United States: EU Court Confirms European Commission's Decision On Pay-For-Delay Agreements

Summary

On 8 September 2016, the General Court of the European Union upheld the European Commission's decision in which the antitrust regulator imposed fines of approximately EUR 150 million on Lundbeck and a number of generic companies for entering into reverse settlement agreements which delayed the entry of cheaper generic versions of a blockbuster antidepressant.

The Commission had first hinted that patent settlement agreements causing delayed generic entry might be problematic in its 2009 report on the Pharmaceutical Sector Inquiry.  

In Depth

The Commission launched a formal antitrust investigation against Lundbeck in January 2010, only six months after publishing the Final Report of the Pharmaceutical Sector Inquiry. The investigation was concluded on 19 June 2013, when the Commission imposed a fine of EUR 93 million on Lundbeck, and fines amounting to EUR 52 million on several generic manufacturers, for breaching Article 101(1) of the Treaty on the Functioning of the European Union (TFEU).

The Commission found that, shortly prior to the expiry of the underlying intellectual property protection, the Danish firm agreed with its generic competitors to delay the market entry of cheaper generic versions of Lundbeck's branded Citalopram, a popular anti-depressant. In return for not entering the market, the generic producers obtained "substantial payments and other inducements" from Lundbeck, often corresponding to the profits that the generics could have expected following entry. In particular, the value transfers took the form of direct lump-sum payments and acquisitions of generic stock for subsequent destruction.

The Commission held that the reverse payment settlement agreements were in violation of Article 101(1) TFEU "by object" and that Lundbeck's reverse payments served to eliminate the generics' incentives to continue their independent efforts to enter the market. Furthermore, the Commission noted that acceptance of the limitations was achieved not by the strength of Lundbeck's patents, but by the transfer of value from Lundbeck to each of the generic companies.

Appeal to the General Court

Lundbeck brought an appeal against the Commission's decision arguing, inter alia, that (i) Lundbeck and the generic companies that were parties to the agreements were not potential competitors under Article 101(1) TFEU, and (ii) the Commission's conclusion that the patent settlement agreements restricted competition by object under Article 101(1) rests on a wrongful application of the established principles on restrictions by object.

In the 8 September 2016 judgment, the General Court dismissed all of Lundbeck's grounds of appeal and upheld the Commission's 2013 decision.

Potential Competition

The General Court held that the Commission had carried out a careful examination of the real, concrete possibilities that the generic companies had of entering the market, and had based its findings on objective evidence. The Court agreed with the Commission's finding that Lundbeck's patents did not necessarily constitute insurmountable barriers for the generic manufacturers which were willing and ready to enter the market, and which had already made considerable investments to do so. This apparent readiness to enter the market, according to the General Court, represented the expression of potential competition.

The Court concluded that, in order to establish the existence of potential competition, it is not necessary to demonstrate with certainty that the generic manufacturers would have entered the market and that that entry would inevitably have been successful, but only that they had real, concrete possibilities in that respect.  

"By Object" Infringement

The General Court also held that the Commission was correct in considering that the very existence of payments from the originator to the generic, and the disproportionate nature of those payments, were relevant factors in establishing whether the agreements constituted restrictions of competition "by object". This is because, through those payments, the originator provided an incentive to the generics not to continue their independent efforts to enter the market. The Court also pointed out that an agreement may be regarded as having a restrictive object even if it does not have the restriction of competition as its sole aim but also pursues other legitimate objectives (such as the settlement of a dispute).

The General Court held that the reverse payment settlement agreements at issue were comparable to market exclusion agreements, which are among the most serious restrictions of competition, and that the exclusion of competitors from the market constitutes an extreme form of market sharing and limitation of production. The Court concluded that such agreements may, by their very nature, be regarded as restricting competition in a sufficiently serious manner as to be classified as a restriction "by object", which by its very nature cannot benefit from the possibility of exemption under Article 101(3) TFEU.

The General Court also found that Lundbeck had failed to demonstrate that these arrangements were needed to protect its intellectual property rights.

Comments

Many pharmaceutical companies will find the General Court's judgment difficult to accept. The imposition of a blanket ban on reverse settlement agreements appears to be predicated on the assumption that the only purpose of such settlements is to delay unduly the entry of a generic product and to prolong the exclusivity enjoyed by the originator.

The presumption that a reverse settlement agreement is less competitive than the expected outcome of the litigation that is being settled appears at least controversial. By condemning reverse settlements, the Commission is implying that the generic company would have successfully challenged (i.e., invalidated) the originator's patent rights, and that the settlement is therefore an artificial way of preserving a patent that ought not to confer upon its holder any exclusivities. Given the inherent complexities and uncertainties attached to patent litigation, this is an assumption that should be difficult for an antitrust regulator to make.

Implications

The General Court's decision is not final, as recipients of the judgment may still bring an appeal to the Court of Justice questioning the General Court's stance on reverse payment settlements as well as the Court's approach to restriction "by object". Lundbeck already issued a press release stating that it strongly disagrees with the ruling and that it is considering whether to bring an appeal before the Court of Justice.

This judgment will have important implications for the remaining pay-for-delay appeals currently pending in Luxembourg, as well as for the related damages action before the UK Competition Appeal Tribunal.  

Originators and generics wishing to discontinue pending patent litigation should carefully consider the terms and conditions of their settlement agreements, with particular attention given to the overall scope of such agreements and any value transfer that may be construed, where relevant, as an inducement to ensure that a contract party delays or cancels market entry. 

EU Court Confirms European Commission's Decision On Pay-For-Delay Agreements

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