‘Pay-for-delay’ agreements: further guidance from the Advocate General

12.06.2020

The Opinion of Advocate General Kokott in Case C-591/16 P H. Lundbeck A/S and Lundbeck Ltd v European Commission (“Lundbeck”) delivered on 4 June 2020.

For those interested in ‘pay-for-delay’ agreements, 2020 has proved to be an action-packed year.  Following the CJEU’s judgment in Case C-307/18 Generics (UK) Limited & Others v Competition and Markets Authority (“Generics”) in January 2020, Advocate General (“AG”) Kokott has now given her Opinion in the long running proceedings between H. Lundbeck A/S and Lundbeck Ltd (together “Lundbeck”) and the European Commission (“EU Commission”).

This case is particularly significant as it marks the first time that the guidance given by the CJEU in Generics (see previous articles here and here) has been applied to a different (albeit not entirely dissimilar) fact pattern.  Moreover, in contrast to Generics where the CJEU responded to a preliminary reference from the UK Competition Appeals Tribunal, this case has arisen from an appeal from the EU Commission and General Court.

The agreements

The proceedings related to one of Lundbeck’s products which contained the API citalopram.  In addition to the original patents for, amongst other things, the citalopram compound itself, Lundbeck subsequently obtained a series of process patents for the production of citalopram by various methods.

In 2002 (around the time of expiry of the original patents in the UK), Lundbeck entered into six agreements relating to citalopram with four generic manufacturers including companies in the Merck, Arrow, Alpharma and Ranbaxy groups.   Whilst the agreements vary slightly in their scope, all six included significant value transfers from Lundbeck to the generic manufacturers and imposed various restrictions on the generic manufacturers’ ability to enter the citalopram market.  For example, the agreement between Lundbeck and Alpharma (which concerned all EU Member States, Norway and Switzerland) required Alpharma to cancel, cease and desist from any importation, production or sale of citalopram products and provided that Alpharma would deliver its stock of generic citalopram to Lundbeck in return for the transfer of $12 million from Lundbeck.

In June 2013, the EU Commission found that the agreements infringed EU competition law and imposed substantial fines of more than £90 million on Lundbeck and the generic manufacturers.  That decision was upheld by the General Court in September 2016.   In November 2016, Lundbeck and the generic manufacturers appealed.

Perhaps unsurprisingly given the CJEU’s judgment in Generics, the AG has recommended that Lundbeck’s appeal be dismissed in its entirety.

Lundbeck’s appeal raises numerous points of both law and procedure (all of which are addressed by the AG). This update focusses on the points of law that are likely to be of broadest interest.

(1) The existence of potential competition between Lundbeck and the generic manufacturers

As explained by the CJEU in Generics, the AG has reiterated that the existence of process patents cannot be regarded an insurmountable barrier to entry.  She explains that although there is a presumption of validity of patents (which is an automatic consequence of the registration of a patent), this does not equate to a presumption that it is illegal for a generic product to be placed on the market, nor does it provide the patent holder with protection against challenges to the patent’s validity.  Uncertainty as to the validity of patents and their infringement, is a “fundamental characteristic” of the competitive relationships that exist in the pharmaceutical sector.

The key question is whether the generic manufacturer has real and concrete possibilities to enter the market at the relevant time (for example, by launching at risk).  Accordingly, there was no need for the Commission to have established that the generic manufacturers were able to enter the market without infringing any of Lundbeck’s patents.  Indeed, even though Lundbeck subsequently adduced evidence to show that the generic manufacturers had infringed its patents (and that the validity of at least one of its patents had been upheld by the EPO) that was not relevant to the assessment of the competitive relationship between the parties.  What mattered was the state of mind of market operators at the time the agreements were concluded.

Although it is necessary to determine whether the generic manufacturer has taken sufficient preparatory steps to enable it to enter the market in a timeframe that would impose competitive pressure on the patent holder, the AG considered that the lack of an MA did not prevent the finding that there was potential competition between Lundbeck and the generic manufacturers:  the steps taken by the generic manufacturer may include measures to obtain an MA but this is not necessarily required.

(2) The agreements as restrictions of competition ‘by object’

The AG reiterated the guidance given by the CJEU in Generics about the ‘by object’ classification of patent settlement agreements.

As explained in Generics, patent settlement agreements will not necessarily fall foul of EU competition law and may indeed be pro-competitive. However, if a generic manufacturer gives an undertaking not to enter a market or challenge a patent (or patents) in return for a value transfer from the patent holder, a settlement  may restrict competition.  If the sole consideration for a value transfer from the patentee to the generic manufacturer is an agreement not to enter the market and challenge the patent this indicates, in the absence of any other plausible explanation, that the value transfer has induced the generic manufacturer to stay off the market and refrain from challenging the patent.

In this case, the AG considered that Lundbeck had failed to adduce “even minimal concrete evidence that might provide an alternative explanation” for the value transfers. She gave very short shrift to Lundbeck’s contention that the payments were justified by the “asymmetry of risks” between itself and the generic manufacturers.

Despite Lundbeck’s arguments, the AG also agreed with the General Court that it is not necessary to a ‘by object’ finding for an agreement to contain explicit no-challenge clauses as the agreements under review ensured that the generic manufacturers had no incentive to challenge Lundbeck’s patents.

(3) The imposition of fines

The AG considered that the General Court had applied the correct test when considering the fines imposed by the Commission: the “standard for culpability” means that a fine can be imposed if an undertaking “cannot be unaware of the anticompetitive nature of its conduct”.   According to the AG, the Commission is not required to show with certainty that the undertaking was in fact aware of the anticompetitive nature of its conduct. The Commission need show only that a “diligent economic operator” could reasonably have been expected to be aware of that position.   In circumstances where Lundbeck could not have been unaware that the only consideration it received from the generic manufacturers for its value transfers was the undertaking not to enter the market, the AG supported the General Court’s conclusion that it was not unforeseeable that the agreements might infringe Article 101 TFEU.

What next?

Although the Opinion is non-binding, given that the AG has applied the guidance given by the CJEU in Generics, it seems unlikely that the CJEU will reach a different conclusion.  In any event, the CJEU’s judgment in Lundbeck will not be the end of the story for ‘pay-for-delay’ agreements as a further ruling in the Servier proceedings (on appeal from the EU Commission and General Court) is expected later in the year.

Pat Treacy

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Olivia Henry

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