This paper – which can be found here – contains the reflections of a number of legal scholars about European decisions regarding reverse settlement payments (also known as “pay for delay” agreements).
Reverse settlement payments consist of payments by the owner of IP rights to entities that are challenging such rights in court – and they are particularly important in the pharmaceutical sector, where producers of generic drugs may challenge the IP of branded drugs, and the owner of the drug may pay the generics’ company not to challenge his/her/its IP (and, thus, not to enter the market). As noted in the introduction: “Schemes of this nature are bound to set off alarm bells in the mind of the antitrust erudite. Delaying the entry of would-be competitors would almost certainly entail pushing back the benefits typically derived from a competitive market, the very ones that competition law was designed to protect. And yet the fact remains that, when reverse payment agreements are entered into, the generics manufacturers are not actual competitors of the patent holder. Unless they infringe the IP rights of the originator, the generic version of the drug will only hit the market once the basic patent is no longer in force. To what extent, therefore, should the application of competition extend to a future threat which may never materialise?”
This has been the subject of different approaches across the world. In the US, the leading case is Actavis. In it, the Supreme Court ruled that reverse settlement arrangements could be challenged under antitrust law, but subjected such agreement to a rule of reason analysis. In Europe, on the other hand, the EU General Court (GC) in Lundbeck held that these agreements are object restrictions under Article 101(1) TFEU, and the CMA also decided in a recent case (currently under appeal) that such practices are ‘by nature antithetical to the competitive process’.
What makes these “decisions particularly interesting is that they rely almost entirely on the fact that the generics producers are potential competitors of the originator firm who is in possession of the patent. The concept of potential competitors and its boundaries has thus gained a pivotal role in the application of competition law to reverse payment agreements.” – and been subject to some criticism (e.g. can the notion of potential competition really be stretched as far as to include situations in which a patent would have to be infringed in order to compete?).
The paper (which I assume contains contributions to a seminar) provides a number of approaches to this topic:
- Niamh Dunne (LSE) explores the logic behind the protection of future competitors. She notes that potential competition is firmly established as a relevant parameter within the context of Article 101 TFEU, and that it requires “real concrete possibilities for the undertakings concerned to compete among themselves or for a new competitor to penetrate the relevant market and compete with the undertakings already established.” To demonstrate such ‘real concrete possibilities’, the likelihood of prospective competition must be more than ‘purely theoretical’ and not ‘unrealistic’. Entry must therefore represent an ‘economically viable strategy’ for the would-be competitor. Potential competition can be said to exist, therefore, when even absent a current presence on the market there is a realistic possibility of new entry that acts as a competitive constraint on existing actors.
While apparently assuming that the agreements in Lundbeck obviously harm consumers, she nonetheless questions: (i) the characterisation of pay-for-delay agreements as restrictions by object, since “the counterparties to the pay-to-delay agreements did not yet compete in the markets concerned, nor was there any guarantee that entry, if attempted, would have been successful”; and (ii) the logic of refusing to accept that the mere existence of an IP right, the scope of which ostensibly encompasses the market activity subject to a claim of potential competition, could be determinative of whether and to what extent such competition can be said to arise (in other words, disputing the Court’s apparent conclusion that potential competition can exist even where competition would—or at least might—involve violation of validly-maintained IP rights).
Her piece then builds on this to look at the extent to which competition law can and should safeguard potential competition. She notes that: “A lessening of potential competition is a concern for competition policy [only] where it stems from artificial interference with the otherwise organic competition process”. (I would note here that one would presume such process to be lawful – and yet, under Lundbeck the protections of EU competition law are not restricted to unequivocally ‘lawful competition’ as such!) Under Art 102, there are various examples of exclusionary practices where the use of financial transfers to exclude competition are prohibited (e.g. exclusivity rebates, certain supply contracts that are excessive in scope and duration), or where companies are required to take into account of the impact of their behaviour on their competition. So Lundbeck could be added to these decisions.
We then move on the an analysis of how potential competition aligns with concerns regarding the maximisation of consumer welfare. The principal difficulty is that restricting potential competition does not deprive today’s consumers of alternative sources of supply, although it may restrict the options available to tomorrow’s consumers. To deal with this, she sees two ways forward: (i) to focus on the current contribution of potential rivals to competition within the relevant market; (ii) to focus on the nature and quality of the potential rival’s future contribution to competition, if and when entry is attempted.
This is a good breakdown of the law as it stands, even if I’m not really convinced by the efforts to justify the legal status quo. In particular, I would point out that the examples provided to support Lundbeck – in, particular, that there are per se prohibitions (e.g. exclusive rebates) under Art. 102 and that there is a “dominant company duty” to take into account the impact of one’s conduct on one’s competitors – are amongst the most controversial elements of EU competition law . The author seems to hold similar doubts when she points out that there can be said to exist “a disjuncture between the orthodox understanding of the object category and its application in Lundbeck, which calls into question the conclusion that such arrangements should be considered harmful ‘by their very nature” – but this is just before concluding that: “Although at first glance perhaps somewhat conceptually problematic, therefore, the antitrust treatment of potential competition within the recent Lundbeck case in fact reflects a nuanced understanding of the interplay of competitive forces—actual and potential—within the market concerned”.…
Having said this, this is as solid an explanation and defence of the law on potential competition under EU law as you will find – even if it may be attempting to make lemonade out of some rotten lemons.
- Knut Fournier (Leiden, HK NCA) engages in a comparative analysis of US and EU approaches. The piece begins with a first section on the state of the law on pay-for-delay agreements in the US, including the legislative and regulatory framework surrounding the approval of generic drugs – including a history of the regulatory framework applicable to generic drugs up to the adoption of the Actavis decision, which applied the rule of reason to pay-for-delay agreements.
The second section then discusses how the notion of potential competitor was approached in a merger context in the US, where it originally developed in the 1960s. This section notes that potential competition has not really taken root outside the field of merger control, and even in this field is mainly used as a “shield” against antitrust enforcement (e.g. a situation akin to lower barriers to entry).
The third section looks at potential competition in Sherman Act enforcement, including in pay-for-delay cases and in the U.S. v Microsoft judgment – the most high-profile and most detailed discussion of potential competition in an antitrust context in the US.
The fourth part argues that the reason why the notion of “potential competitor” is not a central factor in pay-for-delay enforcement is that US courts and enforcers focus instead on a company’s perception of nascent competition, which can be uncovered through procedural tools such as discovery, depositions and cross-examination.
This is an interesting, if snot particularly deep overview of the differences between the EU and US on reverse payment settlements and potential competition. The most interesting (if not express) takeaway is how thorny substantiveissues under one system (EU) can be reconceptualised as evidentiary / procedural matters in another jurisdictions (USA).
- Sofia Pais (Porto Catholic University) addresses the intersection between competition and patent law. Her paper begins from the observation that the scope of a patent right, its commercial value and its validity are contingent questions. While only a small number of patents—about 0.1 per cent—is challenged in court, of those that are challenged around 50 per cent are deemed to be invalid in patent litigation.
She thus adopts Lemley and Shapiro’s theory of probabilistic patents, which refuses to see patents as well-defined property rights giving their owners a monopoly over a market, but perceives patents instead as merely granting a right to IP owners to try to exclude entrants from the market. From this perspective, the owner of a patent only has a probabilistic right, and is not entitled to conclude an agreement that would harm consumers. The relevant standard here is whether: ‘a settlement would leave consumers as well off as they would have been from ongoing patent litigation’. Furthermore, ‘a generic entrant would still be seen as a potential competitor if there is a sufficiently high probability that it would actually prevail in litigation and therefore be able to enter the market’.
The author then then goes on to discuss the Lundbeck case and the concept of potential competitor in parts III and IV. In part V, she discusses how not all exclusivity rights are equal as regards potential competition. While some exclusive rights granted by the State exclude potential competition, the validity of others – such as patents – is uncertain. As a result, she considers that the strength of a patent will be relevant to findings of whether patent settlements are anticompetitive – and that the perceived strength of an IP right can be assessed by reference to the dimension of the payment made by the patent holder. This is perceived to have been the approach by the EU under Lundbeck, but also in the US under Actavis where the Supreme Court held that “the presence of a significant reverse payment in a patent settlement agreement can provide a “workable surrogate for the weakness of a patent, without a court having to carry out a detailed analysis of the validity of that patent”.
This is a really good attempt to provide a normative foundation to cases on reverse settlements. It is true that it could try to provide greater normative guidance regarding the relevant standards (e.g. how strong must a patent be perceived to be in order to exclude the possibility of potential competitors? How does one measure the different impacts on welfare of settling a case and engaging in IP litigation?), but it sets out a clear framework that is able to explain the law and can guide its development and application in similar cases.
- Derek Ritzmann, (Compass Lexecon Hong Kong and former Chief Economist of the HK NCA) tries to provide an economic perspective that brings some clarity to the concept of “potential competition” based on the theory of contestable markets.
His paper begins by providing an overview of the Lundbeck case, with a focus on the threshold issue of which companies are “actual or potential competitors”. The second section, arguably the most interesting one, outlines some relevant aspects of the economics of potential competition. He provides an overview of the original literature on barriers to entry (Bain, etc.), before moving to the impact that game theory and the development of industrial organization economics has had in refining our understanding of the various mechanisms that may affect the contestability of markets. He focuses particularly on contestable market theory and on the various conditions which much be fulfilled in order for it to apply (or, more practically, the various obstacles that may arise to the perfect contestability of markets).
He concludes by explaining how the legal concept of “potential competition” is devoid of meaning unless informed by economic thought. This gives rise to the possibility for analytical and doctrinal inconsistency arising from analogous fact scenarios.
This is a very interesting paper. However, since he does not outline how contestable market theory should be applied to reverse payment cases or even discuss the specific elements of that theory that may be relevant here, I remain somewhat sceptical of claims that economic theory would avoid inconsistency even in the same case, let alone in analogous fact scenarios. This should not be understood as an argument for ignoring economic theory in cases like this. I’m just sceptical of claims that “if you just apply economic theory, the result will be clear, coherent and simple to obtain.