A “pay for delay” agreement can be categorized as an agreement that aims to restrict competition in a market, and it may also constitute an abuse of a dominant position, which is why it may be contrary to EU competition rules.
Read attorney Hans Sønderby Christensen’s article published on Monday, November 16, 2020, on Jyllands-Posten’s website here or download it as a PDF here.
Based on an English case, the EU Court of Justice lays down the criteria for determining when a settlement in a dispute between a patent holder for a medicinal product and a manufacturer of generic medicinal products, i.e., copycat products, is contrary to EU competition law.
The Court stated, among other things, that a “pay-for-delay” agreement may constitute a violation of the EU rules on abuse of a dominant position if the dominant company uses a market strategy that causes potential competitors who manufacture generic medicinal products to be temporarily kept out of the market. This is the case if such a strategy restricts competition in the market and has exclusionary effects that exceed the specific effects associated with the conclusion of the individual settlement agreements. A “pay-for-delay” agreement may therefore even aim to restrict competition in the market, which is why the decision provides good guidance for future settlement agreements between competing companies.
The case concerned GlaxoSmithKline (GSK), which in the 1990s marketed a prescription drug for depression under the name “Seroxat”. In addition, GSK had obtained a number of secondary patents related to various aspects of the manufacturing process itself.
In January 1999, GSK’s patent on the active substance “paroxetine” in the original drug expired, and already in mid-2000, GSK became aware that a number of manufacturers of generic drugs, including Generics (UK) Ltd (GUK) and Alpharma LLC, were considering offering a generic version, i.e., a copycat product, of paroxetine.
GSK filed a lawsuit against, among others, GUK and Alpharma, claiming that the copycat products infringed GSK’s secondary patents. However, no judgment was ever handed down in the case, as the parties reached a settlement shortly before the case was concluded. In the settlement agreements, the manufacturers of the generic products agreed to waive the sale of their own generic drugs on the market for an agreed period in exchange for payments from GSK – a so-called “pay-for-delay” agreement.
In February 2016, the British competition authority, CMA (Competition and Markets Authority), issued a decision in which it imposed fines totaling approximately DKK 400 million on the parties. The CMA had found that the settlement agreements constituted a violation of the prohibition against entering into anti-competitive agreements, and that GSK had abused its dominant position in violation of EU law.
The parties brought the decision before the Competition Appeal Tribunal (CAT), which in 2018 decided to submit a number of preliminary questions to the EU Court of Justice. This was necessary for the Competition Tribunal to decide the case and thus assess whether the CMA’s decision was valid. CAT wanted an interpretation of the EU’s competition rules, both regarding the delimitation of the relevant market and the delimitation of the abuse of a dominant position and its possible justification.
The EU Court of Justice initially emphasized that, according to EU competition rules, all agreements between companies, all decisions within associations of companies and all forms of concerted practice that may affect trade between Member States and that have the purpose or effect of preventing, restricting or distorting competition within the internal market are incompatible with the internal market and prohibited. The EU competition rule thus distinguishes between the concept of “anti-competitive purpose” and the concept of “anti-competitive effect”.
In order for companies’ behavior to fall within the prohibition, it must thus appear that there is a secret agreement between them – i.e., an agreement between companies, a decision within an association of companies or a concerted practice – but the secret agreement must also negatively and significantly affect competition within the internal market. This presupposes that the said agreement is entered into between companies that are at least in a potential competitive relationship.
As the parties had not entered the market for paroxetine at the time of the conclusion of the settlement agreements, the present case only concerns the concept of “potential competition”. In order to assess whether such a potential competitive relationship existed, it is required that the company has real and concrete opportunities, i.e., no insurmountable market barriers, to enter the market and thus compete with GSK. In an assessment thereof, account must be taken of the structure of the market and of the economic and legal context in which it is included.
The Court then stated that the EU rules must be interpreted in such a way that a manufacturer of original medicinal products and manufacturers of generic medicinal products must be regarded as competitors, regardless of whether the parties are involved in a lawsuit concerning the validity of a patent. It only requires that it is established that the manufacturer of the generic medicinal products actually intends and has an actual opportunity to enter the market.
In addition, the EU Court of Justice stated that a “pay-for-delay” agreement constitutes an agreement that has “the purpose” of preventing, restricting or distorting competition, if it can be established that the payments from the original manufacturer to the generic manufacturer are solely due to the contracting parties’ business interest in not competing on services. However, account must be taken here of the fact that the agreement has established “pro-competitive effects”, which may give rise to reasonable doubt as to whether it is sufficiently harmful to competition.
Regarding the concept of “abuse of a dominant position”, the Court stated, firstly, that for the purpose of delimiting the relevant product market, account must be taken not only of the original version of this medicinal product, but also of its generic versions, if the manufacturers concerned of generic medicinal products have the prerequisites for being able to enter the market in question at short notice and with sufficient strength to constitute a serious counterweight to the original medicine manufacturer already on the market.
It may be decisive for this that the dominant company’s market strategy means that potential competitors who manufacture generic medicinal products are temporarily kept out of the market – e.g. pursuant to a “pay-for-delay” agreement.
