February 10, 2015

European Antitrust Watchdogs Warn Of Uncertain Future For Pay-For-Delay Settlements

A View from Constantine Cannon’s London Office

By Irene Fraile

A recent lively discussion with European Commission competition officials indicates that antitrust enforcement is continuing to evolve to deal with the thorny issues raised by so-called “reverse-payment” or “pay-for-delay” patent litigation settlements designed to delay the sale of generic drugs.

On January 29, 2015, Brussels Matters (which hosts informal discussions with senior EU officials) hosted the first pan-EU discussion with officials from the European Commission’s Directorate General for Competition (“DG COMP”) after the Commission’s Lundbeck decision, which imposed hefty fines for entering into pay-for-delay agreements that violated EU antitrust rules that prohibit anticompetitive agreements.

In that June 19, 2013, decision, the Commission imposed a fine of 93.8 million euros on the Danish pharmaceutical company Lundbeck and fines totalling 52.2 million euros on several producers of generic medicines for delaying generic market entry of the drug Citalopram.  This was the first EU infringement decision concerning pay-for-delay agreements.

The conference was begun by Harald Mische and Alexandre Bertuzzi, both case handlers at DG COMP’s unit in charge of antitrust enforcement in the pharmaceutical sector.  Their presentation mainly focused on the Lundbeck decision but also touched upon later Commission decisions in the Fentanyl and Perindopril cases (not yet public) and the U.S. Supreme Court judgment in FTC v Actavis.

The Commission’s presentation was followed by a lively debate on the Lundbeck decision, as well as broader issues on the interaction between antitrust and patent law.  In addition to DG COMP representatives, participants included lawyers directly involved in the pay-for-delay cases mentioned above.  Therefore, many of the topics discussed are at the core of the EU infringement proceedings and the ongoing appeals.

The relevance of Intellectual Property (“IP”)

The debate opened with a discussion about the relevance, if any, of intellectual property in the antitrust assessment of pay-for-delay cases.  Concerns were expressed that the Commission may be watering down the importance of IP and the key role it plays in many industries, such as pharmaceuticals, by encouraging innovation.  Various participants pointed out that there is a risk of oversimplification in comparing reverse-payment settlements with market-sharing agreements between two competitors, because there is a critical difference between them, namely, the involvement of IP.

Moreover, according to these opinions, the Commission decisions are embedded with an implicit assumption that, in the absence of the settlements in question, the generic company would have won in litigation and entered the market.  This may well not be the case and, if anything, the assumption should be in favour of the validity of the patent.  Patent litigation is extremely complex and it always involves a high degree of unpredictability, which is precisely one of the reasons why companies settle, even if they are confident that their patents are valid.  In this regard, some participants also questioned the role that the strength of the patent plays in the Commission’s antitrust assessment of pay-for-delay agreements.

In response to these questions, it was clarified that the Commission does take into account the existence of IP in these cases as part of the legal and economic context of the agreements.  However, what matters the most for the purposes of the Commission’s antitrust assessment is not the strength of the patent but the strength of potential competition.  Potential competition is assessed taking into account different elements, including whether there is a realistic chance of entering the market in the near future and also the fact that there is a patent involved and whether the patent has been challenged.

It was also argued that the undeniable importance of IP and the uncertainty inherent in patent litigation does not change two other important facts.  First, IP rights can be challenged.  Indeed, the Commission’s Pharmaceutical Sector Inquiry Report showed that in 60% of the cases the generic company succeeds in challenging the originator’s patent.  Second, especially in scenarios where the primary or compound patent has lapsed and there remain only secondary or process patents, the patent may not be infringed at all.  It is precisely the potential to come into the market in the presence of the patent (e.g., by producing the compound through a process other than the patented one) that drives generic competition and this does not call into question the value of IP at all.

It was also said that the Commission is not presuming that the patent is not valid and/or infringed, but neither is it presuming the contrary.  This position, which was said to be in line with the U.S. Supreme Court judgment in Actavis, rejects the so-called “scope of the patent” test.  If an originator company eliminates potential competition by paying its potential competitors to stay out of the market, that will most likely amount to an antitrust infringement, irrespective of the underlying patent dispute and the alleged strength of the patent.

The relevance of the pharmaceutical regulatory environment and the asymmetry of risks

Additional questions were asked regarding the relevance, if any, of the pharmaceutical sector’s regulatory environment, which distinguishes patent settlements in this sector from patent settlements in other areas such as electronics or consumables.  Indeed, whereas in many areas there is a high degree of uncertainty over patent validity or patent infringement, the regulatory environment in the pharmaceutical sector makes patent litigation an even bigger gamble, given that in many EU countries as soon as there is generic entry there is an automatic regulatory price decrease imposed, sometimes of at least 30% or 40%.  Such a price decrease cannot be undone, even if following the relevant appeals the initial decision that allowed generic entry is overturned.  In this regard, it was questioned whether the Commission had taken due account of this factor, and in general of the asymmetry of risks between originator and generic companies, when assessing reverse-payment settlements under antitrust laws.

The counter-argument is that an originator is not entitled to enter into an anticompetitive agreement just because it has a lot at stake.  A business decision made on the basis of a valid risk assessment, which makes perfect sense from a commercial perspective, may not always be compliant with competition rules.

The “by object/by effect” debate

One of the most vehemently debated topics was the question of whether pay-for-delay cases should be seen as “by object” or “by effect” infringements.  In all its decisions regarding pay-for-delay agreements so far, the Commission has adopted a “by object” approach, i.e., it has considered that the companies’ behaviour was “by its very nature” restrictive of competition.  When adopting such an approach, the Commission is not obliged to prove that the behaviour has actually caused anticompetitive effects in the market.  Rather, it is sufficient to show that the agreement, in its legal and economic context and taking into account its content and the objectives it seeks to achieve, is inherently liable to negatively affect competition.  It is only when a contextual analysis reveals that the agreement in question is not sufficiently injurious to the normal functioning of competition that actual or potential anti-competitive effects need to be established and compared with the relevant counterfactual or “but for” scenario, which requires significant Commission effort.

Some participants criticised the fact that the Commission has adopted a “by object” approach in all its decisions regarding pay-for-delay agreements so far.  It was argued that, in line with the Court of Justice of the European Union judgment in the Cartes Bancaires case, a “by object” approach should only be taken in cases where there is a high degree of likelihood that there is a restriction of competition, e.g., because experience in similar cases proves so, or because the preliminary analysis shows that there is clearly an antitrust problem.  However, according to these critics, that is definitely not the case in the pay-for-delay decisions, which (i) are the first decisions ever adopted by the Commission on the subject matter, (ii) involve high uncertainty and unpredictability, and (iii) are being so strongly debated by antitrust experts as to whether they are anticompetitive at all.

It was also pointed out that settlements (both in and out of court) should be encouraged as mechanisms to put an end to or to avoid litigation, thereby saving private and public resources.  This is true provided the parties have not fraudulently concocted a dispute in order to then settle it.  The point was made that there was no fraudulent disputes at issue in certain cases analysed by the Commission, such as Lundbeck, in which they were uncertain about the validity of the patent and/or the existence of a patent infringement, as admitted by the Commission itself.  Some of the participants found it difficult to understand how in such scenarios a settlement can amount to a restriction of competition by object.

The Commission´s position on the by object/by effect debate was defended with several arguments.  First, it was clarified that the fact that these cases have been found restrictions “by object” does not mean that all reverse-payment cases will be considered “by object.”  The Commission always undertakes a case-by-case analysis and, unlike under U.S. antitrust law, no behaviour is per se unlawful under EU competition law.

Second, it was questioned whether one can talk about procedural shortcuts, shortcuts in reasoning or a shift in the burden of proof when there is a decision with 450 pages, exceptionally well founded in facts and in evidence of the parties’ anticompetitive intention.  Moreover, the Commission did analyse effects to some, limited extent in the UK market.  In particular, it found that once the restrictive agreements had come to an end, generic entry did take place and prices of the relevant drugs dropped on average by 90%.

Third, regarding the alleged lack of experience in similar cases, it was contended that there are indeed precedents of “exclusion payments.”  For instance, in the Irish Beef case there was uncertainty over whether a number of companies would leave the market (which had problems of overcapacity) and companies that wanted to stay in the market paid other companies to exit the market.  In the present cases the situation worked the other way around, i.e., there was uncertainty over whether the generics would enter the market and the originator paid them to delay their entry.  While the cases are not identical because of the patent element, it was contended that the similarities regarding exclusion payments are clear and that, whereas reverse-payment cases are factually very complex, conceptually they are not:  a company is paying off competitors so they stay out of the market, which is a clear breach of competition rules.

Finally, it was pointed out that, even if settlements can indeed be a legitimate tool to put an end to or to avoid litigation, and even if there were a public policy to encourage settlements, this would by no means exempt such agreements from antitrust scrutiny.  Indeed, if through the agreement in question, as happened in Lundbeck, the originator pays the amount of profit expected by the generic company in case of entry so that it commits not to enter the market for a certain period of time, that is collusion, and it amounts to an antitrust infringement by object.

Moreover, in Lundbeck there was not a settlement of a dispute because there was no commitment from Lundbeck to refrain from infringement proceedings if the generics entered the market after the expiration of the agreement.  It was just a mechanism for Lundbeck to delay the upcoming loss of monopoly rents by sharing a “part of the cake” with its potential competitors, or, as the Lundbeck decision called it, using a poker analogy, “the art of playing a losing hand slowly.”

Those interested in further analysis of the cases discussed above, and the legal standards applied by EU and U.S. antitrust authorities to reverse-payment settlements, should read “Drug Test:  When Are Pay-for-Delay Agreements Illegal?” by Irene Fraile, Ankur Kapoor, and Rosa Morales in Global Competition Litigation Review, Issue 4, 2014.  That article has been nominated for best business article in the Antitrust Writing Awards 2015.

Edited by Gary J. Malone

Categories: Antitrust and Intellectual Property Law, Antitrust Enforcement, Antitrust Policy

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