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Life sciences quarterly newsletter - December 2016

Eversheds Sutherland (International) LLP

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Austria, Belgium, European Union, Germany, Netherlands, Spain, Switzerland, United Kingdom, USA December 15 2016

Clearing the path for biosimilar Humira™/

adalimumab market entry in the UK – the English

Patents Court considers how its small molecule case

law applies to the world’s highest selling biologic

In Fujifilm Kyowa Biologics Co. Ltd v AbbVie Biotechnology Limited

[2016] EWHC 425 (Pat) (1 March 2016), the English Patents Court

refused to strike out FKB’s application for a declaration that its

biosimilar Humira™/adalimumab product and associated dosage

regime were obvious at the relevant priority date of certain Abbvie

patents relating to Humira™. The willingness to contemplate

awarding this form of relief should help FKB to clear the path of

a large portfolio of pending European patent applications which

otherwise would create significant commercial uncertainty for

FKB’s UK launch plans. It could become a key patent litigation tactic

for biosimilar manufacturers looking to enter the UK as the first

generation of blockbuster biologic drug products moves towards

expiry of the primary patents.

Background

AbbVie is the proprietor of European Patent (UK) No 0 929 579

(the “Basic Adalimumab Patent”) which protects the monoclonal

antibody adalimumab, sold under the trade mark Humira™. The Basic

Adalimumab Patent and its associated UK supplementary protection

certificate (“SPC”) will expire on 15 October 2018.

Adalimumab is a monoclonal antibody specific for human tumour

necrosis factor α. This is a cell signalling protein, misregulation of

which is implicated in several human inflammatory diseases include

rheumatoid arthritis, psoriatic arthritis and psoriasis. Humira™ has

been approved for those indications, with a basic dosage regime of

40mg every other week as a single dose via subcutaneous injection

(“40mg sc eow”). Humira™ is currently the highest selling prescription

drug in the world, achieving net sales in 2014 of US$12.5 billion, and

UK sales of £438.8 million (i.e. more than £1million per day).

AbbVie has filed applications for numerous secondary patents

protecting dosing regimens, formulations and uses of adalimumab.

FKB told the Court that, as of April 2016, it was aware of over 50

pending European divisional patent applications in 17 families filed by

AbbVie for this subject matter (the “Secondary Applications”).

FKB characterises this as a “dense thicket of patents” around

Humira™. AbbVie rejects this characterisation, pointing out that in

a ground-breaking invention such as Humira™ it is unsurprising to

find a portfolio of patents and patent applications directed to many

different aspects of the invention.

FKB intends to launch a biosimilar adalimumab product (“FKB327”) in

the UK after expiry of the Basic Adalimumab Patent and associated

SPC on 15 October 2018.

What?

In order to avoid the risk of an interim injunction being granted to

prevent this launch, FKB has explained that it would like to ‘clear the

path’ of the Secondary Applications (which might proceed to grant at

any point prior to launch).

Clearing the path in the UK normally involves bringing a revocation

action or applying for a declaration of non-infringement (or both).

However, in relation to the Secondary Applications, FKB faced the

difficulty that it is not possible in the UK to apply to revoke a patent

until the patent has been granted (s72 of the UK Patents Act 1977).

So, relying on the well-known judgment of Kitchin J (as he then was)

in Arrow Generics v Merck [2207] EWHC 1900, FKB applied instead

for a declaration that its FKB327 product was obvious at the relevant

priority dates(s) (specifically, that “products containing a biosimilar

monoclonal antibody to the antibody adalimumab for the treatment

of rheumatoid arthritis, psoriatic arthritis and/or psoriasis by the

administration of 40mg every other week by subcutaneous injection”

would have been obvious at the priority dates of the Secondary

Applications). This unusual type of declaration is referred to as an

Arrow declaration, after that case.

The purpose of the Arrow declaration sought by FKB in the

present case is to prevent AbbVie from commencing infringement

proceedings in the UK against FKB327 under any of the Secondary

Applications once they have been granted. The logic is as follows:

if it was obvious at the relevant priority date to treat the authorised

indications by the 40mg sc eow dosage regime, then any allegation

of patent infringement by Abbvie would necessarily mean that the

patent in question was invalid as obvious.

Abbvie applied to strike out FKB’s request for an Arrow declaration.

AbbVie argued that Arrow v Merck was wrongly decided. Its position

was:

– the English Court in fact has no jurisdiction (in the sense of

power) to grant Arrow declarations since they are an indirect

attack on the validity of a patent. Section 74 of the UK Patents

Act 1977 strictly limits the types of proceedings in which the

validity of a patent may be put in issue, and declaratory actions

are not included.

– If the Court does have the power to grant Arrow declarations, it

can only exercise that power in unusual circumstances and FKB’s

pleadings did not disclose any reasonable grounds for alleging

that such unusual circumstances exist.

Clearing the path for biosimilar Humira™/

adalimumab market entry in the UK – the English

Patents Court considers how its small molecule case

law applies to the world’s highest selling biologic

3

Showcasing a culture of bright ideas

Our quarterly life sciences newsletter

December 2016

In order to succeed on its first argument, AbbVie had to convince

the English Patents Court (Henry Carr J) to depart from its earlier

decision at first instance (Kitchin J) in the Arrow case. The English

doctrine of precedent allows the Court to do so, but only where the

second judge is convinced that the first decision was wrong.

In this case, the Court held that it was not convinced that Arrow was

wrongly decided. It commented that, if the Court really has no power

to grant Arrow declarations, a party wishing to clear the path would

be unable to do so and would face years of commercial uncertainty

posed by cascading divisional applications in the EPO.

In relation to AbbVie’s second argument, the Court accepted that

this jurisdiction (in the sense of power) must be exercised with

caution. The Court then considered whether FKB had pleaded facts

which disclosed a reasonable prospect of the Court exercising its

jurisdiction in favour of FKB.

FKB relied upon AbbVie’s abandonment of a European patent in

the course of opposition proceedings in the EPO, five days after

FKB brought revocation proceedings in the UK in respect of the UK

designation of the European Patent. FKB also relied upon AbbVie’s

filing of a divisional application claiming virtually the same subject

matter as the abandoned patent, shortly before the abandonment.

FKB alleged that this indicated that AbbVie was trying to delay

scrutiny of its patent by the UK Court or by the EPO Opposition

Division, and hence to prolong the commercial uncertainty for FKB

for as long as possible. AbbVie denied this allegation, explain that

there were separate, quite innocent reasons for the abandonment of

the European patent. The Court found that the pleaded facts were

sufficiency unusual for there to be a reasonable prospect of the

Court exercising its discretion to grant the declaration. The Court

therefore dismissed AbbVie’s strike out application, and has allowed

FKB’s claim for an Arrow declaration to proceed to trial.

So what?

– This decision demonstrates the willingness of the English Patents

Court to apply to biosimilars a novel form of relief which was

developed to address market entry of small-molecule generic

therapeutics. (The Arrow case concerned a European patent for

the treatment of osteoporosis by Fosamax™/alendronate where

the novelty lay in the dosage regime (70mg of alendronate per

week rather than 10mg once per day)).

– It also demonstrates the flexibility of the Court’s declaratory

jurisdiction to give relief where there is a real commercial need

for clarity.

– Seven of the world’s top selling drugs in 2015 were biologics.

As the primary patents and SPC protection for these products

expire in the EU, market entry of biosimilars will become a key

issue for both innovators and biosimilar manufacturers. Assuming

similar patterns of patent filing for these blockbuster biologics,

Arrow declarations may become a key weapon for biosimilar

manufacturers.

– There has been much speculation amongst commentators about

whether the English Patents Court will be as willing to grant

interim injunctions to prevent the launch of biosimilars as has

been the case for small-molecule generics. The dynamics of the

biologic/biosimilar market are rather different to the market for

small-molecule therapeutics/generics, including the difficulties

of manufacturing biosimilar molecules and the requirements of

the regulatory pathway. There has therefore been speculation

that the consequences of biosimilar market entry would be less

severe for the innovator than the consequences of generic entry

for small-molecule therapeutics. This might tip the assessment

of the balance of convenience on an application for an interim

injunction in favour of the biosimilar manufacturer. In particular,

the likelihood of attracting further market entrants (i.e. the

snowball effect) and an ensuing irreversible price collapse may

be less. This in turn might lead the English Courts more routinely

to withhold interim injunctions against biosimilar entry. It is

interesting to note that FKB believed that it should nevertheless

take steps to clear the path – it was obviously not willing to rely

solely on the Court taking a different approach to the assessment

of balance of convenience.

The decision is under appeal. It is listed for hearing in the Court of

Appeal on 29 and 30 November 2016. We will report the outcome of

the appeal in a future edition of this newsletter.

Adrian Toutoungi

Partner, IP/Regulatory

Tel: +44 1223 44 3831

[email protected]

4

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Our quarterly life sciences newsletter

December 2016

Precis

In the forty-three years since the UK acceded to the European Union,

a large body of case law has developed in the Court of Justice of the

EU and national courts dealing with parallel trade of pharmaceuticals

within the EU. A recent decision in the English Courts, Flynn Pharma

v Drugsrus Limited and Tenolol Limited [2015] EWHC 2759 (Ch), has

added to that body of case law. It considers parallel imports in an

commercially important context: the divestment in one member state

of the EU by a research-based pharmaceutical company of its rights in

a mature, off-patent, branded pharmaceutical product. The divesting

company retained the rights to the product elsewhere in the EU, and

continued to market the product there. The acquirer of the rights in

the UK did not manufacture the product itself. Instead, it sourced its

supplies for the UK market from the divesting party. A third party also

began to import the products of the divesting party into the UK. The

imported products were therefore identical to the products of the UK

acquirer. Nevertheless, the acquiring party successfully blocked the

parallel imports, on the basis of a trademark infringement claim at

the High Court. Due to the nature of the particular drug in question,

the case involved an unusual combination of regulatory and pricing/

reimbursement issues which make it of particular interest.

Background – the basic facts

In 2012, a UK-based specialty pharmaceutical company, Flynn

Pharma, acquired from Pfizer the rights in the UK to the hard

capsule form of phenytoin sodium, an anti-epilepsy drug. Pfizer, the

research-based pharmaceutical company, had originally developed

the product. In particular, Flynn Pharma acquired from Pfizer the UK

marketing authorisation for the product. Under EU medicinal product

regulatory law, the marketing authorisation holder is responsible

for the product, including quality, continuity of supply, provision of

medical information and post-marketing pharmacovigilance.

Flynn Pharma did not operate as a research-based pharmaceutical

company. Instead, its business model was to acquire rights in the UK

in off-patent, tail-end branded products which were no longer core

to the business of the originator.

Prior to the divestment, Pfizer had sold the product throughout the

EU under the brand name EPANUTIN. Pfizer retained the rights to the

product in the EU outside the UK. Pfizer also continued to sell other

forms of the drug (chewable tablets, injections, oral suspension) in

the UK under the EPANUTIN mark.

When Flynn Pharma acquired the rights to the product, its plan was

to debrand it and sell it under its international non-proprietary name

(”INN”), phenytoin sodium. After discussion with the UK Medicines

and Healthcare Products Regulatory Agency (“MHRA”), it was instead

instructed to call the product Phenytoin Sodium Flynn.

Upon receiving confirmation on the name change from the MHRA in

August 2012, Flynn Pharma registered FLYNN as a UK trade in Class 5

(pharmaceutical preparations).

Since Flynn Pharma does not operate its own manufacturing facilities,

it also proposed to continue to source its supplies of phenytoin

sodium from Pfizer.

The pricing regime for Phenytoin Sodium

The UK allows free pricing of non-branded (i.e. generic)

pharmaceutical products. Price controls, whether under the

voluntary Pharmaceutical Price Regulatory Scheme or the statutory

scheme (discussed in an earlier briefing here) apply only to branded

products. At the time of the divestment by Pfizer, the price at which

EPANUTIN capsules could be sold was controlled by the PPRS, and

was very low.

By dropping the use of the EPANUTIN brand, Flynn Pharma was free

to increase the price of the product.

The regulatory regime for Phenytoin Sodium

Phenytoin sodium has an unusually narrow therapeutic index.

The therapeutic index of a drug is the dosage range within which

a therapeutic response is induced without causing any significant

adverse effect. Drugs with a narrow therapeutic index have a very small

difference between a therapeutic dose and a toxic dose. Even tiny

increases in the blood level of the drug required for therapeutic efficacy

can trigger adverse reactions in patients and/or drug toxicity. Since

variations in manufacturing process, or even a change of manufacturing

line, can bring about such tiny increases, the MHRA advises doctors to

ensure that patients prescribed phenytoin sodium are maintained on the

product of a specific manufacturer. To facilitate this, the MHRA’s naming

conventions requires the name of the manufacturer to be added as a

suffix to the INN, and the MHRA requires the product to be prescribed

by brand or, if an out-of-patent product, by reference to a particular

manufacturer. (The UK does not permit dispensing pharmacists to

substitute a generic product for a branded prescription, and hence

continuity of manufacturer can be guaranteed.)

Thus, upon the acquisition in 2012, when Flynn applied to the MHRA

to change the name from EPANUTIN to phenytoin sodium, it was

instructed by the MHRA to call it PHENYTOIN SODIUM FLYNN.

Even though the product name incorporates a registered trade mark (i.e.

FLYNN®), it is still deemed to be an unbranded product for the purposes

of the UK pricing regime (as only product-specific brand names, rather

than house brands, are taken into account for this purpose).

Thereafter, advisories were sent to doctors, pharmacies and epilepsy

charities regarding the change in the market authorisation holder

from Pfizer to Flynn Pharma, reassuring them that Flynn’s drug was

“ identical to Epanutin” and that “the site of manufacture remains

unchanged”.

Divestment of mature pharmaceutical products in the EU

– implications for parallel imports

5

Showcasing a culture of bright ideas

Our quarterly life sciences newsletter

December 2016

What?

Parallel importers Drugsrus Limited and Tenelol Limited (‘Tenelol’)

acquired supplies of EPANUTIN which had been put on the market in

other EU member states by Pfizer and sought to import them into the

UK to compete with Flynn’s rebranded version.

Tenelol was in a tricky situation. It knew that pharmacists could not

fulfil prescriptions written for PHENYTOIN SODIUM FLYNN with their

imported EPANUTIN. Tenelol also realised that doctors were also

unlikely to write prescriptions by reference to the EPANUTIN brand

without the assurance of a stable source of supply (which Tenelol

was unable to guarantee).

Therefore, Tenelol decided that in order to obtain effective access to

the market for its imported EPANUTIN, it would need to repackage it

under the name PHENYTOIN SODIUM FLYNN.

This prompted Flynn Pharma to issue proceedings for trade mark

infringement.

Flynn Pharma claimed that the proposed use of its registered mark

was an infringement under section 10(1) of the Trade Mark Act 1994

because it constituted use of identical sign in relation to identical

goods. Further, it argued that its trade mark rights had not been

exhausted. It referred in this regard to the longstanding case law of

the Court of Justice of the EU on repackaging of parallel imported

pharmaceuticals, in particular Bristol-Myers Squibb v Paranova

[1997] FSR 102 and Pharmacia & Upjohn v Paranova A/S [1999] ECR

I-6927. These decisions established that a trade mark owner cannot

legitimately enforce its trade mark to prevent parallel imports of

packaged products from elsewhere in the EU if five conditions are

met. The first such condition is that the owner of the trade mark

in the Member State of importation must have put an identical

pharmaceutical product on the market elsewhere in the EU in various

forms of packaging (or consented to a third party doing so), and that

repackaging carried out by the parallel importer is necessary in order

to market the product in the Member State of importation.

Tenelol’s primary argument was that, even though that condition

was not satisfied, a prohibition on import on the grounds of the

protection of intellectual property would still be unlawful under

the free movement of goods provisions of the Treaty on the

Functioning of the EU (specifically, Article 36, second sentence) on

the grounds that it would constitute a disguised restriction on trade

to prevent the import of goods which are identical in every way to

the goods marketed by the trade mark owner in the Member State of

importation.

The Court rejected this bold submission, commenting that it would

amount to abandoning the protection conferred by a trade mark

in favour of some public health criterion dependent solely on the

characteristics of the goods sold.

Tenelol’s secondary argument was that the contractual arrangement

between Pfizer and Flynn meant that Flynn should be treated

as having consented to the putting on the market of EPANUTIN

elsewhere in the EU by Pfizer. The Court considered in detail those

contractual arrangements, which included in the normal way an asset

sale agreement, an exclusive supply agreement, a quality agreement,

and a pharmacovigilance agreement.

Telenol argued that the effect of those agreements was closer to

an exclusive distribution arrangement than a true assignment of the

marketing authorisation coupled with a contracting manufacturing

arrangement (as Flynn Pharma contended).

The Court held that the key issue was whether Flynn Pharma had

the right to control the quality of EPANUTIN tablets sold by Pfizer in

Member States outside the UK. On the true construction of those

agreements, Flynn had no such control. The Court therefore held

that there was no exhaustion of rights, and Telenol was liable for

trade mark infringement. An injunction was granted preventing

further parallel imports.

6

Showcasing a culture of bright ideas

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December 2016

So what?

The circumstances of this case were highly unusual. In particular:

– although patent protection for phenytoin sodium had long

expired, the very low price of EPANUTIN meant that there were

no competing generic alternatives on the market at the date of

the divestment, and very few parallel imports;

– this market dynamic, together with the UK pricing regime, made

a price increase for the unbranded product feasible following the

divestment;

– the price increase following the divestment made parallel imports

and generic entry more attractive. As such generic entry and

parallel imports would normally have the effect of reducing

price, the price increase strategy would only have had a transient

benefit to the acquiring party.

– the price increase was only sustainable in this case due to MHRA’s

insistence on branded prescribing (or prescribing by reference

to a specific manufacturer) for this specific product. This made

effective market entry for generic products difficult in practice.

If the normal UK rule of prescribing by reference to the INN had

applied, Flynn would not have been able to block generic entry or

(debranded) parallel imports of EPANUTIN.

This decision is therefore unlikely to become a template for the

pharmaceutical sector on how to structure a divestment of a mature,

off-patent pharmaceutical product in the EU to avoid parallel

imports. It is however an instructive case study.

We understand that the decision has been appealed, and the English

Court of Appeal is due to hear the appeal at the end of October 2016.

We will report on the outcome of the appeal in a future briefing.

Following Brexit, the law on exhaustion of trade mark rights is likely

to change. If the UK adopts a model for Brexit which means the UK

is no longer part of the European Economic Area, UK IP rights are

Adrian Toutoungi

Partner, IP/Regulatory

Tel: +44 1223 44 3831

[email protected]

Nadia Gracias

Associate - UK

Tel: +44 1223 44 3816

[email protected]

likely to be able to be used to restrict all imports into the UK from

elsewhere in the EEA and EEA IP rights could be used by their holders

to do the same in respect of the EEA market. Business models based

on parallel trade into the UK from other EEA member states would be

undermined and may no longer be viable. The principle of exhaustion

of rights has been implemented in UK law in various IP-related

legislation. These provisions will require amendment or repeal.

Post-script: As this briefing went to press, the UK Competition and

Markets Authority (‘CMA’) issued an infringement decision (on 8

December 2016) in respect of its investigation into the UK pricing of

Epanutin. The CMA found that Pfizer and Flynn each abused their

dominant positions in the UK by imposing excessive prices, in breach

of competition law. The CMA imposed a fine of £84.2 million on

Pfizer and £5.2 million on Flynn, while also directing both companies

to reduce the price of the drug. The fine against Flynn was the

maximum available to the CMA (10% of Flynn’s global turnover), and

the fine against Pfizer was the largest ever levied by the CMA, in each

case to indicate the seriousness with which the CMA viewed the

conduct in question. Both Flynn and Pfizer have indicated that they

will appeal the CMA’s ruling. We will report on the CMA’s ruling in

more detail in our next Life Science quarterly briefing.

7

Showcasing a culture of bright ideas

Our quarterly life sciences newsletter

December 2016

8

Showcasing a culture of bright ideas

Our quarterly life sciences newsletter

December 2016

Precis

In its recent decision in Genentech Inc v Hoechst GmbH & Sanofi-

Aventis Deutschland GmbH (7 July 2016), the Court of Justice of the

EU (“CJEU”) has ruled that an obligation on a licensee under a patent

licence agreement to pay royalties on products which do not fall within

the scope of the licensed patent claims, or where the obligation to pay

royalties continues for the entire term of the agreement regardless of

the earlier revocation of the licensed patents, does not in itself amount

to a breach of EU anti-trust law (Article 101 Treaty on the Functioning

of the EU) and hence is enforceable against the licensee, provided

that the licensee can terminate the licence agreement on reasonable

notice.

This decision largely confirms existing EU law. However, valuable

lessons on the drafting of patent licences can be drawn from the

context for the decision. We highlight these below.

Background

On 6 August 1992, Behringwerke AG (the predecessor of Hoechst

GmbH) granted a worldwide non-exclusive licence to Genentech

for the use of a human cytomegalovirus (“HCMV”) enhancer, with

effect as of 1 January 1991 (the “Licence Agreement”). Enhancers

are discrete segments of DNA capable of enhancing the expression

of one or more functionally associated genes by upregulating

transcription (the process of synthesizing RNA from a DNA template).

They are used in the biotechnology sector to boost production

efficiency for protein-based products. For example, by linking an

enhancer to a gene encoding a biological drug, bioreactor yields of

that drug from cells expressing that gene can be improved.

Genentech used the HCMV enhancer in this way in the production of

its monoclonal antibody rituximab, which forms the active ingredient

in its blockbuster biological medicinal product MabThera™. This is

a cancer drug for the treatment of common forms of blood cancer,

including non-Hodgkin’s lymphoma (NHL), follicular lymphoma

and chronic lymphocytic leukaemia (CLL). It is also used to treat

rheumatoid arthritis and certain types of vasculitis. MabThera™ is

marketed as Rituxan™ outside Europe, and had global sales in 2015

of $7.2bn.

At the time of the Licence Agreement, the HCMV enhancer

technology was the subject of European Patent EP 1,731,753 (“EP

‘753”), issued on 22 April 1992, as well pending US patent applications

which later issued as US 5,849,522 (on 15 December 1998) and US

6,218,140 (on 17 April 2001). The patents claim methods of using the

HCMV enhancer to increase expression of a gene in a mammalian

cell, isolated HCMV enhancers, plasmid DNAs comprising an ECMV

enhancer operatively linked to a heterologous gene, and eukarytoic

host cells transformed with such plasmids.

EP ‘753 was subsequently revoked in its entirety by the European

Patent Office in opposition proceedings on 12 January 1999, leaving

only the US patents in force.

The Licence Agreement

Under the Licence Agreement, Genentech undertook to pay: a oneoff

upfront fee (20,000 Deutschmarks); a fixed annual research fee

(20,000 Deutschmarks) and a running royalty of 0.5% on the net sales

of ‘Finished Products.’

The Licence Agreement defined Finished Products as “commercially

marketable goods incorporating a Licensed Product …”.

‘Licensed Product’ was in turn defined as “materials (including

organisms) in respect of which the manufacture, use or sale would,

in the absence of this agreement, infringe one or more unexpired

claims included in the rights attached to the patents under licence”.

The Licence Agreement was terminable for convenience by

Genentech on two months’ written notice, and was governed by

German law.

The dispute

Genentech paid the one-off fee and the annual research fee, but never

paid the running royalty.

In June 2008, 14 years after the Licence Agreement was signed, Sanofi-

Aventis Deutschland GmbH, a subsidiary of Hoechst, asked Genentech

for information about its sales of Finished Products. This prompted

Genentech to give notice of termination of the Licence Agreement,

which took effect from 28 October 2008. Hoechst subsequently

initiated ICC arbitration proceedings, in accordance with the dispute

resolution clause in the Licence Agreement, claiming unpaid running

royalties on sales of Finished Products prior to the date of termination.

The seat of the arbitration was specified as Paris, with a single arbitrator.

Shortly after Hoechst initiated the arbitration, it also brought, in parallel,

an action for patent infringement against Genentech in the US in respect

of alleged use of the HCMV enhancer technology after the date of

termination of the Licence Agreement. On the same day as Hoechst

commenced those proceedings, Genentech brought proceedings

for revocation of Hoechst’s US patents (US ‘122 and US ‘644). The

US Courts dismissed the claims of both Hoechst and Genentech,

upholding the validity of the patents but finding no infringement.

Amongst other reasons, they found that Genentech did not infringe

the method claims as Genentech did not practise the required step of

“inserting” the isolated HCMV enhancer in a mammalian cell. It was

common ground that Genentech derived the cell lines used to produce

rituximab by inserting the enhancer into mammalian cells, but had done

so before the US patents issued in 1998, and so that act of insertion

could not amount to patent infringement. Those existing cell lines

were subsequently propagated by mitosis (cell division), but this did not

amount to “insertion” of the enhancer into the daughter cells.

Royalties under patent licence agreements: can they

remain payable even if the licensed patents(s) are revoked

or not practised? Lessons from Genentech Inc v Hoechst

GmbH & Sanofi-Aventis Deutschland GmbH

9

Showcasing a culture of bright ideas

Our quarterly life sciences newsletter

December 2016

Despite the finding of non-infringement of the US patents by the

US Court, and the revocation of the European patent thirteen years

earlier, the sole arbitrator hearing Hoechst’s claims in arbitration held

Genentech liable to pay the unpaid running royalties up to the date

of termination of the Licence Agreement, and assessed these at €108

million. He considered that Genentech’s position was based on a literal

interpretation of the Licence Agreement, in particular the definition

of “Licensed Product”, and he rejected this approach as a matter of

German law (the governing law of the contract). He concluded instead

that the commercial objectives of the parties had been to avoid the need

in litigation for detailed consideration of whether the manufacture or

sales of Rituxan™ in the patented territories amounted to infringement,

and of whether the licensed patents were valid. He therefore concluded

that the Licence Agreement should be interpreted as:

– Applying to all US sales of Rituxan™ between the date the earliest

US licensed patent issued (1998) and the termination of the Licence

Agreement (2008). The full text of the arbitral award is confidential

and the extracts which have been made public do not make clear

whether the running royalty was also held to be due on sales of

Rituxan™ in the European jurisdictions covered by EP ‘753 until

termination of the Licence Agreement, though the CJEU appears to

have proceeded on this basis.

– Not requiring reimbursement of running royalties which have been

paid, and not permitting the withholding of unpaid running loyalties,

in the event that the licensed patents were revoked or found not to

cover Rituxan™.

Genentech applied to the French courts (the supervising courts of

the seat of the arbitration) to set aside the arbitral award. French

arbitration law (as the law of the seat of the arbitration) contemplates

such annulment applications, but only on very limited grounds – for

example, breach of international public policy. Annulment proceedings

do not, however, involve a review of the substantive legal issues in the

award. Genentech argued that the sole arbitrator had interpreted the

Licence Agreement in a way that made it incompatible with European

Union anti-trust law (Article 101 TFEU), and this amounted to a breach

of international public policy. The French courts asked the CJEU to rule

on whether such a licence was incompatible with Article 101 TFEU; i.e.,

whether, for a licence agreement like that in issue, Article 101 precludes

parties imposing an obligation to pay a royalty for the use of patented

technology for the life of the agreement, even in the event of the

revocation or non-infringement of patents protecting that technology.

As summarised above, the CJEU concluded that Article 101 TFEU did not

have that effect, as long as the licensee was able to terminate the licence

agreement on reasonable notice.

So what?

In light of the CJEU decision, the French annulment proceedings

will almost inevitably be dismissed, leaving Genentech to satisfy

the arbitral award (or possibly attempting to resist recognition and

enforcement of the award in the US (or in any other jurisdictions in

which they have assets), to the extent that there are arguable grounds

for doing so under the New York Convention.)

Two brief observations can be made on the decision of the CJEU

itself.

– First, the CJEU decision is consistent with the Opinion of

Advocate-General Wathelet, which was handed down a few

months earlier. However, the Advocate-General worded his

approval more narrowly than the CJEU. He limited his judgement

to licence agreements where:

(1) the licensee can terminate the license agreement by giving

reasonable notice;

(2) the commercial purpose of the licence agreement is to avert

patent litigation;

(3) the licensee can challenge the validity or infringement of the

patent during the term; and

(4) the licensee retains his freedom of action after termination

(i.e. is not subject to a contractual obligation to discontinue

use of the licensed technology).

– Second, the position articulated by the CJEU is somewhat

different to the position under US law, which views charging

royalties under patents which have expired or been revoked

as patent misuse (Brulotte v Thys Co, 379 U.S. 29 (1964),

recently affirmed by the US Supreme Court in Kimble v. Marvel

Entertainment, LLC, 576 U.S. __ (2015)). This is the basis

for the common practice in well-drafted US-style patent &

know-how licences of distinguishing between the royalty rate

payable in respect of licensed products falling within a valid

unexpired patent claim, and the royalty rate payable in respect

of unpatented know-how. Given that the Licence Agreement

covered the US territory, and in that sense the arbitral award

(from a Paris-seated sole arbitrator) governs the charging of

royalties within the US, it is interesting to speculate as to whether

Genentech will rely on incompatibility with the US patent misuse

doctrine in seeking to resist enforcement of the arbitral award in

the US courts).

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Some useful lessons for the drafting of patent licences can also be

drawn from this salutary saga:

– The importance of the choice of law clause. Questions of

contract interpretation are resolved by the application of the

governing law of the contract.

o In this case, the application of German law appears to have

allowed the sole arbitrator to put significant emphasis on

the commercial purpose of the licence agreement, and to

disregard the plain and ordinary meaning of the definition of

“Licensed Product”. This definition was fairly standard in well

drafted patent licence agreements, and clearly required a

“Licensed Product” to be one that “infringe[d]… an unexpired

claim”. It is questionable whether a tribunal applying English

law or New York law would have felt able to depart from the

plain and ordinary meaning of these words.

o The arbitrator did so as he determined that the commercial

purpose of the Licence Agreement was to avoid litigation,

and in particular the need for detailed consideration of

validity and infringement. What the arbitrator meant by this,

and the basis for this finding, is unclear (at least, from the

public reports of the arbitral award). It could be said that

the commercial purpose of virtually all patent licences is to

avoid litigation, at least as regards the validity of the licensed

patents. This would only not be the case where the validity

of the patent has previously been established in a binding

decision of a court of competent jurisdiction. As regards

avoiding litigation over infringement, where this is the

commercial purpose of the licence agreement it would be

more normal to define the Licensed Products by reference

to specific products (by name or product reference number,

and avoid reference to the concept of infringement in the

definition.

o Agreeing the choice of law clause is often left to the last

minute in a contract negotiation. Time and budget constraints

often do not allow the input of local counsel and the choice

is often made ‘at the 11th hour’ or without appropriate advice.

The choice of law clause is of fundamental importance. This

case is a useful reminder that best practice for any material

contract is always to allow time for review by local counsel

before final agreement is reached.

– Draft expressly to specify the consequences of revocation of

a licensed patent. Well drafted patent licences should stipulate

what will happen to royalties which have been paid, or which

fell due for payment but remain unpaid, prior to revocation of

a licensed patent. Are those royalties refundable? Similarly, the

licence agreement should provide expressly for whether royalties

continue to accrue following revocation of a licensed patent,

if the licensee continues to practise the (previously patented)

invention and the licence agreement has not been terminated.

– The importance of an appropriate dispute resolution provision.

The advantages of arbitration in international commercial

contracts, including patent licences, are well known. They include

confidentiality (subject to the choice of an appropriate seat and/

or arbitral rules), the ability to appoint subject matter expert(s)

as the tribunal, and, generally most importantly, ease of crossborder

enforcement of arbitral awards. However, careful drafting

of the arbitration clause is required. Two particular aspects are

highlighted by this dispute.

o Choice of composition of the arbitral tribunal – one or three

arbitrators? It seems that the Licence Agreement provided

for a sole arbitrator. This reduces costs and can allow for a

more expeditious timetable. On the other hand, it means that

each side will not be able to appoint a representative to the

Tribunal (as is typically the case in a three-arbitrator tribunals),

which is seen by some parties as an important advantage of

arbitration, or at least one member of the Tribunal, although

neutral to the parties, will typically nonetheless seek to ensure

that its appointing party’s arguments are understood by the

Tribunal.

o The finality of arbitration is generally accepted internationally

as a key policy aim, but is not always fully appreciated by

contract drafters. The scope to challenge an arbitral award

is strictly limited. This should be taken into account in

deciding whether to provide that disputes should be resolved

by arbitration. The choice of the seat of the arbitration

determines the national courts which have supervisory

jurisdiction over the arbitration. This in turn determines the

national arbitration law which will apply to determine the

grounds on which an arbitral award can be annulled by the

local courts. The institutional rules stipulated by the parties as

governing the arbitration are also relevant, as many (including,

for example, both the ICC and LCIA Rules) expressly waive

recourse which may be available under the supervisory law

(for example, for arbitrations seated within the UK, under s69

of the Arbitration Act). Some countries are more liberal than

others, allowing a wider range of grounds on which arbitral

awards may be annulled or otherwise challenged. These

factors should be prioritised when choosing the seat of the

arbitration, rather than choosing solely on logistical grounds.

Returning to Genentech Inc v Hoechst, French law is strict in

this regard, only allowing annulment on very limited grounds.

This promotes finality but, especially when combined with

a sole arbitrator, leaves a losing party with few options if it

believes that the sole arbitrator has made an error of law,

even one which is obvious on the face of the award.

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Adrian Toutoungi

Partner, IP/Regulatory

Tel: +44 1223 44 3831

[email protected]

Timeline of dispute

Date Event

January 1991 Effective Date of the Licence Agreement

April 1992 EP ‘573 granted by EPO. US patent applications pending

August 1992 Licence Agreement signed

November 1997 FDA grants biologics licence application for Rituxan™

June 1998 European Medicines Agency grants centralised marketing

authorisation for MabThera™/Rituxan™

December 1998 US 5,849,522 issued by US Patent & Trade Mark Office

January 1999 EP ‘573 revoked by EPO in its entirety

April 2001 US 6,218,140 issued by US Patent & Trade Mark Office

June 2008 Licensor requests statement of account of royalties from

Licensee

August 2008 Licensee gives notice to terminate the Licence Agreement

October 2008 – Licensor initiates arbitration proceedings

– Licensor brings patent infringement proceedings against

Licensee in US Federal District Court for the Eastern

District of Texas

– Licensee brings action for revocation of US Licensed

Patents, and for declaration of non-infringement in the

Northern District of California

March 2011 US District Court dismisses infringement action and

revocation action

March 2012 US Court of Appeals for the Federal Circuit upholds the firstinstance

decision

September 2012 Sole arbitrator issues third partial award, holding Licensee

liable for payment of the running royalty

December 2012 Licensee brings action before Cour d’Appel de Paris seeking

annulment of third partial award

February 2013 Sole arbitrator issues final award and fourth partial award on

quantum and on costs

September 2014 Cour d’Appel de Paris requests preliminary ruling from the

Court of Justice of EU

July 2016 Court of Justice of EU hands down decision

Cameron Forsaith

Senior Associate, L&DM

Tel: +44 20 7919 0507

[email protected]

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December 2016

In July 2016, the Belgian Federal Minister of Health issued a call for the submission of

mHealth pilot projects (“mHealth Pilot Projects”) with a supporting budget of 3.25 million

euros made available for the purpose. The call fits within ‘Action Point 19 - Mobile Health’

of the national eHealth plan that has been put in place in Belgium in order to strengthen

and promote eHealth and mHealth by 2019. The key objective of Action Point 19 is to

create a framework for integrating mHealth applications into the Belgian health system by

taking into account different qualitative, legal, organisational and financial aspects. Five

‘use cases’ were identified as taking priority. These were:

– diabetes;

– cardiovascular care;

– acute stroke care;

– care for patients with chronic pain; and

– mental health.

The aim of the mHealth Pilot Projects is to gain the expertise needed to create a legal

framework for such applications.

Prior to the launch of the mHealth Pilot Projects, a baseline inventory of mHealth

applications was generated and a market survey was sent to several mHealth app

suppliers for completion. The survey focused on questions relate to the functioning,

security, privacy, semantic interoperability, evidence based character, usability and

functionality of their apps. The Minister of Health stressed that it was important that a

mHealth app met the following criteria:

– provided sufficient guarantees in relation to privacy and security;

– showed interoperability between different apps and other eHealth services (e.g.

an app registering the heart beat and blood pressure of a patient must be able to

exchange this data with the electronic file of the patient kept by his/her personal

healthcare professional (doctor));

– had obtained a CE-label;

– provided scientifically based evidence to demonstrate the technology underlying the

functionality, i.e. how the app derived from a patient’s blood values that they were

diabetic.

The call for the mHealth Pilot Project is addressed to all interested parties in the health

care sector and runs until 30 September 2016. Applicants should provide a project

proposal and a budget plan with an aim for the first mHealth Pilot Projects to be launched

by the end of this year.

Belgium: Major public investment in pilot projects

for mHealth developments

Gunther Meyer

Partner, Belgium

Tel: +32 27 37 93 65

[email protected]

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December 2016

The Corporate Tax Reform III has been approved by Swiss Parliament

with the intention of securing Switzerland’s attractiveness in relation

to taxation, and as a location for multinational companies. Due to

potential referendums and implementation of the reform, entry into

force is not expected before the beginning of 2019.

One of the Corporate Tax Reform’s key innovations is the so called

“patent box regime”. It will provide for a lower tax rate on income

stemming from intellectual property rights, namely patents,

complementary protection certificates and royalties on patents.

The regime will apply at a cantonal and municipal level of corporate

income taxation rather than at a federal level. Cantons may exempt up

to 90% of the patent income, resulting in an effective tax rate of only

10% on qualifying patent income.

Who is subject to the preferential tax treatment?

Self-employed persons in possession of qualified IP as well as legal

entities can benefit from the preferential tax treatment. Contribution

to the actual research or development of the innovation is required

to benefit from the tax relief on profits and as such, corporations

holding acquired patents cannot benefit from the tax relief. However,

the patent box regime will apply to those with the power to control

research and development within a group.

Switzerland: Corporate Tax Reform III - Patent Box

Monika McQuillen

Partner, Switzerland

Tel: +41 44 20 49 29 7

[email protected]

What is subject to the preferential tax treatment?

Patents and rights similar to patents can benefit from the preferential

tax treatment, the details of which will need to be determined by the

federal council, considering the requirements of the OECD. Income

will only qualify if it stems from a patent registered or to be registered

in Switzerland. Non-patentable IP such as trademarks will not qualify.

How does the calculation of the preferential tax treatment work?

The calculation follows a two-step approach: firstly, the residual

method is used to determine the earnings on the total profit of the

qualified IP and secondly, the remaining residual profit is adjusted by

the OECD modified nexus approach, as provided under Action 5 of the

OECD BEPS initiative.

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In our quarterly newsletter of June 2015, we reported on a preliminary

ruling referred to the Court of Justice of the European Union (“CJEU”)

by judgement of the Court of Appeal of Antwerp dated 26 January

2015. The referral addressed the compatibility of Belgian legal

provisions concerning recovery of legal costs, on the one hand, and

the Belgian case law on the recovery of expert fees, on the other hand,

with Article 14 of the Directive 2004/48/EG of the European Parliament

and the Council of 29 April 2004 on the enforcement of intellectual

property rights (“Enforcement Directive”).

A brief recap of the Belgian recovery system

Article 1022 of the Judicial Code provides a scheme for the recovery

of lawyers’ fees and costs by the successful party in civil and

commercial litigation cases, including IP litigation cases (i.e. a flat-rate

reimbursement system). According to this mechanism, the successful

party is entitled to a fixed amount that is deemed to recover the

lawyers’ fees and other legal costs of that party. The fixed amount will

depend on the value of the case and might be increased or lowered

under certain conditions (e.g. either by taking into account the

complexity or the manifestly unreasonable nature of the case, or both).

In relation to the fees and costs of technical experts assisting parties in

legal proceedings (e.g. patent attorneys), Belgian case law (including

the case law of the Belgian Supreme Court), established that such fees

and costs are only recoverable in the event the unsuccessful party has

committed a (contractual or extra-contractual) fault (for example, by

filing or continuing an infringement action) and the fees and costs paid

to the expert are the inevitable consequence thereof.

The referred questions for a preliminary ruling by the CJEU

(1) Do the terms “reasonable and proportionate legal costs and other

expenses” in Article 14 of Directive 2004/48 preclude the Belgian

legislation which offers courts the possibility of taking into account

certain well-defined features specific to the case and which

provides for a system of varying flat rates in respect of costs for the

assistance of a lawyer?

(2) Do the terms “reasonable and proportionate legal costs” and “other

expenses” in Article 14 of Directive 2004/48 preclude the case-law

which states that the costs of a technical adviser are recoverable

only in the event of fault (contractual or extra-contractual)?

Belgium: Ruling of the Court of Justice of the European Union

on the Belgian system for recovery of lawyer’s fees and costs

of technical experts in IP litigation cases: To an enhanced

recovery system for the successful party (Case C-57/15)?

The judgement of the CJEU (Case C-57/15, 28 July 2016)

(1) Flat-rate reimbursement of lawyers’ fees

As to the first question, the CJEU first confirms that the concept

“legal costs” in Article 14 of the Enforcement Directive includes,

amongst others, lawyers’ fees, which constitute generally

a substantial part of the costs incurred in IP enforcement

proceedings.

• Reasonableness condition

Based on the wording of Article 14 of the Enforcement

Directive that Member States should ensure only the

reimbursement of “reasonable costs” and Article 3(1) of the

Enforcement Directive that the procedures laid down by

the Member States must not be unnecessarily costly, the

CJEU concludes that legislation providing for a flat-rate

reimbursement of lawyers’ fees could in principle be justified,

provided that it is the intent to ensure the reasonableness

of the costs to be reimbursed, taken into account different

factors, such as:

• the subject matter of the proceedings involved;

• the sum involved;

• the work carried out to represent the client.

The CJEU gave the following examples of what could meet

the condition of reasonableness: a flat-rate reimbursement

of lawyers’ fees intending to exclude the reimbursement of

excessive costs due to:

• unusually high fees agreed between the successful party

and its lawyers; or

• the provision, by the lawyer, of services that are not

considered necessary in order to ensure the enforcement

of the IP rights at stake.

The CJEU also provides an example of a flat-rate based system

that would not meet the reasonableness condition, namely

Member State legislation that imposes a flat-rate system

significantly below the average rate actually charged for the

services of a lawyer in that Member State. Such system would

be incompatible with Article 3 (2) of the Enforcement Directive,

providing all procedures and remedies must be dissuasive.

The dissuasive effect would be seriously diminished if the

infringer could be ordered only to reimburse a small part of the

reasonable lawyers’ fees.

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• Proportionality condition

Article 14 of the Enforcement Directive introduces also

a proportionality condition, which cannot be assessed

independently of the costs that the successful party incurred in

respect of lawyers’ fees, provided they are reasonable.

According to the CJEU, the proportionality condition does

not imply that there is an obligation on the Member States to

provide reimbursement of the entirety of all costs incurred by

the successful party. However, it does imply that the successful

party should have the right to reimbursement of, at the very

least, a “significant and appropriate” part of the reasonable

costs actually incurred by that party.

The CJEU continued that a national legislation that lays down

an absolute limit of fee recovery (such as the Belgian law), must

ensure that:

• such limit reflects reality of the rates charged for the

services of a lawyer in the field of IP; and

• at the very least, a significant and appropriate part of

reasonable costs actually incurred by the successful party

are borne by the unsuccessful party.

The CJEU adds that it is not possible for a legislation

that provides in a recovery system with an absolute limit,

particularly in a situation in which the limit is too low, to

prevent the amount of those costs vastly exceeding the

provided limit, so that the reimbursement which the successful

party may claim becomes disproportionate or even, where

applicable, insignificant.

(2) Recovery of costs of a technical adviser

Article 14 of the Enforcement Directive also provides that not only legal

costs but also “other expenses” incurred by the successful party should

be reimbursed. The CJEU ruled that costs incurred for services of a

technical adviser should be included in this concept (for example, the

services of patent attorney assisting a lawyer in a patent litigation case).

What about costs of identification and research of IP infringements?

In most cases such services are also rendered by technical advisors.

Referring to recital 26 of the Enforcement Directive, the CJEU ruled

that such costs do not necessarily fall within the scope of Article 14 of

the Enforcement Directive, but they may qualify under the damages

provision of Article 13(1) of the Enforcement Directive. Therefore, the

CJEU seems to leave this discussion open. In any event, the CJEU

decided that a wide interpretation of the concept “other expenses” in

Article 14 of the Enforcement Directive, without going into any detail

about those costs, risks conferring excessive scope on Article 14 and

thus depriving Article 13 of its practical effect. The CJEU therefore

concludes that the concept of “other expenses” in Article 14 of the

Enforcement Directive should be interpreted narrowly, i.e. only costs

that are directly related to the judicial proceedings concerned fall

under this concept.

The CJEU further ruled that Article 14 of the Enforcement Directive

does not contain any element from which it may be concluded that

Member States may subject reimbursement of “other expenses” (legal

costs in general) to a condition of fault on the part of the unsuccessful

party. As indicated above, the successful party will need to show a

direct link between the costs and the judicial procedure concerned in

order to fall under the scope of Article 14 of the Enforcement Directive.

For example, a close direct link can be established in a situation where

services of a technical advisor are essential in order for a legal action

seeking to have such right upheld to be usefully brought.

On the other hand, the CJEU concluded that the following examples

of costs of research and identification of IP infringement shall not fall

under Article 14 of the Enforcement Directive, because they lack a

close direct link:

• a general observation of the market carried out by a technical

advisor;

• the detection by a technical advisor of possible infringements of IP

law, attributable to unknown infringers at that stage.

Implications of the CJEU’s decision on Belgian IP proceedings

With its judgement of 28 July 2016 (C-57/15), the CJEU gives a clear

message to the Belgian State that the flat-rate reimbursing system, as it

presently exists, is not fully in line with what should be expected under

the provisions of Article 14 of the Enforcement Directive. It is now

for the Belgian legislator to examine how to deal the CJEU’s decision

under Belgian national law.

In the meantime, the Belgian courts, who have the obligation to

interpret and apply Belgian law in conformity with EU law, will have to

give full effect to the CJEU’s decision when deciding on recovery of

lawyers’ fees and costs of technical experts. In each IP enforcement

case the Belgian courts will now have to examine whether the

application of the existing flat-rate reimbursement system would

result in an adequate reimbursement of legal costs. I.e. whether the

amount that would normally be awarded under the applicable system

is significantly below the average rate charged for services by lawyers

in similar cases, so that such amount would not be able to provide the

successful party with a significant and appropriate reimbursement of

its legal costs. In the event the court concludes this is the case, it will

have to set aside the applicable flat-rate and award a higher amount

reflecting reimbursement of all legal costs.

The recovery of costs of technical advisors, including, but not limited

to, costs of identification and research of IP infringements in IP

enforcement cases will now be much more easily recoverable. In the

event the successful party can show that such costs are directly related

to the judicial proceedings, they will qualify as “other costs” in the

sense of Article 14 of the Enforcement Directive and will be recoverable

without proving any fault on the part of the unsuccessful party.

The CJEU’s judgement of 28 July 2016 will more than likely also effect

decisions in other Member States that provide a capped or similar fee

recovery system. It might be that, in IP enforcement cases, such systems

could also be questioned on their compatibility with the Enforcement

Directive and the criteria set out by the CJEU in this ruling.

Gunther Meyer

Partner, Belgium

Tel: +32 27 37 93 65

[email protected]

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New German law combating corruption in the health sector

(June 2016)

Precis

In order to protect the healthcare system against bribery and

corruption, Germany has recently introduced a new legislative

approach which encompasses a more rigorous and stringent

penalisation of all bribery acts in the healthcare industry. The German

law combatting corruption in the health sector came into effect in

June 2016

The newly introduced criminal offences regarding bribes and

corruptive practices aimed at health care professionals, represent

a crime punishable by a fine or imprisonment of up to three years

not only for the professional, but also for the person attempting to

bribe or engage in corrupt practices with a professional, regardless of

the health care professional’s working status (employed by a public

institution or self-employed).

Background

Bribery and corruption in the pharmaceutical and medical industries

has become an important issue due to the significant monetary

impact it can have on the public healthcare system. Any investigation

regarding bribery and corruption attracts a large media presence and

subsequently, negative press for the respective company.

In terms of bribery, there is a difference between bribery in public

sector and in private business. In the public sector, the law prohibits

both payment to and receipt of bribes by public officials (public

bribery, sec. 331 et seqq. German Criminal Code, Strafgesetzbuch,

StGB). In the private sector, an employee or agent of a business

must not demand or allow himself to be promised consideration,

or accept a benefit for himself or another person in a business

transaction for affording an unfair preference in the competitive

purchase of goods or services (commercial bribery, sec. 299 StGB).

The same applies to anyone who offers, promises or grants such

persons a benefit in this context.

This distinction between the public and private sector is significant,

because in Germany, there are largely two kinds of health care

professionals: independent physicians operating within Germany’s

public health insurance system (Kassenärzte) and physicians employed

in a certain employment with subordinate status, mostly in public

owned medical institutions, the so-called public officials (Amtsträger).

As such, until now only public officials were seen as legally capable

of committing public bribery. There is no criminal penalisation of

the Kassenärzte regarding bribery or corruption so far. In 2012,

the German Federal Court of Justice (Bundesgerichtshof, BGH)

constituted that independent health professionals do not qualify as

an employee or an agent under the provisions outlawing commercial

bribery (sec. 299 StGB), as they are primarily self-employed (neither

being in subordination to an employer nor in an agency relationship)

and, thus, cannot commit commercial bribery. Nor do they act as

so-called public officials under the laws prohibiting public bribery (sec.

331 et seqq. StGB). Consequently Kassenärzte were not legally capable

of committing a crime as a public official.

Following the German Federal Court of Justice‘s decision and in order

to defend the healthcare system against bribery and corruption, a more

rigorous and stringent penalisation of all bribery acts in the healthcare

industry has been initiated and came into effect in June 2016.

What?

On 13 May 2016 the bill on combating corruption in the

healthcare sector (Gesetz zur Bekämpfung von Korruption im

Gesundheitswesen) passed the Federal Council of Germany. The

new law came into effect on 4 June 2016. It contains new criminal

offences in sec. 299a and sec. 299b StGB:

§ 299a Corruptibility in health care

Any member of a health care profession requiring state-regulated

qualification in order to practice or to hold a professional title who,

in connection with the practice of their profession demands, allow

himself to be promised, or directly accepts a benefit for themselves

or a third person as compensation in return for:

1. the prescription of pharmaceutical products, remedies and

adjuvants or medical devices,

2. the procurement of pharmaceutical products or remedies or of

medical devices that are intended for direct use by the health

care professional or one of his supporting staff, or

3. for the referral of patients or test materials,

For according an unfair preference to another in domestic or foreign

competition shall be punished by up to three years’ imprisonment or

a fine.

§ 299b Bribery in health care

Whoever offers, promises or grants a member of a health profession

in terms of § 299a or a third person in connection with the practice of

their profession a benefit as compensation for:

1. the prescription of pharmaceutical products, remedies and

adjuvants or medical devices, or

2. the procurement of pharmaceutical products or remedies or of

medical devices that are intended for direct use by the health

care professional or one of his supporting staff, or for the

3. the referral of patients or test materials,

for the health care professional according an unfair preference to

another in domestic or foreign competition shall be punished by up

to three years’ imprisonment or a fine.”

In this context and to fight bribery and corruption, some State

Chambers of Physicians (Landesärztekammer) have also taken a

more stringent approach with regard to benefits given to healthcare

professionals by implementing respective provisions into the state

professional codes for physicians.

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So what?

As consequence of the new legislation, bribes and corruptive

practices aimed at healthcare professionals represent a crime

punishable by a fine or imprisonment of up to three years not

only for the professional (sec. 229a StGB - corruptibility in health

care), but also for the person attempting to bribe or engage in

corrupt practices with the professional (sec. 229b StGB - bribery

in health care). Both provisions refer to members of healthcare

professions including both academic health professions (physicians,

dentists, veterinarians, pharmacists, non-medical psychotherapists

and child and adolescent psychotherapists) and paramedical

professions (Gesundheitsfachberufe, e.g. speech therapists, nurses,

physiotherapist, physician’s assistant). Further, there is no longer a

distinction between self-employed physicians and those employed

by public institutions with regards to bribery and corruption

penalisation. The underlying reason being that the principles of fair

competition and the integrity of medical decisions should not be

tainted by criminal acts of bribery and corruption.

The new law will ensure companies in the pharmaceutical and

medical sector are more diligent in their relationships with physicians,

given that a breach of the new provisions has consequences

under criminal law. Companies are advised to check whether their

agreements, internal guidelines and policies on relationships with

health care professionals have to be revised and amended.

Given the above, it is best for any company to avoid the impression

that it may influence a healthcare professional in their professional

independence in any prescribing, therapeutic and procurement

decisions. Therefore, companies must not offer, give, or receive

money or any other item of value either as an inducement to make

or as a reward for making any decision that is favourable to one’s

personal interest or to the company’s corporate interest. Additionally,

all fee-for-service agreements must be in writing, approved in advance

through the appropriate channels and documented. Agreements (e.g.

healthcare professional agreements regarding consultation or other

services, agreements regarding external training events, sponsoring

agreements) and internal guidelines dated before the changes of the

German Criminal Code shall be revised and, if necessary, amended

according to the new statutory regulations.

Dr Tobias Maier

Partner, Germany

Tel: +49 89 54 56 51 44

[email protected]

Magdalena Anna Kotyrba

Associate, Germany

Tel: +49 89 54 56 53 08

[email protected]

18

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December 2016

The Dutch Minister of Health, Welfare and Sport

(in Dutch: Minister van Volksgezondheid, Welzijn

en Sport) (“Minister”) announced in a letter to

Parliament dated 23 June 2016 that the penalty in

respect of culpable shortages of medicines will be

increased.

The Minister will do this in two steps:

1. The penalty will be increased from 45,000

euros to 150,000 euros, since this is currently

the maximum penalty within the Dutch

Medicines Act (in Dutch: Geneesmiddelenwet).

Such penalties and violations have been

laid down in the Policy Rules administrative

penalty (in Dutch: Beleidsregels bestuurlijke

boete Minister VWS 2016). The Minster is

working on an amendment to the Policy Rules

administrative penalty and expects to finish the

aforementioned amendment this summer.

2. Afterwards, the maximum possible penalty

under the Dutch Medicines Act will be

increased to 820,000 euros through a change

in the Dutch law, which is also the level of the

Commodities Act (in Dutch: Warenwet).

What?

The Dutch Medicines Act contains a best efforts

obligation in which a commercial licence holder

is responsible for ensuring that medicines in

accordance with the commercial licence need

to be sufficiently available for wholesalers and

pharmacists to fulfill the needs of patients. The

legal basis for this obligation is found in article 49

paragraph 9 of the Dutch Medicine Act. Further, the

Medicines Act contains a best efforts obligation for

wholesalers under article 36 paragraph 2. Those

articles are based on article 81 of the Directive

2004/27/EC of the European Parliament and the

Council of 31 March 2004 amending Directive

2001/83/EC on the Community code relating to

medicinal products for human use.

Dutch Minister of Health, Welfare and Sport

increases penalty of commercial license holders

regarding culpable shortages of medicines

So what?

Following a recent shortage of medicines, the

Minister increased penalties for culpable shortages

of medicines. An investigation is still pending to

decide whether or not a pharmaceutical company

operating in the Netherlands was liable for not

having certain medicines sufficiently available for

patients, the shortage of which had a significant

impact on some patients. The event also drew a

lot of attention in the Dutch media. Consequently,

the Minister wrote a letter to Parliament that

possible shortages should be notified on time by

commercial licence holders. Commercial licence

holders and wholesalers now risk a penalty of

150,000 euros after the amendment of the Policy

Rules and 450,000 euros after the Dutch Medicine

Act is amended if they do not have medicines

sufficiently available.

At the moment, two points of contact have

been established for the notification of shortages.

Foreseeable shortages should be notified to

the Medicines Evaluation Board (in Dutch:

College ter Beoordeling van Geneesmiddelen,

“MEB”) and unforeseeable shortages to the

Healthcare Inspectorate (in Dutch: Inspectie

voor de Gezondheidszorg, “HI”). Before the end of

this year, a single point of contact should be

set up by the MEB and HI jointly which should

allow for an efficient process which enables

notification of anticipated shortages to be received

as soon as possible.

Tom van Wijngaarden

Partner, Netherlands

Tel: +31 20 56 00 63 5

[email protected]

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Under the microscope

Our quarterly life sciences newsletter

May 2016

Précis

On 23 June 2016 the Netherlands Authority for

Consumers and Markets (“the ACM”) published

the definitive version of the “Guidelines on

collective procurement of prescription drugs” (“the

Guidelines”). The Guidelines inform hospitals

and health insurers about the possibility of

procuring prescription drugs collectively in light

of competition law. The ACM expects that the

Guidelines will ensure that lower drug prices and

better conditions can be negotiated.

What?

In April 2016, the ACM published a draft version

of the Guidelines. Stakeholders were given the

opportunity to comment on the draft version. In

addition, the ACM organised several roundtable

discussions with health insurers and hospitals to

determine whether the Guidelines were sufficiently

clear. In the final version of the Guidelines several

parts of the draft version have been clarified.

The Guidelines explain what opportunities the

competition rules offer, and what limits they set

if hospitals or health insurers purchase drugs

collectively. The ACM lists three rules in the

Guidelines. The ACM anticipates that if purchasing

agents follow these rules, they will not fall a foul of

competition law and collective procurement will

be considered to be a permitted arrangement. The

rules are:

1. The total costs of the drugs purchased

collectively cannot comprise more than a

limited proportion of the hospital’s costs;

2. Other buyers must be able to join any group

purchasing organisation (or joint purchasing

organisation);

3. It must be easy to leave a group purchasing

organisation (or joint purchasing organisation).

New Guidelines on collective

procurement of prescription drugs

In addition, it must be noted that the exchange

of information between the participants of the

collaboration cannot go beyond what is necessary

in order to collectively procure prescription drugs.

This must prevent the exchange of competitivesensitive

information between the participants of

the collaboration.

So what?

The ACM expects that the new Guidelines will

provide hospitals and health insurers the ability to

negotiate lower drug prices and better conditions.

Although the Guidelines do not provide a new

understanding of the relevant legislation, the

Guidelines provide for a very efficient mechanism

to opening up new possibilities for the collective

procurement of prescription drugs.

It should be noted that also outside the rules laid

down in the Guidelines, cooperation between

purchasing agents continues to be possible.

In order to determine whether a specific

collaboration complies with general competition

law rules, a more extensive analysis of the

collaboration in question may be necessary

Michel Chatelin

Partner, Netherlands

Tel: +31 10 24 88 03 5

[email protected]

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The Court, and subsequently the Court of Appeal in Amsterdam have rendered judgements with regard to

the question as to when receivables against either patients or health insurers, or both, arise for services that

have been provided by healthcare providers.

Should a pledger enter into insolvency (and thus lose the power to dispose of its assets), it is important that

a pledgee can determine whether a receivable that was pledged to him (in advance), existed and whether

it was thus possible for the pledger to grant a valid right of pledge over the receivables. If the receivable did

not already exist at the moment that the pledger entered into bankruptcy, the receivable cannot be pledged.

In the Netherlands, both the Treatment Contract and the Billing Contract (with health insurers) and the now

repealed Billing Regulation influence the moment when a receivable arises for a healthcare provider against

a health insurer (in this case).

When do receivables for provided

services arise for health care providers?

Background

Better Life B.V. (“Better Life”) was a healthcare

provider who offered treatment processes which

consisted of multiple consultations. Better Life was

financed by Famed B.V. (“Famed”). Better Life gave

Famed a valid right of pledge over all current and

future receivables which Better Life had or would

acquire against health insurers in relation to the

consultations that Better Life provided.

Several agreements played a part in this case. Next

to the factoring agreement between Famed and

Better Life, there were treatment contracts between

Better Life and its patients (“Treatment Contracts”)

and contracts between Better Life and several

health insurers with regard to the manner in which,

and the moment that, Better Life could bill it’s fees

for consultations it provided under a Treatment

Contract (“Billing Contracts”). Pursuant to such

Billing Contract, healthcare providers can directly

bill their fees from the health insurer, rather than

from the patient.

The (repealed) Regulation Expenses scheme

in the curative Mental Healthcare (“the Billing

Regulation”) was applicable to the contractual

relationship between Better Life and the health

care providers by operation of law. According to

the Billing Regulation, Better Life could only invoice

it’s fees from the health insurers after finishing the

entire treatment process.

Better Life went bankrupt and a substantial part of the

treatment processes was not yet finished. Therefore,

the question was if Better Life receivables had

arisen against the health insurers with respect to the

consultations that Better Life already performed during

the process, but for which they had not yet submitted

their invoice to the health insurers in accordance with

the Billing Contract and the Billing Regulation.

The bankruptcy trustee was of the opinion that for

consultations that Better Life had already provided,

but for which the entire treatment was not yet

finished (and therefore not yet billed), no receivables

against the health insurers had arisen for Better Life.

Therefore, these receivables did not yet exist and

could therefore not have been pledged in advance

to Famed. Of course, Famed was of the opinion that

the receivables arose directly after Better Life had

provided the consultation, regardless of the fact that

they hadn’t been billed yet.

The judgement

The court of first instance

According to the judgement of the Court, the

receivables of Better Life against the various health

insurers arose in three phases. The first phase

was the entering into of the Billing Contract. The

second phase was the entering into of Treatment

Contracts with patients. According to the court, the

entering into of a Treatment Contract lays down the

foundation of payment obligations. The third phase

was the actual treatment of a patient. According

to the court, after each consultation a payment

obligation arises for the patient and thus, pursuant

to the Billing Contract, a receivable arises against

the relevant health insurer for Better Life.

The Court ruled that in respect to the Treatment

Contracts which were entered into before the

bankruptcy and for which treatments have actually

been performed before bankruptcy, receivables arose

against the health insurers. These receivables may

not have been due and payable in accordance with

the Expenses Contract, but nevertheless existed and

could therefore be made subject to a right of pledge

to Famed (whether or not in advance).

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Court of Appeal

The Court of Appeal did not share the judgement

of the court of first instance. In their view, the

receivables do not arise pursuant to the Treatment

Contracts, but pursuant to the Billing Regulation and

therefore they only existed from the point in time

that the entire treatment could be invoiced to the

relevant health insurer. The receivables of Better Life

against the health insurers arose from the moment

that all requirements of the Billing Contract and the

Billing Regulation were met. As long as this was not

the case, Better Life could not invoice their fees for

the separate consultations and therefore did not

have any receivables against the health insurers that

could be validly encumbered with a right of pledge.

So what?

The factual issue in this case was that nothing was

specifically agreed with regard to the moment when

receivables would arise against either the health

insurers or the patients, or both. The only point that

was agreed, was the moment that the fees for the

consultations could be billed. It follows that because

there was no agreement when the receivables

would arise, Better Life was dependent on the

interpretation of the different contracts.

Given the significance of this case for the financing

of health providers, we expect that this case will

be submitted to the Supreme Court. Until then,

financers of healthcare providers are advised to

demand clear agreements from their clients with

their patients and health insurers with respect

to the moment that receivables arise for either

consultations or treatments, or both, as well as

ensuring that it is clear for all parties when these

receivables are due and payable.

Please use the following link for the full decision

of the court of appeal in Amsterdam (only

available in Dutch): http://deeplink.rechtspraak.nl/

uitspraak?id=ECLI:NL:GHAMS:2016:1143

Lucas Lusterman

Senior Associate, Netherlands

Tel: +31 10 24 88 03 1

[email protected]

Casper Rooijakkers

Associate, Netherlands

Tel: +312 05 60 05 68

[email protected]

22

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Compensation for mental distress extended?

Precis

The Austrian Supreme Court recently awarded damages for mental

distress to a patient because a piece of broken scissors remained in

his body after heart surgery. The claimant suffered no physical pain

due to this foreign object in his body.

What?

During the claimant’s heart surgery, the tip of the dissecting scissors

broke and slipped into the left pulmonary vein. The broken tip was

approximately 1 centimetre in length. An attempt to retrieve the tip

failed and so it remained in the claimant’s body. Post-surgery, the risk

of inflammation or sepsis due to the remaining piece of scissors was

increased, but did not occur. The foreign body was integrated into the

body and did not cause any pain or affect the health of the claimant

in any other way physically or mentally. Although the claimant was

informed that complications or further migration of the foreign object

were highly unlikely, the claimant was concerned and distressed about

such migration or any other negative impact. From a medical point

of view the removal of the scissor tip was not recommended as this

would most likely require the removal of part of the left lung. The

claimant sued the hospital and the manufacturer of the scissors for

future damages as well as for compensation for pain and suffering in

the sum of 9,500 euros.

Both claims against the hospital were dismissed on the grounds of

the correct performance of the surgery. Based on product liability

law, the liability of the manufacturer of the scissors for future

damages caused by the foreign object in the claimant’s body was

ascertained and damages for mental pain awarded in the amount of

5,000 euros, despite the fact that the claimant had no physical pain

and had not suffered mental injury.

The Supreme Court expressly held that the permanently remaining

scissor tip qualified as physical injury, especially because later

consequences could not be excluded. The claimant’s distress and

uncertainty were seen as rather understandable mental consequences

of a physical injury and not only as mental impairment that would not

qualify as equal to a physical injury by itself.

So what?

So far, Austrian courts have been rather reluctant to award damages

for pain and suffering. In general such damages were only granted

in small amounts in addition to compensation for physical injuries.

Given the claimant suffered no physical pain in this instance, the

awarded amount is quite generous. It remains to be seen if this new

approach will be maintained or even extended.

Teresa Bogensberger

Partner, Austria

Tel: +43 15 16 20 16 0

[email protected]

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The sale of medicines via the internet in Spain

In Spain, the sale of medicines via the internet is dealt with by Law no.

34/2002 on Information Society Services and E-commerce, which

transposed the Directive 2000/31/EC and which envisaged the use of

internet to commercialise medicines and medical devices, although

this law referred to potential “specific legislation” on those topics.

More recently, Law 29/2006 was enacted in relation to the

guarantees and rational use of medicines and healthcare

products. The Law is limited to non-prescription drugs, although it

provides that “the implementing regulation shall specify the exact

requirements needed for selling non-prescription medicines”.

E-commerce of prescription medicines was expressly forbidden.

Thus, for many years the pharmaceutical wholesalers have seen how

the Law of 2006 allowed them to sell non-prescription medicines

via the internet in theory, but in the absence of an implementing

regulation, selling medicines online was not in fact possible in practice.

The situation changed with the entry into force of the Royal Decree

870/2013, which aimed to regulate distance selling to the general

public, via websites, of non-prescription medicines for human use.

The principal aim of which was to grant legal certainty for the sale

of medicines via the internet, as well as to prevent the acquisition of

counterfeit medicines. The Royal Decree excludes from its scope

other healthcare products as personal care products, cosmetics or

infant food preparations.

In respect of the requirements for dispensing medicines via the

internet, the Royal Decree provides that:

i) Only duly authorized pharmacies open to the public are entitled

to carry out this type of sale;

ii) All sales have to be made by a qualified chemist with personalised

advice and from an open pharmacy (this is to say, that only the

dispensing chemists are able to sell medicines via the internet);

iii) The pharmacies which intend to sell medicines online have to

have communicated that decision in advance to the competent

authority;

iv) Pharmacy websites have to meet the specific legal requirements;

and

v) The medicines offered to the public must provide the legally

requested information.

Finally, in order to ensure that the final consumer can ensure they are

purchasing from a trusted website and avoid counterfeit medicine,

it is mandatory that any legal website in Spain shows the official

EU logo for the lawful online sale of medicines, as designed and

imposed by Regulation (EU) 699/2014.

Other legal obligations

The Royal Decree does not allow the final consumer to order any

medicine anonymously because the pharmacist is obliged to make

contact with the consumers before shipment and advise them on

the proper use of the medicine. However, the pharmacist’s obligation

may be replaced by a link to a website containing information related

to the ordered medicines.

In respect of the return of purchased medicines, the general rule is that

returning the delivered medicines is not possible. As an exception, the

pharmacist shall be obliged to accept the return of medicines and to

destroy them if the medicines are incorrectly supplied, the medicines

delivered do not correspond to what was ordered or if the medicines

have been damaged during transport. Additionally, the consumer shall

be entitled to a full reimbursement when the delivery time exceeds

over 50% of the time specified for the purchase.

Finally, pharmacists should create extensive records of all shipments,

maintaining these records for at least two years.

Conclusion

In conclusion, selling prescription medicines via the internet remains

expressly prohibited in Spain. It is expected that this scenario will

not change, as dispensing prescription medicines requires tight

regulation in order to control the flow of medicines, ensure the

correct and appropriate use of them and to allow for the protection

of the patient and a legal certainty.

As for the sale of non-prescription medicines, even if for some

time there was “some legal uncertainty” because the implementing

regulation required had not been developed, the current situation has

changed and Spanish Law now allows the sale of non-prescription

medicines under strict regulations, which guarantees that proper

advice is given to consumers by healthcare professionals.

Finally, despite a background of extensive EU regulation regarding

medicine for human use, harmonization between EU member states

on this issue is incomplete and many differences still exist between

member states. In light of the above, it would be desirable to develop

greater harmonisation, particularly in respect of sales to the final

consumer and including those purchased online.

Eduardo Buitron

Lawyer, Spain

Tel: +34 91 42 94 33 3

[email protected]

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December 2016

Pensions Issues for Life Sciences Newsletter –

September 2016

The UK Pensions landscape continues to change at a pace, both as

a result of new legislation and regulation and recent events. In this

article, we look at the impact of Brexit on pension schemes and some

key developments affecting trustees and sponsoring employers of

defined contribution (i.e. money purchase) pension schemes.

Recent developments

Brexit and pensions

Following the EU referendum result, it is likely to be some time before

the terms of the UK’s future relationship with the EU are known.

In the short term, there is likely to be considerable investment

volatility in light of the Brexit vote. The position will need to be

monitored carefully. Trustees of occupational pension schemes,

in particular, will need to consider quickly whether their scheme’s

investment portfolio remains appropriate for a post-Brexit world.

Scheme investments governed by the laws of another Member State

or contingent assets based in the EU will need particularly close

attention to ensure they remain appropriate and enforceable.

Also in the short term, Brexit is unlikely to have a significant impact

on the legal and regulatory framework for UK pension schemes.

However, it does open the door for UK legislation to deviate from EU

requirements in the future (for example, in relation to the funding of

defined benefit (“DB”) schemes, investment and scheme governance).

Also, without the influence of the ECJ in the background, UK case

law on matters previously the preserve of the EU, such as equal

treatment and TUPE, may start to take its own domestic direction.

The macro-economic impact of Brexit and its impact on individual

businesses is difficult to predict with certainty. It is likely to be

determined, to a large extent, by the nature of the UK’s ongoing

relationship with the EU as well as any trade deals that the UK enters

into with countries outside of the EU (such as the US and China).

Trustees of DB schemes need to be alive to any deterioration in the

financial strength of the business standing behind their schemes

and corporate sponsors need to be prepared to address trustees’

concerns in this regard.

The most pressing action points for corporate sponsoring employers

and trustees as a result of the Brexit vote are likely to be as follows:

• Corporate sponsors should assess the potential impact of Brexit

on their business and on their pension scheme and prepare

appropriate contingency plans for this.

• Trustees should consider the suitability of their investment

portfolio post-Brexit and what steps they can take to mitigate

the impact of continued volatility on investment markets on their

scheme.

• Trustees should reassess the strength of the financial covenant

standing behind their scheme in light of Brexit (including any

contingent security granted to the scheme) and take steps to

mitigate the risk of any material weakening in this.

• Trustees and corporate sponsors should consider the need to

send a communication to scheme members to reassure them

about the steps that they are taking to mitigate any risks to the

scheme arising as a result of Brexit.

Further information about Brexit can be found on our Brexit hub

(http://www.eversheds.com/global/en/what/publications/brexit/

index.page?&utm_source=website&utm_medium=homepagepromo-

image&utm_campaign=brexit).

Regulator’s DC Code of Practice and “how to” guides

The Pensions Regulator has issued a revised Code of Practice 13,

relating to money purchase pension benefits, which came into

effect on 28 July 2016. The new Code applies to trustees of all

occupational trust-based pension schemes with two or more

members which offer money purchase benefits, including:

• defined contribution (“DC”) (i.e. money purchase) schemes;

• DC sections within schemes that offer mixed benefits (e.g. a

scheme with both a DB and DC section); and

• money purchase benefits resulting from additional voluntary

contributions.

The new Code sets out the Regulator’s expectations of trustees

and what is required of them to comply with legislation, including

the most recent changes in law. The new Code is shorter than the

previous version, and it has been simplified, with an increased focus

on legislative requirements.

The Code covers issues such as assessing value for members,

designing and monitoring DC investment strategies and the need for

diversity on trustee boards.

The Regulator has also issued six “how to” guides to help trustees

implement the new Code and meet the new governance standards

in practice. Much of the material that might otherwise have been

included in the new Code is set out in these guides. Aside from the

obvious challenge of navigating around this guidance, one of the key

issues is that the line between practical suggestions and minimum

regulatory expectations is not always clear.

The Regulator also produced a “self-assessment template” tool to

help trustees assess their scheme against the standards in the new

Code. The Regulator has also issued a final updated compliance

and enforcement policy for occupational DC schemes, describing its

expectations for compliance with legislation and how it will enforce

the law.

It is clear that the standards expected of trustees of schemes with

money purchase benefits are rising, and trustees of such schemes

need to engage with the new Code and, where relevant, make any

required changes.

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The new Code can be found on the Regulator’s website (http://

www.thepensionsregulator.gov.uk/codes/code-governanceadministration-

occupational-dc-trust-based-schemes.aspx). Links

to the “how to guides” are in the section of the Code headed “The

purpose of this code of practice”.

Chair’s annual governance statement

Trustees of occupational pension schemes that provide money

purchase benefits must (except where the only such benefits are

Additional Voluntary Contribution benefits) produce an annual

governance statement signed by the chair of trustees, as part of their

scheme’s annual report and accounts. Broadly, this statement needs

to describe and explain how the trustees have discharged the new

DC governance requirements. The statement must be published

within seven months of the end of the scheme year.

The Pensions Regulator has already demonstrated that it is prepared

to fine trustees who do not comply with this requirement. In June

2016, the Regulator reported that it issued its first fine against trustees

for failing to produce a chair’s governance statement. The trustees

received the minimum mandatory £500 fine after they notified

the Regulator of the breach and quickly took action to prepare the

required statement.

More recently, in August of this year, a professional trustee company

was ordered to pay three £2,000 fines for failing to prepare annual

governance statements in respect of three separate schemes. The

maximum fine was imposed because the schemes had a professional

trustee and there were no mitigating factors.

Automatic re-enrolment

It is nearly four years since the automatic enrolment requirements

were introduced, and more employers are now approaching their

first automatic re-enrolment date.

The process for automatic re-enrolment is broadly the same as

the automatic enrolment process. However, there are some subtle

but significant differences that employers need to be aware of (for

example, employers cannot use postponement in connection with

re-enrolment).

There are a number of actions that employers need to take in

connection with their first re-enrolment date, including

• selecting the re-enrolment date;

• assessing who is eligible to be automatically re-enroled;

• deciding whether to apply new exemptions from auto-enrolment;

• testing payroll software;

• preparing re-enrolment communications; and

• submitting a declaration of compliance to the Pensions

Regulator.

For more information, please visit (http://www.eversheds.com/

documents/e-briefs/Pensions_speedbrief_Auto_enrolment_

update_10_June_2015.pdf).

On the horizon

Capping DC early exit charges

The UK Department of Work and Pensions (“DWP”) and the UK’s

Financial Conduct Authority (“FCA”) each issued proposals at the end

of May 2016 to introduce a cap (from April 2017) on early exit charges

imposed by providers of DC pension arrangements.

The proposed level of the cap is 1% for existing pension

arrangements, and nil for any new pension arrangements entered

into after the new provisions come into effect.

In relation to contract-based, personal pension schemes, the

obligation to comply with the cap is placed on the pension provider.

For trust-based schemes, the obligation will rest either on the

scheme’s trustees / managers or on service providers, depending on

whether the cap derives from the scheme’s rules or from contractual

arrangements entered into with third parties.

The DWP warns that trustees / managers must be vigilant to ensure

that excessive charges are genuinely capped, rather than simply

displaced.

More generally, the DWP invited interested parties to provide further

evidence (by 16 August 2016) on the application of such exit charges

in relation to occupational pension schemes, including how common

such charges are, how they are calculated and how they are imposed.

For further information, please visit (http://www.eversheds.com/

global/en/what/articles/index.page?ArticleID=en/Pensions/UK_

Pensions-Speedbrief-Freedom-and-choice-capping-exit-chargesfor-

DC-savers).

If you have any questions about what any of the above developments

may mean for you and your pension arrangements, or if you would

like any further information about them, please contact:

Richard Shelton

Office Location Head

Tel: +44 113 200 4847

[email protected]

Jon Walters

Partner

Tel: +44 161 831 8525

[email protected]

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Would you be fined if your employee was

burgled at home?

You may be surprised to know that the answer may

be yes. Whitehead Nursing Home in Northern Ireland

found this out to its cost, when the Information

Commissioner’s Office (“ICO”) fined them £15,000 as a

result of a security breach.

So why does this matter?

The ICO emphasised that the size of this fine reflects the small

size of the nursing home business involved. “A bigger organisation

experiencing a similarly serious breach should expect to receive

a much larger fine.” Currently the maximum potential ICO fine

is £500,000. From 25 May 2018, when data protection laws are

updated, it is expected that enforcement action will increase and

potential fines may be as large as the higher of 20 million euros, or

4% annual global turnover.

So what happened?

An employee took a work laptop home containing personal

information about fellow staff and their employer’s nursing home

residents. The laptop was then stolen during a burglary later that

evening. The details in the laptop did not relate to thousands of

individuals and only concerned 46 staff and 29 residents. The data

was not hacked, nor left on a train.

Despite this the Nursing Home who employed the staff member

affected and who had provided the laptop to them was found liable

for a serious breach of their data security obligations due to the break

in and theft.

So how can this be possible?

The details stolen with the laptop included data about staff sickness

absence and disciplinary matters, together with private information

about nursing home residents, such as date of birth, their mental, and

physical health and even their “do not resuscitate” status.

This health related detail is sensitive personal data and carries more

onerous care and security obligations than everyday personal

information. Similarly, the distress likely from extremely private

information, such as on disciplinary matters, falling into the wrong

hands should not be underestimated and would have been taken into

account by the ICO.

The real issue here was not that the laptop was stolen, nor that the

employee took it home, nor that it contained work personal data.

The key problem was that the device was unencrypted, facilitating

unauthorised access to the personal data. This despite the ICO’s

continual messaging over several years that mobile devices

containing sensitive personal data must be encrypted.

The ICO also found that the nursing home did not have any relevant

policies in place regarding homeworking, encryption use and the

storage of mobile devices - nor did it offer adequate training to its

employees regarding safeguarding personal information.

The Head of ICO Regions, Ken Macdonald said that the “nursing

home put its employees and residents at risk by failing to follow

basic procedures to properly manage and look after the personal

information in its care… Today’s fine shows we can and will act

against any organisation we feel is not taking seriously its duty to

look after the personal details it has been entrusted with. In a world

where personal information is increasingly valuable, it is even more

important to ensure the security of data is not overlooked.”

The ICO has previously taken enforcement action against

organisations to compel them to roll out a mandatory data protection

training programme for all staff; and to ensure policies and

procedures relating to data protection and information governance

are brought to the attention of all staff. Despite that, Mr Macdonald

further noted that, “…Our investigation revealed major flaws in the

nursing home’s approach to data protection. ... Whitehead Nursing

Home had totally inadequate provisions for IT security and procedure

and poor data protection training.”

So what next?

The ICO will expect all those in the sector to sit up take note and

make any necessary adjustments to avoid a repeat. More is expected

of the sector due to its trusted position handling the sensitive health

and medical related details of millions of individuals.

What else has happened?

The sector has continued to make headlines with another fine, this

time to a GP surgery in Hertfordshire. In this case, there was no

theft of personal data. Instead, the surgery was fined as a result of

complying with their data protection obligations responding to a

subject access request.

27

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December 2016

So why fine an organisation for responding to a subject access

request?

Unfortunately, when disclosing personal data in response to the

subject access request, the surgery also released third party personal

information to which the data subject was not entitled.

A patient’s ex-partner made a subject access request for the medical

records of the former couple’s son. The staff at the GP’s practice

responded with 62 pages of information, but these included the

woman’s contact details, as well as those of her parents and an

older child the man was not related to. The woman had asked the

GP practice to take particular precautions to safeguard her personal

information.

As a result of this breach, the ICO fined the GP practice £40,000.

The ICO found that the breach arose because the GP practice had

insufficient systems in place to protect the personal information

that it held and further, its staff had not received adequate training,

supervision, nor guidance about what could be disclosed or should

be withheld.

The ICO’s Head of Enforcement said, “there is no doubt that releasing

this information would have caused great distress to the woman, her

children and the rest of her family… In failing to ensure staff were

properly equipped to safeguard against unauthorised disclosures,

this medical practice placed a member of its team in the firing

line… It was unfair to expect this person to deal with the potentially

devastating fall-out created by sharing personal data wrongly. GPs

could have protected staff by providing proper support, training and

guidance. They did not do this.”

Liz Fitzsimons

Partner

Tel: +44 1223 44 3808

[email protected]

Candice O’Brien

Associate

Tel: +44 1223 44 3639

candiceo’[email protected]

What should you be aware of?

Individual data subjects are now able to bring compensation claims

for data protection breaches even where no financial loss has

occurred. The nature of personal information used in the sector and

its extremely personal and private nature, increases the likelihood

of distress arising from any breach and thus of claims being made.

Similarly, the regulator implying breach of employer responsibility in

this case, may lead to employment related claims by affected staff.

With a new Commissioner, the ICO is likely to take a fresh look at

compliance and enforcement from summer 2017 and, with the

direction of travel being enhanced data protection obligations and

fines, organisations should increasingly expect tougher and more

robust enforcement.

5 September 2016

28

Eversheds Sutherland (International) LLP - Simon Crossley, Adrian Toutoungi, Nadia Gracias, Cameron Forsaith, Gunther Meyer, Monika McQuillen, Dr. Tobias Maier, Magdalena Kotyrba-Hagenmaier, Tom van Wijngaarden, Michel Chatelin, Lucas Lustermans, Casper Rooijakkers, Teresa Bogensberger, Eduardo Buitrón, Richard Shelton, Jon Walters, Liz Fitzsimons and Candice O'Brien

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