Court of Justice of European Union Rules that Pay-for-Delay Patent Settlements May Restrict Competition 'by Object'

• 03/02/2020
• Articles

On 30 January 2020, the Court of Justice of the European Union (CJEU) handed down its judgment in Case C-307/18, Generics (UK) and Others. This case marks the first time the CJEU has ruled on patent settlement agreements between originator pharmaceutical companies and generic producers. Depending on the circumstances, such agreements may prevent generic versions of a patented medicine from entering the market or may delay such entry. The CJEU held that pay-for-delay agreements may be infringements of competition by their very object.

The case was referred to the CJEU by the UK Competition Appeal Tribunal (the Tribunal), which was tasked to rule on whether the UK Competition and Markets Authority (CMA) had lawfully fined manufacturers of generic medicines and the pharmaceutical company GlaxoSmithKline (GSK) 45 million pounds for settling a patent dispute with a deal permitting GSK to pay generic manufacturers a total amount of around 50 million pounds in exchange for refraining to enter the market with their own generic products. In essence, this agreement was intended to delay the potential entry of generic competitors into the UK market after GSK’s patent for the active substance of the anti-depressant medicine paroxetine, and secondary patents, protecting some processes for the manufacture of the active substance, expired in 1999.

The Tribunal sought guidance on how to interpret EU rules that ban arrangements which have as their object or effect the restriction of competition (Article 101 of the Treaty on the Functioning of the EU - TFEU) with respect to the pay-for-delay agreements and whether GSK was able to abuse its dominant position on the relevant market (Article 102 TFEU).

Article 101 TFEU – Restrictive agreements

The CJEU found that an agreement is subject to the prohibition of Article 101 TFEU only if it has a negative and appreciable effect on competition within the internal market, and that the parties to the agreement should at least be in a relationship of potential competition. This implies a showing that there are real and concrete possibilities to access the market. With respect to the generic manufacturers which at the time of the agreement had not entered the market, the CJEU ruled that "[i]t is necessary to assess, for each manufacturer of generic medicines concerned, whether the manufacturer of generic medicines concerned has a firm intention and an inherent ability to enter the market, having regard to the preparatory steps it has taken, and that there are no insurmountable barriers to entry". It added that since the validity of patent rights can be contested, patent rights, in themselves, do not constitute such barriers.

The CJEU further opined that if such agreements were to be categorised as a restriction of competition “by object”, which was indeed how the CMA had reasoned, then such a categorisation would depend on the degree of harm. It rationalised that the way to identify the degree of harm is by the transfers of value provided in the agreement, which cannot “because of their scale, have any explanation other than the commercial interest of the parties to the agreement not to engage in competition on the merits and, accordingly, act as an incentive to the manufacturers of generic medicines to refrain from entering the market concerned". The CJEU thus gave the regulator leeway in finding an infringement of the competition rules by object and not having to prove the actual effects of anticompetitive conduct on the market. This approach is in line with the non-binding opinion of Advocate General Julian Kokott of 20 January 2020 (available here).

If, however, the agreement were to be categorised as restrictive “by effect”, the CJEU specified that it would then be necessary for the regulator to establish how the market would probably operate and be structured in the absence of the patent settlement agreement. Significantly, the CJEU did not deem it necessary to assess whether manufacturers of the generic medicine would be successful in patent proceedings or dispute settlements that are less restrictive to competition.

Article 102 TFEU – Abuse of dominance

In answering the question as to whether GSK had been able to abuse its dominant position on the market, the CJEU confirmed that a dominant company can also abuse its dominant position under Article 102 TFEU when concluding an agreement that violates Article 101 TFEU. The CJEU ruled that in objectively assessing whether there has been an abuse of a dominant position, the regulator has to evaluate the accumulative restrictive effects on competition, in particular exclusionary effects, resulting from GSK’s various agreements with different generics manufacturers. Such an objective assessment should weigh the favourable effects for consumers against the unfavourable ones, the CJEU opined. For this purpose, it is open to GSK to provide justification for its anticompetitive behaviour.

It would appear that this ruling has set a strong bar for pharmaceutical companies to justify pay-for-delay agreements. Not surprisingly, it was welcomed by European commissioner responsible for competition chief Margrethe Vestager, who announced that "[t]he court ruling looks very promising on first reading, and in that of course we feel very much encouraged because we find these cases important". She added that while she found it justified to have patents, once they expire and generic versions can start to be placed on the market “patients should get the full benefit of that”. Similarly, the CMA expressed appreciation for the ruling stating that “[t]his case shows our ongoing determination to take action against illegal behaviour by drug companies designed to stifle competition at the expense of the NHS”.

The CJEU will have to rule on two further cases that deal with patent settlement agreements. The first case involves Denmark’s Lundbeck (C-591/16 P) and the second case involves France’s Servier (C-201/19 P and C-176/19 P).

The judgment is accessible here.