Pay for delay and document retention - The ECJ‘s Lundbeck decision

Hogan Lovells

Hogan Lovells

In the much-anticipated Lundbeck case (i.a. C-591/16 P), the European Court of Justice (“ECJ”) on 25th March 2021 confirmed the decision of the European Commission (“Commission”) to impose fines on Lundbeck and several generics companies. The case concerns a pay-for-delay agreement dating back to the year 2003. After the expiry of its basic patent for an antidepressant, Danish pharmaceutical company Lundbeck endeavored to further protect its market position for the drug by entering into agreements with several generics companies. The ECJ's decision confirms previous case law on pay-for-delay agreements and establishes a new duty of care to retain documents in case of sector inquiries by the Commission.


In 2002, Lundbeck agreed with some generics companies to not enter the market of a certain antidepressant offered by Lundbeck. In return, Lundbeck granted them high payments and bought up their generics stocks; the related agreement expired in 2003. In the same year, the Danish Competition Authority reported this to the Commission. Five years later, in 2008, the Commission launched a sector inquiry into the pharmaceutical industry – i.a. to investigate in general “instances of lacking timely entry by suppliers of generic medicines”. Proceedings against individual companies followed in 2010 and led to fines of almost EUR 150 million in total against Lundbeck and several generics companies in 2013. These decisions came under appeal, leading to the ECJ’s recently adopted decision (which, due to the different appellants, essentially consists of six nearly identical judgements; for ease of reference, these are being referred to as “the decision” or “the judgement” in the following).

Pay-for-delay agreements as an infringement of competition law 

The decision confirms the previous case law on “pay-for-delay”, a highly relevant topic in the pharmaceutical industry. It especially confirms the judgement in the Generics case (C-307/18). In brief: 

Potential competition from generics producers

According to the ECJ, Lundbeck and the generics companies were potential competitors at the time the agreements were concluded. For "potential competition" to exist, there must be real and concrete possibilities for a company not (yet) present on the market to enter the market and compete with the companies already present. In particular in the pharmaceutical sector, it has to be examined whether the entrant (i.e. the generics producer) is determined and able to enter the market on its own or whether there are insurmountable barriers. The former can be assumed if at the time of the agreement, the generics producer had taken sufficient preparatory steps to enable it to enter the market concerned within such a period of time “as would impose competitive pressure on the incumbent patent holder. For the latter, the ECJ emphasizes that a patent in itself does not constitute an insurmountable barrier to enter the market, provided the generics company is willing to take the risk, upon entering the market, of being subject to infringement proceedings brought by the patent holder. This in turn may be demonstrated by preparatory measures of the generics producer, e.g. through investments, already concluded supply agreements or steps taken to obtain a market authorization for the respective drug. According to the ECJ, there are no other evidential requirements. In particular, the Commission or a court would neither have to examine the strength of the respective patent in their assessment of whether there are insurmountable barriers nor would they need to find that the generics producer will enter the relevant market with certainty nor that it would be able to successfully compete in the market in the end. The ECJ confirmed the existence of potential competition based on these standards. 

Pay-for-delay agreements as a restriction of competition by object

The ECJ afterwards examined whether pay-for-delay agreements are solely restrictions of competition by effect or even restrictions of competition by object. It found that they are not always restrictions of competition by object (and thus by their very nature regarded as harmful to the proper functioning of competition) – but in this case they are. A restriction of competition “by object” exists, according to the ECJ, if the relevant agreement shows that the agreed transfer of value (i.e. the reverse payment of the patent holder to the generics producer) can be explained solely by the commercial interest of the companies to avoid competition on the merits. However, the reverse payment does not have to be higher than the profits the generics producer would have made in case of a successful market entry. Indeed, it is sufficient that the positive net balance of the specific reverse payment is high enough to actually induce the generics company to refrain from entering the market. If this is the case, it is not necessary to examine other aspects, e.g. whether the agreement went beyond the scope of protection of the patent in dispute, whether a non-challenge clause was included or how strong the process patents in question were. Instead, the existence of a restriction of competition by object has to be assumed. The ECJ did not follow Lundbeck's argument that the damages the patent holder would be able to receive would often be too low to compensate for the actual losses in case of a generics producer (illegally) entering the market. The lower-instance General Court already found it “unacceptable for undertakings to attempt to mitigate the effects of legal rules which they consider excessively unfavorable by entering into restrictive arrangements intended to offset those disadvantages on the pretext that those rules have created an imbalance detrimental to them”. The ECJ seconded that. That means: “self-defense” is not a valid counterargument to fend off the accusation of a restriction of competition by object. 

The novelty: sector inquiries trigger document retention duty of care

Xellia Pharmaceuticals and Alpharma (C-611/16 P) had argued in their appeal that the Commission had violated their rights of defense because it had informed them of the proceedings against them only eight to nine years after their initiation. With that much time lapsed, the companies had not been able to find certain documents potentially relevant for their defense. The ECJ saw an error of law on the part of the General Court because it had applied case law relating to document retention in the case of excessive duration of proceedings and thereby after the opening of the administrative procedure, whereas in the present case the documents had been lost or destroyed before the opening of proceedings. However, the ECJ did not annul the decision, as the General Court's judgment proved to be correct for other reasons:

Irrespective of the case law the General Court had referred to, the sector inquiry in the pharmaceutical sector initiated in 2008 would, according to the ECJ, have resulted in a “specific duty of care” for the undertakings concerned. The sector inquiry precisely related to the examination of agreements between pharmaceutical companies, “such as settlement agreements […] in order to determine whether they infringe Articles 101 and 102 TFEU”. The fact that sector inquiries – in contrary to the infringement proceedings initiated later on – are not directed against individual undertakings makes no difference. According to the ECJ, sector inquiries are “an instrument designed to confirm suspicions of restrictions of competition in the sector concerned”. If undertakings are engaged in a conduct which is the subject of a sector inquiry, they must therefore expect that individual procedures may possibly be initiated against them in the future. Accordingly, they are subject to a specific duty of care requiring them “to ensure that information enabling details of their activities to be retrieved is retained properly in their books or records, in order, in particular, that they have in their possession the necessary evidence in the event of subsequent administrative action or judicial proceedings”. The ECJ found that “well-informed and seasoned operators” could not have been unaware of the inquiry and hence should have felt compelled to take precautions against the loss of evidence. The fact that the sector inquiry had been initiated well over four years after the expiry of the pay-for-delay agreements is, according to the ECJ, not relevant.

What now?

The Lundbeck decision shows two things: 

  1. Beware of patent settlement agreements: To the extent patent settlements aim to include transfers of value by a patent holder to generics companies, the parties to such agreement should examine (i) whether there exists potential competition between them according to the Lundbeck criteria and (ii) whether a restriction of competition by object can be assumed. To that end, the circumstances of the individual case, in particular the amount of the (net) value transferred by the patent holder to the generics manufacturer(s), must be analyzed in detail. The Lundbeck decision underscores once again that companies should tread very carefully in this area.
  2. Be aware of the importance of document retention: The decision also shines a light on the fact that a company’s document retention policy can often be central to its defense (not only) in antitrust cases. Missing documents are a disadvantage and a defending undertaking cannot claim a violation of its rights of defense if it is unable to find documents that it would need to properly counter the allegations of a prosecutor – at least if the company has been forewarned about the risk of there being a possible "defense case". For such early warning, a sector inquiry may be sufficient – even if it is initiated years after the end of the potentially illicit conduct. Undertakings should therefore keep a close eye on sector inquiries initiated by the antitrust authorities in the EU. At the moment, for example, the Commission is conducting an inquiry in the Internet of Things sector for consumer related services. 

It is important to note that the ECJ does not derive the “specific duty of care” purely from EU law principles. It therefore cannot be ruled out that courts and competition authorities in the Member States will also rely on the Lundbeck judgment as a precedent. For instance, the wording of § 32e GWB (German Act against Restraints of Competition) also stipulates that sector inquiries may be conducted if "domestic competition may be restricted or distorted"; this essentially corresponds to the provision of Art. 17 Section 1 Subsection 1 of Regulation 1/2003 referred to by the ECJ. In Germany, companies active in sectors such as hospitals, domestic waste, messenger services, publicly accessible vehicle charging stations or online advertising should therefore review their document retention policies with particular care.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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