On June 19 2013 the European Commission imposed fines totalling €146 million on Lundbeck (€93.8 million) and a number of generic companies (€52.2 million) for entering into alleged pay-for-delay patent settlement agreements. The press release announcing the fine was frustratingly short on detail and long on rhetoric. It is likely to be several months before the non-confidential version of the final decision is made publicly available and only then will the commission's theory of harm be fully understood.
In imposing a fine at the end of a 10-year investigation into conduct that has not been previously condemned - and on the basis of what appears to be a subjective assessment of the strength of the disputed patents - the commission has not only created considerable legal uncertainty, but also undermined confidence in the patent system.
Generic manufacturers threatened entry when the patent protecting the molecule of Lundbeck's blockbuster anti-depressant Citalopram had expired, but certain manufacturing processes remained patent protected. The validity of Lundbeck's process patents does not seem to have been in question.
On the merits of Lundbeck's subsequent patent settlement agreements, the European competition commissioner said:
"Lundbeck did not prevent market entry by successfully enforcing its patent rights; rather, it simply paid other companies so that they would not compete, giving them the equivalent of what they would have earned if they had entered the market. This means they shared the monopoly rents among themselves: one internal document even speaks of this group of companies as a 'club' and refers to 'a pile of dollars' being shared among participants."
'Pay-for-delay' deals are now classified as severe competition law infringements. Worryingly, the commissioner considered that "once the patent over the molecule has lapsed, price competition between the pharmaceutical companies that invented the original medicine and the generic makers plays a crucial role". The commissioner concluded that:
"Paying competitors to stay out of the market at the expense of European citizens has nothing to do with the legitimate protection of intellectual property: it is an illegal practice and the Commission will fight against it."
It would be nothing short of an outright attack on the patent system if the commission were to disregard the ability of a patent holder to invoke its process patents to prevent generic entry. This seems unlikely, but publication of the decision is required for clarity.
Reading between the lines, the allegation appears to be that the generics could have got around Lundbeck's process patents and come to market without infringing them. That is a complex issue and something that Lundbeck is likely to contest vigorously. Nonetheless, if there were clear evidence that it was possible to design around Lundbeck's process patents, then there would be a valid argument that in preventing non-infringing generic entry, the settlement agreements went beyond the scope of exclusivity conferred by Lundbeck's process patents. In such a scenario, there is undoubtedly a role for competition agencies to intervene.
In Federal Trade Commission (FTC) v Actavis, the US Supreme Court ruled on June 17 2013 that patent and antitrust policies are both relevant in determining the "scope of the patent monopoly" in the context of assessing patent settlements involving payments to generics. The European Commission evidently agrees.
However, the commission's approach diverges markedly from that of the Supreme Court in the standard of review applied to 'reverse payment' settlements. In the United States, the FTC has the burden of proving that the harm outweighs the benefit. The Supreme Court requires that the US agencies conduct a full rule-of-reason analysis weighing the restrictive and beneficial effects of the agreement against a full assessment of the facts before reaching a conclusion. In the European Union, the defendant has the burden of proving that the benefit outweighs the presumed harm.
The commission, acting as judge and jury, has decided on a near per se approach - or in other words, that agreements of this nature should be presumed anti-competitive by object. In so doing, the commission has granted itself a free pass. The notion of an object restriction is nebulous. Offending conduct which may potentially have a negative impact on competition is presumed restrictive of competition, with the burden of proof on the parties to demonstrate that any restrictive affects are outweighed by verifiable efficiencies likely to be passed on to consumers - and this without the commission having to trouble itself with any analysis of whether the restrictive agreement actually had any negative effects in the market.
This anti-competitive presumption is precisely what the FTC sought in Actavis, but the Supreme Court refused to grant.
The European courts have ruled consistently that the establishment of an object restriction requires:
- an assessment of the content of the agreement;
- its objectives; and
- the economic and legal context of which it forms a part.
In that context, the commission must take into consideration the nature of the goods affected, as well as the real conditions of the functioning and structure of the markets in question. In Lundbeck, it would appear that the commission ignored the economic and legal reality, which can be summarised as follows:
- Patent settlement agreements in the pharmaceutical sector are a symptom of the weaknesses of the current IP enforcement regime in Europe, which is highly fragmented and inefficient.
- Patent disputes are often litigated in multiple jurisdictions and are complex and costly. The outcomes are something of a lottery and often contradictory.
- Any infringement, invalidity counterclaim or revocation action may be subject to diverse national rules. Effective injunctive relief may or may not be available.
- Generic launch at risk in just one country can cause irreparable harm to the extent that it has an irreversible and immediate effect on the reimbursement price of a product. Even if the patent holder ultimately prevails in upholding the validity of the patent, the reimbursement price will not rise to the level of pre-generic entry.
- That lower reimbursement price in one market can have a magnified knock-on effect where it is included in other countries' international reference price systems. Quantifying those international losses is difficult; and seeking their inclusion in a national judge's assessment of damages is next to impossible.
These stark realities mean that it is entirely rational for parties in Europe to settle patent disputes on terms which involve some form of (even substantial) value transfer.
Three dissenting US Supreme Court justices rejected a regime "where courts ignore the patent and simply conduct an analysis of the settlement without regard to the validity of the patent". This is the correct approach, but one which the commission regrettably failed to follow.
Patent settlement agreements are efficiency enhancing and legitimate when there are bona fide grounds for dispute. The fact that they may involve a value transfer says nothing about the validity or strength of the disputed rights. Circumstantial evidence regarding profits to be gained by generic delay ought to have no role in the debate either, unless the disputed patent has been obtained fraudulently or the settlement includes restrictions that exceed the scope of the patent.
The patent system, for all its imperfections, should remain the only forum for adjudicating on the merits of patents. Regulators and courts on both sides of the Atlantic have chosen to impose an overlay of competition law scrutiny favouring the static, short-term goal of achieving immediate healthcare savings. What is needed is a dynamic view that is mindful of the longer-term implications for research and development spend, patient health and competitiveness.
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