India: : Reverse Payment Deals In Patent Disputes And Its Impact On Competition

Last Updated: 4 August 2016
Article by Sakya Chaudhuri, Ikleen Kaur and Shuchi Singh

In India, 'pay for delay' conduct can be scrutinized as anti-competitive agreement under Section 3 of the Competition Act, 2002 or as abuse of dominance under Section 4 of the Act where such agreements are entered by a dominant firm (for e.g. Pharmaceutical Company/Originator) to foreclose effective competition in the market.

The recent decision of the UK's Competition & Market Authority (CMA) on agreements entered between GlaxoSmithKline plc (GSK) and some pharmaceuticals companies in relation to paroxetine during 2001 and 2004 is an interesting case study for the Indian pharmaceutical, IT and other sectors involving innovation and patents.

During 2001, GSK had in its name, certain patents with relation to paroxetine (an anti-depressant medicine); which was very popular in UK with the name of 'Seroxat' and was a major revenue earner for GSK as its sales exceeded 90 million in 2001. In the same year, many pharmaceutical companies, including Generics (UK) Limited (GUK) and Alpharma Limited (Alpharma) were trying to enter the UK market for paroxetine with a generic version.

GSK had planned to challenge these generic versions of paroxetine as the generic drugs would have infringed GSK's patents. However, GUK and Alpharma entered into separate agreements with GSK, whereby these generic pharmaceutical makers agreed not to launch their product for a certain period of time against payments and other value transfers made by GSK to these companies totaling over 50 million. The agreements included clauses prohibiting GUK and Alpharma from entering the UK paroxetine market. The CMA, considering the anti-competitive nature of the GSK's agreements with GUK and Alpharma has imposed fines amounting to 44.99 million on the companies.

The agreement worked out by GSK with GUK and Alpharma is commonly referred to as 'pay-for-delay' agreements. The term is so coined since these agreements are typically worked out to defer introduction of prospective competition in the market. The effect of 'pay for delay' agreements is adverse to free competition in the market such as the pharmaceutical sector as such agreements would deter the price of drugs being reduced which causes serious harm to the consumers in terms of having to pay exorbitant prices. Pay for delay agreements are generally entered into by patent owners to curb the threat of lower prices offered by competing (generic) entrants. In the GSK case, the agreements had potentially deprived the National Health Service (NHS) of substantial price reductions in paroxetine, which eventually took place at the end of year 2003 when the average paroxetine prices dropped by over 70% in 2 years.

How 'Pay for Delay' deals work?

In the words of Dr. Farasat Bokhari in his article "What Is The Price Of Pay-To-Delay Deals?" (Journal of Competition Law & Economics, June 2013) – "A pay-to-delay deal (or "reverse payment") involves a payment from a branded drug manufacturer to a generic maker to delay market entry. Under the terms of a typical pay-to-delay deal, a pharmaceutical company holding a patent on a drug enters into an agreement with a generic challenger where, in return for withdrawing the challenge, the generic firm receives either a payment or an authorized licensed entry at a later date (or both), but before the expiration of the patent itself".

Pay for delay agreements are a type of patent settlement mechanism, especially in the pharmaceutical sector. Once a generic drug maker tries to enter a market of a particular drug, the patent holder of the branded version of the drug challenges the same with the respective authorities. In order to settle the matter amicably the patent holder promises to pay the generic drug maker a certain amount, along with other benefits as long as the said drug maker agrees to stay out of the market of the specific drug for a certain period. The payment may be made to settle an impending patent litigation or it might be through a contract between the originator and the generics. The tendency for entering such agreements is higher where the patent is weak, either by efflux of time or for other factors.

The arrangement is beneficial for both the parties as the patent holder is able to hold on to its monopoly, without any competition for a longer period of time; while on the other hand the generic maker is able to earn a decent amount of money without having to face the risk of penetrability and marketing of its drug. They are also able to cover the cost of research and innovation and avoid litigation. It's a win-win situation for all except the consumers, who in the process is denied access to a lower priced product. Therefore, pay for delay agreements violate anti-trust principles of fair play and competition in the market.

The effect of 'pay for delay' agreements on Indian Market

There is a growing concern for 'pay for delay' deals in various industries, especially in the pharmaceutical industry. Since India is regarded as the 'pharmacy of the poor world', pay for delay agreements in India should be dealt with heavily not only the Competition Regulators but also other authorities. Reverse payments or pay for delay deals hinder effective competition in the market. Indian courts often direct parties involved in patent infringement actions for mediation to reach amicable settlement. It is important for the CCI to closely monitor and examine such settlements to see if these ultimately result in anti-competitive arrangements. A possible indicator of the degree of anti-competitive conduct is the extent of reverse payment paid. The larger the reverse payment, the stronger is the presumption of invalid or weak patents still persisting in the market.

Pay for delay agreements between rival pharmaceutical companies that delays entry of a generic drug in the market can be presumed to cause an adverse effect on competition in India, and therefore call for scrutiny under the Competition Act, 2002. If, however, such an agreement is entered into during the life of the patent, the patentee may claim a limited right of defense under Section 3(5) of the Act, as long as the restriction is necessary to protect its intellectual property rights. The raison d'etre of an intellectual property right is to grant the originator the ability to solely exploit an original creation, and this could arguably include compensation paid to maintain the exclusivity of that right. However, this line of defense would have to be weighed against how the consumers and the relevant market are being affected by such a horizontal agreement.

In India, 'pay for delay' conduct can be scrutinized as anti-competitive agreement under Section 3 of the Competition Act, 2002 or as abuse of dominance under Section 4 of the Act where such agreements are entered by a dominant firm (for e.g. Pharmaceutical Company/Originator) to foreclose effective competition in the market.

To conclude, though patent laws recognize the requirement of innovators to recoup research cost investment, yet, the practice where an innovator may artificially increase the costs for a certain period to gain supernormal profits violates anti-trust law and distorts price stability in the market which ultimately affects consumers.

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