Background

On 9 December 2013, the European Commission (“Commission”) published its Fourth Monitoring Report on Patent Settlements in the pharmaceutical sector (the “Report”). The Report is the latest follow up to Commission’s 2009 pharmaceutical sector inquiry, which found that some patent settlements between originator and generic companies may be problematic from a competition law perspective.

To compile the Report, the Commission asked 53 originator and 66 generic companies to provide copies of all patent settlement agreements relevant to EU/EEA markets entered into in 2012. The Report summarises the Commission’s analysis of the 183 agreements submitted.

Principal Findings in the Report

Consistent with its assessment undertaken in previous years, the Commission classified the notified agreements according to whether they restrict the generic company’s ability to market its own product. Agreements that do not restrict generic entry are categorised ‘A-type’. Agreements that do limit generic entry are known as ‘B-type’ and are further categorised into two groups: agreements that do not foresee a transfer of value from the originator company to the generic company are categorised as ‘B.I settlements’; agreements that do foresee a value transfer are categorised as ‘B.II settlements’.

The Report compares the results from the 2012 monitoring exercise to the findings in the previous monitoring reports which, in combination, cover patent settlements entered into between 2000 and 2011. The Report concludes that the use of patent settlement in the European pharmaceutical sector is increasing. In the Commission’s view this shows that the increased scrutiny of B.II settlements by the Commission has not hindered companies from concluding patent settlements in general. On the other hand, the Report finds that the number of B.II settlements has decreased from 22% of all settlements on average for 2000 to 2008 (reported in the 2009 sector inquiry) to 7% for the 2012 period. The number of B.I settlements is found to have increased from 26% on average for settlements reported in the 2009 sector enquiry to 51% in 2012. This increase is, however, to some extent explained by a change to the law in Portugal which has meant that the number of settlements in Portugal increased greatly in 2012. If Portuguese settlements are excluded, the percentage of B.I settlements for 2012 is 30%.

Category B.II settlements (i.e., settlements that may limit generic entry, in return for a value transfer) are of most interest to the Commission and are likely to attract the highest degree of competition law scrutiny. The Report states that although category B.II settlements may be problematic, “this is not to suggest that agreements falling into this category would always be incompatible with EU competition law”. Each settlement agreement needs to be assessed on its particular facts in terms of its impact on trade in the EU, irrespective of where the agreement happens to have been executed.

As a general matter, the Report provides an instructive reminder of the Commission’s expansive view as to what might amount to a relevant value transfer. The four types of value transfer identified by the Commission in its review of the notified settlement agreements were: (i) clauses providing for early entry, (ii) a licence, (iii) a supply agreement, and (iv) the buying of old stock. The companies that had entered into such agreements claimed that payments made under their terms were not stand-alone direct cash payments from the originator to the generic, but were instead compensation for legal costs or damages, or payments for the purchase of old stock. These agreements were, however, still treated as category B.II settlements. Accordingly, it seems that the Commission views any form of payment as containing a transfer of value, whatever the underlying explanation for such payment, placing the settlement agreement as a whole in the category that is most likely to be viewed by the Commission as potentially anticompetitive.

The Report also notes that patent settlement agreements that may lead to a delay of generic entry may be problematic even where there is no value transfer (i.e., category B.I settlements). One example provided in the report is settlements that contain restrictions beyond the scope of the patent (e.g., geographic scope, term, or patented product). Another example is settlements where the patentee knows that the patent does not meet the patentability criteria, such as when the patent was granted following the provision of incorrect, misleading, or incomplete information.

Conclusions

The Report concludes by stating that the Commission may decide to continue the patent monitoring exercise in order to examine further the development of the trends identified. We expect that the Commission will continue actively to enforce the competition rules both in relation to patent settlement agreements as well as all agreements that result in the delayed emergence of a competing product. One very recent example of the latter was the Commission’s 10 December 2013 decision against Johnson & Johnson and Novartis (AT.39685, IP/13/1233), in which the Commission imposed fines totalling €16 million. This case concerned an agreement entered into by the two companies that, according to the Commission, delayed the market entry of generic versions of the painkiller Fentanyl. Despite its description as a “co-promotion agreement”, the Commission found this was actually  an agreement under which Johnson & Johnson paid Novartis to keep its generic product off the market.