Jump to Content Jump to Main Navigation
Antitrust and Patent Law by Devlin, Alan (17th March 2016)

Part VI Agreements Concerning Patented Technology, 13 Exclusionary Agreements in the Biopharmaceutical Industry

Edited By: Lars Kjølbye

From: Antitrust and Patent Law

Alan Devlin
Edited By: Lars Kjølbye (Consultant editor)

From: Oxford Competition Law (http://oxcat.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber: null; date: 26 January 2020

Subject(s):
European Union — Copyright — Rights — Technology transfer agreements — United States

(p. 443) 13  Exclusionary Agreements in the Biopharmaceutical Industry

I.  Introduction

13.1  Horizontal market division is a per se and by-object violation of US and EU antitrust law, respectively. That rule is as fundamental as the ban on naked price-fixing. Yet, under patent law, a patentee may exclude all competition within the scope of its claims. Imagine the conflict, then, when a patentee pays an alleged infringer not to enter the market for its patented good. Were it not for the patent, such a deal could land the executives responsible in jail in America and certain EU member states. The patent is the critical detail. If a patentee could exclude its rival by litigating to trial, may it achieve the same result through a paid settlement? Should patent or antitrust policies control, and do those policies even differ? Those issues are the province of pay-for-delay agreements or reverse-exclusionary payments, which have arisen in the pharmaceutical sector.

13.2  The law on pay-for-delay agreements continues to evolve rapidly. Most US Courts of Appeal had held such deals to be lawful, absent sham litigation, if they fell within the scope of the asserted patent.1 The Third and Sixth Circuits, by contrast, had deemed such deals to be prima facie and per se antitrust violations, respectively.2 The Supreme Court ended the circuit split in its 2013 Actavis decision.3 It held that pay-for-delay agreements can violate the Sherman Act under the rule of reason.4 Reverse exclusionary payments that exceed saved litigation costs likely fail scrutiny. That decision handed the FTC, which had staunchly opposed (p. 444) the practice, a major victory. Nevertheless, the Court refused to adopt the FTC’s advocated rule for quick-look analysis.

13.3  In contrast to the inconsistent analysis of these issues in America, the EU approach to reverse exclusionary payments has been single-minded of purpose. At the time of writing, neither the General Court not the CJEU has ruled on pay-for-delay agreements, though the issue is pending before the General Court. The European Commission, however, has condemned them.5 Indeed, its approach to date demonstrates by-object analysis, which signals more hostile treatment than the rule-of-reason standard that now governs under US law.

13.4  Although pay-for-delay deals occur in Europe, they appear to be less common than in the United States. That phenomenon may reflect the distinct regulatory framework in Europe, which has no analogue to the 180-day exclusivity period for the first generic firm to file an Abbreviated New Drug Application with the US Food and Drug Administration. The carrot that US law uses to spur generic entry means that, in picking off the first entrant with a reverse payment, a pioneer may face less determined entry by further competitors. Thus, under the US system, even owners of suspect patents may rationally pay large sums to keep the first generic out, with serious anticompetitive effect. By contrast, doing so in Europe may be more likely simply to invite further entry that the patentee may not be able to afford to pay off.

13.5  Paying for delay raises fascinating policy issues, dividing commentators and courts alike. Analytic problems abound. Post-Actavis, for instance, both US and EU law would condemn a patentee that settles infringement litigation by paying the accused infringer to stay out of the market—in America, where the sum involved exceeds the foregone litigation costs and value of services provided. If the same patentee later successfully sued another entrant, proving infringement and successfully opposing an invalidity challenge, its earlier reverse-payment settlement would thus have imposed anticompetitive effects subsumed within the claims of a valid patent. Yet, an antitrust violation would endure. Although problematic, this implication results from judging legality on imperfect information. The opposite rule—allowing a patentee to pay its rival to stay out of the market and to abandon an invalidity challenge—would yield problems of its own. Should a pioneer drug manufacturer lose its patent in a lawsuit after having lawfully settled prior (p. 445) litigation on the same patent, it would turn out that that deal’s anticompetitive effect had lacked any patent justification. The problem is thus to identify an optimal rule in an information-deprived setting.

13.6  The pay-for-delay dilemma is a function of probabilistic patent rights. If such IPRs were definitely valid and infringed, exclusion would be lawful. The fact that US law presumes a patent to be valid thus complicates the analysis. In evaluating this conduct, the law faces a choice. First, it could struggle through prospective evaluations of patent strength at the time of a reverse payment. Alternatively, it could fashion a rule that does not require formal assessment of patent validity and infringement. EU and US law have adopted the latter approach.

13.7  Given pay-for-delay agreements’ complexity, this chapter begins with an economic assessment of this conduct. Having explained that, in most cases, reverse exclusionary payments benefit the contracting parties at disproportionate cost to society, the chapter explains the current state of US and EU law, which remains in flux at the time of writing.

II.  The Economic Effects of Reverse-Exclusionary Payments

13.8  Pay-for-delay agreements are complex phenomena that courts have struggled to understand. This part explores the economics of these deals, explaining how they can affect static and dynamic efficiency, and showing the assumptions on which normative evaluation rests. It begins with conventional settlements, demonstrating when value will flow from defendant to patentee. That example contextualizes the analysis that follows, reflecting the basic insight that reverse exclusionary payments are a function of patent weakness. The legal and economic questions are distinct, however, not least because US patents enjoy a statutory presumption of validity.6

A.  Reverse payments reflect patent weakness and are generally inefficient

13.9  Law and economics teaches that people act in the public interest when they internalize the full effects of their choices. Parties settle cases based on their own interests, rather than those of society. When externalities accompany settlement decisions, those deals do not presumptively further the collective good. Thus, settlement may not always align with social welfare. This chapter addresses a form of settlement potentially subject to powerful negative externalities—one in which patentees compensate accused infringers in return for abandoning a validity challenge. We begin, however, with some basic principles.

(p. 446) a.  Absent sham, conventional patent settlements are efficient, even though they foreclose validity challenges

13.10  Typically, patent litigation settles when an accused infringer pays for a licence as recompense for prior unauthorized practice (and for future practice). Absent sham, antitrust has never looked askance at such garden-variety settlements. The value transfer is not suspicious because it reflects the defendant’s potential liability for prior and future infringement. The fact that the parties can agree on a sum reflecting anticipated liability at trial suggests that the patentee’s compensation reflects the patent’s strength. A plaintiff that wields a feeble patent will secure a meagre settlement. Further, settlement avoids litigation costs, not all of which are private to the parties. Of course, there is also a negative externality. Ending an infringement dispute allows an impugned patent to escape scrutiny. Should the litigated patent bestow market power, consumers would continue to pay supracompetitive prices after settlement, while a trial might have invalidated the patent. As validity and infringement are probabilistic, settlement may deny consumers competition.

13.11  The cost-saving benefits of settlement and parties’ incentive to tailor the settlement to the patent’s strength and value typically outweigh the social cost of a foregone validity determination. Nevertheless, not all settlements are presumptively efficient. This section assesses the special case of reverse payments—where the direction of value transfer flows to, rather than from, an accused infringer. We begin by showing that reverse payments are a function of perceived patent weakness and an aversion to competition. There is a strong efficiency case against them.

b.  Reverse exclusionary payments generally harm social welfare

13.12  In terms of static efficiency, society gains more than a patentee loses when a court invalidates a patent infused with market power. Technology users benefit because they can make sales without paying tribute, but the public benefits more due to reduced deadweight loss. The patentee, of course, stands to lose monopoly profits in defending such a patent. That dynamic invites privately beneficial, but socially costly, exchange.

13.13  When doubts arise about the validity of a patent bestowing monopoly power, the patentee and accused infringer may be better off sharing the supracompetitive profits and ending their dispute. That win–win potential exists when a deal would allow the patentee to maintain a monopoly price, which creates a larger producer surplus than oligopoly or competition would do. Proponents of the social interest, however, lack a seat at the bargaining table.

13.14  Thankfully, such settlements remain rare because they can successfully protect and divvy up monopoly profits only when a demanding criterion is satisfied: after settlement, other firms must be unlikely to follow the accused infringer’s lead in (p. 447) entering the market and making unauthorized sales. In the general case where other firms are primed to compete, paying off one competitor will simply entice further entry. Dividing monopoly profits between an increasing number of rivals will quickly lead to sums that are insufficient to compensate a competitor for foregoing entry. Thus, the reverse-payment problem is not a general case, but is limited to where the accused infringer is unusually well positioned to challenge the incumbent monopolist’s patent.

13.15  To understand these dynamics, consider a numerical example. Suppose that a firm has a patent with which it reaps $90 million per year in monopoly profit. All parties are risk neutral, litigation costs are $3 million apiece, the discount rate is zero, and five years remain on the patent term. Consider how settlement dynamics change based on patent strength and the number of potential rivals. We begin by assuming that only one potential competitor exists. Under duopoly, each firm would earn $30 million per year, but would earn zero under perfect competition after patent expiration.

13.16  If the patent is definitely valid and infringed, then no entry occurs. The expected value to the rival of entering the market would be negative $3 million. $90 million in monopoly profit will endure each year until patent expiration.

13.17  Now suppose that the patent is definitely invalid or not infringed. One would expect entry because the expected value to the competitor is $150 million.7 Yet, the expected cost to the patentee is larger. It will lose $300 million if its rival enters the market. Therein lies the potential for an anticompetitive deal. The parties would both be better off if the patentee pays its competitor between $150 million and $300 million not to enter the market. A deal divvies up the $150 million in producer surplus that entry would eliminate. Consumers lose that $150 million and more because lower prices would have led to higher output and lower deadweight loss. Such static-efficiency losses always exist when a patent confers market power, of course, but here the patent is invalid or not infringed. Its presence is a ruse meant to hide the hardcore antitrust violation of horizontal market-sharing behind a veneer of settling a dispute.

13.18  The danger to competition does not disappear if the patent may or may not be valid and infringed. Assume that validity and infringement is a 50–50 proposition. The entrant then expects to gain $72 million in entering and defending a lawsuit, while the expected cost to the patentee of entry is $153 million. The parties once again have an incentive to settle for between those two figures. Consumers would lose more than the $75 million foregone expected wealth transfer from the patentee.

(p. 448) 13.19  Finally, suppose that the patent has a 95 per cent chance of being valid and infringed. Now the entrant has an expected value of $4.5 million, while the patentee experiences an expected cost of $288 million. Once again, the patentee would rationally split its monopoly rents with the entrant, paying it more than $4.5 million and less than $288 million. Again, consumers lose more than the parties gain.

13.20  These examples illustrate important points. First, if reverse payments are lawful, then the patent generates the same monopoly profits no matter how strong or weak it is. Second, patent strength merely controls the share of the monopoly rents that the patentee gives to the entrant. The weaker the patent, the more that the patentee has to pay the entrant to compensate it for foregoing entry. Third, the harm to consumers of reverse-payment settlements increases in tandem with the weakness of the patent used to justify the settlement. The only case where a reverse payment would not harm consumers—in static-efficiency terms, at least—is where the patent is definitely valid and infringed. In that situation, of course, the patentee would have no need for a reverse payment. Fourth, the examples above require that only one potential competitor exist. If many firms can enter the market—and the patent is the only barrier to entry—then successive entrants would have an incentive to enter the market, undercut the patentee/conspirators’ monopoly price, and seize a disproportionate share of the profits.

13.21  In the hypotheticals just considered, there was a clean reverse payment because the setting was one of prospective infringement, as when a potential entrant sues a patentee for declaratory judgment of invalidity and non-infringement. The transfer amount would change if there were potential liability on the part of the entrant. Then, the settlement may involve the entrant’s paying the patentee a net sum. That dynamic would not change the economic effects of the pay-for-delay arrangement, under which the competitor agrees to abandon its market entry in return for a reverse flow of value. That value could involve a reduced royalty payment based on prior infringement. In practice, of course, breaking down the compensation into its constituent parts would be difficult.

13.22  In short, a reverse payment denies consumers the fruit of pre-expiration entry tied to potential invalidity, creating deadweight loss and perverse incentives to focus innovative activity on acquiring prosaic patents.8 As noted, the boon to society from an invalidity determination exceeds a patentee’s expected loss. That principle holds true, however, only if two conditions are met. First, the patentee must be risk neutral. Risk aversion may cause a patentee to face a higher cost in going to trial on validity than society stands to gain. Conceivably, then, banning reverse payments could undermine some patentees’ incentive to innovate. Second, patent invalidity (p. 449) must track the social-welfare criterion. It is generally reasonable to equate the statutory requirements of patent validity with the social-welfare justification for a patent. Still, that is not universally true, especially as to revolutionary or costly inventions that a technicality may strip of patent protection.

13.23  A patent covering a pioneer invention uncovered at great expense may account for a large portion of a firm’s income stream, potentially making the patentee highly risk averse when facing an invalidity challenge. In such a case, the patentee’s paying to protect its IPR against invalidation may—but will not always or generally—promote dynamic efficiency. This insight may only have theoretical implications, of course, because society cannot easily distinguish payments that bolster strong patents claiming breakthrough technologies from those that perpetuate monopoly based on weak patents. The latter suppress both dynamic and static efficiency. To carve-out the few such deals that promote efficiency would require an administrable rule, which legislatures likely cannot formulate. At most, one might view IPRs covering pharmaceutical compounds—that is, drug-substance patents constituting the heart of a drug innovation—differently than secondary patents, such as methods of use that have less compelling a claim to excluding all competition in a market.9

13.24  This discussion shows that fear of patent invalidity and a resulting loss of monopoly profits can induce a patentee to pay an accused infringer to settle a case if doing so cuts off or deters further attempted entry. In practice, this condition is rarely satisfied, making reverse payments a rare phenomenon. Entrants can scrutinize an incumbent’s patents to discern their quality, and should they learn that the patentee paid the first entrant to settle an infringement case, that ultimate expression of patent weakness would surely open the floodgates to competition.

B.  Reverse payments in the pharmaceutical industry

13.25  Reverse payments seldom materialize because they rarely exclude competitors beyond the accused infringer. The regulatory environment in the pharmaceutical industry, however, bears unique features that change that dynamic. In particular, the US Hatch-Waxman Act encourages generic firms to rush to be the first to seek marketing authorization from the Food & Drug Administration (FDA). The first generic to file obtains 180 days’ marketing exclusivity, which is tremendously lucrative. The first filer generates up to 90 per cent of its total profits in that half-year. As subsequent challengers to its monopoly have reduced incentives, the (p. 450) incumbent pioneer firm may have an opportunity to nip competition in the bud by paying the first filer to abandon a validity challenge.

13.26  To get FDA approval, an entrant usually must certify that marketing the generic drug would not infringe the incumbent’s patent. That certification is a technical act of infringement. It thus creates asymmetric risk, such that the generic faces no pecuniary liability, but the pioneer may lose its patent-bolstered monopoly. As we saw in the numeric examples in the last section, an entrant’s lack of liability makes a reverse transfer of value from the patentee more likely. Finally, the Hatch-Waxman Act prevents the FDA from granting the generic marketing approval for sixty months if the pioneer sues within forty-five days of the generic’s certification. Thus, if the brand-name manufacturer pays the first generic to delay, no other generic can enter until the sixty-month term has run or it establishes the patent’s non-infringement or invalidity.

13.27  Those factors create an environment conducive of settlement in which value flows from the patentee to the first generic filer. Not all such deals, however, harm efficiency. We consider two examples. In the first, the law prohibits reverse payments that exceed the litigation costs that settlement avoids. In the second example, paying for delay is lawful.

a.  Example 1: paying for delay is prohibited

13.28  Suppose that a pioneer sues the first generic to certify invalidity or non-infringement in its FDA authorization request. The likelihood that the patent is both valid and infringed is actually 20 per cent, but the patentee and generic estimate that probability at 40 per cent and 10 per cent, respectively. Litigation costs for each party are $2 million. The patentee will recover no damages, even if it wins at trial. The generic is the only potential entrant, however, unless the patent is found invalid or not infringed, in which event perfect competition would ensue. If the patentee prevails, it would enjoy $450 million in future monopoly profits ($90 million for each of the next five years, with a discount rate of zero). If it loses, it would enjoy $30 million in the first six months in duopolistic profits and nothing after. By the same token, if the generic wins, then it would reap $30 million in profit in the first six months and nothing afterward.

13.29  The expected value of the lawsuit for the generic is $25 million. While the pioneer would have earned $450 million in profits if the generic had not entered, the lawsuit reduces that expected value by $254 million. Now, there is a settlement range in which the patentee agrees to pay the generic between $25 million and $254 million. In this example, however, the law prohibits any payment beyond $4 million (the foregone litigation costs).10 That reading arguably comports with Actavis’s (p. 451) reference to the reverse payment’s ‘scale in relation to the payor’s anticipated future litigation costs’ and whether the payment ‘reflects ... avoided litigation costs or fair value for services’.

13.30  Can the parties settle if no money changes hands? Yes, they can. Allowing the generic to enter with six months remaining on the patent term conveys $30 million dollars of value on the generic. Thus, the pioneer can offer the generic its expected value in suing by allowing it to enter with five months remaining on the patent term (a $25 million value to the generic). If the parties negotiate to split the private surplus of the deal, the patentee will allow the generic to enter with 28 months remaining. In both cases, society gains because lower prices expand output and reduce deadweight loss.

13.31  The calculus gets easier if the parties agree on the likelihood that the patent is valid and infringed. If the pioneer and generic both estimate that probability as 20 per cent, for instance, then they will agree that the generic can enter with four years remaining. That is desirable because the patentee gets a monopoly reward discounted to reflect the probabilistic nature of its IPR. If the patent is unusually strong—say, a 95 per cent probability—the monopoly will endure until six months remain, such that the patentee gets 95 per cent of the monopoly reward of a certainly valid patent.

b.  Example 2: paying for delay to perpetuate monopoly

13.32  Now consider what happens when reverse payments are lawful. The pioneer and generic will agree to protect the otherwise-infirm patent monopoly and to split the ensuing monopoly rents. In the example at hand, the patentee would pay the generic between $25 million and $254 million. The key to understanding the social-welfare repercussions is that the annual monopoly profits of $90 million will endure throughout the patent term. As the patent underlying the deal becomes weaker, the pay-for-delay deal becomes increasingly problematic. For example, if there is a 90 per cent chance that the patent is valid and infringed, a reverse payment that guarantees the patent’s force through term could overreward the patentee by a maximum of 11 per cent. Conversely, if the patent only had a 10 per cent probability of being valid and infringed, a reverse exclusionary payment could overreward the patentee by 1,000 per cent. The incentive distortions as to R&D and patenting are obvious.

13.33  In practice, there is an effective lower cap on the quality of a patent giving rise to a reverse exclusionary payment. If only a transparently invalid patent stands in the way of lucrative sales, generics will likely line up to challenge it, if not enter ‘at risk’. Further, from a legal perspective, objectively baseless sham litigation can itself be (p. 452) actionable and, if used to justify market division between competitors, would fail scrutiny under any legal standard. Nevertheless, since the regulatory framework inhibits subsequent generic entry and even likely-invalid patents may not showcase their tenuous claim to novelty, utility, and non-obviousness, the problem is a serious one. We now move to consider how US law assesses pay-for-delay agreements, before shifting to the European view.

III.  Pay-for-Delay Agreements under US Law

13.34  Reverse exclusionary payments convert probabilistic rights into guaranteed ones, harming static and likely dynamic efficiency in proportion to the patent’s weakness. The question whether such contracts violate antitrust law, however, is distinct.

13.35  The analytic problem is that a patent can lawfully inhibit competition falling within its claims, regardless of the efficiency repercussions of exclusion in a given case. The social ills of pay-for-delay deals find their root in potential invalidity and non-infringement. Were a patent both valid and infringed, any ensuing reverse payment would not affect efficiency (though one might ask why a sure-to-prevail patentee would pay anything more than its foregone litigation costs to end litigation). For patentees that subsequently vindicate their rights and exclude competition, it seems odd that they would have violated antitrust law in previously paying rivals not to practise their claimed technologies.

13.36  Perhaps the most vexing legal factor, however, is that US law presumes a patent to be valid.11 If anticompetitive effects from pay-to-delay agreements materialize only when the patent is invalid, as when infringement is not in dispute, then it is unclear how one can state an antitrust claim if one must presume that the patent is valid. Principally for that reason, the author had argued for a rule of reason standard, which would prohibit reverse settlements where it is likely that the patents are invalid or not infringed.12 Actavis has since held that paying to foreclose the risk of an invalidity finding has anticompetitive effects, thus aligning the legal standard with normative economic reasoning. Pausing only to explain the statutory background, this section explains how the courts have struggled to navigate antitrust and patent issues weighing on pay-for-delay agreements.

A.  The Hatch-Waxman Act

13.37  The cornucopia of antitrust issues that have arisen in the biopharmaceutical sector reflect the statutory framework. The relevant legislation is the Hatch-Waxman Act, (p. 453) which Congress passed in 1984 to spur greater competition by generic drug makers without compromising pioneer drug manufacturers’ incentives to invest in R&D.

13.38  To induce generic entry, the Act introduced an expedited approval process with the FDA. Brand-name drug makers must file a New Drug Application, presenting safety and efficacy data generated at huge expense over many years based on clinical trials.13 The Hatch-Waxman Act, however, allows generic drug producers to use that existing data. A prospective entrant into a drug market can thus file an Abbreviated New Drug Application (ANDA), relying on the pioneer’s data, but must also show that the drug is bioequivalent with, and has the same active ingredient as, the branded drug.14 That regulatory procedure facilitates cost-effective generic entry, thus promising consumers the fruits of greater price competition. Further to magnify incentives to enter the market, the Act grants the first company to file an ANDA 180 days’ marketing exclusivity from when it first markets the drug or when a court finally adjudicates validity or non-infringement.15 Should multiple firms file ANDAs on the same day, the same exclusive right attaches to those firms vis-à-vis other generic pharmaceutical companies that filed ANDAs later.

13.39  The remaining impediment to entry, of course, is a patent. Pioneers protect their inventions through drug-substance and product patents, as well as patents claiming methods of use. Such protection, often complemented by regulatory exclusivity laws for a period of time, is indispensable for spurring innovation. The biopharmaceutical industry can spend nine- or even ten-figure sums in bringing a compound from the laboratory through the FDA’s multi-clinical-trial data collection and review process and to consumers. As critical as patents are to innovation in pharmaceuticals and biologics, however, when improvidently granted they cost consumers dearly in monopoly pricing that generic competition would otherwise have eliminated. The Hatch-Waxman Act sought to encourage suspect-patents challenges, while providing branded-drug firms some measure of security in relying on their IPRs.

13.40  When a generic drug maker files an ANDA with the FDA, it must include one of four certifications as to patents listed in the ‘Orange Book’ by a pioneer drug manufacturer over the relevant drug. These are: (1) the relevant patent information has not been filed with the FDA; (2) the patent has expired; (3) the patent will expire on a certain date (in which case the FDA will not grant marketing approval until that date); and (4) the requested new drug would not infringe the patent or the patent is invalid, which certification must include a detailed explanation from (p. 454) the grounds of claimed invalidity or non-infringement.16 That final certification—the Paragraph IV certification—gives rise to reverse-exclusionary settlements discussed in this chapter. Importantly, a Paragraph IV certification constitutes patent infringement, and the ANDA filer must give notice of it to the patentee.17 To induce the pioneer drug manufacturer to sue, the Act grants the patentee thirty months’ exclusivity if it files an infringement lawsuit within forty-five days of receiving notice of the Paragraph IV certification.18 If the ensuing litigation finds the patent to be invalid or not infringed before the thirty-month mark, the FDA is free to approve the ANDA. Should the case continue beyond that period, and if the FDA grants the ANDA, the generic drug producer must then decide whether to forego immediate entry or start marketing the drug and risk potentially massive damages.

13.41  The principal anticompetitive practice that has arisen here is pay-for-delay agreements, in which pioneer drug manufacturers and ANDA filers settle the litigation flowing from the Paragraph IV certification with the patentee’s paying the generic not to enter the market. Other practices, however, include authorized generics, in which a branded drug maker introduces its own generic drug to compete with the first ANDA filer during the 180-day period. That strategy dramatically reduces the profitability enjoyed by the first ANDA filer.19 In a further exclusionary practice known as ‘product hopping’, a pioneer withdraws its listed drug from the Orange Book after an ANDA filing to stop the entrant from using generic-substitution laws. By preventing pharmacists from substituting cheap generics in lieu of prescribed pioneer drugs, the strategy is a form of ever-greening.

B.  The FTC’s war against pay-for-delay agreements

13.42  The FTC has led the charge against pay-for-delay agreements. Such deals were rare prior to 2005, when there were only two appellate decisions. The first decision, in 2003, held reverse exclusionary payments to be per se illegal.20 There, in In re Cardizem, the Sixth Circuit held that a reverse-exclusionary deal ‘was, at its core, a horizontal agreement to eliminate competition’.21 From an antitrust perspective, this holding is unremarkable because a firm may not pay its competitor to stay out of the market.22 From the viewpoint of patent law, however, it seems odd to condemn a firm for paying its rival to respect its presumptively valid exclusive rights. (p. 455) After all, the Supreme Court has referred to patents as ‘an exception to the general rule against monopolies’.23 This tension led the courts to splinter. Shortly afterward, in Valley Drug, the Eleventh Circuit held that pay-for-delay agreements are not illegal per se, such that the factfinder must determine whether a deal restricted competition beyond ‘the potential exclusionary power of the patent’.24

13.43  Pay-for-delay deals began to flourish in 2005, when the Eleventh Circuit vacated an order of the FTC and held that exclusionary effects falling within the scope of the patent monopoly are lawful.25 There, in Schering-Plough, the court observed that ‘patents create an environment of exclusion, and consequently, cripple competition’.26 It reasoned that, although pay-for-delay agreements are ‘“clearly anticompetitive”’, they may still be lawful because of ‘a rather simple reason: one of the parties owned a patent’.27 The Eleventh Circuit thus adopted a three-part test that considered: ‘(1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects.’28 The test effectively immunized reverse-payment settlements from antitrust scrutiny as long as the parties did not agree to exclude competition beyond the patent’s temporal duration or claim scope. So, in a subsequent opinion, the Eleventh Circuit held that a generic’s agreeing to retain its 180-day exclusivity period and not ever to market a generic version of the patented drug stated a plausible antitrust claim because its anticompetitive effects went beyond the patent’s scope.29

13.44  Additional opinions facilitative of pay-for-delay agreements followed. In 2006, the Second Circuit held that, ‘so long as the patent litigation is neither a sham nor otherwise baseless, the patent holder is seeking ... to protect ... a lawful monopoly’.30 Two years later, the Federal Circuit adopted a scope-of-the-patent test and found that ‘the essence of the Agreements was to exclude the defendants from profiting from the patented invention. This is well within Bayer’s rights as the patentee’.31 It thus held that, ‘in the absence of evidence of fraud before the PTO or sham litigation, the court need not consider the validity of the patent in the antitrust analysis of a settlement agreement involving a reverse payment’.32

(p. 456) 13.45  As of 2008, then, it was open season for revere-exclusionary settlements. The Sixth Circuit’s holding in Cardizem was an outlier, of course, but it was distinguishable because the settlement was probably illegal under any standard. The first ANDA filer had agreed to forego marketing non-infringing generic versions of the branded drug, and had agreed not to relinquish its exclusive 180-day marketing period, which delayed entry by other generics.33 The result of the Second, Eleventh, and Federal Circuits’ decisions was a spike in reverse-payment settlements. In 2004, no such settlement took place and, in 2005, there were three. Between 2006 and 2009, however, an average of over fifteen pay-for-delay agreements occurred each year. In 2010, 2011, and 2012, there were thirty-one, twenty-eight, and forty such deals, respectively.34

13.46  Having suffered successive defeats in the courts, the FTC launched a campaign designed to elicit congressional action. In 2010, it released an empirical study finding that reverse-exclusionary settlements extend a branded drug’s monopoly by an average of 17 months, and cost US consumers $3.5 billion per year.35 The agency followed that report with annual studies detailing the number of pay-for-delay settlements each year and stressing the negative social-welfare implications of the practice. It continued to press against such deals in litigation.

13.47  The FTC finally secured a victory in 2012 before the Third Circuit, which rejected the scope-of-the-patent test and held that pay-for-delay agreements are presumptively unlawful under ‘quick look’ analysis.36 Shortly afterward, the agency suffered a setback when the Eleventh Circuit again held such deals to be lawful to the extent they fall within the patent’s scope.37 That ruling cemented the circuit split and, with the proliferation of pay-for-delay agreements, led the Supreme Court to grant certiorari. Its subsequent decision in Actavis, of course, handed the FTC a hard-win victory, though the Court declined to adopt the FTC’s requested quick-look standard.38

C.  The basic law on pay-for-delay agreements after Actavis

13.48  The starting point for analysing reverse-payment settlements is Actavis.39 The scope-of-the-patent test is now dead.40 Today, the basic rule is that a reverse payment is unlawful if it reflects ‘a desire to maintain and to share patent-generated (p. 457) monopoly profits’ or an ‘objective ... to maintain supracompetitive prices ... rather than face what might have been a competitive market’.41 In so holding, the Court held that a pioneer and generic may not bolster a suspect patent and share the following monopoly profits. The rationale is that transforming a potentially valid patent into a sure thing overrewards the pioneer—especially if its patent is weak—and deprives consumers of entry tailored to the perceived strength of the patent. The result is allocative and dynamic efficiency losses, save in cases where risk aversion or the need for exclusivity to promote innovation is pronounced.

13.49  Notably, the Court’s phraseology as to ‘desire’ and ‘objective’ invites enquiries into subjective intent, which some courts have endorsed.42 The better view, however, may be to consider the impugned deal’s functional effect. If the payment exceeds the summed value of the generic firm’s agreed-to services and the pioneer’s saved litigation costs, the payment’s surplus value reflects something else. Absent explanation, that something else must be consideration for avoided competition, rendering the agreed payment unlawful. Subjective intent illuminates that enquiry, but the Supreme Court did not hold that intent controls the legality of pay-for-delay settlements.

13.50  So, what does the requisite rule-of-reason enquiry look like under Actavis? The Court did not provide all the answers, but it did contextualize the relevant analysis. The framework is the rule of reason, which is a staple of US antitrust law.43 The Court did not explain how district courts should fashion that assessment, though the next section explains how lower courts have subsequently done so. The Court’s opinion suggests, however, that necessary factual questions include: (1) the fact of a reverse payment; (2) the payment must be sufficiently large; (3) the payment must exceed the parties’ saved litigation costs and the value of any services that the generic agreed to provide to the pioneer in settling the case; (4) whether other proffered justifications for the payment exist; (5) whether the pioneer firm has market power; and (6) whether the deal harmed competition in a relevant market. A private plaintiff would also have to show antitrust standing, including antitrust injury. Obviously, that leaves a lot of important details for the lower courts to resolve.

13.51  Actavis provided some guidance. While it did not explain whether a reverse payment can be nonpecuniary, define a ‘large’ payment, or indicate what justifications beyond litigation costs and services might plausibly explain a payment on grounds other than eliminating competition, it did comment on patent strength and market power. Those considerations matter because, in most antitrust–patent cases, (p. 458) one must usually assess patent validity and infringement to conduct the antitrust analysis. That is not realistically possible in pay-for-delay cases, where the problem is that the answer to the patent question is unknown. Actavis solved that difficulty by holding that ‘it is normally not necessary to litigate patent validity to answer the antitrust question’ because the ‘size of the unexplained payment can provide a workable surrogate for a patent’s weakness’.44 Even risk aversion, which might explain an outsize payment, is an insufficient explanation because the risk being avoided is competition.45 Similarly, the Court explained that an ‘important patent’ and ‘the presence of higher-than-competitive profits’ both evidence market power.

13.52  We emphasize an important principle: pioneer drug manufacturers and ANDA filers can lawfully settle patent litigation under Actavis. As consideration, a patentee may license a defendant to sell a generic version of the branded drug before the patents expire. Actavis explained that parties may settle ‘by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point’.46 The principle here is that the duration of exclusion agreed to as part of a lawful settlement reflects the parties’ (risk-adjusted) view on the patent’s validity. For instance, suppose that ten years remain on a drug patent at the time of settlement and the parties agree that there is a 60 per cent chance that the patent would be valid and infringed by marketing the generic drug. Absent discount rates and assuming risk neutrality, the parties would agree to let the generic enter with four years remaining on the patent. Consumers would get the benefit of competition prior to the patent’s expiration, while the patentee would enjoy compensation tied to the strength of its patent.

13.53  Second, the fact that a patentee pays an ANDA filer as part of a settlement does not make the agreement illegal. A patentee may explain or justify a reverse payment to show that the sum does not evidence ‘a desire to maintain and to share patent-generated monopoly profits’.47 A pioneer drug manufacturer may demonstrate this fact in various ways. For instance, Actavis held that a ‘reverse payment ... may amount to no more than a rough approximation of the litigation expenses saved through the settlement’.48 Thus, a modest reverse payment reflecting the foregone cost of litigation may justifiably underlie a lawful settlement.49 Similarly, the parties may fashion a settlement by which the ANDA filer agrees to perform services for the brand-name drug manufacturer. For instance, the defendant might agree to produce inputs for the branded drug’s construction or distribute the(p. 459) pioneer drug. In such cases, a patentee may justify a reverse payment as compensation for valuable services provided by the defendant. Of course, in all such cases, the parties to such deals could expect to face claims that their litigation-cost and value-of-service justifications are pretextual.

D.  The lower courts weigh in on Actavis

13.54  Actavis invited the lower courts to fashion a rule-of-reason framework, but it left many open questions. Can a branded firm escape Actavis by compensating a generic other than with cash? What is a ‘large’ payment? Which party bears the burdens of proof and persuasion on the rule of reason, and how does that rule work in the pay-for-delay setting? The courts are presently ironing out these issues as they arise in litigation, and definitive answers are elusive at the time of writing. Nevertheless, some valuable guidance exists.

a.  How the rule of reason applies to pay-for-delay agreements

13.55  The Supreme Court left it to the lower courts to fashion the rule of reason to reverse exclusionary payments. District courts have reached different conclusions, struggling to discern where Actavis’s frequent invocation of ‘large and unjustified’ payments fits within the calculus and which party must prove whether a procompetitive benefit justifies such a reverse payment.

13.56  An important opinion is the Eastern District of Pennsylvania’s 2015 decision in King Drug.50 There, the court rejected the argument that a plaintiff must satisfy a ‘threshold burden’ to show that a reverse payment is both large and unjustified. Instead, a plaintiff must evidence a large reverse payment pursuant to its initial evidentiary burden to show anticompetitive effects under the rule of reason. The burden then shifts to the accused firm to show that the payment is procompetitive, which showing would then require the plaintiff to show a fact question whether the reverse payment is unjustified or unexplained.

13.57  In that holding, the King Drug district court disregarded the Actavis dissent’s suggestion that a large and unjustified payment is a requisite of bringing rule-of-reason scrutiny to bear. It also rejected dicta in Lamictal that analysis under Actavis involves three steps: (1) whether there is a reverse payment; (2) whether that payment is large and unjustified; and (3) whether that deal fails scrutiny under the rule of reason.51 Further, it found unconvincing the holding in Nexium that a plaintiff must first prove a large and unjustified payment, after which the defendant must show a procompetitive objective, in which event the plaintiff must prove under the rule of reason that the settlement’s net effect harms competition.52

(p. 460) 13.58  An interesting question is whether a plaintiff must show causation under the rule of reason, such that the generic would have entered the market but for the reverse payment. The answer is yes for a private litigant, which must prove antitrust injury.53 Nevertheless, it is not clear that the government would have to prove actual anticompetitive effects as long as a pioneer made a large and unjustified payment to eliminate the risk of early generic competition. Actavis implies that a pioneer could pay a generic entrant to delay entry—unlawfully, because the patent may have been invalid or not infringed—and then later successfully assert the same patent against a subsequent generic competitor. Although the settlement ultimately would have no market effect, a Section 1 violation would presumably endure.54

b.  Does Actavis only apply to cash payments?

13.59  The courts are split on whether Actavis reaches value transfers that do not involve cash payments. At the time of writing, only one case holds that Actavis applies only to a money transfer, and that case, Loestrin, is on appeal to the First Circuit.55 Most decisions hold that Actavis prohibits all value transfers from pioneer to generic that otherwise meet the prohibition on paying for delay.56 A late 2014 opinion in Effexor found that both lines of cases made valid points—since ‘Actavis never indicated that a reverse payment had to be a cash payment; but it ... emphasized cash payments’—and thus Effexor held that a ‘non-monetary payment must be converted to a reliable estimate of its monetary value’.57 In 2015, the Third Circuit became the first federal appellate court to rule on a pay-for-delay issue after Actavis, holding that a pioneer’s agreement not to sell an authorized generic was a value transfer that triggered rule-of-reason scrutiny.58 At the time of writing, then, it appears that a pioneer’s agreement not to market an authorized (p. 461) generic during the 180-day period of exclusivity may be a reverse payment, thus triggering the rule in Actavis.59

c.  What is a ‘large’ reverse payment?

13.60  Case law on the meaning of a ‘large’ reverse payment is still developing. The Eastern District of Pennsylvania’s 2015 decision in King Drug held that ‘a reverse payment is sufficiently large if it exceeds saved litigation costs and a reasonable jury could find that the payment was significant enough to induce a generic challenger to abandon its patent claim’.60 That reading arguably comports with Actavis’s reference to the reverse payment’s ‘scale in relation to the payor’s anticipated future litigation costs’ and whether the payment ‘reflects ... avoided litigation costs or fair value for services’.61

13.61  One opinion suggests that alleging a nine-figure sum may not itself suffice. In 2014, in Effexor, the District of New Jersey found that plaintiffs had failed plausibly to allege the existence of such a payment, despite averring a payment of half-a-billion dollars.62 The payment must ‘appear to be large from the perspective of the brand company making the payment’.63 Due to the perceived pleading failure, the court did not reach the question what a ‘large’ sum means, observing two extreme possibilities: (1) the amount exceeds the profit that the generic would have obtained in winning the litigation and entering the market; and (2) the figure surpasses the avoided litigation costs.64

IV.  Reverse-Exclusionary Agreements under EU Law

A.  Paying for delay in Europe

13.62  Potential for exclusionary conduct arises when a primary patent—one covering a molecule or active pharmaceutical ingredient—expires, leading a branded-drug firm to try to ‘evergreen’ its exclusive market position. Sometimes, firms use regulatory exclusivity provisions and data-exclusivity laws to extend exclusive selling rights. Although those paths are typically lawful, mischief arises when pharmaceutical firms base applications on false data to hinder generic entry. The CJEU made (p. 462) that clear in AstraZeneca.65 Pioneer-drug companies also rely on secondary patent protection to bolster their market position. Such IPR protection claims a drug’s ancillary features, such as a method of use, manufacturing process, or formulation. Disputes often arise as to whether entrants can sell generics without infringing such secondary patents. Such controversy feeds opportunities for mutually beneficial resolution, potentially at the expense of consumers. Therein lies the dilemma of pay-for-delay agreements in Europe.

13.63  The EU and US pharmaceutical sectors differ in one critical respect. Europe lacks an equivalent to the 180-day exclusivity period that the first ANDA filer enjoys in America. That distinction matters. In Europe, unlike in America, no generic occupies a bottleneck access point to the market. It is therefore more difficult for a pioneer to pay one generic to abandon a validity challenge without attracting other generics. As explained above, pay-for-delay agreements work if the conspiring parties share monopoly rents flowing from the patent, which can only happen if that patent is not otherwise invalidated or the monopoly profits flowing from the settlement dissipated. We should therefore expect a lower incidence of reverse exclusionary payments in Europe than in America. The Commission’s reports monitoring patent settlements ‘show[] that the number of settlements that may give rise to antitrust concerns is continuously low’.66 Nevertheless, the fact that paying for delay may be less effective for a branded firm in Europe does not make it irrational. The enquiry is, of course, contextual. Should many generics seek to enter the relevant market, dividing up the monopoly between all entrants may be neither feasible nor profitable for the incumbent. In other situations, however, perhaps just one or two generics are actively considering whether to enter. Even absent a regulatory benefit falling uniquely to the first entrant, paying for delay may profit the patentee.

B.  The pharmaceutical sector inquiry report

13.64  The Commission has been cognizant of imperfect outcomes in the pharmaceutical sector, especially in terms of price and innovation. Wary of incentives for exclusionary conduct, the Commission launched a study of the pharmaceutical sector in 2008. It sought to explain why generics were slow to enter markets and why innovation had declined. Focusing on practices by originators (i.e. pioneers) directed at foreclosing generic competition, the Commission studied forty-three pioneers and twenty-seven generics from 2000 to 2007. Issuing its final report in 2009, the agency found evidence of exclusionary conduct.67 The study examined the industry’s competitive dynamics, and revealed the Commission’s thinking on branded firms’ evergreening strategies, including pay-for-delay arrangements.

(p. 463) 13.65  As a threshold matter, the Commission agrees that IPRs spur originators to keep innovating and that protecting such rights ‘is paramount to Europe’s competitiveness’. In fostering allocative efficiency and controlling member states’ budgets, however, generic competition is essential. Generic entry leads to dramatic price reductions in the market. On average, the Commission found, generics entered at a price 25 per cent below the level that prevailed prior to loss of exclusivity. Two years after entry, that price gap had grown to 40 per cent.

13.66  The question for the Commission was why such generic entry did not materialize more widely and more expeditiously. Of course, patents, SPCs, and data exclusivity are the principal impediments to generic entry. The Commission noted that IPRs and associated exclusive rights inculpate crucial R&D incentives, but the premise underlying its report is that those rights are qualified. Patentees may take steps unrelated to practising their technologies, excluding competition and perpetuating their monopoly rents. Signalling its enforcement principles, the Commission noted that, ‘[i]f the existence and exercise of an industrial property right are not of themselves incompatible with competition law, they are not immune from competition law intervention’. The result is a tension familiar to the antitrust–patent field. Discerning the optimal balance between exclusivity and open access is complex and context dependent.68

13.67  Clearly, the Commission is concerned about inadequate generic competition. The basic reason for limited entry, of course, is IPRs. When they expire, competition ensues. The Commission noted that half of all medicines that went off patent (or otherwise lost exclusivity) faced generic competition within one year, and drugs subject to entry were disproportionately valuable. Patents and regulatory exclusivity are promising mechanisms by which pioneers can extend their monopolies. Originators increasingly rely on secondary patents to evergreen existing drugs, as new compounds prove elusive despite large R&D expenditure. There is nothing inherently anticompetitive, let alone unlawful, about this conduct. Nevertheless, it is potentially vulnerable to abuse. The Commission found that pioneers’ tactics include building ‘patent clusters’ over a single drug product, such that up to 1,300 patents and applications across all twenty-seven EU member states can exist over one medicine. Evidence unearthed during the report showed that patentees know that some of these patents are weak. An important factor driving such large-scale patenting is a desire to block generic entry.

13.68  Further, originators intervene in front of marketing-authorization bodies in member states to delay generic selling approval. Such challenges are predominantly unfounded. Originators prevailed in just 2 per cent of cases, but the net effect benefited pioneers, regardless. Based on a sample, intervention delayed marketing authorization by four months. Originators also fared poorly when suing to(p. 464) establish that data-exclusivity rules foreclosed marketing authorization, winning only 19 per cent of those proceedings. Of course, pioneers’ principal tool to exclude competition is infringement litigation. The data, however, revealed that the patents driving these proceedings are not universally strong. Indeed, generics won 62 per cent of the 149 cases in the study period subject to final judgment. Meanwhile, inefficiencies in the European patent framework in the form of parallel litigations in different member states led to conflicting judgments in 11 per cent of final decisions. Such litigation imposed considerable private costs, however, estimated to exceed €420 million.

13.69  The report thus portrayed a complex regulatory environment hardly conducive of fluid entry, and awash in strategic opportunities for pioneer drug makers to delay generic competition. Yet, the dynamic interplay of originator and generic rivals leads to ambiguous outcomes from the perspective of social welfare, since enhanced exclusivity magnifies R&D incentives on the part of originators but creates static-efficiency losses. The Commission did little to address these complexities, though it stands to reason that effective monopoly extensions through secondary patenting—and especially sham intervention in marketing-approval proceedings—incentivize strategic exclusion, rather than breakthrough novel drugs. Ominously for pioneers that would delay generic entry using patents in such ways, the Commission emphasized:

With regard to competition between originator companies, in particular, defensive patenting strategies that mainly focus on excluding competitors without pursuing efforts and/or the refusal to grant a licence on unused patents will remain under scrutiny in particular in situations where innovation was effectively blocked.

13.70  The agency took a similarly dim view of sham proceedings, by which pioneers may file baseless petitions before marketing-authorization bodies. It invited those injured by such practices to bring such evidence to its attention.

13.71  The report bears heavily on the crux of this chapter: pay-for-delay agreements. The Commission provided useful insight into patent settlement and its proclivity for extending the patent monopoly. Given patent litigation’s cost, originators and generics often settle infringement proceedings. During the period of the study, they agreed to more than 200 such agreements. The Commission was concerned that over twenty of those settlements involved direct payments—that is, reverse exclusionary payments—that in total exceeded €200 million. Other deals involved alternative value transfers to generics, such as distribution deals or licences. The Commission displayed an uncompromising mood as to pay-for-delay agreements. It explained that exclusionary agreements may violate EU competition law, identifying: ‘[s]ettlement agreements that limit generic entry and include a value transfer from an originator company to one or more generic companies’ as likely candidates for prohibition. That is especially so ‘where the motive of the agreement is the sharing of profits via payments from originator to generic companies (p. 465) to the detriment of patients and public health budgets’. The Commission thus endeavoured to monitor patent settlements going forward, and has issued several reports since then. Indeed, it went right into action after publishing the report, opening an investigation in April 2011 into whether the world’s largest generic-drug manufacturer, Teva, had violated competition law in settling patent-infringement lawsuits in America and the United Kingdom with Cephalon. Pursuant to those 2005 settlements, Cephalon apparently agreed not to sell a generic of Profigil, a narcolepsy drug, in the EEA until October 2012.

13.72  The sentiments reflected in the report presage the by-object condemnation of pay-for-delay agreements that ensued. We now turn to the Commission’s enforcement actions.

C.  EU competition law on pay-for-delay agreements

13.73  At the time of writing, EU law on reverse-exclusionary deals finds expression in the Commission’s prohibition decisions in Lundbeck and Servier, which became publicly available in 2015.69 In both cases, the Commission treated pay-for-delay agreements as by-object restrictions that violate Article 101 TFEU, though in Servier it also analysed effects and found an abuse of dominance under Article 102 TFEU. The EU approach condemns such contracts, and appears to be less receptive of purported justifications than US courts would be.

13.74  Although the Commission’s in-depth analysis in Lundbeck and Servier reveals much, it remains difficult to predict how the Commission would treat more complex cases, such as if pioneer and drug companies settled litigation as part of a larger deal that included a reverse value transfer.70 Lundbeck and Servier involved ‘bad facts’, which make it unclear whether a by-object approach would apply to less egregious scenarios. For instance, would a value transfer from originator to generic in return for purported services as part of a settlement trigger a prohibitory rule, or would the Commission formally examine the restriction’s effects under Article 101? One would hope that it would be the latter—especially in light of Servier71 and the CJEU’s guidance in Cartes Bancaires72 —but every indication to date shows an uncompromising stance by the Commission. Lawyers should advise their clients accordingly. Indeed, in Fentanyl, the Commission had no trouble finding that a co-promotion agreement between Sandoz and Johnson & Johnson’s (p. 466) Dutch subsidiary restricted competition by object when the arrangement delayed Sandoz’s entry in return for payments that exceeded what Sandoz expected to obtain in selling its generic drug.73

a.  The Commission condemns Servier’s pay-for-delay deals

13.75  In 2014, the Commission issued its largest-ever fine for reverse payments, hitting Servier with a €331 million sum for total fines of €428 million. Having found violations of Articles 101 and 102, the Commission published its 800-page prohibition decision in July 2015.74 The anticompetitive conduct centred around Servier’s efforts to evergreen its most lucrative product, a blood-pressure drug called perindopril, after the compound patent covering it expired in 2003/2005.75 A principal effort lay in Servier’s obtaining apparently weak secondary patents, covering processes and crystalline forms. Servier referred to them as ‘blocking’ and ‘paper’ patents, some of which involved ‘zero inventive activity’.76 National jurisdictions annulled Servier’s secondary patent with the greatest exclusionary potential and the EPO revoked it in 2009. Of course—short of misleading the patent office77 —obtaining patents does not violate competition law, save perhaps in the most extreme circumstances.78 Nevertheless, even though it did not qualify each of Servier’s exclusionary practices as a violation, the Commission thought them collectively relevant because ‘they all form part of Servier’s overall and comprehensive strategy against generic companies’.79

13.76  Servier’s unlawful conduct centred on two anticompetitive practices. First, when it learned that an active-pharmaceutical-ingredient manufacturer had apparently discovered a non-infringing process for making perindopril, Servier acquired those technologies to block entry into the market.80 Second, of most relevance to this chapter, Servier paid five generic competitors more than €120 million to delay entry between 2005 and 2007. Further, Servier adopted a product-hopping strategy by which it hoped to induce patients to switch to a bioequivalent, generic version of its perindopril product before its competitors could enter the market with generic versions of Servier’s first-generation good.81

13.77  The Commission found that the pay-for-delay agreements were by-object violations of Article 101 TFEU. Although it granted that patent settlements generally benefit society, the Commission found that patentees may restrict competition by (p. 467) object if they make a significant value transfer to their competitors to restrict their ability and incentives to compete.82 The key distinction between lawful and illegal patent settlements is where factors extraneous to the litigation affect generics’ incentives to compete independently.83 Notably, patent law provides no right to pay competitors not to enter the market.84 The Commission emphasized a fundamental principle of Article 101 jurisprudence, which is that ‘each economic operator must determine independently the policy which it intends to adopt on the market’.85 Further, the economic context shows that pay-for-delay deals can make both originators and generics better off at the expense of the larger public.86 For those reasons, the Commission rejected a scope-of-the-patent test, which ‘would tend to perpetuate very high costs to consumers for medicine compounds whose patent protection had expired’, and observed the US Supreme Court’s recent holding in Actavis to similar effect.87 Hence, the rule against pay-for-delay arrangements: ‘settlement agreements rewarding a competitor for staying out of the market distinctly pursue the object to restrict competition’.88

13.78  Based on that analysis, the Commission adopted the following test to determine whether a patent settlement restricts competition by object: (1) the generic undertaking and the originator undertaking were at least potential competitors; (2) the generic undertaking committed itself in the agreement to limit, for the duration of the agreement, its independent efforts to enter one or more EU markets with a generic product; and (3) the agreement was related to a transfer of value from the originator undertaking as a significant inducement which substantially reduced the incentives of the generic undertaking to independently pursue its efforts to enter one or more EU markets with the generic product.89

13.79  The Commission also found that the exclusionary agreements lasted through the entire period of the patent term, reflected the expected profit to generics from successful entry, and—perhaps most importantly—exceeded the scope of the underlying patent litigation.90 In that last respect, the pay-for-delay agreements granted Servier larger exclusionary effect than if it had simply litigated its secondary patents and won.

13.80  Encouragingly, however, the Commission did not confine itself to by-object analysis, but also analysed effects ‘for the sake of completeness’.91 It carefully analysed (p. 468) each of the five pay-for-delay agreements into which Servier entered with genericcompanies, finding that each agreement restricted competition by effect in light of Servier’s market position, each generic’s being a potential competitor of Servier, the fact that significant reverse payments changed generics’ incentives to accept the exclusive clauses of each agreement, and the fact that competition would have existed absent the agreements.92 Among other considerations, there were ‘real concrete possibilities’ for competition or ‘for a new competitor to penetrate the relevant market and compete with the undertakings already established’.93

13.81  The Commission rejected an argument that certain reverse payments did not delay entry. Under EU law, the Commission need not prove that a challenged restriction had an anticompetitive effect, as long as ‘it has the potential’ or ‘simply be capable’ of negatively impacting competition.94 As the CJEU held in 2014, though, not just any potential will suffice to obviate the need for effects-based analysis: rather, the ‘behaviour ... may be considered so likely to have negative effects ... that it may be considered redundant ... to prove that they have actual effects on the market’.95

13.82  It bears noting that the facts in Servier were egregious. There was a reference to a generic’s ‘taking the money in exchange for being bought out’ by Servier.96 One generic characterized its received payment in terms of ‘Perindopril sales sacrificed in settlement’.97 A Servier document characterized the deals as ‘4 years gained—great success’, as the invalidity holding in England and Wales came four years after Servier’s primary patent on perindopril had expired.98 One generic firm’s documents referred to the possibility of ‘having a pile of cash from Servier’.99 In terms of its secondary-patent applications, Servier referred to a ‘maze of patents’.100

(p. 469) 13.83  Uniquely in the pay-for-delay setting, the Commission also found an Art. 102 violation. It did so based on ‘Servier’s API technology acquisition and reverse payment settlements[, which] formed part of a single exclusionary strategy to buy out potential sources of generic competition as part of broader anti-generic strategy’.101 As with its analysis of effects notwithstanding its by-object finding, the Commission may have been simply covering its bases. Still, Servier’s conduct went beyond paying for delay. In particular, the firm acquired alternative technologies that generics needed to manufacture competing drugs. Servier apparently did not obtain this technology to use it productively, but solely to deny its use to generic rivals. Consistent with the Commission’s remarks in its 2009 sector study, the acquisition of IPRs for purely exclusionary purposes may violate EU competition rules.

b.  The Lundbeck decision

13.84  In June 2013, the Commission fined Lundbeck €93 million for paying four rivals not to market generic versions of citalopram, an anti-depressant. The Commission released its nearly 500-page decision in 2015.102 As in Servier, the primary patent had expired, such that the originator firm ‘no longer enjoyed complete blocking power against production and sales of citalopram by generic undertakings’.103 Instead, Lundbeck relied on less robust exclusivity in the form of secondary patents.

13.85  The Commission employed by-object analysis to condemn the deals. Generics’ accepting commitments not to compete for the duration of the agreements ‘through the transfer of considerable value ... were by their very nature injurious to the proper functioning of normal competition and ... are restrictions of competition by object’.104 Whether such summary condemnation governs all settlements that involve payment from pioneer to generic, however, remains unclear.105 Like Servier, the facts in Lundbeck appear to have been particularly bad. Indeed, the agreements reached beyond the scope of the patents because Lundbeck accomplished greater exclusionary effect than would have been possible if it had litigated its patents and won.106 The agency uncovered documents referring to the formation of a ‘club’ leading to the conspirators’ sharing ‘a large pile of $$$’ and to ‘the art of playing a losing hand slowly’.107

(p. 470) c.  Conclusion

13.86  Although EU competition law on pay-for-delay agreements is in its formative stage, the Commission has zero tolerance for originators that pay generics to abandon validity or infringement litigation. Its by-object analysis to date may warrant some criticism for, even if reverse payments can harm efficiency, the economics of the phenomena are complex. In that respect, one might consider Advocate General Wahl’s explanation in Cartes Bancaires that by-object condemnation is properly employed ‘when experience based on economic analysis shows that a restriction is constantly prohibited that it seems reasonable to penalise it directly for the sake of procedural economy’.108 The General Court’s anticipated rulings in Lundbeck and Servier remain pending at the time of publication, though they will no doubt shed light on reverse exclusionary payments under EU law. It will be interesting to see whether the Commission’s by-object approach—though supplemented by effects-based analysis in Servier—will give way to an exclusively effects-driven analysis consistent with the spirit of Cartes Bancaires. In the meantime, however, pay-for-delay settlements appear to violate EU law without regard to anticompetitive effects.

Footnotes:

1  Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1073 (11th Cir. 2005), cert. denied, 548 U.S. 919 (2006); In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 215 (2d Cir. 2006), cert. denied, 551 U.S. 1144 (2007); In re Ciprofloxacin Hydrochloride Antitrust Litig., 604 F.3d 98, 105 (2d Cir. 2010) (per curiam), cert. denied, 131 S. Ct. 1606 (2011); In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1333 (Fed. Cir. 2008), cert. denied, 129 S. Ct. 2828 (2009).

2  In re K-Dur Antitrust Litig., 686 F.3d 197, 218 (3d Cir. 2012); In re Cardizem CD Antitrust Litig., 332 F.3d 896, 908 (6th Cir. 2003).

3  FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013).

4  Ibid. at 2236.

5  See European Comm’n, Press Release, Antitrust: Commission fines Servier and five generic companies for curbing entry of cheaper versions of cardiovascular medicine (9 July 2014), <http://europa.eu/rapid/press-release_IP-14-799_en.htm>; European Comm’n, Press Release, Antitrust: Commission fines Lundbeck and other pharma companies for delaying market entry of generic medicines (19 June 2013), <http://europa.eu/rapid/press-release_IP-13-563_en.htm>; European Comm’n, Press Release, Antitrust: Commission fines Johnson & Johnson and Novartis €16 million for delaying market entry of generic pain-killer fentanyl (10 Dec. 2013), <http://europa.eu/rapid/press-release_IP-13-1233_en.htm>.

6  35 U.S.C. § 282.

7  It would be irrational for the patentee to sue for infringement because it would have a zero-per-cent chance of succeeding, but would suffer $3 million in suing. Thus, the expected value of entry to the entrant is the present value of its future profits from the duopoly.

8  Indeed, a recurring contemporary criticism of the pharmaceutical industry is that it has recently developed too few new chemical entities and too many minor adjustments of existing drugs.

9  Some enforcers seem to have alluded to this distinction. The European Competition Commissioner, for instance, observed in a prominent pay-for-delay action that ‘[a]fter Lundbeck’s basic patent for the citalopram molecule had expired, it only held a number of related process patents which provided a more limited protection. Producers of cheaper, generic versions of citalopram therefore had the possibility to enter the market’. European Comm’n, Press Release: Antitrust: Commission fines Lundbeck and other pharma companies for delaying market entry of generic medicines (19 June 2013).

10  Note that, under Actavis, it is possible that only the litigation costs saved by the pioneer firm making the reverse payment count. Actavis, 133 S. Ct. at 2236 (referencing a reverse payment’s ‘scale in relation to the payor’s anticipated future litigation costs’). From an economic perspective, however, there is a sound argument that courts should measure the reverse payment against all litigation costs saved by the parties.

11  35 U.S.C. § 282.

12  Alan Devlin, ‘Exclusionary Strategies in the Hatch-Waxman Context’, Mich. St. L. Rev. 631, 656 (2007).

13  21 U.S.C. § 355(b)(1).

14  21 U.S.C. § 355(j)(2)(A).

15  21 U.S.C. § 355(j)(5)(B)(iv).

16  21 U.S.C. § 355(j)(2)(A)(vii).

17  21 U.S.C. § 355(j)(2)(B).

18  21 U.S.C. § 355(j)(5)(B)(iii).

19  Comments of Generic Pharm. Ass’n to FTC on Authorized Generic Drug Study 2 (27 June 2006), <https://www.ftc.gov/system/files/documents/public_comments/2006/06/062806gpha.pdf>.

20  In re Cardizem CD Antitrust Litig., 332 F.3d 896, 907–08 (6th Cir. 2003). But see Asahi Glass Co. v. Pentech Pharma., Inc., 289 F. Sup. 2d 986, 994 (N.D. Ill. 2003) (Posner, J., sitting by designation) (questioning antitrust condemnation of reverse-payment settlements).

21  In re Cardizem, 332 F.3d at 908.

22  See Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49 (1990).

23  Blonder-Tongue Labs., Inc. v. Univ. of Ill. Found., 402 U.S. 313, 343 (1971) (quoting Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U.S. 806, 816 (1945)).

24  Valley Drug Co. v. Geneva Pharma., Inc., 344 F.3d 1294, 1309–12 (11th Cir. 2003).

25  Schering-Plough Corp. v. Fed. Trade Commn, 402 F.3d 1056 (11th Cir. 2005).

26  Ibid. 1065–66.

27  Ibid. 1064 (quoting Valley Drug Co. v. Geneva Pharms., 344 F.3d 1294, 1304 (11th Cir. 2003)).

28  Ibid. 1066.

29  See Andrx Pharma., Inc. v. Elan Corp., 421 F.3d 1227, 1231–36 (11th Cir. 2005).

30  In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 208–09 (2d Cir. 2006); see also Arkansas Carpenters Health & Welfare Fund v. Bayer AG, 604 F.3d 98 (2d Cir. 2010), cert. denied, 131 S. Ct. 1606 (2011) (per curiam).

31  In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F.3d 1323, 1333 (Fed. Cir. 2008).

32  Ibid. 1336.

33  See generally ibid. 1335 (distinguishing In re Cardizem, 332 F.3d at 907–08).

34  FTC Study: In FY 2012, Branded Drug Firms Significantly Increased the Use of Potential Pay-for-Delay Settlements to Keep Generic Competitors Off the Market (2013).

35  FTC Staff Study, Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions (2010).

36  In re K-Dur Antitrust Litig., 686 F.3d 197, 217–18 (3d Cir. 2012).

37  FTC v. Watson Pharma., 677 F.3d 1298, 1312–15 (11th Cir. 2012).

38  Actavis, 133 S. Ct. at 2237.

39  Actavis may affect antitrust–patent issues beyond pay-for-delay agreements because it changed how competition and patent laws intersect. Chapter 2 discussed that jurisprudential shift. This section explains the law on reverse-exclusionary deals under Actavis.

40  Actavis, 133 S. Ct. at 2237–38.

41  Ibid. 2236–37.

42  In re Effexor XR Antitrust Litig., No. 11-cv-5479, 2014 U.S. Dist. LEXIS 142206, at *64 (D.N.J. Oct. 6, 2014) (interpreting Actavis such that ‘the Supreme Court focuses on the antitrust intent of the settling parties’).

43  Actavis, 133 S. Ct. at 2237–38.

44  Ibid. 2236–37.

45  Ibid. 2236 (‘The owner of a particularly valuable patent might contend, of course, that even a small risk of invalidity justifies a large payment. But, be that as it may, the payment (if otherwise unexplained) likely seeks to prevent the risk of competition.’).

46  Ibid. 2237.

47  Ibid. 2237.

48  Ibid. 2236.

49  Ibid. 2237.

50  King Drug Co. v. Cephalon, Inc., 88 F. Supp. 3d 402 (E.D. Pa. 2015).

51  Ibid. 413-14 (citing In re Lamictal, 18 F. Supp. 3d at 565; In re Loestrin 24 FE Antitrust Litig., 45 F. Supp. 3d 180 (D.R.I. 2015)).

52  Ibid. (citing In re Nexium, 2014 WL 4370333, at *23).

53  Cf. ibid. 421–22 (a fact question existed whether the generic would have launched at risk) and In re Nexium Antitrust Litig., 1:12-md-2409, Dkt. 1383 (D. Mass. Dec. 5, 2014) (jury verdict finding that the net effects of a pay-for-delay agreement were anticompetitive under the rule of reason, but no antitrust violation existed because the patentee would not have agreed to allow a generic to launch before patent expiration); see also In re Niaspan, 42 F. Supp. 3d 735, 755–57 (E.D. Pa. 2014) (plaintiff sufficiently alleged antitrust injury by averring that generic would have launched at risk but for the pay-for-delay agreement, the size of which indicated that the protected patent was weak).

54  Accord Actavis, 133 S. Ct. at 2245 (Roberts, C.J., dissenting).

55  In re Loestrin, 45 F. Supp. 3d at 192–93; see also In re Lamictal Direct Purchaser Antitrust Litig., 18 F. Supp. 3d 560, 567 (D.N.J. 2014), rev’d sub nom, King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp., 791 F.3d 388 (3d Cir. 2015).

56  King Drug, 791 F.3d at 388; In re Actos End Payor Antitrust Litig., No. 13-CV-9244, 2015 WL 5610752, at *13 (S.D.N.Y. Sept. 22, 2015); In re Aggrenox Antitrust Litig., 94 F. Supp. 3d 224, 242–43 (D. Conn. 2015); United Food v. Teikoku Pharma USA, Inc., 74 F. Supp. 3d 1052 (N.D. Cal. 2014); In re Niaspan, 42 F. Supp. 3d at 2014 U.S. Dist. LEXIS 124818, at *32; In re Nexium Antitrust Litig., 968 F. Supp. 2d 367, 392 (D. Mass. 2013); see also In re Lipitor Antitrust Litig., MDL No. 2332, 2013 U.S. Dist. LEXIS 126468, at *26 (noting in dicta that ‘nothing in Actavis strictly requires that the payment be in the form of money’).

57  Effexor, 2014 U.S. Dist. LEXIS 142206, at *62.

58  King Drug, 791 F.3d at 388.

59  Cf. In re Wellbutrin XL Antitrust Litig., __ F. Supp. 3d __, 2015 WL 5582289 (E.D. Pa. Sept. 23, 2015) (in an unusual case where the challenged pioneer-generic reverse settlement ‘allowed the underlying patent litigation to continue’, plaintiff could not proceed to trial on pioneer’s agreement not to market an authorized generic due to lack of evidence that the agreement ‘delayed the launch of a generic product’); see also FTC v. AbbVie, 107 F. Supp. 3d 428 (E.D. Pa. 2015).

60  King Drug, 88 F. Supp. 3d at 417.

61  Actavis, 133 S. Ct. at 2236–37.

62  In re Effexor, 2014 U.S. Dist. LEXIS 142206, at *75–76.

63  Ibid. *75.

64  Ibid.

65  C-457/10 P, AstraZeneca v. Comm’n, E.C.R. __ [not yet published], [2013] 4 C.M.L.R. 7.

66  European Comm’n, Antitrust: Commission fines Servier and five generic companies for curbing entry of cheaper versions of cardiovascular medicine p. 3 (9 July 2014).

67  European Comm’n, Pharmaceutical Sector Inquiry Report (2009) (‘Pharmaceutical Report’).

68  See Chapter 7.

69  AT.39612—Perindopril (Servier), Commission Decision of 9.7.2014 (Servier Decision); AT.39226—Lundbeck, Commission Decision of 19.6.2013 (Lundbeck Decision).

70  Servier did note, however, that there are legitimate circumstances in which a value transfer as part of a patent settlement: even from originator to generic, such as if the originator had wrongly excluded a generic from the market through threatened litigation involving a weak patent and thus had to compensate the generic. Servier Decision, para. 1143.

71  Servier Decision, para. 1143 (‘[T]he Commission examines value transfers on a case by case basis’).

72  C-67/13 P, Groupement de cartes bancaires v. Comm’n, 2014 E.C.R. __ [not yet published], [2014] 5 C.M.L.R. 22.

73  AT.39685—Fentanyl, Commission Decision of 10.12.2013.

74  Servier Decision.

75  Ibid. para. 4.

76  Ibid. para. 5.

77  Case C-457/10 P, AstraZeneca v. Comm’n, E.C.R. __ [not yet published], [2013] 4 C.M.L.R. 7.

78  See Chapter 10, discussing Boehringer Ingelheim.

79  Servier Decision, para. 4.

80  Ibid. para. 6.

81  Ibid. para. 8.

82  Ibid. paras. 1118, 1134.

83  Ibid. paras. 1136–37.

84  Ibid. para. 1137.

85  Ibid. para. 1139.

86  Ibid. paras. 1146–53.

87  Ibid. paras. 1193, 1199.

88  Ibid. para. 1141.

89  Ibid. para. 1154.

90  Ibid. para. 1155.

91  Ibid. paras. 1213, 1228–2122.

92  Ibid.

93  Ibid. paras. 1506, 1659, 2024, 2052.

94  See Case C-8/08, T-Mobile Netherlands BV v. Raad van bestuur van de Nederlandse Mededingingsautoriteit, 2009 E.C.R. I-4529, para. 31; see also Case C-7/95 P, John Deere, Ltd v. Comm’n, 1998 E.C.R. I-3111, paras. 77–78.

95  Case C-67/13 P, Groupement des cartes bancaires v. Comm’n, E.C.R. __[not yet published], [2014] para. 51. Note that, in 2015 in Toshiba, Advocate General Wathelet carefully explored the case law and principles underlying the treatment given by-object restrictions. Case C-373, Toshiba Corp. v. Comm’n, E.C.R. __ [not yet published] [2015], paras. 39–91. He noted confusion that had flowed from the Court’s instruction to assess ‘the economic and legal context’ of a restriction—including ‘the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market or markets in question’—to determine whether it restricted competition by object. Ibid. 52–54 (discussing Case C-32/11, Allianz Hungária Biztosító Zrt. v. Gazdasági Versenyhivatal, E.C.R. __ [not yet published], [2013] 4 C.M.L.R. 25). He opined that the depth of the requisite analysis of the restriction’s economic and legal context depends on whether the agreement falls within one of the situations referred to in Art. 101(1) TFEU or is atypical and complex. Toshiba 88–91.

96  Servier Decision, para. 1140.

97  Ibid. para. 1339.

98  Ibid. paras. 4, 112.

99  Ibid. para. 694.

100  Ibid. para. 2742.

101  Ibid. para. 2962.

102  Lundbeck Decision.

103  Ibid. para. 3.

104  Ibid. paras. 821, 959, 1084, 1171.

105  In Servier, though, the Commission did note that a reverse payment could possibly be appropriate. Servier Decision, para. 1143.

106  Lundbeck Decision, paras. 642, 662, 693, 824, 874, 962, 1013, 1087.

107  Ibid. paras. 187, 298, 804.

108  C-67/13 P, Groupement des cartes bancaires v. Comm’n, E.C.R. __ [not yet published], Opinion of Advocate General Wahl, para. 55 (27 Mar. 2014).