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. “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.