Pay for Delay?

On June 19, the European Commission hit major Danish pharmaceutical company Lundbeck with a fine of € 93.8m. Four other major European generic drug manufacturers (Alpharma, Merck KGaA/Generics UK, Arrow, and Ranbaxy) were similarly subject to fines, totalling € 52.2m. Their offense was violating EU anti-trust rules. In 2002, Lundbeck entered into patent settlement agreements with the four manufacturers, delaying entry of cheaper generic versions of Lundbeck's popular citalopram (a "blockbuster" antidepressant) onto the European pharmaceutical market.

The ruling is a significant milestone, marking the first time the European Union has sought to clamp down on "reverse payment patent settlements," better known as "pay for delay" deals. This column will examine the trend toward finding an antitrust claim to vacate reverse payment patent settlements and review the precedents set by the Lundbeck decision.

The application of antitrust rules to patent settlements is controversial, as it casts a spotlight on the inherent tension between intellectual property rights (IPR) and competition law.

The essential characteristic of IPR is that they confer upon their owner an exclusive right, affording them a legal monopoly. Once a patent has been granted, the owner has the power to exclude others from doing anything that infringes the patent. Antitrust rules, on the other hand, generally exist to keep markets open to competition, and view any kind of monopoly as inherently negative.

Today, it is often asserted that this inherent tension is anything but apparent as IPR and antitrust rules share the same fundamental goals of enhancing consumer welfare and promoting innovation. This statement is, however, to some extent debatable.

Article 101 in the Treaty on the Functioning of the European Union (TFEU) prohibits anticompetitive agreements and stipulates that all agreements between undertakings; decisions by associations of undertakings; and concerted practices which may impact trade between member states, and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, are prohibited. They are deemed incompatible with the internal market.

Generally, there are three different ways of analyzing reverse payment patent settlements under Article 101:

The "scope of the patent" test. Under this test, a reverse payment patent settlement may not infringe Article 101, as long as it remains within the scope of the patent and is strictly limited to preventing products that potentially infringe the patent from being introduced to the market. Thus, where there are bona fide grounds for a dispute, the settlement may be said not to go beyond the exclusionary power of the patent itself. Until recently, the US courts consistently applied the "scope-of-the-patent" test. With the US Supreme Court judgment of June 17, 2013 in FTC v. Actavis, however, this has now changed.

The "restriction by object" test. The opposite view is to take the position that reverse payment settlements presumably restrict competition by object and may thus generally be considered to constitute an infringement of Article 101, without it being necessary to demonstrate any negative effect on the market. Under this test, payments from the original patent holder to the generic drug manufacturers are generally presumed to have as their object the delay of generic entry, and the sharing of monopoly profits.

The "rule of reason" test. An intermediate view is to provide room for antitrust scrutiny of reverse payment patent settlements even where these clearly remain within the scope of the patent, without, on the other hand, presuming them to be unlawful. This "rule-of-reason" test has been adopted by the FTC v. Actavis judgment. According to the Supreme Court, the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payer's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of other convincing justification.

The Lundbeck decision

In 2002, citalopram was Lundbeck's best-selling medicine. Citalopram's patent was nearing the end of its lifecycle, with patent protection for the chemical composition lapsed outright, and remaining patent protection limited to particular manufacturing processes.

On January 28, 2004, the Danish Competition Authority announced that it had made a preliminary assessment of the settlement agreements, and discussed the agreements with the Commission.

According to the Authority, the Commission at that time stated that reverse payment settlement agreements resided in a "grey area," that the amount of the payments made by Lundbeck did not at first hand imply that the company was paying a compensation to the generic drug manufacturers to stay out of the market, and that the Authority and the Commission therefore did not at that time wish to commence legal proceedings against Lundbeck (see the Authority's case no 1120-0289-0039 at www.kfst.dk).

Nevertheless, based on the knowledge acquired during the sector inquiry finalized in 2009, the Commission decided to initiate formal antitrust proceedings against Lundbeck (see IP/10/8).

In July 2012, the Commission sent a Statement of Objection (see IP/12/834) to Lundbeck and, on June 19, 2013, the Commission decided to initiate damage proceedings. The infringement decision itself is yet to be published, but it appears from the Commission's press release that "Internal documents refer to a 'club' being formed and 'a pile of $$$' to be shared among the participants. Lundbeck paid significant lump sums, purchased generics' stock for the sole purpose of destroying it, and guaranteed profits in a distribution agreement. The agreements gave Lundbeck the certainty that the generics producers would stay out of the market for the duration of the agreements without giving the generic producers any guarantee of market entry thereafter. These agreements are very different from other settlements of patent disputes where generic companies are not simply paid off to stay out of the market."

Joaquín Almunia, vice president of the European Commission responsible for competition policy, announced at the same time that, "by today's decision we are confirming that these so-called 'pay-for-delay' deals constitute severe infringements of EU competition law. They may cause severe harm to patients and taxpayers and must be sanctioned accordingly."

It appears that, according to the Commission, the settlement agreements in question constitute a restriction of competition by object. It is, however, not entirely clear whether all reverse settlement agreements will in future be deemed to constitute a restriction of competition by object, and thus an infringement of Article 101.

Thus, in his speech, Almunia also states that the decision is in "good company" as it is in line with the US supreme-court judgment in FTC v. Actavis. In other words: the commissioner seems to indicate that the Commission has opted for a rule-of-reason test under which reverse payments are not presumed to be unlawful, but may be found to be so in individual cases, and in particular, if the payments made are found to be unjustifiably large and/or not motivated by genuine disputes.

Lundbeck announced that the company will appeal the Commission's decision to the General Court. Thus, it is the company's view that the settlement agreements were entered into in order to enforce its patents rights, and not in order to exclude generic companies. Nothing has yet been published about the appeal case. According to the latest statistics, the average duration of proceedings before the court is 48 months; a judgment is therefore not to be expected in the near future.

The state of the law in this respect is, therefore, yet to be finally settled. As a follow-up in 2010, 2011, and 2012, the Commission monitored settlement agreements in the pharmaceutical sector and the Commission has, besides proceedings against Lundbeck, initiated proceedings against French drugmaker Servier on similar grounds. Proceedings have also been initiated against Dutch subsidiaries of Johnson & Johnson and Novartis, as well as Cephalon and Teva.

Practical impact: clearing the air?

The Lundbeck case is the first antitrust decision taken by the Commission on reverse payment settlement agreements.

Following the decision, it is clear that paying a company to avoid market entry is anticompetitive and thus constitutes an infringement of the EU antitrust rules. However, it is unclear under which circumstances other settlements involving payments between originators and generics could also be anticompetitive, since this requires a case-by-case approach. For now, however, it seems advisable not to enter into settlement agreements involving reverse payments, unless one is willing to run the risk of an antitrust case before the Commission.

The other cases pending before the Commission and the General Court's judgment in the Lundbeck case are expected to deliver further legal clarity, hopefully in the form of a more nuanced and balanced approach to reverse payments.

Reverse payments may often be the best solution to a deadlock situation and the competition authorities should, in our opinion, be cautious not to "overregulate" within this field of the law.

In general, the competition authorities should only intervene when the settlement is, in reality, just a cover-up for an agreement in which one manufacturer eliminates competition by paying other manufacturers to stay out of the market. When, on the other hand, the reverse payment is motivated by a real patent dispute and broadly seems to reflect the parties' risk relating to the dispute, no intervention should be requested, or required.

Søren Zinck is a partner in the EU & Competition Law group at LETT, a Danish law firm based in Copenhagen. He can be reached at szi@lett.dk.