Pay-for-delay: General Court (partially) annuls Commission´s fines in Servier-Case

On 12 December 2018 the General Court of the European Union (“GC”) handed down its second decision on pay-for-delay agreements after its 2016 Lundbeck decision. In its Servier decision, the GC partially annulled the European Commission´s 2014 decision against drug manufacturer Servier and other generic pharmaceutical companies - reducing Servier’s fine by more than EUR 100 million. In essence, the GC confirmed that patent settlement agreements can be restrictive of competition by object if they have to be considered market exclusion agreements. This requires a thorough assessment of the facts. Regarding an abuse of a dominant market position, the GC stressed the importance of market definition and annulled the Commission’s decision in this respect in its entirety.

The Decision

On 9 July 2014, the Commission imposed fines with a total amount of EUR 428 million on Servier and five producers of generic medicines, inter alia, Lupin and Krka. 

Restriction of competition

According to the Commission, the pharmaceutical companies entered into patent settlement agreements related to perindopril – a medicine used for the treatment of high blood pressure. By those agreements the patent holder agrees to settle a patent dispute with a patent challenger by means of a settlement payment that provides the patent holder´s business with ongoing patent protection. At the same time the patent holder delays the market entry of cheaper generic versions of patented drugs. The Commission found that these pay-for-delay agreements constitute restrictions of potential competition by object, i.e. they are regarded as being injurious to the proper functioning of normal competition by their very nature. In the view of the Commission producers of generic medicines are potential competitors, because they have an actual possibility of market entry with their generics. By preventing this potential competition, Servier foreclosed the markets.

Although the GC recognized the importance of settlement agreements and intellectual property rights, it held that these agreements are a restriction by object if the agreements are “the inducement, and not the recognition by the parties to the settlement of the validity of the patent, which is the real reason for the restrictions on competition introduced by the agreement”. In other words: If the settlement agreement is essentially a pure market exclusion agreement it is a by object violation.

However, the GC annulled the fine imposed on Servier in respect of agreements with Krka. A more detailed analysis of this agreement showed that the Commission, in this particular case, failed to prove that Servier and Krka agreed to a reverse payment in exchange for Krka´s withdrawal from the market and that the market entry of Krka´s generic was impeded. Thus the GC did not find a restriction of competition.

Abuse of Dominance

In addition, the Commission also found that Servier abused its dominant market position. The Commission essentially argued that Servier did not compete on the merits, but used its market dominant position on some national markets for perindopril in order to delay generic entry by removing close sources of competitive threats.

The GC annulled the Commission’s abuse of dominance decision in its entirety. The GC found that the Commission made various mistakes in defining the relevant market: the Commission “wrongly considered that perindopril differed, in terms of its therapeutic use, from other ACE inhibitors, underestimated propensity of patients treated with perindopril to change medicines and attributed excessive importance to price in analyzing competitive constraints”. The GC thus concluded that the Commission did not show that the product market was limited to the perindopril molecule alone, because there could be non-price competitive pressures from other medicines in the same therapeutic class. Consequently, the GC held that market dominance was not proven by the Commission.

Outlook

The decision deals with a controversial issue. For one thing settlements between originators and producers of generic medicines are an essential and necessary instrument to resolve patent disputes. Likewise they provide a possibility to effectively amortize their development costs. On the other side the agreements can deprive consumers of cost savings, as the market entry of cheaper generics are delayed.
The GC affirmed that settlement agreements may be anticompetitive by object if the purpose of the agreement is to prevent the market entry of a potential competitor. However, the GC also clarified that the Commission needs to prove and provide evidence that the settlement parties agreed to reverse payments and the agreement actually forecloses market entry. In respect to a dominant market position, it needs to assess competitive restraints more thoroughly (here e.g. if non-price competitive pressures from other medicines of the same therapeutic class exist).

The highest European Court has not yet decided on pay-for-delay agreements, as the appeal of Lundbeck against the GC´s judgment from September 2016 is still pending. However, the current decision provides some guidance what to do and not to do in respect to settlement agreements. Companies active in the manufacturing of drugs and generics are well advised to check their practices, as violations might also trigger damage claims by customers of medicines, e.g. health insurance companies.