On 12 December 2018, the General Court partly annulled the Commission's decision to fine drug manufacturer and originator company Servier and five generic companies in a reverse payment patent settlement case.
Although supporting the Commission's view that the settlements restricted competition 'by object', the General Court has paved the way for pharmaceutical companies to argue that therapeutic use should be central to market definition, a move away from the tendency to define a separate market for each molecule. In concluding licensing agreements alongside patent settlements, companies may safeguard the agreements by ensuring they are concluded at arm's length.
Servier is the originator company of perindopril, a medicine used in the treatment of hypertension and heart failure. After the compound patent over the active substance expired, protection was ensured by a secondary patent. The validity of the secondary patent was challenged in court by five generics producers, Niche/Unichem, Matrix, Teva, Lupin and Krka. All companies settled their claims, agreeing to refrain from entering the market or challenging the patent. Krka also concluded a licence agreement with Servier.
The Commission found that the settlement agreements restricted competition 'by object' and 'by effect' because their aim was to protect Servier from price competition by generic companies and that Servier implemented a strategy to exclude possible generic entrants. The Commission imposed fines on Servier and the generic companies totalling EUR 427.7 million. Servier was also found to have abused its market power.
In its judgment, the General Court (GC) reduced the total amount of fines to EUR 315 million. Its main findings were as follows: (i) it supported the Commission's view that the agreements constituted a restriction of competition 'by object', (ii) it found that the agreements with Krka were not anticompetitive, (iii) it fully annulled the finding of abuse of dominance based on issues with the market definition, and (iv) it reduced the fine connected to the agreement with Matrix based on overlaps between infringements. The first three findings have the most practical relevance and will be briefly discussed below.
Reverse payment settlements concluded by Servier amount to a 'by object' restriction of competition
Although recognising that patent settlement agreements are not necessarily contrary to competition law, the GC found that the agreements concluded by Servier amounted to a restriction of competition 'by object'. When the originator company incentivises generic companies to refrain from entering the market, even if the incentives are included in a settlement agreement, this may be anti-competitive. This would be the case if the real reason for concluding the settlement is not so much related to a recognition of the patent's validity, but is done instead with a view to inducing the generic company to stay out of the market.
The GC provided some instructions on how to perform the latter analysis. The starting point would be to determine the costs inherent to the settlement, including the patent litigation, in order to assess whether the difference between the value transfer to the generic company and those inherent costs constitutes an inducement to settle. The GC then indicated that any difference would not necessarily lead to an illegal settlement, but that the inducement would have to be "significant". Such significance, it continues, would have to be derived from the fact that the inducement actually leads generic companies to accept non-challenge and non-commercialisation clauses. At that point, the GC's reasoning appears somewhat circular, as it is precisely the difference between the value transfer and the inherent costs that would indicate the presence of an anti-competitive incentive.
In any event, the GC helpfully clarified that costs of making the generic medicines infringing the patent, research and development costs and costs entailed by terminating third party contracts, such as supply agreements, are extraneous to the patent litigation and may therefore indicate the existence of a significant inducement.
Licencing agreements may be difficult to qualify as reverse payments if at arm's length
Alongside the settlement agreement, Servier licenced perindopril to Krka in seven markets. The GC concluded that this was neither a restriction of competition 'by object', nor 'by effect'. Commercial agreements connected to patent settlement agreements which include restrictive clauses may indicate the existence of an inducement to not compete. However, this does not hold true for licensing agreements, which the Commission must prove were not granted under normal market conditions.
In finding that there was no proven restriction of competition, the GC considered the context and scope of the agreements, including the fact that there were, from the parties' perspective, indications that the patent was valid before negotiations started and that the licence, although favourable to Krka, was concluded at arm's length.
Abuse of dominance annulled due to a too narrow definition of the relevant market
The GC annulled in full the Commission's finding that Servier had abused its dominant position, based on the faulty definition of the relevant market that was limited to the perindopril molecule, both original and generic. Basing itself on the market reality that demand for a product is not controlled by the end consumer, but by prescribers, for whom therapeutic use is most important, the GC found the Commission's analysis to be flawed.
The Commission wrongly found that perindopril differed from other medicines of the same class, excessively relied on price and underestimated the propensity of patients to switch medicines. The GC noted that internal and promotional documents where perindopril was presented as superior to other medicines of its class must be interpreted in their context and considering their objectives, and should not be relied on as such. The considerations regarding the relevant market will prove relevant beyond this case.
Not the end of the road for pharmaceutical patent settlement cases
More changes and clarifications are anticipated in the near future, as the European Court of Justice is expected to rule on (i) the appeal against the General Court's judgment in Lundbeck [see our October 2016 Newsletter] (ii) a UK national court referral in the case of GSK and (iii) potential appeals in the Servier case.
This article was published in the Competition Law Newsletter of January 2019. Other articles in this newsletter: