California officials were dealt a setback by a federal judge who ruled that a controversial law banning so-called pay-to-delay deals between pharmaceutical companies is, in part, unconstitutional and so cannot be enforced against agreements that had no link to the state.
In his ruling, U.S. District Court Judge Troy Nunley determined that the state law, which was enacted in 2019, violated the Dormant Commerce Clause of the U.S. Constitution because it would extend to pay-to-delay agreements that happened outside of California and, therefore, attempted to regulate interstate commerce.
In these deals, a brand-name drugmaker settles a patent lawsuit by paying cash or transferring something else of value to an erstwhile generic rival, which agrees to delay launching a copycat medicine until a specific date in the future. This gives the brand-name drugmaker more time to sell its medicine without lower-cost competition.
Pay-to-delay deals have factored into the larger debate over the cost of prescription medicines. The U.S. Federal Trade Commission, which went to court several times to protest such deals, claimed the agreements, at one point, cost U.S. consumers an estimated $3.5 billion annually. In 2012, the U.S. Supreme Court ruled these agreements can be subject to review for anticompetitive arrangements.
The pharmaceutical industry, however, contended the deals are not only legal, but actually allow lower-cost drugs to reach consumers faster than if patent litigation drags on for year. In this instance, the Association for Accessible Medicines, a trade group representing generic makers, quickly filed a lawsuit arguing the California law is unconstitutional, because it directly regulates business that is conducted in other states.
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California was the first state in the nation to outlaw pay-to-delay deals, a step that state officials said was necessary to prevent drug companies from thwarting competition and maintaining higher prices. The move was also significant because California is generally seen as a bellwether state and suggested that, if the law survived court battles, other states might pursue similar legislation.
But in his decision, which converted an existing preliminary injunction into a permanent one, Nunley wrote the state conceded the law would still “extend to agreements entered into out-of-state, to the extent that they cover California-based sales” of medicines. This means the law “directly regulates transactions that occur entirely out of state” and “on its face,” violates the Dormant Commerce Clause, he wrote.
He also shot down the argument from California officials that there is a “long history and tradition of states regulating antirust and unfair competition,” despite the assertion by the generic trade group that the law is unconstitutional. “The state does not have the authority to enact and enforce antitrust legislation that, otherwise, has been found to violate the Dormant Commerce Clause,” he wrote.
As a result, the ruling is a victory for the generic drug industry. Going forward, state officials will be allowed to enforce the law for any pay-to-delay agreements that are negotiated, completed, or agreed upon only within state borders. This suggests that drug companies are likely to make a point of negotiating and finalizing any pay-to-delay deals in any state other than California.
We asked California Attorney General Rob Bonta for comment and will update you accordingly.
In a statement, John Murphy, who heads the Association for Accessible Medicines, said that “we are pleased that Judge Nunley has permanently enjoined this unconstitutional law. Patent settlements expedite patient access to lower-cost medicine, and the court correctly recognized that California cannot regulate out-of-state patent settlement agreements.”
