CJEU rules that pay-for-delay agreements likely violate competition law where reverse payments occur without justifiable explanation

In today’s decision in Generics (UK) v. Competition and Markets Authority [C-307/18, here], the Court of Justice of the European Union (CJEU) ruled that pay-for-delay agreements may violate Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). Under a pay-for-delay agreement, the holder of a pharmaceutical patent pays generics to stay off the market or delay their entry on the market. The decision is significant because it is the first time the CJEU addresses this issue.
The judgment follows very closey the Opinion of Advocate-General (AG) Kokott, which was only handed down last week [here]. [Says Merpel: perhaps the Court is clearing its docket of important UK referrals before some Brits “celebrate” Brexit Day tomorrow…]

Case background
The case concerns an antidepressant medicine, paroxetine, developed by GlaxoSmithKline (GSK) and protected under various patents. Between 2001 and 2003, GSK entered into agreements with three generics companies. In short, the agreements: (i) put in place distribution arrangements whereby the generics companies would resell GSK-produced paroxetine; (ii) provided for various payments of GSK to the generics companies; and (iii) precluded the generics companies from making, importing or supplying paroxetine in the UK.

In December 2003, another generics company obtained a marketing authorization (MA) for paroxetine in the UK and successfully defended itself against a patent infringement suit brought by GSK. Consequently, the three generics companies terminated their agreements with GSK. The independent market entry of these generics companies had a significant impact on prices: by December 2005, average prices of paroxetine had fallen by around 74%.

Comment by Katfriend Gaëlle Béquet

Any mention of pay-for-delay makes this Kat think of his old friend Gaëlle Béquet, with whom he spent many cheerful evenings when they were both young associates before the Amsterdam patent bar. Gaëlle specializes in competition law and has kindly agreed to share some thoughts on today’s decision by the CJEU.

Play around, but don't kill the competition (Meme Credit: Makeameme.org)
Over to Gaëlle:

The scenario of Generics (UK)is familiar to that in Servier and Lundbeck, heard by the General Court (GC) and Johnson&Johnson a European Commission decision: an originator trying to protect its market position for a blockbuster from generic entry. The CJEU followed the line previously set by the European Commission, the GC and the AG. The decision therefore comes as no surprise for readers following developments in this area.

Originator and generic are potential competitors

The CJEU reiterated that the prohibition to restrict competition pursuant to article 101 TFEU with respect to horizontal cooperation only applies to competitors or potential competitors (§32). Whether a generic, which is not yet on the market, must be considered as potential competition for an originator, depends on its real and concrete possibilities to enter the market, absent the settlement agreements (§37).

Such possibilities require that the generic has taken the necessary preparatory steps to enter the market (e.g. MA, stock of generics,patent litigation), and that there are no insurmountable barriers to entry (§44-45). In line with the AG’s Opinion, the CJEU considered that patents are no such insurmountable barrier because of the uncertainty around the validity of patents and the possibility for a generic to launch-at-risk (§46-51). Unsurprisingly given the overall approach, the CJEU also held that the fact that an interim injunction had been granted does not preclude potential competition (§53).

Taken at face value, there are quite a number of commonly recognized entry barriers present in this case: the medicines sector is characterized by strong entry barriers and is strictly regulated. Also, a launch “at risk” of a generic competing against a blockbuster could lead to a huge exposure of the generic if the patent turns out to be valid and infringed. It follows from established case law that regulatory barriers, access to infrastructures and IP rights can create a so-called “blocking position” on the market (Guidelines Technology Transfer §32-33).

Nevertheless, the CJEU ruled that a competitive relationship was present in this case. The reason for the decision is relatively intuitive: if market players feel the need to conclude an agreement to keep one of them out of a specific market, this is a strong indication that a competitive relationship exists between them (§55). In other words, in a pay-for-delay case, the competition law assessment of the agreements almost precedes the question whether the parties to the agreement are competitors. The CJEU (and before it the GC and AG) seemed to be reasoning to the goal that it wished to achieve.

The CJEU’s considerations around potential competition show that patent-related matters remain a source of constant struggles for competition law. On the one hand, patents are presumed to be valid, creating entry barriers; on the other hand, there is a constant uncertainty regarding the outcome of validity proceedings, which limits the relevance of patent validity as a factor when applying competition law. The economic and legal context around patents makes it difficult to establish whether they are capable of restricting competition that would otherwise have existed – a phenomenon known from cases involving Standard Essential Patents (SEPs).

Agreements that have the object or effect to restrict competition

Also in line with the AG, the CJEU considered that pay-for-delay agreements may have the object to restrict competition (as opposed to agreements having the effect of restricting competition). Qualifying an agreement of restriction by objectreleases a competition authority of the obligation to prove that competition is in fact distorted by the agreement. Hence, the agreement is considered to be harmful to competition by its very nature.

Although the AG condemned the present agreements, the CJEU nuanced the nature of the agreements, stating that they cannot be regarded as agreements bringing to an end entirely fictitious disputes, or designed with the sole aim of disguising a market-sharing or market-exclusion agreement (§76).

The fact that a settlement involves transfers of value (pecuniary or non-pecuniary) by the originator to the generic (a so-called reverse payment) is not sufficient ground to classify it as a “restriction by object”, since those transfers of value may prove to be justified, e.g. to compensate the litigation costs (§85-86). This reverse payment, however, is to be qualified as a restriction by object when it cannot have any explanation other than the commercial interest of both originator and generic (§87).

If the agreement has pro-competitive effects for consumers, those may be taken into account, provided that those are sufficiently significant, so that they justify a reasonable doubt as to whether the settlement agreement harmed competition (§107). A slight reduction in the price of the medicine is in any case no such pro-competitive effect (§109).

A settlement that may not be qualified as a restriction by object may still be a restriction by effect and, therefore, prohibited. This however requires a more thorough analysis of the effects of the agreement for the competition. The CJEU mentioned that the likelihood of success in the validity proceedings, i.e. the validity of the patent in general, is not relevant for this assessment (§121).

Abuse of dominance

After Servier, this is the second EU case where abuse of dominance by the originator was established by the relevant competition authority, next to infringement of the cartel prohibition. In Servier, the GC annulled the Commission decision with respect to the finding of abuse of dominance because the Commission had failed to establish the existence of a dominant position. To that end, the Commission in its assessment of dominance had not sufficiently considered the competitive pressure exerted by other molecules for the treatment of the same disease. The UK Competition Authority seems to have taken this competitive pressure into account and now requests guidance on the concept of the abuse itself.

The CJEU unsurprisingly considered that a dominant undertaking, entering an agreement restricting article 101 TFEU, may at the same time abuse its dominant position. The cumulative effects that restrict competition arising from the conclusion of the various agreements with the different generics may be considered to have a foreclosure effect on the market, ultimately harming consumers.

Take-away message

The take-away message from this decision may be summarized as follows:

  • If a generic has taken any preparatory steps to enter the market, it is likely to be considered a potential competitor of the originator. Roughly said, the existence of a horizontal (settlement) agreement between originator and generic already shows potential competition.

  • If there is a reverse payment from originator to generic, that has no explanation other than the commercial interest of both parties, it is very likely to be anticompetitive, also when there are certain pro-competitive effects. 

For interested readers, the GC's Servier and Lundbeck decisions provide additional interesting insights on this topic in relation to what should be considered as a value transfer and when licensing and distribution agreements may be considered anticompetitive. For Kats and readers proficient in Dutch, my case notes on the Serviercase can be found hereand here.
CJEU rules that pay-for-delay agreements likely violate competition law where reverse payments occur without justifiable explanation CJEU rules that pay-for-delay agreements likely violate competition law where reverse payments occur without justifiable explanation Reviewed by Léon Dijkman on Thursday, January 30, 2020 Rating: 5

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