The EU Court of Justice provides guidance for the antitrust assessment of "pay-for-delay" agreements in the pharmaceutical sector.

Article summary: 

Introduction

On 30 January 2020, the Court of Justice of the European Union (the ‘CJEU’) rendered its preliminary ruling in case No. C-307/18 – Generics (UK) and Others v CMA (Paroxetine) (the "Decision") in response to a request from the UK Competition Appeal Tribunal (the ‘CAT’)[1] regarding the lawfulness of the decision with which the UK Competition and Markets Authority held that settlement agreements between the holder of a pharmaceutical patent (GlaxoSmithKline (‘GSK’)) and generic drug manufacturers (so-called "pay-for-delay" agreements[2] ) infringed Article 101 TFEU and constituted, on the part of GSK, an abuse of its dominant position in the relevant market[3].

This decision is in line with the growing focus of the European Commission on transactions between competitors in the pharmaceutical sector[4] . Considering the cases currently pending before European courts in this area[5] , the principles set out in the Decision are intended to lead the EU approach on "pay-for-delay" settlements. The effect of this decision can already be found in the Opinion of the Advocate General in Lundbeck issued on 4 June 2020[6] .

The Court's judgment is also relevant because it addresses some EU competition law issues heavily debated in recent times: the Decision confirms the need for an effect-based approach in antitrust analysis and accordingly the relevance of any efficiency that may be produced by the contested practice in the infringement assessment.

In particular, the Court held that pro-competitive effects should not only be considered under Article 101(3) TFEU, but they are also relevant for the classification of an anticompetitive practice as a restriction of competition by object under Article 101(1) TFEU. At the same time, according to the Court, activities which fall within the scope of Article 102 TFEU may be justified by showing that the resulting restrictive effect is counterbalanced, or even overcome, by efficiency advantages which also benefit the consumer.  

Potential competition relationship

The Court stated that an agreement between undertakings is subject to the prohibition laid down by Article 101(1) TFEU only if it has an appreciable negative effect on competition within the internal market, which presupposes that those undertakings are at least in a relation of potential competition. 

The relevant test is whether there would have been a real and concrete possibility for the generic manufacturer to enter into the market and compete with undertakings in that market, if the relevant settlement agreement had not been concluded. This test must be carried out having regard to the structure of the market and the economic and legal context within which the competitors operate.

Therefore, in the case at hand where the product patent had previously expired, whether the generic manufacturers could be considered potential competitors of GSK for the manufacture of paroxetine depends on if, at the time of the agreement at hand, the manufacturer of generic medicines had taken sufficient preparatory steps to enable it to enter into the market concerned within a period of time that would impose competitive pressure on the originator. Furthermore, no unsurmountable barrier to the entry should exist.

In this regard, the Court states that: a) patent rights do not constitute, in themselves, barriers to entry into the market, since their validity can be contested; b) in particular, a process patent protecting the manufacturing process of an active ingredient that was in the public domain could not be considered to be an insurmountable barrier to entry as such; (c) the conclusion of an agreement between a number of undertakings operating at the same level in the production chain, some of which have no presence in the market concerned, generally constitutes a strong indication that a competitive relation existed between those undertakings; and d) the intention expressed by a manufacturer of originator medicines to make transfers of value to a manufacturer of generic medicines in exchange for the postponement of the market entry of the latter, which is then acted upon, constitutes a further such indication. The Court went further saying that the very existence of a patent dispute constitutes evidence of the existence of a potential competitive relationship between originators and generics.

Requirement for the assessment of the "pay-for-delay" agreements: “restriction of competition by object” or by “effect”?

On the basis of consolidated precedent and following the opinion of the Advocate General, the Court recalled that:

• if a concerted practice is to be subject to the prohibition in principle laid down in Article 101(1) TFEU, it must have as its “object or effect” the prevention, restriction or distortion of competition within the internal market to an appreciable extent;

• in order to classify practices as “restrictions by object” within the meaning of Article 101(1) TFEU, all that is required is the demonstration that they can in fact be classified as such due to a sufficient degree of harm to competition, upon which there is no need to investigate their effects nor a fortiori to demonstrate their effects on competition.  

In light of the principle that the concept of restriction of competition “by object” must be interpreted strictly taking into account the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market, the Court noted that an agreement to settle patent infringement proceedings in which a competitor of the patent holder undertakes not to enter the market and to cease its challenge to the patent in exchange for the payment of a substantial sum, could not automatically be considered a “restriction by object” even where the agreement entailed a value transfer, given that such value transfers could be justifiable, appropriate, or necessary.

Conversely, when the transfers of value provided for by such agreements 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, they must be deemed to constitute a “restriction by object”. In this analysis, all the value transfers between the parties should be individually analysed in order to determine whether overall transfer of value incentivized the generics company to refrain from entering the market.

However, the assessment is only slightly impacted by the existence of IP rights as the Court appears to downgrade them to little more than a single parameter of competition, rather than a fundamental property right. This is why the Court states that, under Articles 101-102, the following are not decisive: (1) the patent validity presumption; (2) the existence of genuine litigation; and (3) the award of an interim injunction against the generics. 

The Parties can invoke the pro-competitive effects of the agreement, and these may be assessed to the extent that they are relevant and specific to establish whether the concerned settlement agreements have caused a sufficient degree of harm to competition and thus to prove or not their anti-competitive object.

Finally, as requested by the CAT, the Court provided guidance to assess whether a patent settlement agreement gives rise to a restriction of competition ‘by effect’. For this limited purpose, the Court ruled that it is necessary to determine how the market would have operated in the absence of the agreement, but not to establish how likely it is that a generic drug manufacturer would have been successful in the original patent dispute or that a settlement agreement less restrictive of competition could have been concluded.

The existence of an abusive exclusionary strategy 

The Court was also asked to rule on whether a strategy consisting in the conclusion of a series of patent settlements, including some agreements which had not been found to be in breach of Article 101 TFEU, could constitute an abuse of a dominant position.

Based on the assumption that even dominant companies can defend their commercial interests if they are attacked and that such companies must be granted the right to take reasonable steps as they deem appropriate to protect these interests, the Court stated first that the exercise of an exclusive right linked to an intellectual property right, such as the conclusion of a settlement agreement, could not in itself constitute an abuse.

According to the Court, any anticompetitive intent of the undertakings must be taken into consideration by the referring court in order to assess whether their conduct must be deemed to be an abuse of a dominant position within the meaning of Article 102 TFEU. However, this is not sufficient because the competition authority should prove that, notwithstanding the subjective intent, the conduct was objectively capable of producing exclusionary effects. 

The Decision is in line with the consolidated substantive approach followed by European case law (Post Danmark (C-209/10), Deutsche Telekom (280/08 P), Telia Sonera (C-52/09), Intel (C-413/14P), MEO (C525/16) and Slovak Telekom (T-851/14)) requiring the demonstration of a negative impact on competition (i.e., an effects-based approach). For this purpose, the balancing of the favourable and unfavourable effects on competition of a specific conduct requires an objective analysis of its effects on the market.

In the same vein, the Court reiterated its view that generic and originator versions are substitutes, and thus that they should be included in the same product market.

That said, the Court recalled that a dominant undertaking may provide justification for behaviour that is liable to fall under the prohibition set forth in Article 102 TFEU, in particular by establishing that the exclusionary effect produced by its conduct may be counterbalanced, or outweighed, by advantages in terms of efficiency that also benefit consumers. 

For further information, contact Federico Marini Balestra or Lucia Antonazzi. 

^{[1] Competition Appeal Tribunal, 08.03.2018, Case n. 1251-1255/1/12/16, available at the following Link}

^{[2] A pay-for-delay settlement is an agreement in which a transfer of value takes place from a patent owner to a generics manufacturer for which the generics manufacturer delays market entry in return.
In the case ta hand, two generics companies undertook steps to enter the market for paroxetine, a product developed by GSK whose product patent expired in 1999. In 2000-2001 GSK sued the generics companies for infringing its process patents related to the production of paroxetine. In response, the generics manufacturers claimed that GSK’s patents were invalid. Before the patent proceedings were concluded, GSK offered payments to both generics companies for not further pursuing their invalidity claims and for not making, importing, or supplying generic versions of Paroxetine in the UK. In addition, GSK arranged agreements between the generics companies and its sole distributor of Paroxetine for the UK.
The UK Competition and Markets Authority adopted a decision in 2016 which found that GSK abused its dominant position in the market for paroxetine, and that the settlement agreements also infringed Article 101 TFEU.} 

^{[3] Decision of the Competition and Markets Authority, 12.02.2016, Case CE- 9531/11, Paroxetine, available at the following Link} 

^{[4] Following the Sector Inquiry into the Pharmaceuticals Sector in 2012 - "3rd Report on the Monitoring of Patent Settlements (period: January-December 2011)", the EU Commission subsequently started monitoring patent settlements, and initiated several proceedings, including Lundbeck (Case AT.39226) Commission Decision of 19 June 2013, Fentanyl (Case AT.39685) Commission Decision of 10 December 2013, and Perindopril (Servier) (Case AT.39612) Commission Decision of 9 July 2014.} 

^{[5] See judgment of 12 December 2018 Servier and Others v Commission, T-691/14, EU: T: 2018:922. Appeal cases before the CJEU: C-176/19 P and C-201/19 P.; Judgment of 8 September 2016 of the GCEU, Lundbeck v Commission, T-472/13, EU: T:2016:449. Appeal case before the CJEU: C-591/16 P.}

^{[6] The Advocate General proposes dismissing the appeal brought by Lundbeck against the judgment of the General Court upholding the Commission’s 2013 infringement decision in its first “pay-for-delay” case. The full text of Advocate General’s Opinion in Case C-591/16 P, Lundbeck v Commission, is available at the following Link.}