EU’s top court clarifies when a patent settlement agreement can infringe EU antitrust rules

Whilst the questions the ruling addresses are mostly pertinent to pay-for-delay agreements, with the ECJ setting the bar high for pharmaceutical companies to show that these types of agreements are not anti-competitive by nature (ie, by-object infringements), the ruling also includes some guidance of more general application on when cooperation agreements may be deemed ‘by-object’ infringements under EU competition law.

Background

The ECJ’s ruling stems from questions referred to it by the UK Competition Appeal Tribunal (CAT) – the CAT is currently considering appeals against a UK Competition and Markets Authority (CMA) decision to impose fines of GBP 45 million on GSK and generics manufacturers for agreeing, in the context of disputes related to the validity and alleged infringement of certain of GSK’s patents, to delay the entry of generic versions of an anti-depressant medicine (paroxetine) in return for payments by GSK.

The existence of a patent dispute is not incompatible with a relationship of (potential) competition

As a preliminary question, the ECJ was called upon to rule on whether the holder of a patent for a pharmaceutical drug and a generic company seeking to enter the market with a generic version of that drug are to be regarded as potential competitors when they are engaged in a bona fide patent infringement dispute. In fact, agreements between companies only fall within the scope of the prohibition against anti-competitive agreements if they have a negative and appreciable effect on competition in the EU.

The ECJ, concurring with the opinion of AG Kokott issued earlier this month, ruled that horizontal cooperation agreements (i.e. agreements between companies operating at the same level of the production or distribution chain), such as patent settlement agreements, can be anti-competitive only if the companies involved are “at least in a relationship of potential competition”. This requires an assessment of whether, in the absence of the settlement agreement and notwithstanding the existence of the patent in dispute, the generic manufacturer would have had “real and concrete possibilities” to enter the relevant market and compete with the patent holder. In the ECJ’s view this means that:

• the generic manufacturer has a firm intention and an inherent ability to enter the market (looking, in particular, at the preparatory steps it has taken, such as seeking administrative authorizations for marketing a generic version of the drug, or challenging the patent in court); and
• there are no insurmountable barriers to entry – importantly, the court noted that any patent rights cannot be regarded as barriers given that their validity can be contested. The existence of injunctions granted by a national court, prohibiting the generic manufacturer on an interim basis from selling the generic version of the originator medicine at issue, cannot undermine this principle as they in no way prejudge the merits of an infringement action.

Infringement ‘by object’

The ECJ then went on to conclude that pay-for-delay agreements can be anti-competitive ‘by object’ (i.e. by their very nature), meaning that a regulator may not need to prove that the agreement in question had anti-competitive effects on the market.

To amount to a restriction of competition ‘by object’ the agreement must cause a sufficient degree of harm to competition. This will be the case, said the ECJ, if the payments (or other non-financial ‘value transfers’) to the generic drug manufacturers under the agreement cannot, because of their size, have any explanation other than the commercial interest of the parties not to engage in competition on the merits. It is not necessary to show that the value transfers to the generic drug manufacturers exceed the amounts they would have obtained if they had followed the patent disputes through to the end and prevailed – “all that matters is that those transfers of value are shown to be sufficiently beneficial to encourage the manufacturer of generic medicines to refrain from entering the market”. The ruling refers to only limited circumstances in which a value transfer may be justified, such as where it corresponds to compensation for the costs of or disruption caused by the litigation, or to remuneration for the actual supply of goods or services to the patent holder.

The ruling confirms that the fact that the relevant settlement agreements do not exceed the scope and the remaining period of validity of the patent to which they relate is not material to the ‘by object’ assessment. The ECJ reasoned that, whilst a patent is an intellectual property right that permits its holder to oppose any infringement of that right, it does not permit its holder to enter into anti-competitive agreements.

While it is still open to the companies involved to demonstrate relevant pro-competitive effects that are so significant as to cast doubt on whether the agreement causes a sufficient degree of harm to competition, the ruling does not provide any clear guidance on the circumstances when this might be the case.

Restriction ‘by effect’

When assessing whether a patent settlement agreement gives rise to a restriction of competition ‘by effect’, the ECJ ruled that it is necessary to determine how the market would operate in the absence of the agreement. But it is not necessary to establish how likely it is that a generic drug manufacturer would have been successful in the original patent dispute or that a settlement agreement could have been concluded that is less restrictive of competition.

Abuse of dominance

The ECJ also found that a dominant firm’s strategy to conclude patent settlement agreements to keep generic drug manufacturers out of the market can amount to an abuse of a dominant position.

On the question of dominance, the ECJ held that, in a situation where an originator impedes the market entry of generic medicines on the basis of a process patent, the validity of which is uncertain, the relevant product market should, in principle, include not only the originator medicine but also its generic versions, even though the latter would not be able legally to enter the market before the expiry of that process patent.

For such a patent settlement strategy to amount to an abuse, it must have the capacity to restrict competition and, in particular, to have exclusionary effects which as a whole go beyond the anti-competitive effects of each of the individual settlement agreements.

The ECJ stressed that, while the exercise of an exclusive right linked to an intellectual property right (such as the conclusion of a patent settlement agreement) cannot, in itself, constitute an abuse of dominant position, such conduct cannot be tolerated when its purpose is precisely to strengthen and abuse a firm’s dominant position. This will be the case when it is intended to prevent effective access to the market – for example, that of a generic medicine containing an active ingredient that is in the public domain.

The conduct can be justified, however, if the dominant firm can prove these effects can be outweighed by efficiencies that also benefit consumers.

Looking forward

The CAT will now resume its consideration of the appeals, applying the principles identified by the ECJ to the facts of the cases.

More broadly, the case is likely to have a significant bearing on other pay-for-delay cases: appeals against the European Commission’s decisions to fine Lundbeck and Servier are both currently pending before the ECJ and raise similar questions to those addressed in the ECJ’s ruling, with Lundbeck being reviewed by the same judges as ruled on the CAT’s reference. The Commission also has an open antitrust investigation into patent settlements between Cephalon and Teva regarding Modafinil, a medication for the treatment of certain sleep disorders. Despite it having indicated its intention to conclude its investigation in 2019, the Commission has not yet adopted its decision and may have been waiting for the ECJ’s ruling before doing so.

Looking beyond the EU, the test enunciated by the ECJ for a ‘by object’ finding is similar in many ways to the test applied by the U.S. Supreme Court in 2013 in FTC v. Actavis. In Actavis, the court held that “there is reason for concern that [pay-for-delay] settlements (…) tend to have significant adverse effects on competition” as a result of removing the most likely source of competition and should, therefore, be analysed under the Rule of Reason (akin to the ‘by effect’ analysis in the EU). Similarly to the ECJ, the Supreme Court considered that the likelihood of any settlement payment bringing about anti-competitive effects necessarily “depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification.”