On 8 September 2016 the General Court (GC) handed down its judgments in relation to the appeals brought by Lundbeck and a number of generic companies (Sun Pharma (Ranbaxy), Arrow, Generics UK, Merck and Xellia/Alpharma) against a European Commission (Commission) decision finding that the parties had breached Article 101 TFEU by agreeing to delay the market entry of generic citalopram. The GC fully upheld the Commission decision and the fines imposed on the parties (see judgments in Cases T-472/13, T-470/13, T-469/13, T-467/13, T-460/13 and T-471/13).
The GC confirmed the Commission's finding that Lundbeck and the generics were potential competitors at the time the agreements at issue were concluded as, absent the agreements, the generics would have had "real concrete possibilities of entering that market" including by "launching at risk".
The GC also found that the Commission had been correct to conclude that the agreements at issue constituted restrictions of competition "by object", as they affected potential competition by transforming the uncertainty as to whether Lundbeck's patents would have enabled it to block generic entry into the certainty that the generics would not enter the market by means of very significant reverse payments. According to the GC, Lundbeck did not demonstrate that the restrictions set out in the agreements at issue were "objectively necessary" in order to protect its IP rights. Lundbeck could have protected its rights by bringing legal proceedings or it could settle the patent dispute without imposing restrictions on generic entry. Finally the GC noted that there were no efficiencies benefiting consumers.
1. Business impact
This is a seminal case as it is the first time the GC has dealt with such so-called "pay-for-delay" agreements. The GC has fully upheld the Commission's decision and approach and this is likely to encourage the Commission and national competition authorities (NCAs) to pursue more "pay-for-delay" cases in the future. The Commission continues its annual monitoring of patent settlements between originators and generics in order to identify settlements which could be problematic from an antitrust perspective. "Pay-for-delay" agreements remain very much in the spotlight and pharma companies are thus advised to consider carefully the terms of their settlement agreements relating to market entry.
Background to the case
In June 2013 the Commission fined Lundbeck €93.8 million and several producers of generic medicines a total of €52.2 million for delaying the market entry of citalopram, Lundbeck's blockbuster antidepressant medicine.
According to the Commission, after Lundbeck's basic patent for the citalopram molecule had expired, it only held a number of related process patents which provided a more limited protection; generic producers of citalopram had the possibility to enter the market in a variety of ways. Instead of competing with each other, the Commission found that Lundbeck and the generics entered into a series of patent settlement agreements under which the generics agreed to delay their market entry in exchange for financial compensation (a so-called reverse payment or value transfer). In its assessment of the Lundbeck agreements, the Commission took into account the following factors:
- The agreements at issue were agreements between undertakings that were at least potential competitors as the generics had "real concrete possibilities of entering the market" (including by launching at risk)
- The generics committed themselves to limit, for the duration of the agreement, their independent efforts to enter the market
- The agreements included significant value transfers from the originator to the generics, which substantially reduced the incentives of the generics to pursue their independent efforts to enter the market
- The value transfers took into consideration and corresponded to the profits expected by the generics in case of entry
- The agreements afforded Lundbeck protection it could not have obtained through enforcement of its process patents
- Lundbeck did not commit to refrain from infringement proceedings after expiry of the agreements
The Commission concluded that the agreements in question did not resolve or terminate any patent dispute and did not agree on any entry date for the generic company, but rather agreed on a period during which the generic company would be excluded from the generic market, without any guarantee of unrestricted market entry thereafter, in exchange for a considerable sum of money from the originator company. As such the Commission held the agreements were market sharing agreements which constitute a violation of competition "by object", i.e. they were by their very nature injurious to the proper functioning of normal competition. It was therefore not necessary for the Commission to establish that the agreements had anti-competitive effects.
All parties involved in the agreements appealed the Commission's decision arguing that the Commission committed a number of errors in law and in the assessment of the facts. The main grounds of appeal related to the Commission's finding that Lundbeck and the other parties to the agreements were actual or potential competitors under Article 101 TFEU and its findings that the patent settlement agreements restricted competition "by object" under Article 101 TFEU.
Key findings of the GC
The GC dismissed the appeals brought by Lundbeck and the generics and confirmed the fines imposed by the Commission. The key findings of the GC in relation to the two main grounds of appeal are set out below.
2. Potential competition
- The GC considered that Lundbeck and the generics were indeed potential competitors at the time the agreements at issue were concluded on the ground that absent the agreements the generics would have had "real concrete possibilities of entering that market".
- The GC found that the Commission carried out a careful examination of the generics' "real concrete possibilities of entering the market", relying on objective evidence, such as the investments already made, the steps taken in order to obtain a marketing authorisation (MA) and the supply contracts concluded with suppliers of active pharmaceutical ingredients and the fact that no court had found at the time the generic products to be infringing. Further, the GC agreed with the Commission that the very fact that Lundbeck paid significant amounts in order to keep them out of the market is a strong indication that the generics were perceived by Lundbeck as a potential threat.
- The GC further confirmed the Commission's approach to take into account documents reflecting the perception of the parties of the strength of Lundbeck's patents at the time of the conclusion of the agreements in order to evaluate the competitive situation between the parties.
- In addition, the GC noted that the generics had several "real concrete possibilities of entering the market" at the time the agreements at issue were concluded, which included inter alia launching the generic product "at risk", i.e. with the possibility of having to face infringement proceedings by Lundbeck. According to the GC, the presumption of validity of the patents "cannot be equated with a presumption of illegality of generic products validly placed on the market which the patent holder deems to be infringing the patent".
3. Restriction of competition "by object"
- The GC also found that the Commission had been correct to conclude that the agreements at issue constituted a restriction of competition "by object", as they transformed the uncertainty as to whether Lundbeck's patents would have enabled it to block generic entry into the certainty that the generics would not enter the market by means of significant reverse payments, and not on the basis of the parties' assessment of the merits of the patents. The GC confirmed the Commission's finding that "the very existence of reverse payments and the disproportionate nature of those payments were relevant factors in establishing whether the agreements at issue constituted restrictions of competition ‘by object’ in that, by those payments, the originator undertaking provided an incentive to the generics not to continue their independent efforts to enter the market". In this regard, the Court also noted that the size of a reverse payment may constitute "an indicator of the strength or weakness of a patent, as perceived by the parties to the agreements at the time they were concluded".
- Further, Lundbeck had relied on the Court of Justice ("CJEU") judgment in the Cartes Bancaires case, which provided that the concept of restriction "by object" should be interpreted restrictively and argued that that judgment supported its view that the Commission had erred in classifying the agreements at issue as restrictions "by object". The GC dismissed this argument and upheld the Commission's finding that the agreements at issue "were comparable to market exclusion agreements, which are among the most serious restrictions of competition" and thus constituted "by object" restrictions.
- In addition, the GC took the view that Lundbeck did not demonstrate that the restrictions set out in the agreements at issue were "objectively necessary" in order to protect its IP rights and, in particular, its crystallisation patent. Lundbeck could have protected those rights by bringing actions before the competent national courts in the event that its patents were infringed. Furthermore, there were numerous ways of settling a patent dispute without agreeing to restrictions on the market entry of undertakings.
- The GC also pointed out that the Commission was only required to demonstrate that the agreements at issue revealed a "sufficient degree of harm to competition", in view of the content of their provisions, the objectives that they were intended to achieve, and the economic and legal context of which they formed part. It was not, however, required to examine the effects of those agreements or the situation that would have arisen if they had not been concluded ("hypothetical counterfactual scenario"). Instead, what matters is that the generics had "real concrete possibilities of entering the market" at the time the agreements were concluded and they were thus exerting competitive pressure on the latter. That competitive pressure was eliminated for the term of the agreements at issue, which constitutes, by itself, a restriction of competition "by object".
- The GC further ruled that the Commission did not err in rejecting the "scope of patent" test as the relevant test for the purposes of examining the agreements at issue. That test is based on a subjective assessment by the patent holder of the scope and the validity of its patents whereas a national court or a competition authority may have taken a different view. In other words, it is not a defence to assume that the patent is valid (and hence excludes competition by its very existence) as the question of the patent's validity remains an unresolved question.
All in all, the key concept appears to be whether the agreements eliminate potential competition in a situation where the generics have "real and concrete possibilities of entering the market" (including by launching at risk) by removing the uncertainty of whether the patents would have enabled the patent holder to block generic entry by means of significant reverse payments.
The Commission welcomed in a press release the GC judgment which "fully confirmed [its] findings" (see here).
On the other hand, Lundbeck said in a statement that it "strongly disagrees" with the GC judgment and that its agreements "did not go beyond the protection already offered by society via Lundbeck's patent rights". Both Lundbeck and the generics are likely to appeal the judgments at the CJEU.
It should be noted that the GC's approach is arguably different from the US position in relation to "pay-for-delay" agreements, as the Supreme Court ruled in FTC v Actavis that such agreements do not constitute per se restrictions of competition and should instead be assessed under the "rule of reason". Even though in the EU an efficiency analysis is possible also for agreements that restrict competition "by object", it is in principle almost impossible to reverse the presumption that such agreements harm competition by pointing to efficiencies. Indeed, the GC pointed out that the agreements in question had no redeeming features and did not benefit consumers (patients and national health departments).
EC's ongoing monitoring of patent settlements and other "pay-for-delay" cases
Patent settlement agreements between originators and generics came under the spotlight during the Commission's sector inquiry in the pharmaceutical sector in 2008-2009. Since then, the Commission has been monitoring patent settlements annually in order to identify settlements which could be potentially problematic from an antitrust perspective. Its latest monitoring report was published in December 2015 (see here).
Following its decision in Lundbeck, the Commission adopted decisions in two other "pay-for-delay" cases (see our previous bulletin here). In particular, in December 2013 the Commission fined Johnson & Johnson and Novartis a total of €16.3 million finding that they agreed to delay the sale of Novartis' generic version of Johnson & Johnson's painkiller fentanyl in the Netherlands under the guise of a "co-promotion agreement". In July 2014, the Commission imposed fines totalling €427.7 million on Servier and five generic companies for concluding a series of deals aimed at protecting Servier's blockbuster drug perindopril from price competition by generics in the EU. The Servier decision is currently on appeal before the GC. Further, the Commission has at least one ongoing investigation (opened in 2011) which involves a settlement agreement between Cephalon and Teva which delayed the generic entry of modafinil.
In the UK, the CMA imposed fines totalling £44.99 million on GlaxoSmithKline plc (GSK) and a number of generics companies for having entered into pay-for-delay patent settlement agreements. GSK agreed to make payments and other value transfers of £50 million in total to the suppliers of generic versions of its drug paroxetine, in order to delay the entry of generic competition on the UK market. The CMA's decision is also currently on appeal before the Competition Appeal Tribunal.
It is clear that "pay-for-delay" agreements remain a "hot topic" in the EU. The Commission and the NCAs remain vigilant in this area and the GC judgment is likely to encourage them to pursue more "pay-for-delay" cases in the future.