Antitrust Law Daily Wrap Up, ANTITRUST—E.D. Cal.: California reverse settlement agreement law partly violates dormant Commerce Clause, (Feb 14, 2025)

By Justin Marcus Smith, J.D.

California offered stiff resistance to the idea that a state law making certain “reverse payment” patent settlements presumptively unlawful unconstitutionally affected out-of-state commerce.

California Assembly Bill 824 (AB 824) violates the dormant Commerce Clause of the United States Constitution “except for settlement agreements negotiated, completed, or entered into within California’s borders,” held the federal district court in Sacramento, California. The court had already ruled, at the time it granted plaintiff Association for Accessible Medicines’ (AAM) motion for preliminary injunction, that “AB 824 on its face does not include a limitation to California sales.” California’s defense of the law relied on a case that only involved a claim of indirect, practical effects on out-of-state commerce. Plaintiff AAM had associational standing because its constitutional challenge involved questions applicable to all members (Association For Accessible Medicines v. Bonta, No. 2:20-cv-01708-TLN-SCR (E.D. Cal. Feb. 13, 2025)).

In 2019, the California legislature enacted AB 824. The statute made “reverse payment” settlements of patent infringement claims between brand-name and generic pharmaceutical companies presumptively anticompetitive and unlawful.

In September 2020, AAM, a nonprofit voluntary association of generic drug manufacturers and distributors, filed a complaint to invalidate the law. AAM also moved for a preliminary injunction. In December 2021, the district court found AAM was likely to succeed on the merits of its claim that AB 824 violates the dormant Commerce Clause by directly regulating out-of-state conduct. The court granted AAM’s motion for a preliminary injunction.

In early 2022, California filed a motion to modify the preliminary injunction to permit in-state enforcement of AB 824. The State also asked the court to clarify the injunction was only applicable to AAM and its member entities, not third parties. The court left the preliminary injunction intact, but it clarified 1) the injunction did not apply to settlement agreements negotiated, completed or entered into within California’s borders because such agreements did not run afoul of the dormant Commerce Clause; and 2) the injunction only applied to AAM and associated parties.

The instant litigation was not AAM’s first attack on AB 824. AAM filed a pre-enforcement attack in 2019, failed to obtain a preliminary injunction, and filed an interlocutory appeal to the Ninth Circuit Court of Appeals. On remand, the district court followed the Ninth Circuit instruction to dismiss, without prejudice, on the basis that AAM and its members did not have Article III injury-in-fact and AAM lacked associational standing to bring claims on its members’ behalf.

The instant complaint asserted nearly identical causes of action. In September 2023, California and AAM filed cross-motions for summary judgment. California argued the participation of each AAM member was necessary to establish associational standing because the court would need to conduct individualized inquiries to determine which settlement agreements were negotiated, completed, or entered into within California’s borders; and all AAM claims should fail on the merits. AAM argued there were no genuine disputes of fact about its standing, including Article III standing; individualized inquiries were not necessary in the context of injunctive relief; it should prevail on the merits of its dormant Commerce Clause claim; and California waived its associational standing argument by failing to raise it sooner. The court also footnoted that California’s opposition to the AAM motion for summary judgment did not challenge AAM’s Article III standing, only its associational standing.

Standing. The court found AAM had associational standing to bring its claims in the instant matter because it sufficiently established, per the third prong of Hunt, that the claims did not require AAM member participation in the lawsuit. See Hunt v. Wash. State Apple Advertising Com’n, 43 U.S. 333, 343 (1977). Hunt held that an association would have standing for its members when: i) members would have standing to sue; ii) the litigation is germane to the association’s purpose; and, iii) neither the claim asserted nor the relief requested requires individual member participation. The parties only disputed whether AAM satisfied the third prong.

As for California’s argument that members must participate to resolve whether or not their settlements were completed in California, AAM argued it was black-letter law that the third prong of Hunt is satisfied when an association seeks uniform injunctive relief. AAM essentially argued injunctive associational standing could be resolved as a matter of law. AAM said its challenge was both as-applied and facial. The as-applied challenge to AB 824 only pertained to settlements completed wholly out-of-state, but the challenge was also facial because it pertained more broadly to all such settlements.

The court explained the third prong of Hunt was merely prudential, it was only about administrative convenience and efficiency, and it only required a finding of complete identity between the interests of the consortium and those of its members. The court agreed with California to the extent that as-applied claims generally require individualized fact inquiries for each association member, even in the injunctive context; however, the court distinguished that associations can sometimes bring as-applied challenges, for example, when there is an equal protection question that depends on a purely legal analysis.

Here, AAM only sought injunctive relief for all of its claims on the basis that AB 824 “violates the United States Constitution and is therefore void and unenforceable.” The court previously held that the plaintiff brought an as-applied challenge only to settlements completed wholly out-of-state, but the challenge was also facial because it challenged all such settlements. Accordingly, AAM’s claims involved questions applicable to all members and were well-suited to associational resolution.

The court continued that although some individual member participation might be necessary to determine whether a particular settlement agreement was completed wholly outside of California, the court held that possibility did not preclude standing on the third prong of Hunt. In the court’s view, California’s cases were also distinguishable because the remedies sought would have required more than a few individualized inquiries. Accordingly, AAM had associational standing in the instant matter.

Dormant Commerce Clause. The court held that AB 824 violates the dormant Commerce Clause only with respect to settlement agreements negotiated, completed, or entered into outside of California.

California contended the Supreme Court decision in National Pork Producers Council v. Ross (Pork Producers), 598 U.S. 356 (2023), precluded what California characterized, here, as AAM’s sole dormant Clause argument, i.e., that any regulation affecting commerce outside California was categorically unconstitutional. AAM said Pork Producers did not affect the extraterritoriality claim that AB 824 directly regulates even those settlements completed entirely out-of-state. AAM distinguished that Pork Producers only involved a claim of indirect, practical effects on out-of-state commerce which were too great. AAM maintained that the court already recognized that AB 824 directly regulates out-of-state transactions.

The court distilled the parties’ arguments to the following three questions: 1) whether AB 824 violates the dormant Commerce Clause; 2) whether it applies only to settlements covering drug sales in California; and, 3) whether historical antitrust case law supports upholding AB 824.

First, the court noted that AB 824 was unlike Proposition 12 in Pork Producers because AB 824 could directly regulate out-of-state transactions by those with no connection to California. California countered AB 824 did not offend the direct-regulation principle, but the court said it had already found that AB 824 could reach a settlement agreement in which none of the parties, the agreement, or the pharmaceutical sales involved, would have any connection with California. The court reasoned that AB 824 was fundamentally different from the law challenged in Pork Producers, which only regulated actors engaging in in-state conduct. Another AAM case was instructive on this distinction. See Ass’n for Accessible Medicines v. Ellison (Ellison), 704 F. Supp. 3d 947 (D. Minn. 2023).

The court explained further that Pork Producers did not curtail other cases California cited, it “only clarified there is no ‘per se’ rule that follows from them.” See Pork Producers, 598 U.S. at 371. The court accordingly agreed with AAM that the Ninth Circuit extraterritoriality cases AAM cited were applicable here.

Again, the court found that AB 824 “on its face” may result in extraterritorial regulation of settlement agreements in which none of the parties, the agreement, or the pharmaceutical sales have any connection with California. The court considered California’s counterarguments and cites at considerable length in reaching this finding. In sum, Pork Producers did not change the court’s initial analysis accompanying its December 9, 2021 order grating AAM’s motion for preliminary injunction.

Next, as to whether California was correct that AB 824 applies only to settlements covering drug sales in California, AAM maintained the court had already rejected this argument. The court agreed with AAM that it had already explained, when it entered the preliminary injunction, that “AB 824 on its face does not include a limitation to California sales.” The court continued that it could not read “California sales” into the statute when the legislature did not write the law that way.

Last, as to the relationship between AB 824 and state antitrust statutes, the court rejected California’s contentions that the law comported with the long history and tradition of states regulating antitrust and unfair competition and that a state could have antitrust legislation even if found to violate the dormant Commerce Clause. The court bluntly stated that California did not have the authority to enact and enforce antitrust legislation that otherwise violated the dormant Commerce Clause.

The court found AB 824 violated the dormant Commerce Clause except for settlements negotiated, completed, or entered into within California’s borders. It granted AAM’s motion for summary judgment and denied California’s motion for summary judgment accordingly.

Preemption, etc. The court found AAM raised identical arguments about preemption, excessive fines, and violation of due process that the court already rejected to deny preliminary injunction in AAM’s first, dismissed case. The court granted California’s motion for summary judgment and denied AAM’s motion for summary judgment on these claims accordingly.

The Case is No. 2:20-cv-01708-TLN-SCR.

Judge: Nunley, T.

Attorneys: Michael John Shipley (Kirkland & Ellis, LLP) for Association for Accessible Medicines. David Samuel Houska, California Attorney General’s Office, for Rob Bonta.

Companies: Association for Accessible Medicines

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