California Dreaming Part 3: It’s No Longer Just a Dream

August 7, 2020By Sara W. Koblitz

When California first passed its Pay for Delay bill, AB 824: Preserving Access to Affordable Drugs, we questioned whether the law could withstand a constitutional challenge, and indeed, the Association for Accessible Medicines (“AAM”) brought such a challenge in November 2019.  For those of you who need a refresher, AB 824 Business: Preserving Access to Affordable Drugs 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 “value” is not specifically defined, leaving room for interpretation (though there are several provisions explaining what the term does not include).  Essentially, AB 824 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—regardless of whether the parties do business in California.

AAM sued the state of California in November 2019 seeking an injunction staying the implementation of AB 824 on January 1, 2020, primarily alleging that AB 824 violates the Dormant Commerce Clause because it applies to parties outside of California.  Other arguments posed included federal preemption, violation of the Eight Amendment to the U.S. Constitution (Excessive Fines Clause), and breach of procedural due process rights.  On December 31, 2019, the Eastern District of California denied AAM’s request for a preliminary injunction on ripeness grounds “due to the nature of Plaintiff’s pre-enforcement attack on AB 824.”  The Court was sympathetic to AAM’s arguments, explaining that AB 824 as applied may very well violate the Dormant Commerce Clause, but denied the injunction because it was, at the time, too speculative.

AAM didn’t take that setback lying down:  in January 2020, AAM filed an interlocutory appeal, challenging the denial of its motion for preliminary injunction in the Ninth Circuit.  On July 24, 2020, the Ninth Circuit denied the interlocutory appeal on the basis of standing.  In a short and quick Memorandum Opinion, the Ninth Circuit dismissed AAM’s appeal because it has not shown a “substantial risk” that AB 824 will cause any member to suffer an injury in fact.  Though the lower court made its decision based on ripeness, the Ninth Circuit focused on standing.  The Court acknowledged its departure from the lower court and explained that standing and ripeness basically “boil down to the same question.”  Given this, the Court analyzed the case under the Article 3 standing criteria.

The Ninth Circuit explained that, under the Supreme Court’s standing analysis, AAM was required to show that it (1) suffered a concrete, particularized, and actual or imminent injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.  In this instance, the Court explained, where the injury in fact is the enforcement of an allegedly unconstitutional statute, the plaintiff satisfies the injury-in-fact requirement by alleging an intent to engage in a course of conduct under which a credible threat of prosecution exists.  AAM, the Court determined, failed to show that AAM members intent to enter into settlements “of the sort prohibited by AB 824.”  As such, the Court noted, “AAM has not shown that there is a ‘substantial risk’ that AB 824 will cause any of its members to suffer injury that is concrete, particularized, and imminent.”  Next, the Court explained that AAM members have not established economic injury due to complying with AB 824, which would require foregoing pay-for-delay settlements or litigating patent-infringement suits to judgment.  The possible future injury is not enough to establish a substantial risk of harm.

As we (and the Eastern District of California) explained previously, AAM still has plenty of ammunition for an “as-applied” challenge.  Once AB 824 has been applied to an AAM member (or other putative plaintiff), the constitutionality of the law can be challenged again.  But this means that parties looking to settle have to worry about proving the settlement is not anticompetitive, providing confidential commercial information to a government in which the parties may not even do business, and potentially litigating the findings with California before a settlement can be finalized.  Regardless of the actual content of the settlement, this is inherently burdensome on industry and has the potential delay settlements and eventual market access.  This is what California wanted: the bill was intended to discourage certain patent infringement settlements.  But it does more because the burden it puts on industry actually discourages most, if not all, patent infringement settlements between sponsors and generics.  With any luck, the state of California will see the District Court’s original decision as a “how not to” guide to enforcing the law, but for now, we wait until California actually tries to enforce (or a settlement is actually delayed because of the law) to see what happens.