, completed, or entered into” outside of California’s borders. The court reasoned that applying AB 824 to such agreements violates the Dormant Commerce Clause—which restricts states from regulating commerce occurring entirely outside their jurisdiction—when “none of the parties, the agreement, or the pharmaceutical sales have any connection with California.” Consequently, the ruling narrows the law’s applicability and limits the California Attorney General’s ability to enforce penalties on parties without a direct in-state nexus.

Although the ruling limited the reach of AB 824 to within California’s borders, drug manufacturers should remain cautious when entering into settlement agreements that plausibly could have a sufficient connection to California. This issue—whether a particular settlement agreement was sufficiently “negotiated, completed, or entered into within California’s borders”—remains an open question that will require a case-by-case analysis and likely be clarified through subsequent litigation.

The Potential Interplay Between AB 824 and California’s Unfair Competition Law

There remains an open question about how this law will impact private plaintiff litigants. On the one hand, the legislature expressly declined to grant a private right of action, making clear that any penalty provided for under the law “shall accrue only to the State of California and shall be recovered in a civil action brought by the Attorney General.” On the other hand, there is the possibility that the law—through interaction with California’s Unfair Competition Law (“UCL”)—may nonetheless give private plaintiffs the ability to seek certain relief. Because the UCL allows plaintiffs to “borrow” violations of other state statutes when stating an unfair competition claim, plaintiffs may be able to use violations of AB 824 as an independently unlawful act to sustain a UCL claim. If this strategy is held permissible, plaintiffs in such cases may be entitled to seek injunctive relief or restitution for reverse payment settlements violative of AB 824 when they are negotiated and executed within California. Accordingly, companies in the pharmaceutical industry should continue to monitor enforcement of AB 824—both by the State of California and potentially private plaintiffs—as courts continue to confront and resolve these issues.