The EU Perspective: Lundbeck

Lundbeck held various patents relating to citalopram, both in respect of the substance itself and in respect of various production processes. When the substance patent expired, Lundbeck and the generic manufacturers entered into talks on whether or not certain alternative manufacturing methods infringed the process patents. Lundbeck then entered into settlement agreements with Alpharma (now part of Zoetis), Merck KGaA/Generics UK (now part of Mylan), Arrow (now part of Actavis), and Ranbaxy providing that, against a payment, these would not bring generic versions of citalopram on the market for the duration of the agreements. Because of the payment, such agreements are aslso referred to as "reverse payment" agreements.

The European Commission has found that these agreements violate the prohibition of agreements that restrict competition.

This case is part of a broader European Commission crackdown on the pharmaceutical industry and the European Commission is currently investigating similar cases. The question remains what this European Commission decision concretely means.

In its press release, the European Commission emphasizes that the agreements concerned were "very different from other settlements of patent disputes where generic companies are not simply paid off to stay out of the market" and indicated that it is monitoring settlement agreements in order to identify "those settlements which could be potentially problematic from an antitrust perspective - namely those that limit generic entry against a value transfer from an originator to a generic company."

The US Perspective: Actavis

A similar development is taking place in the US, where on 17 June 2013, the Supreme Court issued a 5-3 decision in FTC v. Actavis.  The court reversed an 11th Circuit decision dismissing antitrust proceedings brought by the Federal Trade Commission against innovator Solvay and various generic manufacturers for settling patent litigation through reverse payments agreements. The court ruled that while such are not per se unlawful, they may still violate antitrust laws and must therefore be assessed under a “rule of reason” analysis.

The dissenting minority (Chief Justice Roberts, joined by Justices Scalia and Thomas) declared that settling a patent claim cannot possibly result in unlawful anticompetitive harm if the patent holder is acting within the scope of a valid patent and therefore permitted to prohibit generic entry. In this view, a settlement can never violate antitrust law when it stays within the boundaries of the patent grant.

Commentary

The Commission's distinction between "normal" and "problematic" settlement agreements is difficult to apply in practice. Indeed, agreements whereby a generic company agrees not to bring a generic version of a certain medicinal product on the market can constitute the legitimate outcome of a settlement. Such a settlement usually aims at avoiding costly and time-consuming litigation relating to, inter alia, (i) the validity of the patents invoked by the innovator and (ii) whether these patents are actually infringed by the substances manufactured by the generic companies or by the processes that these companies apply. While leaving the option open for such settlements, the decision significantly increases legal uncertainty in this area, as companies no longer can exclude that, with hindsight, the European Commission will take the view that a certain settlement in fact restricted competition and therefore justifies the imposition of a fine. An element that complicates the individual competition assessment is that, by their very nature, settlement agreements restrict competition in that, in order to ward off litigation, generic companies accept to respect the application of certain patents or IP rights that they would otherwise have contested and therefore voluntarily agree to restrict their competitive behaviour. Such a settlement may also contain, on legitimate grounds, a value transfer. The concrete assessment is therefore likely to focus on the question whether the patent infringement case which an innovator would have brought in the absence of an agreement is in fact serious enough to justify a settlement.

The downside of this development is that both innovators and generic companies will probably become more risk adverse in contemplating patent litigation settlements. Patent disputes will therefore increasingly be fought out in the courtrooms, resulting in a significant increase in transaction costs for both sides of the industry.

The Supreme Court decision gives more guidance, but still seems to fail to give sufficient importance to the strength of the patent claims involved in assessing whether a settlement is compatible with competition law.

The Commission's press release can be found here. The US Supreme Court's judgment in FTC v. Actavis can be found here.