Pay for Delay?

Oct 01, 2013

On June 19, the European Commission hit major Danish pharmaceutical company Lundbeck with a fine of € 93.8m. Four other major European generic drug manufacturers (Alpharma, Merck KGaA/Generics UK, Arrow, and Ranbaxy) were similarly subject to fines, totalling € 52.2m. Their offense was violating EU anti-trust rules. In 2002, Lundbeck entered into patent settlement agreements with the four manufacturers, delaying entry of cheaper generic versions of Lundbeck's popular citalopram (a "blockbuster" antidepressant) onto the European pharmaceutical market.

The ruling is a significant milestone, marking the first time the European Union has sought to clamp down on "reverse payment patent settlements," better known as "pay for delay" deals. This column will examine the trend toward finding an antitrust claim to vacate reverse payment patent settlements and review the precedents set by the Lundbeck decision.

The application of antitrust rules to patent settlements is controversial, as it casts a spotlight on the inherent tension between intellectual property rights (IPR) and competition law.

The essential characteristic of IPR is that they confer upon their owner an exclusive right, affording them a legal monopoly. Once a patent has been granted, the owner has the power to exclude others from doing anything that infringes the patent. Antitrust rules, on the other hand, generally exist to keep markets open to competition, and view any kind of monopoly as inherently negative.

Today, it is often asserted that this inherent tension is anything but apparent as IPR and antitrust rules share the same fundamental goals of enhancing consumer welfare and promoting innovation. This statement is, however, to some extent debatable.

Article 101 in the Treaty on the Functioning of the European Union (TFEU) prohibits anticompetitive agreements and stipulates that all agreements between undertakings; decisions by associations of undertakings; and concerted practices which may impact trade between member states, and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, are prohibited. They are deemed incompatible with the internal market.

Generally, there are three different ways of analyzing reverse payment patent settlements under Article 101:

The "scope of the patent" test. Under this test, a reverse payment patent settlement may not infringe Article 101, as long as it remains within the scope of the patent and is strictly limited to preventing products that potentially infringe the patent from being introduced to the market. Thus, where there are bona fide grounds for a dispute, the settlement may be said not to go beyond the exclusionary power of the patent itself. Until recently, the US courts consistently applied the "scope-of-the-patent" test. With the US Supreme Court judgment of June 17, 2013 in FTC v. Actavis, however, this has now changed.

The "restriction by object" test. The opposite view is to take the position that reverse payment settlements presumably restrict competition by object and may thus generally be considered to constitute an infringement of Article 101, without it being necessary to demonstrate any negative effect on the market. Under this test, payments from the original patent holder to the generic drug manufacturers are generally presumed to have as their object the delay of generic entry, and the sharing of monopoly profits.

The "rule of reason" test. An intermediate view is to provide room for antitrust scrutiny of reverse payment patent settlements even where these clearly remain within the scope of the patent, without, on the other hand, presuming them to be unlawful. This "rule-of-reason" test has been adopted by the FTC v. Actavis judgment. According to the Supreme Court, the likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payer's anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of other convincing justification.

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