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The Way Forward For Reverse Payments in the US & EU

Posted by on 27 October 2015
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From Actavis to Lundbeck, Wellbutrin and Beyond

In 2013 the US Supreme Court brought the complex interplay and perennial tensions between competition and IP policies and law to the forefront with its ruling on the landmark case ‘Federal Trade Commission v. Actavis Inc.[1]. In its decision, the Supreme Court declined to hold reverse payment settlements between patent holders and market entrants as presumptively unlawful. Rather, it advised lower courts to apply the ‘rule of reason’ principle embodied in the Sherman Act when assessing the lawfulness of such arrangements. In calling for a proportional approach the Supreme Court left many jurists disappointed and a bevy more confused.

One reason for the disappointment and confusion undoubtedly is the strong intuitive response to the very pith and marrow of a reverse payment agreement: an arrangement for transferring value from a monopolist to a potential market entrant in connection to the delay or reversal of entry. In the past, these arrangements often involved direct cash and financial transfers. More recent reverse payments have increasingly varied in their forms. Some of the more complex arrangements include brand owners agreeing to abstain from launching an authorised-generic product that would otherwise compete with the generic manufacturers’ claim for marketing exclusivity during the 180-days periods under Paragraph IV of Hatch-Waxman Act.

Regardless of the exact form, many equate reverse payment agreements to measures such as price-fixing and client allocation which are illegal prima facie. As a result interest groups such as Community Catalyst [2] have taken strong positions against ‘pay-for-delay’ agreements due to the harm inflicted on consumers via artificially inflated prices. Community Catalyst and others had reason to rejoice earlier this September, when Senators Klobuchar and Grassley’s reintroduced the Preserve Access to Affordable Generics Act [3]. If passed, the act would make reverse payment agreements presumptively unlawful and anti-competitive in cases where generic manufacturers delay or forgo research, development or manufacturing efforts in return for receiving anything of value.

Without changes to the prevailing legislation, reverse payment agreements in the US will continue to be decided under the guiding light of the Actavis ruling from 2013. A recent ruling from the Eastern District of Pennsylvania exemplifies well how lower courts apply their new guidance. In its decision, the Pennsylvanian court granted GSK motion for summary judgment and dismissed the claims of purchaser groups, who argued that GSK had fallen foul of antitrust regulations when signing a reverse payment agreement concerning its drug, Wellbutrin. In her ruling, Judge McLaughlin concluded that the plaintiffs could not satisfactorily prove that there were anti-competitive effects in excess of the ostensible competition relation benefits of the agreement which stem from intricate sublicensing arrangements made in connection to the reverse payment agreement.

With her ruling Judge McLaughlin channeled the Supreme Court’s 2013 decision championing the liberty to contract. This was achieved by concluding that holistically assessed procompetitive justifications can overcome formalistic claims of exceeding the scope of the patent and arguments made against the fortification of ‘weak patents’ with cash payoffs.

Incidentally, June 2013 marked an important milestone in the European Union as well. The Commission released its decision to impose fines on Lundbeck and several others in response to the agreements to delay the entry of generic antidepressants within the EU market.[4] In his statement, the Vice-President of the Commission, Joaquín Almunia, argued that “Agreements of this type directly harm patients and national health systems” and noted that the Commission would not tolerate such anticompetitive practices going forward. The decision and its accompanying statement reverberate the European Union’s resolute stance against reverse payment agreements and the widely accepted European view that these agreements are anti-competitive by default.

However, a similar proportionality based approach to that espoused by the US Supreme Court binds the Commission in its assessments of reverse payment agreements. While a typical reverse payment agreement definitely runs the risk of infringing Article 101 of the TFEU by default, there are several factors that could exempt the agreement. Indeed, as per Paragraph III of the aforementioned article, factors such as potential improvements to production and distribution and benefits to technological and economic progress, would need to be holistically assessed and counter-weighed against the anti-competitive effects of the agreement.

The way forward with reverse payment agreements offers no easy template for courts and competition authorities to apply. Rather, the near future will see judges engaged in meticulous in casu analysis of the complex economics and reality that is the interplay between IP and competition. However, as is evident from the recent developments both in the US and in the EU, the judges will be doing so in an increasingly aware and vocally active political environment that already has its sights set on the next Actavis ruling to come.


Mr. Puutio is an expert in the analysis and valuation of intellectual property rights and an active researcher of intellectual property rights regimes for private consulting companies and organizations such as the United Nations. Any omissions and errors are those of the author alone. For comments, please contact him at teemu.puutio@gmail.com.
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