"Pay-for-Delay"

This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

CJEU rules settlement agreements in patent disputes may be anti-competitive

The Court of Justice of the European Union (the "CJEU") has given guidance on 'pay for delay' agreements for the first time in its recent decision in Generics (UK) v Competition and Markets Authority. In doing so, it has made clear that settlement agreements which involve a "transfer of value" from the patent holder to the alleged infringer (referred to as a "reverse payment"), in exchange for the alleged infringer's agreement to stay out of the market for the product to which the patent relates, are highly likely to face scrutiny (at the very least) from competition authorities.

Background

The case relates to a series of settlement agreements in relation to patent infringement proceedings between GSK, manufacturer of the originator medicine of the prescription anti-depressant paroxetine sold under the trade mark Seroxat, and three generic medicine manufacturers seeking to enter the market for paroxetine. The litigation related to alleged infringements of "secondary" patents relating to polymorphs of paroxetine and their production process, the underlying patent for the active ingredient having expired in 1999.

Under the terms of the settlements, GSK agreed to (i) put in place various exclusive distribution arrangements with the generic manufacturers under which they would re-sell its products, and (ii) make various payments to the generic manufacturers in exchange for them agreeing not to otherwise make, import or supply paroxetine in the UK.

In February 2016 the UK Competition & Markets Authority ("CMA") issued a decision in which it held that (i) two of the settlement agreements were anti-competitive and unlawful under Article 101 of the Treaty for the Functioning of the European Union ("TFEU") and Chapter I of the Competition Act 1998 (the "Act"), and (ii) GSK had abused its dominant position in the UK market for paroxetine products, in breach of Chapter II of the Act. The CMA fined GSK and the generic companies c. £45 million for these breaches of competition law. GSK appealed this decision to the Competition Appeals Tribunal ("CAT"), which referred a number of questions of EU law to the CJEU.

The CJEU Decision

The CJEU considered a number of issues in relation to how settlement agreements concerning patent disputes should be approached from the perspective of European competition law. In its decision, which closely followed the opinion given by Advocate General Kokott just eight days earlier, the CJEU gave the following guidance:

Such settlement agreements may be anti-competitive for the purposes of Article 101 TFEU either 'by effect' (i.e. by virtue of their actual impact on the relevant market) or 'by object' (i.e. by their very nature). Where the settlement involves a "reverse payment", this is more likely to lead to the agreement being considered anti-competitive "by object", as it strongly indicates that the originator company perceived the counterparty to be a potential competitor in the relevant market.
Interestingly, the CJEU held that this could be the case even where the parties could point to potentially pro-competitive effects of the agreements. Rather, if such pro-competitive effects are demonstrated, the Court would have to decide whether those pro-competitive effects are sufficiently significant to justify a reasonable doubt as to whether the settlement agreement concerned caused a sufficient degree of harm to competition, and therefore, as to its anti-competitive object. In this case, the CEJU considered that the pro-competitive effects argued for were too minimal and too uncertain to be sufficiently significant.
In markets involving generic products which may not have yet launched, the CJEU provided guidance to the tribunal on the factors which should be taken into account to determine the extent to which the generic rivals are in "potential competition" with the originator at the time the settlement agreements were concluded. In particular, the tribunal should consider whether:
1. the generic manufacturer(s) had a "firm intention" to enter the relevant market, and if so, whether there were real and concrete possibilities for it to actually enter that market and compete. This includes an assessment of whether, at the time of the agreement, the generic manufacturer had taken sufficient preparatory steps to enter the market (e.g. obtaining a marketing authorisation, adequate stocks, challenging patents),
2. the generic manufacturer(s) faced any "insurmountable barriers" to entry into the relevant market. The existence of a patent could not mean there was an insurmountable barrier given the uncertainty around patent validity and that a generic could challenge the patent or launch at-risk. Further, where undertakings at the same level in a production chain conclude agreements, that is a strong indication that there is a competitive relationship between them,
3. whether the settlement involved a "transfer of value" from the originator company to the generic manufacturer(s), and the size of that transfer.
The fact that the originator company holds, and is enforcing, a patent in relation to the relevant product does not mean that there is no prospect of the generic manufacturer entering and competing in the market for that product.
In fact, the very fact of the litigation in relation to the patent and of the settlement agreement itself, indicates that there is a real possibility that the generic manufacturer would enter and compete in the relevant market.
Generic products can be part of the relevant market for an originator product for the purposes of Article 102 TFEU where the generic manufacturer would have been able to bring their product to market sufficiently quickly and in sufficient volume as to represent a serious counterbalance to the market power originator company.
If an originator company entered into a number of settlement agreements of this sort, this may amount to a settlement strategy that is an abuse of a dominant position under Article 102 TFEU.

Conclusions

The CJEU's decision does not reach any firm conclusions as to whether the agreements in question are in fact anti-competitive – this will be for the CAT to decide – and the application of the principles it sets out will inevitably be highly fact-specific.

The Commission and competition authorities across the EU will likely welcome the guidance from the CJEU given the plethora of cases that are currently making their way through various appeals stages. Further developments in this space to look out for include the CJEU's decision in Lundbeck v Commission (with the Opinion of the Advocate General due on 12 March) concerning citalopram, and a hearing at the CJEU in Servier v Commission concerning perindopril. In the meantime, parties looking to settle patent disputes must continue to proceed with caution, particularly where the patent holder appears to be dominant in the relevant market. Settlement terms which include "reverse payments" in exchange for the withdrawal or non-entry of the counterparty into that market will, at the very least, be open to challenge.