Over a year and a half after it was decided (a delay which this blog has bemoaned in the past), the Commission last month published the full (non-confidential) text of the decision on the patent settlement agreements entered into by Lundbeck and a number of generic companies.

This is a long and dense decision. There is much to consider. It is clear that, for patentees and alleged infringers in the pharmaceutical sector who wish to settle (or suspend) litigation, there are many mantraps for the future. Those mantraps could even have a collateral impact on those in other sectors, or engaged in other activities, where IP or settlements, are concerned.

Were it not for the risk of boring our readers, we could doubtless write a number of articles about this decision, which is one of the most important recent Commission decisions on the IP / competition interface. But in this first post, I will stick to an important point on the facts, a summary of the legal test that is applied to patent settlement agreements, and to some discussion of three points of particular interest.

A point on the facts

Before looking at the legal test, it is worth noting that the agreements considered in the Lundbeck decision are not ‘classical’ settlement agreements. Instead of constituting a full and final settlement of the litigation, each of the infringing agreements simply suspended the litigation, and the generic’s entry, for a fixed period of time.

Based on this decision alone, it cannot therefore be excluded that a different approach would, or should, be taken to settlements which conclusively dispose of a dispute. Indeed, the decision notes briefly that certain other settlement agreements entered into by Lundbeck were not challenged by the Commission. It would have been helpful to have more detail about what distinguished these (apparently) non-infringing agreements from the infringing agreements identified in the decision. The limited information which is provided suggests that these agreements closely matched the criteria in the Patent Settlement Monitoring reports (we discussed the latest report here) – i.e., they represented a complete capitulation by one of the parties (in this case, Lundbeck), and/or didn’t involve any ‘pay-for-delay’ element.

Summary of the legal test

The agreements entered into by Lundbeck and the would-be generic entrants are treated as object infringements. The Commission notes that such infringements are serious, but not necessarily obvious. Bearing in mind the recent CJEU Cartes Bancaires judgment which arguably reined in the scope for novel object infringements to be found, we expect this to be a key focus of the appeals. (Details of the grounds on which Lundbeck is appealing are available here – a plea based on inappropriate use of the object category is indeed included.)

The Commission’s analysis of the agreements is structured as follows:

• The analysis is predicated in each case on the idea that Lundbeck and the would-be generic entrants are potential competitors (a particularly significant aspect of the case, which is discussed further below).
• Restrictions upon the generic company’s conduct are identified in each of the agreements – these sometimes, but not always, include a ‘non-infringement’ provision, which the Commission describes as a ‘non-compete’.
• A ‘value transfer’ in favour of the generic company is identified (the decision sets out to demonstrate that the value of such transfers corresponds roughly to what the generic expected to make on the market, but this does not appear to be a necessary element of the infringement).
• The decision seeks to demonstrate that the value transfer in each case “induced” the generic to abandon independent efforts to enter.

A couple of further elements are briefly discussed in connection with the legal test. These are worth noting, but appear to carry less weight than the elements mentioned above:

• The question of whether the settlement exceeds the exclusionary scope of the patent in suit is not determinative of whether there has been an infringement – however, if an agreement does exceed the scope, the restrictions on competition are “all the more clear”.
• The parties’ intentions are investigated but are said not to be probative: on a cynical view, this suggests that evidence intention is relevant where it supports the Commission’s interpretation of the agreements, whereas exculpatory intentions (in particular where they concern the maintenance of an IP right) are liable to be downplayed.
• In connection with ‘inducement’, the decision sets out to demonstrate that the generic obtained at least around the same, in financial terms, as it would have made on the market – however, this does not seem to be an essential ingredient.

The central legal test applied by the Commission is actually reasonably clear (which is to be welcomed, after a long period without such detailed guidance) – but it remains highly fact-specific. Even though the agreements entered into by Lundbeck were considered to be anti-competitive ‘by object’, the decision notes that:

• patent settlements which limit the commercial freedom of one of the parties do not “necessarily” infringe Art 101,
• similarly , it is “not necessarily” the case that all patent settlements containing a payment will be problematic – although the higher the payment, the more likely that it “may” constitute an exclusion payment.

Finding the bright lines will be a challenge for companies wishing to settle patent litigation in cases where the parties seek a genuine compromise, as opposed to a wholesale capitulation by one of the parties.

Three remarkable points

1. Look no patents!

By far the most remarkable point for anyone who spends time with patents (or patent lawyers!) is the almost complete absence of patents from the legal test. While the factual background sections of the decision look at what the parties thought the outcome of litigation might be, the legal assessment treats the agreements purely as contracts to delay one party’s entry (and the analogy with cartel agreements is explicitly made). No consideration is given to the relative merits of the case or the outcome of the litigation on either an ex ante or an ex post basis.

This case is made on the basis that it is an object infringement, without any alternative basis upon effects. Query how effects could be identified without taking a position what the ultimate outcome of the patent litigation would have been, if it had persisted.

2. Everyone’s a competitor

Secondly, the position on potential competition is radical, compared to the case law in the pharmaceutical sector and beyond (cf., for example, the approach taken in a relatively recent pharma merger case which considered the question of potential competition by reference to the concept of whether entry was sustainable).

Lundbeck shares with Samsung and Motorola a stated assumption of patent validity. In the standard essential patent cases, this was a credible position, and one which was reflected in the legal analysis. In this case, however, credibility is strained by the finding that Lundbeck and the would-be generic entrants are potential competitors, i.e. the generic entrants had real and concrete possibilities to enter and remain on the market. While it cannot be excluded that generics will attempt to enter ‘at risk’, a legal theory which considers only this possibility is irremediably one-sided, since it necessarily assumes that the patent in question would ultimately have been invalidated**. This surely contradicts the stated assumption of patent validity – and has the potential to have significant spill-over effects, e.g., in relation to the Commission’s policy on licensing agreements where it may now be more difficult to argue that any given agreement should be reviewed under the standard applicable to non-competitors.

3. A question of policy – but which policy and whose?

This decision is rich in statements which betray something of the Commission’s views on patent policy. It is hard to pick out just one such statement, but perhaps the following (from recital 67) is among the most interesting:

“During the period of patent exclusivity, from the moment the patent holder […] has obtained a marketing authorisation for a medicinal product until the expiry of the SPC (or of the patent if no SPC was granted), corresponding in practice to a maximum period of fifteen years, the patent holder may be able to charge a price for the medicine resulting from the invention that is higher, often far higher, than its marginal cost of production. This allows the originator company to recoup the significant investment it makes in research and development of new medicines (not just the particular product that is being successfully marketed, but also numerous projects that never reach the marketing stage). The end of this period reflects the assessment by the legislator that this is the point in time where the cost to society of continued patent protection, in the form of extra profits to the originator company from its exclusive position, starts exceeding the benefits to society.”

The patents which were the subject of Lundbeck’s settlement agreements were not the patent covering the original pharmaceutical compound, which had expired, but rather a series of different ‘process’ patents covering manufacturing methods. The key concern alluded to in this paragraph is that the patents claimed by Lundbeck did not protect a new product. Yet this is not part of the legal test for patent protection.

The Commission argues that the legislature only intended to accord medicines a standard period of patent protection, as extended by SPCs. But this ignores the fact that the legislature has made patent protection available to other, ‘secondary’ inventions: indeed, incremental innovation makes up the vast bulk of patent applications. Such innovations are likely to become all the more important as fewer new compounds are developed, and there is greater reliance on the development of combination products and second medical uses for existing drugs (an issue on which we commented recently).

Leaving aside the wider policy implications, this aspect of the Commission’s policy suggests that parties settling litigation on an original compound patent may be less likely to encounter competition law obstacles than those seeking to enforce ‘secondary’ patents in a way which defers (even theoretical) generic entry. Only time will tell how accurate this assumption will prove to be – but for now, a cautionary note to finish – even if the Commission observes the primary/secondary patent distinction, it cannot be guaranteed that all NCAs will adopt a similar course.

** Of course, the patent might alternatively have been held to be non-infringed. The decision does not attempt to assess which of these outcomes was more likely. Rather, it relies on the idea that, post-expiry of the compound patent, the market is ‘in principle’ open to generic competition. Statistics drawn from the sector inquiry report about the high rate of invalidity of ‘process’ patents appears to have played into this conclusion.