A bitter pil lto swallow: The legality of reverse payment ... · A BITTER PILL TO SWALLOW: THE...
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Jura Falconis, Jg. 53, 2016-2017, nummer 4 682
A bitter pil lto swallow:
The legality of reverse payment patent
settlements
Laurenz Bové
Under the scientific supervision of:
Prof. M.E. Storme and Mr. J. Ackaert
1. INTRODUCTION
“The vastly cheaper prices and lower profit margins of generics create powerful incentives for both the brand and generic manufacturers to agree to avoid competition. So if it is legal for a brand to pay the generic to ‘sit out’, why wouldn’t it? And if a generic drug company is allowed to make more money by not competing than by going to market, isn’t that a good business deal for the company and its shareholders? Of course it is. Clearly, these are win-win deals for both companies. But they leave consumers footing the bill.”
- J. LEIBOWITZ, 2009.
Settlements are legitimate means for parties to end their legal disagreements. On the same note, patent settlements are favorable because parties save
litigation costs while courts and administrative agencies save time and effort. One type of patent settlements, however, has attracted serious concerns over the last decade in both the U.S. and the EU, namely those featuring a
payment from the patent owner to the alleged infringer in exchange for the latter to renounce its infringing practice. Because the payment flows in the
opposite direction of what is usually the case, these deals are called ‘reverse
payment patent settlements’. Parties to these deals exposed themselves to antitrust scrutiny on both sides of
the Atlantic because on the first sight, these agreements appear to be instruments used to buy off competition, which is incongruous with the Western paradigm of a free undistorted market. Yet their (il)legitimate nature
is not easy to assess because the phenomenon is situated on the delicate edge between three legislative pillars: regulatory –, patent – and antitrust laws.
The first objective of this thesis is to portray the underlying problems which have caused these deals to surface. To do this, the regulatory context in which the agreements occur, as well as the incentives of the parties involved will be
analyzed. The second and most important aim is to assess whether and, under which circumstances these settlements are lawful under current U.S.
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and EU antitrust laws. An elaborate analysis of cogent legislation and preexisting case law is indispensable for this purpose. Lastly, it will be
questioned whether the current U.S. and EU approach towards reverse payment settlements succeeds in providing a balanced policy which facilitates early market entry of generic drugs while procuring sufficient incentives for
brand name companies to continue developing new medicines.
2. WHAT ARE REVERSE PAYMENT PATENT
SETTLEMENTS? 2.1. STRUCTURE OF A RPPS 2.1.1. Description and semblance of RPPS
1. DEFINITION – Reverse payment patent settlements (herinafter ‘RPPS’)
most often occur during patent litigation within the pharmaceutical market where the brand name drug company (‘originator’ or ‘pioneer drug company’) wants to delay the market entry of generic drugs. To achieve such delay, the
originator company pays the manufacturer of the generic drug for (i) abandoning the patent challenge and (ii) postponing the market entry of their duplicate drug.1
Figure 1 below shows a practical example of a RPPS setting.
After a decade of R&D in which $1 billion was spent, company ‘Originator Inc.’ has developed ‘Medicine A’, which will cure thousands of patients. ‘Originator Inc.’ obtained a patent on ‘Medicine A’ and is awarded market authorization in 2015. The management of ‘Originator Inc.’ estimated a yearly turnover of $60 million with the sale of ‘Medicine A’. This would generate $1,2 billion within the patent protection period of 20 years, resulting into $200 million profits. After three years however, another company, ‘Generic Ltd.’, has discovered the biogenetic composition of ‘Medicine A’, and is able to produce an exact generic copy, which it starts selling as ‘Medicine B’ at a considerably lower price. Faced with tremendeous market share loss and price cuts, ‘Originator Inc.’ decides to safeguard its prospected business plan. The legal department advises not to initiate judicial proceedings, as the chances of effective remedy are too shy. ‘Originator Inc.’ then decides to settle with ‘Generic Ltd.’. In exchange for a $100 million payment, ‘Genetic Ltd.’ agrees to delay the
marketing of ‘Medicine B’ until 2035, when the patent of ‘Originator Inc.’ expires.
Figure 1: fictious example of a RPPS
These type of patent settlements have attracted world-wide antitrust scrutiny
due to the purported anticompetitive effects they effectuate. These deals allegedly cause harm to consumers, as the latter are paying the cost of the high prices that originator companies can maintain.2 Moreover, competition
1 FTC v. Actavis, Inc., 133 U.S. 570 (Supr. Ct. 2013), at 1. 2 R. NELSON, “Pay-for-Delay Drug Deals: Do They Hurt or Help Patients?”, Medscape Medicals 2015, Vol. 4, 1 and FTC Statement of 3 june 2009, “how pay-for-delay settlements make consumers and the federal government pay more for much needed drugs”, at 2, available
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is weakened – if not eliminated – not on the grounds of merits of the patents covering the concerned medicines, but rather on the value transfer from
originator to the generic company. The European Commission described RPPS very briefly and vigilantly as:3
“Patent settlement agreements [that] lead to a delay in a generic’s product entry in a specific market in return for a payment by the originator to the generic company.”
2. DENOMINATION – These settlements are called ‘reverse payment patent
settlements’ because the payment flows in the opposite direction (from the patent holder to the alleged infringer) as what is usually the case in patent litigation.
Another term is ‘pay for delay settlements’, which emphasizes the core incentive and consequence of these deals, i.e. delay of generic entry.
A third, less employed synonym is ‘exclusionary payment patent settlement’, though these are rather a subtype, indicating those RPPS which not only delay, but
permanently exclude generic market launch.4 2.1.2. Elements that compose a RPPS
3. COMPOSITION OF A RPPS – In order to assess the legality of RPPS, it is
necessary to establish its legal position through identifying the seperate
elements and obligations it consists of, and the legal effects it generates. This heading merely displays an inventory of the different RPPS elements. For the legal assessment of these elements, see infra, Chapters 3 and 4.
Although RPPS appear in different forms and under different circumstances, RPPS (at least those that incite the most anticompetitive concerns) generally
contain the following elements:
(i) a legal dispute concerning a patent claim; (ii) an agreement that settles the dispute; which contains:
(iii) a value transfer from the originator to generic company (i.e. ‘reverse payment’); and (iv) a limitation of generic market entry.
at https://www.ftc.gov/sites/default/files/documents/one-stops/pay-delay/p859910payfordelay-1.pdf. 3 Commission Communication, EU Pharmaceutical Sector Inquiry, Final Report, July 8, 2009, available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/staff_working_paper_part1.pdf, §708
[herinafter: EU Pharmaceutical Sector Inquiry Final Report]. 4 FTC Statement of 3 june 2009, “how pay-for-delay settlements make consumers and the federal government pay more for much needed drugs”, at 2.
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4. DISPUTE OVER A PATENT CLAIM – Settlements and by virtue, patent
settlements are commercial agreements to settle actual or impending legal disputes.5 The conclusion of a settlement thus implies an underlying legal
dispute that it seeks to resolve. Although patent settlement agreements occur most often pending litigation, the conclusion of a settlement does not depend on preceding initiation of any judicial procedure. Hence, patent settlements
may arise either during patent litigation, opposition procedures or even absent any court proceeding.6
The disagreement between opposing parties within the framework of a RPPS is about (i) whether the generic company’s practices infringe the originator’s
patent and/or (ii) whether the patent of the originator is valid altogether.7
5. SETTLEMENT – The central aim of a settlement is to end the dispute or
litigation at issue. Opposing parties may be induced to settle their dispute since the alternative (continuation c.q. initiation of litigation) may be
unpredictable, costly and time-consuming.8 Contestants of RPPS claim that such settlements may also have alternative
commercial motives, more specifically the allotment of the market.9 This, of course, is prohibited by antitrust laws (infra, nr. 46).10
In practice, (reverse payment) patent settlements generally occur at the patent infringement lawsuit stage, i.e. where the originator – owner of the patent protecting the brand drug – sues the generic company for alleged patent
infringement.11
6. VALUE TRANSFER FROM ORIGINATOR TO GENERIC – Emblematic for
RPPS is that they contain a ‘reverse payment’, i.e. a value transfer from the originator to the generic drug manufacturer.
5 H. HOVENKAMP, M. JANIS, M. LEMLEY and C. LESLIE, IP and Antitrust: An Analysis of Antitrust
Principles Applied to Intellectual Property Law, New York, Wolters Kluwer, 2009, 35 [herinafter: H. HOVENKAMP (ed.), IP and Antitrust, 2009]. 6 H. HOVENKAMP (ed.), IP and Antitrust, 2009, 6-7. 7 EU Pharmaceutical Sector Inquiry Final Report, §707. 8 For an extensive overview of the incentives for a party to conclude a settlement, infra nrs. 19 – 26. 9 T. COOK, “Pharmaceutical Patent Litigation Settlements: Balancing Patent & Antitrust Policy through Institutional Choice”, Michigan Telecomm. & Tech. Law Rev. 2011, Vol. 17, 419
[herinafter: T. COOK, “Balancing Patent & Antitrust Policy through Institutional Choice, 2011”]. 10 EU antitrust prohibition of market sharing-agreements: art. 101 of the Treaty on the
Functioning of the European Union, C 326/47 (post-Lissabon consolidated publication) [herinafter: “TFEU”]. U.S. prohibition: incorporated provisions of the United States Sherman Act of 1890 in 15 U.S. Consitution § 45(a) [herinafter: “15 U.S.C. § 45 (a)”]. 11 R. BAGHERIAN, “The Preserve Access to Affordable Generics Act: Will Congress’ Response to
Reverse Payment Patent Settlements Enhance Competition in the Pharmaceutical Market?”, J. Marshall Rev. Intell. Prop. Law 2007, 154 [hereinafter: R. BAGHERIAN: “Will Congress’ Response to RPPS Enhance Competition?”, 2007].
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Much like any other settlement agreement, patent settlements reflect negotiated positions of the parties. 12 Under ordinary circumstances, a
settlement concluded at the patent infringement suit stage would include a payment from the generic to the originator that would indemnify (i) damages that the originator would have suffered due to the illegitimate generic entry
and (ii) other side-damages such as defrayed legal fees.13 A sphere in which a reverse payment occurs thus signifies a considerably weak negotiation position of the originator company. This weak position can be the sequence
of either (i) a weak, invalid or non-infringed patent or (ii) discommoding regulatory or economic circumstances. Determining which of these two underlying factors cause the weak negotiation position of the originator is
crucial for the antitrust analysis of a given settlement as the former would implicate an artificial extension of the patent scope.
It has been said that RPPS appear in different shapes and under different circumstances. Accordingly, value transfer within such RPPS may take different forms too. The most evident form is a lump-sum or installed
monetary payment. Yet other, less obvious forms of value transfer through ‘side deals’ have been noticed as well, such as the purchase of generic’s assets, distribution agreements, or the granting of a patent licence to the generic.14
To determine whether such agreements constitute a value transfer, it should be assessed whether they accord market practice and conform to market
conditions. The purchase of assets well above their market value or the granting of a royalty-free exclusive patent licence, for example, has little chance of being conform market standards.15 The fact that the settlement
terms are unrelated to the patent issue at stake could be an indication to such deviance.16
7. LIMITATION OF GENERIC MARKET ENTRY – The final element that
constitutes a RPPS is the delay or even permanent exclusion of generic market entry.
Generic entry can be limited in various ways. The most obvious form is when
the generic company explicitly recognises the validity of the originator’s
patent in the settlement, which precludes him from entering the market until the patent expires. Generic entry can also be controlled, for example when the originator company grants a patent license to the generic, allowing the
12 J. SCHLICHER, Settlement of Patent Litigation and Disputes: Improving Decisions and Agreements to Settle and License, ABA Publishing, Chicago, 2011, 11 [herinafter: “J. SCHLICHER, Settlement of Patent Litigation and Disputes, 2011”]. 13 FTC Study of 18 JULY 2002 “GENERIC DRUG ENTRY PRIOR TO PATENT EXPIRATION”, at 2, available at https://www.ftc.gov/sites/default/files/documents/reports/generic-drug-entry-prior-patent-expiration-ftc-study/genericdrugstudy_0.pdf. 14 EU Pharmaceutical Sector Inquiry Final Report, §794. 15 B. HAWK, International Antitrust Law & Policy: Fordham Competition Law 2009, Huntington, Juris Publishing, 2010, 428 [herinafter: B. HAWK, International Antitrust Law & Policy: Fordham Competition Law 2009]. 16 P. L’ECLUSE, C. LONGEVAL, K. T’SYEN and S. CORCORAN, “Patent settlement agreements, the state of play in the EU and the US”, Multi-Jurisdictional Guide 2012, 2 [hereinafter: P. L’ECLUSE (ed.), “Patent settlements, state of play”, 2012].
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latter to enter the market though under strict conditions.17 The most occuring form of generic entry limitation however, is its delayance. This is the case
where neither party acknowledges anything regarding the validity of the patent but where they, as a matter of mutual renouncement, agree to a specified date on which the generic can enter the market in spite of an
existing patent, without having to fear an impending infringement claim. It is very difficult from a legal perspective to determine the occurance of a
delay. One cannot asservate a delay without establishing the conventional date of entry. Yet establishing the conventional date of entry is exactly where the shoe pitches. Is this the day when the patent expires? When litigation ends
with a court ruling? Or at the indeterminable day when the originator is expected to grant licences or conclude distribution agreements? Things get even more complex when the RPPS occurs absent any judicial proceeding,
which is often the case in the EU.18 U.S. Food and Drug Administration (herinafter: ‘FDA’) advisor STARR
attempted to formulate a standard to determine when a ‘delay’ is created. She argues that “consumers have the right to the level of competition that would have prevailed,
had the parties litigated their patent dispute in court.” If the originator is victorious in
litigation, generic entry cannot take place until the patent expiration date. If the generic wins in litigation, there is an immediate generic entry. According to STARR “a delay then exists if the agreed-upon date is past the avarage date of generic
entry established by litigation”.19 From a legal perspective, I have to refute this reasoning. Not only is it hardly congruent with the freedom of contract, it does not accomodate the legal reality either. If the brand name company’s
patent turns out to be invalid or uninfringed, even one day of deferred generic market entry should account for a delay, while, if the patent is indeed found to be infringed, the brand name company derives the right from its
patent to exclude any generic entry until expiration thereof. I would rather affirm that one cannot establish a ‘delay’ without considering the strength of the patent and its likelihood to hold up in court altogether.20
17 M. CLANCY, D. GERADIN and A. LAZEROW, “Reverse-payment patent settlements in the
pharmaceutical industry: An analysis of US antitrust law and EU competition law”, The Antitrust Bulletin 2014, Vol. 59, 164 [herinafter: M. CLANCY (ed.), “RPPS in the pharmaceutical industry: An analysis of US and EU antitrust law, 2014]. 18 Certainly in the EU, generics are not likely to initiate any patent suits themselves nor are they
inclined to evoke them. The European Commission’s Sector Inquiry Final Report shows that generics aim to enter the market ‘safely’, that is to say avoiding large damage claims through lenghty and expensive litigation. A settlement indicating an exact for the generic to enter the market, is thus very favorable as it eliminates the risk of facing litigation. This practice however,
makes it near impossible to determine a conventional generic entry date. See EU Pharmaceutical Sector Inquiry Final Report, §544 – 546 and §721. 19 K. DRAKE, M. STARR and T. MCGUIRE, “Do reverse payment settlements of brand-generic
patent disputes in the pharmaceutical industry constitute an anticompetitive pay for delay?”, NBER 2014, 11-12 [herinafter: K. DRAKE, M. STARR and T. MCGUIRE, “Do RPPS in the pharmaceutical industry consitute an anticompetitive pay for delay?”]. 20 ELHAUGE and KRUEGER agree with me in rejecting what they call the “perceived probalistic test”
in favour of an inquiry into the patent scope. Yet, they warn for the intricacy and the irreplacable role of the court in this matter. See E. ELHAUGE and A. KRUEGER, “Solving the Patent Settlement Puzzle”, Texas Law Review 2012, Vol. 91, 287 – 295.
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For the sake of completeness, it is worth mentioning the reverse payment settlements that do not limit generic entry, for example settlements that allow
an immediate generic market entry and where the reverse payment serves as compensation for revenues the generic firm missed because it unduly refrained from the market owing to patent that turned out to be either invalid
or not infringed. This form of settlement of course does not constitute any antitrust problems and accordingly does not attract scrutiny.21
2.2. WHERE DO RPPS COME FROM? 2.2.1. Understanding the pharmaceutical market
8. THE MERIT OF A MARKET ANALYSIS – For a sound assessment of the
(il)legality of RPPS, it is indispensible to have at least a basic understanding of its origin and the flaws in the economic environment which they occur in. Since RPPS recur primarily in the pharmaceutical sector, this heading will
cover the elements which make the pharmaceutical environment so vulnerable for the recurance of RPPS.
An all-embracing record of the pharmaceutical market cannot be displayed within the framework of this dissertation. Therefrom, the exegesis below will
be limited to those features which allow a solid understanding of the problem. For a comprehensive understanding of the functioning and dynamics of the pharmaceutical market, SCHWEITZER’S ‘Pharmaceutical Economics and Policy’
(U.S.) 22 and WALLEY’S ‘Regulating Pharmaceuticals in Europe’ (EU) 23 are recommended. a. Positional problems and specifics of the pharmaceutical
market
9. MAIN CHARACTERISTICS OF THE PHARMACEUTICAL MARKET – The
pharmaceutical industry is a unique, innovation driven market with a variety of stakeholders. While the supply side consists of only two different types of suppliers (brand
name drug manufacturers and generic firms), the demand side is very complex as the interests of doctors, pharmacies, hospitals, third-payer parties, governments, etc. are involved.
From a monetary angle, the pharmaceutical industry has a major position in both governmental and public’s budget.
21 B. HAWK, International Antitrust Law & Policy: Fordham Competition Law 2009, 428. This policy is
confirmed by the European Commission in its infringement decisions against Lundbeck and others, see Commission Decision (COMP/39.226), Lundbeck and others, C 3803 [2013], nr. 164 and 639. 22 S. SCHWEITZER, Pharmaceutical Economics and Policy, New York, Oxford University Press, 2007,
11-33. 23 T. WALLEY, M. MRAZEK and E. MOSSIALOS (eds.), Regulating Pharmaceuticals in Europe: Striving for Efficiency, Equity and Quality, Berkshire, Open University Press, 2004, 1-368.
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The EU Commission estimated the total size of the 2007 EU pharmaceutical market at €214 billion, accounting for 2% of the annual EU GDP.24 With the
average age of the EU population on the rise, these figures are not likely to decline in the near future. IMS and OECD data confirm this increasing trend, showing an increase of €30 billion in just six years.25
The U.S. market, on its part, accounts for more than 40% of the global pharmaucetical industry and has its current size estimated at $380 billion, or
2,4% of the annual U.S. GDP.26 10. MARKET IMPORTANCE AND COMPETITIVE CONCERNS – The
pharmaceutical industry is undeniably one of the most difficult markets to
achieve (let alone maintain) an undistorted competitive environment in. The market is characterised by: (i) a high GDP per capita ratio, constituting a large impact on citizen’s
budget; (ii) a very low price elasticty of demand;27 (iii) a low amount of suppliers, making it a rather duopolistic market;
and (iv) the presence of strongly divided submarkets without
interchangeability.28
These features invest tremendeous power in the supply side of the market, which makes the market vulnerable to supply-power exploitation.
By consequence, there is a significant state involvement and a high degree of regulation in the market, which is of vital importance to achieve and balance
different objectives (improve and maintain a high degree of public health while controlling public expenditure).29
Other objectives and interests at stake that justify regulatory interference are displayed in the table below.
24 EU Pharmaceutical Sector Inquiry Final Report, §41 - 44. 25 OECD, Pharmaceutical Expenditure 2013, available at
https://data.oecd.org/healthres/pharmaceutical-spending.htm. 26 IMS Health, US Pharmaceutical Industry Size in USD, available at https://www.imshealth.com/files/web/Corporate/News/Top-Line%20Market%20Data/Global%20Prescription%20Sales%20Information5%20World%20fig
ures%20by%20Region%202015-2019.pdf. 27 Being life-necessary goods, medicines’ elasticity of demand is already by nature insensitive to price fluctuations. Moreover, it is not the consumer, but his doctor who makes the ultimate
decision whether or not to buy the concerned drugs. For a comprehensive apprehension, read FDA STUDY OF 2002 ON THE ELASTICITY OF DEMAND FOR HEALTH CARE, available at http://www.fda.gov/ohrms/dockets/dailys/04/June04/061404/03p-0029-bkg0001-Ref-09-vol3.pdf. 28 Evidently, each drug forms a seperate market. A painkilling medicine, for example, is not in competition with contraceptive drugs. 29 EU Pharmaceutical Sector Inquiry Final Report, §39.
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Health care policy Industrial policy Public health policy
• Expenditure containment;
• Promoting R&D; • Safe medicins;
• Cost-effective medication;
• IP protection; • Innovative cures;
• Generic promotion; • Supporting scientific community;
• High-quality preparations;
• Safeguard access to medicines;
• Generating and protecting employment;
• Effiacious treatments;
Table 1: competing policy interest in the pharma market [source: T. WALLEY, Regulating Pharmaceuticals, infra note 16, 39.]
b. The supply side of the pharmaceutical market
11. STRUCTURE OF THE SUPPLY SIDE – The supply side of the
pharmaceutical market consists of two different types of suppliers: originator
and generic drug manufacturers. Competition within the pharma market generally befalls as originator
opposed to generic firms. Generic companies will ineluctably employ all means to enter the market as soon as possible, while on the other hand, originator companies will do all what is necessary to effectuate their patents’
exclusionary protection (and maintain their monopolist market position). Competition between two or more originators (e.g. two different medicins
with the same therapeutical effect) or between multiple generics (e.g. after originator’s loss of exclusivity, in the occasion where multiple generics enter the market and compete eachother on price) also occurs, but has only little
importance for the current analysis. 12. ORIGINATOR COMPANIES – The first type of companies present at the
supply side of the market are the originator manufacturers (‘originator’, ‘pioneer
drug company’, or ‘brand name company’). These are R&D-based innovative companies that depend largely on patent protection.30 Their business model dwells on the marketing of new patent-protected medicines, while reinvesting
the money that is generated during the exclusivity period into the R&D of new medicines.31
Originator companies are generally global multinationals with departments all over the world.32 The largest originator companies (in terms of annual
turnover) are Sanofo-Aventis, Glaxo-Smith-Kline, Pfizer, Solvay, Hoffmann LaRoche,
30 B. ROLLINS and M. PERRI, Pharmaceutical Marketing, Burlington (MA), Jones & Bartlett Publishers, 2013, 47 [herinafter: ROLLINS & PERRI, Pharmaceutical Marketing, 2013]. 31 ROLLINS & PERRI, Pharmaceutical Marketing, 2013, 48. 32 F. ABBOTT (ed.), Global Pharmaceutical Policy: Ensuring Medicines for Tomorrow’s World, New York City (NY), Edward Elgar Publishing, 2009, 143 [herinafter: F. ABBOTT, Global Pharmaceutical Policy, 2009].
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Astra-Zeneca, Novartis and Johnson & Johnson.33 It would nonetheless be wrong to describe one economic entity as either an originator or generic company.
Rather, there is no bright line between them. Brand name companies also have divisions (e.g. Novartis’ generic Sandoz division) which manufacture and market generic drugs.34 Likewise, predominantly generic companies are
increasingly attempting to develop innovative drugs (e.g. U.S. company Watson Pharmaceuticals, Inc. is well-known for their generic supply, yet they also develop innovative brand name drugs).35
The main expenditure for originator companies is R&D along with the marketing and promotion costs of their drugs.36 The development of new
drugs is a very lengthy, uncertain and expensive process. Originators spend on average ten to fifteen years on testing during which only one out of 10,000 tested substances leads to a marketable drug.37 The cost of this developing
process is estimated at approximately $1,3 billion per drug.38 Originator companies generate the larger part of their turnover during the
exclusivity period of their patented new drugs. Effective patent protection is hence indispensible for originator companies to earn back their R&D investments. On that account, an effective and balanced patent policy is
inevitable for the promotion of innovation and the development of new drugs that will adress public health issues. For the shortcomings in the current patent regime that incited companies to eventually conclude RPPS, see infra
nrs. 21 – 26. Various market studies have shown a great dependency of pharmaceutical
companies on one or just few best selling medicines (‘blockbuster’).39 Some originators generate even up to 60% of their total turnover from just one blockbuster drug. Since their blockbuster drugs not only form the
predominant part of their turnover, but also generate a much higher profit margin than their other products (80% as compared to 30%), originators have a major incentive to protect (the economic life of) their blockbuster
medicines.40
33 EU Pharmaceutical Sector Inquiry Final Report, §62. 34 AMERICAN BAR ASSOCIATION SECTION OF ANTITRUST LAW, Pharmaceutical Industry Antitrust Handbook, ABA Publishing, Chicago, 2009, 8 [Herinafter: “ABA Pharmaceutical Industry Antitrust Handbook 2009”]. 35 P. POLLAK, Fine Chemicals: The Industry and the Business, Hoboken (NJ), John Wiley & Sons
Publishing, 2011, 111. 36 FTC Study of 18 july 2002, “Generic Drug Entry Prior to Patent Expiration”, at 4. 37 K. PEERS, “Are Patent Settlements Anti-Competitive? – Policy View from Research Based Industry”, Max Planck Seminar (Brussels, October 18, 2013 – University Saint Louis). 38 ABA Pharmaceutical Industry Antitrust Handbook 2009, 3. Figures confirmed by US Pharm. Research & Mfrs. Of Am. (PhRMA), Pharmaceutical Industry Profile 2008, available at http://www.pharma.org/files/2008%20Profile.pdf, [hereinafter: “PhRMA 2008 Industry
Profile”]. 39 The term ‘blockbuster’ designates drugs that are likely to reach global sales that exceed $1 billion. For an elaborate analysis of the so called ‘Big pharma blockbuster model’, which refers to the business model that large brand name drug companies employ, read M. DING, J. ELIASHBERG
and S. STREMERSCH, Innovation and Marketing in the Pharmaceutical Industry: Emerging Practices, Research and Policy, New York, Springer Science & Business Media, 2014, 45 and further. 40 EU Pharmaceutical Sector Inquiry Final Report, §68.
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Although this dissertation is considered with only one specific type of behaviour, originator companies employ various other strategies to protect
their innovative blockbusters from generic competition. The following list of methods to limit generic market entry employed by originator drug manufacturers is exemplatory:
(i) Patent evergreening41; (ii) Patent clustering42; (iii) Patent linking43;
(iv) Claiming data exclusivity and initiating data exclusivity infringements44;
(v) Publicly question the generic’s safety and/or efficiency45;
(vi) Etc.
13. GENERIC COMPANIES – The second type of suppliers in the
pharmaceutical market are generic companies. The core business of generic companies is the development and marketing of equivalent (‘generic’) medicines to originator products that have proven to be economically
successful.46 In order to avoid patent litigation, generic firms usually market their
duplicate versions of brand name drugs only after the originator product has lost its exclusivity. Yet sometimes generics are marketed earlier, in spite of patent protection. This is especially the case when they believe that the
concerned patent(s) are invalid or not infringed by the marketing of their generics.47
As compared to their originator counterparts, generic firms have the technical advantage that they do not have to invest heavily in R&D as they rely on the research of originator companies. Accordingly, generic firms are
41 Patent evergreening is usually understood as filing subsequent patents (generally during the
exclusivity period of preexisting patents) to prolong the protection period. To obtain these subsequent patents, originator companies usually slightly modify (the composition of) one active ingredient in a drug, in order to present it as a new drug. See EU Pharmaceutical Sector Inquiry
Final Report, §1018. 42 Patent clustering is the filing of a multitude of patent applications all on the protection of the same drug to create several layers of protection (e.g. a combination of formulation, process and active ingredient dosage patents). The brand drug company’s exclusivity shield then will only be
intruded if all of its patent have been declared invalid or not-infringed. See EU Pharmaceutical Sector Inquiry Final Report, §476 – 506. 43 Although forbidden under EU law, originator companies in the EU have reportedly been linking their patents to the market authorisation procedure of generic drugs. The practice of
patent linking exists in originator companies who accuse market authorisation bodies in colluding with an alleged patent infringement, threatening to sue them. See EU Pharmaceutical Sector Inquiry Final Report, §871 – 873. 44 See EU Pharmaceutical Sector Inquiry Final Report, §878 – 885. 45 Brand name drug developers not only publicly question the generic’s safety, they also threat to sue third parties who engage in the resale of those drugs for damage they might suffer by substituting the originator product with the generic version. See EU Pharmaceutical Sector
Inquiry Final Report, §946. 46 EU Pharmaceutical Sector Inquiry Final Report, §89. 47 EU Pharmaceutical Sector Inquiry Final Report, §89.
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also excempted from the requirement to provide extensive pre-clinical test data once it is proven that their product is bioequivalent to the brand name
product (infra, nr. 15).48 Generic companies furthermore require a smaller marketing and promotion budget because (i) they rely on the brand name drug’s promotions and (ii) marketing is often not even needed as various
national laws prescribe the mandatory prescription of generic drugs.49 These advantages allow generic firms to produce significantly cheaper
versions of the concerned drugs. Generic market entry is therefore enivitably associated with hefty price cuts, which is the main reason for originator companies to delay generic market entry as much as possible.
Since all generic companies generally apply the same strategy in duplicating only the most profitable brand name drugs, there are usually multiple generic
versions to one drug. After the originator’s loss of exclusivity, generics thus generally compete with one another on price.50 c. The demand side of the pharmaceutical market
14. MULTITUDE OF STAKEHOLDERS – The demand side of the
pharmaceutical market is rather complex, with interests of doctors, hospitals, patients, governments, health insurance providers and other reimbursement systems involved.51
The demand side has notably little power in the pharmaceutical market, compared to other economic industries. This is primarily the case because it
is not necessarily the end – consumer (patient), but rather his doctor who makes the choice whether or not to buy a specific medicin. This of course further reduces the price elasticity and bequeathes ever more power in the
supply side in terms of price setting. 52
48 The European Court of Justice has stated that a generic medicine is ‘bioequivalent’ when “it is essentially similar to an original medicinal product where it satisfies the criteria of having the same quantitative and qualitative composition in terms of active principles and of having the same pharmaceutical form unless it is apparant in the light of scientific knowledge that it differs significantly from the original product as regards safety or efficacy.” See Case C-368/96, The Queen v. Medicines Control Agency, Ex Parte Generics UK and others [1998] ECR I-7967, §24. This definition has been included in the Medicines Directive of 2001 (Council Directive 2001/83/EC of 6 November 2001 on the Community code relating to
medicinal products for human use, L 311 [2001]). The same definition is employed in U.S. legislation, see 21 U.S.C. §355(j)(8). 49 31 U.S. States have implemented State Regulations on mandatory generic substitution. See
NATIONAL ASSOCIATION OF BOARDS OF PHARMACY, “Survey of Pharmacy Laws. XIX: Drug product selection laws”, available at: http://www.uspharmacist.com/content/s/44/c/9787/#sthash.pbZ33UMu.dpuf. 50 ABA Pharmaceutical Industry Antitrust Handbook 2009, 7. 51 For an elaborate comprehension, see EU Pharmaceutical Sector Inquiry Final Report, §119 – 127. 52 EU Pharmaceutical Sector Inquiry Final Report, §120.
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d. Regulatory context and main legislation governing the
pharmaceutical market
15. MARKET AUTHORIZATION – Medicins save human lifes. However,
medicins are also dangerous as they are composed by highly concentrated chemical or biological substances with a grievous impact on the human body. More than in any other sector, it is of vital importance that every product
reaching the pharmaceutical market is tested intensively on its safety in order to protect public health.53 To this end, regulations in both the U.S. and the EU prescribe mandatory testing of medicins, organised by governmental
agencies.
In the U.S., all pharmaceutical products are regulated by the FDA.54 No
drug55 can be marketed without authorization of the FDA, confirming its safety and effectiveness.56 The formal application for marketing authorization is called a NDA (‘New Drug Application’).57 Since the enactment of the
Hatch-Waxmann Act in 1984, applicant manufacturers who want to market a generic drug to a yet-authorized drug do not have to file an extensive NDA. Rather, if the generic drug company establishes that their duplicate drug is
bioequivalent to the NDA-drug, they suffice with submitting an ANDA (‘Abbreviated New Drug Application’) in which they can rely on the safety studies of the brand name drug NDA.58
When submitting an ANDA, the generic applicant must consult the registers whether the drug he is seeking authorisation for is covered by one or more
patents of the brand name drug manufacturer. If that is the case, he must attach either a ‘Paragraph-III certification’ or a ‘Paragraph IV-certification’ to his ANDA.59 With a Paragraph-III certification, the ANDA applicant indicates
that he will not market his generic version of the patented drug until expiration of that patent.60 A market approval will then become effective on
the date the brand name drug’s patent expires. When a Paragraph-IV certification is filed, the applicant seeks market approval prior to the expiration of the brand name’s patent and reveals its belief that the
concerned patent is either invalid, unenforcable or not infringed by the
53 ABA Pharmaceutical Industry Antitrust Handbook 2009, 69. 54 Section 505(a) of the U.S. Federal Food, Drug and Cosmetic Act (FDCA), as incorporated in 21 U.S.C. §355(a): “No person shall introduce or deliver for introduction into interstate commerce any new drug, unless an approval of an application filed with the FDA is effective with respect to such drug”. 55 21 U.S.C. §321(g)(1)(C) defines ‘drug’ as “articles intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease in man or other animals or articles intended to affect the structure or any function of the body.” 56 21 U.S.C. §355(a). 57 21 U.S.C. §355(b) sets forth the requirements a NDA should fulfill before it could be
considered by the FDA. Among others, the applicant manufacturer has to provide: (i) full reports of investigation that support its safety; (ii) a full list of the components of the drug; (iii) a full statement of the composition of the drug; (iv) a full description of the methods used in manufacturing the drug and (v) samples of the drug. 58 21 U.S.C. §355(j). 59 21 U.S.C. §355(j)(5). 60 21 U.S.C. §355(j)(2)(A)(vii)(III).
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proposed generic.61 The filing of an ANDA along with a Paragraph-IV certification is a technical act of patent infringement.62
Market approval of drugs in the EU is characterised by a two-tier system. Drug manufacturers choose to apply for either (i) a national authorisation or
(ii) a Community authorisation. National authorisations are issued by the competent national authorities of the EU Member States and are limited to their respective territory. Other Member States may nonetheless recognise an
authorisation issued by another Member State through a mutual recognition procedure. Application for a Community authorisation has to be filed with the European Commission. Once issued, a Community authorisation grants
the applicant drug manufacturer the right to market its product throughout the entire territory of the EU.63
16. PATENT LAW – Apart from the market authorisation that is required to
lawfully sell their medicines, originator drug manufacturers will also need a patent to shield them from generic competition so that they alone can exploit and sell their innovative drugs. This patent protection creates a monopolist
position indispensable for the originator company to generate sufficient revenues to cover the R&D expenses.
Hence in both the U.S. and the EU, patent laws provide economic protection to inventions. The conditions for a creation to be considered a patentable
invention are analoguous on both sides of the Atlantic.64 An application for patent protection can be filed for (i) creations of a scientific or technical nature; (ii) that are new; (iii) resulting from an inventive process; and (iv) that
can be applied in the industrial practice, as opposed to merely theoretic methods.65
Theoretically, a patent provides 20 years of exclusivity protection. Practice
nonetheless shows that patent challenges and the marketing of allegedly infringing products in spite of an existing patent, shorten this period immensely.
Heading 2.2.2 (infra) will evince that while the immediate cause for RPPS to
surface in the U.S. was the regulatory regime concerning market
authorisation, the problem in the EU was the undeveloped patent system that incited brand name drug manufacturers to conclude such settlements in order to avoid litigation.
61 ABA Pharmaceutical Industry Antitrust Handbook 2009, 87. 62 35 U.S.C. §271(e)(2)(A). 63 EU Pharmaceutical Sector Inquiry Final Report, §298 – 299. 64 For the U.S., these conditions are codified in 35 U.S.C. §§102 – 112. In the EU, they are incorporated in article 52 (1) EPC. 65 Further prerequisites in both U.S. and EU law are constructed to guarantee that the creation is
adequately disclosed. The necessity of a creation to be made public is the reason why patent protection is only granted after completion of a strict application process. It embodies the rationale of the ‘public contract’ lying underneath the patent system: inventors are awarded economic protection in exchange for public disclosure of their inventions. For an elaborate
display on the rules of disclosure, read S. HALPERN, C. NARD and K. PORT, Fundamentals of United States Intellectual Property Law: Copyright, Patent and Trademark, Alphan aan den Rijn, Kluwer Law International, 2011, 196.
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17. THE INCONGRUOUSNESS OF ANTITRUST THEORY AND PATENT LAWS –
Although patent laws have been at odds with antitrust laws ever since, they are not mutually inconsistent in terms of their rationale.66 They are rather complementary since both are aimed at the enhancement consumer welfare,
industrial development and innovation.67 They might indeed promote complementary goals, yet the respective ways in
which both patent – and competition laws seek to effectuate these goals are incoherent to such an extent, that interference is inevitable. As it was set out above, patent laws encourage innovation (which will eventually be to the
benefit of consumers) by granting exclusive monopolist protection, while, the
idea behind the undistorted competition theory is just the very evasion of such monopolist market scenarios. Free trade is distorted when individuals
achieve undeserved exclusivity (for example, because their protected product is not innovative after all). Especially when such exclusivity is created or retained artificially, antitrust laws may be seriously infringed.
18. HIERARCHY BETWEEN THE TWO? – Especially in Europe, there are
movements that premise a hierarchy between both theories. Some scholars
claim that competition (and by virtue, antitrust) laws are subordinate to patent laws as competition law is more of an ‘instrument’ rather than a goal itself. Their argument is deducted from the concept of ‘workable competition’.
They claim support in three sources. First, the European Court of Justice (‘ECJ’) has ruled in the 1973 Continental Can judgement that “the restraints on competition [are allowed by the Treaty] because of the need to harmonize various objectives
of the Treaty [...]”.68 Secondly, the ECJ has expressively mentioned the concept
of ‘workable competition’ in its 1977 Metro SB Großmärkte ruling and defined it as “the degree of competition necessary to ensure the observance of the basic requirements and
the attainment of the objectives of the Treaty”.69 Lastly, it is claimed that, the fact that
the normative power of the EU to take measures to safeguard free competition has been cut out of the TEU to Protocol no. 27, characterizes its subordinate position to other EU objectives.
However, this postulation is based on unconfirmed (and thus legally weak)
positions. The ECJ’s definition in Metro SB reveals very little as to whether
competition rules are in fact secondary to regulations that embody other Treaty objectives. A hierarchy thus cannot be deducted that easily. Also, the EU competition policy indeed has been replaced to an attached Protocol no.
27, but being primary EU law, these protocols share the exact same legal status as the constitutional treaties themselves.70
66 E. GELLHORN, W. KOVACIC and S. CALKINS, Antitrust Law and Economics, Thompson West Publishing, St-Paul, 2004, 477. 67 Atari Games Corp. v. Nintendo of America, Inc., 975 F. 2d 832 (Fed. Cir. 1992). 68 Case 6/72, Continental Can Company Inc. V Commission of the European Communities [1973] ECR 0215, § 24. 69 Case 26/76, Metro SB-Großmärkte GmbH & Co. KG v Commission of the European Communities [1977]
ECR 1875, § 20. 70 C. BARNARD, The Substantive Law of the EU: The Four Freedoms, Oxford, Oxford University Press, 2010, 211.
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This assumption is moreover not that useful altogether. Even if there would be such a hierarchy, different rules still conflict, and this cannot be solved by
a simple hierarchy application. One cannot ignore competition laws and decline antitrust enforcement, simply because there are other values at stake. This consideration has inspired in particular U.S. courts to formulate a
standard in reviewing RPPS (patent scope test; infra, nrs. 53 – 57). 2.2.2. Origin and emergence of RPPS in the U.S: Hatch-Waxmann
19. HISTORICAL CONTEXT IN THE U.S. – Under the pre-Hatch-Waxman
regulatory regime, two main flaws have lead to increasing demand to amend
U.S. patent – and regulatory laws.
The first imperfection was the concept of ‘patent infringement’, which was interpreted too broadly. As said, patent laws confer patent holders the right to
exclude others from practices that infringe their patent.71 In 1984, ‘patent
infringement’ was defined in the United States as “making, using or selling a patented
invention during the life of the patent without authority from the patent owner”.72 At that
time, generic drugs could only get market authorization (‘FDA approval’) through submission of clinical test data to ascertain their safety and effectiveness. This clinical testing, which usually took two years, necessitated
the patented active ingredient to be tested. In 1984, the U.S. Federal Circuit confirmed in its Roche v. Bolar ruling that such testings were indeed infringing
and not merely experimental. According to the Court, these tests had “a
definite commercial purpose and impact on the concerned patents”.73 Making it possible for pioneer drug manufacturers to forbid generics to test their duplicate drugs
before patent expiration, the Roche v. Bolar ruling created a de facto extention of 2 years of the patent protection after its expiration because generics could not start mandatory FDA testings until the patent expired without risking
infringement claims.74 The Federal Circuit’s ruling has been heavily criticized and instigated the plea for patent law amendmend to effectuate earlier market entry of generic drugs.
Secondly, there was the limited patent term that was critized. In 1984,
patents were limited to 17 years protection from the date of issuance. As the
FDA approval process prevents the pioneer drug company to market their drug until long after the patent on the product had been issued, the economically useful period of exclusivity was even shorter by many years.
Market participants thus wanted (i) generic drugs to enter the market sooner and (ii) to have the effective life of patents extended to reflect time lost due to extensive regulatory review for pharmaceuticals.
20. THE US HATCH-WAXMAN ACT OF 1984 – In an attempt to elevate
these problems, U.S. Congress voted the 1984 landmark Hatch-Waxmann Act that sought to conceive a balance between the interests of both originator
71 35 U.S.C. §154. 72 ABA Pharmaceutical Industry Antitrust Handbook (2009), 81. 73 Roche Prods., Inc. v. Bolar Pharm. Co., 733 F.2d 858 (Fed. Cir. 1984). 74 ABA Pharmaceutical Industry Antitrust Handbook (2009), 82.
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and generic companies. On the one hand, it shaped an environment for earlier generic market entry,75 while on the other hand it extended the
effective patent protection period.76 Under the Hatch-Waxman regime, generics are strongly encouraged to
challenge weak brand name drug patents. First, the Hatch-Waxman Act created a mechanism under which the generic
could instigate patent infringement – and validity litigation to begin even before their generic drugs have entered the market (‘Paragraph-IV certification’,
supra, nr. 15). Contrary to what has been the case before, generics are now the
ones incited to start litigation as they bear little or no financial risk. Regardless of the litigation outcome, the generic company will not be exposed to infringement damages. The generic product has not entered the
market yet, and thus cannot have caused any damage to the brand drug patent. Put simply, the generic firm has everything to win, but nothing to lose.
Secondly, generic companies are further inclined to challenge brand drug patents as the first generic producer to challenge a brand name patent is
entitled to 180 days of exclusivity to subsequent generic producers (‘180-day
marketing exclusivity for first ANDA-filer’). This 180 day – period of protected competition is evidently very lucrative for the first generic manufacturer.77
Originator companies, on the other hand, have a major interest in avoiding litigation as they could face enormeous consequences. If they turn out to be
victorious, they suffer no financial losses yet they do not gain anything either. If, by contrast, litigation declares their patent either invalid or not infringed by the generic’s market entry, they immediately lose their highly profitable
monopolist position and a very large part of the market.78 Many U.S. States have ‘automatic substitution’ laws, postulating an automatic prescribtion of the generic drug version to the patient once it is available.79 Hence, originators
have nothing to win, but everything to lose.
Needless to say, patent litigation suddenly became extremely riskful for
originator companies. Even when they believe they have a solid patent and thus a high likelihood of winning, they have no interest in proceeding litigation: (i) even if they are victorious, they redeem no financial gain and (ii)
the risk of litigation is too high, especially when the originator only has few products or the concerned drug is a blockbuster.
75 H.R. REP. NO. 98-857 (pt. 1), 98th Congr., 1984 U.S.C.C.AN. 2647, §14 – 18. 76 The protection period was extended from 17 to 20 years, with the possibility to extend to adress the time lost due to FDA approval, 35 U.S.C. §154(a)(2). 77 K. DRAKE, M. STARR and T. MCGUIRE, “Do RPPS in the pharmaceutical industry consitute an anticompetitive pay for delay?”, 7. 78 FTC studies estimated that in twelve months after their market entry, generic drugs on avarage acquire 90% of the market, see FTC Staff Study of 28 january 2010, “Pay-for-Delay: How drug
Company Pay-Offs Cost Consumers Billions”, available at at http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf. 79 E. JACKSON, Law and the Regulation of Medicines, Oxford, Hart Publishing, 2012, 188.
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It has been set out above that patent settlements are commercial agreements that reflect the parties’ negotiated positions.80 The Hatch-Waxman Act
created an environment in which originator companies have a major incentive in avoiding litigation, whereas generic companies are incited to start litigation. This of course puts the originator company in a rather weak
negotiation position, which generics will exploit into including a ‘reverse
payment’ in their settlement.
The Hatch-Waxman thus created (or at least facilitated) an environment under which the first U.S. RPPS emerged.81 2.2.3. RPPS in the EU: ineffective patent protection
21. INEFFECTIVE PATENT PROTECTION IN EUROPE – Shortly after the first
RPPS appeared in the U.S., the phenomenon began to loom over the European markets, too. As the EU does not have a common regulatory framework that compares with the U.S. Hatch-Waxman Act, originator firms
are not put in the awkward position where they have to fear litigation prior to generic market entry. Yet the EU regulatory context, in particular the EU patent regime, has some defaults of its own which leads to a certain level of
justice disfigurement, inciting originators to conclude RPPS. 22. ABSENCE OF AN EU PATENT – First, the EU still lacks a common EU-
wide patent. Patents are issued and protected by national laws of the Member
States. An originator company thus cannot obtain unified patent protection that covers all European Member States.
There is indeed a European Patent Convention (EPC),82 however this international83 instrument provides nothing more than a common application procedure.84 In the future, a European Patent with unitary effect will become
available when the Agreement on the Unified Patent Court (UPC)85 enters
80 J. SCHLICHER, Settlement of Patent Litigation and Disputes, 2011, 11. 81 Even U.S. courts recognised that the Hatch Waxman regime was the immediate cause of RPPS to be concluded. The Second Circuit in this regard stated that “reverse payment patent settlements are particularly to be expected in the drug-patent context because the Hatch Waxman Act created an environment that encourages them.”, In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 193 (2nd Cir. 2006). 82 Convention on the Grant of European Patents (European Patent Convention) of 5 October 1973, UNTS, vol. 1065, 255 – 509 [hereinafter: «EPC»]. 83 The European Patent Convention is an international Treaty. Although all EU Member States have ratified the Convention, it was not entrenched within the EU’s auspices. 84 A European patent application filed under the EPC regime is a ‘cluster of national patent
applications’, aimed at the simplification of the process to obtain patent protection in multiple Member States. A ‘European patent’ granted through the EPC grants its proprietor national patents in the member states that were indicated, with the same rights that would have been conferred if the national patent(s) were granted through a national patent application (article 64
EPC). In this manner, there is no ‘European like protection’, and infringements of patents granted through the EPC are dealt with by national law 85 Council Agreement 2013/C on a Unified Patent Court (UPC), OJ C-175 [2013].
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into force. At the time this dissertation was finished, the UPC was not likely to enter into force any time soon.86 23. INEFFICIENT, CONTRADICTING AND EXPENSIVE LITIGATION –
Further, there is no common litigation framework to enforce patents in the
EU as long as the aforementioned UPC has not entered into force. In the event of a generic market entry in spite of a patent protecting the originator’s product, the latter has to seek enforcement for every (national) patent
infringement in each state individually.87 The European Court of Justice has held that a patent owner cannot sue for the courts of one Member State infringements that took place in other Member States.88 This makes it very
complex and expensive for originators to start infringement proceedings against generic companies. There is furthermore a risk to conflicting rulings which makes it a very uncertain business.
As regard to the costs of EU patent litigation, figures show an average of €230,000 in legal fees for each party, per case, per Member State.89Since
patent litigations occur simultaneously in multiple EU Member States, legal fees and litigation costs for just one infringement becomes almost unaffordably large. Consonantly, the European Commission estimated that
pharmaceutical companies spent over €420 million in legal fees between 2000 and 2007.90
These costs could be reduced easily if there were to be a unified forum where parties could litigate there infringement procedures all at once, in stead of having them litigated parallelly in multiple countries. It has been estimated
that roughly 30% of all patent suits in the EU are duplicates of proceedings that are yet pending between the same parties before the courts of another Member State.91
Identical parallel proceedings not only makes litigation expensive. Since it enmeshes the risk to contradicting decisions, it makes litigation incalculable
too. Of all cases reported to the Commission within the Sector Inquiry (infra),
86 At least thirteen Member States (including France, United Kingdom and Germany) must ratify the Agreement for it to enter into force (article 89.1 UPC). As of December 2015, only eight Member States (including France) have ratified the Agreement. For the current ratification status, consult http://www.consilium.europa.eu/en/documents-publications/agreements-
conventions/agreement/?aid=2013001. 87 The same reasoning applies to generic companies. As they are the only ones competent to assess the validity of a patent in their territory, declaratory rulings of non-infringement or patent invalidity, too, have to be brought before national courts. 88 Case C-539/03, Roche v. Primus [2006] ECR I-6535, §§25-27. Under the Brussels 1 Convention, accumulation of claims is possible only when there is a risk to contradictory decision. In Roche v. Primus, the ECJ ruled that for decisions to be contraditing, it is not sufficient
that there is a divergence in the outcome of the dispute, rather that divergence must arise in the context of the same situation of law and fact. Since patent infringements are governed by national patent laws, there is no context of uniform law, according to the Court. 89 In the UK, the avarage is even €993,000 per procedure. See EU Pharmaceutical Sector
Inquiry Final Report, supra note 2, § 659. 90 EU Pharmaceutical Sector Inquiry Final Report, supra note 2, § 660. 91 EU Pharmaceutical Sector Inquiry Final Report, supra note 2, § 662.
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11% of the final judgements were diverging. 92 The consequences of contradicting judgements should not be underestimated. The incalculability
implies a serious hit to the legal certainty of the originators. Foremost, a deviant ruling in just one Member State can effect the overall Union-wide price level of the brand name drug enormously because of parallel trading
and national laws prescribing compulsory generic substitutions to pharmacists.93
These problems will be adressed when the aforementioned UPC Agreement takes effect. A ‘Unified Patent Court’ will be established where proprietors of a European unitary patent can seek judicial relief for one single forum for
infringements on their patent. Yet hitherto, things remain unchanged and the current EU patent regime continues to dwell on the policy of brand name companies.
24. PROCEDURAL FLAWS – Also, it is not only complex and expensive to
obtain effective enforcement of patents, originator companies also complain that it is very difficult to effectively prevent generic market entry during their
exclusivity period.94 In fact, practice shows that national judges in the EU are very reluctant to grant (interim) injunctions prohibiting generic market entry, unless there is an actual infringement. This is problematic because once the
infringing generic has entered the market (which is required to constitute an actual infringement), it will have caused irrepairable harm.95
25. INCENTIVES UNRELATED TO PATENT LAW – In addition to these
shortcomings in the EU patent law regime, the following considerations further incite brand name drug manufacturers to conclude settlements containing reverse payments:
(i) Patent litigation suits are generally very complex matters that require a high level of court competence. Since the required competence is often absent, litigation outcome becomes very uncertain;96
(ii) Litigation strategies consume a considerable share of senior management time which could be allocated more efficiently in case of settlement;97
(iii) Certainly in the case of blockbuster drugs, the company management is rather risk-averse since their turnover relies too heavily on the concerned drug, magnifying their willingness to settle
under less favorable terms;98
92 EU Pharmaceutical Sector Inquiry Final Report, supra note 2, § 664. 93 M. CLANCY (ed.), “RPPS in the pharmaceutical industry: An analysis of US and EU antitrust
law”, 2014, 161. 94 EU Pharmaceutical Sector Inquiry Final Report, §723. 95 Drug manufacturers furthermore claim that this harm is nearly impossible to estimate and
prove, making it very hard to recover damages in court event in the case of proven infringement. Source: K. PEERS, “Are Patent Settlements Anti-Competitive? – Policy View from Research Based Industry”, seminar (Brussels, 18 October 2013 – Université Saint Louis). 96 M. STERPI and T. CALAME, Patent Litigation: Jurisdictional Comparisons, London, Sweet &
Maxwell, 2011, 129. 97 EU Pharmaceutical Sector Inquiry Final Report, §721. 98 Pharmaceutical Sector Inquiry Final Report, §68
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(iv) Settling impending patent disputes is preferred over litigating them as it keeps the concerned patent in force in any event. Even if the
settlement dictates the originator company to pay a considerable amount of money, the latter avoids facing a court ruling that would establish the invalidity of their patent or declare their patent
uninfringed by generic entry. Settlements thus cut off subsequent generic entry;99
(v) Etc.
26. CONCLUSION: INADEQUATE EU PATENT LAW INSTIGATES FOR RPPS
– It can be concluded that regulatory flaws in the EU patent law system, in
particular the absence of a common EU-wide protection system and the procedural limitations have led to a sense of justice disfigurement on the part
of brand name drug companies, inciting them to adopt the U.S. strategy of artificially delaying generic market entry through RPPS in the EU as well.
2.3. WHY ARE RPPS PROBLEMATIC? 2.3.1. Antitrust scrutiny of RPPS
a. Antitrust scrutiny in the U.S.
27. COMPULSORY NOTIFICATION SETTLEMENTS WITH FTC & FDA –
Reverse payment settlements first drawed attention when private parties
started to sue several patent settlements on antitrust arguments in the late ‘90s. In 2002, RPPS really came in the spotlights when a FTC study portrayed the impact and dissemination of the problem throughout the
pharmaceutical market. In order to better monitor potentially anticompetitive patent settlements, Congress thereupon voted the 2003 “Medicare Modernization
Act” which introduced a mandatory notification system, obliging all
‘Paragraph-IV settlements’ to be filed with both the FTC and the U.S. Department of Justice (‘DoJ’).100 This system made it impossible for reverse payment settlements to escape the radar as potential infringements attracted
immediate scrutiny. b. Antitrust scrutiny in the EU
28. THE 2003 LUNDBECK INVESTIGATIONS – As said, the phenomenon of
reverse-payment settlements not only surfaced the U.S. pharmaceutical market, it emerged in the EU, too. Since the beginning of the century, the EU pharmaceutical market exposed itself to antitrust suspicion due to a
noticeable deceleration of the market. The number of new medicins reaching the market declined and the average delay of generic market entry became conspicuous.
99 EU Pharmaceutical Sector Inquiry Final Report, §728. 100 Medicare Prescription Drug, Improvement and Modernization Act of 2003 (codified as 42 U.S.C.), p.L. 108 – 173. The “Medicare Act” contained the Access to Affordable Pharmaceuticals Act which amended the Hatch-Waxman act thereby introducing the mandatory filing system.
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The first review of a RPPS in Europe took place when the European
Commission, cooperating with the Danish Competition Authority (DCA), investigated a sequence of settlements featuring reverse payments from Lundbeck to multiple generic manufacturers. Although the DCA expressed
severe concerns about the claimed illegitimate nature of these settlements, the European Commission decided not to initiate legal proceedings against Lundbeck at that time as they considered it doubtful whether the agreements
were restrictive of competition, stating that they fell into “a legal grey zone and
that it is unclear how close they are to the black zone”.101
29. THE 2008 PHARMACEUTICAL SECTOR INQUIRY – Being faced with
these concerns, though unable to air a proper legal opinion, the European Commission was necessitated to gather more information. To this end, a sector-wide inquiry was launched to survey the pharmaceutical market in
January 2008.102 The aim of the sector inquiry was to assess the general competitive structure of the market along with the strategies and conduct adopted by market players, rather than investigating individual cases of
potential competition infringement.103 The sector inquiry was formally closed with the publication of the final report
in 2009. Besides sketching the market’s structure, the industry players it is composed of and the regulatory context, the final report indentified litigation – and patent strategies adopted by brand name drug manufacturers to delay
generic entry (supra, nr. 12). As regard to patent settlements, the Commission provided a typification by which they show the types of settlements with that attract most competition scrutiny (infra, nr. 81).
30. FOLLOW UP REPORTS – After conclusion of the Sector Inquiry, the
European Commission deemed it appropriate to further monitor settlement agreements that limit generic entry in the pharmaceutical sector.104 Since
publication of the Final Report, the Commission has issued six periodical monitoring reports on RPPS. In each of the six monitoring reports, the Commission argued that while the overall number of patent settlements
increased, the potentially infringing settlements declined. The Commission took credit for this outcome, claiming that its persistent scrutiny deterred companies from entering into fishy agreements.105 However, others have
pointed out that the Commission’s optimistic interpretation could be
101 Danish Competition Authority, Case No. 1120/0289/39, Press Release, “Investigation of Lundbeck: Council Meeting of January 28, 2004”, available at http://www.kfst.dk/Afgoerelsesdatabase/Konkurrenceomraadet/Styrelsesafgoerelser/2004/Un
dersoegelse-af-Lundbeck?tc=E538038EB1E04A96B9964BE4C0F85F46. 102 Commission Decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector (COMP/D2/39.514), §§3 – 5. 103 Commission Decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector (COMP/D2/39.514), §§6 – 7. 104 EU Pharmaceutical Sector Inquiry Final Report, §1574. 105 Commission Report of 2 December 2015, 6th Report on the Monitoring of Patent
Settlements, available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report6_en.pdf, §50.
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misleading. 106 In fact, the monitoring reports only portrayed patent settlements with a direct monetary payment from originator to generic as
potentially problematic.107 Yet it is no secret that RPPS with other types of value transfers and side deals, which are not portrayed as potentially infringing in the monitoring reports, are on the rise. It therefore can be
questioned whether any change in settlement behavior can be deducted from these monitoring reports.
31. INVESTIGATIONS AND INFRINGEMENT DECISIONS – So far, the
European Commission has issued three infringement decisions in which they penalized drug manufacturers for anticompetitive reverse payment
settlements (infra, nr. 83). While another EC investigation is still in play,108
National competition watchdogs have recently started to prosecute RPPS, too. The UK Competition and Markets Authority has fined GlaxoSmithKline £37,6 million for delaying the market entry of generic versions to its
blockbuster antidepressant Seroxat in February 2016.109 2.3.2. Understanding the antitrust claim: the distortive effects of a RPPS
32. OUTLINE – Without aiming to provide an all-embracing display, each of
the six phases that can be differentiated in the drug life cycle will be displayed
briefly under this subheading. The price levels that accord along these phases, as well as their artificial retainal, help to understand the claim antitrust agencies have formulated towards RPPS.
106 See for example P. PARCU and M. ROSSI, “Reverse payment patent settlements in the
pharmaceutical sector: a European perspective”, European Journal of Risk Regulation 2011, Vol. 2, 262. 107 Commission Report of 5 July 2010, 1st Report on the Monitoring of Patent Settlements, available at
http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report1.pdf, §4. 108 The European Commission is currently investigating a RPPS between Teva and Cephalon concerning Modafinil (a sleeping disorder medicin). See Commission Press Release of 28 April
2011, “Commission opens antitrust investigation against pharmaceutical companies Cephalon and Teva”, available at http://europa.eu/rapid/press-release_IP-11-511_en.htm. The same deal has been subject of antitrust scrutiny in the U.S. too, leading the companies conclude a $1,2
billion settlement with the FTC in May 2015. See FTC Press Release of 28 May 2015, “FTC Settlement of Cephalon Pay for Delay Case Ensures $1,2 Billion in Ill-Gotten Gains Relinquished; Refunds Will Go To Purchasers Affected By Anticompetitive Tactics”, availble at https://www.ftc.gov/news-events/press-releases/2015/05/ftc-settlement-cephalon-pay-delay-
case-ensures-12-billion-ill. 109 CMA Press Release of 12 February 2016, “CMA fines pharma companies £45 million”, available at https://www.gov.uk/government/news/cma-fines-pharma-companies-45-million.
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Figure 2: Timeline drug development and marketing process
33. PHASE 1: R&D – The pharmaceutical product’s life cycle starts with the
research, discovery and development of biologic and chemical mixtures.
Throughout this process, an average of $1,3 billion is spent on the examination of 10,000 compounds of which eventually just one leads to a marketable product. The R&D phase typically covers 13 years.110
34. PHASE 2: PATENT AND MARKET APPROVAL APPLICATIONS – As soon as
the R&D leads to a potentially marketable product, the innovating company will file a patent application to protect its invention. Since medical products may only be marketed after having obtained marketing authorisation (infra,
nr. 15), originators will file an application for marketing authorisation simultaneously with the patent application.
The average duration of an unconditional patent application in the EU is two to four years,111 while marketing approval is generally achieved after two years.112 In the U.S., the patent application process generally takes two years
while marketing approval is achieved after fifteen months on average.113
110 KMR PHARMACEUTICAL BENCHMARKING, “2012 Annual R&D General Metric Study Report: New Success Rate and Cylce Time Data”, available at
https://kmrgroup.com/PressReleases/2012_08_08%20KMR%20PBF%20Success%20Rate%20&%20Cycle%20Time%20Press%20Release.pdf. These figures are shared by PHRMA 2008
INDUSTRY PROFILE, §2. Yet the European Commission tends to disagree with these US figures, estimating the costs of the R&D process lower than $800 million. See EU Pharmaceutical Sector
Inquiry Final Report, §149. 111 EPO 2013 Annual report data in E. MÜLLER and C. MULDERR, Proceedings before the European Patent Office, Cheltenham, Edward Elgar Publishing, 2015, 8 [herinafter: “E. MÜLLER and C.
MULDERR, Proceedings before the EPO, 2015”]. 112 EU Pharmaceutical Sector Inquiry Final Report, §312. 113 Although the FDA aims to review standard NDA’s within 10 to 12 months, internal evaluations show that such standard NDA review covers 16 months in practice. See FDA
Performance Report of 30 September 2010, http://www.fda.gov/downloads/AboutFDA/ReportsManualsForms/Reports/UserFeeReports/PerformanceReports/PDUFA/UCM243358.pdf, at 4.
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Since these applications generally occur simultaneously, the second phase takes on average two years.
35. PHASE 3: PATENT EXCLUSIVITY – Once a patent has been granted, the
originator – owner of the patent – is given an exclusivity period during which only he is entitled to produce, use, sell or import the pantented goods or processes. This patent protection lasts – subject to payment of annual fees
and actual exploit of the patent – 20 years from the date of filing.114 During this period, the originator will price its drug on the basis of various criteria: (i) re-earn production – and development costs, (ii) monopolist
power, (iii) drug price regulations, (iv) etc.
36. PHASE 4: EXTENDED EXCLUSIVITY – Under certain circumstances and
conditions, some medicinal products in the EU can obtain a supplementary protection certificate (‘SPC’).115 The twenty years of patent protection starts at
the time the patent application is filed. Because marketing approval is often granted only much later, the idea behind SPC’s is to compensate for the loss of effective patent protection due to these application processes.116 A SPC
amounts to an extention of maximum five years.117
37. PHASE 5: LOSS OF EXCLUSIVITY – When the patent expires (or the
extended patent or data exclusivity runs out), the brand name drug company loses its monopolist position. This is the moment where the generic drug
enters the market. The generic market entry has a major impact on both the price and the market share of the originator drug.118
Because generic manufacturers do not always wait to market their generic drugs until the brand name drug’s patent has expired, generic drugs are often marketed precociously. This is in particular the case when the generic
manufacturer believes that the concerned patent is either invalid or not infringed by its product. It is therefore very challenging for the management of brand name companies to estimate the exclusivity period of their drugs.
114 The duration of the patent protection is the same in the EU (Article 63 EPC) as it is in the
U.S. (35 U.S.C. §154(a)(2)). 115 Council Regulation (EEC) 1768/92 of 18 June 1992 concerning the creation of a supplementary protection certificate for medicinal products, OJ L 182, 1 [herinafter: “SPC
Regulation”]. 116 EU Pharmaceutical Sector Inquiry Final Report, §293. 117 Article 13 SPC Regulation. 118 Because of their duopolist position, the brand name drug and the generic drug manufacturers
will not cast the price of their drugs down as drastically as is the case in a situation of subsequent generic entries, yet the impact is still major for the originator as price levels can cut as deep as 50% within the first twelve months, infra note 120.
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Figure 3: Timeline price level drug marketing process
38. PHASE 6: SUBSEQUENT GENERIC ENTRY – While the launch of a
generic version effectuates a decline in price, the subsequent marketing of other generics makes the price level fall even deeper, as generic drug
companies compete eachother on price.119 In a market with multiple generics, the generics take over 90% of the unit sales and cut the price level to only 15% of the original price of the brand name product.120
While an immediate subsequent generic entry is possible in the EU, the U.S. Hatch-Waxman act provides a 180 – day exclusivity period for the first
generic to file a Paragraph-IV certification and who proceeds its patent litigation (supra, nr. 20).121
39. CONCLUSION: INCENTIVE TO DELAY GENERIC ENTRY – Considering
the enormeous price cuts and loss of market share that accords along, it is
needless to say that originator companies want to avoid precocious generic entries by any means. Yet the analysis above illustrated that current regulatory regime in fact facilitated such antecedent generic entry while
deterring originator companies from proceeding to trial (infra, nrs. 20 – 26).
Hence originator companies are urged to settle with the generic firms. Because of the strong negotiating position the generic firm is in, the
settlement often includes a payment from the originator to the generic in exchange for the latter to stop marketing its allegedly infringing generic product.
These settlements are accused of stifling competition because by having the generic promise not to market its drug, the originator company retains its
119 EU Pharmaceutical Sector Inquiry Final Report, §103. 120 FTC Staff Study of 28 January 2010, “Pay for Delay: How Drug Company Pay-Offs Cost Consumers Billions”, available at https://www.ftc.gov/sites/default/files/documents/reports/pay-delay-how-drug-company-pay-
offs-cost-consumers-billions-federal-trade-commission-staff-study/100112payfordelayrpt.pdf, at 8. 121 21 U.S.C. §355(j)(5)(B)(iv).
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monopolist position which allows him to maintain the higher price level while preserving its sales. This hinders the market because the lower price level that
accords with a generic entry is a benefit consumers are now hindered enjoying from. As follows, originator companies are accused of buying off the competition with money obtained from a monopolist position they
maintained unlawfully.
The table below shows a fictuous example of how the conclusion of a RPPS is a win-win deal for both the originator and the generic company and how it frustrates consumers by artificially maintaining a higher price level. Portrayed
is a situation with one generic entry that results in a price cut of 20% and a
market share loss of 45% for the originator company.
Table 2: price levels and market effects in case
In the situation that is sketched, the individual consumer is frustrated for is $12,25. In a monopolist market (C), consumers buy the drug for a price of $50 leading to an outright of $50,000 in sales. In a competitive market (B),
the combined sales of originator and generic drugs account for a total of $37,750.
[($50,000) + ($0)] - [($22,000) + ($15,750)]
=
1000 .
$50,000 - $37,750
=
1000 .
[(originator sales C) + (generic sales C)] - [(originator sales B) +
(generic sales B)]
=
#consumers
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In a monopolist setting, consumers thus overpay $12,250 (on average $12,50
per consumer) to the direct benefit of the originator company, who on its turn uses these monopolist profits to pay off the generics to stay out of the market.
The present analysis demonstrates that reverse payment settlements are indeed market restrictive. The million-dollar question then remains whether or not this restriction is lawful under current antitrust rules.
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3. LEGALITY OF RPPS UNDER U.S. ANTITRUST
LAWS
3.1. U.S. ANTITRUST THEORY AND POLICY 3.1.1. Legislative cornerstone
40. SHERMAN ACT OF 1890 – The core of U.S. antitrust law is constituted
through the Sherman Act of 1890 (15 U.S.C. §§1-7), which contains the original constituant provisions on trade-restrictive behaviour. Although
amended repeatedly,122 the text of the Act still forms the basis for the antitrust
policy of both the FTC and U.S. courts today. The keystone provisions, which are analogous to articles 101 – 102 TFEU, are contained in Sections 1 and 2 of the Act. The general prohibition is laid down in 15 U.S.C. §1, which
states that:
“Every contract, [...] or conspiracy, in restraint of trade or commerce [...] is declared to be illegal.”
Although intended to further elaborate on this general prohibition, 15 U.S.C.
§45(a) is drafted with the same degree of abstractness:
“Prohibited are [...]: unfair methods of competition or commerce and, unfair or deceptive acts or pactices in affecting commerce.”
3.1.2. Elements constituting an illegal restraint of trade
41. ELEMENTS OF AN ILLEGAL RESTRAINT – A plaintiff must in any event
prove the following elements for a court to establish an infringement of 15
U.S.C. §45(a): a.The existence of an agreement;
b. Between two or more separate parties;
c. Which unreasonably restrains trade or competition; d. In or affecting interstate commerce; Depending on whether the plaintiff is a prosecuting administrative authority,
a criminal authority or a private party seeking damages, it must also be established: e. In a private action, that the agreement harmed the plaintiff’s business or
property; f. In a criminal action, that there was criminal intend on the part of (one of the) parties to the agreement.123
122 The most significant adjustments were made with the Clayton-, Robinson-Patman and the FTC-Act. For a comprehensive overview, read S. JEFFREY, A Brief History of U.S. Antitrust Law from the Sherman Act to the Foundation of the Federal Trade Commission, Charleston, BilbioLife Publishing,
2011, 11. 123 D. BRODER, U.S. Antitrust Law and Enforcement: Practice Introduction, New York, Oxford University Press, 2012, 28.
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a. Existence of an agreement
42. MEETING OF MINDS – Similar to what is required in the EU (infra), the
U.S. Supreme Court expects a plaintiff to prove with direct or circumstancial
evidence that a meeting of minds between two or more parties has occurred. It is of no relevance whether there is a formal contract or any form of concerted action.124
b. Two or more separate parties
43. INTERNAL AFFAIRS VS. COLUSSION – Most obvious is the requirement
that there must be two separate parties to the unlawful agreement. Absence of
a second party would render the contested conduct a matter falling under the commercial and economic freedom of companies from which any other party (the government included) is precluded from interfering in.125
This requirement leads only very rarely to discussion in inter-group situations. In that regard, the Supreme Court has ruled that fully-owned
subsidiaries, unincorporated divisions and companies forming a joint venture (to the extent of their purpose) cannot be seen as ‘separate parties’.126 The Supreme Court however let things open with subsidiaries that are not fully-
owned. Resultantly, the case law of lower courts is very contraditing on this point.127 c. Unreasonable restraint of trade
44. ORIGIN OF THE REQUIREMENT – 15 U.S.C. provides that “every contract,
[...] or conspiracy, in restraint of trade or commerce [...] is declared to be illegal”. A literal interpretation of this provision would render illegal every agreement in
restraint of trade. To accord better with the economic realities of the market, the Supreme Court has construed the provision from the outset to forbid only ‘unreasonable’ restraints.128
45. DEGREES OF SCRUTINY – In drafting the keystone provisions of the
Sherman Act so broadly, Congress deliberately left it to the Federal courts to elaborate on them. Resultantly, U.S. courts have divided the illegal restraints under 15 U.S.C. §45(a) into two categories: (i) the per se illegalities and (ii)
restraints that are to be judged by the so-called ‘rule of reason’ test. In a later stage, the Supreme Court developed what is seen by many as a third form of scrutinizable behaviour, i.e. practices to be examined under a ‘quick look’ test.
124 Monsanto Co. v. Spray-Rite Servs. Corp., 465 U.S. 752, 768 (Supr. Ct. 1984): “There must be proof that [the parties] had a conscious commitment to a common goal created to achieve an unlawful objective”. 125 Apart from criminal laws, the only way in which competition authorities can attack unilateral company behaviour is when they might be considered as abuse of market power. 126 Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (Supr. Ct. 1984). 127 For a comprehensive overview on the case law of the lower courts on this matter, read D.
BRODER, U.S. Antitrust Law and Enforcement, 2012, 46. 128 See for example State Oil Co. v. Kahn, 522 U.S. 3, 10 (Supr. Ct. 1997) or Arizona v. Maricopa County Medical Soc., 457 U.S. 332 (Supr. Ct. 1982), at 43.
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46. PER SE ILLEGALITIES – U.S. courts define per se illegal practices as “[...] those that are so inherently and obviously anticompetitive, that they will be deemed illegal
regardless of any possible justification.” 129 If a plaintiff can prove that the defendant entered a per se illegal agreement, he
can establish the third element (i.e. unreasonable restraint of trade) without the need to demonstrate any actual competitive harm. Practices of price-fixing, bid-rigging, market-allocation and boycotting agreements have been
named as per se illegalities.130
Most important within the framework of this dissertation, are the market-
allocation agreements which, according to the Supreme Court, contain elements that allow one to assume that “purported competitors agree not to compete
against one another in a market.” 131 47. RULE OF REASON TEST – The rule of reason test, which has to be applied
to all other restraints, measures whether the procompetitive effects of the
restraint in question outweighs the anticompetitive effects. 132 It is favourable for a defendant to have its conduct qualified as ‘regular’ restraining, because (i) it requires the plaintiff to establish an actual harmful effect of the alleged
conduct on the relevant market and (ii) even if the plaintiff succeeds in demonstrating so, the defendant may still try to justify the conduct on the grounds of its procompetitive effects.133
48. QUICK LOOK TEST – Introduced by the Supreme Court in the late 70’s134
and actively employed from the mid-‘80s onwards, is the ‘quick look’ test. Although considered by many as a fully-fetched third level of processing, it
can rather be described as an ‘abbreviated rule of reason test’. In fact, when applying the quick look test, a court examines practices whose anticompetitive effects are obvious and have no apparant procompetitive
effects.
“[...] absent a reasonable procompetitive, a direct restraint [...] will be deemed a naked restraint that can be found to violate [15 U.S.C. §45(a)] without a detailed inquiry into market power. Only if such a justification is
proffered, a full rule of reason analysis is necessary.” 135
129 R. BORK, “The Rule of Reason and the Per Se Concept: Price Fixing and Market Division”,
Yale Law Journal 1966, Vol. 373, 378. 130 E. STUCKE, “Deception as an Antitrust Violation”, Harvard Law Review 2012, Vol. 125, 1255. 131 State Oil Co. v. Kahn, 522 U.S. 3 (1997). 132 D. BRODER, U.S. Antitrust Law and Enforcement, 2012, 18. 133 Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). 134 National Society of Prof. Engineers v. United States, 435 U.S. 679 (Supr. Ct. 1978), at 13. 135 NCAA v. Board of Regents, 468 U.S. 85 (Supr. Ct. 1984), at 108 – 110.
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d. Affect of interstate commerce
49. INTERSTATE COMMERCE – Being a federal statute, the Sherman Act is
limited in scope to activities that affect inter-state commerce. Since this
requirement is interpreted very broadly136 and will never cause any discussion in a setting of prescription-drug sales, there is no ground to further elaborate on this.
3.2. POSITION OF THE FEDERAL TRADE COMMISSION
50. PER SE ILLEGAL – As hinted under the previous heading, whether or not
a contested practice is qualified as per se illegal may have a decisive impact on the assessment of the legality thereof. It is therefore important which approach is taken by (i) the investigating or prosecuting authority (the FTC)
and subsequently (ii) the court before which an alleged infringement is claimed.
As for the FTC, they have had a strong aversion towards RPPS from the outset and throughout. Hence unsurprisingly, the FTC considers RPPS as ‘presumptively illegal’, at least when they feature following elements: (i) an
agreement that dissuades the generic manufacturer from entering the market; (ii) a substantial value transfer from the originator to the generic company and (iii) absence of any motive to justify the payment, other than
compensating the generic company to delay its market entry.137 As will be shown by the analysis below, the evolving case law of the U.S.
courts has forced the FTC to adjust its position over the years (infra, nr. 57). Yet the core of its argument to consider RPPS unlawful (i.e. the reverse payment serves as inducement for generics to refrain from competing, hence
RPPS are instruments to buy off competition and therefore qualify as market sharing agreements), remained unchanged ever since.
51. SUPPRESSION OF RPPS HIGH ON THE FTC AGENDA – FTC studies
have estimated that RPPS cost American consumers $3,5 billion per year. As
the number of these agreements increased over the years, the FTC
proclaimed it to be one of its top priorities to subdue these practices.138
136 Only cases in which the conduct is exclusively located outside the U.S. or, cases which exclusively affect very restricted areas of local trade may lead to discussion as to whether they fall within the scope of the federal prohibition. 137 FTC Staff Study of 28 January 2010, “Pay for Delay: How Drug Company Pay-Offs Cost
Consumers Billions”, available at: https://goo.gl/xIvP49, at 14. 138 J. LEIBOWITZ (FTC Chairman) speech at the 2009 Center for American Progress, “RPPS in Pharmaceutical Industry: how Congress can stop anticompetitive conduct, protect consumers’ wallets and help pay for health care reform: The $35 billion solution”, transcript available at
https://www.ftc.gov/sites/default/files/documents/public_statements/pay-delay-settlements-pharmaceutical-industry-how-congress-can-stop-anticompetitive-conduct-protect/090623payfordelayspeech.pdf.
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3.3. JUDICIAL APPROACH TOWARDS RPPS
3.3.1. Chronicle of pre-Actavis case law on RPPS
a. Sixth Circuit: per se illegal
52. IN RE CARDIZEM CD – Although trade authorities have been aware of
potential entry-dilatory settlements for decades, the first ever case139 to
appear before an Appelate U.S. court was brought by a private party. A series of private claims was lodged before a District Court in Michigan which eventually certified questions for interlocutory appeal to the Sixth Circuit.
This is the In re Cardizem CD Antitrust Litigation.140
Contested before the Sixth Circuit was an agreement concluded between originator company Hoest Marion Roussel (‘HMR’) and generic manufacturer
Andrx Pharmaceuticals (‘Andrx’). Andrx was the first to file a Paragraph-IV certification challenging the scope of the HMR’s patent. Being the first Paragraph-IV filer, Andrx was granted a 180 day exclusivity protection. The
settlement did not ultimately resolve the dispute in terms of patent validity but rather provided interim terms between the parties. In exchange for $10 million per quarter, Andrx agreed to (i) refrain from marketing its generic
version of Cardizem CD and (ii) not to take any action that would dismiss its rights to the 180 day market exclusivity, hence precluding any other potential generic from entering the market.141
Although acknowledging that agreements that restrain competition are indeed as standard to be judged by the rule of reason, the court qualified the
contested agreement as being illegal per se.
“The [Supreme] Court has reiterated time and time again that horizontal limitations are naked restraints of trade with no purpose except stifling of
competition [...].142 There is simply no escaping the conclusion that the Agreement in question [...] was at its core a horizontal agreement to eliminate competition [...] throughout the entire U.S., a classic example of a per se illegal restraint of trade. It is one thing to take advantage of a monopoly that naturally arises from a patent, but another thing altogether to bolster the patent’s effectiveness in
139 The In re Cardizem CD litigation was in fact not the first RPPS case to reach an Appelate court. In 2001, the D.C. Circuit had to rule on a dismissal in a RPPS case, yet the dictum of the ruling
was limited to procedural considerations and did not contain a substantial antitrust analysis of any kind. See Andrx Pharmaceuticals Inc., v. Biovail Corporation International, 256 F.3d 799 (D.C. Cir. 2001). 140 In re Cardizem CD Antitrust Litigation, 332 F. 3d 896 (6th Cir. 2003). 141 In re Cardizem CD Antitrust Litigation, at 17. 142 In re Cardizem CD Antitrust Litigation, at 16 quoting the Supreme Court in State Oil Co. v. Kahn, 522 U.S. 3 (Supr. Ct. 1997).
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inhibiting competititors by paying the only potential competitor $40 million
per year to stay out of the market.” 143
In formulating its reasoning, the Sixth Circuit exclusively considered the anticompetitive effects of the deal while ignoring the procompetitive effects. The court concluded that the agreement allocated the market completely
between HMR and Andrx by excluding the possibility for a subsequent Paragraph-IV challenge. As such, the court argued that the agreement could not be viewed as an instrument to enforce patent rights, but rather as a
barrier to market entry.
Concludingly, in the first RPPS case ever to feature in a Federal Appelate
court, the Sixth Circuit considered RPPS to be market-sharing practices, which are a clearly per se restraints of trade. While the In re Cardizem CD ruling thus provided a clear signal on the legality of RPPS, it has also been criticized
particularly for its complete ignorance of the procompetitive aspects of the deals and secondly, because its consideration lacked any measurement of the scope of the patent in question.144
b. Second, Eleventh and Federal Circuit: patent scope – test
53. VALLEY DRUG – Just months after the In re Cardizem judgment, the
Eleventh Circuit had to deal with another major RPPS case. In Valley Drug Co.
v. Geneva Pharmaceuticals, Inc.,145 the court had to speak its mind on yet another class action brought by private plaintiffs.
Originator manufacturer Abbott Laboratories (‘Abbott’) concluded two agreements; one with the first generic Paragraph-IV filer, Geneva
Pharmaceuticals (‘Geneva’) and another with a subsequent generic manufacturer, Zenith Goldline Pharmaceuticals (‘Zenith’). Abbott paid over $100 million in exchange for both generic companies to acknowledge the validity of Abbott’s
patents and to delay the market entry of their generic equivalent to Abbott’s blockbuster drug Terazosin hydrochloride (‘Hytrin’).
In spite of the Sixth Circuit’s In re Cardizem CD ruling and, contrary to what was held by the District Court in first instance,146 the Eleventh Circuit did not qualify the RPPS agreements being per se illegal. According to the court, the
agreements could not be seen as merely allocating the market simply because one of the parties owned a patent:
“If this case merely involved one firm making monthly payments to potential competitors in return for their refraining from entering the market, we would readily affirm the District Court’s order [qualifying it as a per se illegality]. This is not such a case however, because one of the parties owned a patent which grants him the lawful right to exclude others and allows him to exploit
143 In re Cardizem CD Antitrust Litigation, at 18-19. 144 T. COOK, “Balancing Patent & Antitrust Policy through Institutional Choice”, 2011, 431. 145 Valley Drug Co. v. Geneva Pharmaceuticals Inc., 344 F.3d 1294 (11th Cir. 2003). 146 In re Terazosin Hydrochloride Antritrust Litigation, 203 F.R.D. (S. Fl. Distr., 2001).
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whatever degree of market power it might gain until expiration thereof [...]
[implication added].” 147
The Court further ruled that:
“To the extend that Zenith and Geneva agreed not to market admittedly infringing products before the [...] patent expired or was held invalid, the
characterization as market allocation is inappropriate” [emphasis
added].148
The Eleventh Circuit hence implied that as long as the contested agreement
does not contain a restriction that goes beyond the exclusionary power of a patent, an antitrust violation is not present. Rather than qualifying them as
per se illegal, the Eleventh Circuit thus suggested a patent scope – analysis to assess the legality of RPPS.
“The presence of an exit payment as part of a settlement does not alone demonstrate that an agreement has obvious anticompetitive tendencies [...]
that exceed the potential exclusionary rights under a patent.” 149
The patent scope – analysis proposed by the Eleventh Circuit requires a judge to evaluate three criteria when assessing the legality of a reverse payment settlement. First, the exclusionary powers of the patent must be
measured (the patent scope). Second to determine are the exclusionary effects of the contested agreements. Lastly, one must look whether and to what extend the exclusionary effects of the agreement exceed the scope of the
patent. Only in the case where the anticompetitive effects of the agreement exceed the patent scope, an infringment of antitrust laws may be present.150
In Valley Drug, the Eleventh Circuit did not measure the scope of the patent in question. The court nonetheless argued that invalidity of the patent in itself does not necessarily trigger antitrust liability when parties may have settled
their respective legal positions in good faith. Consonantly, the court
exemplifies that such antitrust liability may be impending in the case of a
sham patent151 or where patent litigation was fictitious.152 Convinced that the patent scope analysis is the most suited judicial
instrument to preserve the balance between patent – and antitrust laws,153 the
147 Valley Drug Co. v. Geneva Pharmaceuticals Inc., at 56. 148 Valley Drug Co. v. Geneva Pharmaceuticals Inc., at 59. 149 Valley Drug Co. v. Geneva Pharmaceuticals Inc., at 73. 150 Valley Drug Co. v. Geneva Pharmaceuticals Inc., at 61-63. 151 A patent is considered a sham when patent owner knows that its patent does not truely meet the patentability criteria, as it has been granted due to the provision of false, misleading or inconclusive information. 152 Valley Drug Co. v. Geneva Pharmaceuticals Inc., at 68-69. 153 “It is well also to recognize the rationale underlying this decision, aimed of course at achieving a suitable accomodation in this area between the differing policies of the patent and antitrust laws”, Valley Drug Co. v. Geneva Pharmaceuticals Inc., (supra), at 64.
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Eleventh Circuit strongly refuted the Sixth Circuit’s per se approach in In re
Cardizem CD because it failed to measure any provision of the settlement
against the exclusionary power of the patent concerned, hence omitting “to
differentiate between provisions that fell within the patent scope and those that did not”.154
With this ruling, the Eleventh Circuit not only refuted a per se approach, but also the application of a standard rule of reason. According to the court:
“both approaches are ill-suited for an antitrust analysis of patent cases because they seek to determine whether the challenged conduct had an
anticompetitive effect on the market” while, “[...] patents, by their nature, create an environment of exclusion which
implies that the anticompetitive effect is already present.” 155
To conclude, the Eleventh Circuit strongly deviated from the per se approach proclaimed by the Sixth Circuit. Instead, with the patent scope – analysis the
court suggests an inquiry which does not overlook the lawful rights patent laws may grant. When applying this patent scope – analysis, a court must (i) consider the scope of the patent, (i.e. the degree of exclusionary effects that
are allowed); (ii) measure the exclusionary effects generated under the contested agreement and (iii) evaluate whether the exclusionary effects of the agreement exceed the scope of the patent.
54. SCHERING PLOUGH – In 2005, the Eleventh Circuit seized the
opportunity to confirm its patent scope – analysis in Schering-Plough Corp. v.
FTC.156
Simplifying the facts of the case at hand, Schering-Plough holder of a formulation patent on the active ingredient ‘K-Dur 20’, concluded two subsequent agreements with generic manufacturers. The generic firms agreed
not to enter the market with their bioequivalent of K-Dur 20. In exchange, Schering-Plough (i) made payments in cash and (ii) agreed to buy licenses to
patented products from both other generics for royalties that were far in
excess of a legitimate consideration ($90 million).157 The court confirmed its patent scope – analysis from Valley Drug, arguing that:
“[...] monetary payments made to an alleged infringer as part of a patent litigation settlement [do] not constitute a per se violation of antitrust law.”
and, “[...] the proper analysis of antitrust liability requires an examination of: (1) the scope of the exclusionary potential of the patent; (2) the extent to
154 Valley Drug Co. v. Geneva Pharmaceuticals Inc., at 70. 155 Valley Drug Co. v. Geneva Pharmaceuticals Inc., at 84. 156 Schering-Plough Corp. v. FTC, 402 F.3d 1056, (11th Cir. 2005). 157 Schering-Plough Corp. v. FTC, at 13.
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which the agreements exceed that scope; and (3) the resulting anticompetitive
effects.” 158
The court ruled that Schering-Plough’s agreements fell within the scope of (the exclusionary powers of) its patent hence they were not illegal.159 This
ruling once more entrenched the Eleventh Circuit’s clement view that as long as RPPS fall within the scope of a patent that is valid and obtained in good faith, they are not in breach of antitrust laws.
55. IN RE TAMOXIFEN CITRATE – In 2006, the Second Circuit had to rule
on a RPPS in what was named the In re Tamoxifen Citrate Antitrust Litigation.160
In this case, AstraZeneca Pharmaceuticals (‘AstraZenaca’) held a patent on tamoxifen
citrate. Generic company Barr Laboratories (‘Barr’) filed a Paragraph-IV
certification, challenging the validity of the patent. Shortly after the Paragraph-IV was filed, parties settled the dispute. The terms of the settlement obliged AstraZeneca to pay $21 million issue Barr an exclusive
sales license to the drug. Barr, on its part, agreed to refrain its Paragraph-IV certification and to delay the manufacturing of its generic version of Tamoxifen until AstraZenaca’s patent expired.161
In acknowledging the Eleventh Circuit’s opinion expressed in Valley Drug and Schering-Plough, the Second Circuit ruled that unless the patent litigation is
either a sham or completely baseless, the patent owner is entitled to conclude a settlement to protect the lawful monopoly he has on the manufacturing and distribution on its patented drug.162
The plaintiffs argued to the court that (i) the very fact that an originator manufacturer, despite having a patent, is willing to settle and, for yet stonger
reason that (ii) its reverse payments are so excessively large, casts a disbelief in the validity of the patent or the likelihood of infringement so that it can be questioned whether the monopoly that is created through the settlement
agreement falls within the scope of a patent altogether. The court audibly
rejected these arguments, stating that:
“The private thoughts of a patentee or the alleged infringer who settles with him, about whether or not the patent is valid or whether it has been infringed, is not the issue of an antitrust case. A firm that has received a patent from the patent office enjoys the presumption of validity that attaches to an issued patent and is entitled to defend the patent’s validity in court, to sue alleged infringers and to settle with them, whatever its private doubts, unless a neutral observer would reasonably think that [...] the patent was almost certain to be declared invalid or the defendants were almost certain to
158 Schering-Plough Corp. v. FTC, at 18-21. 159 Schering-Plough Corp. v. FTC, at 55. 160 In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 193 (2nd Cir. 2006). 161 In re Tamoxifen Citrate Antitrust Litigation, at. 3-5. 162 In re Tamoxifen Citrate Antitrust Litigation, at. 61.
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be found not to have infringed it. It is not ‘bad faith’ to assert patent rights that one is not certain will be upheld in a suit for infringement pressed to judgment and to settle the suit to avoid risking the loss of the rights”
[emphasis added]. “[...] in the same regard, payments, even ‘excessive’ payments to settle a dispute are not necessarily unlawful as it merely an expression of the parties’
willingness to settle yet unrelated to the merits of the patent.” 163
So, neither the fact of a concluded settlement itself nor the large amount that is paid can render a payment ‘exclusionary’ as it cannot objectively reflect the
validity of the patent but rather merely reflects the parties’ economic incentives to alter their current market setting through legitimate means.
Rather than providing criteria that could be employed to measure a patent’s validity, the court instead focussed on the exclusionary reach of the contested agreement. The court held that AstraZeneca’s agreement was within the
scope of its patent, hence legitimate because (i) it did not extent the patent monopoly by restraining the introduction or marketing of unrelated or non-infringing products; because (ii) the settlement terminated all litigation
between the parties and because (iii) the settlement did not entirely extend competition in the market since it included a sales license that allowed Barr to market Zeneca’s own generic version shortly after the settlement was
concluded.164 Although agreeing with the court that indeed the existence of a settlement
nor the amount of a payment is suited for an antitrust analysis, I reckon the Second Circuit’s decision may have left some unconvinced.
First, it is regretful that the court did not seize the opportunity to provide criteria to assess the patent validity, which is the essential element in the first step of the patent scope – test.
Second, the court accedes with the Eleventh Circuit that not only a per se
illegality approach, but also a rule of reason analysis is ill-suited to assess the legality of RPPS cases. Yet in its dictum, the court nonetheless justified AstraZenaca’s settlement based on an argument that balanced the pro – and
anticompetitive effects, which is the modus operandi in a rule of reason test.165 Lastly, the court’s argument that the contested settlement is lawful because it
did not restrain marketing of non-infringing products indeed says something about the scope of the anticompetitive effects of the settlement, yet nothing about the patent that it should reflect. The court does a good job in analysing
the second and third step of its self-propounded patent scope – test, however
163 In re Tamoxifen Citrate Antitrust Litigation, at. 65-66. 164 In re Tamoxifen Citrate Antitrust Litigation, at. 74-78. 165 In re Tamoxifen Citrate Antitrust Litigation, at. 78; “Finally, the Settlement Agreeent did not entirely foreclose competition in the market for tamoxifen.”
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it seems to struggle in formulating criteria to assess the first step, i.e.
determining the patent’s scope itself.
Concludingly, in the In re Tamoxifen Citrate Antitrust Litigation, the Second Circuit reaffirmed the patent scope – test introduced by the Eleventh Circuit
in the Valley Drug and Schering-Plough cases. The court acknowledged that when a patent’s scope is to be measured, corroboration of its validity is indispensable. Nonetheless, the court reiterated that all patents enjoy validity
presumption and emphasised that, to establish a patent’s validity, the very conclusion of a settlement, nor the excessive amount of reverse payments that are made, can serve as objective criteria. Since the court failed to formulate
criteria that could in fact be employed to assess the legality, application of the patent scope – test remained esoteric.
56. IN RE CIPROFLOXACIN HYDROCHLORIDE – With its In re Ciprofloxacin
Hydrocloride Antitrust Litigation, the Federal Circuit continued the streak of judicial leniency towards RPPS.166
Contested before the court was a settlement between Bayer AG, originator manufacturer and patent holder of the active ingredient Ciprofloxacin and Barr
Laboratories, who created a generic version and filed a Paragraph-IV
certification claiming the invalidity of Bayer’s patent. Under the settlement that was concluded shortly after Bayer initiated the patent infringement suit, Barr agreed to alter its Paragraph-IV certification to a Paragraph-III
certification in exchange for a $50 million payment by Bayer. Just like the Second Circuit, the Federal Circuit emphasized on the validity
presumption of patents and acceded to the Eleventh and Second Circuit’s patent scope – test for analysing the legality of RPPS. The Federal Circuit took matters even one step further down on leniency lane by stating that:
“[There is] no need for the court to consider the validity of the patent hence the settlement agreement that is based upon it, as long as there is no evidence
of fraud before the U.S. Patent Office or sham litigation.” 167
Concludingly, the Federal Circuit not only fully supported the Eleventh and Second Circuit’s patent scope – test, it stretched it to create a de facto
immunity for settlements under which the underlying litigation was genuine and where the patent was not obtained by fraud. This lenient interpretation subsequently inspired the Eleventh Circuit when ruling in FTC v. Watson
(infra).
57. FTC V. WATSON – In 2012, the Eleventh Circuit ruled on yet another
RPPS case168 which was brought for a Georgian District court by the FTC.169
166 In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008). 167 In re Ciprofloxacin Hydrochloride Antitrust Litigation, at 36. 168 FTC v. Watson Pharmaceuticals Inc., 677 F.3d 1298 (11th Cir. 2012). 169 In re AndroGel Antitrust Litigation, 687 F. Supp. 2d 1371 (N.D. Ga. 2010).
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Contested by the FTC was an agreement between Solvay Pharmaceuticals
(‘Solvay’), originator manufacturer of AndroGel on the one hand, and
subsequent generic companies Watson Pharmaceuticals (‘Watson’) and Paddock
Laboratories (‘Paddock’) whereas the latter filed a Paragraph-IV certification to contest the validity of Solvay’s patent. Under the settlement, Watson and
Paddock agreed (i) not to market their generic versions of AndroGel until a specified date that preceded the expiration date of Solvay’s patent and to (ii) promote manufacturing of Solvay’s authentic AndroGel. In return, Solvay
commited itself to pay $72 million to Paddock over six years and to share sales profits of AndroGel with Watson.
Both the District court in first instance and the Eleventh Circuit ruling in appeal dismissed the FTC’s arguments that the settlement at issue was infringing antitrust laws as it unlawfully deferred generic competition “[...] because Solvay was not likely to prevail if a patent litigation suit were to proceed”
(emphasis emulated).170 The court rejected the FTC’s complaint which was
based on the likelihood of the patent stating that it is simply not possible to define the concept of ‘likely’:
“[...] a chance [of losing a patent suit] is only a chance, not a certainty. Rational parties settle to cap the cost of litigation and to avoid the chance of losing. Those motives exist not only for the side that is likely to lose, but also to the side that is likely to win. A party likely to win might not want to play the odds for the same reason that one likely to survive a game of Russian
roulette might not want to take a turn.” 171
The Eleventh Circuit reaffirmed the lenient interpretation by the Federal
Circuit of its own patent scope – test, arguing that unless the litigation is sham or the patent has been obtained by fraud, RPPS are “immune from antitrust attack as long as its anticompetitive effects fall within the scope of the exclusionary potential
of the patent.” 172
Thus, the ruling in FTC v. Watson was important in two ways. First, the Eleventh Circuit refused to incorporate an analysis of the likelihood of the
patent in its patent scope – test because (i) it is simply not possible to determine the notion ‘likely’, let alone to determine whether a patent is ‘likely’ to be held either invalid or not-infringed; and (ii) it would neglect a
party’s rights to settle uncertain claims. Second, the court approved the subsequent lenient stretch to its patent scope
test that was added by the Federal Circuit in the In re Ciprofloxacin Hydrocloride
Antitrust Litigation (supra, nr. 56).
170 FTC v. Watson Pharmaceuticals Inc, at 15. It can be argued that the FTC’s ‘patent likelihood’ –
argument does not discount the purported patent scope – test, but rather provides a claim on the first level of that test. In fact, when claiming that “Solvay is not likely to prevail in patent litigation”, the FTC feigns that Solvay’s patent has no exclusionary potential at all, so that its scope would be narrowed to zero. In that way, any reverse payment settlement would exceed that scope and thus
be unlawful. 171 FTC v. Watson Pharmaceuticals Inc, at 32. 172 FTC v. Watson Pharmaceuticals Inc, at 30.
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c. Third Circuit: Quick look – test
58. IN RE K-DUR – Almost simultaneously with the FTC v. Watson decision,
the Third Circuit gave verdict in the In re K-Dur Antitrust Litigation.173 This was
the first time the Third Circuit was to rule on a RPPS case and it immediately grasped the opportunity to refute the predominant view supported by the Second, Eleventh and Federal Circuit.
The In re K-Dur Antitrust Litigation can be called the flipcoin of the Schering-
Plough case which was litigated before Eleventh Circuit (supra, nr. 54). While
the FTC’s challenge on Schering’s settlements were brought before the
Eleventh Circuit, the private parties’ complaints were consolidated for a New Jersey District court174 and were eventually litigated in appeal before the
Third Circuit. From the very outset of its analysis, the Third Circuit deviated from the
patent scope – test reasoning that:
“As a practical matter, the scope of patent test does not subject reverse payment agreements to any antitrust scrutiny. [...] [W]e cannot agree with those courts that apply the scope of patent test. In our view, that test improperly restricts the application of antitrust law and is contrary to the
policies underlying the Hatch Waxman Act [...].175
The Third Circuit reminded of the improper consequences of neglecting the patent validity stating that:
“Rather than adopt an unrebuttable presumption of patent validity, we believe courts must be mindful of the fact that a patent [...] simply represents a legal conclusion reached by the Patent Office. Many patents issued by the
PTO are later found to be invalid or not infringed.176
While rejecting the patent scope – test, the Third Circuit enticed to apply a quick look test to reverse payment settlements because unlike the patent scope
– test, it does excogitate the economic realities of the RPPS.177 The court
furthermore adduced that:
“[...] any payment from a patent holder to a generic patent challenger who agrees to delay its market entry must be considered by the courts as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry
or (2) offers some pro-competitive benefit.” 178
173 In re K-Dur Antitrust Litigation, 686 F.3d 197 (3rd Cir. 2012). 174 In re K-Dur Antitrust Litigation (First instance), 1652 WL 1172995 (D. N.J. 2010). 175 In re K-Dur Antitrust Litigation, at. 26. 176 In re K-Dur Antitrust Litigation, at. 27. 177 In re K-Dur Antitrust Litigation, at. 32. 178 In re K-Dur Antitrust Litigation, at. 33.
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Succinctly, with its K-Dur Antitrust Litigation ruling, the Third Circuit provided a strong dissent to the lenient patent scope – test supported by the Second,
Eleventh and Federal Circuit. Instead of the patent scope – test, it dictated the application of a quick look test. Secondly, the Third Circuit replaced the de facto antitrust immunity put forth by the aforementioned courts by a
presumption of antitrust infringement. d. Conclusion
59. APPROACHES FEATURING THE PRE-ACTAVIS CASE LAW – It can be
concluded that until 2013, the case law of the U.S. Appelate courts regarding
RPPS was conflicting. Three approaches can be differentiated.
The most stringent and perhaps shallow view is the per se illegal approach unshered by the Sixth Circuit. According to the Sixth Circuit, settlements under which a brand name drug manufacturer pays a potential generic to
delay its market entry constitutes a horizontal agreement aimed at the allotment of the market which, it claims, is a clear example of a per se illegality.
A second, more sophisticated approach is the one applying a ‘consolidated’ patent scope – test. As the Second, Eleventh and the Federal Circuit were
associated with it, this approach was predominant until 2013. In its original form, the courts applying the patent scope – test conducted a ‘three-step-
analysis’ as to (i) the scope of the patent, i.e. its exclusionary potential; (ii) the
anticompetitive effects a RPPS effectuates; and (iii) measurement of whether these anticompetitive effects fall within, or exceed the scope of the patent. Subsequent rulings consolidated the patent scope – analysis into a quasi de facto
antitrust immunity for RPPS as long as they are not built on a sham patent or a baseless litigation.
A third and final approach is advocated by the Third Circuit as a reaction to the patent scope – test. This third approach adjures courts to apply a quick look test to reverse payment settlements and postulates a presumption of
antitrust infringement for all RPPS which can be rebutted only by demonstrating overweighing procompetitive effects or by proving that the reverse payment was intended for a purpose other than delaying generic
entry. It is interesting to note that, apart from the Sixth Circuit’s view, all Appelate
courts disaffirmed the FTC’s position that considers RPPS by nature anticompetitive hence per se illegal.
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60. CRITERIA EMPLOYED PRE-ACTAVIS – Besides differentiating the
different approaches adopted by the courts, the pre-Actavis case law can also be summarized in terms of criteria the courts have accepted or rejected.
Criteria included by the courts in their analysis are: (i) the exclusionary effects of the settlement agreement; (ii) (at least formally though never in substance) the validity of the
underlying patent; (iii) the fact that the settlement definitely ended litigation between the
parties.
By contrast, the courts explicitly rejected to take account of:
(i) subjective thoughts of the parties (it thus immaterial whether the
patent owner himself doubts the validity of its own patent) except in the case of a sham;
(ii) the fact itself that a party, despite having a patent with exclusionary
powers concludes a settlement in which it ‘pays’ for the exclusion; (iii) the amount of the reverse payment.
61. EVALUATION OF PRE-ACTAVIS CASE LAW – All of the aforementioned
Appelate courts strongly refuted eachother’s approach and were very strongly convinced of their own position and the arguments they provided in support.
Nonetheless, all three of the approaches are vulnerable to criticism. The first approach (per se illegal) is argued to be indefensibly stringent. In
failing to calculate neither the validity, strength nor the scope of the patent underlying the RPPS, the per se approach neglects the existence of – and the rights derived from patent laws. It indeed makes sense that if one is allowed to
exclude others from exploiting its patented product through litigation, he should by stronger reason also be entitled to do this through settlement. Negating this would not only leave brand name drug manufacturers hang out
to dry to a very unfavourable Hatch-Waxman regime, but would also be contrary to established principles of law.179
The second approach (patent scope – test) on its part, is far too lenient. In so far as courts ignore whether the underlying patent is valid altogether, they create an immunity for RPPS that are not based on a fraud. In overlooking
this economic reality, the patent scope – test builds a setting in which it encourages owners of weak patents to exclude competition artificially. It might not surprise that the amount of RPPS have increased considerably
after introduction of the tollerant patent scope – test.180 The Second, Eleventh and Federal Circuit may indeed have created a seemingly straightforward rule which balances the legal interests at stake, yet they ran
foul in applying it as too much weight is given to the exclusionary scope of the
179 The Supreme Court has held ever since that "the mere conclusion of a settlement concluding a patent litigation does not in itself violate antitrust laws”, see Standard Oil Co. v. United States, 221 U.S. 1 (Supr.
Ct. 1911). 180 M. CARRIER, “Why the ‘Scope of the Patent Test’ Cannot Solve The Drug Patent Settlement Problem”, Stanford Technology Law Review 2012, Vol. 16, 2.
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settlement at the expense of a sound measurement of the patent itself. Although the first step of the patent scope – test formally acknowledges the
importance of the patent validity as a criterium, it is neglected entirely in the case law of the courts.
The third approach (quick look test), while providing a more sophisticated version of the first approach, can still be accused of being too shallow. The Third Circuit that has prompted this approach correctly considers that the
sole existence of a patent should not justify any anticompetitive agreements that lies within. Nonetheless, the Third Circuit failed to provide any criteria itself to assess these deals but argues instead that RPPS should be presumed
illegal. The aforementioned approaches, in particular the patent scope - test, thus
seem to be very useful instruments for an antitrust assessment of RPPS. Yet its application by the courts falls short simply because a legal fiction (the presumption of patent validity) is chosen over the technical reality in terms of
patent strength. The baby should not be thrown out with the badwater, however. Both the patent scope and the quick look – tests seem more embraced when they do account criteria that help to determine the
exclusionary potential of the patent. So, it is evident to conclude that criteria to measure a patent’s strength
(validity, likelihood, ...) are indispensable for an embracing antitrust assessment. However including such a subanalysis may be a challenge in many ways: (i) measuring the likelihood of a patent seems incongruous with
the principle that all patents are presumed valid; (ii) it can be questioned whether a judge ruling on an antitrust claim is placed to rule on the validity of a patent; (iii) it is not clear whether it is possible altogether to define a legal
standard to the vague and subjective concept of ‘likelihood’ and (iv) having a patent’s validity measured by a court, while parties have chosen to settle for the very reason to avoid a court’s ruling, prejudices the economic and legal
freedom of the parties to conclude settlements. In FTC v. Watson, the Eleventh Circuit accurately argued in this regard that the fact that there is a chance for
a patent be held invalid or not-infringed should not deprive a patentee in
good faith from his right to conclude a settlement because it is the very ratio of settlements to manage risks that accord with the uncertainty over legal disputes.
Be that as it may, the criticism above clearly demonstrates that there is a compelling need to include these criteria on the patent’s strength and validity.
Considering the fact that generic firms are victorious in 73% of all Paragraph-IV challenges, this desire is not just theoretical.181
181 FTC Study of 18 July 2002, “Generic Drug Entry Prior to Patent Expiration”, available at http://www.ftc.gov/os /2002/07/genericdrugstudy.pdf.
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3.3.2. Current approach
a. The U.S. Supreme Court: Actavis
62. EVENTS LEADING UP TO THE ACTAVIS RULING – Faced with conflicting
Circuit rulings, each of which fell short in its own way, the U.S. pharmaceutical sector was desperately waiting for the Supreme Court to resolve the issue. The waiting came to and when the Supreme Court granted
certiorari pursuing the FTC’s petition for judicial review in the Eleventh Circuit’s FTC v. Watson in December 2012. 182 The Supreme Court eventually issued the long-awaited ruling in June 2013, merely two months
after the Third Circuit’s ruling in In re K-Dur. The case was reported as ‘FTC
v. Actavis’ because Watson Pharmaceuticals changed its name to Actavis in October 2012.183
63. SUPREME COURT IMPOSES RULE OF REASON – Well aware of the
existing conflicts, the Supreme Court refused to stand by any of the preceding Circuit rulings.
The per se approach, advocated by both the FTC and the Sixth Circuit, was rejected without further comment.
In holding that “the Eleventh Circuit erred in affirming the dismissal of the FTC’s
complaint”, the Supreme Court also rejected the patent scope – test employed
by the Second, Eleventh and Federal Circuit.184
“Although the anticompetitive effects of the reverse settlement might fall within the scope of the exclusionary potential of Solvay’s patent, this does not
immunize the agreement from antitrust attack.” 185
Finally, the Supreme Court also rejected the Third Circuit’s quick look test because presumptive rules such as the quick look approach are appropriate
only where an observer with even a basic understanding of economics could
conclude that the arrangements in question would have an anticompetitive effects on the market.186 According to the court, reverse payment settlements
do not meet this criterion considering their complexity and the multitude of elements their anticompetitive nature depends on.
Instead, the Supreme Court prompted courts to apply a rule of reason test.187 Interesting to note is that the Court also deviated from preceding Circuit rulings when providing subsequent guidance to the lower courts when
182 FTC, petition for a writ of certiorari, FTC v. Watson Pharmaceuticals, Inc., available at
https://www.ftc.gov/system/files/documents/cases/121004watsonpetition.pdf. 183 FTC v. Actavis, Inc., 133 U.S. 570 (Supr. Ct. 2013). 184 FTC v. Actavis, Inc., at 27. 185 FTC v. Actavis, Inc., at 28. 186 FTC v. Actavis, Inc., at 37 quoting its precedent from California Dental Assn. v. FTC, 526 U.S. 775 (Supr. Ct. 1999). 187 FTC v. Actavis, Inc., at 38.
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applying this test. In fact, the Court surmised that emphasis should be laid upon the size of the reverse payment because, according to the court, it is “a
strong indication” of a patent’s weakness hence it could imply an anticompetitive motive.188 The Court stretched its reasoning so far it came to conclude that settlements may even be assessed without determining the patent’s validity as “a large, unexplained reverse payment can provide sufficient surrogate for a patent’s
weakness.” 189
64. CONCLUSION AND IMPACT OF THE ACTAVIS RULING – In summary, in
FTC v. Actavis, which was the first RPPS case the U.S. Supreme Court ruled
on, the Court refused to apply either of the approaches adopted by the
Circuit courts. On the one hand, the court argued that the anticompetitive potential of these deals were too great to immunize them to antitrust attack
under the patent scope test, while on the other hand, reverse payments settlements are too complex to justify application of presumptive rules such as the quick look or the per se approach. The Court instead instructed lower
courts to apply a rule of reason test, leaving the latter a lot of freedom in the application thereof.
The Supreme Court’s ruling was an important victory for the FTC in its agenda to combat RPPS. The abrupt rejection of the predominant patent scope – test meant that reverse payment settlements within the scope of the
patent were not longer immune to antitrust laws. Lower courts were given the freedom to include more factors in their analysis and subsequently balance the pro – and anticompetitive effects of a given settlement. This consideration
alone has cast uncertainty to companies seeking to conclude reverse payment deals, which caused a decline in the amount of reverse payments since 2013.190 Consumer unions and governmental authorities applauded the
Actavis ruling as it “reopened the door for pharmaceutical competition”.191
b. Post-Actavis discussion and case law
65. POST-ACTAVIS: THE STRUGGLE CONTINUES – Although being
unequivocal in prompting the rule of reason test as the standard to assess
RPPS, the Supreme Court’s dictum in FTC v. Actavis did not end all haziness. The Actavis ruling guided District and Circuit courts to assess (i) the pro – and
anticompetitive effects; (ii) whether the reverse payment can be considered ‘large’; and (iii) whether there is another plausible justification for the
payment. Yet, it remained ambiguous as to which types of transactions may qualify as a ‘payment’, nor did it clarify when such payment is to be considered ‘large’ or ‘unjustified’. Resultantly, District courts are again struggling with
these new questions of interpretation.
188 FTC v. Actavis, Inc., at 39. 189 FTC v. Actavis, Inc., at 40. 190 FTC press release of 13 January 2016, “Is FTC v. Actavis Causing Pharma Companies to Change Their Behavior?”, available at https://www.ftc.gov/news-events/blogs/competition-
matters/2016/01/ftc-v-actavis-causing-pharma-companies-change-their. 191 A. SRISKANDARAJAH, “In re K-Dur Antitrust Litigation: Reopening the door for pharmaceutical competition”, Northwestern Journal of Technology and IP 2014, Vol. 12, 88 – 100.
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66. VALUE TRANSFERS CONSTITUTING A PAYMENT – Monetary payments
from the originator to the generic company are reverse payments most easy to identify. Practice shows, however, that drug companies engage into much
more complicated deals (supra, nr. 6). In some cases, a payment is not even present, e.g. when the originator company refrains from launching its own ‘authorized generic’, when licenses are granted or other types of consideration
that do not accord market practice.192 Because the Supreme Court in Actavis only addressed “payments”, ambiguity
raised as to whether alternative forms of value transfer are subject to antitrust scrutiny, too.
In the early post-Actavis case law, District courts adopted a literal interpretation of the Actavis ruling, dismissing non-monetary forms of value transfer from antitrust scrutiny.193 Both the Third194 and First Circuit195 have
subsequently rejected this approach and instructed the District courts to cast antitrust scrutiny to all kinds of quid pro quo. These Circuit rulings can be applauded because the opposite would forge a loophole in the monitoring of
RPPS as it would induce parties to include non-monetary forms of compensation to avoid antitrust scrutiny.
67. PAY FOR DELAY OR PAY FOR CERTAINTY? – The Supreme Court has
pointed out in Actavis that anticompetitive harm is particularly impending when the reverse payment is “unjustified”. Yet it is the crux of the entire problem to speculate on parties’ intention at the time they conclude their
settlement. In Commil v. Cisco [2015], the Supreme Court held that “a defendant’s belief regarding patent validity is not a defense to an induced infringement
claim.” 196 Because parties choose to settle, it is impossible to measure what the outcome of the patent litigation would have been. Rather than evaluating
the patent’s strength, the Supreme Court suggested to consider the size of the payment as a proxy for determining the originator’s reasons for settling. The idea is that the originator would settle for a “large and unjustified” payment
when his patent is either weak or not likely to be infringed. The question remains when the size of a payment can be considered ‘large’.
While the legal scholary failed to formulate a convincing standard,197 a Pennsylvania District court recently presented the following test:
192 D. GERADIN, D. GINSBURG and G. SAFTY, “Reverse payment patent settlements in the European Union and the United States”, George Mason University Law and Economic RPS
2015, 6 [herinafter: D. GERADIN (ed.), “Reverse payment patent settlements in the EU and U.S.”, 2015]. 193 See for example In re Lamictal Direct Purchaser Antitrust Litigation, 18 F. Supp. 3d 560 (Distr. N.J.
2014), at 14 and In re Loestrin 24 FE Antitrust Litigation, 45 F. Supp. 3d 180 (Distr. R.I. 2014), at 11. 194 King Drug Co. Of Florence, Inc., v. SmithKline Beecham Corp., 791 F.3d 388 (3rd Cir. 2015). 195 In re Loestrin 24 FE Antitrust Litigation, not yet published, (1st Cir. 2016). 196 Commil USA, LLC v. Cisco Systems, Inc., 575 U.S. 896 (Supr. Ct. 2015). Although the this was not
a reverse payment settlement case, the Court’s ruling may be stretched out to Hatch-Waxman litigation, too. 197 D. GERADIN (ed.), “Reverse payment patent settlements in the EU and U.S.”, 2015, 12.
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“A reverse payment is sufficiently large when it exceeds prospected litigation costs and a reasonable third could find the payment to be sufficiently significant to induce a generic challenger to abandon its patent claim if it comes close to or exceeds the profits expected to be earned when victorious in
patent litigation.” 198
It remains to be seen how the Appelate courts will approach this criterion.
3.4. LEGISLATIVE VIGOR TO COMBAT RPPS
68. LEGISLATIVE INITIATIVES – Ever since RPPS surfaced the market, a
series of legislative proposals came across. Apart from the 2003 “Medicare
Modernization Act” which introduced a mandatory filing system for RPPS (supra, nr. 48), not a single Bill that substantially amended the antitrust policy
has been accepted. It is interesting to note that most of the proposals were (re)introduced in 2009, 2011 and 2015. This caprice in the synodical debate demonstrates the discontent of the legislative bodies with both the lenient
application of the patent scope – test (2009 – 2011) and the first generation of post-Actavis District rulings (2014 – 2015).
69. PRESERVE ACCESS TO AFFORDABLE GENERICS ACT – After pressure
from the Obama administration and the DoJ to eliminate RPPS,199 Senator
Kohl introduced a bill to vote a Presserve Access to Affordable Generics Act in 2009.200 Because the Kohl Bill did not make it through the Committee, it has
been reintroduced in respectively 2011,201 2013202 and 2015.203 The legislative proposal suggested to establish the presumption that reverse
payment patent settlements are anticompetitive if the first generic ANDA-applicant either (i) receives any form of value transfer or (ii) agrees to limit the marketing, manufacturing or sale of its generic product.204 While rebuttal of
the presumption would be possible (though only if claimingly procompetitive effects of the targeted agreements are demonstrated by “clear and convincing” evidence), settlements that allow generic entry prior to patent expiration
would be fully excempted from the presumption.205
70. FAIR GENERICS ACT – In 2011, Senator Bingaman introduced a second
Bill,206 only to be reintroduced in 2013 as it did not pass the Committee.207 The proposed Fair and Immediate Release of Generic Drugs Act shared the same
198 In re Modafinil Antitrust Litigation, 2015 WL 356913 (Distr. E. Pa. 2015). 199 P. L’ECLUSE (ed.), “Patent settlements, state of play”, 2012, 6. 200 S. 369, Preserve Access to Affordable Generics Act (110th Congress, 2009). 201 S. 27, Preserve Access to Affordable Generics Act (112th Congress, 2011). 202 S. 214, Preserve Access to Affordable Generics Act (113th Congress, 2013). 203 Z. BRENNAN, “Senators Reintroduce Bill to Make Pay-for-Delay Deals Illegal”, RAPS 2015, Vol. 9, 2. 204 S.2019, Preserve Access to Affordable Generics Act (114th Congress, 2015), §3. 205 S.2019, Preserve Access to Affordable Generics Act (114th Congress, 2015), §3 – 4. 206 S. 1882, Fair and Immediate Release of Generic Drugs Act (112th Congress, 2011). 207 H.R. 3709, Fair and Immediate Release of Generic Drugs Act (113th Congress, 2013).
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spirit with the Kohl Bill, with the minor difference that it did not presume, but irrebuttably considered illegal any settlement that contains a value
transfer from the patent owner to the ANDA filer in exchange for the latter to limit the marketing of its generic drug.208
71. CONCLUSION – So far, neither of the proposed legislative changes has
been adopted. While the Obama administration has interfered the debate by declaring its support in the battle against RPPS, 209 the Generic Pharmaceutical Association has strongly opposed the legislation on the
table.210 That is not so say, however, that legislative changes are unlikely to take place in the near future. Au contraire, while the amount of reverse
payment settlements indeed have been declining since Actavis, FTC figures
show that they are not by any means extinct.211
3.5. CONCLUSION
72. CAPSULIZATION OF THE U.S. APPROACH – The Sherman Act provides
the legislative basis to assess reverse payment patent settlements. 15 U.S.C. §1 states that “Every contract, [...] or conspiracy, in restraint of trade or commerce [...] is
declared to be illegal”. Since this provision is drafted too broadly, the Supreme Court had to accentuate that only “unreasonable” restraints are captured by the prohibition. To establish whether or not a restraint is unreasonable, three
levels of scrutiny are applied: (i) per se illegalities; (ii) rule of reason; and (iii) quick look test.
The FTC has unequivocally advocated a per se approach towards RPPS ever since. The U.S. courts were less convinced. Despite the courts’ contemplation, the U.S. case law on RPPS was conflicting.
Whereas the dissenting Sixth and Third Circuit applied respectively a per se and quick look approach, the predominant case law pre-Actavis considered
neither of the classic approaches suitable to assess the legality of RPPS because patents, by nature, imply exclusionary characteristics. The dominant
view alternatively presented a patent scope test under which RPPS were
considered lawful as long as (i) the exclusionary effects of the agreement do not exceed the exclusionary potential of the patent; (ii) the agreement is not concluded upon a baseless litigation; and (iii) the patent is not a sham. The
patent scope – test has been criticized for being far too lenient and consequently, not every court affirmed this approach. Hence the pre-Actavis case law was all but unanimous and neither of the Appelate courts succeeded
208 H.R. 3709, Fair and Immediate Release of Generic Drugs Act (113th Congress, 2013), §2. 209 J. HOLLAND, “Obama Says Huge Drug Companies Are Fleecing The American People”,
Business Insider 2013, available at http://www.businessinsider.com/supreme-court-pay-for-delay-drug-lawsuit-2013-3?IR=T. 210 P. L’ECLUSE (ed.), “Patent settlements, state of play”, 2012, 6. See also the GPhA’s statement at http://www.gphaonline.org/issues/patent-settlements/. 211 FTC press release of 13 January 2016, “Is FTC v. Actavis Causing Pharma Companies to Change Their Behavior?”, available at https://www.ftc.gov/news-events/blogs/competition-matters/2016/01/ftc-v-actavis-causing-pharma-companies-change-their.
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in formulating a test that allowed to take the strength and prima facie validity of the patent into consideration.
The Supreme Court made an end to the contraditing case law in 2013. In its Actavis ruling, the Court not only rejected the patent scope test, but also
refused to apply the per se approach and the quick look test considering that RPPS are too complex to be subjected to presumptive rules. The Court instead dictated the use of the rule of reason, under which courts will have to
balance the pro – and anticompetitive effects of RPPS. The Actavis ruling did not settle all questions, however. Due to equivocal
language and little guidance by the Supreme Court, lower courts are now struggling with minor questions of law which does not exclude the possibility that a subsequent Supreme Court intervention may be necessary in the
future. While the Supreme Court’s rule of reason is the most tollerant analysis for
judges to consider all the elements of a settlement, it is the most unpredictable, too. The conclusion then must be drawn that, after almost two decades of legal debate, the U.S. still lacks a clear-cut standard to assess
RPPS. On that account, the debate has once more rekindled in Congress.
Discontent with the lack of limpidity, proposals to vote legislation that prohibit RPPS more bluntly have been reintroduced. However, time is running out for the Obama administration and none of the proposals have
been accepted yet. It thus remains doubtful whether legislative interference will take place altogether.
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4. THE LEGALITY OF RPPS IN THE EU
4.1. EUROPEAN COMPETITION LAW
4.1.1. Art. 101 TFEU in general
73. RATIO LEGIS ART. 101 TFEU – Ever since the inception of the ECSC
Treaty in 1952,212 the European legal order has prohibited agreements and concerted practices between undertakings which distort free competition. The normative provision is article 101 (1) TFEU which states:
“1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.”
It is the policy of art. 101 TFEU to prohibit coordinated economic behaviour between undertakings that prevents, restricts or distorts competition, or has the objective to do so.
Hence for art. 101 TFEU’s prohibition to be triggered, there must be: (i) an agreement;
(ii) between undertakings; which has either (iii) the effect or object to prevent, restrict or distort competition; (iv) between EU Member States.
4.1.2. The elements of art. 101 TFEU in a RPPS environment
a. Application of competition law to (patent) settlements
74. NO IMMUNITY TO ANTITRUST SCRUTINY – As was discussed earlier in
this dissertation, patent – and competition laws are often on bad terms with eachother (supra, nr. 17). These tensions are not merely theoretical though. In
212 Art. 65 ECSC already prohibited “all agreements between undertakings [...] that distorted normal competition” and is the predecessor of the current art. 101 TFEU.
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practice, too, it often remains unclear if and to what extent competition law can be applied to settings that feature a patent.
In Centrafarm [1974], the ECJ had to rule for the first time on the application of competition law in a patent context. It immediately set the tone, stating
that competition laws are not preliminary excluded from application in a patent-environment:
“Although the existence of rights recognized under industrial property legislation is not affected by article [101] of the Treaty, the conditions under which those rights may be exercised may nevertheless fall within the prohibitions contained therein. This may be the case whenever the exercise of such a right appears to be the object, the means or the consequence of an
agreement.” 213
In Bayer v Süllhöffer [1998], the Court confirmed its prior ruling and stretched it even further by explicitly stating settlement agreements to a (patent)
litigation suit are, like any other agreement, subject to competition law.214
“In its prohibition of certain agreements, article [101] of the Treaty makes no distinction between agreements whose purpose is to put an end to litigation, and those concluded with other aims in mind.”
Concludingly, the very presence of a patent with exclusionary powers does
not rule out antitrust laws, hence drug manufacturers must respect them when concluding their patent settlements. b. The four elements of art. 101 TFEU in a RPPS setting
75. AGREEMENT, DECISION OR CONCERTED PRACTICE – The application
of art. 101 (1) TFEU is not limited just to legal contracts but applies also to coordinated behaviour through informal agreements and concerted practices. These concepts have been given a broad interpretation by the ECJ.215 In a
setting where a delay in generic market entry is agreed, there will be formal
documents (agreement-instrumentum) with clear-cut obligations. This is quite evident, considering the impending litigation.
The ECJ defines the concept of agreement as “centering around the existence of a concurrence of wills between at least two parties, the form in which it is manifested being
unimportant, so long as it constitutes the faithful expression of the parties’ intention”.216 An
agreement thus exists when a concurrence of wills between two or more parties allows them to coordinate their market behaviour.217
213 Case 15/74, Centrafarm BV and De Peijper v Sterling Drug Inc. [1974] ECR 1147, § 39-40; confirmed with the same phrasing in case 258/78, Maize Seed [1982] ECR 2015. 214 Case 65/86, Bayer AG v Heinz Süllhofer [1988] ECR 5249, § 82. 215 R. WHISH and D. BAILEY, Competition Law (7th edition), 99. 216 Case T-41/96, Bayer AG v Commission [2000] ECR II-3383, §176. 217 Commission Notice of 3 February 2001 on the Guidelines on the application of Article 81 (3) of the Treaty, OJ C 101, 97, §13-14.
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76. UNDERTAKINGS – The EU Treaty does not contain a definition of the
concept ‘undertaking’. Accordingly, it was for the ECJ to decide which entities are to be considered as fully autonomous undertakings for the
purpose of art. 101 TFEU. The ECJ has ruled that an undertaking is “every entity engaged in an economic activity regardless of its legal status and the way in which it is
financed”,218 by which an ‘economic activity’ is understood as “any activity
consisting in offering goods or services on a given market”.219
The economic nature of drug development, – manufacturing and sale has never been contested. Much like any other private corporation, drug
manufacturers have a clear profit motive.220 Moreover, it is beyond any doubt
that the health care-exemption some companies enjoy, is not applicable to any drug manufacturer as they do not serve an exclusive public service and
are fully autonomous.
77. OBJECT OR EFFECT TO PREVENT, RESTRICT OR DISTORT
COMPETITION – While only little discussion is possible about fulfillment of
the first two conditions (agreement, undertaking),221 the third and most important condition (the anticompetitive nature of the deal) is far less evident. For an agreement between undertakings to be anticompetitive, it must (be
likely to) limit the individual commercial autonomy of at least one of the parties involved.222 This may be the result of obligations that regulate their
market conduct as well as of arrangements that influence their respective market conduct.223
Art. 101 (1) TFEU prohibits agreements which have “as their object or effect” the restriction of competition. These are clearly alternative (hence not cumulative) ways to establish the anticompetitive nature of an agreement.224
Consequently, where it is established that an agreement has the object to restrict free trade, competition authorities do not have to prove the
218 Case C-41/90, Höfner & Elser v Macrotron GmbH [1991] ECR I-1993, §21. 219 Case C-180/98, Pavlov [2000] ECR I-6451, §35. 220 It should be reiterated that the fact that an entity does not have a clear-cut economic purpose does not, in itself mean that their activities are not economic; see R. WHISH and D. BAILEY, Competition Law (7th edition), 86. 221 In each of the infringement decisions, the Commission considered the concerned agreements
– and according practices to be ‘agreements between undertakings’ as they contained a concurrence of wills between originator and generic manufacturers with respect to their future commercial behaviour (See for example Commission Decision (COMP/39.226), Lundbeck and others, C 3803 [2013], §609). As the argument is straightforward and not contested in this
dissertation, an elaborate analysis is not required. 222 Commission Notice of 3 February 2001 on the Guidelines on the application of Article 81 (3) of the Treaty, OJ C 101, 97, §15 states that “each economic operator must determine independently the
policy which he intends to adopt on the market” and “[...] the type of co-ordination or collusion between undertakings within the scope of Article [101 (1)] is that where at least one undertaking vis-à-vis another undertaking adopts a certain conduct on the market as to their conduct on the market is eliminated or at least
substantially reduced”. 223 R. WHISH and D. BAILEY, Competition Law (7th edition), 109 citing the ECJ in case T-41/96
Bayer AG v. Commission [2000], ECR II-3383, §69. 224 This interpretation has been confirmed by the ECJ in case 56/65, Society Technique Minière [1966] ECR 235, 249.
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anticompetitive effects of it.225 Hence in practice, authorities will generally plead the restrictive intention of the deal and will only try to prove the
anticompetitive effects of it in a subsidiary order. While antitrust agencies proclaim the illegitimate nature of these deals
because of their restrictive object c.q. effect, one should recall the basic principle, set forth by the ECJ that “not every contractual restriction entails an
effective market restriction” and that “competition authorities must adequately demonstrate
that the concerned agreements are restricting competition”.226 78. BETWEEN MEMBER STATES – The prohibition of article 101 TFEU only
applies to agreements, decisions or concerted practices “which may affect trade
between Member States”. The present criterion defines the boundary between practices respectively covered by EU law and the laws of the Member States.227 Because the submarkets within the pharmaceutical industry are by
nature generally cross-border (or at least affects cross-border trades), this criterion hardly ever renders any problems. 79. CONCLUSION: DETERMINE WHETHER RPPS RESTRAIN TRADE BY
OBJECT OR EFFECT –As counterpart to 15 U.S.C §45(a), the normative
provision of EU antitrust law which prohibits agreements distorting competition, is article 101 TFEU. After the applicability of antitrust laws to situations involving a patent has been questioned, the ECJ acknowledged
these to be subject to article 101 TFEU as much as any other situation. A first look at article 101 TFEU reveals that there are four conditions to be
met for an agreement to be caught by the prohibition. While the first (agreement), second (between two or more undertakings) and fourth condition (affecting trade between Member States) are rather straightforward,
most of the discussion will revolve around the question question whether (and if so, under which conditions) reverse payment settlements are either by object or effect restraining free trade. To answer this question, the obvious
method would be to analyse the current case law on the matter and examine whether this judicial position is sustainable and appropriate. However, unlike
what is the case in the U.S., there is still no compelling case law on RPPS in
the EU. Although two cases are pending before the ECJ at the time this dissertation is written, the Court has not ruled on either of them yet.
The only guidance that leaves us, is the European Commission’s approach induced from its sector inquiry and infringement decisions. This will be analysed in heading 4.2 (infra). In heading 4.3, the Commission’s approach
will be examined thoroughly.
225 R. WHISH and D. BAILEY, Competition Law (7th edition), 118. 226 Case T-374/94, European Night Services v Commission [1998] ECR II-3141, § 5. 227 R. WHISH and D. BAILEY, Competition Law (7th edition), 144, citing the ECJ in case 22/78 Hugin Kassaragister [1979] ECR 1869, 1899.
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4.2. POSITION OF THE EUROPEAN COMMISSION 4.2.1. The pharmaceutical sector inquiry: final report
80. INITIATION OF SECTOR INQUIRY – Despite the Danish Competition
Authority already having expressed their concerns over Lundbeck’s RPPS in October 2003,228 it was not until 2008 for the Commission to formally seal the apprehensions with the launch of a sector-wide inquiry.229
Because it was obvious that the sector inquiry was in fact focussed exclusively on the practice of RPPS and with the debate in the U.S. having reached full-
speed, the EU Commission was expected to express at least a prima facie position on the (il)legitimacy of RPPS. With the publication of the sector inquiry’s final report however, the Commission left things up in the air.
“It is not the purpose of this sector inquiry to provide guidance as to the comptability of certain practices with EC competition law. The Commission will further investigate whether individual behaviour may have fallen foul of
the competition rules.” 230
81. CATEGORISATION – Although the Commission remained on the fence
regarding the legality of RPPS, it did provide a typification from which can
be reduced which settlements will attract most competition scrutiny. Having examined the settlements reported during the sector inquiry, the
Commission divided them into two main categories. Agreements that do not restrict generic market entry are categorised as ‘A-type’, whereas agreements that do restrict generic entry, are categorised as ‘B-type’.231Within the ‘B-type’
category of settlements, a subsequent distinction is made between agreements which do (‘B.II-type’) and those that do not contain (‘B.I-type’) a value transfer from originator to generic company.232
This leads to the following categorisation overview (see figure 4 below).
228 Danish Competition Authority (Case No. 1120/0289/39), Press Release, “Investigation of Lundbeck: Council Meeting of January 28, 2004”, in which the Authority displayed the timeline of proceedings. 229 On the basis of Article 17 (1) of Regulation 1/2003/EC, the Commission formally decided on January 25, 2008 “to initiate an inquiry into the pharmaceutical sector” because there were “certain circumstances that suggest that competition may be restricted or distorted in the pharmaceutical sector in Europe, such as a decline in innovation as measured by the number of novel medicines reaching the market and notable late
generic entry.” The Commission stated that it had indications that collusive agreements distorted competition as they “de facto extended patent protection”. For the full proclamation, read Commission Decision (COMP/D2/39.514) of 15 January 2008 initiating an inquiry into the pharmaceutical sector. 230 EU Pharmaceutical Sector Inquiry Final Report, §859. 231 EU Pharmaceutical Sector Inquiry Final Report, §741. 232 EU Pharmaceutical Sector Inquiry Final Report, §742.
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Figure 4: European Commission’s categorisation following its Pharmaceutical Sector Inquiry
Needless to say, ‘Type-A’ settlements will attract little or no antitrust scrutiny
as the chances for anticompetitive effects are considerably smaller. The same goes for ‘Type-B.I’ settlements,233 although there may be circumstances under which ‘Type-B.I’ may attract scrutiny nonetheless. For istance, when the
settlement contains restrictions that exceed the scope of the patent or, in the case of the so-called ‘sham patents’ 234, these settlements may turn out to be problematic after all.235
The Commission reiterated that the present categorisation has no legal value, stating that neither type of RPPS is presumed illegal, rather the legality
should be assessed on a case-by-case basis.236 Nonetheless, the categorisation does contain an important psychological element. A deterrent signal is sent to companies that they expose themselves to antitrust scrutiny if their
233 J. KILLICK, “Patent settlements as by object restrictions: a European approach, but is it the right one?” in D. EDWARD, I. Forrester: A Scot without Borders – Liber Amicorum, New York, Concurrences Review, 2015, 188. 234 European Commission Report of 9 December 2013, 4th Report on the Monitoring of Patent Settlements (period: January-December 2012, available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report4_en.pdf, §4. 235 P. L’ECLUSE (ed.), “Patent settlements, state of play”, 2012, 2. 236 EU Pharmaceutical Sector Inquiry Final Report, §763: “[...] any assessment of whether a certain settlement could be deemed compatible or incompatible with EC competition law would require an in-depth analysis of the individual agreement, taking into account the factual, economic and legal background.”
All settlement
‘A-Type’ Settlements
= No limitation on generic entry
Patent settlement does not restrict
either parties’ freedom to enter or leave
the market.
‘B-Type’ Settlements
= Limitation on generic entry
Patent settlement precludes generic
company from entering the market freely
with its own product.
‘B.I-Type’ Settlements ‘B.II-Type’
Settlements = No value transfer from originator to
generic
Patent settlement restricts generic entry,
but contains no value transfer.
= Value transfer or reverse
payment
Patent settlement does
restrict generic entry and
contains value transfer from
originator to generic company
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agreements fall among the categories less favourably described, since these are at risk of being unlawful.
82. TECHNOLOGY TRANSFER GUIDELINES – In 2014, the Commission
confirmed its position expressed in its Final Report on the Sector Inquiry and the monitoring reports that followed along.237 In its Technology Transfer
Guidelines, the Commission stated that non-challenge clauses in settlement agreements may be anticompetitive since
“the restriction of the freedom to challenge an intellectual property right is not part of the specific subject-matter of an intellectual property right and may restrict competition, for instance [...] where an intellectual property right was granted following the provision of incorrect or misleading information. Scrutiny of such clauses may also be necessary if the licensor [...] induces the licensee to agree not to challenge the validity of the technology rights
financially or otherwise.” 238
4.2.2. Infringement decisions
83. INVESTIGATIONS AND DECISIONS TO DATE – With the launch of the
phamarceutical sector inquiry, the Commission acquainted competition
scrutiny over RPPS. Concerns rose, yet clarification did not. With the Commission omitting to take a formal position towards the legality of RPPS and in absence of any ECJ ruling on the matter, legal uncertainty scourged
the drug market. Matters fell into place in 2013 when the Commission issued its first RPPS decision against Lundbeck and others, eludicating its position.
Although it was stated at the launch of the sector inquiry that no specific firms or transactions were under formal scrutiny, the Commission opened formal investigations against Lundbeck simultaneously with the publication of
the sector inquiry final report in 2009. Shortly after, subsequent investigations were opened against Janssen-Cilag and Servier Laboratories.
Since concluding the sector inquiry, the Comission has issued three infringement decisions on reverse payment settlements. In June 2013, Lundbeck and several generic manufacturers were fined for their settlement
agreement concerning the antidepressant citalopram.239 In December 2013, Johnson & Johnson subsidiary Janssen-Cilag and Novartis subsidiary Sandoz were fined for their agreement concerning the painkiller fentanyl.240 In July 2014,
the Commission penalized Servier and five generic manufacturers for a
237 D. GERADIN (ed.), “Reverse payment patent settlements in the EU and U.S.”, 2015, 19. 238 Communication from the Commission – Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, OJ 2014, C 89/3, §243. 239 Commission Decision (COMP/39.226), Lundbeck and others, C 3803 [2013], [herinafter:
“Lundbeck”]. 240 Commission Decision (COMP/39.685), Fentanyl (Johnson & Johnson/Novartis), C 8870 [2013], [herinafter: “Fentanyl”].
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sequence of agreements concluded to delay the market entry of generic versions to Servier’s perindopril.241
The following paragraph will further elaborate on these three cases. First, in a brief reproduction of the facts along with the decision of the Commission in
each of the three cases is displayed (A). Thereafter, the arguments that the Commission employs in the three infringement decisions are set out (B). a. Analysis of the infringement decisions
84. THE LUNDBECK DECISION – Being the the brand name manufacturer
of the blockbuster anti-depressant, Lundbeck held dosage and process patents
on citalopram.242 With the expiration date of Lundbeck’s patents closing in, several firms started manufacturing generic versions to citalopram in 2002,
preparing themselves to start selling as soon as the patents expired. Lundbeck thereupon initiated proceedings, claiming that the manufacturing infringed its process patents. Shortly after proceedings were initiated, all disputes were
settled. Lundbeck paid the generics a considerable amount of cash and offered them a lucrative distribution agreement in return for the latter to refrain from entering the market with their generic version.243 Lundbeck
furthermore bought the generic firms’ stock of the generic drug with the purpose of destroying it.
Except for one agreement,244 the Commission deemed all of Lundbeck’s agreements to be infringing article 101 TFEU. Lundbeck was fined for €93,8 million, while the generics received a total of €52,4 million in fines.245
The Commission considered the agreements to be presumptively illegal hence constituting a by object restraint and omitted to examine the real
anticompetitive effects the agreements effectuated. The Commission based its decision on the deliberate stifling intent which it deduced from internal documents of the parties.
“[...] the value transfer was designed to induce [the generic] to enter into the agreement and to give up its plan to enter the market independently. The analysis of the objective elements of the agreement moreover shows that the primary objective of the agreement was to ensure that [the generic] did not
enter the market.” 246
In coming to conclude that the agreements are by object anticompetitive, the Commission gave particular weight to the fact that (i) Lundbeck and the
241 Commission Decision (COMP/39.612), Perindopril (Servier), C 5044 [2010], [herinafter:
“Servier”]. 242 Lundbeck, nr. 3. 243 Lundbeck, nr. 218 and following. 244 The settlement with Generic manufacturer Neolab was not considered anticompetitive by the
Commission, see Lundbeck, nrs. 164 and 639. 245 Article 2 of the Lundbeck decision. 246 Lundbeck, nr. 802.
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generics were competitors when they concluded the agreements;247 (ii) the generic firms agreed to limit the market entry of their products248 and (iii) the
settlements contained a value transfer from Lundbeck to the generics which incited the latter to refrain from the market, rather than to compete.249
The Commission further neglected the presence of Lundbeck’s patent. The agreements may as well have had the intention to end an underlying patent litigation, yet according to the Commission, that consideration yields no
salvation as the primary objective of the agreements is to falsify competition. In this regard, the Commission argues that “an agreement to restrict competition
does not become legal simply because it may also have had other, legitimate objectives”.250
Lundbeck and all of the generic manufacturers that have been penalized have appealed the Commission’s decision to the ECJ, where the case is now
pending. 85. THE FENTANYL DECISION – A second infringement decision was issued
in December 2013. Scrutinized by the Commission was an agreement
between a Johnson & Johnson subsidiary (Janssen-Cilag BV) and a generic subsidiary of Novartis (Sandoz BV). Under the agreement, Johnson & Johnson’s originator division agreed to make monthly payments to Novartis’ generic
firm in exchange for the latter to refrain from the market itself and to promote Johnson’s fentanyl.251
The Commission considered the agreement to restrict article 101 TFEU and imposed a fine of €10,8 million on Johnson & Johnson and €5,5 million on Novartis.252
In its fentanyl decision, the Commission applied the same reasoning as it did in Lundbeck (supra, nr. 84). The Commission emphasized on the same elements,
namely the fact (i) that Novartis was at least a potential competitor of Johnson & Johnson at the time parties concluded the settlement; (ii) that the agreement included a “non entry mechanism” under which the monthly
payments would have ceased if Novartis or any other generic entered the
market and the consideration that Novartis indeed did stay out of the market;253 (iii) that the total amount Johnson & Johnson paid to Novartis
exceeded the latter’s expectations if it were to market their generic version themselves;254 and more importantly (iv) that the promotion services were undefined with Novartis carrying out only very limited promotion
activities.255 The Commission henceforth concluded that
247 Lundbeck, nr. 746. 248 Lundbeck, nrs. 763 – 766. 249 Lundbeck, nr. 789. 250 Lundbeck, nrs. 802 – 803. 251 Fentanyl (Summary), nrs. 1 – 3. 252 Fentanyl (Summary), nr. 17. 253 Fentanyl (Summary), nr. 12. 254 Fentanyl (final version), nr. 220. 255 Fentanyl (Summary), nr. 13.
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“[...] the analysis is confirmed by the intentions of the parties’. The agreement was designed to ensure that the generic product was kept out of the market and [Johnson] could maximise its profits. Johnson shared those supra-competitive profits with [Novartis]. The Commission therefore concluded that the agreement constituted a restriction of Article 101 by
object.” 256
Neither Johnson & Johnson nor Novartis have appealed the Commission’s decision.
86. THE SERVIER DECISION – In its most recent decision, the Commission
scrutinized a series of agreements between Servier, originator manufacturer of
perindopril and five generic firms. Although Servier had composition patents covering the largest part of perindopril’s production, the drug was not fully patent-protected. When Servier’s two most important patents on perindopril
expired, Servier launched a scheme to delay generic entry by (i) buying patentable technology that could be employed to produce perindopril hence extending its patent protection and (ii) concluding reverse payment
settlements with generic competitors in which Servier paid the generics considerable amounts of money to stay out of the market.257
The Commission imposed a fine of €331 million on Servier and a further €97 million on the generic manufacturers as it qualified the settlements as infringements of article 101 TFEU.258
Conforming its earlier arguments in Lundbeck and Fentanyl, the Commission found Servier’s agreements to be restrictions by object.259 However, although
the Commission reiterated that it is by no means obliged to demonstrate actual anticompetitive effects of by object infringements,260 it did examine them nonetheless “for completeness’ sake”.261
The parties subject to the infringement decision have filed an appeal to the
ECJ where the case is now pending.
b. Conclusion and summary of the Commission’s arguments
87. ANTICOMPETITIVE EFFECTS AND OBJECT – The Commission has
emphasized repeatedly that not every patent settlement that contains a limitation on either party is illegitimate, especially when these limitations do
not exceed the patent rights and when they are based on competing interests
256 Fentanyl (Summary), nrs. 14 – 15. 257 Servier, nr. 160 and following. 258 Article 7 of the Servier decision. The Commission also withheld an infringement of article 102 TFEU as it decided Servier had abused its dominant position. For a thorough analysis of the article 102 TFEU infringement, see Servier, nr. 2759 and following. 259 Servier, nr. 1225. 260 Servier, nr. 1112. 261 Servier, nr. 1671 and following.
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that relate directly to the strength of the patent. 262 Under the same conditions, even the existence of a value transfer for certain limitations are
not prima facie unlawful as “payments may [...] be instrumental to the finding of an
acceptable and legitimate solution for both parties”.263
Patent settlements containing a reverse payment, however, are more problematic. Especially when they come along with the commitment of the generic manufacturer to exit, delay or refrain altogether from the market,
such payments may in fact serve as ‘exclusion payments’.264 The Commission considers these settlements to be anticompetitive, as the commercial restrictions (i) go beyond the material scope of the patent, (ii) are not an
expression of normal contrary market interests and behaviour between competitor undertakings and (iii) harm consumers.
As to whether or not RPPS may consitute agreements that distort competition ‘by object’, the Commission is assuredly affirmative. The Commission argues that RPPS containing a stipulated delayed entry date for
the generic manufacturer, constitutes a market-sharing agreement which by its very nature has the object to reduce competition.
In considering RPPS to be infringements by object, the Commission puts weight on the following considerations: (i) The agreements’ obligations exceed the scope of the concerned
patent rights; (ii) The agreements’ terms do not definetely resolve the ongoing
dispute but merely delay generic entry;
(iii) The value transfer has an unexpected direction (reverse), constituting an exclusion payment (which it seems to be decisive in qualifying it as by object restrictive: the reverse payment serves as
an incitement for the generic to refrain from marketing its own product);
(iv) The claimed competition between originator and generic
manufacturers; (v) The real purpose of the agreements is to keep generic
manufacturers out of the market;
(vi) The absence of court litigation, which the Commission claims to be a prerequisite for a legitimate settlement.
Concludingly, the Commission applies the very simple standard that when an entity induces a competitor to stay off the market, it commits a per object
infringement. According to the Commission, RPPS match this description
because (i) the reverse payment serves as an inducement to refrain the generic from entering the market and (ii) brand name and generic companies are in competition with eachother regardless of any patent.
262 Lundbeck, nr. 638. 263 Lundbeck, nr. 639. 264 Lundbeck, nr. 640.
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88. REVERSE PAYMENT INDUCES THE GENERIC TO STAY OFF THE
MARKET – For an entity to ‘buy off’ the competition, an ‘exclusionary’
payment must be withheld. An exclusionary payment is either a cash payment or any other form of value transfer that is used to induce a
competitor to accept commercial limitations “which it would not, based purely on its assessment of the likelihood of infringing a patent and of invalidating any such patent,
have the same incentive to accept in the absence of such payment”.265 In each of the infringment decisions it has issued, the Commission considered
reverse payments to be exclusionary. First, the Commission believes that the payment itself reveals an exclusionary intent when parties cannot provide a
justification based on the merits of the patent.
“[...] the limitations the generic agreed to are likely to breach article 101 when they cannot be justified and do not result from the parties’ assessment of the merits of the exclusive right itself, but in particular from a transfer of value overshadowing this assessment and inducing the generic not to pursue
its independent efforts to enter the market.” 266
Secondly, the Commission deduces exclusionary intent from the size of the payment. Especially when the reverse payment exceeds the revenues the generic firm expected to earn if it were to enter the market with its own
product, the payment entices the generic not to compete.267
89. ORIGINATOR AND GENERICS FIRM ARE IN COMPETITION DESPITE
PRESENCE OF A PATENT – The Commission is of the opinion that, even in
spite of an existing patent that protects the production of the concerned drugs, generic and originator manufacturers are still (at least potential)
competitors, hence the prohibition of art. 101 (1) TFEU is not excluded.268 The Commission argues that, although a patent can legally restrain generics from launching a bio-equivalent drug, competition is not fully eliminated
because: (i) generics may find methods to produce a bio-equivalent generic
through ways not protected by any patent;
(ii) it is not a condition to obtain market authorisation that the generic drug does not infringe any patent. Generic drugs thus can enter the market and be in direct competition with originator drugs without
ever having had any discussion on a potential patent infringement. Rather, it is only when the originator successfully proves in a court of law and receives a final injunction that the concerned generic is
infringing its patent, that the generic is no longer a potential competitor because he will be judicially withheld from selling it; and
265 Lundbeck, nr. 640. 266 Lundbeck, nr. 641. 267 Fentanyl, nr. 220. 268 Lundbeck nrs. 610 – 614 and 741 – 756.
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(iii) the very nature of patent litigation (both infringement suits and the seeking of non-infringement declarations) is an expression of
competition as parties strive to defend c.q. obtain a market position.
4.3. THE (IL)LEGALITY OF RPPS UNDER ART. 101 TFEU
90. RECAP – In heading 4.1 of this dissertation, it has been discussed that the
prohibition of art. 101 (1) TFEU consists of four elements (supra nr. 73). There
must be (i) an agreement or concerted practice (ii) between two or more undertakings (iii) that has either the object or effect to distort free trade (iv)
between EU member states. It was made clear that while the first, second and
fourth condition leave only little room for debate, the anticompetitive object or effect is the centrepoint of discussion in a RPPS-setting.
In heading 4.2, the Commission’s approach on the third condition (anticompetitive nature) is set out. The Commission considers payments in exchange for a delay in generic market entry as ‘exclusionary payments’,
accounting to market sharing agreements, which are by object unlawful. Under this heading, it will be assessed using current legal theory and
principles of ECJ case law whether or not RPPS infringe article 101 TFEU hence whether the Commission’s approach can be affirmed. 4.3.1. Do RPPS restrict competition by object?
91. BY OBJECT: CRITERIA SET BY ECJ CASE LAW – Established case law
indeed confirms that there are some types of agreements whose
anticompetitiveness follows solely from their object.269Although agreements that restrict competition by object cannot be reduced to an exhaustive list,270 the burly consequences of a ‘by object’ – qualification271 make it obvious that
there are strict criteria for an agreement to be flagged ‘unlawful by object’. In Cartes Bancaires [2014], the ECJ ruled that the concept of ‘restriction by
object’ must be understood restrictively:
“[the concept of restriction by object] can be applied only to certain types of coordination, which reveal a sufficient degree of harm to competition that [...] by their very nature, are harmful to the proper functioning of normal
competition.” 272 (emphasis added)
269 R. WHISH and D. BAILEY, Competition Law (7th edition), 118, with reference to case law. 270 Case T-491/07, Groupement des cartes bancaires v Commission [2012] nyr, §146. See also Advocate
General Trstenjak’s statement in Beef Industry [2009]: “In my view, the notion of restriction of competition by object cannot be reduced to an exhaustive list either.” 271 The major consequences of being labeled ‘restriction by object’ are (i) the inability to enjoy any exemption, although they can still appeal to a potential art. 101 (3) TFEU application; and
(ii) that the Commission is not required to demonstrate the actual anti-competitive effects on the market. 272 Case C-67/13 P, Groupement des cartes bancaires v Commission [2014], nyr, §58.
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Citing its earlier case law, the Court in GlaxoSmithKline v. Commission [2009] then provided criteria for assessing whether an agreement is restrictive ‘by
object’:
“[...] must regard, inter alia, the content of the provisions, the objectives it seeks to attain and the economic and legal context which it forms part of.” 273
Hence it is the objective spirit of the agreement (rather than the subjective intentions of the parties) that must be considered for qualifying an agreement as a restriction by object. As the name itself reveals, it must be established
that the ‘object’ (the objective aim) of the agreement is to restrict competition. This criterium, however, has a stringent application. The Commission itself, citing established case law,274 stated in its Guidelines on the application of
Article [101 (3)] of the Treaty that:
“Restrictions of competition by object are that by their very nature have the potential of restricting competition. These restrictions have such a high potential of negative effects on competition that it is unnecessary to demonstrate any actual effects on the market. This presumption is based on the serious nature of the restriction and on experience showing that restrictions of competition by object are likely to
produce negative effects on the market (emphasis added).” 275
Resultantly, for an agreement to be qualified as ‘restrictive by object’, competition must be restricted ‘appriciably’. This may imply the requisite of any sort of quantitative analysis,276 though not in cases where the concerned
agreements contain “obvious restrictions of competition such as price-fixing, market-
sharing or the control of outlets.” 277
Making a long story short, when assessing if an agreement is restrictive by object, one must look at the provisions and objectives of the agreement as well as the legal context it forms part of. When doing so, only “restrictions which
by their very nature distort competition appreciably” can be considered as restrictive by object. Lastly, to establish whether such restriction distorts competition appreciably, there are two alternative criteria or tests. The anticompetitive
nature of the restriction must either be obvious or must be established using existing experience.
273 Case C-501/06 P, GlaxoSmithKline Services Unlimited v Commission [2009] ECR I-9291, § 58. 274 Case C-32/11, Allianz Hungária Bitzosûtó Zrt and Others v Gazdasági Versenyhivatal [2013], nyr, § 35. 275 Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of
the European Union to horizontal co-operation agreements, OJ [2004], C 11, 97, § 21. 276 R. WHISH and D. BAILEY, Competition Law (7th edition), 120. 277 Case T-373/94, European Night Services v Commission [1998] ECR II-3141, §136.
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92. OBVIOUS VIOLATIONS – Obvious restrictions are those whose market
distortive effect, even absent any quantitative analysis is not questionable. The ECJ has named market-sharing and outlet-control agreements as
examples of ‘obvious per object restrictions’. 278 In his opinion to the GlaxoSmithKline case [2009], AG Trstenjak described these obvious restrictions as “restrictions of competition by object of which the negative interferences with market conditions are so clear that the agreements can be presumed, without any detailed market
analysis, to have a restrictive effect.” 279
In its infringement decisions, the Commission claims that RPPS are market
controlling agreements in the sense of art. 101 (1)(b) TFEU, hence
constituting an obvious by object restriction. To support this claim, it appeals to the Irish Beef case where the ECJ condemned a mechanism intended to
reduce overcapacity in the beef sector through arrangements that obligated undertakings who stayed in the market to pay financial compensation to undertakings who agreed to leave the market. The Court found the
mechanism to be an obvious restriction by object.280 It remains doubtful, however, if the ECJ will follow the Commission’s
reasoning. In fact, while the Irish Beef arrangements indeed were clear-cut market limiting agreements, RPPS are not. An analogous application moreover seems not compelling considering both the factual and legal
differences between both cases. First, in Irish Beef, a sector wide arrangement was installed for an undefined period. RPPS, on the other hand, are typically short-term agreements that seek to settle a specific dispute between one
originator and one or more generic manufacturers. Second, while the Irish
Beef arrangements reduced competition that would otherwise definitely exist, one could argue that RPPS do not exclude any (lawful) competition since the
originator manufacturers hold patents that give them the right to exclude infringing drugs from competing.
The legal scholary is divided on this point. Some authors share my opinion that RPPS can hardly be considered to be restrictive by object.281 Yet others, in particular WHISH and BAILEY, disagree with me and uphold a loose and
analogous application of art. 101 (1)(b) TFEU to similar agreements.282 The Irish Beef case aside, chances are small that the ECJ will flag RPPS as
‘obvious per object restrictions’ altogether. In fact, certainly in the case of settlements that do not exceed the scope of the concerned patents, the
278 Case T-373/94, European Night Services v Commission [1998] ECR II-3141, §136. 279 Opinion AG Trstenjak, Case C-501/06 P, GlaxoSmithKline Services Unlimited v Commission [2009] ECR I-9291, §92. 280 Case C-209/07, Competition Authority v. Beef Industry Development Society Ltd and Barry Brothers Meats
Ltd [2008], ECR I-8637, §33. 281 GERADIN, BINSBURG and SAFTY, for example, state that “the effects of reverse payment patent settlements can vary a lot in scope and nature, so that they are unlikely to be clear-cut and therefore should be proven”. For their full analysis, read D. GERADIN, D. GINSBURG and G. SAFTY, “Reverse
payment patent settlements in the European Union and the United States”, George Mason University Law and Economic RPS 2015, 16 – 24. 282 R. WHISH and D. BAILEY, Competition Law (7th edition), 123.
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chances of a real market injury is very small. Even settlements whose restrictions are out of the patent’s scope do not necessarily have an
established restrictive effect, and even if it did, it is certainly not an obvious one. The fact that it took the Commission more than a decade to formulate a standard, might just be the proof of that.
Lastly, the Commission supports its claim by assuming without any question that RPPS are “pay for delay” deals, insinuating the anticompetitive intentions
of the parties and the spirit of their settlement. However, although some deals might indeed be intended to artificially extend a (weak or invalid) patent monopoly, one cannot simply judge a book by its cover and presuppose a
malicious intent at every patent settlement that contains a reverse payment. In fact, there are many other motives plausible that can form the basis of a settlement, such as risk-reduction, cost-saving, resource allocation, etc.283 In
the context of ongoing patent settlements, the management of an originator manufacturer might prefer a settlement with a certain profit-flow over a court ruling with an uncertain outcome.284 The originator might be willing to pay
for this risk reduction, which then forms a genuine motive behind the reverse payment. In this case, the term “pay for certainty” is more suited than “pay for
delay”. Here, the reverse payment is not a consideration for a delay in generic
entry beyond any expected litigation outcome.285 Rather, the payment is a sacrifice for risk controlling, which is a legitimate motive. Criteria to discover the genuine spirit of the settlement are (i) the size of the reverse payment; (ii)
the scope of the patent; (iii) the fact that the settlements are based solely on parties’ assessment of the strength of the patent; (iv) etc.
The foregoing plead clearly shows that RPPS are far from obvious per object infringements.
93. EXISTING EXPERIENCE – As said, agreements and practices may also be
qualified ‘restrictive by object’ not because their anticompetitive nature is obvious, but because existing experience conclusively establishes so.
However as of today, there is no ‘existing experience’ of RPPS being anti-
competitive by object. So far only three infringement decisions have been issued, while no court ruling has confirmed the anticompetitiveness of these
agreements. It can be concluded that RPPS cannot be considered to restrict competition
‘by object’. The fact that the Commission needed almost 10 years to issue a
283 It should be emphasized, however, that a multitude of agreement objectives of which both legitimate and illegitimate, does not impede an agreement from being found restrictive by object, see Case 110/82, NV IAZ International Belgium and Others v Commission [1983], ECR 3369, §25. 284 The fact that brand name companies prefer settlement over litigation, may not surprise. Apart from the flaws in the patent system that deters companies from proceeding patent litigation (supra, nrs. 21 – 26), considerations such as litigation costs, impact on stock price, the risk to follow-on price reductions, etc. discourage brand name companies from litigating. 285 K. DRAKE, M. STARR and T. MCGUIRE, “Do reverse payment settlements of brand-generic patent disputes in the pharmaceutical industry constitute an anticompetitive pay for delay?”, NBER 2014, 13.
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legal standard proves that they are far from ‘obvious restrictions’. There is moreover not any existing experience present either that can convincingly
establish that RPPS are by nature appriciably injurous to free competition. Therefore, the Commission has to prove the anticompetitive effects of each agreement they deem illegitimate.286
4.3.2. Do RPPS restrict competition by effect?
94. FULL ASSESSMENT OF THE AGREEMENT, THE PRODUCT AND THE
MARKET – Where it is not established that an agreement restricts
competition by object, competition authorities must demonstrate the actual
restrictive effects it effectuates.287
When ruling on the anticompetitive effects of an agreement, the court has to analyze extensively the market context in which the agreement was concluded, as well as the products that are covered by the agreement.
“[...] account should be taken of the actual conditions in which it functions, in particular the economic context in which the undertakings operate, the products or services covered by the agreement and the actual structure of the
market concerned.” 288
Accordingly, the court ruling on the lawfulness of a RPPS has to consider elements such as validity, strength and scope of the patent. In contrast with a
per object approach, these elements have to be assessed factually, rather than presumptively. On that account, the Commission bears the burden to prove substantially that the patent lying underneath the RPPS is either invalid or
not infringed, or alternatively, that the commercial limitations included in the RPPS exceed the exclusionary potential of that patent.289
When doing so, the Commission will have to appeal to both new (e.g. a patent scope analysis) and established principles in trying to establish the patent’s weakness.
95. THE COUNTERFACTUAL METHOD – Only when the Commission has
satisfied this burden of proving the patent’s weakness, the court will be adequately suited to apply the test used to determine whether an agreement
has a restrictive effect on free trade, i.e. the ‘counterfactual test’.290 In
286 Note that in its infringement decision in Servier, the Commission, although still claiming a ‘by object restriction’, tried to prove the anti-competitive effects of the agreements concerned. 287 R. WHISH and D. BAILEY, Competition Law (7th edition), 123. 288 Case T-373/94, European Night Services v Commission [1998] ECR II-3141, §136. 289 When arguing that a RPPS is a per object restriction, the Commission presumes the invalidity
or weakness of a patent because on the grounds that the inducement of the reverse payment reveals such a weak position. When determining the anticompetitive effects, however, the Commission will have to prove substantially (rather than deduce it from other elements) that the concerned patent is invalid or weak. This is a much more burdensome effort for the Commission.
See R. WHISH and D. BAILEY, Competition Law (7th edition), 120. 290 J. BOURGEOIS and D. WAELBROECK, Ten years of effects-based approach in EU competition law, Brussels, Bruylant, 2013, 211.
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applying this test, the court will consider what the situation would have been if the agreement would not have been concluded.291 After comparing that
fictuous situation with the reality (in which the agreement did occur), the court can spot the restrictive effects that took place. 96. ARE PATENT OWNERS IN COMPETITION WITH PATENT INFRINGERS? –
For an agreement to be qualified as ‘restricting competition by effect’, there
must not only be a restrictive effect (supra, nrs. 94 – 95), that restrictive effect must also reflect on the existing competition. For this second element to be fulfilled, parties to the agreement must be in (actual or potential) competition
with one another.292
The Commission does consider originator firms with a patent to be at least in
potential competition with generic firms that may potentially infringe their patent (supra, nr. 89). Although I do not disagree with the Commission that indeed potential competition may be present in certain situations, in
particular when the originator firm only has process patents on its drug,293 questions may arise if there is any competition altogether allowed in the event
a drug is fully patent-protected.294 However, the discussion whether generic competition is actually allowed, is not paramount in the ‘by effect analysis’ because this is a matter that emanates directly from the patent’s validity,
strength and scope, which have to be analyzed to withhold a restrictive effect in the first place.
97. CONCLUSION – If it wants a court to qualify a RPPS as a ‘restriction by
effect’, the European Commission (or any national competition authority) that prosecutes the settlement will have to demonstrate its actual distortive effects on the market.
As courts will analyze all elements present, the legitimacy of a RPPS is entirely dependent on (i) the terms of the settlement itself, in particular
whether its restrictions exceed the exclusionary potential of the patent; (ii) the strength and validity of the patent and (iii) the extend to which the prosecuting authority is able to demonstrate any flaws therein.
Of course, there are situations in which it is far more likely than others that a restriction will be asserted, in particular when the RPPS exceeds the patent’s
scope (e.g. where the agreed date of generic entry is after expiration of the patent). Apart from those cases, though, the entire analysis will lean on the
291 Case T-328/03, 02 Germany GmbH & Co v. Commission [2006] ECR II-1231, §§67 – 71. 292 R. WHISH and D. BAILEY, Competition Law (7th edition), 127. 293 In the event that the originator firm only has process patents (hence not composition or dosage patents) on its drug, potential competition may be present as it is not excluded that the
generic firm finds methods to manufacture the drug in a way that does not infringe the originator firm’s process patent. 294 In the event that (the composition of) a drug is sufficiently patent-protected, questions may arise as to whether one must look at either the legal situation (in which the patent lawfully
excludes any competition) or the reality (in which generics enter the market in spite of the patent). Entering the market as a competitor does not necessarily mean that this competition is allowed.
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evaluation of the patent, the settlement and the economic circumstances it was concluded in. Since these elements are different in each case, its legal
assessment is, too. All in all, it is possible for a RPPS to be found restricting competition by
effect, yet one cannot say that RPPS are (in general) restricting competition by effect.
4.4. CONCLUSION
98. RPPS UNDER EU ANTITRUST LAW: SUMMARY – Article 101 TFEU
prohibits agreements between undertakings that have the object or effect to prevent, restrict of distort free trade between Member States. For the prohibition to be triggered, the restrictive object or effects are alternative
requirements. If an agreement is found to be a restriction by object, its distortive effects do not have to be demonstrated.
After having thoroughly examined the problems RPPS cause in the EU pharmaceutical sector, the European Commission started prosecuting them. Because the European Court of Justice has yet to rule its first RPPS case,
there is no case law dictating a specific approach to assess the legality of RPPS.
In all of its three infringement decisions, the Commission proclaimed that RPPS are restricting competition by object. It is rather unlikely, however, that the ECJ will affirm this position. First, the Commission’s arguments are
unconvincing as they are based on the circular reasoning that the originator company settles because it has a weak patent, while the patent’s weakness could be reduced from the fact that the company settles. Second, for an
agreement to restrict competition by object, its anticompetitiveness must be either obvious or resulting from established experience. Not only is there in absence of an ECJ ruling no established experience present, its restriction is
not obvious either. The Commission may have shot itself in the foot hereof
when stating in 2004 that RPPS fall into “a legal grey zone and that it is unclear
how close they are to the black zone”.
Chances are therefore real that the ECJ will consider the actual anticompetitive effects RPPS effectuate. When doing so, the Court will have to take count of all the elements substantially. The most important role in this
analysis befalls on the validity of the patent and whether or not it is infringed by a generic market entry. Yet one could question whether a judge ruling on an antitrust infringement is an adequate forum to assess matters of patent law
in. Be that as it may, while it is likely (though not by any means certain) that
RPPS are not to be found restrictions per object, they are not restrictions by effect, either. Whether these settlements do indeed run foul of competition law, must be assessed on a case-by-case basis.
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5. FINDING THE CURE: SUPRESSION OR PREVENTION OF
RPPS
99. THE POLICY TO SUBDUE – We have seen that after the arise of RPPS,
authorities have tried to quell them through prosecution. Penalties have been imposed, court rulings have been issued and legislative proposals have been submitted. It strikes me that all of the three branches of the trias politika have
chosen for suppression of RPPS, rather than preventing them. It is no secret that the U.S. Hatch-Waxman Act and inefficient EU patent
laws are the reason these settlements emerged in the first place.
“Reverse payment settlements are particularly to be expected in the drug-patent context because the Hatch-Waxman Act created an environment that
encourages them.” 295
– 2nd Circuit Court, In re Tamoxifen.
Should it then not be better to tackle the problem at its roots? Certainly in the EU, there is room to reform current patent laws by (i) improving the efficacy
and uniformity of patent litigation and (ii) introducing the unitary EU patent along with the Unified Patent Court.
Although things look less optimistic in the U.S., there are still plenty of amendmends to think of. The U.S. legislator could for example amend the Hatch-Waxman Act to the extend that the filing of a Paragraph-IV
certification would not just constitute a technical patent infringement, but makes the generic liable to pay damages, too. 100. FINDING A BALANCE: IS EARLY GENERIC ENTRY THE ONLY
SOLUTION? – Moreover, RPPS are a thorn in the governments’ side because
they are claimed to delay generic market entry. Early generic market entry is promoted by governments because it contributes to attaining their policy of safeguarding access to (affordable) medicines (infra, nr. 10). This is an
objective that can be achieved by many other means, too. For example, why does the majority of the EU Member States still lack more stringent laws obliging doctors and pharmacists to dispense the cheapest available drug?
Why have authorities on both sides of the Atlantic not looked at the role reimbursement and insurance systems can play in the debate? While these measures would not conduce early generic market entry, they will surely
contribute to cheaper medicines without risking to overlook other important policies such as the promotion of R&D and the protection of IP.
Governments can prosecute RPPS as much as they want, but if they do not compensate the early generic entry they are yielding for with measures like these, they risk losing out completely on R&D of new drugs. I reckon both the
market and the authorities would welcome studies that estimate the impact of
295 In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187, 193 (2nd Cir. 2006), at 252.
LAURENZ BOVÉ
Jura Falconis, Jg. 53, 2016-2017, nummer 4 752
a severe RPPS suppresion policy on the development of new drugs as it could render the environment unfit for originator companies to survive in.
That is something to keep in mind for authorities when they prosecute RPPS. Antitrust laws are devised to enhance consumer welfare. However consumer
welfare is not only related to low prices or purchase power, it also dwells on product quality, diversity and choice.296
On that note, reverse payment patent settlements might just be a bitter pill to swallow.
296 J. WRIGHT, “The goals of antitrust: Welfare trumps choise”, in Fordham Law Review 2013, Vol. 81, 2407.
A BITTER PILL TO SWALLOW:
THE LEGALITY OF REVERSE PAYMENT PATENT SETTLEMENTS
753 Jura Falconis, Jg. 53, 2016-2017, nummer 4
6. CONCLUSION
After close examination of the pharmaceutical market, it became clear that its regulatory regime is incongruous with the business model originator pharmaeuticals dwell on. The U.S. Hatch-Waxman Act and the European
patent law system encourage an early market entry of generic drugs, which is lethal for the originator company seeking to recover the enormeous R&D costs. As a consequence, reverse payment settlements started to loom. It did
not take long for these settlements to raise concerns as to whether they run foul of antitrust laws.
The debate started in the United States. The FTC immediately expressed its vexation and proclaimed these settlements to be illegal per se. The courts, on their part, were less consonant which led the U.S. case law on RPPS to
conflict. The Supreme Court’s landmark Actavis ruling put an end to the conflicting case law and dictated courts to apply the rule of reason test to assess the legitimacy of RPPS.
Although competition authorities have been aware years ahead, it was not until 2007 for the issue to become center-staged in the EU. It took a sector
wide inquiry of two years for the European Commission to realize that the pharmaceutical market was flawed. After publicizing its final report, the Commission started to investigate and penalize individual settlements. In
each of its decisions, the Commission classified RPPS to be by object restrictions of free trade. However, profound consideration of EU antitrust theory reveals that the Commission’s position is questionable to say the least.
Two of the Commission’s decisions have been appealed to the European Court of Justice where they are now awaiting judgment. Hence it is very much possible for the Court to reject a by object approach and to consider
whether RPPS restrict competition by effect, instead. Along these lines, it can be concluded that after nearly two decades of legal
polemic, the U.S. judiciary has chosen to apply the most open standard in assessing RPPS. It is not unlikely that the ECJ is on the verge of doing the
exact same thing. This might be an unsatisfying conclusion in terms of legal certainty. However we should not trick ourselves into thinking this is the last page of the story. So far, the discussion has almost exclusively revolved
around the question whether or not RPPS are presumptively illegal. Now it is clear that RPPS are too complex to be considered per se c.q. by object illegal, a second wave of case law will chew on the elements and features of
settlements that effect the market restrictively. It is moreover not excluded that legislation may be adopted which could change the course of the discussion entirely.
The first chapter may be finished, the book is definitely not.