In recent years, there have been various antitrust investigations in the pharmaceutical sector resulting in decisions of the European Commission (EC) and the European Courts.[1] In two recent rulings – “Lundbeck”[2] and “Paroxetine”[3] – the European Court of Justice (ECJ) dealt with settlement agreements between originator companies and generic companies aimed at delaying the introduction of generic drugs to the market, so-called “pay-for-delay” or “reverse patent settlement” agreements. In these agreements, the generic companies usually commit to refrain from entering the market for a relevant medicine protected by a (possibly contestable) patent that the originator company holds while the originator company is obliged to pay a certain compensation. The recent ECJ judgments indicate that most of the “pay-for-delay” agreements likely constitute anti-competitive agreements by object and hence violate EU antitrust laws.
Facts/Background
The ECJ provided fundamental guidance regarding questions on “pay-for-delay” agreements in its preliminary ruling in “Paroxetine” on January 30, 2020. In this case, the British Competition Appeal Tribunal (“CAT”) referred various questions to the ECJ for a preliminary ruling. The background for the legal proceedings were settlement agreements with respect to patent disputes between GlaxoSmithKline (the holder of a patent for the paroxetine anti-depressant) and certain generics companies, in which the generics companies agreed to refrain from entering the market with their own generic medicines for a certain period of time and GlaxoSmithKline promised payments in return.
In its “Lundbeck” decisions of March 25, 2021, the ECJ applied the principles established in “Paroxetine” to a fine decision of the EC. The ECJ confirmed the previous EC decision including the ruling of the General Court to fine Lundbeck (originator company of the citalopram anti-depressant) and producers of generic medicines for their anti-competitive settlement agreements. After the original compound patent expired in 2002, Lundbeck (still holding a number of secondary patents) and several generic companies entered into “pay-for-delay” agreements. The generic companies committed not to enter the citalopram market and Lundbeck made in return significant payments and also purchased their stocks of generic products. Those agreements led to investigations concluded by the EC’s decision of June 19, 2013[4] to fine Lundbeck and the generic companies. Their appeals before the General Court were dismissed by various judgments of September 8, 2016. Finally, the ECJ dismissed the appeals against the Court’s decisions.
The ECJ Decisions
The ECJ’s decisions mainly focus on the standards of the European cartel ban (Article 101 TFEU) and the rules on abuse of dominance (Article 102 TFEU, see particularly “Paroxetine”) applying to “pay-for-delay” agreements. They particularly provide clarity in which cases generic manufacturers could be considered as potential competitors and in which cases “pay-for-delay” agreements constitute a restriction of competition “by object” (or effect). While the preliminary ruling in “Paroxetine” provides the guidelines to assess “pay-for-delay” agreements in general, the ECJ confirmed and applied those guidelines to a specific fine decision in “Lundbeck.”
Potential Competitors
The “pay-for-delay” agreements are only anti-competitive if the companies involved are at least “potential competitors.” According to the ECJ in its “Paroxetine” ruling, the relevant potential competition between the originator companies and the generic companies needs to be assessed with “regard to the structure of the market and the economic and legal context within which it operates.” To establish potential competition, the ECJ emphasized that there is no need for certainty that the generic company will in fact enter the market, but the generic companies must have “real and concrete possibilities of entering the market at the relevant time.” More precisely, according to the ECJ, this means that a potential competitor must have taken sufficient preparatory steps to enter the market at the time of the conclusion of the “pay-for-delay” agreement and must show a firm intention as well as an inherent ability to enter the market. Moreover, there shall be no “insurmountable barriers” for entering the market, but the ECJ clarified that the existence of a patent alone cannot be regarded as such an “insurmountable barrier” as long as the potential competitor shows a readiness to challenge the validity of that patent. According to the ECJ, it is not required to assess the “strength of the patent” or how likely it is that a court would find that the patent is valid and has been infringed.
Restriction of Competition by Object
Regarding the question when there is a “restriction of competition by object,” the ECJ pointed out that the agreements must reveal a sufficient degree of harm to competition, considering the agreement’s content, objectives, and economic and legal context. According to the ECJ, such a harm to competition is strongly indicated when the agreed transfers of value cannot have any explanation other than the commercial interest of the parties not to engage in competition on the merits. For this purpose, it is crucial to assess whether the net gain arising from the payments in question is high enough to act as an incentive to the generic companies to refrain from entering the market. However, the net gain is not required to be higher than the profits the generic company would have made if it were successful in the patent proceedings. As with the assessment of a “potential competition,” it is not necessary to assess the strength of the respective patents or of the party’s prospects of success in a patent process, if the transfer of value is significant enough.
Abuse of Dominance
In its “Paroxetine” decisions, the ECJ also specified the conditions under which a “pay-for-delay” agreement constitutes an abuse of a dominant market position (Article 102 TFEU). According to the ECJ, the definition of the relevant product market must take the generic versions of the medicine into account, although the generic companies would not be able to legally enter the market. The ECJ further clarified that the exercise of an IP right, including the conclusion of patent settlement agreements, is not per se abusive, but that negative effects for competition arise if this exercise prevents access to the market. Finally, the ECJ pointed out that adverse effects on the market might be counterbalanced by efficiency advantages that also benefit consumers.
Conclusion and Outlook
After the EC and the General Court established the first principles for the assessment of “pay-for-delay” agreements in the pharmaceutical sector under EU antitrust law, the two ECJ rulings provided now more clarity and final guidance on this topic for various issues. This particularly concerns the qualification of the companies involved as “potential competitors,” the relevant test for assessing whether there is a “restriction of competition by object,” and the (non‑)relevance of the likelihood of success in patent proceedings. There are still some open questions, particularly regarding the defense of the companies involved with respect to potential pro-competitive effects or efficiencies. But this could also have been deliberately left open as, in general, the ECJ seems to put “pay-for-delay” agreements under close scrutiny. And while it does not generally prohibit those agreements, they are subject to a critical assessment resulting in “tough (antitrust) times” for any “pay-for-delay” agreements.
[1] See for more information: https://www.mofo.com/resources/insights/190111-general-courts-ruling-pay-delay.html.
[2] Judgments of the ECJ of March 25, 2021 in Cases C-586/16 P, C-588/16 P, C-591/16 P, C-601/16 P, C-611/16 P, and C-614/16 P.
[3] Judgment of the ECJ of January 30, 2020 in Case 307/18.
[4] EC Decision of June 19, 2013, Case AT.39226 – Lundbeck. in Cases T-460/13, T-467/13,, T-469/13, T-470/13, T-471/13, and T-472/13.