Antitrust Law Daily EU high court clarifies ‘competition’ criteria for pharmaceutical patent holder v. generic manufacturer settlements
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Friday, January 31, 2020

EU high court clarifies ‘competition’ criteria for pharmaceutical patent holder v. generic manufacturer settlements

By Thomas G. Wolfe, J.D.

Addressing a request for a preliminary ruling from the U.K. Competition Appeal Tribunal, the European Union Court of Justice set forth in its judgment the criteria for determining whether a settlement between a pharmaceutical patent holder and a manufacturer of generic medicines is contrary to EU competition law.

The European Union Court of Justice has rendered a Jan. 30, 2020, judgment that clarifies the criteria applicable to settlement agreements, purportedly resolving disputes between pharmaceutical patents holder GlaxoSmithKline, plc (GSK) and manufacturers of generic medicines, that are claimed to fall within the TFEU [Treaty on the Functioning of the European Union] Articles prohibiting practices or agreements that have as their object or effect the restriction of competition or the abuse of a dominant position. The EU Court of Justice’s judgment responds to a request from the U.K. Competition Appeal Tribunal for a preliminary ruling in connection with a contested decision by the U.K. Competition and Markets Authority, which held that the settlement agreements at issue in the case restricted competition and constituted, on the part of GSK, an "abuse of its dominant position in the relevant market." In particular, the EU Court’s judgment elaborated on the criteria to be applied concerning TFEU principles of "restriction of competition by object," "restriction of competition by effect," and "abuse of a dominant position" (Generics (UK) Ltd. v. U.K. Competition and Markets Authority, EU Case No. C-307/18).

Backdrop. Pharmaceutical company GSK held a patent for the active ingredient of the anti-depressant medicinal product paroxetine and secondary patents protecting particular manufacturing processes of that active ingredient. When the main patent expired in 1999, several manufacturers of generic medicinal products planned to enter the U.K. market with generic paroxetine. However, disputes arose between GSK and those generic manufacturers, in which the validity of GSK’s secondary patents was contested. GSK and the generic manufacturers subsequently entered into agreements in settlement of those disputes, in which the generic manufacturers agreed not to enter the market with their own generic products for a set period in exchange for payments by GSK. The U.K. Competition and Markets Authority found that these agreements constituted anti-competitive agreements and imposed fines of approximately $54 million on the parties.

When the parties challenged the decision before the U.K. Competition Appeal Tribunal, the Tribunal sought guidance from the EU Court of Justice. Earlier in January, EU Court of Justice Advocate General Juliane Kokott submitted an advisory opinion suggesting that the EU Court should find that a settlement agreement concerning the dispute between GSK and a manufacturer of generic medicinal products may be contrary to EU competition law. Further, in connection with the allegation that the pharmaceutical company entered into agreements with generic manufacturers to delay the release of a generic product, the Advocate General believed that this likely constituted an abuse of a dominant position by eliminating conventional competition without providing meaningful benefits to consumers.

EU Court judgment. At the outset, the EU Court of Justice stated that, in its judgment, an agreement between undertakings is subject to the prohibition in TFEU Article 101(1) "only if it has a negative and appreciable effect on competition within the internal market, which presupposes that those undertakings are at least in a relationship of potential competition." The court held that it is necessary to assess, for each manufacturer of generic medicines concerned, whether that manufacturer of generic medicines "has a firm intention and an inherent ability to enter the market, having regard to the preparatory steps it has taken, and that there are no insurmountable barriers to entry." Moreover, any patent rights "do not constitute, in themselves, such barriers, since their validity can be contested."

Next, addressing the "restriction of competition by object" principle, the court explained that taking into account the "appreciable fall in the sale price of the medicines concerned following the market entry of their generic version," the degree of harm typically may be identified "where the transfers of value [are] provided for by an agreement," and that the agreements at issue cannot, because of their scale, "have any explanation other than the commercial interest of the parties to the agreement not to engage in competition on the merits"; they act as "an incentive to the manufacturers of generic medicines to refrain from entering the market concerned." Moreover, the court concluded that it was up to "the national court" to assess, with respect to each agreement under examination, "whether the demonstrated pro-competitive effects are sufficient to permit a reasonable doubt as to whether it causes a sufficient degree of harm to competition."

Turning to the "restriction of competition by effect" principle, the court emphasized that in order to assess the existence of potential or real effects of a settlement agreement on competition, "it is necessary to determine how the market will probably operate and be structured in the absence of the concerted practice, but it is not necessary to establish the probability of the manufacturer of generic medicines concerned being successful in the patent proceedings or of a settlement agreement being concluded that is less restrictive of competition."

In connection with issues surrounding the "abuse of a dominant position," the court held that the product market must be determined by "taking into account also the generic versions of the medicine whose manufacturing process remains protected by a patent, provided that it can be established that their manufacturers are in a position to enter the market with sufficient strength to constitute a serious counterbalance to the manufacturer of originator medicines already on that market." Similarly, the court stated that the finding of an abuse of a dominant position "presupposes an adverse effect on the competitive structure of the market that exceeds the specific effects of each of the agreements concerned with respect to which penalties were imposed" under Article 101 of the TFEU.

Discussing the "cumulative effects" of the settlement agreements on restricting competition, the court perceived an "overall contract-oriented strategy" as having a "significant foreclosure effect on the market, depriving the consumer of the benefits of entry into that market of potential competitors manufacturing their own medicine and, therefore, reserving that market directly or indirectly to the manufacturer of the originator medicine concerned." At the same time, the court explained that "such conduct can be justified if the party engaged in it proves that its anti-competitive effects may be counterbalanced, or outweighed, by advantages in terms of efficiency that also benefit consumers."

Companies: Actavis UK Ltd.; Alpharma Pharmaceuticals ApS; Generics (UK) Ltd.; GlaxoSmithKline, plc; Merck KGaA; Xellia Pharmaceuticals ApS

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