Drug manufacturers urged to reconsider patent dispute strategies in response to ground-breaking EU and US rulings.

On 19 June the EC published its first decision on “pay for delay” settlements, levying fines of €93 million on Lundbeck, a Danish pharmaceuticals developer. The decision was followed, just two days later, by a landmark decision of the US Supreme Court clarifying the scope of review of pay for delay settlements under competition law.

Drug manufacturers (and their lawyers) will need to review their litigation strategies in light of these crucial decisions.

Pay for delay: in a nutshell

The balance between incentivising innovation and the promotion of competition in the world of pharmaceutical drug development is satisfied by the grant of a patent; the innovator enjoys monopoly protection for a limited duration, after which generic producers are free to enter the market. Litigation arises when the generic producer tries to enter the market protected by a secondary patent – for example where the patent holder has reformulated the original patent into a liquid, rather than a tablet form, thereby extending the period of patent protection.

In a typical pay for delay case:

• The generic producer enters the market before the innovator’s secondary patent expires.
• The innovator takes infringement proceedings against the generic producer.
• The generic producer counterclaims that the innovator’s patent is invalid and unenforceable.
• Before the claim reaches trial the parties reach settlement whereby the innovator makes a payment to the generic producer on the condition that the latter stays out of the market.

Such “reverse-payment” settlements have the potential to offend competition law. The monopoly price for pharmaceutical drugs has been found to be up to 90% higher than the competitive price. By accepting payment to stay out of the market (rather than continuing litigation and potentially securing the right to enter the market) the generic producer is, in effect, agreeing to preserve the innovator’s monopoly in return for a share of the monopoly profits. The recent rulings demonstrate that competition law can intervene and render reverse payment settlements unlawful.

Of course, the parties might have legitimate reasons for settling the claim. Time and financial costs of litigation considerations are of paramount importance – patent litigation is notoriously technical and expensive. The crucial question (which has been lingering for a number of years) is where the boundary of competition law jurisdiction lies.

When will a reverse-payment settlement agreement offend competition law?

Guidance from the US:

In FTC v Actavis the US Supreme Court rejected the two (conflicting) approaches previously applied by the courts (below) and adopted the “rule of reason analysis“.

Under the rule of reason analysis, courts must undertake a full analysis of the settlement’s anticompetitive and procompetitive effects.

This is a departure from the two (conflicting) tests that were previously applied by the US courts, which required either no competition analysis or a “short cut” presumption of anticompetitive effects.

This means that, for the first time, a large settlement of a patent dispute has been found to be anticompetitive.

The EU’s approach:

The EU’s first ruling on reverse-payment settlements (the Lundbeck case) indicates that the EU will also adopt the rule of reason analysis.

In this case, the dispute turned on whether Lundbeck’s manufacturing process patent would be infringed by the generic producers’ production processes (the substance patent had already expired). The dispute was settled between the parties on a reverse-payment basis: the generic producer accepted payment from Lundbeck to stay out of the market. The parties went even further, with Lundbeck also purchasing the generics’ stock for the sole purpose of destroying it and offered the generics guaranteed profits in a distribution agreement.

When reviewing the settlement, the Commission undertook a detailed analysis of the economic and legal context of the agreement to determine whether there was a violation of EU antitrust law. The Commission found that Lundbeck’s process patents did not prevent generic versions of the drug from entering the market – in fact, one generics company was already selling its own version and several others had made serious preparations to do so. By agreeing to stay out of the market, the companies had unlawfully restricted competition.

The European Commission is presently investigating two further pay for delay cases, while the OFT investigates GlaxoSmithKline and three generic companies regarding pay for delay, so additional guidance is likely to be forthcoming in the near future.

Impact on businesses

So, what can businesses with the pharmaceutical industry expect going forwards?

• The rule of reason analysis requires detailed examination of the relevant market and entails lengthy and expensive examination of expert economic evidence. As such reverse-payment settlements, if challenged, are likely to be costly and time consuming to defend.
• The case by case approach necessitated by the rule of reason test casts a veil of uncertainty over the validity of reverse-payment settlements and goes someway to counteract the certainty and time, cost and risk management benefits that attract parties to out of court settlements.
• More pharmaceutical patent cases to reach full trial (increasing the cost and the risk of commencing litigation).
• A need to adopt a more risk-averse approach to settling patent disputes.
• A need to adopt a more risk-averse approach when considering whether to commence/defend litigation.
• Continued proactive and detailed scrutiny of patent settlements by the commission.