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Pay-for-delay: brightened lines between object and effect restrictions

Pay-for-delay: brightened lines between object and effect restriction

Pay-for-delay: brightened lines between object and effect restrictions

06.02.2020 NL law

In its first pay-for-delay case, the ECJ has clarified the criteria determining whether settlement agreements between a patent holder of a pharmaceutical product and a generic manufacturer may have as their object or effect to restrict EU competition law. The judgment confirms the General Court’s earlier rulings in Lundbeck and Servier (see our October 2016 and December 2018 newsletters) in which it was held that pay-for-delay agreements (in these cases) constituted a restriction ‘by object’.

At the same time, the ECJ has left a certain amount of wriggle room to take account of pro-competitive effects in this analysis.

On 30 January 2020, the European Court of Justice answered preliminary questions from the UK Competition Appeal Tribunal (“CAT”). The CAT sought guidance on whether a settlement agreement for a patent dispute may constitute a restriction of competition ‘by object’ or ‘by effect’, and whether entering into such an agreement may constitute an abuse of a dominant position.

In 2016, the UK Competition and Markets Authority (“CMA”) found that GSK had agreed to make payments of GBP 50 million to generic suppliers in exchange for their entering into a series of agreements under which the generic entry of paroxetine, an anti-depressant medicine, onto the UK market would be delayed. The CMA also found that GSK abused its dominant position by inducing generic providers to delay their efforts to independently enter the UK market. When GSK’s primary patent expired, a number of generic manufacturers considered introducing the generic version of paroxetine into the UK market. GSK brought infringement proceedings against those manufacturers, and the latter challenged the validity of one of GSK’s secondary patents. GSK and the generic manufacturers thereafter entered into settlement agreements whereby the manufacturers, in exchange for a value transfer, would not launch a generic version of GSK’s paroxetine product for an agreed period.

The ECJ judgment, which largely follows the opinion of AG Kokott, backs the CMA decision to fine GSK and the generic manufacturers for entering into settlement agreements to delay the introduction of the generic versions of paroxetine onto the UK market.  

Potential competitors

First, the ECJ confirmed that the CMA was correct to establish that GSK and the generic manufacturers were potential competitors when entering into these agreements. The ECJ rejected the argument that, as GSK’s patents were presumed to be valid and as result of which legal market entry was precluded, the generic manufacturers should not be considered as potential competitors. The ECJ found that the generic companies had a firm intention and an inherent ability to enter the market at the time that the agreements were concluded. The generic companies had taken sufficient preparatory steps (such as applying for marketing authorisation) to enable them to enter the market. Moreover, the mere existence of patent disputes can demonstrate that potential competition exists between the patent holder and the generic manufacturer.

‘Pay for delay’ as a restriction by object or effect

Second, the ECJ reiterated the essential criteria for establishing whether there is a restriction of competition "by object". The court recalled that this concept should be interpreted strictly, and can be applied only to agreements which reveal "in themselves and having regard to the content of their provisions, their objectives, and the economic and legal context of which they form part, a sufficient degree of harm to competition for the view to be taken that it is not necessary to assess their effects”.

In its determination of whether pay-for-delay agreements may constitute a ‘by object’ infringement, the ECJ considered the two main elements:

  1. Transfer of value: The test is whether the transfer of value is shown to be sufficiently beneficial to encourage the generic manufacturer to refrain from entering the market concerned and from competing on the merits with the originator. The fact that the amount of money transferred by the originator to the generics manufacturer was less than the profit that the latter was likely to achieve by entering the market does not mean that the agreements were not a restriction of competition ‘by object’.
  1. Pro-competitive effects: According to the ECJ, the agreements’ pro-competitive effects need to be considered "in so far as they are capable of calling into question the overall assessment of whether the [agreement] concerned revealed a sufficient degree of harm to competition". These pro-competitive effects must be specifically related to the agreement concerned, and must be sufficiently significant. In this particular case, the ECJ found the settlement agreements were likely to give rise to pro-competitive affects that were not only minimal, but probably also uncertain.

Interestingly, the ECJ explicitly denied that its recognition of pro-competitive effects meant that it recognised a ‘rule of reason’ in EU competition law. Even so, the ECJ’s reasoning does seem to broaden the scope of assessment for ‘by object’ qualifications; an approach that AG Bobek’s opinion in Budapest Bank, and the UK Court of Appeals ruling in Ping, seem to underscore. Pro-competitive effects may therefore now play a more explicit role in the balancing act of ‘by object’ qualifications.

The ECJ subsequently clarified under which conditions a settlement agreement would be considered to restrict competition ‘by effect’. According to the ECJ, in order to establish potential anti-competitive effects of settlement agreements, it is not necessary to determine either that the generic manufacturer would probably win the patent proceedings, or that the parties to the agreement could likely have concluded a less restrictive settlement agreement. The determinative factor is whether the agreement has had the effect of eliminating competition between the parties to the agreement, and whether that effect is appreciable based on the context of the agreement.

Abuse of Dominance

Finally, the ECJ also acknowledged that the exercise of an IP right held by a dominant firm cannot in itself constitute an abuse of a dominant position. However, the dominant firm’s conduct is anti-competitive when it is intended to deprive potential competitors of effective access to a market. The ECJ confirmed that, in a market where the originator is dominant, that originator’s strategy to enter into a series of settlements to temporarily keep generic medicines out of the market may amount to an abuse of that dominant position.

Conclusion

The classification by the ECJ of the settlement agreements as restriction of competition ‘by object’ comes as no surprise after the General Court’s judgments in Lundbeck and Servier (see our October 2016 and December 2018 newsletters). The ECJ judgment provides the following key takeaways:

  • a dispute between an originator and a generic manufacturer constitutes evidence that they are potential competitors;
  • settlement agreements offering significant value transfers from the originator to the generic manufacturer, with the intention that the latter will refrain from entering the market, are likely to be considered an ‘by object’ restriction; and
  • pro-competitive effects can be taken into account for the purpose of determining the existence of a ‘restriction by object’.

 

This article was published in the Competition Newsletter of February 2020. Other articles in this newsletter:

Team

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