ECJ rules for the first time on “pay-for-delay” agreements

On 30 January 2020 the European Court of Justice (“ECJ”) clarified for the first time the criteria governing whether so-called “pay-for-delay” agreements entered into between originator and generic pharmaceutical companies fall foul of EU competition law rules. Such agreements are a form of patent dispute settlement, whereby in return for a value transfer, a generic manufacturer acknowledges the patent of the originator pharmaceutical company, and agrees to refrain from marketing its generic version of the drug in question for a specified period of time. Pay-for-delay agreements have been in the spotlight of the European Commission (“EC”) and national competition authorities for over a decade.

In line with the non-binding Opinion delivered by Advocate-General Kokott on 22 January 2020, the ECJ held that such agreements may constitute “by object” infringements of the prohibition on anti-competitive agreements (such that a competition regulator is not required to prove effects on the market) or “by effect” infringements, and may also amount to an abuse of a dominant position.

The ECJ had been asked to provide guidance on this issue by the UK Competition Appeal Tribunal (“CAT”), by way of a reference for a preliminary ruling in the UK Paroxetine case. That case involves an appeal by GlaxoSmithKline (“GSK”) and five generics against a 2016 decision of the UK Competition and Markets Authority (“CMA”) imposing fines totalling £45 million on the basis that such pay-for-delay agreements infringed competition law.

Why is the ECJ’s judgment important?

The ECJ’s judgment is expected to have significant implications for both ongoing and future cases in the pharmaceutical sector:

• The ECJ has sent a clear message to both originator and generic companies that once a generic has demonstrated a clear intention to market a rival version of an originator drug, it is likely to be considered a “potential competitor” of the originator (and thus any patent settlement between the originator and that generic involving a value transfer is likely to attract antitrust scrutiny).
• The ECJ held that patent settlement agreements can be lawful. In particular, the existence of a value transfer (pecuniary or not) is not, by itself, sufficient to classify the agreement as a restriction of competition by object. This is because such value transfer may be justified taking into account the parties' legitimate objectives (e.g. if it constitutes compensation for the generic's litigation costs). However, the ECJ considered that where the value transfer by the originator to the generic cannot have any explanation other than the commercial interest of both parties not to compete on the merits, the agreement at issue will constitute a restriction of competition “by object” (i.e. it will be anticompetitive by its very nature). Therefore, although patent settlement agreements between originators and generics are not automatically anti-competitive, it appears that agreements with large value transfers from the originator to the generic(s) in exchange for a delay in market entry are highly likely to be deemed to be an “object” infringement in most cases. Pharmaceutical companies wishing to argue otherwise are likely to face an uphill struggle (although the ECJ has left the door open in very limited circumstances).
• Further, the judgment indicates the approach the ECJ is likely to take in pending appeals against EC infringement decisions in two other pay-for-delay cases: Lundbeck (citalopram) and Servier (perindopril).
• It also seems likely to encourage both the EC and national competition authorities to aggressively pursue more pay-for-delay cases in the future. Indeed, Commissioner Vestager commented to journalists that the judgment “looks very promising on first reading, and in that of course we feel very much encouraged because we find these cases important”. Similarly, the CMA has welcomed the judgment, noting that it “has clarified a number of important questions and will help competition authorities, including the CMA, in their work to tackle this harmful behaviour by pharmaceutical companies”.

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