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Judge halts California ban on ‘pay to delay’ pharma deals

The judge said the nation's first ban on pay-for-delay generic pharmaceutical deals would impermissibly affect the drug market outside the Golden State's borders.

SACRAMENTO, Calif. (CN) — A federal judge on Thursday suspended California’s first-in-the-nation ban on pharmaceutical industry pay-for-delay deals, ruling the law intended to increase the flow of affordable generic drugs likely violates out-of-state commerce protections.

Siding with a group of leading generic drug manufacturers and distributors, U.S. District Judge Troy Nunley agreed the law enables California to issue multimillion-dollar civil penalties against companies that have no connection to the state. In a terse ruling, the Barack Obama appointee ripped the law and said it must be temporarily enjoined due to clear constitutional shortcomings.

“As it is written, the civil penalties provision could hypothetically reach a corporate officer of a Delaware company entering into a settlement agreement with another Delaware company regarding pharmaceutical sales in only Delaware,” Nunley wrote. “The court cannot reasonably find that Assembly Bill 824 regulates only the California market.”

Governor Gavin Newsom signed the landmark drug industry reform in 2019 and proclaimed the state was using its buying power to force drug companies to offer a wider variety and cheaper range of generic options.

The law outlaws a common industry practice known as “pay-for-delay” where large pharmaceutical companies pay or incentivize a competing company to keep cheaper generic drugs off the market. Critics say the backroom deals choke competition and force Americans to pay more for prescription drugs.

The Federal Trade Commission has long studied the practice and acknowledged the deals cost consumers billions in drug costs annually. 

The measure cleared the Legislature in bipartisan fashion and was hailed by the California Medical Association and labor unions as a rare meaningful attempt to lower the cost of prescription drugs.

Shortly after the bill’s passage, the Association for Accessible Medicines sued in federal court, arguing AB 824 clashed with the Commerce Clause and cast it as a blatant attempt to regulate interstate commerce. The Ninth Circuit tossed the challenge in 2020 for lack of standing, ruling the industry hadn’t been specific enough in showing there was an imminent or impending threat of fines from the state.

The panel largely declined to address the merits of the law however, leaving room for the industry to recuperate and go back to the drawing board.  

On its second attempt, the industry bolstered its case with declarations from drugmakers claiming they missed out on opportunities to cash in on lucrative settlements by prolonging expensive litigation due to the looming threat of California’s AB 824. It argued the law has “perverse and far-reaching consequences” for both consumers and the industry by preventing companies from settling patent suits.

“The inevitable result of allowing AB 824 to be enforced will be fewer low-priced generic and biosimilar alternatives entering the market before patent expiry, resulting in less competition and higher prescription drug prices for patients nationwide—exactly the opposite of what Congress sought to achieve,” plaintiff argued in court.  

Nearly 18 months after the first case was dismissed, the industry has clearly hooked Judge Nunley.

“The monetary injury stems from plaintiff’s members foregoing cost-saving settlement agreements likely deemed unlawful by AB 824 and instead litigating these cases to judgment,” Nunley wrote. “Accordingly, the court is persuaded that plaintiff’s members will be unable to recover monetary damages against the state even if plaintiff is successful on the merits of its case.”

The bill's author said the judge's decision was "beyond frustrating."

"The association’s name and mission would imply that they are somehow on the side of patients when, in fact, they are only on the side of protecting their own profits,” said Assemblyman Jim Wood, D-Eureka.

California Attorney General Rob Bonta, who voted for AB 824 while a member of the state Assembly, noted the case is in the early stages.

"Pay for delay agreements — where one drug company pays off a competitor in order to preserve a monopoly and keep lower price generics off the market — harm millions of patients in California by driving up drug costs and preventing access to life saving medications," Bonta's office said in an email. "We are disappointed in the court's decision to enter a preliminary injunction at the outset of this case. However, this case is still in its early stages and we remain confident the state will eventually prevail."

On the other side, Jeff Francer, the association's general counsel, celebrated the decision in an email.

“The ability of a generic or biosimilar drug developer to settle patent litigation with a brand name drug company often accelerates patient access to more affordable medicines by many years," Francer wrote. "AAM is encouraged that the federal court today recognized the harm caused by California in restricting litigation settlements that typically bring more affordable medicines to patients and taxpayers more quickly.”

In addition to irreparable harm, Nunley said it was likely the industry would ultimately prevail on its claim that AB 824 violates the dormant Commerce Clause and temporarily enjoined the state from enforcing the law. He capped the 18-page order by signaling a permanent injunction is likely to follow.

“The court finds the balance of equities and the public interest element tips sharply in plaintiff’s favor such that an injunction would be proper even if there were only serious questions going to the merits,” Nunley concluded.

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