Competition between generics and originators – what’s the relevance of a patent?(Part II)


The Judgment of the Court of Justice of the European Union in the Paroxetine “pay-for-delay” litigation (Case C-307/18, judgment given on 30 January 2020)

Following the UK’s Competition Appeal Tribunal’s (‘CAT’) decision to refer a number of questions to the CJEU about the correct legal approach to “pay-for-delay” agreements under EU competition law, and the delivery of Advocate General Kokott’s Opinion on 22 January 2020, the CJEU has now given judgment.

Below we discuss the most interesting aspects of the CJEU’s judgment and draw out some key points for both originators and generic manufacturers.

At a comparatively slim 173 paragraphs, the Judgment largely endorses the approach adopted by AG Kokott. Our previous article (which can be found here) takes a more detailed look at the factual background and the reasoning of the AG.

Article 101
Originators and generics may be ‘potential competitors’ – even if patents are in force

As readers will be aware, Article 101 bites only on an agreement that can affect competition. In the context of an agreement delaying or controlling market entry that will be the case only if the market is ‘open to competition’ so that the parties may be in actual or potential competition with one another. Agreeing with AG Kokott, the CJEU considered that a generic will be a ‘potential competitor’  of an  originator where there are ‘real and concrete possibilities’ to enter the market and compete with the originator. In making this assessment, the relevant factors are:

  • whether the generic has a ‘firm intention’ and an ‘inherent ability’ to enter the market and has taken ‘sufficient preparatory steps’ (including, for example, obtaining an MA, having an adequate stock of the generic product, taking steps to challenge the process patents held by the originator and making marketing efforts); and
  • whether there are any ‘insurmountable barriers’ to market entry – the CJEU did not consider the existence of a process patent for an active ingredient that is already in the public domain to be an insurmountable barrier.

A  finding that a particular generic is a potential competitor is likely where:

  • there is a genuine dispute between an originator and generic manufacturer; and
  • an originator makes a transfer of value to the generic manufacturer in exchange for the generic delaying entry – the CJEU held that the more significant the transfer of value, the stronger the indication that a competitive relationship exists.

Like the AG, the CJEU considered that the structure of the market and the economic and legal context within which it operates determines whether parties can be in actual or potential competition. The CJEU acknowledged that the existence of patents and how those patents are enforced and/or attacked is part of that economic and legal context. However, the Court held that none of the presumption of patent validity, the uncertain outcome of disputes concerning validity or the existence of an interim injunction would undermine a finding that an originator and a generic were ‘potential competitors’. Instead, the assessment of whether two undertakings are in competition should consider whether the generic manufacturer has in fact real and concrete possibilities to enter the market notwithstanding the patent situation.

A settlement agreement involving a value transfer may be  a restriction of competition ‘by object’

The CJEU held that a settlement agreement is a restriction of competition ‘by object’ where:

  • one party undertakes not to enter the market and not to continue an invalidity challenge in exchange for a transfer (or transfers) of value from the other; and
  • it is clear that the transfers of value can be explained only by the commercial interests of the parties to the agreement to avoid competition on the merits.

Building on the AG Opinion, the CJEU’s judgment provides guidance on the factors that should be borne in mind when assessing a transfer of value in a settlement agreement:

  • All transfers of value (pecuniary and non-pecuniary; direct and indirect) must be taken into account. For example, profits from a distribution agreement with the originator must also be considered.
  • A transfer of value may be justified, and not lead to the conclusion that there is a ‘by object’ restriction of competition, if it is appropriate and strictly necessary in the light of the legitimate objectives of the agreement. Justified transfers of value may include compensation for the costs of litigation (or the disruption caused by litigation); remuneration for the actual supply of services or goods to the originator; and the discharge of a cross-undertaking in damages given by the originator to the generic manufacturer. Similarly, the provision of any proven and legitimate consideration or waivers by the generic manufacturer may indicate that the transfer of value was justified.
  • The size of the value transfer is relevant. To be problematic, the net gain to the generic manufacturer must be ‘sufficiently large’ or ‘sufficiently beneficial’ to induce the generic manufacturer to delay entry; there is, however, no requirement that the transfer of value exceed the profits that the generic manufacturer may have obtained, had they won the patent litigation.

The CJEU did not consider the fact that the term of the agreement did not exceed the scope or duration of the patent in issue to be relevant. Nor did the CJEU consider uncertainty as to the validity of the patent to be a relevant consideration.

A conclusion that an agreement is ‘by object’ an infringement of Article 101 (and its UK counterpart) may be avoided if the parties can show that the settlement agreement concerned has pro-competitive effects, raising a reasonable doubt that the agreement will in fact cause a sufficient degree of harm to competition to be regarded as an infringement ‘by object’. At that point, the agreement would have to be analysed using the approach required to prove a ‘by effect’ infringement – which requires a more detailed analysis of the actual or likely impact  of the agreement on competition (see below).

The CJEU ruled that any alleged pro-competitive effects of the agreement  must be ‘specifically related to the agreements in issue’ and ‘sufficiently significant’ to justify a ‘reasonable doubt’ as to whether the settlement agreement constituted a sufficient harm to competition to be a restriction ‘by object’. ‘Minimal’ and ‘uncertain’ benefits will be insufficient to escape ‘by object’ categorisation. The CJEU noted that in the context of a preliminary reference it is for the referring court to assess the facts of the case and whether any pro-competitive effects arose that could raise a reasonable doubt about the ‘by object’ nature of the agreement. However, the CJEU indicated that a slight reduction in the price of paroxetine in circumstances where only a limited volume of generic entry had been allowed onto the market would not be capable of giving rise to such a reasonable doubt.

A settlement agreement comprising a transfer of value may restrict competition ‘by effect’

If an agreement is not a ‘by object’ infringement, its actual effects must be considered to assess whether it infringes Article 101(1). Doing so requires consideration of what the competitive landscape would have been had the agreement not been concluded (the so-called counter-factual). When undertaking this task the CJEU have endorsed the AG’s view that there is no need for the referring court to establish that, in the absence of the agreement, the generic manufacturer would have been successful in patent proceedings or that the parties would likely have concluded a less restrictive settlement agreement.

Article 102
Generic products may be relevant when determining the relevant product market

In line with the approach adopted by AG Kokott, the CJEU concluded that both originator and generic products can, in appropriate circumstances, be part of the relevant product market.

The CJEU considered the actual progress made by the generic manufacturer in preparing for market entry to be a key factor. In particular, where a generic manufacturer is in a position to launch its generic product very quickly and with ‘sufficient strength’ to act as a ‘serious counterbalance’ to the originator product and has formed an effective strategy for market entry (including, for example, obtaining an MA or concluding supply contracts with third party distributors), the generic product must be taken into consideration.

Entry into a number of settlement agreements may constitute an abuse

The CJEU acknowledged that the conclusion of a settlement agreement was an ‘exclusive right linked to an intellectual property right’ which would not, on its own, constitute an abuse of a dominant position. However, entering into settlement agreements may be an abuse when their purpose is to strengthen the dominant position of the originator and to deprive potential competitors of effective access to the market.

The CJEU indicated that as well as each individual agreement infringing Article 101, a ‘contract-orientated strategy’ of delaying generic entry by concluding agreements with a variety of generics could in principle also infringe Article 102 , where:

  • it had the capacity to reduce competition; and
  • the anticompetitive effect of the strategy went beyond the effect of each individual agreement – for example, by foreclosing the market to any generic entry and thereby preserving the originator’s market (whether directly or indirectly).

In conducting this analysis, the referring court should consider:

  • whether the dominant undertaking (i.e. the originator) has a anticompetitive intent – for example, to maintain a monopoly position for as long as possible. While intent to abuse is not necessary for an infringement of Article 102 to be established, any such intent is relevant to the assessment of whether there has been abuse; and
  • whether the exclusionary effects achieved by the strategy may be counterbalanced by advantages (whether intended or accidental) to be assessed on an objective basis.

Building on the detailed reasoning set out in the AG Opinion, the CJEU has provided some clarity about the circumstances in which a settlement agreement providing for a transfer of value between an originator and a generic might fall foul of competition law. As this was a reference, it is for the CAT to apply the CJEU’s answers, to the specific facts of the case.

For those contemplating settlements in patent proceedings, the following points are of interest:

  • The existence of patents will not prevent a competitive relationship existing between an originator and generic manufacturer.
  • The preparatory steps taken by the generic are crucial – the closer the generic is to market entry, the more likely it is that it  will be regarded as a viable competitor.
  • Value transfers (pecuniary or non-pecuniary; direct or indirect) may be acceptable if objectively justifiable by something other than the removal of a potential competitor.
  • A settlement agreement may still restrict competition even it results in a some pro-competitive advantages (for example, a slight reduction in the price of a medicinal product).

It remains to be seen how the CJEU’s judgment will be applied to cases with a different factual background. For example, although the questions referred by the CAT referred simply to ‘patents’, the CJEU’s ruling almost invariably refers to ‘process patents’, or a variation on that wording. This suggests that the analysis might be different if the underlying patent was to a compound or a particular formulation rather than a process. As is usual for the CJEU when dealing with preliminary references, the Judgment has avoided dealing with issues outside the scope of the underlying dispute. The forthcoming Judgments in the Lundbeck and Servier cases, which arise from appeals against Commission decisions, may be more expansive.

Pat Treacy


Olivia Henry