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More Guidance on Pharma Settlement Agreements from the Court of Justice of the EU (ECJ)

It is clear that under certain specific circumstances, a settlement agreement between a holder of a pharmaceutical patent and a manufacturer of generic medicines can be contrary to EU competition law. Patent settlement agreements have been the subject of two Commission Decisions (2013 Lundbeck, 2014 Servier) which have in turn resulted in numerous judgments of the General Court and a few appeals pending before the Court of Justice of the European Union (“CJEU”). The UK’s GSK decision, adopted in 2018 by the UK Competition and Markets Authority, leap-frogged the Lundbeck appeal to the CJEU through the preliminary reference procedure (Article 267 TFEU). This procedure allows the CJEU to provide its interpretations to the questions raised by the CAT. While the CJEU cannot interpret national law under this procedure (such as Chapters I and II of the UK Competition Act 1998), an exception applies for national law which has adopted the same approach as EU law with a view to avoiding any distortion of competition and ensuring that concepts taken from EU law are interpreted uniformly. This allowed the Court to establish general principles to be applied to these novel issues, in response to the preliminary questions from the CAT on fundamental issues relating to the application of potential competition, object, effect, definition of the relevant market and abuse. As a result, the case now goes back to the CAT with the CJEU’s interpretations to be applied to the facts and arguments before it.

Facts

GSK was the holder of a patent for the active pharmaceutical ingredient of the anti-depressant medicine paroxetine and of secondary patents protecting some processes for the manufacture of that active ingredient as well as product claims in both hydrate and anhydrate medicine forms. When GSK’s patent on the active ingredient expired in 1999, several manufacturers of generic medicines, including IVAX Pharmaceuticals UK (‘IVAX’), Generics UK Ltd (“GUK”) and Alpharma contemplated introducing generic paroxetine on the UK market and soon after IVAX, GUK and Alpharma filed Marketing Authorisation applications in the UK, Ireland and Denmark. Against that background, there were a series of patent disputes between GSK and generic medicine suppliers seeking to enter the UK markets which went before the UK patent courts. GSK settled these disputes with some of these generic suppliers including Ivax, Alpharma and GUK manufacturers. Others, such as Apotex did not settle and Apotex’s patent litigation went through the UK Courts to the Court of Appeal. GSK and the manufacturers of generic medicines thereafter concluded settlement agreements with respect to those disputes, whereby the latter agreed to refrain, for an agreed period within the scope of the duration of the patent, from entering the market with their own generic medicines, in return for payments and supply by GSK of specified volumes of generic paroxetine tablets to the generic suppliers for resale on the UK market.

The Competition and Markets Authority held that the agreements at issue infringed the prohibition on concluding agreements that restrict competition under 101 TFEU and its UK equivalent (Chapter I) and constituted, on the part of GSK, an abuse of its dominant position in the relevant market on the basis of the equivalent of Article 102 TFEU in the UK Competition Act (Chapter II). Consequently, the CMA imposed financial penalties on the parties to those agreements.

Court’s assessment

The key question that the CJEU was asked to address on potential competition was whether and in what circumstances a generic supplier who has made preparations to enter a market prior to the expiry of the originator’s patent but after market data exclusion has expired, may be considered a “potential competitor”. For manufacturers or suppliers of generic medicines that have not yet entered the market at the time of the conclusion of a settlement agreement, this requires a demonstration of real and concrete possibilities to enter the market. This should be assessed on a case-by-case basis. To be considered potential competitors, generic manufacturers must have a firm intention and an inherent ability to enter the market and, in addition, barriers to entry should not be insurmountable. The Court explained that since the validity of patent rights can be contested, patent rights do not constitute insurmountable barriers to entry in themselves.

As for the question whether a settlement agreement constitutes a ‘restriction of competition by object’, the Court concluded that patent settlement agreements may or may not be anti-competitive by object depending on whether the terms of the agreement demonstrate a sufficient degree of harm to competition. The Court takes into account that the appreciable fall in the sale price of the medicines concerned following the market entry of their generic version is imperative for the degree of harm. That degree of harm may be identified where the transfers of value provided for by an agreement such agreements at issue 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. If the background to those agreements is a genuine dispute relating to a process patent subject of proceedings before a national court, those agreements cannot be regarded as agreements bringing to an end entirely fictitious disputes, or as designed with the sole aim of disguising a market-sharing agreement or a market-exclusion agreement. Whether such agreements have to be characterised as ‘restrictions by object’ must be assessed on a case by case basis. According to the Court, uncertainty as to the outcome of those proceedings cannot be sufficient ground to exclude from characterisation as a ‘restriction by object’ a settlement agreement which may conceivably attain the degree of harm to competition. At the same time, the fact that a settlement agreement involves transfers of value, either pecuniary or non-pecuniary, made by the manufacturer of the originator medicine to the manufacturer of generic medicines is not sufficient ground to classify it as a ‘restriction by object’, since those transfers of value may prove to be justified, that is, appropriate and strictly necessary having regard to the legitimate objectives of the parties to the agreement. All the transfers of value made between the parties, whether those were pecuniary or non-pecuniary, must be assessed. A two pronged test is proposed (paragraph 111): whether the net gain from the transfer of value can have no other explanation than the commercial interests of the parties to the agreement not to engage in competition on the merits unless the settlement agreement concerned is accompanied by proven pro-competitive effects capable of giving rise to a reasonable doubt that it causes a sufficient degree of harm to competition.

In addition, the Court also requires that any pro-competitive effects arising from agreements at issue (i.e. on a case-by-case basis) be taken into consideration, provided that those effects are demonstrated. If the settlement agreement concerned is accompanied by proven pro‑competitive effects capable of giving rise to a reasonable doubt that it causes a sufficient degree of harm to competition, it cannot be regarded as a ‘by object’ restriction of competition, according to the Court.

Regarding ‘restriction of competition by effect’, the Court posits that it is necessary to assess how the market would operate and be structured without the concerted practice. Yet, according to the Court, it is not necessary to establish the probability of the generic manufacturer being successful in patent proceedings or in concluding a settlement agreement that is less restrictive of competition. Article 101(1) TFEU must be interpreted as meaning that if a settlement agreement, such as those at issue in the main proceedings, is to be demonstrated to have appreciable potential or real effects on competition, and, therefore, is to be characterised as a ‘restriction by effect’, that does not presuppose a finding that, in the absence of that agreement, either the manufacturer of generic medicines who is a party to that agreement would probably have been successful in the proceedings relating to the process patent at issue, or the parties to that agreement would probably have concluded a less restrictive settlement agreement.

Abusive behaviour?

The Court also considers the key issue of market definition, in the context of abuse of dominance, which will have wider implications for the pharmaceutical industry than patent settlement agreements alone. The Court has therefore been quite careful to frame its views within this very narrow context. While the penalty imposed on GSK for abuse of a dominant position was based on national law and not on Article 102 TFEU, the Court noted its jurisdiction to rule on a request for a preliminary ruling in situations wherein the provisions of EU law have been made applicable under national law. The Court posits that if the generic medicines are as a matter of fact (to be determined by the court) in a position to enter within a short period of time with sufficient strength to compete with the originator, then they are to be considered within the relevant market.

The Court observes that, taking into consideration the possible cumulative effects that are restrictive of competition of the various agreements, the conclusion of those agreements, in so far as it is part of an overall contract oriented strategy, has a significant foreclosure effect on the market, depriving the consumer of the benefits of entry into that market of potential competitors manufacturing their own medicine and, therefore, reserving that market directly or indirectly to the manufacturer of the originator medicine concerned. While intent alone is insufficient for determining abuse, any established anticompetitive intent must be taken into consideration by the national court for the purposes of application of Article 102 TFEU.

However, the Court also considers that such conduct can be justified if the party engaged in it proves that its anti-competitive effects may be counterbalanced, or outweighed, by advantages in terms of efficiency that also benefit consumers. GSK’s agreement with IVAX resulted in a change in the UK regulatory regime, resulting in favourable prices to the NHS, could be taken into account in the weighing up exercise. It is for the national court to determine whether the strategy to conclude settlement agreements with the object or effect of delaying generic entry, has the capacity to restrict competition and, in particular, to have exclusionary effects, going beyond the specific anticompetitive effects of each of the settlement agreements that are part of that strategy.

Take aways

Patent settlement agreements even with value transfer by the originator or supply agreements are not necessarily anticompetitive “by object” but the terms are subject to review under Article 101(1) and should be very carefully assessed.

As regards market definition, the Court has been careful to frame this in the context of the factual nexus but it does indicate that even where there are therapeutic substitutes and existing patents, originators are increasingly having to be aware during the ‘end-of-life’ period of patents (where market exclusion has expired) that actions which could have an adverse impact on potential generic entry may give rise to risk under Article 102 (as well as Article 101)

The judgment also seems to open a door for dominant companies to argue that their conduct brings efficiencies that benefit consumers. It remains to be seen how this proof can be constituted but arguments may be retrieved from a balancing between investments in R&D and more innovative medicines instead of lengthy and costly court cases. While patent holders may have a justified interest when it comes to concluding settlement agreements, even if this entails delaying generic entry or value transfer, the Court has set a high bar for proving that these interests are justified. The room for justification that both art. 101 and 102 TFEU offer comes with a high burden of proof for originators that engage in these settlement agreements.

The European Federation of Pharmaceutical Industries and Associations (hereafter: “Efpia”) retains a positive outlook as well. In a statement to Mlex, Efpia considers that the judgment entails an opening for pharma companies to argue that payments are pro-competitive and that a thorough case-by-case evaluation is needed for each deal. They deem it helpful that the Court recognized that patent-settlement agreements can be efficiency-enhancing and legitimate. This conclusion from the judgment is a little bit too positive, I would say but it remains to be seen of course and we are waiting for the Lundbeck case of the Court of course which may provide additional guidance as well.

The statement from the CJEU on this matter can be found here.

 

 

Written by
Janneke Kohlen
Janneke Kohlen
I am a partner in our Competition & EU Law Group in The Hague where I specialise in competition law and public procurement law, advising on contentious and non-contentious matters for a broad variety of our clients.
Pauline Kuipers
Pauline Kuipers
I am a partner in our office in The Hague where I have worked since 2001, and I am one of its founding lawyers. Today, I lead our International Competition and EU Law Group and head our Competition Group in the Netherlands, providing our clients with wide-ranging expertise in EU & competition law, particularly in regulated sectors and on the interface between IP and competition law. I am also a member of our Tech & Comms, Media, Retail & Consumer and Life Sciences Groups.
Brona Heenan
Brona Heenan
I am an associate in our Competition & EU Law based in Brussels. My practice covers all areas of competition law (both EU and UK) and I have also advised on the application of procurement law to contracting authorities, public bodies, utilities and EU institutions.

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