Reverse Payment Settlements in the Pharma Sector after the General Court’s Judgment in Lundbeck

On 8 September 2016, the General Court (‘GC’) handed down a seminal judgment for the pharmaceutical sector in the Lundbeck case. The judgment is the first ruling of the EU Courts affirming that pharma pay-for-delay (‘PFD’) agreements (or reverse payment settlement agreements) may be subject to competition law scrutiny.

The Lundbeck Saga: Origins of the Judgment

Lundbeck, a Danish pharmaceutical company, developed and sold a blockbuster antidepressant medicine with the active pharmaceutical ingredient citalopram. Lundbeck's compound patent for citalopram had expired by January 2002 in most EEA countries, but the company held certain process patents. In order to protect its market position, Lundbeck launched a number of proceedings against generic producers, claiming infringements of its process patents.

It is in this context that Lundbeck concluded six agreements with four generic firms, thus settling their patent disputes. The pattern of all these agreements was the same: the generic producers committed not to enter the market for a specified period of time and Lundbeck offered substantial payments in return.

In its decision of 19 June 2013, the Commission regarded the six agreements as constituting restrictions of competition ‘by object’ within the meaning of Article 101(1) TFEU. The Commission imposed fines on all parties to the agreements: € 93.8 million on Lundbeck and a total of € 52.2 million on the generic companies.

Judgment of the GC

Both Lundbeck and each of the generic undertakings appealed the Commission’s decision. The GC dismissed all actions, fully confirming the Commission’s findings.

Potential Competition

The GC held that the Commission was right in its understanding of the concept of potential competition. The legal test applied by the Court was whether the generic producers had real concrete possibilities to enter the market in the absence of the agreements; that is, whether they had the ability and incentive to do so (paras 100-1).

The GC held that the generic undertakings were potential competitors of Lundbeck. This was so, first, because Lundbeck’s process patents did not constitute insurmountable barriers for the generic undertakings, which were willing and ready to enter the citalopram market (para 124). Moreover, Lundbeck itself estimated the probability that its process patent would be held invalid at 50-60% (para 122). Secondly, the presumption of validity accompanying patents cannot be equated with a presumption of illegality of generic products (para 121). Thirdly, the Commission was not required to demonstrate with certainty that the generic undertakings would undoubtedly have been able to obtain a commercially viable and non-infringing process during the term of the agreements at issue, but only that they had real concrete possibilities of doing so within a sufficiently short time (para 203). Finally, the ‘potential competition’ which is protected under Article 101 includes all the administrative and commercial steps required in order to prepare for entry to the market (para 171).

‘By object’ Restriction of Competition

The GC again agreed with the Commission’s analysis, holding that the agreements constituted a restriction of competition ‘by object’ for the purposes of Article 101(1). Hence, the GC concluded that those agreements established a coordination between the parties which revealed a sufficient degree of harm to competition for the examination of their effects to be considered superfluous (para 437).

Observations

The much awaited judgment of the GC in Lundbeck is very important for the pharmaceutical sector: it is the first judgment of the EU Courts to hold that PFD agreements can be subject to competition law scrutiny; and it also plainly illustrates the very peculiar features of the pharma sector, which is most prominently manifested in the analysis of potential competition.

The Commission presented a very strong narrative which was difficult to rebut. Undoubtedly, it benefited significantly from its inquiry in the pharmaceutical sector which enabled it to comprehend the anticompetitive nature of certain agreements in this sector. In this regard, the Commission only initiated antitrust proceedings in this case in January 2010, ie eight years after the conclusion of the agreements. Having concluded its competition inquiry into the pharmaceutical sector, the Commission could devote the substantial resources required to address these complex legal issues more efficiently, and could also claim that its conclusions were based on a clear understanding of the pharma sector and of its special features.

With regard to potential competition, the GC was correct in its analysis, considering the special characteristics of the pharma sector. The Commission was right to determine that the potential competition which is protected by Article 101 includes all the steps required in order to prepare for entry to the market. That is, competitive pressure can be exerted by the generic undertakings even before the actual expiry of the basic patent. Otherwise, effective competition would suffer significant delays, at the expense of patients and/or national health insurance schemes (para 171). This is so because any undertaking active in the pharmaceutical sector is familiar with the fact that preparation for the production of generic versions of drugs commences many years before the expiry of an original patent, and that the expiry itself triggers an intense race in order to be the first to enter the market. In the present case, the generic undertakings had begun making preparations to enter the citalopram market one to three years before the expiry of Lundbeck’s original patents (para 179). Moreover, those that have a proper knowledge of the sector appreciate how undemanding it is for generic producers to manufacture a generic version of a drug that would not infringe a process patent. Although this is common knowledge for those active in the sector, it is an impossible task to prove with certainty. Hence, the GC was correct to hold that the ability of the generic producers to enter the market with a non-infringing process need not be demonstrated with certainty. In the present case, it was clear that Lundbeck’s process patents were incapable of preventing all possibilities of market entry.

Having established that generic producers were potential competitors of Lundbeck, it was inevitable on the facts that the agreements would be regarded as being restrictive of competition by object. This is not only because the agreements provided simultaneously for the limitation of generic market entry and for significant value transfers, but is also due to some further aggravating factors: the payments amounted to the expected profits of the generics had they entered the market; the real purpose was not to resolve the underlying patent dispute between the parties insofar as the agreements did not provide for market entry upon their expiration; and the content of the agreements went beyond the scope of Lundbeck’s patents, since they were intended to prevent the sales of all types of generic citalopram while Lundbeck could not have obtained the same outcome through the enforcement of its patents.

In this vein, the ‘weak’ nature of the intellectual property rights (‘IPRs’) at issue certainly affected the reasoning and outcome of the judgment. Hence, Lundbeck is a ‘special case’; neither the Commission nor the GC suggest that this strict approach is to be regarded as the general rule to be applied to all reserve payment settlement agreements. On the contrary, recognising the positive aspects of settlements of litigation, the Commission and the GC were careful to emphasise that the existence of a reverse payment in the context of a patent settlement is not always problematic. This is especially so when they are not accompanied by any restriction on market entry. Consequently, the finding of restriction by object in Lundbeck was based on the individual assessment of the circumstances of the case. Even so, Lundbeck indicates that pharmaceutical companies need to be diligent when entering in such agreements. It is not a risk-free strategy; this is especially so for patent settlements that both limit generic market entry and provide value transfers. The latter are likely to attract the highest degree of antitrust scrutiny.  

Interestingly, the GC referred on several occasions to the judgment of the US Supreme Court in Actavis, where the facts are similar. Generally, to talk of divergence when EU and US rulings employ different approaches to similar matters is to skip a step, namely failing to acknowledge the existence of different rules. Even so, the divergence between the two rulings is more apparent than real: both held that PFD agreements can be subject to antitrust scrutiny; both considered the size of the value transferred as a relevant factor for the assessment of the settlement agreements; both rejected the ‘scope of the patent’ test as being problematic; and both stressed that the patent validity presumption is not equated to a presumption of patent infringement. Furthermore, even the legal tests applied for the assessment of PFD agreements were contiguous insofar as the Commission did not adopt a ‘quick look’ approach in order to characterise the agreements in Lundbeck as restrictive ‘by object’; rather, it did so following a detailed examination of the agreements having regard to their content, purpose and context.

More generally, the peculiar feature of PFD cases is that they are about striking the right balance between the protection of IP law and the corresponding protection of competition law. One needs to appreciate the very peculiar features prevailing in the pharma sector and the potential conflict between competition law and IPRs, which results from the fact that -as a rule- pharmaceutical firms enjoy patent protection.

In Lundbeck, the Commission and the GC properly applied the competition rules to remedy the overprotection provided by IP law.

This piece is based on an article published on the European Law Blog.   

Konstantinos Sidiropoulos is a DPhil Candidate and a Tutor in Competition Law at the University of Oxford.