This post contains a fairly long discussion, so those who are familiar with the case may want to skip it.
This decision – which can be found here – concerns a pay for delay case and identifies a number of interesting questions regarding this type of conduct – some of which were referred to the Court of Justice of the European Union (CJEU).
I do not propose to summarise the decision (it is 180 pages long). Instead, I will merely review the parts that I found most interesting. In particular, the judgment contains a very clear discussion of how the law stands as regards pay-for delay agreements in Europe. It also reviews EU law, particularly in the context of the Tribunal’s decision to make a preliminary reference to the CJEU. These questions flow mostly from the debate, apparent in my earlier posts, regarding whether pay-for-delay agreements should be treated as restrictions by object or by effect under EU law following Lundbeck.
The facts of the case were as follow. Paroxetine is a prescription-only anti-depressant medicine that was marketed by GlaxoSmithKline (GSK). GSK’s patent for paroxetine expired in 1999, even though GSK obtained a number of secondary process patents. From December 2000, GSK faced the prospect of generic entry, unless it could rely on its secondary patents. Between 2001 and 2004, GSK entered into a number of agreements with generic suppliers which had alleged that the relevant secondary patents held by GSK over paroxetine were invalid and/or that the generic paroxetine which they intended to market in the UK did not infringe GSK’s patents. Under these agreements: (i) generic suppliers agreed not to enter the market; (ii) generic suppliers became distributors of GSK’s branded product; and (iii) GSK would pay the generics suppliers substantial sums, as promotional and marketing allowances.
In summary: the agreements avoided (or ended) patent litigation; they also ‘provided the generic companies with significant but limited volumes of paroxetine manufactured by GSK which they could sell under their own brand names at prices expected to be highly profitable for them, and also gave them various other payments which further increased the profitability of the Agreements’. These agreements could be terminated if or when generic supplies of paroxetine from other companies entered the UK.
In December 2016, some of these agreements formed the basis of an infringement decision by the CMA, which imposed penalties amounting to circa £45 million pound sterling.
- The first issue before the Tribunal was whether GSK and the generic suppliers were potential competitors (paras. 90-159). This is a pre-requisite to a finding that a pay-for-delay agreement can restrict competition by object, instead of merely by effect.
The test for potential competition is whether, in the light of the structure of the market and the relevant context, there are real, concrete possibilities for an undertaking to enter the market in question and compete with established undertakings. The Tribunal established, following a detailed analysis of the evidence, that a number of generic suppliers were, indeed, potential competitors to GSK.
It is particularly interesting that the Tribunal found that: (i) the mere risk of a court deciding against the generic companies as regards their entry breaching GSK rights does not mean that the generic suppliers were not potential competitors as long as the outcome is uncertain (para. 136); (ii) the granting of an interim injunction preventing a generic from entering the market does not mean that the generic supplier is not a potential competitor, at least when the duration of the agreement exceeds the duration of the injunction (paras. 137-143). The Tribunal thought that its interpretation regarding this second point was in line with Lundbeck. However, the General Court’s decision on Lundbeck is currently under appeal before the CJEU, so the Tribunal decided to include in its preliminary reference a question on whether, and to what extent, it is relevant for the purposes of identifying potential competitors in pay-for-delay cases that the generic company is subject to an interim court order.
- Having concluded that GSK and the generic suppliers were potential competitors, a second issue before the Tribunal was whether the agreements between them restricted competition by object (paras. 160-326). The Tribunal started by noting that the analysis of whether a restriction is by ‘object’ “focusses on determining the potential effect of the agreement, having regard to its nature and its context, rather than on establishing on the facts what are, or were, its likely effects” (para. 170).
In order to understand the nature of the agreements, the Tribunal first looked at the nature of the financial payments made by GSK to the generic suppliers/distributors. Two types of payments were identified: payments in the form of promotional and marketing allowances, and a fixed profit margin in the distribution of GSK’s branded Paroxetine product. The Tribunal found that these payments were merely a convenient label for the financial consideration paid by GSK to each generic company against their agreement not to enter into the UK market with an independent generic product. Although: ‘a supply agreement involved the cost of giving up some market share to the generic challenger and might require financial payments to the generic company, GSK believed that this “controlled” entry would cause significantly less commercial damage than full generic entry’ (para. 227). As a result, these agreements were ‘settlements whereby GSK secured protection for a specified period of its patent position from the risk of entry by a particular generic challenger, in return for transfers to the generic companies of substantial value in both cash and non-cash terms, which was well above any avoided litigation costs’ (para. 243).
Having done this, the Tribunal turned to the question of whether agreements such as these can amount to restrictions of competition by object. In order to reach such a conclusion, the Tribunal held that the existence and validity of a patent must be taken into account. The CMA had followed Carl Shapiro’s argument that, when a payment or cash equivalent transferred from the originator to the generic company has no legitimate explanation other than as consideration for the delay in the attempt to enter the market, then the agreement is objectively to be regarded as inherently restrictive of competition. [N.B. Shapiro was an advisor to the CMA in this case, and a witness for them at trial]. The counterargument is that, unless it is ascertained that the generic company would probably have prevailed in proceedings regarding the validity of IP protection, pay-for-delay agreements cannot be regarded as “by their nature” harmful to competition. While its analysis does not seem to hinge on this point, the Tribunal found that the strength of the patents was uncertain, and that ‘there is no scope to assess the likelihood that either GSK or the generic challenger would have won if the respective cases had gone to trial’ (para. 205; see also para. 246). Having gone this far, the Tribunal decided to ask the CJEU whether: ‘when the strength of a patent is uncertain, does a transfer of value from the originator to the generic company in an amount substantially greater than avoided litigation costs and which cannot be explained on the basis of payment for any goods or services to the patent holder, under a settlement agreement whereby the generic company agrees not to enter the market with its generic product and not to challenge the originator’s patent for the duration of the agreement (which is no longer than the unexpired period of the patent), constitute a restriction ‘by object’?’
The Tribunal then turned to the impact that the existence of efficiencies may have on the classification of an agreement as a restriction of competition by object (paras. 274-308). This was necessary because the Tribunal accepted that the agreements brought about a slight increase in quality of products in the market (para. 292) and led to a small but not insignificant benefit by way of reduction in the average price of paroxetine to pharmacies (para. 297). However, the increase in quality was relatively modest, and the small reduction in the average price of paroxetine to pharmacies was the result of GSK re-engineering the market. The Tribunal held that if: ‘an agreement by its nature materially distorts the structure of the market by impeding actual or potential competition, the fact that the distorted structure brings certain advantages or benefits, including some limited competitive benefit, does not preclude a finding that the agreement, viewed overall, has an anti-competitive object.’ Instead, it considered that these benefits should be assessed under sect 9 CA or Art 101(3) (paras. 307-308). Nonetheless, the Tribunal considered that, given the fact that the issue is under appeal before the CJEU in Lundbeck, it would be appropriate to refer a preliminary question to the CJEU on whether the fact that the agreements bring certain advantages or benefits, including some limited competitive benefit, precludes a finding that the agreement, viewed overall, has an anti-competitive object.
- At this point, the judgment moves onto a discussion of whether one of the agreements restricted competition by effect (paras. 327-349). The Tribunal starts from the observation that: “in order to show a restriction by effect, in our judgment it is necessary to establish on the balance of probabilities: i.e. that it is more likely than not that the counter-factual would have been more competitive” (para. 330).
The CMA’s decision identified two possible counterfactuals: (i) the patent litigation would have come to a conclusion; (ii) the parties would have entered into less restrictive settlements, in particular either a licence permitting entry with royalty payments or an early entry agreement. Importantly, the CMA argued that the settlement agreements eliminated the prospect of potential competition. As regards (i), the Tribunal found that it was equally likely that GSK would have won or lost. If GSK won, all the competitive benefits that the CMA relies on would not arise (para. 333). As regards (ii), the Tribunal found that the CMA had no basis on the evidence to find that the parties would have reached such an alternative form of settlement (para. 334). In short, the Tribunal found that the CMA had failed to discharge its burden of proof. As regards the counterfactual analysis of potential competition, the Tribunal discussed the potential relevance of the Commission’s decision in Servier, which is under appeal, and concluded that it should include a question in its preliminary reference as to whether the relevant effects’ analysis should focus on whether there was a real possibility that the generic companies would have succeeded against GSK in the patent litigation.
- Lastly, the Tribunal addressed the possibility of GSK having abused a dominant position (paras. 376-403). A critical issue here was whether GSK was dominant, which was a direct consequence of product market definition. Importantly, the Tribunal adopted an approach which it recognised was novel: it took into account the investigated conduct to identify the relevant market. This was possible because the definition of a relevant market should reflect the issue under consideration, and can vary accordingly (paras. 402-403): ‘Therefore, since here the conduct of GSK that is under scrutiny concerns its agreements with a succession of generic companies whereby they would not introduce their independent generic product onto the market, in our judgment the relevant market for the purpose of the competitive assessment should encompass that generic product.’ (para. 404). In any event, the Tribunal included a question about market definition in its preliminary reference.
Concerning the existence of an abuse, the Tribunal considered that the practice would be the entry of GSK’s entry into agreements with the generics’ suppliers. As such, the qualification of this practice as an abuse depends on the same grounds as those relied on to establish a breach of the Chapter I prohibition (i.e. unlawful collusive practice). As such, whether the finding of an abuse stands will depend on the outcome of the preliminary reference questions on restriction by object and effect that the Tribunal made to the CJEU.
Comment: This judgment is a tour de force, and I recommend reading it for a number of reasons. It contains a detailed analysis and assessment of ‘pay-for-delay’ agreements under competition law, and it exposes the limits – and difficulties – of treating them as by object restrictions given the diversity of contexts in which they may arise. It contains some of the clearest discussion I have seen of apparently straightforward, but really rather complex concepts such as potential competition and restriction by object. It also introduces into EU law an approach to market definition that is closer to some US practices that focus on the effects of a monopolistic practice in order to identify the relevant market.
I found the discussion on restriction by effect to be particularly interesting because it touches on the wider issue of how to assess the impact of practices that affect or interfere with legal rights. The existence or scope of such rights may be dubious, and this raises significant issues concerning the identification of the relevant counterfactual (i.e. does the legal right exist and would it apply, or not?). This, in turn, is a particular emanation of the foundational question of how competition law should relate to other areas of the law – a question which is well above my pay grade. All I can say is that I look forward to the CJEU’s decision on the preliminary reference – in two years or so…