Wragge & Co's first analysis of the EU Commission's preliminary report on the pharmaceutical sector looked at the regulatory issues covered by the preliminary report. The IP team now moves on to consider the patent-related practices the preliminary report focused on.

Many of the practices that concern the EU Commission are common to other patent intensive industries. Therefore, whether or not the EU Commission's concerns relating to the pharmaceutical sector are justified, the relevance and possible implications of this preliminary report may stretch well beyond it


In 1974 the European Court of Justice (ECJ)[1] clearly set out the balance to be struck between patent rights, which although monopolistic are to be tolerated due to the public interest which they serve (incentive to innovation) and the fundamental principle of the freedom of movement of goods within the EU community:

"[under the] provisions in the [EEC] Treaty relating to the free movement of goods and in particular article 30 [now article 28] quantitative restrictions on imports and all measures having equivalent effect are prohibited between member states.

By article 36 [now article 30] these provisions shall nevertheless not include prohibitions or restrictions...justified on grounds of the protection of industrial...property.

Nevertheless it is clear from this same article...that whilst the treaty does not affect the existence of rights recognized by the legislation of a member state in matters of industrial property, yet the exercise of these rights may nevertheless depending on the circumstances, be affected by the prohibitions in the treaty.

Inasmuch as it provides an exception to one of the fundamental principles of the common market, article 36 [now article 30] in fact only admits of derogations from the free movement of goods where such derogations are justified for the purpose of safeguarding rights which constitute the specific subject matter of this property.

In relation to patents, the specific subject matter of the industrial property is the guarantee that the patentee, to reward the creative effort of the inventor, has the exclusive right to use an invention with a view to manufacturing industrial products and putting them into circulation for the first time, either directly or by the grant of licences to third parties, as well as the right to oppose infringements..."

This core statement from 1974 was made in the context of a pharmaceutical patents case (although it concerned parallel imports rather than generics) but applies to all types of patents.

The Pharmaceutical Sector Inquiry

In January 2008, the EU Commission instigated an inquiry into the pharmaceutical sector because of its concerns that originator companies may be using practices, including many involving the patent system, in a possibly unjustified way. The result of these practices according to the EU Commission is that "competition may be restricted or distorted" and generic entry to the market blocked or delayed.

Again the practices identified by the EU Commission are far from confined to the pharmaceutical sector and therefore all those in patent intensive industries should take note of this development.

The preliminary report was issued on 28 November 2008. Throughout it, the EU Commission is at pains to point out that this initial document does not make any conclusions as to the compatibility with competition law of any of the "toolbox" of practices and strategies it has identified that individual originator companies have adopted in order to maximize or continue their "revenue streams".

Although the preliminary report purports not to draw conclusions at this stage, the EU Commission is concerned that the identified general patent-related practices are serving to extend originators' period of exclusivity in the market beyond what is justified to preserve the specific subject matter of their patent rights. Indeed the European Commissioner for Competition Policy (Neelie Kroes) in her speech on the preliminary report, highlighted patent clustering, the large number of patent litigation cases and patent dispute settlements as the "most damaging practices which delayed or blocked market entry of competitors".

She has made her view that competition is being deliberately distorted in this sector very clear –

"What could summarise our concerns better than the internal strategy document of a large originator company. It reads: "We identify options to obtain or acquire patents for the sole purpose of limiting the freedom of operation by our competitors... You will not be surprised if I tell you that the Commission will not hesitate to open antitrust cases against companies where there are indications that the antitrust rules may have been breached".[2]

Again in her words the EU Commission had concluded that the industry was not operating in the way that it should and that the EU Commission had picked up "the trail of the scent".

The so-called "toolbox"

Secondary patents, patent clusters, evergreening and defensive patents

What does the EU Commission mean by these terms?

What is a secondary patent? In the pharmaceutical context "Patents covering new active ingredients can also be referred to as "primary", "basic" or "compound" patents. Patents covering products containing active ingredients already covered by a primary patent, or covering new production processes for the production of active ingredients already covered by a primary patent, are sometimes referred to as "secondary patents"."[3]

What is a patent cluster and what is its purpose? "A patent cluster is aimed at ensuring either "exclusivity at least until the end of the patent protection period of the base Patent. [The cluster is formed by the originator company filing] a multitude of [secondary] patent applications (on process, reformulation, etc.) protecting the product in addition to the base patent with the aim of creating several layers of defence...Thus where generic companies might manage to invalidate the base patent before its regular expiry they still cannot enter the market, if the originator company has succeeded in creating a multilayered defence or other patents surrounding the product". Alternatively a patent cluster may be obtained "towards the end of the protection period of the base patent, with the aim of keeping generics off the market beyond expiry of the first patent..."[4]

What is evergreening and what is its purpose? A follow-up invention or second generation product is patented to which it is intended patients will be "switched" by promotion, before the expiry of the base patent; often by removing the base product from the market before the end of the period of protection and therefore before a generic alternative has become available.[5]

What is defensive patenting and what is its purpose? Applications for "defensive patents ... usually refer to inventions which the applying company considers to have little or no prospect of being developed and/or commercialised [by it] and/or which, once granted, the company holds primarily to protect itself against actual or potential competition". Furthermore "Once the [defensive] patent applications have been published and thereby become public knowledge, the subject matter of the application will not be of development interest to other companies even if the applications are subsequently withdrawn, as they would not be able to get patent protection for their development if it has already been anticipated by the first patent application. Thus companies may achieve the aim of preventing thedevelopment of a new competing product by gaining an enforceable right on the one hand and by creating prior art on the other".[6]

What potentially anti-competitive practices did the EU Commission identify?

Evidence of clustering and evergreening with weak secondary patents

The preliminary report made statements that:

"the majority of granted patents (or applications) held are for a small proportion of the 219 INNs (The International Non-Proprietory Name for pharmaceutical substances of which 219 were selected for review during the enquiry). For example, the top 20% of INNs (by total number of patents granted and pending applications) account for 60% of all patents and applications, whilst the top 50% account for 90%." – [evidence of patent clustering around blockbusters][7]; and

A clear trend in the case of the top ten INNs for companies to file significant numbers of patent applications well after the first product launch, in particular immediately before or after the primary patent in the portfolio expires" – [evidence of patent evergreening around blockbusters][8]

Comment: To many these findings will be unsurprising. They demonstrate that the originator companies are concentrating their efforts on strengthening and / or prolonging their exclusivity in respect of those products which are most profitable for them at the point where the need to maintain that profit stream has become most pressing. The question is whether this patenting activity - which is undoubtedly and admittedly aimed at managing the effects of competition (by their nature, patents are intended to exclude others from competing, without a licence, with products or processes which fall within the patent's claims) is legitimate or abusive.

The clear message from the authors of the preliminary report is that it is the latter; that many of the patents involved in these activities are invalid and those that applied for them knew this was so. The preliminary report quotes from originator company documents to support this view:

"Clustering – protecting the companies (sic) products and processes...Clustering involves three components... - Broad Scope...- Maximizing Patent Term through innovation.[9]

To maximize patent coverage on our commercial products, patent applications will also in general be filed to cover any novel potentially commercially important aspect of products such as processes, formulations, additional pharmaceutical or other indications and salts/solvates/physical forms (so called 'secondary' or 'subsidiary' patent protection).[10]

Purpose: Establish an effective barrier to generic competition by extending the term of the existing compound patent and by filing patents on further inventions that last beyond the expiry of the compound patent...The objective [of scope of patent claims] is to secure an optimal competitive position for [our company's] products in the market by blocking competitors."[11]

However in the light of the wording we have placed in bold it is difficult to see what concerns the EU Commission could justifiably have (defensive patenting strategies are discussed further below).

The EU Commission also cites quotes from originator company documents which it believes indicate "doubt as to the inventiveness and strength of their patents" from the originator companies themselves –

"Some of those patents are inevitably more vulnerable and more likely to be challenged [...]- Strategy – better to have patent which might not be "rock solid" than no patent. All patents and applications create a hurdle/problem for a competitor [...][12]

Inevitably there will be patents covering products on the market that can be, and will be challenged [...] The strategy today is to try and provide a solid protection for the substance (has a limited time though) and a portfolio protecting different aspects of product providing extended protection both in brea(d)th and time but inevitably less solid and robust."[13]

However these quotes may be understood as merely acknowledging that incremental innovation, by its very nature, always involves a smaller step forward from the prior art. It is hence "inevitably" more vulnerable to challenge (particularly obviousness attacks). These quotes are far from an admission that applications are made for knowingly invalid patents –being aware that such patents "might not be rock solid" is a great distance away from that.

If around 5% of judges' decisions on validity conflict from country to country (as the preliminary report has found) then this illustrates how difficult a task it can be to assess whether a patent is valid or not. Many if not most patent applications are on or near the borderline of validity. Where then is the evidence to suggest that originators are filing applications for patents they know or at least should have known to be invalid?

Small steps forward can, of course, be inventive. Further incremental improvement is often practically or commercially very significant and brings with it large consumer/patient benefits – e.g. a new salt form can dramatically improve the efficacy or improve the side effect profile of a drug.

A good example of an arguably incremental product which has recognized benefits and has been held to be inventive is Levofloxacin. The Supplementary Protection Certificate (which will not expire until 19 June 2011) for this pharmaceutical was found to be valid by the UK High Court following a challenge by a generics company[14]. Levofloxacin is frequently prescribed for treating a wide range of infections (such as pneumonia and urinary tract infections). It has shown to have antimicrobial activity of about twice that of the prior product; Ofloxacin (a racemic compound) along with significantly less toxicity. Levofloxacin is the (-) enantiomer of Ofloxacin.

Further if originator companies are not aware and it is not clear that any one of their patents is spurious rather than valid, then how can they be at fault for attempting to enforce it? As Jacob LJ has stated:

"...it would be seriously dangerous to have a rule that applying for or seeking to enforce a patent of doubtful validity was a violation of competition law: most companies in the world would be guilty on that basis. Courts are the basic places for deciding on the validity of rights – to punish someone for going to court may involve conflict with Art. 6 of the European Convention on Human Rights."

Evidence that originators are playing the withholding applications game?

There is a suggestion within the preliminary report that in relation to the making of applications "timing is of crucial importance" and originator companies are tactically holding back incremental innovation and only filing secondary patents just before the base patent's expiry. The evidence given in support of this is that statistically there is significant patenting near the expiry particularly of "blockbuster" base patents. However, rather than deliberate withholding, this may simply reflect that there is a pressing financial incentive to innovate incrementally at that point, which was less pressing earlier. The only originator evidence cited for there being such "a game" was actually a statement saying it shouldn't be played, as the risks of doing so were too high:

"Don't play games in patenting new salt forms too late, the generics are starting earlier and earlier. Get claims on key intermediates that cover a number of routes."[15]

Comment: If the secondary patent relates to a genuinely innovatively improved product - isn't a further monopoly justified? Market entry by generics and originators (that do not make use of the incremental innovation) will not be impeded.

Note for instance the recent Ratiopharm GMBH v NAPP Pharmaceutical Holdings Ltd [2008] EWHC 3070 (Pat) (16 December 2008) case in the UK in which a secondary patent was held valid but not infringed. The patents in issue in that case were not concerned with the discovery of the drug (oxycodone) which occurred in 1916, rather they were concerned with a slow release formulation.

However, in practice, as the preliminary report notes, where the original product was "evergreen-ed" - withdrawn from the market before patent expiry as soon as the switch to the product protected by the secondary patent was made - the market may have got used to and prefer the "improved" version. This would decrease the ability of generics companies to persuade a switch back to a generic version of the old product (absent the "improvement"). This "new improved" marketing tactic to retain brand loyalty does not appear to be specific to the pharmaceuticals industry, nor is it necessarily problematic.

Furthermore, as reflected in the preliminary report, more and more generics companies are also filing their own secondary patents – so this practice is found in the "toolboxes" of both sides.

Evidence of filing and withdrawing patent applications?

The preliminary report notes that in relation to "patent applications for prescription medicines for human use filed at the European Patent Office (EPO) between 2000 and 2007 with the originator company as sole applicant. In 50% of the cases, no decision has yet been reached, 17% were granted a patent, 31% of applications were withdrawn and 2% were refused"[16]

Comment: As patents applied for increase legal uncertainty for those wishing to compete, a practice of filing knowing/suspecting that the application is later going to be withdrawn or even being cavalier as to whether or not the application will be withdrawn is undoubtedly problematic – if it exists.

The problem is the data given in the preliminary report merely states the number of withdrawals – it does not delve any further into the reasons for those withdrawals. Legitimate reasons could include further research revealing that the compound would not be a viable pharmaceutical due to safety issues or reprioritisation within the company concerned. If the EU Commission does regard this as a real concern then it is very surprising that such an investigation does not appear yet to have been untaken.

Patent-related threats

The preliminary report notes that originator companies send "warning letters" to generics companies and health authorities ...[and] it is not uncommon for originator companies to start sending letters to doctors"[17]. Further "a significant number of letters even mention the possibility of damage claims against doctors and pharmacists prescribing/dispensing the generic product"[18].

Comment: Warning letters are an essential first step to patent enforcement. However they can be problematic if those that receive them react to them and there is no intention to follow through with proceedings. It is for this reason that in the UK the action for "groundless threats" was developed where groundless threats of proceedings, other than in respect of making the patented product, are made. An EU-wide groundless threats action may help to alleviate this problem. However the preliminary report provides no real guidance as to how widespread these practices are in the pharmaceutical industry other than referring to having obtained "many" examples of such letters.

The preliminary report does refer to a case in Germany in which;

"an originator company reported that it had sent about 164,000 letters concerning one product in a relatively short period: approximately 84,000 to doctors about the new formulation, approximately 60,000 to doctors about the terms of reimbursement and approximately 20,000 to pharmacies about the terms of substitution".

However it provides no details at all of what was actually said in any of these letters. More significantly, it provides no indication whatsoever as to whether this example was typical of many or an isolated instance[19].

The Preliminary report's findings on patent litigation

Infringement actions

The EU Commission sees patent litigation, and threats of the same, to be another means by which originator companies seek to distort competition. The preliminary report quotes an originator company document - describing the statement as setting out the position "bluntly" –

"[...] we will legally exploit all opportunities to get generics out of the market."[20] Again however the originator company's concern to act legally is emphasised.

Nevertheless the preliminary report concludes that;

"in certain cases, when enforcing patent clusters and/or divisionals, an originator company may bring numerous patent infringement actions against a generic company in several Member States on each supposed infringed patent, even where the originator company does not believe to have a chance of being successful."

The supporting evidence in the preliminary report is the following originator company quotation–

"Our strategy is clear. We want to send a signal (by applying for interim injunctions well knowing that we will not be granted a ban) that we do not accept early [generic] entry and then later we withdraw everything."

Comment: It is understandable why competition authorities may view this as an admission of abuse of the court system. In the UK, failure to disclose the intention to "withdraw everything" would be breach of the obligation of full and frank disclosure if the injunction was obtained ex parte. However this is the only evidence provided to support the wide allegation made. The tactical use of an inequality of arms is a perennial problem of any court system in any industry.

The problems with the present system of patent dispute resolution have been discussed above. The high cost of such litigation is seen as being easier to bear by large originator companies increasing their ability to use it as a tool to overcome smaller generics. However it is also interesting to note from the preliminary report that generics companies choose to litigate mostly in the UK, perhaps due to the reputation of its courts for being the most thorough in their examination of a patent's validity. This is despite the UK's reputation for also being one of the most costly jurisdictions.

Interim injunctions

Interim injunctions are singled out by the preliminary report as being a powerful weapon in the armoury of originator companies. This is especially so, as the results of an interim injunction hearing are more likely to be in the originator companies favour than the results of a full trial on the merits of a patent infringement claim. Further the preliminary report notes that the ban such an injunction imposes lasts on average 18 months (taking into account the wide differentials in duration between the Member States looked at). The preliminary report notes that originator companies made 255 requests for interim injunctions from 2000 - 2007, of which 112 (44%) were granted[21]. This contrasts with the 38% of patent infringement cases won by originator companies in which final judgment was given[22]. The difference of 6% does not seem to be very high, certainly not enough to justify a conclusion of abusive behaviour.

It should also be noted that applying for and obtaining an interim injunction can seriously backfire, at least in the UK. In the case of Les Laboratoires Servier & Anor v Apotex Inc & Ors [2008] EWHC 2347 (Ch) (9 October 2008) obtaining an interim injunction for a patent that was later found invalid, resulted in a substantial award of damages (over £17 million) being made in favour of the generic company under a cross-undertaking in damages.

"Clearing the way"

Generics companies can choose "to clear the way" as the UK courts put it by making an earlier application to revoke the patent or for a declaration of non-infringement before exposing themselves to an infringement action.

Patent clusters make properly clearing the way more difficult. However an innovative form of declaration developed by the UK courts (but not mentioned by the preliminary report) may provide generics companies with a further option in this respect. In Arrow Generics Ltd & Anor v Merck & Co, Inc [2007] EWHC 1900 (Pat) (31 July 2007) the generic company obtained a declaration in effect that, its product was obvious (as at a certain date) so to the extent that it fell within the scope of any patent granted or yet to be granted (with the same or later priority date), that patent was invalid.

However, even if this possibility were available across Europe, "clearing the way" early on may still be unattractive to a generics company. Its profit is maximized by being the first and only generic in the market for as long as possible. Accordingly it may not want to rehearse its arguments as to why it thinks the patent is invalid or as to how it has "designed around" it before it chooses to enter the market "on risk". If it does it may encourage other generics to follow suit quickly.

Defensive patenting

The preliminary report notes that defensive patenting is generally a strategy designed to limit competition of competing originator companies rather than generics companies. In the section of the preliminary report dealing with originator to originator competition several documents in which originator companies refer to their defensive patenting strategies are cited including the following which was singled out by Neelie Kroes in her opening remarks as particularly concerning-

"We identify options to obtain or acquire patents for the sole purpose of limiting the freedom of operation of our competitors [...]"

The EU Commission regards this practice as closely related to the "decline in innovation as measured by the number of novel medicines reaching the market" which was one of the reasons given for the launch of the inquiry[23];

"...examples in the report show that 'defensive patenting 'tactics are being used by originator companies to shield themselves against competition, rather than genuinely protect innovation.

In total, the samples investigated in our inquiry revealed at least 1,100 instances across EU Member States where the patents held by an originator company might, for example, be infringed by a medicine and/or an R&D programme of another originator company. This overlap means originator companies can find important research activities blocked, undermining the innovation process in the industry."[24]

Comment: One possible response to this issue would be to re-design the compulsory licensing system for pharmaceutical patents that have not been worked. This would address the legal obstacle that such patents place in the way of competing companies who may wish to exploit the development. The problem with this will of course be determining the time period after which the licence could be applied for and the criteria to be applied. Any such system would have to take into account evidence of efforts that have been made by the patentee towards getting to the market, however prolonged, so as to apply only to truly defensive patents. However a compulsory licensing arrangement is very unlikely to provide the necessary incentive to an originator company to embark on the extensive research and development required to overcome the regulatory hurdles. Generally only exclusivity will provide the necessary incentive.

The key issue

The key issue appears to be patent quality. However, although it is unavoidable that invalid patents are sometimes granted in all industries, this is not something that can be wholly resolved by better patent examination at the offices, as some have suggested; it is really an issue that can only be addressed by specialist patent courts with the benefit of expert evidence etc. For example in the Les Laboratoires Servier & Anor v Apotex Inc & Ors [2008] EWCA Civ 445 (09 May 2008) case where the secondary pharmaceutical patent was held to be invalid and "very plainly so", Jacob LJ noted that:

"There are [cases] where the Patent Office examination is seen to be too lenient. But this is not one of them. For simply comparing the cited prior art ('341) with the patent would not reveal lack of novelty and probably not obviousness. You need the technical input of experts both in the kind of chemistry involved and in powder X-ray diffraction and some experimental evidence in order to see just how specious the application for the patent was. The only solution to this type of undesirable patent is a rapid and efficient method for obtaining its revocation. Then it can be got rid of before it does too much harm to the public interest".

Other than in the clearest cases where there is in effect a confession that a blatantly and knowingly bad patent was applied for or enforced, it is difficult to see how this specialist, highly technical and complex issue could be adequately addressed by the competition authorities either.

When considering the issue of patent quality, the Organisation for Economic Co-operation and Development firmly concluded for "several reasons, such as a lack of relevant technical expertise and limited resources, it does not appear to be prudent for competition authorities to assume responsibilities related to the initial review of IP applications."[25]

The same of course applies to reviewing the validity of existing patents.

Generics companies are often the only ones with a direct interest in challenging the patents of originator companies (although originator companies are increasingly challenging each others) but there are problems with the systems of challenge which can act as a disincentive.

As the preliminary report acknowledged, all sides recognized the need for a community patent and a centralized patent litigation system to decrease the costs, increase the speed and increase the consistency of patent dispute resolution.

While the problems within the current court system continue (cost, delay, complexity and inconsistent results), generics companies (who also make decisions based on their own revenue streams and commercial risk) will understandably frequently decide it makes more sense for them to settle with an originator, rather than proceed with a challenge against a bad patent (however confident they may have been of their eventual success). They will make this decision irrespective of the interests of national health authorities and the public.

Such settlements were also the subject of the preliminary report's scrutiny. However, if it is in the public interest for generics companies to be encouraged to persist with strong legal challenges then the most effective way to ensure this would be by tackling the disincentives to proceeding with such challenges inherent in the court system.

Where do we go from here?

A Community Patent and/or the central European Patent Court?

Unfortunately one thing which everyone agreed would be helpful, does not appear to be likely to occur in the short- or medium-term future.

Progress on the Community patent and/or the European Patent Court has again stalled indefinitely. The French Presidency failed to get Member States to agree on a common position on a Community patent and/or a European Patent Court at the Competitiveness Council on the 1 December 2008 in the light of "political obstacles". The EU Council Press Release noted that: "discussions would have to continue during the incoming Presidencies with a view to finding effective solutions...". However, the Community patent does not appear to be a priority of the new Czech Presidency, which has set economic recovery, energy and external relations as its main three points of focus. The Swedish, who will take over the presidency in July 2009, are not expected to push hard on this subject either. As for the Spanish, who will hold the following six-month presidency, they are known to be rather opposed to the current proposals. Against this backdrop, the Community patent proposal might be put on hold for quite some time.

Differentials in the severity of the problem between Member States?

An issue which was far from adequately addressed within the preliminary report was whether the identified concerns differed in severity between Member States. Such variations may reveal the methods of dealing with the issues identified, that are most likely to be effective in the absence of a Community patent system. Is the pharmaceutical market operating more as the EU Commission would wish in some Member States than others and if so, why?

The evidence of wrongful anti-competitive patent-related activity?

The public consultation closes at 31 January 2009 and a final report is expected to be published in the spring/summer of this year.

It may be that the EU Commission will disclose more convincing and concrete evidence of competition abuses via the patent system in the final report, this is largely absent from the preliminary report. For example it is stated that the quotes from originator company internal documents disclosed in the preliminary report "form only a part of those obtained in the course of the sector inquiry". However if more damning statements were available surely the EU Commission would have included them?

The pharmaceutical sector inquiry is the fourth sector inquiry launched by the EU Commission while Neelie Kroes has been the European Commissioner for Competition Policy. The first was into the gas and electricity sector (final report published in January 2007), the second was into the retail banking sector (final report published in January 2007) and the third was into the business insurance sector (final report published in September 2007). These sector inquiries have not led to a stream of competition law cases against individual businesses within the sectors investigated.

It has been widely reported[26] that Neelie Kroes is expected to be leaving her position when the next EU Executive is appointed in just under a year. It may be that the new occupant of this position has different priorities especially in the dramatically changed economic circumstances Europe is currently experiencing.

However in her speech, Neelie Kroes firmly declared that the EU Commission has "got the scent" and would not hesitate to bring actions against individual companies. It is to be hoped that the EU Commission will learn from the public consultation and ensure that any scent it tracks is real.