On appeal of a claim for compensation of damages lodged by Elli Lilly and Company Korea (“Lilly Korea”) against Myung In Pharm Co. Ltd. (“Myung-In”), the Korean Patent Court found Myung-In liable for selling generic pharmaceutical drugs prior to the expiration of the patent term of the original pharmaceutical product, which reduced the pharmaceutical prices of the original pharmaceutical product in accordance with pharmaceutical pricing registration procedures, thereby causing Lilly Korea harm.

[Facts]

Lilly Korea is the licensee of “Olanzapine,” a treatment for disorders affecting the central nervous system, which is covered by Korean Patent No. 195566, expiration date April 24, 2011 (“the Olanzapine Patent”). Eli Lilly and Company Ltd. (“Eli Lilly”) is the licensor of Olanzapine. On or about 1998, Lilly Korea acquired the import approval from the Ministry of Food and Drug Safety (MFDS) for Zyprexa 2.5 mg (which contains Olanzapine), and has been selling the same since 1998. On March 31, 2010, Myung-In applied for pharmaceutical pricing registration to designate a drug price (set by the government for the purposes of coverage under the national health care system) for Neurozapine 2.5mg, which is the generic version of Zyprexa. The pricing application stated that Myung-In will start selling Neurozapine “after the expiration of the patent on Olanzapine (April 24, 2011).” On November 5, 2010, the Korean Patent Court found the Olanzapine Patent to be invalid for lack of inventiveness. Myung-In revised its application to state that it will start selling its generic version “immediately upon registration (December 6, 2010),” and Myung-In started selling Neurozapine 2.5 mg since January 2011, which was more than three months before the expiration of the Olanzapine Patent.

As a result of Myung-In’s launch earlier than initially stated in its application, on February 1, 2011, the Ministry of Health and Welfare (MoHW) reduced the price of Zyprexa covered by the National Health Insurance by 20 percent (the price limit on how much the government will pay as part of the National Health Insurance after introduction of a generic, hereafter, “Coverage Price”). However, the Korean Supreme Court reversed the Korean Patent Court decision and held the patent valid, which decision was finalized on December 21, 2012.

Shortly thereafter, Lilly Korea filed a new claim with the Seoul Central District Court for compensation of damages against Myung-In, arguing Myung-In’s sale of the generic product prior to the expiration of the patent on Olanzapine caused Lilly Korea harm. In that suit, the following were key points of contention: (i) whether Lilly Korea is an exclusive licensee; (ii) whether Myung-In’s conduct is illegal; and (iii) whether there is a causal relationship between Myung-In’s conduct and reduction in Zyprexa’s price. The District Court held in favor of Lilly Korea on all three issues but awarded only a minimal amount of damages. Both Lilly Korea and Myung-In cross appealed to the Patent Court, which has exclusive jurisdiction for appeals of IP related matters.

[Decision of the Patent Court]

The Patent Court mostly upheld the District Court’s decision on the three major points and awarded damages approximately threefold the damages awarded at the district court level. We summarize below the Patent Court’s reasoning for each of the key points of contention.

1. Whether Lily Korea Is an Exclusive Licensee

The Korean Patent Court stated that, in order to determine whether Lilly Korea’s expected revenues were illegally infringed by the reduction in the Coverage Price of Zyprexa, Lilly Korea must be an exclusive licensee of Olanzapine where only Lilly Korea has the right to use Olanzapine in Korea. On this point, the Korean Patent Court held that Lilly Korea indeed has the exclusive license from Eli Lilly to import Olanzapine into Korea and sell it for the following reasons: (i) the special relationship between Lilly Korea and the patentee, Eli Lilly; (ii) the background and purpose of Lilly Korea’s incorporation; and (iii) Lilly Korea’s de facto role as the exclusive licensee of Olanzapine in Korea, namely Lilly Korea’s marketing approval application for Zyprexa and Lilly Korea’s exclusive sale of Zyprexa in Korea, both of which have been permitted by Eli Lilly.

2. Whether Myung-In's Conduct Is Illegal

The Korean Patent Court considered the following factors in totality: (i) the nature of the pharmaceutical products market covered by the National Health Insurance system; (ii) benefits accrued by Lilly Korea due to its status as the exclusive licensee; (iii) the close relationship between Myung-In’s sale of its generic drug and its application for pharmaceutical pricing registration; (iv) the purpose of the notice by the MoHW, which requires a reduction in the price of the original drug upon the pharmaceutical pricing registration of a generic; and (v) general considerations, such as the balance of the respective interests of the litigants and the public interest. Upon such considerations, the Patent Court held that Myung-In knew that its pharmaceutical pricing registration and subsequent sale of the generic drug Neurozapine would reduce Zyprexa’s price, which, in turn, would harm Lilly Korea; applied for pharmaceutical pricing registration for Neurozapine and sold Neurozapine prior to the expiration of the Olanzapine patent with such knowledge, in order to establish a foothold in the applicable generics market before anyone else; caused the reduction of the designated price for Zyprexa; and thereby violated Lilly Korea’s legally protected right as the exclusive licensee. The Court held that Myung-In’s conduct is illegal because it not only harms the fairness and soundness of transactions, but also contravenes honest traditions or disrupts social order.

The Court further held that Myung-In’s conduct is presumed negligent pursuant to Article 130 of the Korean Patent Act (which stipulates, “A person who infringes a patent or exclusive license of any third person shall be presumed negligent regarding such infringement”) and such legal violation is not rebutted solely by the fact that the Korean Patent Court found the Olanzapine patent invalid before that decision was overturned by the Korean Supreme Court.

3. Whether There Is a Causal Relationship between Myung-In’s Conduct and Lilly Korea’s Damages

The Korean Patent Court recognized the causal relationship between Myung-In’s conduct and the harm suffered by Lilly Korea on the following grounds: (i) the minister of MoHW would not have reduced the Coverage Price of Zyprexa, but for Myung-In’s pharmaceutical pricing application and subsequent sale of its generic product; (ii) while the minister of MoHW, in principle, has discretion on whether to adjust the Coverage Price, an enforceable regulatory order titled “Criteria for Decision or Adjustment on Drugs” requires an adjustment of the Coverage Price to 80 percent, unless a prescribed exception applies, irrespective of the minister’s discretion, and drug prices have consistently been adjusted pursuant to this standard in practice; (iii) there were no other circumstances that would have led to the reduction of Zyprexa’s price; and (iv) Myung-In knew, or could have known, that when it filed a pharmaceutical pricing application and sold the drug immediately, the minister of MoHW would reduce the drug price of Zyprexa, which would harm Lilly Korea.

For the reasons above, the Korean Patent Court held that the damages shall be the amount of reduction in Zyprexa’s Coverage Price during the time the Coverage Price was reduced until the expiration of Olanzapine’s patent term. However, the Court limited Myung-In’s liability to 70 percent of the above amount in light of various circumstances (such as the fact that Myung-In’s sale was short and revenues were not that substantial and that the benefits of decreased drug prices accrued not to the benefit of Myung-In but of the patients covered under the National Health Insurance system) and the principle of compensation of damages based on sharing harm, as well as deducting the amount Lilly Korea would have paid as royalties.

[Lessons and Implications]

This is the first court decision that found a generic pharmaceutical manufacturer liable for damages suffered due to a decrease in drug price resulting from selling a generic drug after a pharmaceutical pricing application was validly filed but before the patent term of Olanzapine had expired. This case is also remarkable in that liability was found even though the generic drug manufacturer decided to launch the product earlier when the Korean Patent Court found Olanzapine patent to be invalid.

This decision also directly contradicts a decision by the Seoul High Court, which found no liability for a generic manufacturer under a similar fact pattern (2015Na2040348 Decision, dated Oct. 6, 2016, pending review by the Korean Supreme Court). Generic manufacturers sometimes launch their products before the patent on the original drug expires, when a court below the Supreme Court level holds the patent invalid, because generic manufacturers can boost sales through the “first in market” effect. This decision, which held a generic manufacturer liable for taking this approach, may lead to an increase in the number of cases dealing with similar facts.

The above Seoul High Court 2015Na2040348 decision is pending in the Korean Supreme Court. Likewise, the present Korean Patent Court decision will likely be appealed to the Korean Supreme Court, as well. Therefore, both originators and generic manufacturers will be paying close attention to the Korean Supreme Court’s forthcoming decisions.