The Court of Justice of the European Union provides clarifications on the assessment under competition law of pay-for-delay deals in the pharmaceutical sector

Hogan Lovells

Hogan Lovells

On 30 January 2020, the Court of Justice of the European Union (CJEU) issued its decision on a request for preliminary ruling submitted by the UK Competition Appeal Tribunal (CAT) in a case concerning the long-standing dispute on the balances and limits between legitimate and anti-competitive settlement agreements.

The decision of the CJEU largely reflects the Opinion of the Advocate General Kokott issued few days ago and touches upon three main interesting aspects, namely: i) whether originator and generic producers can be considered to be potential competitors where there is a dispute on the validity of the originator's patent and/or the existence of a violation of such patent by the generic drug, ii) whether a settlement agreement can be considered as infringing competition “by object” and iii) whether the same conduct can be said to violate, at the same time, the prohibition of anticompetitive agreements and the prohibition of abuses of dominance.

In the early 2000s, GlaxoSmithKline (GSK) concluded three settlement agreements with three generic manufacturers, each having a short duration (2-3 years).

GSK was in fact the originator company of a paroxetine-based drug, whose exclusive protection expired at the end of 2000. By that time, however, GSK had obtained a number of secondary patents allowing it to maintain its position of sole supplier of paroxetine-based drugs in the UK.

During the same period, three generic manufacturers were seeking marketing authorizations in the UK for their generic versions of paroxetine.

In this context, a dispute arose between GSK and those three generic manufacturers regarding the latter’s possible violation of GSK’s secondary patents concerning the manufacturing process.

Subsequently, GSK and the generic manufacturers entered into agreements, the objective of which was to put an end to the patent disputes and whereby the generic manufacturers agreed – in return for payments by GSK of a certain amount of money – to postpone their entry onto the market for a certain period of time.

On 12 February 2016, the Competition and Markets Authority (CMA) adopted a decision finding that GSK held a dominant position in the market for paroxetine and had allegedly abused it by concluding the three settlement agreements. In addition, the CMA considered that two of the three agreements were anticompetitive. As a consequence, penalties were imposed on GSK and two of the generic manufacturers involved in the proceedings.

The companies then appealed the CMA’s decision before the CAT and it is in this context that a preliminary ruling was submitted asking the CJEU to answer ten questions.

With its questions, the CAT essentially wished to understand whether an agreement to settle a medicinal product patent dispute may constitute a restriction of competition by object or by effect, and whether the conclusion of such agreement can also give rise to an abuse of dominant position.

The CMA found that one of the agreements was actually excluded from the scope of application of national rules on anticompetitive agreements due to the application of the special rules on vertical restraints which were applicable at the time and subsequently repealed.

Main takeaways from the preliminary ruling
Competitive relationship between the parties to the agreement. For an agreement between companies operating at the same level of the production or distribution chain to be regarded as unlawful, the parties to such agreement must be in competition with each other, if not actually, at least potentially. This is why the first point considered by the CJEU is whether a patent holder and a generic manufacturer not yet in the market may be regarded as potential competitors, where there is an ongoing dispute between the parties regarding the validity of the originator's patent and/or the existence of a violation of such patent by the generic drug.

The position expressed in this respect by the CJEU largely reflects that of the Opinion of the Advocate General.

According to the CJEU, in establishing potential competition, account is to be taken of whether, at the time in which the agreement was concluded, the generic manufacturer had taken sufficient preparatory steps (e.g., marketing authorization applications, sufficient stock of generic products to enter the market) to enable it to enter the market in a reasonable period of time and therefore to exert pressure on the originator.

The second factor to be evaluated is whether such entrance is impeded by barriers to entry. In this respect, the CJEU observes that the existence of a patent does not amount to such an insurmountable barrier. As stated by the Advocate General in her Opinion, the CJEU considers that patent rights form part of the legal and economic context that competition authorities are expected to take into account when assessing the competition relationship between the parties. However, competition authorities are not expected to carry out their own assessment of the strength of the patent and/or of the chances of success of a dispute relating to the validity of such patent.

Following the Advocate General’s Opinion, the CJEU indeed states that a dispute on the validity or infringement of a patent does not prevent the patent holder and the generic manufacturer from being considered as potential competitors. This applies also when an interim injunction has been granted prohibiting a generic manufacturer from entering the market since such injunction does not prejudice the merit of the action especially when it is granted in return for a cross-undertaking in damages agreed by the patent holder (like in the case at hand). The CJEU further points out that the existence of such a dispute between a patent holder and generic manufacturers should actually even be regarded as evidence of the existence of a potential competitive relationship between them.

The third factor to be considered when evaluating the competition relationship is the intention of the originator manufacturer to make a transfer value in favour of the generic producer to delay its entry into the market: the greater the transfer value offered, the stronger is the indication that a competitive relationship exists.

Anticompetitive nature of the agreement. In assessing whether an agreement akin to the one at issue can amount to a restriction by object, the CJEU first makes clear that a settlement agreement – even when involving a value transfer from the originator manufacturer to a generic producer – cannot be considered, “in all cases”, as a restriction by object.

However, when it appears from the settlement agreement that the transfer of value cannot be explained other than by the commercial interest of both parties not to engage in competition on the merits.

The assessment of the transfer value (either pecuniary or non-pecuniary) made between the parties is therefore critical for the purposes of evaluating whether the agreement is anticompetitive by object. The CJEU makes clear in that respect that the fact that the transfer of value exceeds the gains that could have been expected by the generic manufacturer if it had been successful in the patent proceedings is irrelevant: all that matters is that such transfer of values proves to be "sufficiently beneficial to encourage the manufacturer of generic medicines to refrain from entering the market concerned".

If the assessment of the settlement agreement does not reveal a sufficient degree of harm to competition, so that no restriction by object may be characterized, it is necessary to assess the effects of such an agreement. The CAT asked the CJEU to clarify whether the characterization of a restriction by effect necessarily requires a finding that, in the absence of the settlement agreement, the generic manufacturer would have probably succeeded in the patent proceedings or that a less restrictive agreement would have been entered into by the parties. The CJEU answers in the negative to that question, stating that the chances of success of the generic manufacturer in the patent proceedings or the probability of the conclusion of a less restrictive agreement constitute only some factors among many to be taken into consideration when determining how the market would operate in the absence of the contentious settlement agreement.

Originator manufacturer's abuse of dominance. Consistently with the above mentioned analysis regarding the existence of a competitive relationship between the originator drug and its generic versions, which are not yet in the market, the CJEU confirms that such generic versions should be included in the relevant market as long as generic manufacturers are capable of entering the market swiftly and of exercising competitive pressure on the patent holder.

On the merits, the CJEU states that a strategy by a dominant company consisting in concluding a set of settlement agreements having, at least, the effect of keeping potential competitors outside the market constitutes an abuse of dominant position provided that the exclusionary effects of such a strategy go beyond those which result from each of the settlement agreements.

The CJEU's preliminary ruling provides some useful clarifications on the way pay-for-delay deals should be assessed under EU competition law. The analytical framework it describes as regards (i) the notion of potential competition and (ii) the inclusion in the relevant market of generic drugs not yet in the market and subject to patent dispute is particularly interesting and should have implications broader than the mere pharmaceutical sector.

However, a number of questions remain unanswered. For instance, the concept of "significant transfer of value" will necessarily be subject to interpretation and will have to be taken into account by companies contemplating entering into such types of agreements.

Similarly, assessing potential anticompetitive effects of an agreement aimed at delaying the entry of a product onto the market is not an easy task, in particular in a sector characterized by regulatory constraints and significant research and development, and will require in-depth economic analysis.

The much awaited judgments which should be issued by the CJEU in the Lundbeck and Servier cases may hopefully contribute to a further clarification of these questions.

That said, differentiating a lawful settlement agreement from an anticompetitive pay-for-delay deal remains a case by case appraisal, which highly depends on the features of the agreement itself and of the characteristics of the products and markets concerned.

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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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