Aam v. Robert Bonta: an End to California Pharmaceutical Legislative Reform?
| Publication year | 2022 |
| Author | Written by Seth Silber and Alexander Poonai |
Written by Seth Silber1 and Alexander Poonai2
In December 2021, California's latest ambitious legislative effort to reform the healthcare industry ran into another hurdle. California Assembly Bill No. 824, "Preserving Access to Affordable Drugs" ("AB 824"),3 was introduced back in February 2019 to reduce drug costs to consumers by increasing scrutiny of so-called "reverse payment" or "pay-for-delay" agreements. These agreements are used to settle certain complex patent infringement lawsuits in federal district courts throughout the country. The bill's supporters argue that reverse payment agreements harm consumers by protecting "weak" patents on expensive drugs. Opponents of the bill argue that AB 824 would unconstitutionally regulate business outside of California's borders, that it is preempted by the federal patent and antitrust laws, and that it would have the opposite of its intended effect on drug prices.
Soon after the bill's enactment, the Association for Accessible Medicines ("AAM") brought suit to block its enforcement.4 AAM is a trade association representing manufacturers and distributors of generic prescription drugs and others in the U.S. generic drug industry.5 After initially facing adverse decisions at both the district court and the Ninth Circuit, on remand, the Eastern District of California ruled in late 2021 that AB 824 was likely unconstitutional in Association for Accessible Medicines v. Bonta.6 After over two years of litigation since the bill's passage in 2019, U.S. District Judge Troy Nunley granted AAM's motion for a preliminary injunction preventing enforcement of the law, holding that the law likely violated the Dormant Commerce Clause of the U.S. Constitution.
AAM v. Bonta is the latest in a long line of decisions challenging the constitutionality of far-reaching California laws. In 2019, California successfully defended against a suit from out-of-state industry groups arguing that California's Low Carbon Fuel Standard unconstitutionally regulated activity outside of California's borders.7 The Ninth Circuit held that that regulation was not unconstitutional because it did not aim to control fuel-related transactions outside of California and was narrowly focused and expressly written to address carbon emissions within the State. In 2015, the Ninth Circuit held that a California law requiring a royalty payment following the sale of fine art was unconstitutional under the extraterritoriality
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doctrine because, unlike the carbon emissions case, this law could apply to isolated transactions outside of California.
California's recent state-level efforts at broad reform come as new federal legislation slows to a trickle. In an increasingly divided Congress, federal legislative reform appears to have become prohibitively difficult. This trend has resulted in state legislators attempting to enact laws to meet their own policy goals. AAM v. Bonta provides further guidance for legislators and policy professionals as to the constitutional limits of state regulation, and could cause state legislatures to rethink their attempts to regulate national industries.
In February 2019, Assemblymember Jim Wood (D-Santa Rosa) introduced AB 824 in partnership with then-Attorney General Xavier Becerra.8 In a joint press release, with Assemblymember Wood, Attorney General Becerra stated that the bill was "a crucial step in combating predatory pricing practices, like 'pay-for-delay' schemes."
A. WHAT ARE REVERSE PAYMENT AGREEMENTS?
"Reverse payment" or "pay-for-delay" agreements relate to patent litigation settlement agreements between pharmaceutical manufacturers. In a typical alleged reverse payment, a company that holds a patent sues a potential competitor to prevent the launch of a generic version of its drug. These suits arise under the federal patent laws, including the Hatch-Waxman Act. After litigation and negotiation, the parties reach a settlement in which the patent owner conveys some form of value to the generic company. In exchange, the potential generic competitor receives a license to launch its generic product at some point in the future, but before the plaintiffs' relevant patent(s) expire. Courts have held that this "payment" can take the form of a cash payment, or the transfer of other valuable goods, services, or business arrangements. These are called "reverse" payments because, under these agreements, the plaintiff (i.e., the patent owner) pays the defendant (i.e., the alleged patent infringer) to settle the litigation, rather than the other way around.
Reverse payment agreements have been considered controversial. Assemblymember Wood argues that they harm consumers by delaying the introduction of affordable generic versions of existing brand-name drugs.9 Pharmaceutical industry professionals generally argue that reverse payment agreements can benefit patients by allowing generic companies to introduce low-cost alternatives before the end of a full twenty-year patent term.
B. HOW ARE REVERSE PAYMENT AGREEMENTS CURRENTLY REVIEWED?
Courts applied varying standards of review to reverse payment agreements until the Supreme Court's 2013 decision in FTC v. Actavis.10 In that decision, the Court rejected the FTC's argument that reverse payment settlements are presumptively unlawful, and instead applied a "rule of reason" analysis. Under the rule of reason, plaintiffs challenging a reverse payment bear the burden of showing that the reverse payment agreement has anticompetitive effects.11 The burden then shifts to the defendant pharmaceutical companies to show procompetitive justifications for the agreement. If they satisfy that standard, the burden then shifts back to the plaintiffs to show that the restraint at issue is unnecessary or that the defendant's objectives could be achieved by less restrictive means. The Actavis Court stressed the need to examine the individual facts of a case to determine whether a settlement harms competition. It encouraged courts to look to the size of the payment, the expected costs of the patent litigation, whether the payment could be considered compensation for unrelated services the generic firm provides the patent holder, and other relevant business justifications.
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Two years after Actavis, the Supreme Court of California also adopted a rule-of-reason test for alleged reverse payment settlements in In re Cipro.12 The court acknowledged the U.S. Supreme Court's call for other courts to develop the framework by which to analyze reverse payments and crafted a "structured" test designed to be "in harmony with Actavis."13
AB 824 would make it easier for third parties to challenge reverse payment agreements under the antitrust laws by establishing a rebuttable presumption that the agreements "are anticompetitive and that they delay entry of the generic drug into the marketplace." Specifically, under AB 824:14
[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 [generic company] 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 [generic company] agrees to limit or forego research, development, manufacturing, marketing, or sales of the [generic company]'s product for any period of time.
The bill departs from the burden-shifting rule-of-reason approach set forth by both the U.S. and California Supreme Courts, and instead places the burden of persuasion on the defendant pharmaceutical manufacturers from the outset. The parties to the alleged reverse payment agreement may rebut the presumption by demonstrating by a preponderance of evidence that:15
(A) The value received by the [generic company] . . . (1) is a fair and reasonable compensation solely for other goods or services that the nonreference drug filer has promised to provide.
[or]
(B) The agreement has directly generated procompetitive benefits and the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement.
AB 824 also authorizes the California Attorney General to bring a civil suit and recover penalties against "any party to an agreement that violates this section."16 In addition, the bill states that "[e]ach person that violates or assists in the violation of this section" is subject to civil penalties of "up to three times the value" either received by or given to the party "that is reasonably attributable to the violation of this section, or twenty million...
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