Cartel prohibition and abuse of dominant position set limits on settlement of patent disputes

Intellectual property rights may be at odds with competition law. Although both areas of the law are intended to promote innovation, they do so in different ways. Whereas intellectual property rights reward innovations in the form of (temporary) exclusivity, an important principle of competition law is that innovation is stimulated by effective competition.

That area of tension is clearly visible in the pharmaceutical sector, where attention is paid in particular to the affordability of medicines. The Court of Justice added a number of new perspectives to this in the Generics judgment. That judgment demonstrates that settlement agreements between medicine producers in the event of patent disputes may be troublesome from a competition law perspective. This blog addresses the developments in the field of competition and pharma, and lists the main aspects of the Generics judgment.

Competition and pharma

Several competition authorities are currently investigating (alleged) excessive prices and cartels in the pharma sector. At the Netherlands Authority for Consumers and Markets (“ACM”), medicine prices have been on the agenda since 2018. In response to an enforcement request ACM is investigating whether Leadiant is abusing an economic position of power by charging excessive prices for CDCA. A similar investigation by ACM into AstraZeneca ended unsuccessfully in 2014.

Attention is also being paid to the pharma sector at a European level. Following an investigation by the European Commission (the “Commission”), Aspen recently offered to reduce the prices of six medicines. In addition to the affordability of medicines, innovation is also central to the Commission’s policy. The producers of new medicines (“originators”) are faced with high development costs. Innovations are rewarded in the form of temporary market exclusivity (of no less than 20 to 25 years in some cases) consisting of patents for active ingredients and additional protection certificates for production processes. Originators are able to recoup their investments during that exclusivity period.

Only after the exclusivity period does price competition take place by the producers of non-branded medicines (known as “generics”). Generics have the same active ingredients as originator medicines and, according to the Commission, are on average 50% cheaper than originator medicines. ACM also subscribes to the importance of entry to the market of generics with a view to price competition and freedom of choice.

Pay-for-delay agreements

In practice, originators use a range of strategies to safeguard a medicine’s market exclusivity for as long as possible. One of those strategies is known as the pay-for-delay agreement, in which the originator and the generic agree that a generic medicine will not be placed on the market, or only after a delay, in exchange for a service in return or a payment by the originator to the generic (known as a “reverse payment”). That payment is sometimes made on the grounds of patent infringement proceedings filed against the generic that wishes to enter the market. The Lundbeck (2013) and Servier (2018) cases demonstrate that pay-for-delay agreements may infringe the cartel prohibition set out in Article 101 of the TFEU (and Article 6 of the Dutch Competition Act). The Commission therefore regularly monitors settlement agreements in the pharma sector.

Generics: cartel prohibition

In the Generics judgment of 30 January 2020, the Court of Justice specified the criteria for determining whether a settlement agreement in a patent dispute between an originator and a generic breaches the cartel prohibition. The reason for the judgment was the UK Competition Appeal Tribunal’s request for a preliminary ruling on the fine decision of the English competition authority (CMA). The CMA’s fine decision in question was directed at GlaxoSmithKline (“GSK”) and a number of generics. GSK instituted infringement proceedings against the generics because they challenged the validity of paroxetine-related patents of GSK. The patent disputes ended in settlement agreements, preventing the generics from marketing generic alternatives to paroxetine in the United Kingdom. The generics received financial compensation from GSK in exchange.

The Generics judgment specifically addresses the role of intellectual property rights in the assessment of (pay-for-delay) agreements under the cartel prohibition. The Court of Justice reiterated the principle that an agreement (see also this judgment) must actually be able to restrict competition. It does not necessarily have to assessed whether an intellectual property right is lawful (also after a patent dispute). It must be established, however, whether a generic has specific possibilities of entering the relevant market and therefore competes with the originator. Proceedings on the infringement of IP rights are an indication that the producers in question are (prospective) competitors.

The Court of Justice stipulated two cumulative requirements in the Generics judgment in determining whether a settlement agreement is in breach of the cartel prohibition. In principle, a settlement agreement has as its object the restriction of competition if:

  • the only plausible explanation for a reverse payment is to reimburse the generic for not competing with the originator; and
  • the settlement agreement has no proven procompetitive effects (that create reasonable doubt about the settlement agreement’s harmful effect on competition).

In that case it can be assumed that the generic refrained from entering the market due to the pay-for-delay agreement (rather than the originator’s intellectual property rights and a possible infringement of those rights by the generic).

If the settlement agreement does have proven procompetitive effects, it is doubtful whether the settlement agreement sufficiently harms competition (and therefore constitutes a restriction of competition by object). In those cases it must be assessed whether the settlement agreement noticeably restricts competition.

Generics: abuse of a dominant position

The Court of Justice also explained in the Generics judgment the circumstances in which holders of pharmaceutical patents abuse a dominant position by entering into pay-for-delay agreements, as set out in Article 102 of the TFEU (and Article 24 of the Dutch Competition Act). The Court of Justice stated that:

  • the mere exercising or protecting of intellectual property rights does not constitute abuse of a dominant position;
  • it is relevant whether generics have specific possibilities (authorisations, licences or stocks) to enter the relevant market. If such specific market entry possibilities exist, a patent holder is less likely to have a dominant position; and
  • the strategy of an originator with a product patent for a decontrolled active ingredient of entering into settlement agreements that have as their effect the exclusion of competitors (or prospective competitors) may amount to an abuse of a dominant position.

Points for attention in settlements

The Generics judgment demonstrates that it is important in considering a settlement agreement to pay attention to the circumstances in which the patent dispute is settled.

  • The more specific the generic’s possibilities of market entry, the more likely it is that a settlement agreement restricts competition, is void and may be fined. Important aspects in this regard are the type of intellectual property right of the originator (active ingredient or production process), the generic’s stocks, if any, and the possession of the permits that a generic requires.
  • The amount of the reverse payment in a settlement agreement is also crucial. The greater the reverse payment, the greater the generic’s legitimate commitments must be in order to justify the payment. If no legitimate justification can be given, it is more likely to be assumed that the reverse payment was the reason why the generic decided not to enter the market.
  • It is advisable to check whether an objective justification for the reverse payment is conceivable. That may be the case in particular if the generic is reimbursed for its legal and other costs or for the disruption of its normal operations caused by the patent dispute.
  • Finally, it appears from Dutch case law that provisionally settling a legitimate patent dispute with a settlement agreement for the remaining term of the patent in question is in accordance with competition law. The purpose of such an agreement is to come to a standstill between the originator and generic pending a final decision in the patent dispute, and not to take away the generic's specific possibilities of market entry.

The Court of Justice is very likely to follow the approach in the Generics judgment this year when it addresses Lundbeck’s and Servier’s appeals. Advocate General Kokott has advised the Court of Justice in the Lundbeck case, with reference to the Generics judgment, to uphold the General Court’s judgment. To be continued!

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Martijn van de Hel

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