Pay-for-delay deals risk competition law breach

Pay-for-delay deals may constitute agreements that restrict competition by object, restrict competition by effect or breach rules on the abuse of a dominant market position, Juliane Kokott said in a non-binding opinion issued on Wednesday in which she considered the circumstances in which pharma patent holders and generic manufacturers can be said to be potential competitors.

Competition law expert Robert Vidal of Pinsent Masons, the law firm behind Out-Law, said the European Commission would welcome the opinion, but said aspects of it are controversial.

"The legal test for potential competition requires a real and concrete possibility of market entry. This is an objective test as indicated by the use of the word 'real'. There is a legal presumption that patents are valid and a generic may be blocked from entering a market because it would involve the infringement of a valid patent or they may simply lack the required marketing authorisation."

"Kokott’s opinion suggests that a competition authority may ignore all these valid legal barriers to entry. One should simply assume potential competition on the basis of the patent holder’s subjective perception of generic entry regardless of whether this accords with reality. She believes a settlement agreement delaying generic entry can harm competition even if it turns out the generic could never compete to begin with. This does seem to dilute the objective requirement of the test for potential competition and the need to consider the counterfactual. In effect, Kokott regards patent litigation as a form of competition. It will be interesting to see what the CJEU eventually decides," he said.

The Court of Justice of the EU (CJEU) is expected to issue a formal ruling on the issues in the coming months. Kokott is expected to issue another opinion on similar legal issues in March following an appeal to the CJEU as a result of the European Commission's decision to impose total fines of €146 million on Lundbeck and several generic companies for entering 'pay-for-delay' agreements.

'Pay-for-delay' is a term used to describe cases where generics manufacturers agree to delay the launch of new products into a market in return for some form of payment by pharmaceutical companies.

The CJEU has been asked by the UK's Competition Appeal Tribunal (CAT) to clarify how EU competition rules apply in the context of pay-for-delay deals to help it resolve an underlying dispute concerning a decision taken by the UK's Competition and Markets Authority (CMA).

The CMA previously held that 'pay-for-delay' agreements between GlaxoSmithKline (GSK) and several generic medicines manufacturers breached competition rules – a decision challenged by the companies concerned.

The agreements served to settle a dispute over the validity of patent rights GSK held for an anti-depressant drug called paroxetine. Under the agreement, the generic manufacturers agreed to delay the launch of generic paroxetine products in return for payments from GSK.

The questions the CJEU has been asked to answer concern the circumstances in which pay-for-delay agreements might be considered to fall subject to either or both of the central prohibitions on anti-competitive behaviour stipulated in EU law.

Under Article 101 of the Treaty on the Functioning of the EU (TFEU) there is a general ban on organisations putting in place agreements which may affect EU trade where those agreements "have as their object or effect the prevention, restriction or distortion of competition within the internal market".

The abuse of a dominant market position is also generally prohibited under Article 102 of the Treaty.

Assessing potential competition

Among the questions the CAT has posed to the CJEU is whether EU pharma patent holders and generic manufacturers seeking to launch generic rivals to patented drugs can be regarded as potential competitors where there is an ongoing dispute over the validity of the patent rights or over whether the generics have infringed those patents.

In her new opinion, advocate general Kokott said the companies can be regarded as potential competitors in such cases. She said the existence of a dispute over patent validity or infringement, even if that has yet to give rise to judicial proceedings or injunctions, is "a factor which is capable of demonstrating that potential competition exists between the patent holder and the generic manufacturer". A further factor is where there is evidence that pharma patent holders regard generics as potential competitors, she said.

Restrictions on competition 'by object'

In relation to the Article 101 prohibition, Kokott said 'pay-for-delay' agreements will constitute "a restriction of competition by object" in cases where the agreements settle disputes over patent validity or infringement and induce generic manufacturers to abandon their efforts to enter the market independently, and where the sole purpose of the payment "is that the generic manufacturer refrains from entering the market with its product and from continuing to challenge the patent during the agreed period".

Kokott said that will be the position even if the restrictions in those agreements "do not go beyond the scope and unexpired period of the patent and where the amount transferred to the generic manufacturer is lower than the profit it could have expected if it had entered the market independently".

However, Kokott suggested that some pay-for-delay agreements will be permitted under the Article 101 rules where consumer benefits from those deals outweigh any negative impact on competition. She said an "assessment of the benefits afforded to consumers" must be carried out "to examine whether the existence of those benefits is likely to give rise to doubts as to the existence of a restriction of competition in general and a restriction of competition by object in particular".

Restrictions on competition 'by effect'

According to Kokott, competition authorities and courts do not have to assess whether there has been a restriction of competition 'by effect' if it is already satisfied a pay-for-delay agreement constitutes a restriction of competition by object. However, she set out circumstances in which pay-for-delay deals will trigger the 'by effect' provisions.

A pay-for-delay agreement will fall foul of the 'by effect' provisions if the effect of the agreement is to eliminate competition between pharma patent holders and generic manufacturers and that effect "is appreciable on the basis of the context of the agreement", she said. The structure of the market, the position of the parties on it and, where appropriate, the existence of other agreements of the same type will be relevant to that assessment, Kokott said.

Abuse of dominance

In considering the provisions under Article 102 of the TFEU, Kokott acknowledged that competition authorities must first define the market at issue before determining whether there has been an abuse of a dominant position in the market. In this respect, she said the relevant market can be considered to include generic versions of patent products which have yet to be placed on the market in cases where generics are "able to enter the market with sufficient speed and strength to create a serious counterweight to the patented medicinal product and thus exert significant competitive pressure on the patent holder".

Uncertainty over whether generics can enter the market without infringing the patents at issue "does not mean that there is no competitive relationship between the patent holder and the generic manufacturers in question", she said, meaning those generic products can be factored in when defining the relevant product market.

According to Kokott, pharma patent holders can be said to have abused a position of market dominance if they enter a number of pay-for-delay agreements within the intention of inducing generics to "undertake to abandon their efforts to enter the market independently by means of a value transfer the sole consideration for which is that abandonment and if entering into them is capable of influencing the structure of the market concerned in such a way as to hinder or even to eliminate the remaining competition on that market, thereby strengthening the patent holder’s dominant position by methods other than competition on the merits".

Like in relation to cases that concern alleged breaches of the Article 101 rules, Kokott said competition authorities and courts "must take account of any benefits deriving from the conduct concerned, whether or not the operators involved intended them". Those benefits must be shown to "neutralise the harmful effects of the conduct on competition on the affected markets" to overcome claims that they constitute an abuse of dominance, she said.

Kokott said: "The fact that a number of settlement agreements concluded by the patent holder with manufacturers of generics provide for controlled entry by those manufacturers to the market which affords limited benefits to consumers is not, however, capable of satisfying those conditions, if those agreements otherwise have the effect of eliminating effective competition by removing all or most existing sources of potential competition".