CJEU ruling on legality of “pay-for-delay” (pharma) settlement agreements

On 30 January 2020, the Court of Justice of the EU (“CJEU”) for the first time ruled on the compatibility of so-called ‘pay-for delay’ agreements with EU competition law.

On 30 January 2020, the Court of Justice of the EU (“CJEU”) for the first time ruled on the compatibility of so-called ‘pay-for delay’ agreements with EU competition law. “Pay-for-delay” agreements are a form of patent dispute settlement between the holder of a pharmaceutical patent and a generic drug manufacturer, whereby the generic pharmaceutical manufacturer usually acknowledges the validity of the patent and agrees to refrain from entering the market with its own generic version of the drug for a specific period of time, in return for a “value transfer” (monetary or otherwise). The CJEU more specifically clarified when such an agreement is in breach of EU competition law .

In 2016, the UK Competition and Markets Authority (“CMA”) found that the pay-for-delay agreements entered into by the pharmaceutical group GlaxoSmithKline (“GSK”) and various manufacturers of generic medicines, infringed the prohibition on agreements that restrict competition and constituted, on the part of GSK, an abuse of its dominant position in the relevant market. The CMA therefore imposed financial penalties on the parties to those agreements. On appeal, the UK Competition Appeal Tribunal (“CAT”) requested the CJEU to provide guidance on whether and when “pay-for-delay” agreements amount to a breach of European competition law, in particular Article 101 and Article 102 TFEU. The CJEU largely followed the opinion of Advocate-General Kokott and upheld the decision of the CMA to fine GSK and the generic manufacturers. Below we discuss the most important findings of the Court.

“Potential competitors”

First of all, the CJEU confirmed that the holder of a pharmaceutical patent and a generic company seeking to enter the market with a generic version of that drug, who are in dispute as to whether that patent is valid or whether the generic medicines concerned infringe that patent, are “potential competitors” within the meaning of Article 101(1) TFEU if:

-  the generic company has in fact a firm intention and an inherent ability to enter the market” (looking in particular at the preparatory steps it has taken, such as challenging the patent in court or seeking administrative authorisations);

-  and that market entry does not meet barriers to entry that are insurmountable” (which is for the national court to assess).

The CJEU noted that patent rights cannot be regarded as such barriers considering that their validity can be contested. Moreover, the existence of patent disputes can according to the Court constitute evidence of a potential competitive relationship between the patent holder and the generic company.

“Restriction by object”

According to the CJEU, agreements bringing entirely fictitious disputes to an end or designed with the sole aim of disguising a market-sharing agreement or a market-exclusion agreement, are as harmful to competition as market-sharing agreements or market-exclusion agreements, and as such have to be characterised as “restrictions by object” (i.e. by their very nature).

“Pay-for-delay” agreements with respect to genuine patent disputes between a manufacturer of originator medicines and a manufacturer of generic medicines – who are potential competitors – which cause a sufficient degree of harm to competition, can according to the CJEU also be anti-competitive “by object” if:

-  the transfers of value to the generic company can have no other explanation, due to their size, than the commercial interest of the parties to the agreement not to engage in competition on the merits. The fact that these transfers of value were less than the profit the generic company was likely to achieve by entering the market, is irrelevant according to the Court;

-  unless the agreement 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, which is for the national court to assess. The CJEU explicitly stated that its recognition of pro-competitive effects does not mean that it recognises a “rule of reason” in EU competition law.

“Restriction by effect”

The CJEU further ruled that in order to establish the potential or real anti-competitive effects of “pay-for-delay” agreements, it is not necessary to determine that, absent the agreement, either the generic company would probably have been successful in the patent proceedings, or that the parties to that agreement would probably have concluded a less restrictive settlement agreement. Determinative is whether the agreement has had an anti-competitive effect between the parties and whether that effect is appreciable based on the context of the agreement.

“Abuse of dominance”

Finally, the CJEU ruled that a dominant firm’s strategy to conclude a set of “pay-for-delay” agreements which have at least the effect of temporarily depriving generic companies – that are potential competitors – of effective access to the market, can constitute an abuse of a dominant position within the meaning of Article 102 TFEU. This will more specifically be the case when that strategy has the capacity to restrict competition and, in particular, to have exclusionary effects, beyond the specific anti-competitive effects of each of the “pay-for-delay” agreements that are part of that strategy.

However, the Court acknowledged that such conduct can be justified if the dominant firm can prove that the anti-competitive effects may be outweighed by advantages in terms of efficiency that also benefit consumers.

For the definition of the product market concerned, the Court held that not only the originator version of that medicine but also its generic versions must be taken into consideration (even if the latter would not be able to enter the market legally before the expiry of that patent), if it can be established that the generics are in a position to enter the market within a short period of time “with sufficient strength to constitute a serious counterbalance” (which it is also for the national court to determine).

Conclusion

Aside from providing clear guidance to the UK CAT who will now resume its consideration of the above-mentioned appeal, this case is more generally also likely to have significant bearing on other cases concerning “pay-for-delay” agreements. The CJEU is for example likely to take a similar approach in the appeals against the European Commission’s decisions to fine Lundbeck and Servier, which are currently pending before the CJEU and concern similar issues. 

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