Reverse payment settlement agreements under scrutiny

Out-Law News | 31 Jan 2020 | 2:44 pm | 3 min. read

Competition authorities across Europe are likely to enhance their scrutiny of reverse payment settlement agreements in pharmaceuticals markets in light of a ruling issued by the EU's highest court, a competition law expert has said.

On Thursday, the Court of Justice of the EU (CJEU) provided some clarification on when reverse payment settlement agreements will constitute agreements that restrict competition by object, restrict competition by effect and/or breach rules on the abuse of a dominant market position.

Vidal Robert

Robert Vidal


The ruling lowers the bar for antitrust enforcement involving reverse payment settlement agreements and will have significant implications for pharma companies who are considering the settlement of a dispute or litigation

Under Article 101 of the Treaty on the Functioning of the EU (TFEU) there is a general ban on organisations putting in place agreements which may affect EU trade where those agreements "have as their object or effect the prevention, restriction or distortion of competition within the internal market".

The abuse of a dominant market position is also generally prohibited under Article 102 of the Treaty.

'Reverse payment settlement' is a term used to describe cases where generic medicine manufacturers agree to delay the launch of new products into a market in return for some form of consideration by pharmaceutical manufacturers of originator products for which patent rights are in dispute.

Competition law expert Robert Vidal of Pinsent Masons, the law firm behind Out-Law, said the CJEU had sided with the position taken by a number of competition law authorities and that its judgment also chimes with an opinion issued by an advocate general to the court published last week in a separate case.

In its ruling the CJEU explored the circumstances in which generic medicine manufacturers can be said to be 'potential competitors' to originator manufacturers. The concept is important to determining whether the companies can be said to be active in the same market and therefore to an assessment of the impact on competition in the market of a reverse payment settlement agreement between those companies.

"The traditional legal test used to determine whether a generic is a 'potential competitor' is whether they have a real and concrete possibility of entering the relevant market," Vidal said. "The CJEU has now declared that a generic would have to prove there is an 'insurmountable barrier' to entry in order to show it is not a potential competitor. It is difficult to see what such a barrier could be given that a valid patent in a blocking position will not be regarded as a sufficient barrier to entry as the CJEU believes such an approach would 'frustrate EU competition law'."

"A significant factor will be whether the innovator perceives the generic to be a potential competitor. In fact, the reverse payment settlement will itself be an indicator that such a perception of potential entry exists. What was an objective requirement has now been transformed into a subjective and somewhat circular test. The CJEU also found that the scale of 'transfer of value' in a settlement agreement is relevant in determining if the agreement amounts to an ‘object’ infringement," he said.

According to the CJEU, reverse payment settlement agreements will not be considered anti-competitive 'by object' if "the settlement agreement concerned is accompanied by proven pro-competitive effects capable of giving rise to a reasonable doubt that it causes a sufficient degree of harm to competition".

Defining the market in which companies operate is fundamental to considerations of whether a business is dominant in a market and, if so, whether it has abused its position of dominance. In that respect, the CJEU explained when generics can be said to be operating in the same market as originators.

Generic versions of the originator product should be taken to be active in the same market even if patent rights serve as a barrier to entry so long as the generics "are in a position to present themselves within a short period on the market concerned with sufficient strength to constitute a serious counterbalance to the manufacturer of originator medicines already on that market", the court said.

The CJEU also explained when strategies adopted by dominant originator manufacturers that involve the companies settling disputes over the validity of their patents will constitute an abuse of dominance.

If those settlements at least temporarily keep potential generic competitors out of the market the strategy will be said to be an abuse of dominance if it "has the capacity to restrict competition and, in particular, to have exclusionary effects, going beyond the specific anticompetitive effects of each of the settlement agreements that are part of that strategy", the court said.

Vidal said: "The ruling lowers the bar for antitrust enforcement involving reverse payment settlement agreements and will have significant implications for pharma companies who are considering the settlement of a dispute or litigation."

The CJEU was ruling on the issues after questions of EU law were referred to it from the Competition Appeals Tribunal (CAT) in the UK. The CAT is considering a dispute between a number of pharmaceutical companies and the UK's Competition and Markets Authority (CMA).

In 2016, the CMA imposed fines totalling £44.99 million on the companies after it said they had breached competition laws. The CMA took issue with three agreements relating to the anti-depressant drug paroxetine. The agreements had been entered into in the early 2000s within the context of a patent dispute between GSK and several generics. The companies fined by the CMA have challenged that decision before the CAT.