WELCOME TO CHARLES RUSSELL SPEECHLYS.
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On 8 September 2016, the EU General Court ruled against appeals by pharmaceuticals giant Lundbeck and several producers of prospective generic alternatives to its citalopram medicine for treating depression and related disorders. The Court affirmed the Commission’s findings that agreements involving payments to the generics manufacturers in exchange for commitments not to sell their products (and, indeed, to destroy existing stock) constituted infringements by object (i.e. regardless necessarily of their effects) of the prohibition on anti-competitive agreements under Article 101(1) of the Treaty on the Functioning of the EU.
In particular, the Court rejected Lundbeck’s argument that at the time the agreements were entered into there was no realistic prospect of the generics producers entering the market for the relevant pharmaceuticals. The agreements concerned citalopram, Lundbeck’s top-selling product, in respect of which its basic molecular patent had expired in (at the latest) 2003, with only a handful of related process patents remaining in order to provide limited IP protection. The Commission’s finding had been that Lundbeck had made very substantial lump sum payments to the generics, bought out their stock of rival products solely in order to destroy it and given assurances over profit shares in a distribution agreement concerning citalopram. Through two such agreements with each of Merck and Arrow, and further agreements with Alpharma and Ranbaxy, Lundbeck secured commitments from the generics producers to remain out of the market for their duration (2002 to 2003), without any guarantee as to their ability to enter thereafter.
The generics were fined between €9 million and €20 million each, whilst Lundbeck was handed a penalty of €93.8 million.
The Court considered Lundbeck and the generics’ arguments but concurred with the Commission’s finding that the expiry of Lundbeck’s original chemical patents had seen various producers become very active in developing prospective rival drugs in order to become the first rival to enter the market for the treatment provided by citalopram. Importantly, the Court supported the Commission’s conclusion that it was economically viable for the generic producers, regardless of whether it may or may not in each case have been the respective firm’s subjective intention to do so at the time, to enter the market. It did not matter that patents are presumed valid until expressly revoked or declared invalid by a court or regulator, the real possibility remained that prospective competitors would enter rival products onto the market, even if this may have carried a ‘risk’ of patent infringement.
The Commission had, the Court said, satisfactorily and comprehensively assessed the objective evidence as to how realistic it was for generic competitors to enter the market, including in relation to the investments and time spent in preparing for the launch of new rival medicines. It also confirmed the Commission’s finding that the generics had a sufficiently strong possibility of being able to develop, sufficiently quickly, a generic rival version of citalopram without infringing any remaining patent protections Lundbeck enjoyed.
As the Court pointedly remarked, it would have been rather surprising for Lundbeck to have agreed to pay several million euros to the generics producers involved if there was no more than a theoretical risk that they would otherwise enter the market and contest citalopram’s existing hegemony.
The Court also backed the Commission’s decision that the settlement agreements between Lundbeck and its would-be generics rivals constituted object infringements of competition law – that is, infringements whose conscious purpose entailed a breach of Article 101(1), irrespective of their effects. This was because they involved the exclusion of Lundbeck’s counter-parties from the market, meaning that through sizeable reverse payments Lundbeck was able to exchange the uncertainty of whether it might be able to block its rivals through patent enforcement litigation for the guarantee that the generics would not attempt to compete at all (at least for the duration of the agreements, and seemingly for an indefinite period thereafter, also).
Indeed, the Commission was furthermore correct to highlight the disproportionate scale of the sums being paid by Lundbeck, which in turn gave a clear indication as to the purpose of the agreements, noting in particular that the amounts appeared to correlate with those profits the generics would have anticipated generating had they instead entered the market and achieved sales upon expiry of Lundbeck’s patents. The Court was also satisfied that the Commission had correctly targeted only those agreements whose nature and purpose was to agree a payment in exchange for non-entry, as opposed to genuinely resolving the underlying patent dispute.
Fundamentally, the Court rejected Lundbeck’s assertion that the agreements, and the restrictions they contained, were objectively necessary in order for it to protect its IP rights; rather, it could have brought proceedings for infringement, where it considered appropriate, before competent courts and regulatory bodies in the affected countries. There were also no grounds or precedents for ruling that a patent-related agreement, or one to settle a patent dispute, ought to be exempt from competition law, with Article 101(1) making no distinction between agreements ostensibly designed to resolve litigation and those entered into for other purposes.
The Court was also clear in emphasising that the Commission was fully entitled to evaluate the character of the agreements concluded with the generics within the context of Lundbeck’s plan to bring about a delay in the market entry of generic rival products onto the market. Whilst not all of its actions in pursuing this objective may in isolation have been unlawful, it was however appropriate that the agreements and their propensity to restrict competition be assessed in light of the wider context in which they were entered into.
Finally, the Court also dismissed claims that the Commission had:
Having found no flaws in the Commission’s finding of infringement against Lundbeck and the other appellants, the Court also dismissed their claims that the Commission had incorrectly imposed and calculated their fines. Firstly, the Commission was right to regard it as foreseeable that the arrangements entered into could be deemed to violate Article 101(1). Secondly, the level of the fines was appropriate, with the Commission correct in labelling the infringements “serious”, applying the fine over the entire period over which there remained the potential for (not just the realisation of) generic competition, adding a deterrence mark-up (in light of the agreements amounting to a form of ‘market sharing’ or ‘out-put restriction’) and rejecting any plea in mitigation, on the basis that Lundbeck ought to have foreseen the potential for competition law proceedings and had entered into the agreements with the intention of restricting competition rather than merely being negligent as to the possibility of infringement.
The outright failure of Lundbeck’s appeal in every aspect serves as a powerful reminder of the Commission’s powers to impose severe penalties for infringements of competition law. In particular, pharmaceutical producers and, indeed, companies throughout various innovative sectors of industry should remember that when the question of patent infringement arises, any temptation to leverage present cashflow and ‘buy’ potential competitors out of the race should be resisted – failure to do so will be clamped down upon hard by the regulators.
If you should have any queries regarding the issues raised in this article, please do not hesitate to contact our EU & Competition team.