California urges Ninth Circuit to revive 'pay-for-delay' drug law

SAN FRANCISCO (CN) — An attorney for California argued Tuesday before a Ninth Circuit panel that a lower court got it wrong by scuttling a state law regulating prescription drug settlements.

At question was Assembly Bill 824, a 2019 law that stopped drug companies from paying competitors to keep generic drugs out of stores, a move known in antitrust law as “pay-for-delay.”

A lower court ruled the law unconstitutional, as it regulated agreements involving parties or pharmaceutical sales with no link to California — a violation of the dormant commerce clause. The ruling favored plaintiff Association for Accessible Medicines — a nonprofit group composed of manufacturers and distributors of generic drugs, pharmaceutical ingredients, and goods and services providers to that industry — which called the law a “textbook” violation of the clause which forbids discrimination against interstate commerce.

Representing the state before the Ninth Circuit, attorney Diana Kim argued the panel should look toward interpretive clues in the text of the legislation. While the plain text places no geographic limits, it indicates lawmakers were focused on the Golden State.

“The purpose of the legislation was to protect California consumers,” Kim said, noting the word “sale” is in the law, meaning in-state. No constitutional problem existed, she said, because companies that don’t want to comply with the law can leave California’s market.

U.S. Circuit Judge Gabriel Sanchez, a Joe Biden appointee, questioned if a company would fall under the law if it sold $1 worth of drugs in California.

“So, California gets to regulate that?” he questioned.

Sanchez said the association has argued the law interferes with a patent holder’s right to grant licenses for its products. Kim said a patent holder has the ability to confer licenses, but would face scrutiny if a license is used for an illegal act.

And pay-for-delay is unlawful, she added.

U.S. Circuit Judge Kim Wardlaw, a Bill Clinton appointee, said such an agreement between companies wouldn’t be illegal under federal law.

“This is California stepping up and acting in a way that’s contrary to the federal scheme,” she added.

Association attorney William Jay said the law doesn’t regulate drug sales but instead agreements between companies.

“It’s the settlement that incurs the penalty,” he added.

U.S. Circuit Judge Carlos Bea, a George W. Bush appointee, said that still affects the price of drugs in California.

Jay said California’s argument is that all settlements between companies affect California, because the drugs involved are marketed nationwide. However, what that leads to is a state law that could regulate an agreement between, for example, New Jersey and New York.

California has a presumption that these settlements are illegal while the federal government presumes them to be legal, Jay said.

In an effort to stop pay-for-delay, the state law prohibits any delay from the moment a settlement between companies occurs to the moment a drug enters the market. That characterizes any agreement as a delay, Jay argued.

The case has wound through the court system for over six years.

The association first sued in 2019, though a judge found it failed to show a likelihood of success on the merits or establish a likely and imminent irreparable harm. The association appealed to the Ninth Circuit, which remanded the case with instructions to dismiss without prejudice. The appeals court ruled the association had no standing to bring claims for its members.

In 2020, the association sued again. A judge in 2021 granted a preliminary injunction, finding it now had standing and was likely to succeed on the dormant commerce clause claim. The injunction was tweaked the following year, and the state was permitted to enforce the law when settlement agreements are made in California.