Competition Appeal Tribunal refers GSK “pay for delay” case to the European Court of JusticePrint publication
The Competition Appeal Tribunal (CAT) recently gave judgment in the long awaited appeals by GSK and five generic pharmaceutical companies (Generics (UK) Ltd, Xellia Pharmaceuticals ApS, Alpharma LLC, Actavis UK Ltd and Merck KGaA) against a decision by the Competition and Markets Authority (CMA) to impose fines of almost £45 million in total for alleged “pay for delay” agreements in relation to the antidepressant drug, paroxetine.
In its judgment the CAT decided to refer the main points of law to the European Court of Justice (ECJ) whilst ruling on some of the points of appeal in favour of the CMA. On 27 March 2018, the CAT made the formal court order referring the questions to the ECJ for a preliminary ruling.
This referral to the ECJ should help to clarify the law for pharmaceutical companies in this complex area. “Pay for delay” agreements have long been posing difficult questions for competition enforcement agencies in the US and EU and this case represents the first occasion on which the CAT has ruled on these issues.
“Pay for delay” agreements
“Pay for delay” or “reverse payment settlements” involve a pharmaceutical company making a payment in cash or in some other form (called a “value transfer”) to another challenger pharmaceutical company in return for a commitment or understanding that the challenger pharmaceutical company will either not enter the market or enter the market on less competitive terms under a licence agreement or another arrangement. This helps the incumbent pharmaceutical company to continue to maximise its position in the market, to make further profits and to share some of those profits with the challenger companies, rather than competing directly against them.
These types of settlements usually arise in the context of patent settlements whereby one challenger pharmaceutical company is trying to enter the market for a particular product. The incumbent will often argue that the challenger (usually a generic pharmaceutical company) is infringing its patent rights over the existing drug. The parties reach an agreement to manage the situation involving a value transfer from the incumbent to the challenger – hence the payments are called “reverse” in that one might otherwise normally expect the challenger to pay the patent holder a licence fee to market its new product without fear of infringing the patents.
In this case, GSK was found by the CMA to have made payments worth several millions of pounds to certain generic pharmaceutical companies (GUK and Alpharma) that were bringing new generic versions of paroxetine to the market. In return for the payments in cash and in kind, the companies instead decided to sell an unbranded version of GSK’s product, Seroxat, under their own brands. According to the CMA, this delayed the entry of independent generic paroxetine until another company, Apotex, defeated GSK patents in a later court case. The CMA also found that GSK had abused its dominant position by excluding its rivals in a manner which was not “competition on the merits”.
The CAT judgment
The key development in the case was the referral of several questions to the ECJ for consideration under the preliminary reference procedure (Article 267 TFEU).
The questions posed to the ECJ relate to the following issues:
- Potential competition: the CAT battled with the question as to whether the pharmaceutical companies were true potential competitors. Whilst they had products in development, the generic pharmaceutical companies argued that they could not enter the market because of GSK’s patents and in fact, one company (GUK) faced an interim injunction preventing it from entering the market with its own product. The CAT decided that it should be a question for the ECJ as to whether the existence of a bona fide patent dispute or an interim injunction should mean that a company is not a potential competitor. If the generic pharmaceutical company is not a potential competitor, then competition is arguably not restricted under Article 101(1) TFEU.
- Restriction of competition by object/effect: the CMA argued that these types of agreements are “restrictions by object” because they are clearly anti-competitive and may cause harm to consumers. The pharmaceutical companies argued that the position was more complex and that the CMA should show that the actual effect of the agreements in question was to increase prices for consumers. The pharmaceutical companies argued that the entry by the companies under the deals with GSK had in fact reduced prices for consumers to some extent by allowing for early entry. The CMA argued that the price drop would have been far greater with independent generic entry. The CAT referred a number of questions on this issue to the ECJ including: (i) whether the agreements constitute a restriction by object; (ii) whether the scope of the restriction on the generic company should make a difference to the finding if it does not go beyond the scope of the patent in dispute; and (iii) whether the fact that the agreement provides for some limited additional volume brings some benefits to consumers which would not have occurred if the patent holder succeeded in the litigation. The CAT also asks a question on the interpretation of restriction of competition by effect and whether the court should look at the probabilities of the generic companies winning the litigation in deciding on the counterfactual or whether the parties would have entered into a less restrictive settlement agreement.
- Dominance/market definition: The issue of market definition in pharmaceutical cases is often very challenging and the CAT considered in detail whether the relevant market should be at the molecule level (for paroxetine) or at the wider SSRI level (which includes other types of anti-depressants with a similar mode of action). The CAT considered that the CMA had correctly defined the market at the molecule level in this case but disagreed with the CMA’s approach. It has asked the ECJ to consider whether excluded generic products should also be taken into account for the purpose of defining the relevant market although they could not enter the market before expiry of the patent, if the patent is found to be valid or infringed.
- Abuse of dominance: the CAT decided to refer several questions to the ECJ on abuse of dominance including whether the conduct in question in entering into the agreements amounted to an abuse of dominance and whether it makes a difference if the intention was either to avoid litigation or was part of a strategy to preclude generic entry or if there were alleged savings to the public health authorities.
Arguments dismissed by the CAT
The CAT dismissed arguments that the CMA’s decision erred in finding that the agreements did not benefit from exemption under the under the Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 which at the time excluded certain vertical agreements from the scope of competition law.
The CAT also dismissed GSK’s argument that the CMA’s decision erred in finding that the agreements did not benefit from an exemption under the Vertical Block Exemption Regulation (Regulation (EC) No 2790/1999) or from individual exemption.
The CAT also dismissed GUK, Merck and Actavis’s argument that their rights of defence had been infringed and also dismissed Xellia/ALLC’s argument that the CMA’s decision erred in holding them jointly and severally liable with Actavis.
This case will continue to be followed closely by competition law professionals and pharmaceutical companies in particular given the novel competition issues raised by patent settlement agreements and the approach to abuse of dominance and market definition. There are also other similar pay for delay appeals pending before the ECJ in the Lundbeck case and the General Court in the Servier case which involve similar types of issues so this will be continue a hot topic for many years to come.
In September 2016, the General Court agreed with the European Commission that “pay for delay” agreements could be considered anti-competitive by their very nature and upheld a fine on Lundbeck of €93.8 million.
The recent European Commission 8th monitoring report on patent settlements published in March 2018 shows that the number of type B.II “pay for delay” agreements has reduced in the last few years and now only represent around 15% of overall patent settlements. However, pharmaceutical companies should be careful when drafting patent settlements not to breach the rules on anti-competitive agreements. Companies should also be aware that the CMA and other competition enforcement agencies may also challenge exclusionary conduct under the rules on abuse of dominance.
The consequences of breaching competition law can be severe. In addition to potential fines of up to 10% of group worldwide turnover, companies can also face lengthy proceedings and damages actions from third parties harmed by the arrangements. For example, the timeline in the GSK case indicates that it originated from agreements in 2001-03 which were investigated by the CMA between 2011 and 2016. Following the CMA’s decision, it has taken two years for the CAT appeal. It will take perhaps another two years for a preliminary ruling from the ECJ, meaning the case will have run for over nine years. The CAT will then issue its final judgment, which may be subject to appeal. If the CMA is ultimately successful in defending its decision, the companies involved may then face damages actions by national health agencies for alleged overcharges.
The Competition Team at Walker Morris has extensive experience in assisting companies in complying with competition law and has experience from working on pay for delay investigations and abuse of dominance cases (including at the CMA). If you would like further information on how Walker Morris may be able to assist you, please contact any member of the Competition Team listed below.