Posted by Chantal Lavoie on 16 September 2016
In a series of much awaited judgments delivered on 8 September 2016[1] (referred to as the judgments or the Lundbeck judgments), the General Court has upheld the European Commission’s infringement decision under Article 101 TFEU regarding pay for delay patent settlement agreements entered into by originator pharmaceutical company Lundbeck with several generic drug manufacturers in relation to a drug called citalopram (the Lundbeck agreements). In the judgments which run over 380 pages, the General Court agreed with the European Commission’s assessment that the agreements were prohibited under Article 101(1) TFEU and not capable of exemption. This is because the agreements were viewed as having the object of preventing access to the citalopram market in the EEA to generic manufacturers who had real concrete possibilities of entry. In addition, the pay for delay agreements could not be viewed as ancillary to Lundbeck’s legitimate objective of protecting its IP rights.
The judgments are important for several reasons. They are the first rulings by the European courts on the assessment of pay for delay settlement agreements under Article 101 TFEU. They also confirm the application of EU competition rules to patent settlement agreements and the notion that a pay for delay agreement can breach Article 101(1) TFEU even if the restrictions contained in the agreement are within the scope of a patent. The ruling will be a disappointment mostly for Lundbeck and other originator pharma companies who rely heavily on pay for delay arrangements in the context patent settlement disputes. Lundbeck has indicated that it may appeal the judgment to the Court of Justice.
Background
The pay for delay agreements between Lundbeck and generic drug manufacturers were entered into to resolve a patent dispute. Indeed, Lundbeck’s original patents for the drug citalopram had expired in most EEA countries at the time of the agreements. This had paved the way for the eventual entry of generic citalopram into the market. In fact, a number of generic manufacturers had already started to invest in a generic citalopram and to prepare for market entry. Lundbeck continued to hold other related process patents which arguably provided limited protection but were not expected to prevent all possibilities of generic market access. Once of the process patents, a so-called crystallization process, was viewed as offering Lundbeck the best possibility of blocking the entry of a generic citalopram but it was reported that Lundbeck estimated the chances of that patent being held invalid at 60%.
The pay for delay agreements consisted in a transfer of value from Lundbeck to the generic manufacturers in exchange for the latter not selling generic citalopram. The transfer value was calculated based on the sales which the generic manufacturers expected to have made had they entered the market. The effect of each agreement was therefore to delay the entry of generic citalopram to the market for the duration of the agreement in return for financial compensation. The agreement did not address whether the sale of generic citalopram infringed any patent owned by Lundbeck. In fact, the agreement did not put an end to the patent dispute as Lundbeck was free to introduce infringement proceedings against the generic drug manufacturers once the agreement expired. One of the important consequences arising from such agreements was the harm to consumers and State health budgets as they were deprived of the price fall resulting from generic entry.
In its decision, the European Commission concluded that the agreements amounted to a restriction of competition by object contrary to Article 101 TFEU and that the parties had not put forward evidence to the required degree that the pro-competitive benefits flowing from the agreements outweighed its anti-competitive effects. Fines were imposed on Lundbeck and generic manufacturers for an amount totaling EUR 93 766 000 and EUR 52 239 000 respectively.
The European Commission started to focus on pay for delay patent settlement agreements as early as 2003 and then as part of its sector inquiry into the pharmaceutical industry which was launched in 2008. The formal investigation into this case was opened in 2010, after the European Commission adopted its Pharmaceutical Sector Inquiry Report in 2009. The Report highlighted the existence of pay-for-delay patent settlement agreements which could prove to be ‘problematic from a competition law perspective’. Since 2009, the European Commission has carried out annual patent settlement monitoring exercises and adopted three infringement decisions in relation to patent settlement agreements between originators and generic manufacturers (namely Lundbeck, Servier, Johnson & Johnson and Novartis). Both the Lundbeck and Servier decisions were appealed to the General Court. The Lundbeck decision is the first one to have been reviewed and upheld by the General Court.
General Court judgments
The General Court rejected each of the pleas of Lundbeck and the generic manufacturers parties to the agreements. The judgments focus on two key substantive issues: whether the generic manufacturers were potential competitors and whether the pay for delay agreements constituted a restriction by object.
Potential competition
In determining whether the agreements breached Article 101 TFEU, the European Commission was required to show that the agreement restricted actual or potential competition. Lundbeck argued before the General Court that Article 101 TFEU protects only lawful competition and that the entry of the generic drug infringed Lundbeck’s exclusive right to market citalopram in the EEA by virtue of the lawful patents it held. The General Court concluded that:
- As per existing case-law and although the existence of IP rights granted under national legislation is not affected by Article 101 TFEU, the conditions under which IP rights are exercised may fall under Article 101 TFEU.
- The presumption of validity of a patent does not mean that, conversely, the sale of generic products is presumed illegal solely because the patent holder deems the sale in breach of its patents.
- Potential competition may be exerted even before expiry of a patent.
- As per the judgments in European Night Services and Visa Europe and Visa International Service, an agreement restricts potential competition within the meaning of Article 101 TFEU if there are real concrete possibilities for the parties to enter the market within a short period of time. Existing case-law does not impose an additional requirement to show that market entry is lawful.
- The European Commission was right in concluding that the generic manufacturers were potential competitors as they had several routes available to enter the market in a short period, including the possibility to launch the generic product ‘at risk’. These were real concrete possibilities.
The following factors were upheld as relevant in showing the existence of potential competition:
- Lundbeck’s original patents had expired and Lundbeck’s process patents were not able to prevent all possibilities of entry to the market.
- Lundbeck acknowledged that other non-infringing processes existed to produce generic citalopram.
- no court had found the generic products to be infringing.
- the generic manufacturers made significant investment to prepare entry into the market, including obtaining market authorisation or taking the steps to obtain such authorisation within a reasonable period of time, and some had actually entered the market ‘at risk’ and were able to make sales of generic citalopram.
- Lundbeck concluded pay for delay agreements to prevent the entry of generic manufacturers into the market, thereby providing a strong indication that they were viewed as a potential threat and not only as a theoretical possibility.
Restriction of competition by ‘object’
The General Court agreed with the European Commission that the pay for delay agreements between Lundbeck and the generic manufacturers amount to a restriction by ‘object’. This is a significant win for the European Commission which finds its approach confirmed by the General Court. In the US, pay for delay settlement agreements are reviewed under the rule of reason approach following the Supreme Court ruling in FTC v Actavis 570 U.S. (2013).
The General Court reiterated that the conclusion of a settlement agreement to avoid the cost of potential patent litigation is not in itself anti-competitive. However the General Court agreed with the Commission’s assessment that the (i) existence of reverse payments, (ii) the disproportionate nature of such payments, combined with other factors namely (iii) the amount of the payments calculated by reference to the sales of the generic manufacturers had they entered the market, (iv) the fact that the agreement did not provide for the entry of the generic manufacturers on the market after expiry of the agreement without the risk of infringement actions being lodged by Lundbeck and (v) the presence of restrictions going beyond the scope of Lundbeck’s patents, were sufficient elements to conclude to a restriction of competition by ‘object’. Indeed, it was essentially the size of the reverse payment which convinced the generic manufacturers not to enter the market, rather that the existence and strength of Lundbeck’s patents. It was not necessary for the Commission to prove without a doubt that Lundbeck doubted the validity of its patents. It was sufficient to show that there was significant uncertainty in the market regarding the possibility for generic manufacturers to enter the market and this uncertainty was replaced by the certainty that the generic manufacturers would not enter the market. The General Court concluded that, combining a significant reverse payment with an exclusion of competitors without resolving the underlying patent dispute amounted to a buying-off of competition.
The General Court disagreed with the notion that an originator should be able to protect itself against the price fall which necessarily results from the entry of generic products and which could not have been avoided whether the patent infringement proceedings were successful or not. The General Court emphasised that this is part of the normal commercial risk which originators take and which cannot be offset by entering into anti-competitive agreements. Otherwise this would lead to the higher prices being maintained to the detriment of consumers and state health budgets. In fact such an outcome could not even have been achieved before national courts by litigating the validity of their patents.
Whilst recognizing that the concept of restriction by object must be interpreted restrictively, the General Court nevertheless found that the agreements under review were comparable to market exclusion agreements, thus amounting to “an extreme form of market sharing and limitation of production”. The Commission’s assessment was therefore in line with existing case-law by concluding that the agreements revealed by their very nature a sufficient degree of harm to competition. The General Court discarded the need to carry out a counterfactual assessment which is relevant rather for the assessment of restrictions of competition by effect.
The General Court also concluded that the European Commission was not required to apply the scope-of the-patent-test in order to determine whether the pay for delay agreements fell under the scope of Article 101(1) TFEU. The scope-of-the-patent-test has been used in the past by lower courts in the US to resolve similar disputes but, since the Actavis ruling in 2013, it has been replaced by a rule of reason approach. The scope-of-the-patent-test is based on the presumed validity of patents and consists in claiming that restrictions contained within the scope of a patent do not infringe competition law. The European Commission applied instead the concept of restriction by object to its competition analysis as developed by case-law of the European Union courts. The approach allowed the European Commission to take into account the inherent objective of Article 101(1) TFEU of ensuring that economic operators must decide independently their behavior on a market and the aim of protecting consumers. It rejected the scope-of-the-patent-test which was based on a subjective assessment as to the scope and validity of the relevant patents. Indeed at the time that the restrictive agreements were entered into, no court had pronounced itself on whether the generic drugs infringed any of Lundbeck’s patents. In any event, even if the scope-of-the-patent-test had been used, some of the pay for delay agreements were found to contain restrictions which went beyond the scope of the patents.
The General Court agreed also with the European Commission’s approach that, regardless whether the restrictions in the agreements were within or outside the scope of the patents, they were anti-competitive by object because they removed generic manufacturers from the market in exchange for financial compensation without resolving the patent dispute. The object of such agreements was therefore to remove the uncertainty existing in the market by the certainty that generic manufacturers would not enter and to restrict their commercial autonomy by granting a significant financial incentive and other inducements.
Ancillary restraints and legitimate necessity
Lundbeck argued before the General Court that the pay for delay agreements did not fall under the prohibition of Article 101(1) TFEU because they were ancillary to the legitimate objective of protecting its IP rights. Under the ancillary restraints doctrine, certain restrictions can be held to fall outside the scope of Article 101(1) TFEU if they are directly related and necessary to the implementation of a legitimate purpose. The element of ‘necessity’ requires showing that the restriction is objectively necessary and proportionate. However, the restrictions were not found objectively necessary as there were alternative means available to protect Lundbeck’s rights such as infringement proceedings or other settlement terms. Also, the restrictions were not proportionate to the objectives pursued since they did not resolve the patent dispute and some of them went beyond the scope of Lundbeck’s patents.
Exemption under Article 101(3) rejected
The General Court upheld the European Commission’s finding that the restrictions contained in the pay for delay agreements did not meet the conditions for exemption under Article 101(3) TFEU from the application of Article 101(1) TFEU. This conclusion is unsurprising as restrictions by object rarely meet the conditions for exemption. In particular, the General Court highlighted the fact that the agreements were not essential to preserve Lundbeck’s ability to innovate and no explanation was provided as to the benefit for consumers.
Commentary
The General Court’s rulings do not mean the end of pay for delay settlement agreements. However they will considerably reduce the scope for using such agreements as a means to settle patent disputes. The Lundbeck judgments further crystallise the view that pay for delay settlement agreements can be problematic from an EU competition law perspective. In the US, a wider margin of discretion has been granted to patent holders to conclude such agreements, following the rule of reason approach adopted by the US Supreme Court in Actavis (neither presumptively legal nor presumptively illegal) which has also given rise to corresponding uncertainty for structuring such agreements. In the EU, and subject to an eventual appeal of these judgments to the Court of Justice, patent holders in the EEA have an arguably narrower scope for settling disputes by means of such agreements. This is because the application of the concept of restriction by object to such agreements reduces considerably the factual analysis and evidentiary burden required by the European Commission, thereby placing such agreements under more favourable conditions for a challenge under Article 101(1) TFEU. Whilst the European Commission did carry out both an object and effects analysis in the subsequent Servier decision as a matter of precaution, it is likely that, going forward and if the General Court judgment is upheld, only an objects analysis will be made in cases similar to the Lundbeck agreements.
The General Court’s endorsement of this approach relieves the European Commission of a detailed assessment of the effects of such agreements on relevant markets. The content and circumstances surrounding such agreements will vary however from case to case and in some instances it may be that the nature of the agreement does not establish with sufficient certainty the existence of a restriction of competition by object or it may be that the restrictions themselves do not give rise to a sufficient degree of harm. Indeed, had the amount of the reverse payment in the Lundbeck agreements been lower and arguably equivalent to the cost of potential litigation which had been avoided as a result of the agreements, the case for arguing a restriction by object might not have been so clear cut based solely on the very nature of the agreement. Likewise, had the pay for delay agreements not excluded all generic manufacturers from the market but rather imposed some restrictions on their entry into the market, a broader effects analysis might have been needed.
The General Court’s views upholding the European Commission’s ‘restriction by object’ approach is likely to generate some discussion and could be a ground for appeal to the Court of Justice. As stated by the Court of Justice in its 2014 judgment in Cartes Bancaires, the concept of restriction by ‘object’ must be interpreted restrictively. Cartes Bancaires was an important reminder of the distinction between object and effect restrictions, the need for the European Commission to justify why and how a measure should be characterized as restriction by object or effect and the need for the General Court to carry out “a full and detailed examination of the arguments”. The judgment in Cartes Bancaires was also viewed as important step towards limiting the expansive use of the object restriction ‘box’ in Article 101 assessments.
Pay for delay settlement agreements are complex and may vary substantially as regards their content, objectives, economic context and effects. Unlike price fixing cartel-like arrangements, the objective nature of the restrictions arising from a pay for delay agreement might not be immediately obvious on the face of it without a full effects assessment. In the Lundbeck judgments, the General Court dealt briefly with the notion of restriction by object and why the European Commission was correct in finding that the agreements were anticompetitive by object. One would have expected further consideration of this issue, particularly following the Court of Justice’s criticism in the Cartes Bancaires judgment of the General Court’s insufficient standard of judicial review. In particular, the General Court could have explained in more detail in the Lundbeck judgments in what respect the European Commission was correct in finding that the wording of the agreements restricted competition by object and in finding that the pay for delay agreements revealed a sufficient degree of harm to competition, over and above the statement that the agreements were comparable to market sharing agreements and that the existing case-law was correctly applied.
As regards the existence of potential competition, the General Court was correct in my view to uphold the European Commission’s assessment. Indeed, the uncertainty surrounding the possibility for generic manufacturers to enter the market, the investments made by generic manufacturers to prepare for market entry and doubts as to the possibility for Lundbeck to block market entry through infringement proceedings were important factors leading to the conclusion that real concrete possibilities existed to enter the market within a short time. The existence of Lundbeck’s patents and the presumption of validity of patents could not be relied upon to argue that generic producers were unable to enter the market legally. Indeed Lunbeck was unable to show that in the absence of the agreements competition between Lundbeck and the generic manufacturers would not have existed. As accepted by the General Court, there was no certainty existing at the time of the agreements that Lundbeck’s patents could effectively block entry of generic citalopram. The General Court does helpfully clarify that the presumed validity of a patent does not mean that there can be no potential competition. Indeed market entry of a generic product can typically give rise to a period of unresolved uncertainty as to whether there is or not an infringement of existing patents.
Following the Lundbeck judgments, parties seeking to enter into pay for delay agreements should keep in mind that agreements involving a payment in return for not entering a market will continue to be problematic from an EU competition law perspective. Nevertheless, a number of questions remain unanswered. In particular, it remains unclear what amount of payment would be viewed as significant enough to trigger scrutiny under Article 101. A possible threshold would be an amount above the estimated cost of potential litigation and which is not linked to the sales which would have been made had entry occurred. Also it remains uncertain what types of pay for delay agreements might not reveal by its very nature a sufficient degree of harm to competition and therefore require a full effects analysis. This could be the case of pay for delay agreements restricting - but not fully eliminating - market entry. The appeal in Servier might shed some light on these and other issues.
[1] T-472-13 Lundbeck v European Commission ; T-471/13 Xellia Pharmaceuticals v European Commission ; T-470/13 Merck v European Commission ; T-469/13 Generics (UK) v European Commission ; T-467/13 Arrow v European Commission ; T-460/13 Sun Pharmaceuticals Industries and Ranbaxy v European Commission .