Is California Dreamin? Reverse Payment Agreements Presumptively Anticompetitive

September 18, 2019By Sara W. Koblitz

Following the recent trend of state intervention where federal legislative action has failed, California passed a bill last week discouraging patent infringement settlements that delay drug competition.  Pay-for-delay settlements or “reverse-payment agreements” arise when the RLD-sponsor pays the putative generic sponsor to drop any Paragraph IV litigation, to delay market entry, and/or to not enter the market at all.  Long criticized as anticompetitive, these agreements have been challenged repeatedly in federal court but not with overwhelming success.  The closest the federal government has come to prohibiting them is a 2013 case in which the Supreme Court (FTC v. Actavis) held that such agreements are not presumptively illegal, but they may be subject to antitrust scrutiny.

While the California Bill, AB 824 Business: Preserving Access to Affordable Drugs, does not prohibit pay-for-delay settlements, it presumes an anticompetitive effect if, as part of a Paragraph IV litigation settlement, an ANDA sponsor receives anything of value in exchange to limiting or foregoing entry of a generic drug product.  “Anything of value” includes an exclusive license or promise that the brand company will not launch an authorized generic version of the RLD, but the term is not specifically defined, leaving room for interpretation (though there are several provisions explaining what the term does not include).   Parties to a Paragraph IV settlement agreement can overcome the anticompetitive presumption if they can demonstrate that the value received by the ANDA sponsor is fair and reasonable compensation solely for other goods or services or that the agreement has directly generated procompetitive benefits that outweigh the anticompetitive effects of the agreement.  In effect, this shifts the burden from the government to demonstrate that a settlement is anticompetitive to the parties to show that it is not anticompetitive, making it significantly easier for the government to challenge these settlements.  Further, as a result of this presumption, companies will be forced to disclose more information to the California Attorney General’s Office about Paragraph IV settlements, thereby increasing transparency.

The California Bill was passed on the heels of $70 million in settlement agreements that California entered into with pharmaceutical companies in July 2019 based on pay-for-delay agreements.  Teva, Endo Pharmaceuticals, and Teikoku allegedly entered into agreements that prevented a generic version of Lidoderm from entering the market for almost two years while Teva (again) entered into an agreement that delayed market entry of a generic Provigil for almost 6 years.  This bill would have made it markedly easier for California to have imposed up to $20 million or three times the value received by the ANDA sponsor for each violation.  The Bill was passed on September 12, 2019 and awaits the governor’s signature.

The FTC already has the authority to review Paragraph IV settlements and, as evident from the 2013 Supreme Court case, clearly does so.  Specific information relating to agreements between generic and brand pharmaceutical companies must be filed with the FTC in accordance with the Medicare Modernization Act of 2003.  The FTC has the same authority to review biosimilar patent settlement agreements.  The FTC has noted that, despite increased antitrust scrutiny, companies continue to settle patent litigation.  For example, in FY 2016, the FTC reviewed 232 final settlements relating to 103 brand products – as many as 44 of them could have been classified as anticompetitive under the California bill. Had the California Bill been in effect in FY 2016, parties to all of these agreements would have to have demonstrated to the satisfaction of the California Attorney General’s Office that the value received by the putative patent infringer is fair and reasonable or that the agreement has procompetitive benefits to avoid ample fines and penalties.

California AB 824 is reminiscent of a federal bill first introduced by Sens. Amy Klobuchar and Chuck Grassley in the Senate in January 2017 and reintroduced in January 2019.  A similar bill was introduced in the House of Representatives by Rep. Jerry Nadler in April 2019.  So far, none of these bills has gone anywhere.  Given the lack of traction on a federal stage, California appears to have taken a page from the drug pricing control effort to try to regulate at the state level.  However, this increasingly common tactic is bait for constitutional challenges, so it wouldn’t be surprising if California AB 824 is challenged – especially since industry is not in favor of this type of legislation.  Until then, we can only wait to see whether California AB 824 will have any more effect on pay-for-delay settlements than the 2013 Supreme Court decision – or whether California is only dreaming.