On 8 September 2016, the ECJ handed down its judgment in the latest battle between pharmaceutical companies and competition authorities over “pay for delay” agreements.
The appeal of H Lundbeck A/S and Lundbeck Ltd (together “Lundbeck”) against the decision of the European Commission of 19 June 2013 should be of interest, not just to competition law specialists, but to all those who practice in litigation. The Commission’s decision concerned the legitimacy of agreements entered into between Lundbeck and four undertakings (“the Generics”) intending to produce or supply the drug citalopram (“the Agreements”). Ostensibly, Lundbeck entered into the Agreements in order to settle envisaged or ongoing proceedings about whether the Generics had infringed one or more of Lundbeck’s patents for citalopram. However, the Commission determined that, via the mechanism of the purported settlement agreements, Lundbeck was, in effect, buying off its competition, in breach of Article 101 TFEU.
The Agreements each contained a “reverse payment”, namely a payment made by the patent holder to the generic undertaking liable to infringe the patent. The Commission concluded that a settlement agreement containing a reverse payment, accompanied by the exclusion of a potential competitor for a certain period, was potentially problematic from a competition perspective. Indeed, the Agreements were each found to infringe Article 101 TFEU by object.
Whilst Lundbeck advanced a number of pleas in law before the General Court as part of its appeal against the Decision, those of most interest were that the Generics were not potential competitors; and the Agreements did not have an anticompetitive object.
Potential competition
The General Court summarised that the examination of a market must be based, not only on existing competition, but also on potential competition in order to ascertain whether there are real concrete possibilities for existing undertakings to compete or for a new competitor to enter the market. Lundbeck argued that the Generics were not potential competitors primarily because Lundbeck held patents and the Generics were not able to enter the market without potentially infringing those patents.
In respect of whether an undertaking could be considered a potential competitor, the Court found that the Commission had to determine whether, if the agreement in question had not been concluded, there would have been real concrete possibilities for that undertaking to enter the market and to compete with established undertakings. The key question was, having regard to factual evidence or an analysis of the structures of the relevant market, whether market entry could have taken place sufficiently quickly for the threat of a potential entry to influence the conduct of the participants in the market, on the basis of costs which would have been economically viable.
In this context, the Court found that, whilst patents are presumed valid until they are expressly revoked or invalidated by a competent authority or a court, that presumption of validity could not be equated with a presumption of illegality of the generic product. As a consequence, it was determined that Lundbeck’s patents did not necessarily constitute insurmountable barriers for the Generics, which were willing and ready to enter the citalopram market and which had already made considerable investments to that end when the Agreements were concluded. On this point, the Court found that the Generics still had real concrete possibilities and the capacity to enter the market and the strongest indicator of their status as potential competitors was the very fact of the Agreements.
Interestingly, in reaching this decision, the Court had regard to the judgment in Smithkline Beecham plc v Generics (UK) [2002] 25(1) IPD 25005 (“the Paroxetine Case”), which Lundbeck claimed was authority for the proposition that a generic undertaking could not enter the market before it proved that its product did not constitute an infringement. The General Court considered that, in the Paroxetine Case, the English High Court had been concerned with the balance of interests test carried out in order to determine whether an injunction should be granted. It placed emphasis on the fact that the defendant in the Paroxetine Case had not “cleared the way” before launch, i.e. it had not warned the patent holder of its intentions. The General Court also stressed that, in the Paroxetine Case, the patent allegedly infringed existed throughout the period in question whereas, in Lundbeck’s case, the relevant patent was only granted after one of the Agreements examined by the Court had been entered into.
Restriction of competition by object
Certain types of arrangement entered into by undertakings are so harmful to competition that they do not warrant an examination of their effects and should be considered a restriction of competition by object. For example, horizontal price fixing by cartels. The General Court summarised that, in order to establish a restriction by object, regard must be had to the content of the agreement, its objectives and the economic and legal context of which it forms a part. It is also necessary to take into account the nature of the goods or services as well as the conditions of the functioning and structure of the markets in question. The Court confirmed that, although the parties’ intention is not a necessary factor in reaching a decision on whether an arrangement is restrictive, there is nothing prohibiting it from being taken into account.
The General Court agreed with the Commission that the Agreements were akin to market exclusion agreements liable to have negative effects on competition and it was not necessary to demonstrate the Agreements had such effects. In coming to this view, the Court focused on the nature of the reverse payments and the certainty they bought.
The Court agreed with the Commission that, where a reverse payment was combined with the exclusion of competitors from the market, or a limitation of the incentives to seek market entry, it was possible to consider that such a limitation did not arise exclusively from the parties’ assessments of the strength of the patents, but rather was a means of buying off competition. The size of the reverse payment was considered relevant, as was its relationship to the size of the profits that had been anticipated by the Generics had they entered the market.
The Agreements also resulted in Lundbeck going from a position of uncertainty about when a potential competitor would enter the market, to a position of certainty. This was notwithstanding the fact that the Agreements did not contain any no-challenge clauses, as it was found that, as a result of the terms of the Agreements, the Generics had no incentive to challenge Lundbeck’s patents.
Commentary
One could say that the objective of any settlement agreement is to obtain certainty about the relationship between the parties going forward. However, the General Court’s judgment draws a clear distinction between obtaining certainty about the relationship between parties and obtaining certainty over the landscape of the market in which those undertakings operate. In light of the certainty gained by Lundbeck as to what its market share was and would be, the size of the reverse payments provided for, the relationship between those payments and the profits expected by the Generics, the Agreements have been found to fall on the wrong side of the competitive line.
Reverse payment agreements have now come under judicial scrutiny both in the US and European courts. The General Court was keen to contrast its approach to that of the US Supreme Court, confirming that the “rule of reason” adopted in Federal Trade Commission v Actavis (570 US 756 (2013)) cannot be upheld in European competition law. The first of the three steps in a rule of reason analysis requires the plaintiff to show that the defendant’s conduct had an actual adverse effect on competition as a whole in the relevant market. In this respect, it can be suggested that the Commission – and now the General Court – has taken a harder stance in respect of reverse payment agreements.
