CJEU CONFIRMS PAY-FOR-DELAY APPROACH AND UPHOLDS DECISION IN LUNDBECK CASES

On 25 March 2021, the Court of Justice of the EU (“CJEU”) dismissed the appeals by Lundbeck and five producers of generic medicines against the General Court’s (GC) judgments that upheld the Commission’s decision and the fines it had imposed in its first pay-for-delay infringement decision in 2013.  The CJEU upheld the GC rulings and confirmed that Lundbeck (“the originator”) and the generic companies were potential competitors, finding that the existence of a patent cannot, as such, mean that a generic company is not a potential rival, when it has the firm intention and ability to enter the market and shows readiness to challenge the validity of that patent.

In addition, the CJEU confirmed that the agreements in question were a restriction of competition "by object" because it was clear that the significant financial compensation (i.e. the “reverse payment" or "value transfer") granted by Lundbeck to the generic companies had no other explanation than their common commercial interest not to compete with one another.

The CJEU also makes a novel point referring to a duty of care to ensure document retention in the context of a sector inquiry carried out by the Commission.  The issue was raised in the context of the companies’ rights of defence and the CJEU held that undertakings in a sector under investigation, in particular those which have concluded agreements expressly referred to in the decision initiating the sector inquiry, must expect that individual procedures may possibly be initiated against them in the future and should therefore take precautions against the loss of evidence that might prove useful to them in the context of subsequent proceedings.

IMPLICATIONS OF THE JUDGMENT

• The CJEU’s ruling does not come as a surprise and closely follows the CJEU’s guidance in the GlaxoSmithKline Paroxetine preliminary ruling case where it was asked to clarify the same issues in a similar context at the request of the UK’s Competition Appeal Tribunal (see our briefing here).
• The CJEU case law now provides guidance for ongoing and future cases in the pharmaceutical sector on the issue of potential competition between originators and generics in the context of pay-for-delay agreements.
• The cases send 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 and enter the market at risk, it is likely to be considered a “potential competitor” of the originator. In such a context any patent settlement between the originator and that generic involving substantial value transfer that induces the generic to stay out of the market is likely to attract antitrust scrutiny and be found in violation of the competition rules.
• Patent settlement agreements are, however, not automatically in breach of the competition rules and both the General Court and the CJEU gave Lundbeck and the generic companies the opportunity to prove that the agreements had pro-competitive effects. However, where the value transfer is substantial and 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).
• The CJEU considered that the General Court had erred in law in finding that Xellia Pharmaceuticals and Alpharma had a duty of care to keep documents going back to 2003 in order to support their defence in an investigation only launched against them in 2010 and 2011. The CJEU concluded this error did not invalidate the General Court’s decision as the requirement to keep the documents could be justified on the basis of the Commission’s earlier sector inquiry in the pharma sector. It remains to be seen whether this document retention point in the context of sector inquiries is limited to situations where the companies themselves then wish to raise rights of defence issues or whether this introduces a wider, positive obligation or duty of care on all companies subject to a sector inquiry to retain documents relating to the sector inquiry as evidence for potential future individual investigations.

BACKGROUND TO THE CASE

The Commission decision of June 2013

In June 2013, the Commission fined Lundbeck €93.8 million and several producers of generic medicines (Merck, Generics UK, Alpharma/Xellia, Arrow and Sun) a total of €52.2 million for delaying the market entry of generic versions of citalopram, Lundbeck's blockbuster antidepressant medicine.

According to the Commission, after Lundbeck's basic patent for the citalopram molecule had expired, it only held a number of related process patents which provided a more limited protection; generic producers of citalopram had the possibility to enter the market in a variety of ways. Instead of competing with each other, the Commission found that Lundbeck and the generic companies entered into a series of agreements under which the generic companies agreed to delay their market entry in exchange for significant value transfers.

In its assessment of the agreements, the Commission found that:

• The agreements were concluded between undertakings that were at least potential competitors as the generic companies had "real concrete possibilities of entering the market" and committed themselves to limit, for the duration of the agreement, their independent efforts to enter the market.
• The agreements included significant value transfers from Lundbeck to the generic companies, which substantially reduced the incentives of the generic companies to pursue their independent efforts to enter the market. The value transfers corresponded to the profits expected by the generic companies in case of entry.
• The agreements afforded Lundbeck protection it could not have obtained through enforcement of its process patents and Lundbeck did not commit to refrain from infringement proceedings after expiry of the agreements.

The Commission concluded that, through the agreements, Lundbeck and the generic companies agreed on a period during which the generic companies would be excluded from the market, without any guarantee of unrestricted market entry thereafter, in exchange for a significant reverse payment. As such, the Commission held that the agreements were market sharing agreements which constitute a violation of competition "by object", i.e. they were by their very nature injurious to the proper functioning of normal competition. It was therefore not necessary for the Commission to establish that the agreements had anti­competitive effects.

All parties involved in the agreements appealed the Commission’s decision on the main grounds that (i) the Commission had erred in law when it found that Lundbeck and the generic companies which had entered into the agreements were actual or potential competitors under Article 101 TFEU and that (ii) the agreements restricted competition "by object" under Article 101 TFEU.

The General Court’s rulings of 8 September 2016

On 8 September 2016, the GC dismissed the appeals brought by Lundbeck and the generic companies against the Commission’s decision.

Relying on objective evidence such as the investments already made and the steps already taken to obtain a market authorisation, the GC confirmed the Commission’s finding that Lundbeck and the generics companies were potential competitors at the time the agreements were concluded as, absent the agreements, the generics companies would have had ‘real concrete possibilities of entering the market’ including by ‘launching at risk’. The GC also agreed that the mere fact that Lundbeck paid significant value transfers to keep the generic companies out the market was a strong indication that Lundbeck perceived the generic companies as a potential threat.

The GC also found that the Commission had been correct to conclude that the agreements constituted restrictions of competition ‘by object’, as they affected potential competition by replacing the uncertainty of whether generics were infringing the patents or validity with the certainty that the generics would not enter the market by means of very significant reverse payments. The GC held that the very existence of disproportionate reverse payments was a relevant factor to establish whether the agreements constituted a restriction of competition “by object” because, the significant reverse payments provided an incentive to generic companies not to pursue their efforts to enter the market for citalopram. In this regard, the GC also noted that the size of a reverse payment may constitute "an indicator of the strength or weakness of a patent, as perceived by the parties to the agreements at the time they were concluded".

Further, while Lundbeck argued that the characterisation of a restriction “by object” required a restrictive interpretation based on the economic and legal context of the agreements, the GC still confirmed the Commission’s finding that the agreements at issue "were comparable to market exclusion agreements, which are among the most serious restrictions of competition" and thus constituted "by object" restrictions.

According to the GC, Lundbeck did not demonstrate that the restrictions set out in the agreements were ‘objectively necessary’ to protect its patent rights. Lundbeck could have protected its rights by bringing legal proceedings or it could have settled the patent dispute without imposing restrictions on generic entry.

The GC also pointed out that the Commission was not required to examine the effects of those agreements or the situation that would have arisen if they had not been concluded.

Lundbeck and the generic companies appealed the GC rulings before the CJEU.

THE CJEU RULINGS

Potential competitors

The CJEU confirmed the GC’s finding that Lundbeck and the manufacturers of the generics were potential competitors. The Court held that in order to assess whether a company which is not yet present on the market qualifies as a potential competitor, it is necessary to determine whether there are actual and concrete possibilities that the company may enter the market and compete against other companies already active on that market. The CJEU added that there is no need to prove with certainty that the company will actually enter the market and will be capable to maintain its position on that market. For agreements that relate to the opening of a market for a medicine containing an active ingredient which has recently entered into the public domain, it should be established whether the generics manufacturer has the firm intention and inherent ability to enter the market and does not face insurmountable barriers to entry.

The CJEU considered that the existence of a patent which protects the manufacturing process of an active ingredient that is in the public domain cannot of itself constitute an insurmountable barrier. Hence, the existence of such a patent, cannot mean that a manufacturer of generic medicines who has the firm intention and the inherent ability to enter the market, and shows readiness to challenge the validity of that patent, cannot be considered a potential competitor of the manufacturer of the original medicine.

The Court also held that it was not for the Commission to provide definite proof that the generic companies intended to market citalopram that did not infringe Lundbeck’s new process patents.

Restriction of competition “by object”

The CJEU dismissed Lundbeck’s and the generic companies’ claims that the agreements were not by-object restrictions because they pursued legitimate objectives of dispute resolution.

The CJEU confirmed that the agreements at issue constituted restrictions of competition by “object”, because it was clear from their examination that the substantial value transfers granted by Lundbeck to the generic companies had no other explanation than the companies’ common commercial interest not to compete with one another. The value transfers were significant enough to act as an incentive for generic companies to delay their entry on the market. Additionally, the CJEU stated that there was no requirement that the net gain should necessarily be greater than the profits which the generic company would have made if it had been successful in the patent proceedings.

The CJEU confirmed that the qualification of restriction of competition by “object” requires a case-by-case analysis of the specific characteristics of the agreements in light of their economic and legal context.

In the case at stake, the agreements allowed to delay the market entry of generic medicines against significant reverse payments which induced generic companies not to enter the market. The CJEU concluded that this type of agreement is clearly harmful by its very nature and qualifies as a restriction by object within the meaning of Article 101 TFEU.

Retention of documents for the rights of defence

Finally, the CJEU considered that the GC erred in law when imposing a due diligence obligation to retain documents on Xellia Pharmaceuticals and Alpharma going back to 2003. The CJEU held that since the administrative procedure against these two companies only started in the early 2010s, the GC had been wrong to impose on them the obligation to keep any documents that might prove useful for their defence as of 2003. Nevertheless, the CJEU did not set aside the GC judgment on this basis as it concluded that the operative part was well founded on other legal grounds. In light of the Commission’s earlier sector inquiry in the pharma sector (launched in 2008), the companies were under a duty to ensure they had the necessary evidence and records available to assist the Commission in the event of potential subsequent administrative or judicial proceedings.

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