Written with the assistance of HellerEhrman LLP.

The pharmaceutical industry has been scrutinised closely by competition authorities and courts in the US and Europe. Far from being one-off incidents, the investigations appear to be on the increase with the industry having to consider more and more whether its business practices represent a ‘patent misuse’, as that term is variously applied under the US and EU competition regimes. Some key developments from both sides of the Atlantic are considered here.

US developments

Reverse payments in settlements

The long standing historical tension between antitrust laws and patent rights in the United States continues to surface in the US pharmaceutical industry, particularly in the context of patent settlements between brand-name and generic drug firms. Those patent settlements commanding special attention by the courts and the Federal Trade Commission, one of two federal agencies responsible for enforcing antitrust laws, have been so-called ‘reverse payments,’ i.e. settlement payments flowing from the brand-name patent holder to a potential generic entrant (and alleged infringer) to delay entry of a competing generic version of the brand-name drug. Separate, yet inextricably related to the practice of reverse payments, are issues concerning the licensing of pharmaceutical patents outside the scope allowed by US patent laws, and the looming possibility of compulsory licenses, a remedy seldom sought or imposed in the United States.

The interplay between antitrust laws and pharmaceutical patent rights in the US often plays out against the backdrop of the 1984 Hatch-Waxman Act, enacted by the US Congress to incentivise generic drug manufacturers to produce the generic equivalents of brand-name drugs. The complex statutory mechanism created by Hatch-Waxman has, however, led to unintended obstacles that delay the entry of generic drug entrants. In particular, the statutory provision in Hatch-Waxman that grants a 180-day period of market exclusivity to the first generic entrant to challenge a patent for a brand-name drug, has encouraged reverse payments from the brand-name drug company to the first generic filer in order to delay the entry of other generic competition. While Hatch Waxman was amended in 2003 to address some of these ‘parking’ concerns, reverse payments are still occurring. As pharmaceutical patents often confer substantial market power, reverse payments remain a powerful incentive for brand-name firms to alter the competitive landscape.

Although reverse payments have been subjected to substantial judicial review, federal courts have not reached a consensus with respect to the legality of such payments under antitrust laws. For instance, while a 2003 decision by the Sixth Circuit Court of Appeals found reverse payments involving the drug Cardizem to be illegal per se under antitrust laws as a horizontal price fix and market allocation,1 the Eleventh Circuit Court of Appeals in the same year rejected a per se determination if such agreements did not restrict competition beyond the restraint that was inherent in the patent right itself.2 Restraints on competition that go beyond the potential scope or term of the patent tend to present significant antitrust concerns for US regulatory authorities and federal courts, even if arguably ancillary to the settlement agreement. For example, in the Cardizem matter, the settlement agreement further restrained the generic company, Andrx, Inc., from entering the market with a non-infringing product during the term of the agreement. This approach -analysing reverse payment agreements in the context of whether such measures exceed the scope of the patent monopoly - was also evident in a 2005 Second Circuit Court of Appeals review of such an agreement involving the anti-cancer drug Tamoxifen citrate.3 In that case, the court held that the settlement agreement was not unlawful because, among other reasons, it did not extend the patent monopoly by restraining the introduction of non-infringing products.

The Supreme Court has been cautious about entering the fray. In late 2006, it declined to review a decision by the Eleventh Circuit that found a reverse payment agreement between Schering-Plough Corp. and Upsher-Smith Laboratories, Inc. legal consideration for a license, and not an anti-competitive measure to keep generic KDur 20 off the market.4 In this case, the Eleventh Circuit relied on the fact that the designated entry date of the generic drug was prior to the expiration of the relevant patent, and the delayed activities were otherwise within the scope of that patent. The Supreme Court may only have temporarily side-stepped an antitrust review of reverse payments when it declined to review the Schering case, as the plaintiffs in the Tamoxifen citrate litigation filed a Petition for Writ of Certiorari in December 2006 asking the Supreme Court to review the Second Circuit’s decision. The question presented in the petition is worded simply: “Under what circumstances is an agreement by a brand pharmaceutical manufacturer (and patent holder) to share a portion of its future profits with a generic market entrant (and alleged patent infringer), in exchange for the generic’s agreement not to market its product, a violation of the antitrust laws?” It remains to be seen whether the Supreme Court will agree to hear the case. Should it do so, it will undoubtedly address the thorny issue of whether reverse payments deemed to be within the scope of the patent are a per se violation of U.S. antitrust laws or are otherwise anticompetitive under the rule of reason doctrine.

Compulsory licensing - a result of the eBay decision?

On a different front, the Supreme Court has rendered a recent decision that could have a dramatic effect on patent litigation in all industries, including the pharmaceutical industry. In a decision involving the online auction and shopping website eBay, the court reversed the long-standing, almost irrebutable presumption applied by the Federal Circuit that prevailing patent owners are entitled to a permanent injunction in patent infringement cases.5 Going forward, district courts have the discretion to grant a compulsory license in lieu of an injunction, historically a rare remedy in the patent context. Under the eBay ruling, a patentee seeking permanent injunctive relief against an adjudged infringer will have to meet the requirements of a traditional ‘four-factor’ test. That test requires a showing of irreparable injury, a demonstration that remedies such as monetary damages would be inadequate compensation for the infringement, a consideration of the balance of hardships between plaintiff and defendant to show that injunctive relief is warranted, and finally, a showing that public interest would not be disserved should the injunction be granted.

The extent to which this four-factor test affects remedies available in patent litigation in the US will depend on its application. In those cases involving traditional pharmaceutical patents - patents covering specific products and treatment methods involving such products - permanent injunctions are likely to be granted. However, in those cases involving widely-licensed patents for ‘research tools’ (for instance, methods and kits necessary for the discovery of gene function, receptor binding, etc.), or diagnostic patents for genetic screening, disease detection, etc., compulsory licenses may become more prevalent in the aftermath of eBay. As such, the US may, for the first time, embrace compulsory licensing of patented inventions often condoned in Europe but a sharp departure from the power to exclude inherent within patent rights.

European developments

In Europe, developments have brought mixed fortunes for the pharmaceutical industry. Unlike the US, there is no concept of market exclusivity for the first generic entrant to challenge a patent for a drug. Also, any settlement agreement does not need to be filed with the European Commission. Therefore, the issue of reverse payments in settlement agreements has come under less scrutiny in this jurisdiction. However, the industry’s interaction with regulatory bodies and national patent systems and the effect of such actions on generic competition have been scrutinised. Further, the pharmaceutical industry’s interaction with parallel traders has been reviewed. These developments are considered here.

EC Treaty Articles 81 & 82

The EC Treaty sets out the antitrust provisions in Europe. Article 81(1) prohibits restrictive agreements, that is, those which can prevent, restrict or distort competition within the European common market. Article 81(3) contains exemptions to when such restrictive agreements would not be considered anti-competitive. The applicability of Article 81(3) involves an assessment like the ‘rule of reason’ evaluation under US antitrust legislation, comparing the restrictive elements of the agreement with any procompetitive elements. Article 82 prevents the abuse of a dominant position within the common market.

Glaxo’s dual-pricing regime in Spain6

This case considered whether a dual pricing policy could contravene Article 81(1). Glaxo SmithKline adopted a policy with Spanish wholesalers where drugs not intended for the domestic market were sold at a higher price than those intended for the Spanish market. When the Commission looked at this regime, it held that such dual pricing agreements with wholesalers were contrary to Article 81(1). Glaxo’s contention that the arrangements fell within the Article 81(3) exemption was rejected. Glaxo appealed to the Court of First Instance (CFI).

The CFI ruled that the Commission had failed to consider Glaxo’s arguments on the applicability of the Article 81(3) exemption and ordered the Commission to reconsider whether the exemption applied.

Of broader significance is the CFI’s apparent treatment of the pharmaceutical industry as a unique sector. It recognised that, although there is a harmonised approach to the regulation of marketing pharmaceuticals across Europe, the approach to drug pricing was far from harmonised with each European jurisdiction applying its own pricing policy. These market distortions and pricing differentials are outside the pharmaceutical company’s control.

The industry sector will welcome this decision as it has been contending for many years that parallel trade only benefits parallel traders and not the end consumers. Their view is that dual pricing arrangements are pro-competitive improving distribution, promoting innovation and benefiting consumers. Meanwhile, parallel traders will be comforted as the CFI stated in this case that a dual-pricing policy could fall foul of Article 81(1). The debate will continue as the parties have appealed the CFI decision to the ECJ. Until that is resolved, pharmaceutical companies should continue to be cautious in adopting any dual-pricing policies.

Glaxo’s supply quotas in Greece7

The Advocate General recently considered whether imposing supply restrictions in agreements with wholesalers was anticompetitive. In this case Glaxo was supplying Greek wholesalers with quantities of drugs sufficient to satisfy domestic demands (rather than the larger orders placed by the Greek wholesalers). The issue of supply quotas in the pharmaceutical industry is not a new one for the ECJ. In 2003 it held that a unilateral policy by Bayer to limit supplies of the drug Adalat was not a restrictive arrangement under Article 81(1)8.

This time the issue was whether Glaxo’s actions amounted to an abuse of dominant position in contravention of Article 82. The aggrieved Greek wholesalers asked the Hellenic Competition Committee to rule on the issue. The committee referred the question to the ECJ. In the usual manner, the Advocate General of the ECJ issued a non-binding opinion. He stated that, given the unique nature of the industry sector, such a refusal to supply the ordered quotas was not an abuse of dominant position even if its effect is to restrict parallel trade within the European common market.

Unfortunately, the reference to the ECJ was not properly constituted in that the Hellenic Competition Committee is not an independent judicial body and, as such, cannot make references to the ECJ. Therefore, no judgment from the ECJ was possible. Nevertheless, the Advocate General’s opinion may have held some sway with the Hellenic Competition Commission. In September, it ruled that Glaxo could operate its supply quota system to limit the supply of drugs to its Greek wholesalers. Since then the Athens court has made a reference to the ECJ to obtain clarification on the point. The resulting ECJ guidance will be eagerly awaited.

The AstraZeneca decision9

Last year saw AstraZeneca’s interactions with regulatory authorities and national patent offices scrutinised by the Commission. The first activity under investigation was AstraZeneca’s policy of applying for supplementary protection certificates (SPCs) for patent term extension for its blockbuster drug Losec (omeprazole).

The length of patent term extension under an SPC is calculated by reference to the first marketing authorisation to place the drug on the market as a medicinal product in an EU member state. The maximum term of an SPC is five years. The date of patent expiry is critical - drug prices can plummet by as much as 80 per cent on first entry of a generic.

In applying for its SPCs in certain European jurisdictions, AstraZeneca submitted the date when the drug could be sold (the pricing reimbursement date) rather than the earlier date of the first marketing authorisation. The Commission investigated. AstraZeneca argued that the legislation governing applications for SPCs was, at the time, unclear especially in the case of Losec where transitional provisions applied. The Commission held that AstraZeneca had engaged in a ‘pattern of misleading representations’ to national patent authorities and such activity was an abuse of dominant position under Article 82.

The second activity under investigation was AstraZeneca’s selective withdrawal of marketing authorisations for Losec in Scandinavian jurisdictions. In these jurisdictions generics could launch after patent expiry unless the reference product (Losec in this case) was made unavailable. Therefore, by withdrawing the marketing authorisations for Losec in these countries, generic launch was prevented. The Commission held that this was also an abuse of dominant position.

AstraZeneca has appealed to the CFI

Although decided on its own facts, the Commission’s decision raises serious issues, not just for the pharmaceutical industry. Namely, when a company in a dominant position is acting within the legislation or within its reasonable interpretation of the legislation, it could still be found to be in abuse of its dominant position. In relation to the SPC abuse, the legislation was unclear at the time and AstraZeneca had legitimate arguments for its interpretation of that legislation. In relation to the marketing authorisation abuse, AstraZeneca was permitted to withdraw its marketing authorisations. Taking it one step further, for example, will competition authorities now investigate a dominant company’s broad patenting strategy and find that filing for patents which may eventually be found to be invalid is patent misuse and an abuse of a dominant position? We understand that the Commission is looking at least at one case where that is the allegation. Although there have been cases of this nature in the US, the AstraZeneca decision is the first time such interactions of the pharmaceutical industry have been considered an abuse of dominant position. The debate continues as to whether these dealings should be regulated at the level of the government body concerned through legislation rather than being an issue for competition authorities. In the meantime, dominant companies need to take care when interpreting grey areas of the legislation.

In conclusion, there have been significant developments in the US and EU affecting the pharmaceutical industry particularly with regard to what actions brand companies can legally take to control market entry or scope of generic competition. It is likely that this area will see further development in the coming years in both the US and EU.

As first published in Pharmaceutical Law Insight.