By Konstantinos Sidiropoulos
On 8 September 2016, the General Court (‘GC’) handed down a seminal judgment for the pharmaceutical sector in the Lundbeck case. The judgment is of particular importance, because it is the very first ruling of the EU Courts affirming that pharma pay-for-delay agreements (or reverse payment settlement agreements) may be subject to competition law scrutiny. Pay-for-delay (‘PFD’) agreements are agreements that are intended to delay the market entry of generic manufacturers with generic drugs in exchange for payments made by original pharmaceutical producers (i.e., holders of patents for an original branded drug). The GC, upholding the European Commission’s (‘Commission’) decision of 19 June 2013, held that Lundbeck and four generic producers had infringed EU competition law by entering into such agreements.
The Commission has lately been particularly active in this area. Indeed, PFD agreements were first regarded as potential targets for scrutiny under competition law in the EU as a result of the Commission’s Pharmaceutical Sector Inquiry, leading to the publication of its Pharmaceutical Sector Inquiry Final Report in July 2009. Since then, the Commission has been continuously monitoring patent settlements between originator and generic companies, publishing six reports on this matter – the latest of those being published in December 2015.
The Lundbeck Saga
Origins of the Judgment
Lundbeck, a Danish pharmaceutical company, developed and sold a blockbuster antidepressant medicine with the active pharmaceutical ingredient (‘API’) citalopram. Lundbeck’s compound patent for citalopram had expired by January 2002 in most EEA countries, but the company held certain process patents which did not constitute insurmountable barriers to entry for generic producers. In fact, one generic producer had already started marketing its own generic version of citalopram and some other producers were preparing for market entry. In order therefore to protect its market position, Lundbeck launched a number of proceedings against generic producers, claiming infringements of its process patents.
It is in this context that Lundbeck concluded six agreements with four groups of firms which were active in the production and sale of generic medical products, namely Merck (GUK), Alpharma, Arrow and Ranbaxy, thus settling their patent disputes. The pattern of all these agreements was the same: the generic producers committed not to enter the market for a specified period of time and Lundbeck offered substantial payments in return.
In its decision, the Commission regarded the six agreements as constituting restrictions of competition ‘by object’ within the meaning of Article 101(1) TFEU and Article 53(1) EEA Agreement. The Commission relied on the same six factors in reaching its conclusion regarding the compatibility of each of these agreements with the competition rules. Specifically, the Commission found that: i) Lundbeck and every single generic producer were at least potential competitors in the EEA; ii) Lundbeck transferred significant value to the generic producers; iii) the value transfers were linked to the acceptance by the generic companies of the limitations on market entry; iv) the transferred value corresponded approximately to the profits that the generics expected to make if they had successfully entered the market; v) the content of the agreements went beyond the rights granted to Lundbeck pursuant to its process patents; and vi) the agreements did not contain any clause restricting Lundbeck from bringing infringement proceedings against the generics in case the latter entered the market following the expiry of the agreements.
On the basis of these findings, the Commission imposed fines on all parties to the agreements: € 93.8 million on Lundbeck and a total of € 52.2 million on the generic companies.
Both Lundbeck and each of the generic undertakings appealed the Commission’s decision, asking the GC to annul the contested decision, or, in the alternative, to annul or substantially reduce the fines.
Judgment of the GC
The GC dismissed all actions, fully confirming the Commission’s findings and upholding the imposed fines.
One of the main arguments put forward against the contested decision was that Lundbeck and the generic firms were not potential competitors. The idea is that Article 101 protects only lawful competition, which cannot exist where an exclusive right, like a patent, precludes market entry (para 115). Indeed, this was the starting point in the judgment because if the generics were not potential competitors, then the Commission’s characterisation of the agreements at issue as being ‘comparable to market-sharing or exclusion agreements’ would have been erroneous.
The GC held that the Commission was right in its understanding of the concept of potential competition. It thus considered that the Commission had carefully examined the specific characteristics of the pharmaceutical sector and applied the relevant case-law accordingly. The legal test applied by the Court was whether the generic producers had real concrete possibilities to enter the market in the absence of the agreements; that is, whether they had the ability and incentive to do so (paras 100-1). The GC held that the Commission adequately examined the real concrete possibilities that each of the generic undertakings had of entering the market, relying on objective evidence such as the investments already made, the steps taken in order to obtain marketing authorisations (‘MAs’) pursuant to Directive 2001/83/EC, and the supply contracts concluded with, amongst others, their API suppliers (paras 142 and 170).
As such, the Court held that the generic undertakings were potential competitors of Lundbeck. This was so, first, because Lundbeck’s process patents did not constitute insurmountable barriers for the generic undertakings, which were willing and ready to enter the citalopram market, and which had already made considerable investments to that end (para 124). Moreover, Lundbeck itself estimated the probability that its process patent would be held invalid at 50-60% (para 122). In this vein, the Court commented that it would be surprising if an undertaking as experienced as Lundbeck would have decided to pay several million euros to the generic undertakings in exchange for their commitment not to enter the market if the possibility that those generic undertakings could enter the market was purely theoretical (para 161). Secondly, the presumption of validity accompanying patents cannot be equated with a presumption of illegality of generic products (para 121). That is to say, it is for the patent holder to prove before the national courts that generics infringed its process patents, since an ‘at risk’ entry is not unlawful in itself. Thirdly, the Commission was not required to demonstrate with certainty that the generic undertakings would undoubtedly have been able to obtain a commercially viable and non-infringing process during the term of the agreements at issue, but only that they had real concrete possibilities of doing so within a sufficiently short time (para 203). According to the GC, to assert the contrary would amount to denying any distinction between actual and potential competition (paras 159). Finally, the Court stressed that the ‘potential competition’ which is protected under Article 101 includes all the administrative and commercial steps required in order to prepare for entry to the market (para 171). Thus, the absence of an MA does not mean that the generic medicinal products were not capable of entering the market in the near future.
‘By object’ Restriction of Competition
The GC again agreed with the Commission’s analysis, holding that the agreements constituted a restriction of competition ‘by object’ for the purposes of Article 101(1). It was also underlined in the judgment that, as a matter of principle, patent settlements are not problematic from a competition law perspective; however, they are likely to be so where they provide both for the exclusion from the market of actual or potential competitors, and for reserve payments. This is because the limitation of market entry in such a case does not arise exclusively from the parties’ assessments of the strength of the patents but is obtained by means of the payment, constituting a buying-off of competition (para 352). In that regard, the GC confirmed that the Commission was right to employ the large size of the reverse payments as an indicator of the weakness of Lundbeck’s patents (para 353).
Hence, the GC concluded that the agreements restricted competition by object, that is, by their very nature. In other words, the GC held that those agreements established a coordination between the parties which revealed a sufficient degree of harm to competition for the examination of their effects to be considered superfluous (para 437). The reasons put forward in the judgment were the following:
- To start with, the finding that the generics were potential competitors meant that the agreements were comparable to market exclusion agreements; such agreements are among the most serious restrictions of competition as they constitute an extreme form of market sharing and of limitation of production. This is so because even if Lundbeck’s process patents were presumed to be valid, they did not allow the exclusion of all competition in relation to citalopram (para 435).
- Additionally, the agreements removed the very possibility of market entry, and replaced it with the certainty that the generic undertakings would not enter the market with their products during that period (para 401). By doing so, the generic companies were able to split the profits that Lundbeck continued to enjoy, to the detriment of consumers who continued to pay higher prices than those they would have paid if the generics had entered the market. As such, the agreements prevented the normal operation of the competitive process (para 424).
- Thirdly, the agreements did not resolve any patent dispute (para 460); indeed, they contained no commitment from Lundbeck that after their expiry generics would be able to enter the market without having to face infringement actions from Lundbeck.
- Fourthly, the content of the agreements went beyond the scope of Lundbeck’s patents (paras 386 and 460).
- Finally, the generic undertakings had no incentive to challenge Lundbeck’s patents and to pursue their efforts to enter the market after concluding the agreements, since the reverse payments broadly corresponded to the profits that they expected to make if they had entered the market (para 399). In this context, the Court seemed unsurprised by the argument put forward by Lundbeck concerning the ‘asymmetry of risk’ between the former and the generic undertakings. It held that accepting this argument would amount to accepting that Lundbeck can maintain artificially high prices to the detriment of consumers and the healthcare budgets of States; an outcome that would be contrary to the very objectives of EU competition law.
As regards the exemption stipulated in Article 101(3), the GC held that the conditions for its application were not met in the present case (para 720). The applicants have failed to establish, inter alia, how the restrictions on competition arising from those agreements were indispensable for the achievement of these objectives, given that the conclusion of other types of settlement agreements was possible (para 719).
Legal Certainty and Novelty of the Legal Issues
Lundbeck and the generic companies submitted two arguments relating to the principle of legal certainty. As regards the first argument, they deployed the judgment of the Court of Justice in CM v Commission, where it was held that the concept of restriction by object had to be interpreted restrictively (CM, para 58), in order to claim that the Commission was not entitled to classify the agreements at issue as restrictions by object (para 432). The GC answered clearly and unequivocally at para 438 of its judgment that:
‘[t]he fact that the Commission has not, in the past, considered that a certain type of agreement was, by its very object, restrictive of competition is […] not, in itself, such as to prevent it from doing so in the future following an individual and detailed examination of the measures in question having regard to their content, purpose and context’.
The second argument concerned the imposition of the fines. Specifically, it was argued that the Commission failed to observe both the legal certainty and the nullum crimen, nulla poena sine lege principles (Article 7 ECHR and Article 49 CFREU), to the extent that it imposed fines in a case where the underlying factual and legal issues raised where extremely complex and novel. The GC reiterated the case-law, according to which the principles in question are satisfied where the undertakings concerned ‘cannot be unaware’ of the anticompetitive nature of their conduct (para 762). Then, it went on to hold that, far from unforeseeable, the undertaking concerned ‘could reasonably’ perceive that their agreements contained restrictions of competition that were contrary to Article 101(1) (para 777). As the Court explained, it is clear from the very wording of Article 101 that agreements for the exclusion of competitors from the market are unlawful (para 765); and the fact that the said agreements had the form of patent settlements is irrelevant for the assessment of their compatibility with Article 101 (para 766). Moreover, this was corroborated by documentary evidence that demonstrated that both Lundbeck and the generic undertakings were aware of the anticompetitive nature of the agreements (para 776).
The much awaited judgment of the GC in Lundbeck is very important for the pharmaceutical sector: it is the first judgment of the EU Courts to hold that PFD agreements can be subject to competition law scrutiny; and it also plainly illustrates the very peculiar features of the pharma sector, which is most prominently manifested in the analysis of potential competition.
The Commission presented a very strong narrative which was very difficult to rebut. Undoubtedly, it heavily benefited from its inquiry in the pharmaceutical sector which enabled it to refine its approach and fully comprehend the anticompetitive nature of certain agreements in this sector. In this regard, it should be noted that the Commission only initiated antitrust proceedings in this case in January 2010 (see here), i.e. eight years after the conclusion of the agreements. Having concluded its competition inquiry into the pharmaceutical sector, the Commission could devote the substantial resources required to address these complex legal issues more efficiently, and could also claim that its conclusions were based on a clear image of the pharma sector and a coherent, informed, and comprehensive understanding of its special features.
With regard to potential competition, the GC was correct in its analysis considering the special characteristics prevailing in the pharma sector (for a different view, see here and here). The Commission was very accurate when it claimed that the potential competition which is protected by Article 101 includes all the administrative and commercial steps required in order to prepare for entry to the market. That is, competitive pressure can be exerted by the generic undertakings before they obtain an MA, and even before the actual expiry of the basic patent. Otherwise, effective competition would suffer significant delays, at the expense of patients and/or national health insurance schemes (para 171). This is so because any undertaking active in the pharmaceutical sector is familiar with the fact that preparation for the production of generic versions of drugs commences many years before the expiry of an original patent, and that the expiry itself triggers an intense race in order to be the first to enter the market. In the present case, the generic undertakings had begun making preparations to enter the citalopram market one to three years before the expiry of Lundbeck’s original patents (para 179). Moreover, those that have a proper knowledge of the sector appreciate how undemanding it is for generic producers to manufacture a generic version of a drug that would not infringe a process patent. Although this is common knowledge for those active in the sector, it is an impossible task to prove with certainty. Hence, the GC was correct to hold that the ability of the generic producers to enter the market with a non-infringing process need not to be demonstrated with certainty. In the present case, it was clear that Lundbeck’s process patents were incapable of preventing all possibilities of market entry.
Having established that generic producers were potential competitors of Lundbeck, it was inevitable on the facts to regard the agreements at issue as being restrictive of competition by object. This is not only because the agreements provided simultaneously for the limitation of generic market entry and for significant value transfers, but is also due to some further aggravating factors: the payments amounted to the expected profits of the generics had they entered the market; the real purpose was not to resolve the underlying patent dispute between the parties insofar as the agreements did not provide for market entry upon their expiration; and the content of the agreements went beyond the scope of Lundbeck’s patents, since they were intended to prevent the sales of all types of generic citalopram while Lundbeck could not have obtained the same outcome through the enforcement of its patents.
In this vein, the ‘weak’ nature of the IPRs at issue certainly affected the reasoning and outcome of the judgment. Hence, Lundbeck is a ‘special case’; neither the Commission nor the GC suggest that this strict approach is to be regarded as the general rule to be applied to all reserve payment settlement agreements. On the contrary, recognising the positive aspects of settlements of litigation, the Commission and the GC were careful to emphasise that the existence of a reverse payment in the context of a patent settlement is not always problematic. This is especially so when they are not accompanied by any restriction on market entry. Consequently, the finding of restriction by object in Lundbeck was based on the individual assessment of the circumstances of the case. Even so, Lundbeck certainly indicates that pharmaceutical companies need to be diligent when entering in such agreements. It is not a risk-free strategy; this is especially so for patent settlement agreements that incorporate clauses which both limit generic market entry and provide value transfers. The latter are likely to attract the highest degree of antitrust scrutiny.
Interestingly, the GC referred on several occasions to the judgment of the US Supreme Court in Actavis, where the facts are similar. Generally, to talk of divergence when EU and US rulings employ different approaches to similar matters is to skip a step, namely failing to acknowledge the existence of different rules. For instance, in the US there is no equivalent to Article 101(3) TFEU, and in the EU there is no such thing as a rule of reason. Even so, the divergence between the two rulings is more apparent than real: both held that PFD agreements can be subject to antitrust scrutiny; both considered the size of the value transferred as a relevant factor for the assessment of the settlement agreements; both rejected the ‘scope of the patent’ test as being problematic; and both stressed that the patent validity presumption is not equated to a presumption of patent infringement. Furthermore, even the legal tests applied for the assessment of PFD agreements were contiguous insofar as the Commission did not adopt a ‘quick look’ approach in order to characterise the agreements in Lundbeck as restrictive ‘by object’; rather, it did so following an individual and detailed examination of the measures in question having regard to their content, purpose and context.
A point of criticism of the judgment might be that the GC failed to provide more general guidance as to how pharmaceutical undertakings can safely draft their settlement agreements. In that regard, the Court did not address the issue of whether PFD agreements similar to those examined in Lundbeck but without the aggravating factors, would still be restrictive by object.
More generally, the peculiar feature of pay-for-delay cases is that they are about striking the right balance between the protection of IP law and the corresponding protection of competition law, i.e. it is about the coexistence of IPRs and pro-competition principles. The difficulty here is to identify the dividing line between the legitimate protection of rights and the exploitation of those rights for anticompetitive ends. Indeed, one needs to appreciate the very peculiar features prevailing in the pharma sector and the potential conflict between competition law and IPRs, which results from the fact that -as a rule- pharmaceutical firms enjoy patent protection.
It has been argued that:
‘[t]he patent is the elephant in the room, which despite its size and importance seems often to be downplayed or forgotten’.
In Lundbeck the relevant patents looked more like mice rather than elephants; and, as mice occasionally do, they attempted to roar. But as Lundbeck had but one hole, it was quickly taken: in properly applying the competition rules, the Commission and the GC remedied the overprotection provided by IP law.