On 25 March 2021 the European Court of Justice (ECJ) dismissed all the appeals brought by Danish pharmaceutical company H. Lundbeck A/S (Lundbeck) and five generic manufacturers against the judgments of the General Court of the European Union (GCEU), thus upholding (1) a decision of the European Commission (EC) on patent settlement agreements between Lundbeck and five generic manufacturers. The judgment is significant as regards the interpretation and application of fundamental notions of EU competition law, such as ‘by object’ restrictions and ‘potential competition’. It also provides important guidance on when companies need to keep documents on file.
Between 1977 and 1985, Lundbeck developed and patented an antidepressant medicine containing the active substance “citalopram” and two processes for the manufacture thereof (the “original patents”). The original patents were issued in Denmark and in a number of western European countries. Over time, Lundbeck developed additional processes for the manufacture of citalopram for which it obtained patents in several countries, such as Denmark, the United Kingdom and the Netherlands (the “process patents”).
Between 1994 and 2003, the original patents had expired. However, Lundbeck still held the process patents covering possible ways to manufacture citalopram. As generic versions of citalopram were about to enter the market, a number of patent disputes arose between Lundbeck and generic producers. These disputes pertained to the potential infringement or, indeed, validity of the process patents. To settle the disputes, Lundbeck, in 2002, concluded six agreements with four groups of generic manufacturers (collectively, “the generics”). Pursuant to these agreements, Lundbeck provided significant financial compensation to the generics. In return, each of the generics committed to delay their entry on the market with the generic version of citalopram (agreements referred to collectively as “the patent settlement agreements”).
In October 2003, the EC was informed of the patent settlement agreements by the Danish competition authority. Between 2003 and 2006, the EC conducted inspections at the premises of Lundbeck, and in January 2008 the EC launched a sector inquiry into the European pharmaceutical sector. Following an investigation into the patent settlement agreements, in 2013 the EC concluded that they restricted competition “by object”, i.e., by their very nature. The EC fined Lundbeck €93.7 million and the generics a total of €52.2 million (Commission Decision C(2013) 3803 final relating to a proceeding under Article 101 [TFEU] and Article 53 of the EEA Agreement (Case AT.39226 – Lundbeck). In setting the fines, the EC considered that the amounts paid by Lundbeck to the generics corresponded approximately to the profits that they would have made had they entered the market. The parties to the patent settlement agreements appealed the EC’s decision to the GCEU, which, in September 2016, upheld the EC’s decision in full. Lundbeck and the generics subsequently brought appeals before the ECJ, which dismissed them in their entirety.
The ECJ judgment
1. Potential competition
The ECJ ruled that, at the time of the patent settlement agreements, Lundbeck and the generics were potential competitors. In line with its reasoning in Generics UK and others v CMA (“Paroxetine”) (judgment in case C-307/18 Generics (UK) Ltd and Others v Competition and Markets Authority  EU:C:2020:52), the ECJ held that, to assess whether a company is a potential competitor, there must be „real and concrete possibilities“ of it joining the market and competing with those companies already present thereon (C-591/16 P Lundbeck v Commission, para. 54). The test consists of two steps:
Step 1: It is necessary to assess whether “the generic manufacturer had taken sufficient preparatory steps to enable it to enter the market concerned [in this case citalopram] within such a period of time as would impose competitive pressure on the manufacturer of originator medicines” (C-591/16 P Lundbeck v Commission, para. 57).
Such preparatory steps must be such that they demonstrate that “the manufacturer of generic medicines has in fact a firm intention and an inherent ability to enter the market”. These include, inter alia, actions taken by the generic manufacturer to obtain a marketing authorization or equivalent authorization necessary for the marketing of its generic medicine, or legal actions to challenge the validity of the patent held by the originator (C-591/16 P Lundbeck v Commission, paras. 56, 59, 86). Meeting these criteria is sufficient and it is not necessary to demonstrate with certainty that the generic manufacturers will in fact enter the market and successfully remain thereon.
Step 2: It must be determined “that the market entry of a generic manufacturer does not meet barriers to entry that are insurmountable”. Specifically, “the existence of a patent which protects the manufacturing process of an active ingredient that is in the public domain cannot, as such, be regarded as an insurmountable barrier, regardless of the presumption of validity attached to that patent” (C-591/16 P Lundbeck v Commission, para. 58). As such, a competition authority is not required to review the strength of the patent or the chances that it will be found to be infringed.
The ECJ, in line with precedent, including Paroxetine, also ruled that “[a] finding of potential competition between a manufacturer of generic medicines and a manufacturer of originator medicines can be confirmed by additional factors, such as the conclusion of an agreement between them at a time when the former was not present on the market concerned” (C-591/16 P Lundbeck v Commission, para. 57 and C-307/18 Generics (UK) Ltd and Others v Competition and Markets Authority, paras 54-56). A further indication of potential competition is the transfer of value by a manufacturer of originator medicines to a manufacturer of generic medicines in exchange for the postponement of the latter’s market entry, even though the former claims that the latter is infringing one or more of its process patents. The greater the transfer of value, the stronger the indication (C-307/18 Generics (UK) Ltd and Others v Competition and Markets Authority, para. 56).
Drawing upon previous rulings, the ECJ therefore lays down a significant criterion of potential competition: The conclusion of an agreement between companies operating at the same level in the production chain, especially at a point when one of the parties does not yet have a presence in the market, is a strong indication of potential competition between the parties (C-307/18 Generics (UK) Ltd and Others v Competition and Markets Authority, para 55).
2. Restrictions of competition “by object”
The ECJ reaffirmed its conclusions in previous rulings, including Paroxetine (C-307/18 Generics (UK) Ltd and Others v Competition and Markets Authority,), that:
“The concept of restriction of competition ‘by object’ must be interpreted strictly and can be applied only to some agreements between undertakings which reveal, in themselves and having regard to the content of their provisions, their objectives, and the economic and legal context of which they form part, a sufficient degree of harm to competition for the view to be taken that it is not necessary to assess their effects [..]” (C-591/16 P Lundbeck v Commission, para. 112).
In the eyes of the ECJ, a finding of “restriction by object” is appropriate when it is clear that a transfer of money from an originator to a generic company only serves the parties’ common commercial interest not to compete on the merits. Further, the assessment of whether the net gain via the value transfers was sufficiently significant to act as an incentive for the manufacturer of generic medicines to refrain from entering the market concerned and not to compete on the merits with the originator must be conducted on a case-by-case basis. Such an incentive—as induced by significant payments—was demonstrated in the cases at hand. Lundbeck had not identified any pro-competitive effects of the patent settlement agreements that could offset their harm to competition.
The ECJ ruled also that a settlement agreement between the holder of a process patent and a party allegedly infringing that patent constitutes the legitimate expression of the intellectual property right of the holder of the process patent insofar as that patent is protected. However, such agreement must not go beyond the specific subject matter of the protection of the intellectual property rights and infringe competition law. The ECJ found that the patent settlement agreements went beyond the specific subject matter of Lundbeck’s patents; indeed, while the right to challenge infringements does fall with the subject matter of the patent, the right to enter into agreements by which actual or potential competitors are paid for not competing does not fall within the subject matter of the patent.
3. The undertakings’ obligation of diligence in the context of a sector inquiry
Another significant point made by the ECJ in its judgment in the appeal of Xellia Pharmaceuticals (Xellia) and Alpharma (formerly Zoetis) (C-611/16 P Xellia Pharmaceuticals and Alpharma v Commission,) concerns a company’s obligation of diligence to the extent that the generics were required to maintain any document relevant for their defence in the context of a future administrative procedure.
Xellia and Alpharma had argued that the EC infringed their rights of defence by failing to inform them in a timely manner of the existence of an investigation concerning the patent settlement agreements in question. As a result, they did not retain any exculpatory evidence. Xellia and Alpharma argued that the EC’s investigation started in 2003, but they were informed about it only in 2010 and 2011.
The ECJ held that the GCEU had erred in law by imposing an obligation of diligence that is applicable from the time of the initiation of the administrative procedure by the EC against an individual party. In respect of Xellia and Alpharma, the period of diligence could only apply from 2010 and 2011, when the procedure was opened against them.
However, contrary to the GCEU, the ECJ found that the point from which a company is bound by a specific duty to retain all necessary evidence coincides with the opening of a general EC inquiry into a particular sector, i.e., a sector inquiry (as opposed to the opening of an administrative procedure against an individual party). Thus:
“when the Commission initiates sector inquiries, undertakings belonging to the sector concerned and, in particular, those which have concluded agreements expressly referred to in the decision initiating the inquiry, as was the case with Zoetis and Xellia, must expect that individual procedures may possibly be initiated against them in the future”. (C-611/16 P Xellia Pharmaceuticals and Alpharma v Commission, para. 154.)
The opening of a sector inquiry:
“constitutes a factor which should lead them to take precautions against the loss, due to the passage of time, of evidence that might prove to be useful to them in the context of subsequent administrative procedures or judicial proceedings”. (C-611/16 P Xellia Pharmaceuticals and Alpharma v Commission, para. 152.)
Companies in the pharma sector in particular should bear in mind the following:
Patent settlement agreements between the holder of a (process) patent and an alleged infringer are not per se illegal. However, patent settlement agreements may be caught by the EU competition rules (and indeed by the US antitrust rules (see e.g. Case: 19-60394, Impax Laboratories, Incorporated, a corporation, versus Federal Trade Commission, 13 April 2021))if they are concluded between potential competitors, such as an originator and a manufacturer of generics, and involve payments by the former to the latter in exchange for the latter’s delayed market entry (“pay-for-delay”).
An originator and a generic manufacturer may be found to be potential competitors if there is a real and concrete possibility—absent the agreement—of the generic manufacturer entering the market and competing with the originator. An agreement between an originator and generic manufacturers not yet present on the market may provide a strong indication that the originator and the generic manufacturers are potential competitors.
A patent settlement agreement will often be found restrictive of competition by object, i.e., by its very nature, if the transfer of value from the originator to the generic company is clearly sufficiently significant to incentivize the latter to refrain from entering the market. The greater the transfer of value, the stronger the indication.
If the payment corresponds to the generic manufacturer’s anticipated profits post-entry or to the damages that could have been paid if the generic manufacturer had succeeded in litigation against the originator, the agreement may be found restrictive of competition by its very nature.
If no pro-competitive effects of the agreement can be demonstrated, and it is plain that the agreement is inherently restrictive of competition, then the EU Commission will likely not assume any need to look at the competitive effects of the agreement.
Companies active in a sector covered by an EC sector inquiry must be aware that an investigation could potentially be initiated against them. The launch of a sector inquiry by the EC implies a need to retain any and all exculpatory documents going forward.
(1) See judgments in cases C-586/16 P Sun Pharmaceutical Industries and Ranbaxy (UK) v Commission  EU:C:2021:241; C-588/16 P Generics (UK) v Commission  EU:C:2021:242; C-591/16 P Lundbeck v Commission  EU:C:2020:428; C-601/16 P Arrow Group and Arrow Generics v Commission  EU:C:2021:244; C-611/16 P Xellia Pharmaceuticals and Alpharma v Commission  EU:C:2021:245; and C-614/16 P Merck v Commission.  EU:C:2021:246.