”Pay for delay” agreements are a form of patent dispute settlement agreement 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 a consideration in the form of a payment from the originator.

Pay for delay agreements under scrutiny by the European Commission

Following a broad competition inquiry into the pharmaceutical sector in 2008, the European Commission has been focusing increasingly on settlement agreements in patent litigation, with a particular focus on practices to delay the market entry of generic medicines. The Commission has issued a number of formal “Statements of Objection” against pharmaceutical companies, including Les Laboratoires Servier and Lundbeck in two major cases concerning citalopram, an antidepressant, and perindopril, a cardio-vascular medicine.

In addition, the Commission has also published three reports on its monitoring of patent settlements in the pharmaceutical sector, the most recent of which is dated 25 July 2012. In the latest report, it confirmed that the overall number of concluded settlements has significantly increased.

The Commission’s approach to these agreements is focussed on their competition law aspects – if a contractual arrangement has the object or effect of hindering the entry on to the market of generic drugs this would potentially represent a breach of EU competition rules, specifically Article 101 of the Treaty on the Functioning of the EU (TFEU), which bans practices that restrict competition.

Although settlement agreements are undoubtedly subject to competition legislation, the evaluation of an agreement that is intended to settle a patent conflict, for any unlawful restrictive arrangements, does bring up a number of fundamental legal questions:

  • Does a settlement agreement of this kind amount to a violation of competition law as such?
  • Does the grant of benefits by the pharmaceutical industry to a generic manufacturer per se justify the suspicion of anti-competitive behaviour?
  • If a settlement agreement does not contravene competition law by reason of the patentee’s payments to the generic manufacturer alone, in what circumstances does the agreement become contrary to competition law?
  • Who bears the burden of providing evidence?
  • Is the settlement agreement justified according to the exemptions under Article 101 (3) TFEU?

Recent developments in Europe

Following the pharmaceutical sector inquiry, the Commission continues regularly to monitor potentially problematic patent settlement agreements. It has recently launched an antitrust investigation against US-based pharmaceutical company Johnson & Johnson (J&J) and Swiss-based Novartis to assess whether an agreement between Johnson & Johnson and the Novartis’s generic branch, Sandoz, may have had the object or effect of hindering the entry on to the market of generic versions of fentanyl, a strong pain killer for chronic pain, in the Netherlands. Pursuant to this, both companies received a Statement of Objection on 31 January 2013.

Separately, the French Competition Authority, Autorité de la concurrence, responsible for ensuring the competitive functioning of the economy, launched an inquiry in the pharmaceutical sector in February 2013, to examine how competition operates throughout the medicinal products distribution chain. The Authority wants to check whether or not the support of the French regulatory authorities to generic medicines as well as the opening up of online sales for medicinal products in the last few years has brought benefits in the form of price reductions, and/or increased services and innovation. According to the Authority the development of generics is a competition factor and the sale of generic medicines represents a substantial source of savings for public accounts in France. A particular focus of the inquiry will be, therefore, the price-setting for medicinal products and the scope for competitive pricing for pharmaceuticals. As the Authority ought to increase the market access of generics the inquiry will also cover practices likely to delay generic entries.

Recent developments in the United States

One of the US Federal Trade Commission’s (FTC) top priorities in recent years has been to oppose pay for delay agreements which the FTC consistently considers to be anti-competitive. Since 2001, the FTC has filed a number of lawsuits to stop these deals. According to the FTC study for the Fiscal Year 2012, published on 17 January 2013, pharmaceutical manufacturers of branded drugs significantly increased the use of potential pay for delay settlements to keep generic competitors off the market. The study reported that in almost half of these settlements, the promise may have been made by originator companies that they would not develop or market their own authorised generic, in return for the generic companies withholding their competing product. According to the FTC, the settlements in question related to 31 different originator pharmaceuticals representing combined annual US sales of more than $8.3 billion.

Furthermore, the FTC is supporting the “Protecting Consumer Access to Generic Drugs Act of 2012”, introduced into the US Congress on 9 February 2012, which is intended to end pay for delay settlements. The new Bill provides that it is “unlawful for any person to directly or indirectly be a party to any agreement resolving or settling a patent infringement claim in which:

  • an [Abbreviated New Drug Application (“ANDA”)] filer receives anything of value; and
  • the ANDA filer agrees not to research, develop, manufacture, market, or sell, for any period of time, the drug that is to be manufactured under the ANDA involved and is the subject of the patent infringement claim.”

The FTC has also challenged such agreements in court, on the basis that they violate US antitrust laws. One case, involving the generic testosterone-replacement drug AndroGel, is currently pending before the US Supreme Court. In this case, the Supreme Court has agreed to hear the FTC´s appeal against Watson Pharmaceuticals and will need to decide the questions:

  • whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud, or
  • whether reverse-payment agreements are presumptively anticompetitive and unlawful.

What pharmaceutical companies need to consider

Pharmaceutical companies need to be aware that pay for delay settlements are under close scrutiny by competition authorities. Investigations of competition authorities have to take into account that a reasonable balance should be established between patent and competition law aspects in order to assess, on a case by case basis, if a patent settlement is problematic or permissible under competition law. In the light of the more strict view of the competition authorities, pharmaceutical companies are well advised to take great care with regard to the drafting of patent settlement agreements.

The assessment under competition law strongly depends on the scope, in terms of both subject matter and time, of the intellectual property right that is the subject of the agreement between competitors. Any impression should be avoided that factors have prevailed in the agreement other than achieving a fair balance between the scope of the patent right that is the subject of the agreement and the positions of the parties with regard to that right.