Pay-for-delay agreements are sometimes entered into between originator pharmaceutical companies and generic manufacturers as a form of patent dispute settlement. However, this type of agreement may be in conflict with EU competition law. This article discusses the approach taken on these agreements by the General Court of the European Union ("General Court") in the Lundbeck case.
Introduction: pay-for-delay agreements
Pay-for-delay agreements are a form of patent dispute settlement in which a generic manufacturer acknowledges the patent of the originator pharmaceutical company and agrees to refrain from marketing its generic product for a specific period of time. In return, the generic company receives from the originator consideration in the form of payment or other value.
Pay-for-delay agreements allow the parties to avoid the cost of expensive litigation and to direct their limited resources at other activities. Nevertheless, at the same time, such agreements raise competition concerns about market sharing, production limitation, and hence an increase in the price of pharmaceuticals for consumers. Consequently, pay-for-delay agreements have recently been subject to investigations by several competition authorities.
The first case in which pay-for-delay agreements were reviewed at the EU level was the Lundbeck case. This article introduces conclusions arising from this case for pharmaceutical companies which are considering settlement of a patent dispute.
Lundbeck is a Danish company that developed and patented an antidepressant medicinal product containing the active ingredient `citalopram' in the 1970s. After its patent for the citalopram molecule had expired, Lundbeck only held a number of patents related to the citalopram production process. Producers of cheaper, generic versions of citalopram could therefore envisage entering the market.
In 2002, Lundbeck concluded agreements related to citalopram with Generics (UK), Alpharma, Arrow and Ranbaxy, companies active in the production of generic medicinal products. The agreements contained a commitment of the generic manufacturers not to enter the citalopram market. In return, Lundbeck paid them substantial amounts, purchased stocks of generic products competitive to citalopram for destruction, and offered them an opportunity to distribute Lundbeck products.
Following an investigation of the agreements, the European Commission ("Commission") decided that the agreements constituted restrictions of competition by object, in which case competition authorities are not required to investigate their actual impact on the market. The Commission therefore imposed a total fine of nearly 145 million on the manufacturers. Lundbeck and the generic manufacturers brought actions before the General Court seeking the annulment of the Commission's decision and the fines imposed on them. The Court dismissed the actions and upheld the Commission's decision.
Generic manufacturers as potential competitors
One of the reviewed conclusions drawn by the Commission was related to the competitive relationship between Lundbeck and the generic manufacturers concerned. According to the Commission, the generic manufacturers were potential competitors to Lundbeck at the time of concluding the agreements at issue because they would have had "real concrete possibilities of entering the market" had the agreements not been concluded.
The Commission maintained that it had carried out a careful examination, as regards each of the generic manufacturers concerned, of the real, concrete possibilities they had to enter the market, relying on objective evidence such as the investments already made, the steps taken in order to obtain a marketing authorisation and the supply contracts concluded with suppliers of active pharmaceutical ingredients. The Commission emphasised that no court declared any infringement of Lundbeck's patents by the generic manufacturers.
In its defence, Lundbeck claimed that the generic manufacturers could not have been its potential competitors because it was the holder of the patents related to the process of citalopram production at the time of concluding the agreements at issue. In fact, Lundbeck sought the application of the `scope of the patent' test, which has been acknowledged by lower courts in the United States. Based on the test, any conduct that goes beyond the substantive scope of the patent should be excluded from the competition review.3
However, the General Court was of the opinion that the argument was based on erroneous premises, i.e. that the generic manufacturers had infringed upon Lundbeck's patent rights, that Lundbeck would have brought actions against the generic manufacturers, and that the patents concerned would have withstood any claims for invalidation raised by the generic manufacturers. Whilst patents are indeed presumed valid until they are expressly revoked or invalidated by a competent authority or court, that presumption of validity cannot be equated with a presumption of illegality of generic products validly placed on the market. As long as there is uncertainty regarding such premises, it is necessary, in the opinion of the General Court, to regard the generic manufacturers as potential competitors.
Pay-for-delay agreements as restriction of competition `by object'
Another of the examined conclusions of the Commission was related to an assessment of the agreements at issue as restriction of competition `by object'. If any agreement is aimed at restricting competition, that is, if the agreement is, by nature, capable of restricting competition, its actual or potential effects on competition need not be examined, or more precisely, its effects need not be evaluated for the agreement to be prohibited.
According to the Commission, the agreements under review guaranteed that the generic products would not enter the market throughout the term of the agreements at issue. However, such limitations to market entry were not the result of an assessment of the merits of a patent claim, but rather more likely a consequence of very substantial amounts paid by Lundbeck to the generic manufacturers which reflected their expected profits made had they entered the market.
Lundbeck defended itself by referring to the judgment of the Court of Justice of the EU ("CJEU") in the Cartes Bancaires case, according to which the concept of restriction of competition `by object' should be interpreted in a restrictive manner. It argued that an assessment of payfor-delay agreements as a restriction of competition `by object' should be preceded by an economic analysis, or be based on previous experience from past cases.
The General Court upheld the Commission's legal analysis to the effect that pay-for-delay agreements are comparable to market sharing/exclusion agreements. Such agreements are among the most serious restrictions of competition,and hence the evaluation of the agreements at issue as a restriction of completion `by object' was correct.
The approach taken by the General Court can be compared to the US approach to pay-for-delay agreements. In a significant judgment in the Actavis case, the US Supreme Court held, similarly to the General Court in the Lundbeck case, that pay-for-delay agreements may be in breach of competition law. However, unlike the General Court, the US Supreme Court has concluded that pay-for-delay agreements should be subject to a "rule of reason" analysis which requires an examination of effects of the agreement at issue on competition.
We consider the Lundbeck case to be important for the entire pharmaceutical sector. Originator pharmaceutical companies and generic manufacturers considering outof-court settlement of pending disputes should carefully consider the terms of the settlement. This mainly applies if the settlement is to involve payments (or the provision of other values) to generic manufacturers in order to delay their market entry.
Unfortunately, the judgment of the General Court does not provide clear guidance for pharmaceutical companies as to how a settlement should be entered into without taking the risk of a breach of competition laws. Another opportunity to clarify the application of EU competition law in this field will be open to the CJEU (since Lundbeck and some of the generic manufacturers have already filed an appeal), as well as the General Court. This is because, in the meantime, another action has been brought against a decision of the Commission related to pay-for-delay agreements. It concerns the decision against Servier, a French pharmaceutical company, and several generic manufacturers, in which the Commission imposed a combined penalty of EUR 428 million.