In a significant development for the pharmaceutical industry, a federal court has permanently limited the enforcement scope of California's Assembly Bill 824 (AB 824), a first-of-its-kind legislation that presumes certain pharmaceutical patent settlements are anticompetitive. The February 2025 ruling restricts the law's application to settlement agreements "negotiated, completed, or entered into within California's borders," while barring enforcement against agreements with no California connection.
Court Limits Reach of California's Pharmaceutical Patent Settlement Law
The Eastern District of California's permanent injunction follows years of constitutional challenges to AB 824, which was passed in October 2019. The Association for Accessible Medicines (AAM), a trade group representing generic manufacturers, successfully argued that the law's extraterritorial reach violated the dormant Commerce Clause of the U.S. Constitution.
The court's ruling specifically protects AAM, its member companies, and their agents or licensees from enforcement of AB 824 for agreements made outside California. However, the law remains enforceable for settlement agreements with sufficient California connections.
"AB 824 violates the dormant Commerce Clause to the extent it regulates settlement agreements in which none of the parties, the agreement, or the pharmaceutical sales have any connection with California," the court stated in its February 13, 2025 order.
How AB 824 Changes the Legal Landscape for Patent Settlements
AB 824 represents a significant departure from federal standards established in the Supreme Court's 2013 FTC v. Actavis decision. Under federal law, courts apply a "rule of reason" analysis to evaluate whether patent settlements between brand and generic manufacturers have anticompetitive effects.
In contrast, AB 824 creates a statutory presumption that settlements are anticompetitive when:
- A generic manufacturer receives "anything of value"
- The agreement limits or delays research, development, manufacturing, marketing, or sales of a generic or biosimilar drug
To rebut this presumption, settling parties must demonstrate by a preponderance of evidence that the agreement's procompetitive benefits outweigh its anticompetitive harms—effectively shifting the burden of proof to the pharmaceutical companies.
The law imposes substantial penalties for violations, including a minimum civil penalty of $20 million or up to three times the value received by a party attributable to the violation, whichever is greater.
Significant Exceptions and Remaining Questions
AB 824 does include exceptions for certain types of value exchanges. Agreements where the value relates solely to legitimate transactions—such as payment for manufacturing services or compensation for saved future litigation expenses (if reflected in budgets created at least six months before settlement)—may not trigger the law's presumption of anticompetitive behavior.
However, significant questions remain about the law's application:
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Geographic Scope: While the court specified that AB 824 applies to agreements "negotiated, completed, or entered into within California's borders," it did not clarify what specific circumstances qualify. If a company has its principal place of business in California, does that subject all its agreements to AB 824? If a single meeting in a multi-jurisdictional negotiation occurs in California, is that sufficient to trigger the law?
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California Sales: The court declined to allow enforcement based solely on pharmaceutical sales within California. However, its permanent injunction order contains language suggesting sales in California might still be relevant in certain scenarios, creating uncertainty for companies.
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Who Is Protected: The permanent injunction explicitly protects AAM, its members, and their agents and licensees. Non-member pharmaceutical companies technically remain subject to potential enforcement, though they could raise similar constitutional challenges if targeted.
Industry Implications and Risk Mitigation
For pharmaceutical companies engaged in patent litigation, AB 824 adds a layer of complexity to settlement considerations. Legal experts recommend several strategies to navigate this uncertain landscape:
"Companies should carefully assess where settlement discussions occur, where agreements are signed, and where parties are incorporated or headquartered," notes a pharmaceutical patent attorney familiar with the case. "These factors could determine AB 824's applicability."
When settlements include value transfers to generic manufacturers, companies should maintain detailed records showing that payments are justified by litigation costs, unrelated services, or other procompetitive reasons.
The pharmaceutical industry should also monitor ongoing appeals and parallel legislation in other jurisdictions. Both AAM and California have appealed the district court's ruling, leaving the ultimate fate of AB 824 uncertain.
Broader Legislative Trends
California's effort to regulate pharmaceutical patent settlements is part of a growing trend. New York's State Senate recently passed a bill requiring parties to notify the state attorney general of certain patent settlement agreements, though it stops short of presuming illegality or imposing penalties.
At the federal level, the Preserve Access to Affordable Generics and Biosimilars Act has been introduced in the U.S. Senate. This bill mirrors aspects of AB 824 by creating a rebuttable presumption that "reverse payment" settlement agreements are anticompetitive and authorizes the Federal Trade Commission to pursue enforcement.
As this legal landscape continues to evolve, pharmaceutical companies must remain vigilant about how, when, and where they structure patent litigation settlements to minimize regulatory risk while protecting their intellectual property interests.
