ECJ rules patent settlements can be anti-competitive by object

On 30 January 2020, the EU Court of Justice (ECJ) gave its ruling in case C-307/18 on several preliminary questions that were asked by the UK Competition Appeal Tribunal (CAT). The CAT was seized as a result of the appeal by GSK, Generics and Alpharma against the UK Competition and Markets Authority’s (CMA) decision to impose fines on these companies (i) for having concluded anti-competitive agreements and (ii) for GSK having abused its dominant position.

These competition law infringements concern the (patent) settlement agreements and distribution agreements concluded between GSK and manufacturers of generics medicines (including Generics, Alpharma and IVAX). More specifically, these agreements included (i) the agreement by the manufacturers of generics medicines not to enter the market for the remaining duration of GSK’s patent, (ii) not to (continue to) challenge the validity of GSK’s patent and (iii) the agreement by GSK to make a transfer of value to the manufacturers of generics medicines that substantially exceeded the avoided litigation costs and value of goods/services supplied to GSK.

These agreements were concluded following the disputes that arose as to the validity of GSK’s manufacturing process patent (to be distinguished from GSK’s patent for the active ingredient that had expired in 1999).

In essence, the ECJ’s Judgment mainly discussed (i) whether the manufacturers of generics medicines are potential competitors of GSK, (ii) whether the agreements are anti-competitive by object and (iii) whether GSK’s strategy of entering into various agreements to preclude the risk of unrestricted generic entry constitutes an abuse of a dominant position.

Potential competition

As regards the questions relating to potential competition, the ECJ reiterated that an undertaking is a potential competitor if there are real and concrete possibilities of that undertaking joining the market concerned. The ECJ specified in this respect that in the absence of an agreement temporarily keeping an undertaking outside a market, a potential competitor would have had real and concrete possibilities of entering the market. According to the ECJ, such assessment has to be made on a case-by-case basis having regard to the structure of the market and the economic and legal context within which the undertaking operates.

This means, according to the ECJ, in relation to the pharmaceutical sector, that (i) the regulatory constraints such as the need for market authorisations, (ii) intellectual property rights and, in particular, the patents held by manufacturers of originator medicines and (iii) the perception of the established operator as to whether an undertaking exerts a potential competitive threat, must be considered.

The ECJ further clarified that it was therefore necessary to determine whether the manufacturer of generic medicines concerned had taken sufficient preparatory steps and that the entry barriers are not insurmountable. The existence of a patent cannot, according to the ECJ, be regarded as an insurmountable barrier as the validity of such a patent can be challenged (by the potential competitor).

The ECJ indicated in this respect that a competition authority did not have to review the strength of a patent or the probability of a dispute ending in the patent being declared valid. In contrast, a competition authority would have to consider, in addition to the existence of a patent:

• that the presumption of validity of a patent does not amount to a
  presumption of illegality of a generic;
• that a patent does not guarantee protection against actions seeking
  to contest its validity which commonly take place before or
  immediately after market entry of the generic;
• that, to obtain a market authorisation for a generic, there is no
  requirement to prove non-infringement of any patents; and
• that potential competition may be exerted before the expiry of a
  compound patent, since the manufacturers of generics want to be ready
  to enter the market as soon as that patent expires.

Moreover, the ECJ stated that a genuine dispute (with an uncertain outcome) even constitutes evidence of the existence of potential competition. The ECJ reiterated previous case-law which held that the conclusion of a non-compete/entry-delay between undertakings operating at the same level in the production chain constitutes a strong indication of the existence of potential competition. The ECJ considered in this respect that the greater the transfer of value as compensation for such non-compete/entry-delay, the stronger the indication.

By object restriction

In relation to the questions regarding the by object qualification of pay-for-delay settlement agreements, the ECJ reiterated that the concept of restrictions of competition by object should be interpreted strictly and can only relate to agreements/concerted practices of which experience shows that they cause a sufficient degree of harm to competition.

According to the ECJ, such qualification cannot be based on unsubstantiated allegations but requires, on the contrary, an analysis of the content of the provisions, their objectives and the economic and legal context of which they form part, considering the nature of the goods and services affected as well as the real conditions of the functioning and structure of the market(s) in question.

As regards the “nature of the goods and services affected as well as the real conditions of the functioning and structure of the market(s)”, the ECJ subsequently described the characteristics of the medicines sector - identifying strong barriers to entry and controlled prices that are affected by entry of generics - and ruled that in this context, pay-for-delay settlement agreements are particularly sensitive from a competition law point of view.

The ECJ went on to provide its reasoning regarding the assessment of “the content of the provisions of such agreements and their objectives” of pay-for-delay settlement agreements which can be summarized as follows:

• Step 1: Does the pay-for-delay settlement agreement concern a genuine
  dispute or not?

If the answer to this question is no, such an agreement would in fact constitute a market-sharing agreement and/or market-exclusion agreement. Such agreements are by-object restrictions.

If the answer to this question is yes, further analysis is required as such agreements may nonetheless be treated as equivalent to market-sharing or market-exclusion agreements. In other words, the uncertainty as to the outcome of the patent proceedings does not in and of itself preclude the finding of a by-object infringement.

• Step 2: Does the pay-for-delay settlement agreement include no
  payment of sums or payment of sums (i) that cannot be reasonably
  explained as something other than the commercial interest of the
  parties concerned not to engage in competition on the merits (i.e.
  exceed a proven and legitimate quid pro quo) and (ii) that acts as an
  incentive to refrain from entering the market concerned?

• Step 3: Does the pay-for-delay settlement agreement give rise to
  pro-competitive effects that are demonstrated, relevant, specifically
  related to the agreement concerned and sufficiently significant? If
  so, the agreement concerned would no longer qualify as a by object
  restriction.

The ECJ moreover ruled that the finding of a pay-for-delay settlement agreement being restrictive by object cannot be rebutted by the fact that the duration of the agreement does not exceed the duration of the patent validity.

Abuse of dominant position

As the establishment of an abuse of dominant position requires, first, a market definition, the ECJ ruled that in the context of medicines where the active ingredient is in the public domain (whereby entry of generics is nonetheless hindered as a result of a process manufacturing patent), the generics would have to be included in the relevant market if market entry in the short term is possible.

As to whether GSK has abused its dominant position by pursuing a strategy of entering into several agreements to preclude the risk of unrestricted generic entry, the ECJ ruled that it is necessary to assess whether this strategy yielded actual or potential anti-competitive effects going beyond the specific anti-competitive effects of each of the agreements that are part of that strategy - whereby anti-competitive intent is not necessary but nonetheless relevant.

Moreover, the ECJ ruled that even in the event that anti-competitive effects can be shown, the efficiency gains - to be shown by the dominant undertaking concerned - would have to be considered. The ECJ clarified in this respect that the accidental nature of the efficiency gains is of no relevance.

Comment

This Judgment clearly sets out the views of the ECJ in respect of pay-for-delay patent settlement agreements concerning manufacturing process patents. The Judgment arguably allows for some prediction as to the outcome of the pending appeals against the General Court’s Judgment in the Servier pay-for-delay patent settlement cases.

Undertakings - in particular those active in the pharmaceutical industry - should proceed with caution regarding patent settlement agreements and should carefully consider the ECJ’s guidance.