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EU General Court holds that “pay-for-delay” patent settlements can be illegal agreements but annuls abuse of dominance finding

The General Court has given eight judgments on a Commission fining decision concerning patent settlements entered into by Servier and five competitor producers of generic drugs, reducing the fines from a total of € 428 million to € 315 million. The Court broadly upheld the fines based on Article 101 of the EU Treaty, which prohibits anti-competitive agreements, albeit annulling one and reducing another. But it annulled the fine on Servier to the extent that it was based on the Article 102 prohibition of abuse of a dominant market position, reducing Servier’s total fine from € 331 million to € 228 million.
Further EU legal developments in this area are in the immediate pipeline. Most significantly pay-for-delay issues are currently before the European Court of Justice (ECJ) in the context of both an appeal from the General Court in Lundbeck and a UK national court request for a preliminary ruling in GSK.

Why did the Commission fine Servier and the generics producers?

The fines related to agreements made after the generic producers brought court actions challenging Servier's patents for its cardiovascular medicine perindopril, as part of attempts to enter the market themselves. Under the agreements Servier made payments to the generics companies and those companies delayed the marketing of drugs that might otherwise have competed with perindopril. (Servier’s patent on perindopril had expired but it retained secondary patents relating to processes and form.)
A few months after the English Court of Appeal memorably described one of Servier’s patents as “the sort of patent which can give the patent system a bad name”, the Commission launched dawn raids against Servier and others. The Commission found that the settlement agreements reserved the market to Servier and infringed Article 101 of the EU Treaty. In addition it found that, through the agreements in combination with the acquisition of alternative technology for the production of perindopril, Servier had infringed Article 102.

What did the Court say?

The Court confirmed that most of the agreements constituted restrictions of competition by object and approved the Commission’s approach in this respect. In particular it agreed that the generic companies were potential competitors of Servier at the time the agreements were concluded, that the payments were an inducement to them to stay out of the market, and that the no-challenge and no-marketing clauses were not based on the parties' recognition of the validity of the patent in question but rather on that financial inducement. In those cases it was not necessary for the Court to consider the Commission’s findings on the effects of the agreements.
However, in relation to Krka the Court found there was no restriction by object or effect. Krka had agreed a settlement under which it was licensed under the patents for seven CEE markets and agreed to respect the patents in another 18 to 20 markets. Krka subsequently sold some of its own patents to Servier. The Court found that neither of these agreements constituted an inducement not to enter the other markets, meaning they were not anti-competitive by object, and that the Commission had carried out an incomplete examination of whether the agreements had anti-competitive effects. The Court also found that the another two of the agreements were linked and reduced the fine imposed on Servier because of that.
As to abuse of a dominant position the Court annulled the Commission’s finding completely, holding that the Commission had defined the market wrongly. It had wrongly held that perindopril differed in terms of therapeutic use from alternatives, had underestimated the propensity of patients treated with perindopril to change medicines, and had given excessive importance to price in analysing the competitive constraints. The Court concluded that Servier did not hold a dominant position either on certain national perindopril markets or on an upstream input market. The Court stressed that competition in the pharmaceutical sector differs from that in other economic sectors, as non-price competitive constraints can be very significant.

So when are patent settlements and technology purchase illegal?

This and similar cases are controversial because they require anti-competitive arrangements designed to exclude generics from the market to be distinguished from legitimate settlement agreements designed to resolve disputes about the validity and scope of patents. Some argue that condemning patent settlement agreements makes patent disputes more risky and more costly.
The Court in Servier accepts that a patent is presumed valid and that in principle parties to a dispute should be encouraged to conclude settlement agreements rather than pursuing litigation, which means that patent settlements are not necessarily contrary to competition law. However it holds that a balance needs to be found between the benefits of allowing settlements and the risk that they be misused contrary to competition law. The Court agrees with the Commission that when the proprietor of a patent grants a generic company advantages inducing it to refrain from entering the market or challenging the originator company’s patent, the agreement at issue, even if presented as a settlement agreement, must then be considered a market exclusion agreement, because it is then the inducement, and not the recognition by the parties to the settlement of the validity of the patent, which is the real reason for the generics staying out of the market. However, in the absence of such an inducement such agreements are less likely to be problematic.
In this balancing exercise it will be key to verify whether there is a genuine dispute that is subject to the settlement arrangement, and if so it would seem that recognition of the validity of the disputed patent would itself be a legitimate reason for keeping the generics out of the market, as in such case such effect could not be severed from an acknowledgment that the patent is still valid.

The bigger picture

While the findings on “pay-for-delay” appear consistent with the way Article 101 applies to horizontal agreements relating to pharmaceutical patent disputes, albeit with greater scrutiny of the “payment”, Servier seems to signal a change in approach to Article 102. For many years the European courts have shown great deference to the Commission when reviewing its Article 102 decisions. Servier suggests that the ECJ’s 2017 Intel judgment may have encouraged the General Court to take a more active role than previously in holding the Commission to more rigorous economic standards and to review and test the Commission’s analysis of issues such as market definition. If this is a trend it can be expected to have wider repercussions given ongoing attempts by the Commission and national competition authorities to extend the reach of Article 102, for example in the area of excessive pricing of medicines. At least these judgments, like the UK CAT’s decision in Pfizer/Flynn Pharma, are a signal that authorities need to be rigorous in proving their case.
These are very much international concerns. Beyond the EU, the US Federal Trade Commission has stepped up scrutiny of patent settlements after the US Supreme Court 2013 Actavis ruling confirmed that they could be challenged under antitrust law under a rule of reason approach. And in November this year the OECD Competition Committee met to discuss excessive pricing in pharmaceuticals. Its Background Note by the Secretariat noted that “it may be appropriate to explore various avenues for intervention….agencies may therefore target conduct of pharmaceutical firms that has the potential to create anticompetitive effects, and consequently change an excessively high price, then the remedy prescribed to correct the underlying antitrust violation may also lower the price. One such conduct is reverse payments or pay-for-delay patent settlement agreements”.
In conclusion, pay-for-delay cases are part of a bigger picture of competition law enforcement being used by authorities as a means to combat high drug prices that weigh on public budgets. Enforcers around the world are clearly alive to political concerns about “unfair” high pricing in the healthcare sector. Questions remain as to the extent to which competition law should and can be used to intervene, but these most recent judgments remind authorities that the burden remains on them to prove that conduct falls properly within scope of what is prohibited.