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
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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
adriantoutoungi@eversheds.com
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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
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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.
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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
adriantoutoungi@eversheds.com
Nadia Gracias
Associate - UK
Tel: +44 1223 44 3816
nadiagracias@eversheds.com
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.
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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
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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
adriantoutoungi@eversheds.com
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
cameronforsaith@eversheds.com
12
Showcasing a culture of bright ideas
Our quarterly life sciences newsletter
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
gunthermeyer@eversheds.be
13
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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
monika.mcquillen@eversheds.ch
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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December 2016
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
gunthermeyer@eversheds.be
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December 2016
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
tobiasmaier@eversheds.com
Magdalena Anna Kotyrba
Associate, Germany
Tel: +49 89 54 56 53 08
magdalenakotyrba@eversheds.com
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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
tomvanwijngaarden@eversheds.nl
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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
michelchatelin@eversheds.nl
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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
lucaslustermans@eversheds.nl
Casper Rooijakkers
Associate, Netherlands
Tel: +312 05 60 05 68
casperrooijakkers@eversheds.nl
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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
t.bogensberger@eversheds.at
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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
ebuitron@evershedsnicea.com
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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
richardshelton@eversheds.com
Jon Walters
Partner
Tel: +44 161 831 8525
jonwalters@eversheds.com
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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.
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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
lizfitzsimons@eversheds.com
Candice O’Brien
Associate
Tel: +44 1223 44 3639
candiceo’brien@eversheds.com
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
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