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The Commission’s published Lundbeck decision: the legal test now applied to patent settlement agreements

18/05/2015

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Sophie LawranceRachael Barraclough

In January, the European Commission published the full text of its decision finding that patent settlement agreements entered into by Lundbeck and certain generic companies were anti-competitive under Article 101 TFEU. The case had been decided back in 2013, but, until now, only a short press release had been released – third parties were therefore in the dark about the legal basis for the decision.

The decision is currently under appeal but, pending a decision of the General Court, the approach taken in the decision will be vital for an understanding of how competition issues in the pharmaceutical sector will be considered. Any company considering a settlement agreement should be aware of how these will be assessed by the Commission.

Lundbeck’s settlements were concluded at a time when the compound patent for citalopram had expired but certain process patents remained in force. In this period, the Commission considered the market to be ‘in principle’ open to competition. Against that background, Lundbeck was found to have ‘transferred value’ to the generics in return for their agreement to stop selling generic citalopram over a specified period.

The Commission concluded that the ‘object’ of the agreements was to restrict competition. ‘Object’ restrictions are the most serious form of anti-competitive agreement. In such cases, the Commission does not have to prove the existence of effects on competition. This is a significant advantage for the regulator, as proving the existence of effects is not straightforward where an untested patent remains in force which might have legally excluded the generic from the market. This approach will be tested on appeal.

A four-part legal test is applied by the Commission:

  1. Are the parties to the agreement potential competitors?

  2. Does the agreement place restrictions on the generic?

  3. Did the agreement include a ‘transfer of value’? (This is typically a cash payment; however, the annual patent settlement monitoring reports make clear that other benefits passing to the generic may also qualify.)

  4. Did that value transfer ‘induce’ the generic to cease its attempts to enter the market?
The Commission’s position on potential competitors is radical compared to prior case law in the pharmaceutical sector and beyond. The Commission reasons that generic undertakings become a competitive threat as soon as they begin developing commercially viable production processes for the relevant drug. This may be the case even before patent expiry. The Commission’s approach thus disregards whether the generic’s entry is “sustainable” (a test which has been used for assessing overlaps in pharmaceutical mergers). The Commission took the view (in line with the US Supreme Court in Actavis) that the very fact that Lundbeck felt it necessary to transfer considerable value to the generics in exchange for them not entering the market shows that they were potential competitors. If this approach to potential competition were to be applied in the licensing context, it would mean that many more licence agreements have to be assessed under the stricter rules applicable to agreements between competitors. Certainly this is true where a licence is granted in the context of settlement of litigation.

The Commission took a number of further factors into account: (1) the settlement agreements extended Lundbeck’s rights to limit the generic’s market access beyond what could have been achieved through litigation (although this is not determinative by itself); (2) the value transfer from Lundbeck to the generics was pitched at a level which reflected the generic’s expected profit had it successfully entered the market; and (3) Lundbeck made no commitment to refrain from pursuing the generics for patent infringement after the expiry of the agreement. The agreements in this case were thus not full and final settlements of litigation. However, to judge by the Commission’s patent settlement monitoring reports, the approach is unlikely to be different even for conclusive settlement agreements.

Lundbeck’s appeals are unlikely to be heard before 2016 at the earliest.

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