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Legal Challenges to California’s Pay-for-Delay Ban

By Phebe Hong

On October 7th, toward the end of his health care “bill-signing marathon,” Governor Gavin Newsom signed bill AB 824, making California the first state to ban pharmaceutical “pay-for-delay” deals. The new law prohibits pay-for-delay deals, which is the practice of pharmaceutical companies giving “anything of value” to generic manufacturers to keep lower-cost generic versions off the market. The measure allows civil suits to be brought against pharmaceutical companies using such payment agreements to maintain monopolies for their higher-cost brand-name drugs.

Will California’s new legislation face legal challenges? The Association for Accessible Medicines (AAM) is already a strong opponent, calling the state law unconstitutional. The AAM argues that the  California law is unconstitutional because it regulates out-of-state transactions and is preempted by federal patent law. The AAM contends that settlement agreements actually benefit patients by reducing barriers to entry for generic manufacturers and by establishing a specific date for generic drug launch. (As a reminder, the AAM is the generic drug lobby group that successfully nullified Maryland’s drug price-gouging law last year through a constitutional challenge. See the Fourth Circuit Court of Appeals opinion in AAM v. Frosh.).

What do legal precedents tell us about pay-for-delay settlements? The primary court precedent regarding pay-for-delay settlements is the 2013 Supreme Court’s ruling in FTC v. Actavis. In that opinion, the Court allowed the FTC to make antitrust challenges against pay-for-delay agreements under a “rule of reason” analysis. The Court outlined five considerations for applying the “rule of reason” analysis:

  1. Recognition that pay-for-delay settlements have the potential for “genuine adverse effects on competition;”
  2. Anticompetitive harm “will at least sometimes prove unjustified;”
  3. Brand-name drug manufacturers making pay-for-delay agreements likely have the power to bring about anticompetitive harm;
  4. Litigating patent validity is not necessary to determine the anticompetitive effects of the pay-for-delay settlement; and
  5. Recognition that parties in the pharmaceutical industry can settle patent litigation without pay-for-delay payments.

The Supreme Court ultimately concluded that, using this five-factor framework, pay-for-delay settlements could be deemed to violate antitrust laws. The new California law goes a step further by establishing that a settlement involving 1) a payment and 2) delayed entry is presumptively anticompetitive. Such a presumption would likely aid the California Attorney General in bringing antitrust cases against pharmaceutical manufacturers.

Similar bills banning pay-for-delay deals have also been advanced on the federal level. This includes H.R. 987 The Strengthening Health Care and Lowering Prescription Drug Costs Act and H.R. 2375 Preserve Access to Affordable Generics and Biosimilars Act. Thus, this is certainly an area to keep an eye on for future legislation (and litigation) on both the federal and state levels.

Phebe Hong

Phebe Hong

Phebe Hong is a 2L at Harvard Law School. She graduated from Harvard College with a degree in Human Developmental and Regenerative Biology. Prior to law school, she worked as a consultant advising pharmaceutical and biotechnology companies. She is a Research Assistant at the Program on Regulation, Therapeutics, and Law (PORTAL) and an Articles Editor for the Journal of Law and Technology. Her research interests include FDA regulation of biologics and pharmaceutical patent law.

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