Pay-for-delay: The Court of Justice clarifies the scope of “by object” restrictions and “potential competition” in patent settlement cases

On March 25, 2021, the Court of Justice of the European Union (ECJ) ruled on appeal in the Lundbeck case, confirming the previous judgement of the General Court (GC) that upheld the decision of the European Commission (Commission) on pharmaceutical “pay-for-delay” agreements (Case AT.39226 — Lundbeck). The ECJ confirmed in particular that such agreements can be presumed, contrary to Article 101 TFEU, to be anti-competitive “by object,” i.e. by their very nature, without empirical analysis of effects on competition being necessary. Further, the ECJ clarified that an originator and generic producer may be deemed “potential competitors” even if the generic producer’s right to enter the market without infringing the originator’s patent is genuinely disputed and the generic might not have entered the market without the settlement. Indeed, the ECJ clarified that to meet the requisite standard that a patent settlement has an anti-competitive object, the Commission is not required to conduct a full-fledged counterfactual assessment of whether the generic producer would have entered the market earlier absent the settlement agreement, as it is sufficient that it could have done so and was taking tangible steps in that direction.

The Commission’s inspection and sanction

The dispute originated from the decision of the Commission on what are commonly known as “pay-for-delay” patent settlement agreements entered into between Lundbeck as “originator” (meaning a patent holder whose activities are focused on researching new medicinal products and marketing them) and undertakings active in the development and marketing of generic medicines, i.e., medicines composed of the same patented active ingredient as the originator’s product. In such agreements, the originator allegedly pays generic drug manufacturers to delay market entry for the main purpose of protecting the original drug from generic price competition, beyond the expiry of the patent protection.

The at-issue case involved the Danish company Lundbeck, which in 2002 entered into six agreements concerning its blockbuster antidepressant drug citalopram with four undertakings active in the production and/or sale of generic medicinal products, namely Merck (GUK), Alpharma, Arrow, and Ranbaxy. In June 2013, the Commission fined the above companies a total of EUR 146 million for having agreed to delay the market entry of cheaper versions of Lundbeck’s citalopram.

The grounds for the Commission’s decision were that generic competition yields large benefits for patients, who can undergo more affordable treatments by relying on non-branded products. In this case, however, instead of competing, the generic producers agreed with Lundbeck not to enter the market in return for substantial payments and other inducements. More specifically, following its competition inquiry into the pharmaceutical sector, the Commission found that patent settlement agreements that are capable of limiting generic entry in return for value transfers from an originator to the generic companies challenging its patent constitute “by object” anticompetitive agreements, which are presumed to be the most serious breach of Article 101 TFEU.

The judgement of the General Court

The General Court fully upheld the position expressed by the Commission. In particular, after examining the concept of “potential competition” as developed by the EU courts, it concluded that at the time of the agreement Lundbeck and the generic companies were “at least potential competitors.” Indeed, the GC found that according to the case-law, the analysis of competition in a given market must be based not only on existing competition between undertakings already present in the relevant market (actual competition) but also on potential competition, in order to ascertain whether, in light of the structure of the market and the economic and legal context within which it functions, there are concrete possibilities for a new competitor to enter the relevant market and compete with established undertakings. It has to be determined, with the support of factual evidence, whether the new competitor would have had such possibilities even if the agreement in question had not been concluded.

More specifically, the GC found that Lundbeck’s process patents did not necessarily constitute “insurmountable barriers for the generic undertakings which were willing and ready to enter the citalopram market,” and that indeed such generic undertakings had already made considerable investments to that end at the time the agreements were concluded. Therefore, it agreed with the Commission that Lundbeck’s settlements with generic undertakings should be classified as horizontal agreements between competitors for the purpose of restricting competition. To this end, the EU judges agreed with the Commission by arguing that the very existence of “reverse” payments and the disproportionate nature of those payments were relevant factors in establishing whether the agreements at issue constituted restriction of competition “by object.” Accordingly, it concluded that there was no need to examine the effects of the agreements by analyzing the counterfactual scenario.

Furthermore, applying established case-law principles to the Commission’s reasoning, the GC confirmed that not all patent settlements (and not even all patent settlements that contain a “reverse” value transfer) are necessarily problematic under competition law. To this end, the GC clarified that, to establish the anticompetitive nature of an agreement for the purposes of Article 101(1) TFEU, regard must be paid to “the content of its provisions, its objectives and the economic and legal context of which it forms a part,” thus evaluating the presence of anticompetitive agreements on a case-by-case basis.^[1]

Lundbeck appealed the September 2016 judgement of the GC before the ECJ.

The judgement of the Court of Justice

In its March 25, 2021 judgement, the ECJ dismissed all the pleas seeking annulment of the previous decisions and fully backed the Commission and GC positions. In addition, it provided further clarification on the concept of “potential competitors” and on the scope of restrictions “by object.”

As a threshold matter, the ECJ agreed with the GC and the Commission that at the time the settlement agreements were concluded, Lundbeck and the generic manufacturers were potential competitors. The court pointed out that “in the absence of an insurmountable barrier to market entry,” the existence of potential competition between a manufacturer of originator medicines and a manufacturer of generic medicines only requires that the latter has taken “sufficient preparatory steps to enable it to enter the market concerned within a period of time capable of putting competitive pressure on the manufacturer of originator medicines, it being of no relevance whether those steps will in fact be finalised in due time or will be successful.” For instance, in the pharmaceutical sector, potential competition may be exerted before the expiry of a compound patent protecting an originator medicine, as long as the manufacturers of generic medicines provide relevant indication that they want to be ready to enter the market as soon as that patent expires.

To this end, the ECJ once again rejected Lundbeck’s argument based on the presumption of validity of the patent as an insurmountable barrier to entering the market. The ECJ clarified that the existence of a patent “does not, as such, mean that a manufacturer of generic medicines who has in fact a firm intention and an inherent ability to enter the market, and who, by the steps taken, shows a readiness to challenge the validity of that patent and to take the risk, upon entering the market, of being subject to infringement proceedings brought by the patent holder, cannot be characterised as a ‘potential competitor’ of the manufacturer of originator medicines concerned.” In short, it is not necessary to demonstrate with certainty that the generics manufacturers would have entered the market and that the entry would inevitably have been successful, only that those manufacturers had real and concrete possibilities in that respect.

The ECJ also rejected Lundbeck’s argument that the case law of the ECJ requires an empirical analysis of the “counterfactual scenario,” i.e., the hypothetical effects that would have occurred without the settlement agreements, to qualify an agreement as a “by object” restriction. In this regard, the ECJ agreed with the findings of the GC, stating that the Commission “was only required to demonstrate that the agreements at issue revealed a sufficient degree of harm to competition in view of the content of the provisions involved in that practice, the objectives that that practice is intended to achieve and the economic and legal context of which it formed part; the Commission was not required, however, to examine the effects thereof.” Indeed, the analysis of the content of the agreement and of the objective that the competitors intended to achieve does not require examining the practical effects of the provisions contained therein. Instead, and in accordance with the investigation carried out by the Commission, the examination must assess on a case-by-case basis, considering the economic and legal context of which the agreements form part, whether there are other plausible explanations and objectives for such agreements alternative to delaying price competition from generic producers. In the case of reverse payments, this would entail examining whether the net gain of the originator’s transfers of value to the generic undertaking was “sufficiently significant to actually act as an incentive to the manufacturer of generic medicines to refrain from entering the market concerned.”

In light of the above, the ECJ concluded that a restriction “by object” must be found whenever “it is plain from the examination of the settlement agreement concerned that the transfers of value provided for by it cannot have any explanation other than the commercial interest of both the holder of the patent at issue and the party allegedly infringing the patent not to engage in competition on the merits.”

Conclusions

The conclusion provided by the ECJ seems fully in line with established and more recent case law on “by object” agreements.^[2]

In addition, the ECJ took steps to address the interaction between competition law and intellectual property, holding that “[p]atent dispute settlements are, in principle, a generally accepted, legitimate way of ending private disagreements,” but also clarified that “[i]t is unacceptable for undertakings to attempt to mitigate the effects of legal rules which they consider excessively unfavourable by entering into restrictive arrangements intended to offset those disadvantages on the pretext that those rules have created an imbalance detrimental to them.” Moreover, the ECJ added that it is not for competition authorities to review the strength of a patent or the likelihood that a dispute between the patent holder and a generics manufacturer may lead to a patent infringement finding. Notably, in this regard, the GC in Servier[3] pointed out that, “although neither the Commission nor the Courts of the EU are competent to rule on the validity of patents, […] those institutions may, in the context of their respective powers and without ruling on the intrinsic validity of the patent, find that is has been used abnormally, in a manner which has no relation to its specific subject matter.”[4]

While it remains uncontested that the legality of any patent settlement agreement under competition law must be assessed against its own factual background, the Lundbeck judgement, in combination with the existing case-law on the same issue, now sets a clear framework to establish when and how the conduct of both originators and generics are likely to be scrutinized by competition authorities.

[1] For a more detailed analysis of these notions and of other pronunciations of the General Court on pay-for-delay agreements, we recommend this article available on our website and published by Concurrences.com.

[2] See e.g. Case C-228/18, Gazdasági Versenyhivatal v. Budapest Bank Nyrt. et al.; Case C-307/18, Generics (UK) Ltd et al. v. Commission.

[3] Case T-691/14, Servier and Others v. Commission and Case T-684/144, Krka v. Commission.

[4] Case T-684/144, Krka v. Commission, para. 145.