On 8 September 2016, the General Court of the EU (GCEU) handed down five judgments upholding a decision by the Commission of 19 June 2013 imposing fines on Lundbeck, an originator company, and Merck (the parent company of Generics), Arrow, Alpharma and Ranbaxy, four generic companies. The Commission found that the companies had entered into anticompetitive “pay-for-delay” settlement agreements whereby Lundbeck paid a lump sum to the generic companies in exchange for their agreement to delay their entry on the market for Citalopram, an anti-depressant drug.

This ruling is notable in that it is the first time that the GCEU has been asked to rule on patent settlements between originators and generic companies. The GCEU upheld the Commission’s reasoning, noting that the Commission’s reasoning in this case reflects the provisions of its Guidelines on the application of Article 101 of the Treaty on the Functioning of the EU (TFEU) to technology transfer agreements.

Factual background

Lundbeck had a patent covering both the active pharmaceutical ingredient known as Citalopram and two production processes for Citalopram. Subsequently, Lundbeck developed new more efficient processes for which it obtained new patents. When the first patent expired, generic companies could in principle enter the market although there was a risk that Lundbeck would bring actions against them on the basis of their secondary patents protecting new production processes. Instead of entering the market, each of the generic manufacturers entered into agreements with Lundbeck, accepting not to enter the market in exchange for substantial payments.

The Commission’s investigation into Lundbeck’s practices started before it launched its sector inquiry into the pharmaceutical sector in January 2008 with an inspection at Lundbeck’s premises in October 2005. The results of the sector inquiry published in July 2009 – the Commission found, inter alia, that originator companies used various tools to restrict generic entry, including patent settlements – provided the Commission with the incentive to carry out further inspections and to eventually open formal proceedings against Lundbeck and a number of generic companies that had entered into agreements with Lundbeck. On 19 June 2013, the Commission imposed a total fine of approximately € 150 million on all companies (€ 93 766 000 on Lundbeck and € 52 239 000 on the generic undertakings) for having violated Article 101(1) TFEU. All companies appealed the Commission’s decision.

On 8 September 2016, the GCEU rendered six judgments responding to the parties’ different arguments but substantially following the same reasoning.

Potential competition

First, the GCEU confirmed the Commission’s finding that Lundbeck and the generic companies were potential competitors. The GCEU considered that the generic companies had real concrete possibilities of entering the market in the absence of the pay-for-delay agreements. In particular, the GCEU found that Lundbeck’s remaining intellectual property rights covered solely a new production process for Citalopram rather than the active pharmaceutical ingredient or the original production processes and that the generic drug manufacturers had made considerable investments to enter the market.

Restriction by object

Second, the GCEU upheld the Commission’s qualification of the patent settlements as agreements restricting competition by object in violation of Article 101(1) TFEU, meaning that the coordination between the parties was so harmful to competition that there was no need to analyse the effects of the illegal agreements. The GCEU said that that the patent settlements between Lundbeck and the generic companies were in practice market exclusion agreements, which broadly equate to two types of restrictive agreements listed in Article 101(1) TFEU: (i) agreements to limit production and (ii) agreements to share markets.

Notably, the GCEU said that not all patent settlements are illegal – in some cases, they are a legitimate way to find a compromise in a patent dispute – but that in the present case, several factors demonstrated that the agreements should be considered as restrictions by object, including (i) the amount of the payments made by Lundbeck which amounted to the profit anticipated by the generics had they entered the market successfully and (ii) the absence of provisions in the agreements guaranteeing that the generic companies would be able to launch their products on the market after the expiry of the agreements without fear of retaliation by Lundbeck.

No exemption under Article 101(3)

Last, the GCEU confirmed the Commission’s view that the patent settlements could not be exempted under Article 101(3) TFEU because it did not bring about pro-competitive gains. In particular, the GCEU said that the agreements (i) were not essential for Lundbeck to protect its incentive to innovate, (ii) did not bring any benefits to consumers, and (iii) did not avoid litigation costs because the agreements did not resolve any patent disputes between the parties.

Conclusion

There is an apparent tension between competition law and intellectual property law, in particular in the pharmaceutical industry: originator companies must be entitled to benefit from patent protection so as to reap the rewards for their innovation. At the same time, however, intellectual property rights should not enable originators to block the entry of generics on the market once their patents are no longer enforceable. This tension can make it difficult for the Commission and EU courts to conclude that an antitrust infringement has taken place in the context of a patent dispute. The GCEU’s ruling in Lundbeck sends a clear message that an agreement is not exempt from competition law merely because it concerns a patent.

Now that it has the CGEU’s backing, it is likely that the Commission will continue taking an active role in reviewing agreements in the pharmaceutical industry between originators and generic companies.