The European Court of Justice rules on the lawfulness of patent dispute settlement agreements under Article 101 TFEU

In June this year, the European Court of Justice (ECJ) issued its ruling in an ongoing case concerning ‘pay-for-delay’ agreements. The ruling largely upheld the European Commission’s 2014 decision to impose fines on the Servier pharmaceutical group and several generic pharmaceutical companies for entering into patent settlement agreements. In this article, Setterwalls analyses some of the key takeaways from the Court’s ruling on the assessment of the agreements under Article 101 TFEU.

Backgrond
The Servier pharmaceutical group (“Servier”) develops and markets Perindopril, a medication for treating certain heart diseases. In the 2000s, the patent on Perindopril’s active ingredient expired, prompting Servier to apply for new patents related to its manufacturing process. Several generic companies challenged the validity of one of these patents, leading Servier to enter into settlement agreements with some of the companies. These agreements stipulated that the generic companies would refrain from disputing the patent and entering the Perindopril market in exchange for remuneration from Servier.

The European Commission found these agreements to be anti-competitive and found Servier’s actions to be an abuse of a dominant market position. It imposed fines exceeding EUR 330 million on Servier and around EUR 97 million on the generic manufacturers concerned. The General Court of the European Union (the “General Court”) partly upheld the Commission’s decision, confirming that several of the agreements constituted infringements, but annulled the decision regarding Servier’s abuse of a dominant position and agreements with one of the generic companies. Both Servier and the generic companies fined appealed these judgments, as did the Commission.

The European Court of Justice (“ECJ”) handed down its ruling in June this year. This article analyses the decision in relation to Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). It should be mentioned that the decision also addresses several other important issues that are not covered in this article.

The Concept of ‘Pay-for-Delay’ Agreements and their position in EU Competition Law
Article 101(1) of TFEU states that all agreements between undertakings, decisions by associations of undertakings and concerted practices that may affect trade between Member States that have as their object or effect the prevention, restriction or distortion of competition within the internal market are incompatible with the internal market and are prohibited.

From a competition law perspective, a pay-for-delay agreement is a form of cooperation between generic companies and originator manufacturers. This type of agreement may be considered a form of market division. The ECJ has on several occasions held that agreements that divide the market constitute particularly serious breaches of the competition rules. As such, agreements of this kind inherently have a purpose that restricts competition and are classified under agreements explicitly prohibited by Article 101(1) of TFEU.

Pay-for-delay agreements typically involve a scenario where the manufacturer of originator medicinal products agrees to compensate a generic producer to settle or avoid litigation that could potentially invalidate the patents of the originator manufacturer. In return, the generic producer commits to refraining from competing with the manufacturer of the originator drug for a specified period. Such a reverse payment, where the manufacturer of the originator pays the generic company, may be considered to be an infringement of EU competition law.

In practice, it must first be determined whether the agreements can be characterised as a restriction of competition among undertakings that are, or could potentially be, competitors. If this is established, the next step is to assess whether, based on their economic characteristics, these practices qualify as a restriction of competition by object.

While case law about pay-for-delay agreements is generally scarce, the ECJ has established certain criteria to assess whether such agreements constitute an infringement by object and are therefore prohibited under EU competition law.

Firstly, both the manufacturer of the originator and the generic company must be potential competitors. That is to say whether, notwithstanding the existence of a patent, the manufacturer of generic medicines has real and concrete possibilities of entering the market within a timeframe that would impose competitive pressure on the manufacturer of the originator.

Secondly, the entry of the generic company to the market must be restricted.

Thirdly, the agreement between the parties must include a substantial transfer of value from the originator manufacturer to the generic company, which can only be justified by a commercial interest in preventing market competition.

Additionally, it is important to recognise that patent validity challenges are a normal part of competition in the pharmaceutical sector, and settlement agreements where a generic manufacturer temporarily acknowledges a patent’s validity and agrees not to challenge it or enter the market may be considered to restrict competition.

The ECJ Ruling on the Patent Settlement Agreements
In the judgment at hand, the ECJ confirmed the General Court’s ruling on several of the patent settlement agreements, finding that the agreements constituted market-exclusion agreements and restricted competition by object.

In so doing, the ECJ  held that the General Court had relied on correct legal criteria in its assessment. The General Court had inter alia found that while the mere presence of a reverse payment in patent dispute settlement agreements that include non-challenge and non-marketing clauses does not automatically characterise such an agreement as a restriction of competition by object, the situation changes when an unjustified reverse payment is involved in the settlement. In such cases, the generic company is considered to have been induced by that payment to agree to the non-marketing and non-challenge clauses. Consequently, it must be concluded that restriction by object exists.

The General Court further explained that, in such instances, the restrictions of competition resulting from the non-challenge and non-marketing clauses can be attributed to the benefit conferred, which induces the generic company to abandon its competitive efforts.

By recalling its case law, the ECJ held that the reverse payment can only be justified where it constitutes the reimbursement of costs of or disruption caused by the patent dispute, such as the legal expenses and fees of the generic manufacturer, or by the need to provide remuneration for actual supply of goods or services provided by the generic manufacturer to the manufacturer of the originator. If the net gain from the transfer is not fully justified, it must be ascertained whether those transfers can have no explanation other than the commercial interest of those manufacturers not to engage in competition on the merits.

Thus, where a patent settlement agreement provides for an economic benefit for the manufacturer of generic products in return for the limitation of that manufacturer’s efforts to compete with the manufacturer of the originator, it constitutes a restriction of competition by object and is prohibited.

In light of the above, the ECJ upheld the General Court’s judgment on several of the agreements, holding that the General Court had been correct in finding that the patent settlement agreements constituted by-object restrictions of Article 101 TFEU, as the Commission had established the existence of a reverse payment that was not inherent to the settlement agreement at issue and therefore an inducement for the generic company to agree to the non-marketing and non-challenge clauses.

However, in relation to one of the patent settlements, the ECJ overturned the General Court’s judgment, finding that the General Court had made a number of errors of law. The settlement at hand consisted of three agreements: a patent settlement agreement containing non-challenge and non-marketing clauses and no transfer of value, a license agreement granting a license to the disputed patent in return for royalties on net sales in designated territories, and an assignment and lease agreement which assigned two patents to the generic manufacturer in return for remuneration.

In that respect, the ECJ found that two of the abovementioned agreements – the patent settlement agreement and the license agreement – amounted to by-object restrictions of Article 101 TFEU, despite not involving any reverse payment.

The ECJ criticised the General Court for examining the agreements separately, as the generic company would not have entered the settlement without the license agreement, which incentivised it to stay out of Servier’s core markets, while granting the generic company the opportunity to continue operating on the Perindopril market in its core market without the risk of infringement. This error led the General Court to wrongly restrict the scope of its analysis of the characterisation of a restriction of competition by object to the question whether the Commission had succeeded in establishing that the royalty rate was abnormally low.

The ECJ held that the economic and legal context of the patent settlement agreement and the license agreement gave rise to division of markets, irrespective of whether the transfer of value was sufficient to induce the generic company not to enter Servier’s core market. The combination of agreements therefore constituted an infringement of Article 101 TFEU.

Summary remarks
Although the ECJ’s decision does not depart significantly from its previous case law, the ruling is valuable confirmation of how the assessment of pay-for-delay agreements under EU competition law should be performed in practice. Especially as the subject only has limited case law.

The ruling clarifies the extent to which patent settlement agreements may be considered as by-object infringements of Article 101 TFEU and the relevant circumstances for the analysis. As patent disputes are a normal part of competition in the pharmaceutical sector, and since both the Commission and national competition authorities have recently exercised increased scrutiny of the sector, it will be interesting to follow the developments and effects of the ruling to come.

It should be noted that the ECJ referred the question of whether the assignment and lease agreement mentioned above constitutes an infringement of Article 101 TFEU back to the General Court, as it had not ruled on that agreement.  The question of whether Servier’s conduct was an abuse of a dominant market position was also referred back to the General Court, as the ECJ held that the General Court relied on incorrect grounds when it invalidated the definition of the relevant market used by the Commission.