“Pay-for-Delay” Settlements Contrary to EU Competition Law
In the pharmaceutical industry, the term “pay-for-delay” has attracted attention from the business and legal communities for years. However, the legality of the position in Europe remained uncertain for quite some time due to the lack of a precedent-setting verdict from the Court of Justice of the European Union (CJEU). On January 30, 2020, the CJEU finally held in Generics (UK) Ltd., GlaxoSmithKline plc, Xellia Pharmaceuticals ApS, Alpharma LLC, formerly Zoetis Products LLC, Actavis UK Ltd, Merck KGaA v. Competition and Markets Authority, Case C-307/18, that “pay-for-delay” agreements can violate European antitrust and competition laws. As several further related proceedings are pending before the European courts, including the CJEU itself, the decision is highly relevant and has already been cited by the Advocate General in Lundbeck v. Commission, Case C-591/16 P, and Groupe Canal + v. Commission, Case C-132/19 P, the latter involving pay TV channels, indicating the wide-ranging applicability of the CJEU’s decision in Generics.
“Pay for delay,” also known as “reverse payment settlement,” refers to litigation settlement agreements between original and generic pharmaceutical manufactures that exceed the scope of common patent settlement licenses. For example, the patentee may agree to pay the accused infringer to abandon its infringing activities, i.e. to delay the market access of a generic product until expiration of the asserted patent, and to drop any challenges to the validity of the respective patent, while in return, the patentee ends the infringement litigation. Thus, the patentee enjoys market exclusivity due to the delayed launch of a competing generic drug.
These settlements were and are subject to several competition and antitrust law complaints all over the world. They fall within the particular field of tension between exclusive IP rights and antitrust/competition law. The crucial question is when the exercise of exclusive IP rights exceeds the bounds of patent law and becomes anti-competitive behavior. The CJEU’s decision provides welcome clarity on this issue. Most critically, it makes clear that generic manufacturers that have taken preparatory steps for market access are likely to be competitors of the originator. If those two parties go on to conclude an agreement in which the generic manufacturer receives a significant payment from the original manufacturer that has no other explanation than a commercial interest to delay market entry, the agreement will be considered a restriction of competition. The CJEU’s decision also holds that substitutable generics and the original pharmaceutical can share a market pursuant to Art. 102 TFEU.
In general, license and other agreements regarding IP rights are subject to distinctive treatment under EU competition law, meaning that because of the fundamental importance of IP rights and their pro-competitive effects, the parties have a lot of freedom with regard to the terms of such agreements. As long as an IP right is valid, agreements regarding the market access to corresponding products are privileged under antitrust and competition law and such agreements can generally not be considered a violation of Art. 101 and 102 TFEU.
However, certain clauses are deemed to restrict competition under particular circumstances. Among these clauses are, for example, “non-challenge” clauses, i.e. when a party is obliged not to challenge the licensed IP right’s validity. While such “non-challenge” clauses are seen as intended restrictions of competition, they may be exempted, e.g. if included in license or settlement agreements, under Art. 101 (3) TFEU pursuant to Art. 2 et seq. of the EU Technology Transfer Block Exemption Regulation (TT-BER; EU 316/2014).
The respective guidelines to EU 316/2014 specify that such clauses in the context of settlement agreements are generally considered to fall outside the scope of Art. 101 (1) TFEU. The reason for this is that in order to settle their litigation, parties generally agree to discontinue any challenges to the IP rights which were the center of their earlier dispute (cf. Guidelines to EU 316/2014, no. 242). “No-challenge” clauses can, however, still restrict the freedom of competition, as illustrated by the following examples (cf. Guidelines to EU 316/2014, no. 243):
- A “non-challenge” clause may violate competition law if the respective patent was granted “following the provision of incorrect or misleading information during Examination” (cf. CJEU, 6 December 2012, file no. C-457/10 – AstraZeneca AB and AstraZeneca plc v. European Commission);
- Special monetary rewards for withdrawing or not challenging IP.
The latter example requires particular scrutiny, as it relates to “pay-for-delay” agreements (which typically include such clauses), in return for a delay of the market entry of a generic drug. While the Guidelines address this issue, there had been neither a definition nor a binding ruling by a higher instance court regarding how to deal with such “pay-for-delay” agreements in Europe.
The first notable case the Commission addressed on “pay for delay” involved the agreement of Lundbeck A/S with several generic producers over the anti-depressant Citalopram. Although some (rather weak) method patents were still legally active, Lundbeck paid the generic producers millions for not challenging the patents. The Commission imposed fines amounting to several million euros on Lundbeck and the generic manufacturers. Lundbeck filed and lost an appeal.
In the case of the French pharmaceutical company, Servier, the Commission fined Servier and other generic producers 427 million Euro collectively for several settlement agreements found to be anti-competitive. In that case, the Commission found that Servier engaged in a practice of paying off any generic producer that challenged the validity of Servier’s patent in exchange of the generic manufacturer abandoning any lawsuit and/or delaying entry into the market. The Commission determined that the agreements at issue violated Art. 101 (1) TFEU, and due to the dominance of Servier in the market for hypertension medication, also violated Art. 102 TFEU. The Court of First Instance annulled the decision of the Commission regarding the abuse of a dominant position (Art. 102 TFEU) on the basis that the definition of the market by the Commission was defective, but otherwise sustained the finding of a violation of Art. 101(1) TFEU.
In practice, the trend was, therefore, clearly towards the invalidity of “pay-for-delay” agreements in settlements. Still, reliable criteria for determining the competitive relationship between the original drug manufacturers and the generic manufacturers, even if the respective patents are legally valid, and for assessing the effects of such agreements on the relationship, was still missing before the CJEU decision in Generics.
The Decision of the CJEU in Generics
In 1987, the pharmaceutical group GlaxoSmithKline developed the anti-depressant paroxetine, for which it held the molecular patent and several secondary patents protecting the manufacturing process. When the main patent expired in 1999, generic manufacturers pushed for market access in the UK. Disputes over infringement and validity (of the secondary patents) arose, which were finally settled with a “pay-for-delay” agreement. The UK Competition and Markets Authority considered these agreements an infringement of competition law and imposed fines on the parties. Subsequently, the decision of the authorities was challenged and brought before the Competition Appeal Tribunal (UK), which was seeking guidance by way of a request for a preliminary ruling from to the Court of Justice (file no. C-307/18).
Ruling of the CJEU
The CJEU followed the argument of Advocate General J. Kokott closely and ruled that the underlying agreement between GlaxoSmithKline and generic producers violates Art. 101 and 102 TFEU. The Court held that “pay-for -delay” clauses could constitute a restriction of competition and an abuse of a dominant position. First, the CJEU stated that neither the validity of the patent nor the question of infringement ruled out the existence of competition between original manufacturer and generic manufacturer. The disputes over infringement or validity were rather a preparatory step for market access, which demonstrated the potential competition. Crucial, therefore, was whether the launch of the generic product was actually possible, i.e. there must not be insurmountable barriers to enter the market. A patent is, according to the ruling (para. 46-51), not such an insurmountable barrier. Furthermore, the conclusion of a respective agreement was a strong indication of competition. This means that at least potential competition between the parties will likely have to be assumed in most “pay-for-delay” cases.
Regarding the restriction of competition pursuant to Art. 101 (1) TFEU, the CJEU stated that respective agreements may not be regarded “as agreements bringing to an end entirely fictitious disputes, or as designed with the sole aim of disguising a market-sharing agreement or a market-exclusion agreement” (para. 76). Even the transfer of value through those agreements did not automatically constitute a restriction of competition since the transfer may be justified, e.g. to compensate litigation costs. However, clauses in which a generic manufacturer agrees not to challenge the validity of the patentee’s IP rights even temporarily may restrict competition if: a significant transfer of value is made; there is no consideration other than refraining from market access; and no plausible explanation for the consideration other than the commercial interest of both originator and generic manufacturer (para. 87 – restriction of competition by object).
Still, if there are significant pro-competitive effects, those may be taken into account for the characterization as a restriction of competition by object “… in so far as they are capable of calling into question the overall assessment of whether the concerted practice concerned revealed a sufficient degree of harm to competition…” (para. 103). The pro-competitive effects must, however, be sufficiently significant to justify reasonable doubts that competition is harmed at all (para. 107).
In case that was not sufficient, the subsidiary restriction of competition by effect still has to be thoroughly analyzed. However, the Court did not deem such an analysis necessary in order to establish the existence of appreciable potential or real effects on competition of a settlement agreement where (1) the generics manufacturer would probably have been successful in the patent proceedings, or (2) the parties to that agreement would probably have concluded a less restrictive settlement agreement (para. 121). Other factors can be sufficient.
Furthermore, the restriction or even elimination of competition pursuant to Art. 101 TFEU could, as well, be an abuse of a dominant position according to Art. 102 TFEU. One prefatory problem with raising a claim under this section is that the generics manufacturer’s product is often not yet on the market because it is blocked by the patent in question. Under these circumstances, the question of how to define the market arises and whether potential, future competition between the original product and the generic suffices. The Court held that potential competition can be shown if the generics manufacturer can enter the market within a short period (after expiry of the patent) with sufficient strength to constitute a serious counterbalance to the manufacturer of the original medicine already on the market. Such evidence is sufficient to define the market and the branded-manufacturer’s dominant position in that market (para. 132-134). This may be particularly true if the generics manufacturer has historically been able to enter the market effectively, has taken the steps necessary to achieve market entry, and/or has executed supply contracts with third-party distributors. In the present case, it was particularly important that the active ingredient of the medicine was in the public domain, but the process of manufacturing the medicine was patented. These factors tended to show that the barrier to entry was the anticompetitive restraint on trade rather than some, other, lawful restriction.