With support from the FTC, California becomes first state to enact pay-for-delay legislation

Congress passed the Hatch-Waxman Act (1984) to encourage and facilitate generic competition in the prescription drug market. When generic drugs enter the market, they provide a lower cost alternative to the brand, and there is typically rapid substitution in the marketplace over the more expensive brand version. As a result, brand companies have a vested interest in excluding generic competition from the market, with some brand companies taking extreme steps to protect lucrative drug monopolies, as discussed in greater detail here.

One prominent example of this conduct that has caught the attention of judges and legislators alike is pay-for-delay agreements. These agreements, also known as reverse payment settlements, refer to when a brand drug company settles a patent infringement claim with an alleged infringer by paying the potential competitor to stay off the market. The Supreme Court and the FTC have both emphasized that payments flowing in the “wrong” direction (from the plaintiff to the defendant) are suspect, signaling that the generic manufacturer is being compensated for agreeing not to compete with the brand company.[1]

Recognizing the severe consequences of this conduct for consumers, the Federal Trade Commission has taken a strong stance in prioritizing pay-for-delay agreements in recent years, opposing this “costly legal tactic that more and more branded drug manufacturers have been using to stifle competition from lower-cost generic medicine.”[2] One FTC study found that pay-for-delay deals cost consumers and taxpayers $3.5 billion in higher drug costs each year.[3] The FTC has brought numerous lawsuits to challenge these agreements as illegal and advocated for legislation to end reverse payment settlements.[4]

In response to growing local and national concern regarding reverse settlements, California recently became the first state to pass pay-for-delay legislation, with Governor Gavin Newsom signing Assembly Bill 824 into law in October 2019.[5] Under A.B. 824, a settlement agreement is presumptively anticompetitive where the brand drug company transfers “anything of value” to a generic drug company in exchange for an agreement to delay market entry of the competing drug. Consistent with several federal court decisions applying Actavis, the reverse payment does not need to be in cash form, with A.B. 824’s “anything of value” term explicitly including non-cash value transfers such as an exclusive license or a promise that the brand company will not launch an authorized generic. Echoing the Supreme Court’s reasoning in Actavis, A.B. 824 provides an exception if the procompetitive benefits of an agreement outweigh its anticompetitive effects. The Bill imposes substantial monetary penalties, with each party that violates A.B. 824 responsible for a civil penalty of up to three times the value of the settlement or a minimum fine of $20 million, whichever is greater.

Commenting proudly on the legislation, Governor Newsom said, “Competition in the pharmaceutical industry helps lower prices for Californians who rely on life-saving treatments. California will use our market power and our moral power to take on big drug companies and prevent them from keeping affordable generic drugs out of the hands of people who need them.”[6]

In essentially codifying Actavis and its progeny, California’s pay-for-delay legislation changes the landscape in California for this type of anticompetitive conduct. Now, potential violators are not only susceptible to civil liability from private parties, but also may face increased risk of being targeted by the California Attorney General in a civil action to collect the monetary penalties described above. Time will tell if other states follow suit in enacting strong legislation to protect consumers and reduce the skyrocketing costs of crucial medications.


[1] See FTC v. Actavis, 570 U.S. 136 (2013) and https://www.hausfeld.com/news-press/the-federal-trade-commission-slams-impax-endo-reverse-payment-settlement (discussing In re Impax Labs., Inc., No. 9373, 2019 WL 1552939 (F.T.C. Mar. 28, 2019)).

[2] FTC, Pay-For-Delay: When Drug Companies Agree Not to Compete, https://www.ftc.gov/news-events/media-resources/mergers-competition/pay-delay.

[3] Id.

[4] Id. (“Since 2001, the FTC has filed a number of lawsuits to stop these deals, and it supports legislation to end such ‘pay-for-delay’ settlements.”).

[5] Office of Governor Gavin Newsom, Governor Gavin Newsom Signs Legislation Banning “Pay for Delay” to Fight Runaway Prescription Drug Costs, https://www.gov.ca.gov/2019/10/07/governor-gavin-newsom-signs-legislation-banning-pay-for-delay-to-fight-runaway-prescription-drug-costs/

[6] Id.

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