The EU General Court’s Ruling on Pay for Delay

Why Patent Settlement Agreements May Violate EU Antitrust Laws

01/11/2019
Client Alert

The EU General Court (“Court”) reduced the fines imposed on Servier SAS and its subsidiaries (“Servier”) from a total of €428 million to €315 million (see press release no. 194/18), thereby partially annulling a European Commission (“Commission”) decision.

The Court confirmed the Commission’s finding that most of Servier’s practices (patent settlement agreements including connected side deals) violated the European cartel ban (Article 101 TFEU) since they hindered the market entry of cheaper generic drugs. The Court, however, rejected the Commission’s decision on the abuse of market power by Servier (Article 102 TFEU) since the Commission did not correctly define the relevant market.

Background

The pharmaceutical sector has been the focus of the Commission’s antitrust investigations for more than 10 years due to high prices, low innovation, and generic manufacturers’ relatively hesitant market entries after drug patents’ expirations. The Commission’s investigations focus on patent filings, patent enforcement, and dispute settlement agreements concerning pharmaceutical products’ introduction to the market. The latter include settlement agreements between originator companies and generic companies aimed at delaying the marketing of generic drugs – so-called “pay-for-delay” or “reverse patent settlement” agreements – which can constitute restrictions of competition by object or by effect under the European cartel ban (Article 101 TFEU).

In its Lundbeck decision of 2016 (T-472/13, appeal still pending at the European Court of Justice), the Court decided for the first time on a pay-for-delay constellation. However, the decision left market observers with several questions regarding the delimitation between allowed settlement agreements in pharmaceutical patent lawsuits on the one hand, and settlement agreements that constitute anticompetitive pay-for-delay agreements, on the other.

The Court, in Servier, has now shed some light on this issue.

The Facts

In 2001, Servier filed a patent relating to erbumine, a drug intended for the treatment of hypertension and heart failure, and its manufacturing process. The patent was granted in 2004. When the patent’s validity was challenged, Servier entered into settlement agreements, including several highly complex side deals (such as licensing, distribution and acquisition agreements) with five generic companies. The agreements required those five companies to refrain from entering the market or challenging patent’s validity. The Commission, in its 2014 decision, concluded that all of these agreements constituted restrictions of competition by object and by effect and that Servier’s overall settlement strategy would be exclusionary and therefore constitute abuse of a dominant position. On that basis, the Commission imposed fines in the amount of €330.99 million on Servier and a total of €131.53 million on the five generic companies that had been parties to the various settlement agreements.

Decision of the Court In the case of Servier, the Court confirmed that all but one of the settlement agreements (including the connected side deals) that Servier entered into constituted restrictions of competition by object and thus violated the European cartel ban (Article 101 TFEU). The Court, however, refuted the Commission’s finding of the abuse of a dominant position (Article 102 TFEU).

Cartel Ban (Article 101 TFEU)

According to the Court, Servier and the generic companies were potential competitors, as the generic companies would have had a more concrete possibility of market entry with their generic drug perindropil. The Court acknowledged that a patent, when granted by a public authority, is presumed to be valid and that a patentee’s ownership of that right must be presumed lawful. The Court also highlighted, however, that the existence of a patent would not necessarily prevent the Court from finding that potential competition exists, particularly if it is possible for the generic companies to contest the patent’s validity.

The Court also emphasized the importance of settlement agreements in general, and acknowledged that settlements in patent lawsuits are not necessarily contrary to competition law. When the originator company (i.e., the patentee) grants advantages to the generic company, inducing it to refrain from entering the market or challenging the originator company’s patent, the inducement – not the parties’ recognition of the settlement over the patent’s validity – must be regarded as the real reason for the restriction of competition introduced by the agreement.

The Court therefore confirmed that, in light of the diverse and complex nature of the arrangements for granting an inductive benefit for the generic companies to refrain from entering the market or challenging Servier’s patent, most of the settlement agreements (including the connected side deals) between Servier and the generic companies infringed Article 101 TFEU.

Regarding the agreement between Servier and one of the generic companies, Krka, the Court rejected the Commission’s finding of a violation of Article 101 TFEU due to the specific facts of the case. In particular, the Court did not agree with the Commission’s assessment that Krka’s agreement with Servier induced Krka to withdrawal from the market, and that – without the agreement – Krka would probably have entered the market. Thus the Court annulled the fine that pertained to the settlement agreement between Servier and Krka.

Abuse of Dominance (Article 102 TFEU)

Finally, the Court completely annulled the fines imposed on Servier on the basis of Article 102 TFEU, taking the view that the Commission erred in defining the relevant market by wrongly assuming that perindopril differed, in terms of therapeutic use, from alternative drugs. The Court found that the Commission’s analysis underestimated the patient’s propensity and readiness for alternatives, thus attributing excessive importance to the price factor.

Outlook

In Servier, the Court seems to review the Commission’s market definitions more closely than it has in previous cases, as illustrated by the Servier Court’s discussion of the Article 102 TFEU violation. Given the trend among authorities to attempt to extend Article 102 TFEU to, inter alia, cover excessive pricing in the pharmaceutical sector, the Court’s change in direction, should it last, could turn out to be of further significance.

In any event, Servier should serve as encouragement to originator and generic companies to carefully consider whether potential advantages promised in settlement agreements might constitute potential market restrictions in violation of Article 101 TFEU.

Comment: This article is based on the Court’s official press release no. 194/18. The full text of the Court’s decision is currently only available in French. We will examine the English version in detail after its publication and keep you updated on any relevant additional information contained therein.

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