The Status of California’s Pay-for-Delay Legislation & Litigation

By Jordan Paradise

Pay-for-delay settlements arise when the brand drug company compensates the generic in some form to delay entry to market, thereby effectively eliminating the 180-day exclusivity on the market the generic is entitled to under law. At the federal level, the Supreme Court has established factors to determine whether such agreements violate antitrust law, policymakers have introduced legislation to curb the practice, and the Federal Trade Commission continues to actively police such deals. At the state level, California Attorney General Xavier Becerra made headlines for securing legal settlements in July 2019 with several pharmaceutical companies accused of participating in pay-for-delay agreements. Highlights of the legal settlements included injunctions and $70 million in monetary payments. California has also taken the lead at enacting legislation. Assembly Bill 824, Preserving Access to Affordable Drugs, increases antitrust scrutiny of settlement agreements between branded and generic pharmaceutical manufacturers, as well as innovator biologic and biosimilar manufacturers. The law imposes a presumption of illegality, shifting the burden of proof from enforcers and plaintiffs to drug companies accused of anticompetitive behavior to show that the arrangement is not anticompetitive. This article explores the recent legislation and ensuing litigation challenging the bounds of this legislation in California.

Criticisms abound for tactics utilized by the pharmaceutical industry that commentators urge negatively impact competition, cost, and access to products approved by the U.S. Food and Drug Administration (FDA). Legal scholars characterize some of these behaviors as evergreening or product-hopping (shifting availability of an approved drug to a modified form of that drug),^[1] pay-for-delay settlements (entering into reverse settlements with generic companies to keep generic drugs off the market),^[2] contracting for the manufacture of authorized generic drugs^,[3] and filing sham citizens petitions with FDA that delay generic market entry.^[4] As a core federal regulator policing the industry, the Federal Trade Commission (FTC) routinely invokes antitrust and unfair competition law to frame legal challenges to these behaviors.

A weighty source enabling these activities is the Drug Price Competition and Patent Term Restoration Act of 1984 (also known as the Hatch–Waxman Act), which established the abbreviated new drug application process.^[5] Public patent disclosure and patent certification procedures built into the Hatch–Waxman Act were crafted as litigation-forcing mechanisms to challenge weak or invalid patents and allow generic entrants to market. ^[6] In the product application to FDA, the generic sponsor frames measures of bioequivalence, or similarity, to the brand product, also called the reference drug. FDA will approve a suitable generic after all relevant patents and periods of exclusivity have expired for the brand drug unless the generic applicant is successful in a challenge to the validity of the brand product.^[7] This challenge is achieved through a “paragraph IV” certification to FDA and subsequent litigation, wherein the generic sponsor asserts that the brand drug patent is not legally valid or is otherwise unenforceable. Upon such a determination of invalidity or unenforceability by a court of law, the generic drug may enter the market and receive 180-day generic exclusivity for successfully challenging the patent.^[8] Pay-for-delay settlements arise when the brand drug company compensates the generic in some form to delay entry to market, thereby effectively eliminating the 180-day exclusivity on the market it is entitled to under the law. 

These agreements between new drug patent holders and generic drug applicants have faced legal scrutiny for decades, and a significant split on their legality developed in the circuit courts. The 2013 Supreme Court case, Federal Trade Commission v. Actavis, addressed the issue, holding that the settlement agreements were not per se illegal but subject to a rule-of-reason analysis.^[9] The Court found such payments were unlawful if they were “large and unjustified” based on several factors.^[10] In the years following the decision, additional cases have arisen questioning the scope of pay-for-delay settlements and testing the reasoning laid out by the Supreme Court.^[11] An FTC study in 2016 determined that pay-for-delay settlements did decline in the year after the Federal Trade Commission v. Actavis decision, from 29 in fiscal year 2013 to 21 in fiscal year 2014, with a high of 40 in fiscal year 2012.^[12] However, litigation continues in this realm given lower court uncertainty about application of the rule-of-reason analysis.^[13]

There have been several attempts to address such agreements through federal legislation. Most recent is the Preserve Access to Affordable Generics and Biosimilars Act, Senate 1428.^[14] President Biden has also issued an Executive Order calling on federal agencies, including FTC, to harness regulatory authority to combat the misuse of patent laws to inhibit or delay innovation.^[15] FTC has recently created a working group to scrutinize pharmaceutical mergers and related anticompetitive behaviors, including the review of settlements for signs of pay-for-delay agreements.^[16] The group includes the Canadian Competition Bureau, the European Commission Directorate General for Competition, the U.K.’s Competition and Markets Authority, the U.S. Department of Justice Antitrust Division, and U.S. Offices of State Attorneys General. The FTC working group is considering theories of harm, the impact of pharmaceutical merger on innovation, the frequency and impact of regulatory abuses (like pay-for-delay settlements), thresholds of evidence to challenge transactions based on theories of harm, and legal remedies for violative transactions.^[17]

At the federal level, the issue of pay-for-delay settlements is continuing to be addressed in the courts, by Congress in proposed federal legislation, as well by relevant federal agencies through enforcement, presidential directive, and targeted scrutiny by expert working groups.

California’s Stance and AB 824

The State of California has waged legal challenges to pay-for-delay settlements through the Department of Justice and the Attorney General (AG) of California. As the former California AG, Xavier Becerra made headlines for securing legal settlements in July 2019 with several pharmaceutical companies that California had accused of participating in pay-for-delay agreements.^[18] Becerra told senators in his February 2021 confirmation hearing for Secretary of the U.S. Department of Health and Human Services that the litigation allowed the AG’s office to go behind the curtain on the operations of the companies’ drug pricing and “prove there was collusion, at times, going on.”^[19] Highlights of the legal settlements included an eight-year injunction against Endo regarding pay-for-delay agreements, a ten-year injunction against Teva, and a 20-year injunction against Endo partner Teikiku, as well as a collective $70 million in monetary payments.^[20]

California has also taken the lead in enacting legislation to address pay-for-delay deals at the state level. Assemblyman Jim Wood and Senator Melissa Melendez introduced AB 824, Preserving Access to Affordable Drugs, in February 2019. The bill was strongly guided and endorsed by AG Becerra.^[21] The bill unanimously passed the Assembly Health Committee in March 2019, later passed the Assembly Judiciary Committee, and, after several amendments, was passed and signed by Governor Newsom in October 2019.^[22] The law increases antitrust scrutiny of patent settlement agreements between branded and generic pharmaceutical manufacturers as well as innovator and biosimilar manufacturers.^[23] More specifically, the law imposes a presumption of illegality, shifting the burden of proof from enforcers and plaintiffs to drug companies accused of anticompetitive behavior to show that the arrangement is not anticompetitive.^[24] Any agreement that resolves or settles a patent infringement claim connected to the sale of a pharmaceutical product is presumed to have anticompetitive effects and is a violation of the law.^[25] Such a presumption is to be made if:

A) a nonreference drug filer receives anything of value from another company asserting patent infringement, including, but not limited to, an exclusive license or promise that the brand company will not launch an authorized generic version of its brand drug; and B) the nonreference drug filer agrees to limit or forego research, development, manufacturing, marketing, or sales of the nonreference drug filer’s product for any period of time.^[26]

To rebut this presumption, parties to the agreement must show by a preponderance of evidence that either the value received by the nonreference drug filer is fair and reasonable solely for other goods or services that the nonreference drug filer agreed to provide or that the agreement has directly generated procompetitive benefits that outweigh the anticompetitive effects.^[27] Prior to AB 824, plaintiffs and enforcing entities bore the burden of proof to show that the generic nonreference drug filer agreed to abstain from using the patented innovation and that an unexplained payment was exchanged from the brand drug company to the nonreference drug company.

The law excludes from the definition of “anything of value” a patent infringement settlement wherein the consideration granted by the brand or reference drug filer to the nonreference drug filer as part of the resolution or settlement consists of any one or more enumerated aspects. The full excerpt of the legislation, quoted below, demonstrates the specificity of the exclusion for “anything of value.” For purposes of AB 824, “anything of value” does not include the settlement of a claim for patent infringement in which consideration granted to the nonreference generic drug or biosimilar biologic filer by the brand reference product holder consists of one or more of the following:  

(A) the right to market the competing product in the United States before the expiration of either: (i) a patent that is the basis for the patent infringement claim; or (ii) a patent right or other statutory exclusivity that would prevent the marketing of the drug; (B) a covenant not to sue on the claim that the nonreference drug product infringes a United States patent; (C) compensation for saved reasonable future litigation expenses of the reference drug holder but only if both of the following are true: (i) the total compensation for saved litigation expenses is reflected in budgets that the reference drug holder documents and adopted at least six months before the settlement; and (ii) the compensation does not exceed the lower of the following: (I) $7,500,000; or (II) five percent of the revenue that the nonreference drug holder projected or forecasted it would receive in the first three years of sales of its version of the reference drug documents at least 12 months before the settlement. If no projections or forecasts are available, the compensation does not exceed $250,000; (D) an agreement resolving or settling a patent infringement claim that permits a nonreference drug filer to begin selling, offering for sale, or distributing the nonreference drug product if the reference drug holder seeks approval to launch, obtains approval to launch, or launches a different dosage, strength, or form of the reference drug having the same active ingredient before the date set by the agreement for entry of the nonreference drug filer. A different form of the reference drug does not include an authorized generic version of the reference drug; (E) an agreement by the reference drug holder not to interfere with the nonreference drug filer’s ability to secure and maintain regulatory approval to market the nonreference drug product or an agreement to facilitate the nonreference drug filer’s ability to secure and maintain regulatory approval to market the nonreference drug product; and (F) an agreement resolving a patent infringement claim in which the reference drug holder forgives the potential damages accrued by a nonreference drug holder for an at-risk launch of the nonreference drug product that is the subject of that claim.^[28]

The law also establishes civil penalties, including treble damages, for violations.^[29] Recent litigation has challenged the bounds of this legislation in California, leaving the scope of its application in question, as discussed later. After surveying other state attempts at legislation, the remainder of this article will explore the legal decisions relating to California and identify implications for future state legislative activity.

Other State Legislative Activity

A few other states have contemplated legislation addressing pay-for-delay agreements. Bills in both Connecticut and Minnesota have not succeeded, and legislation in Oregon is pending within the legislature. Connecticut Senator Saud Anwar, with support of the Insurance and Real Estate Committee, introduced House Bill 5366, An Act Concerning the Cost of Prescription Drugs, in February 2020.^[30] Among the enumerated purposes in the bill’s Statement of Purpose was to “require pharmaceutical manufacturers to send notice to the Insurance Commissioner about pay-for-delay settlements and reduce the price of innovator drugs that are subject to such settlements.” Specifically, section 9(a) would have mandated:

Each pharmaceutical manufacturer doing business in this state that manufactures a brand name prescription drug and enters into an agreement with another pharmaceutical manufacturer for the purpose of delaying or preventing such other manufacturer from introducing a generic substitute for such drug into the marketplace shall, not later than thirty days after entering into such agreement, send notice to the Insurance Commissioner, in a form and manner prescribed by the commissioner, disclosing the name of such drug.^[31]

However, the bill died in chambers shortly thereafter. 

Also in February 2020, The Preserving Access to Affordable Drugs Act, MN SF3097, was introduced by Minnesota Senator Bobby Champion.^[32] The bill proposed that patent infringement claims in connection with the sale of pharmaceutical products would have a presumption of anticompetitive behavior. The bill contained largely the same language as California’s AB 824, including the factors for the presumption of anticompetitive effects^[33] and the exclusions from “anything of value.”^[34] The act died in May 2020.

Finally, Oregon has a pending bill that passed the Senate and now resides in the House Committee on Rules as of July 2022. ^[35] Again, modeled after California’s law, Oregon Senate Bill 764 tracks the basic structure and language of AB 824, with some minor variations in language related to “item of value.”^[36] Violators are subject to civil penalties, including treble damages or $10 million for each violation.^[37] 

The California Litigation and Implications

Shortly after AB 824 was enacted, a pharmaceutical industry group challenged its implementation. In Association for Accessible Medicines v. Becerra, the district court denied the Association for Accessible Medicines’ (AAM) request for preliminary injunction, finding no imminent threat of harm. The AAM then appealed, seeking to enjoin the law on theories of a violation of the dormant commerce clause, violation of due process, and federal preemption.^[38] The Ninth Circuit rejected the case on the basis of a lack of Article III standing in July 2020.^[39] A few months later, in October 2020, AG Becerra joined 20 other Attorneys General in signing an amicus brief to the U.S. Court of Appeals for the Seventh Circuit to address AbbVie’s antitrust and anticompetitive practices surrounding the drug Humira.^[40] The brief argued that the district court misapplied Federal Trade Commission v. Actavis, thus prompting the exact type of anticompetitive behavior that the U.S. Supreme Court sought to diminish in its decision.^[41] Meanwhile, AAM was reframing its case to address the standing shortcomings noted by the Ninth Circuit.

In December 2021, U.S. District Court Judge Troy Nunley of the Eastern District of California ruled in favor of AAM, temporarily enjoining the law.^[42] Judge Nunley’s ruling focused on constitutional issues with the impact of the law on entities with no connection to the state, in that the civil penalties provisions could hypothetically reach other states. He determined that “the court cannot reasonably find that Assembly Bill 824 regulates only the California market.”^[43] Thus, because the law had the impact of unduly burdening interstate commerce, there was a likelihood of success on the merits that the law ran afoul of the Constitution. Judge Nunley relied on an aspect of the dormant commerce clause referred to as the extraterritoriality principle, where the focus is on “whether the practical effect of the regulation is to control conduct beyond the boundaries of the state.”^[44] There is mixed commentary on the principle, and the Supreme Court has addressed it only a few times.^[45]

However, the broad application of the injunction was short lived. A mere two months later, in February 2022, the district court reassessed the scope of the injunction on the request of California AG Rob Banta and amended it to only apply to settlements that were “negotiated, completed, or entered into within California’s borders.”^[46] However, the court denied the specific request of the AG to allow the enforcement of AB 824 any time an agreement is made relating to in-state pharmaceutical sales that artificially distorts the pharmaceutical market in the state.^[47] As of July 22, 2022, California has not appealed the injunction.

There are several important implications of the legal challenge to the California legislation. First, states that have modeled their legislation after AB 824 likewise face lawsuits testing the scope of any enacted laws. While proposed bills in both Connecticut and Minnesota have failed, Oregon’s SB 764 currently resides in the House Committee on Rules. For other states contemplating such legislation, it may be an opportunity to craft language with the legislation to avoid the fate of AB 824. Second, the Eastern District Court of California’s decision limiting the scope of the legislation to the State of California based on the dormant commerce clause signals more litigation to come challenging state legislation directed at the pharmaceutical industry as an undue burden on interstate commerce. Third, the limitation of AB 824’s reach only within the State of California may result in fewer pay-for-delay settlements negotiated in California, yet such deals will continue to be negotiated and executed elsewhere.

[1] M. Sean Royall, Ashley E. Johnson & Jason C. McKenney, Antitrust Scrutiny of Pharmaceutical ‘Product Hopping’, 28(1) Antitrust 71–77 (Fall 2013).

[2] Federal Trade Commission, Pay-For-Delay: When Drug Companies Agree Not to Compete, https://www.ftc.gov/news-events/topics/competition-enforcement/pay-delay.

[3] Federal Trade Commission, Authorized Generic Drugs: Short-Term Effects and Long-Term Impact (Aug. 2011), https://www.ftc.gov/sites/default/files/documents/reports/authorized-generic-drugs-short-term-effects-and-long-term-impact-report-federal-trade-commission/authorized-generic-drugs-short-term-effects-and-long-term-impact-report-federal-trade-commission.pdf. 

[4] Matthew Avery, William Newsom & Brian Hahn, The Antitrust Implications of Filing ‘Sham’ Citizens Petitions with the Food and Drug Administration, 65 Hastings L. J. 113, 113–52 (2013).

[5] Pub. L. No. 98-417, sec. 101, 98 Stat. 1585, 1585–92 (codified at 21 U.S.C. § 355(j)).

[6] 21 U.S.C. § 355(b)(2)–(3); 21 U.S.C. §§ 355(j)(2)(A)–(D), (j)(5)(B)(i)–(iii), 5(C). 

[7] 21 U.S.C. § 355(j)(5)(A)–(E).

[8] 21 U.S.C. § 355(j)(5)(C).

[9] Federal Trade Commission v. Actavis, 133 S. Ct. 2223 (2013).

[10] Id.

[11] Federal Trade Commission, Pay-For-Delay: When Drug Companies Agree Not to Compete, https://www.ftc.gov/news-events/topics/competition-enforcement/pay-delay.

[12] FTC Staff Report, Agreements Filed with the Federal Trade Commission under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003: Overview of Agreements, Filed in FY 2014, at 3, https://www.ftc.gov/system/files/documents/reports/agreements-filled-federal-trade-commission-under-medicare-prescription-drug-improvement/160113mmafy14rpt.pdf.

[13] See Michael A. Carrier, Payment After Actavis, 100 Iowa L. Rev. 7, 13 (2014).

[14] S. 1428, 117^th Cong. 2021, https://www.congress.gov/bill/117th-congress/senate-bill/1428/text; see also Khadijah M. Silver, Fight Over “Pay for Delay” Heats Up in Washington, MedCity News, July 22, 2021, https://medcitynews.com/2021/07/fight-over-pay-for-delay-heats-up-in-washington/.

[15] Executive Order 14036, Promoting Competition in the American Economy, July 9, 2021, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.

[16] Federal Trade Commission, FTC Announces Multilateral Working Group to Build a New Approach to Pharmaceutical Mergers, Mar. 16, 2021, https://www.ftc.gov/news-events/news/press-releases/2021/03/ftc-announces-multilateral-working-group-build-new-approach-pharmaceutical-mergers.

[17] Id.

[18] State of California Department of Justice, Attorney General Becerra Secures Nearly $70 Million against Several Drug Companies for Delaying Competition and Increasing Drug Prices, July 29, 2019, https://oag.ca.gov/news/press-releases/attorney-general-becerra-secures-nearly-70-million-against-several-drug#:~:text=In%20June%202019%2C%20Attorney%20General%20Becerra%20settled%20with,partner%20in%20the%20production%20of%20Lidoderm%20with%20Endo.

[19] Patients for Affordable Drugs Now, HHS Secretary-designate Xavier Becerra Commits to Addressing High Price of Prescription Drugs, Feb. 23, 2021, https://patientsforaffordabledrugsnow.org/2021/02/23/becerra-drug-pricing/.

[20] State of California Department of Justice, supra note 18.

[21] State of California Department of Justice, Attorney General Becerra, Assemblymember Wood Announce Bill to Outlaw Collusive Agreements Between Drug Companies that Inflate Drug Prices, Feb. 20, 2019, https://oag.ca.gov/news/press-releases/attorney-general-becerra-assemblymember-wood-announce%C2%A0bill%C2%A0-outlaw-collusive.

^[22] Kevin Wallentine, Shifting the Burden on Pay-for-Delay Challenges: Analyzing AB 824’s Effects on Reverse Settlement Payments and Drug Costs, 54 Loyola Los Angeles L. Rev. 385 (2020).

[23] AB 824, at § 13400(d)(1)–(2).

^[24] Wallentine, supra note 22, at 389.

[25] AB 824, at § 134002(a)(1).

[26] AB 824, at § 134002(a)(1)(A)–(B).

[27] AB 824, at § 134002(3)(A)–(B).

[28] AB 824, at § 134002(a)(2)(A)–(F).

[29] AB 824, at § 134002(e)(1).

^[30] Connecticut House Bill 5366 (Prior Session Legislation), LegiScan, (Nov. 3, 2011), https://legiscan.com/CT/rollcall/HB05366/id/949063.

[31] Id.

[32] MN SF3097, Preserving Access to Affordable Drugs Act.

[33] MN SF3097, at § 2(a)(1).

[34] MN SF3097, at § 2(a)(2).

^[35] Tim Gruver, Oregon Lawmakers Butt Heads with Drug Companies over ‘Pay-for-Delay’ Patent Suits, The Center Square, Apr. 8, 2021, https://www.thecentersquare.com/oregon/oregon-lawmakers-butt-heads-with-drug-companies-over-pay-for-delay-patent-suits/article_2f8cf8be-9410-11eb-81b8-eb6d205259c1.html.

[36] Oregon SB 764.

[37] Oregon SB 764, § 5(a)–(b).

[38] Id.

[39] Association for Accessible Medicines v. Becerra, Case No. 20-15014 (9th Cir. 2020).

^[40] State of California Department of Justice, Attorney General Becerra Joins Coalition in Fight Against Pharmaceutical Company AbbVie Inc.’s Anticompetitive Practices, Oct. 14, 2020, https://oag.ca.gov/news/press-releases/attorney-general-becerra-joins-coalition-fight-against-pharmaceutical-company.

[41] Id.

[42] Association for Accessible Medicines v. Bonta, Case No. 2:20-cv-01708 (E.D. Cal. Dec. 9, 2021).

[43] Id.

[44] Healy v. Beer Inst., Inc., 491 U.S. 324, 336 (1989).

[45] Susan Lorde Martin, The Extraterritoriality Doctrine of the Dormant Commerce Clause is Not Dead, 100 Marq. L. Rev. 497 (2016).

[46] Association for Accessible Medicines v. Bonta, No. 2:20-CV-01708-TLN-DB, 2022 WL 463313, at *24 (E.D. Cal. Feb. 14, 2022).

[47] Id. at *13.