Case Name: Association for Accessible Medicines v. Bonta, Civ. No. 2:20-cv-01708-TLN-DB, 2021 WL 5853431 (E.D. Ca. Dec. 9, 2021) (Nunley, J.)
Drug Product and Patent(s)-in-Suit: N/A
Nature of Case and Issue(s) Presented: California legislation AB 824 presumed that settlement agreements between brand and generic pharmaceutical companies, where the generic delays market entry in exchange for something of value, were anti-competitive and unlawful. It also levied a civil penalty—thrice the value received by the individual due to the violation or $20 million, whichever was greater—against any individual who assisted in the violation of the law.
Plaintiff was a nonprofit, voluntary association composed of the manufacturers and distributors of generic and biosimilar medicines, manufacturers and distributors of bulk active pharmaceutical ingredients, and suppliers of other goods and services to the generic and biosimilar pharmaceutical industry. It had previously tried to invalidate AB 824. In that case, it had filed a motion for preliminary injunction, which the court denied, finding that Plaintiff failed to establish a likelihood of success on the merits and that absent a constitutional violation, Plaintiff failed to establish an irreparable harm that was both likely and imminent. On appeal, the Ninth Circuit vacated that decision and remanded with instructions to dismiss without prejudice, finding Plaintiff lacked associational standing to bring claims on its members’ behalf.
On August 25, 2020, Plaintiff filed the subject case, arguing that AB 824: (i) violated the dormant Commerce Clause by directly regulating out-of-state-conduct; (ii) was preempted by federal patent law, namely FTC v. Actavis, Inc., 570 U.S. 136 (2013) and the BPCIA; (iii) violated the constitutional prohibition on excessive fines under the Eighth Amendment; and (iv) violated due process by creating a burden-shift with no meaningful opportunity for rebutting the presumption applied. Plaintiff filed the subject motion for preliminary injunction, which the court granted.
Why Plaintiff Prevailed: The court first addressed the issue of standing. The Ninth Circuit had previously found that Plaintiff lacked standing, in part, because none of the declarations submitted by Plaintiff’s members had alleged an intention to engage in a “pay for delay” settlement agreement of the sort prohibited by AB 824 and because its members “have not established that they have incurred economic injury due to complying with AB 824, i.e., by foregoing pay for delay settlement agreements or litigating patent-infringement suits to judgment.” This time, the court found that Plaintiff’s declarations were sufficient to prove injury-in-fact. For example, one of Plaintiff’s members recently decided, in light of AB 824’s provision deeming exclusive licenses to be things of value, to pull out of a tentative settlement agreement under which the defendant would have received consideration and would have been allowed to bring its generic product onto the market prior to the expiration of the patent, but not immediately. According to that declaration, that member “has thus chosen to continue litigating a patent-infringement lawsuit at considerable cost in terms of legal fees that it would not be incurring had the settlement proposal … been finalized.” The court reasoned that that not only established economic injury, but also that the injury was directly traceable to AB 824. Thus, Plaintiff had sufficiently alleged the elements of associational standing to bring the subject motion for preliminary injunction.
Next, the court focused on whether Plaintiff were likely to succeed on the merits of its claim that AB 824 violated the dormant Commerce Clause. According to Plaintiff, AB 824—because it was not limited to settlement agreements entered into in California or between California entities—directly regulated out-of-state commerce and was therefore a per se violation of the dormant Commerce Clause. California responded that Plaintiff’s argument rested solely on an extraterritoriality theory, which the Supreme Court rarely enforced, and that AB 824 did not regulate conduct occurring wholly outside California because even if an agreement were entered into outside the State, that agreement likely would contemplate engaging in unlawful sales within California.
AB 824 stated:
[A]n agreement resolving or settling, on a final or interim basis, a patent infringement claim, in connection with the sale of a pharmaceutical product, shall be presumed to have anticompetitive effects and shall be a violation of this section if both of the following apply: (A) A nonreference drug filer receives anything of value from another company asserting patent infringement, including, but not limited to, an exclusive license or a promise that the brand company will not launch an authorized generic version of its brand drug. (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.
Cal. Health & Safety Code § 134002(a)(1). With respect to rebutting this presumption, AB824 stated:
Parties to an agreement are not in violation of paragraph (1) if they can demonstrate by a preponderance of the evidence that either of the following are met: (A) The value received by the nonreference drug filer … is a fair and reasonable compensation solely for other goods or services that the nonreference drug filer has promised to provide.
(B) The agreement has directly generated procompetitive benefits and the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement.
Id. § 134002(a)(3). The penalties set forth by AB824 were as follows:
Each person that violates or assists in the violation of this section shall forfeit and pay to the State of California a civil penalty sufficient to deter violations of this section, as follows: (i) If the person who violated this section received any value due to that violation, an amount up to three times the value received by the party that is reasonably attributable to the violation of this section, or twenty million dollars ($20,000,000), whichever is greater. (ii) If the violator has not received anything of value as described in clause (i), an amount up to three times the value given to other parties to the agreement reasonably attributable to the violation of this section, or twenty million dollars ($20,000,000), whichever is greater. (iii) For the purposes of this subdivision, “reasonably attributable to this violation” shall be determined by California’s share of the market for the brand drug at issue in the agreement.
Id. § 134002(e)(1)(A). Nothing in the language of the statute limited these penalties only to California sales. Thus, “If two parties settle a patent suit in Delaware on terms that AB 824 deems unlawful, the settling parties (and every person who merely assists) would be liable for severe penalties under California law.” Put another way, AB 824 could reach settlement agreements in which none of the parties, the agreement, or the pharmaceutical sales would have any connection with California. In addition, the court took exception with the fact that AB 824 could be used to levy substantially significant civil penalties—up to $20 million, or more—on parties that did not have any connection with California. Thus, AB 824 did not regulate only the California market and was likely to violate the dormant Commerce Clause. Because the court found that Plaintiff was likely to succeed on the merits of at least this claim, it did not address the other claims challenging AB 824.
The court then analyzed whether Plaintiff’s members would suffer irreparable harm. The Ninth Circuit had concluded that although monetary harm did not constitute irreparable harm, monetary injury could be irreparable when Eleventh Amendment sovereign immunity prevented a plaintiff from recovering damages in federal court. Here, the monetary injury stemmed from Plaintiff’s members foregoing cost-saving settlement agreements likely deemed unlawful by AB 824 and instead litigating those cases to judgment.
Finally, the court found Plaintiff’s arguments with respect to the balance of equities and the public interest persuasive. Relative to Plaintiff’s injury, the court found that any harm to California was relatively de minimis because it “will still be able to bring enforcement actions under federal antitrust law.”
