On 30 January 2020, the Court of Justice of the European Union (the ‘CJEU’) rendered its preliminary ruling in C-307/18 – Generics (UK) and Others in response to a request from the UK Competition Appeal Tribunal (the ‘CAT’). This is a first CJEU judgment that dealt with so-called ‘pay-for-delay’ agreements, namely a form of a patent dispute settlement agreement by which the originator company agrees to transfer benefits to a generic company in exchange for the latter to undertake not to seek to enter the market with an independent generic product for a while.
In this judgment, the CJEU provided clarity about:
Under Article 101 of the Treaty on the Functioning of the European Union (‘Article 101 TFEU’):
the concept of ‘potential competition’; and
the criteria to determine whether a pay-for-delay agreement is characterised as a restriction of competition by object.
Under Article 102 of the TFEU (‘Aticle 102 TFEU’):
the definition of the relevant product market; and
the criteria to determine whether the conclusion of a set of pay-for-delay agreements amounts to an abuse of a dominant position.
We set out below first, a summary of the underlying proceedings before the CAT, and then the details of the CJEU’s ruling, followed by our comment.
1. UK Main Proceedings
On 12 February 2016, the UK Competition and Markets Authority (the ‘CMA’) fined:
GlaxoSmithKline plc and its affiliates (together ‘GSK’) £37,606,275 in total
for having concluded pay-for-delay agreements with Generics (UK) Ltd and its former parent company (together ‘GUK’) and Alpharma LLC and its former subsidiaries (together ‘Alpharma’) in violation of the prohibition imposed by section 2(1) of the UK Competition Act 1998 (the ‘Chapter I Prohibition’) and, in respect of the agreement with GUK for the period between 1 May 2004 and 1 July 2004, also Article 101 TFE; and
for having abused its dominant position on the UK paroxetine supply market in contravention of section 18 of the UK Competition Act (the ‘Chapter II prohibition’) by making significant value transfers to potential competitors to induce them to delay their potential independent entry to the UK paroxetine market.
GUK £5,841,286 in total for having concluded a pay-for-delay agreement with GSK in contravention of the Chapter I Prohibition and, with respect to the period between 1 May 2004 and 1 July 2004, also Article 101 TFEU.
Alpharma £1,542,860 in total for having concluded a pay-for-delay agreement with GSK in contravention of the Chapter I Prohibition.
GSK concluded three agreements in the years 2001-2004 following the expiry in January 1999 in the United Kingdom of its patent for the active ingredient of the originator medicine, paroxetine. Paroxetine is a prescription-only anti-depressant medicine, belonging to a class of antidepressant medicines known as selective serotonin re-uptake inhibitors (‘SSRIs’). GSK marketed paroxetine under the brand name ‘Seroxat’, which became a blockbuster product for GSK.
The brief overview of each of the three agreements (together the ‘Infringing Agreements’) is as follows:
i. GSK entered into an agreement with IVAX on 3 October 2001 (the ‘First Infringing Agreement’). Under this agreement, IVAX agreed to distribute limited quantities of GSK’s Seroxat and GSK agreed to make significant value transfers, including cash payments, to IVAX (at least £17.9 million). GSK had not brought patent infringement proceedings against IVAX prior to the conclusion of the Agreement. The agreement expired on 29 June 2004.
ii. GSK entered into a second agreement with GUK on 13 March 2002 (the ‘Second Infringement Agreement’). Prior to this, GSK had brought patent infringement proceedings against GUK. Under this agreement, GUK undertook to enter into a sub-distribution agreement with IVAX for the supply of paroxetine, and not to make, import or supply paroxetine hydrochloride in the United Kingdom during the term of that agreement. For its part, GSK agreed to make significant value transfers, including cash payments, to GUK (at least £21.3 million). The agreement expired on 1 July 2004.
iii. GSK entered into a third agreement with Alpharma on 12 November 2002 (the ‘Third Infringing Agreement’). Prior to this, GSK had brought patent infringement proceedings against Alpharma. Under this agreement, Alpharma undertook to enter into a sub-distribution agreement with IVAX for the supply of paroxetine, and not to make, import or supply in the United Kingdom any paroxetine hydrochloride other than what it would purchase from IVAX or what would be manufactured by GSK. For its part, GSK agreed to make significant value transfers, including cash payments, to Alpharma (at least £11.8 million). The agreement expired on 13 February 2004.
The First Infringing Agreement was exempted from the Chapter I prohibition by reason of the UK Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 notably because of the lack of an express restriction on entry by IVAX. Also, Article 101 TFEU was not applied to it because it was unlikely to have an anticompetitive object and/or effect during the period from 1 May 2004 to 29 June 2004 that followed the independent generic entry by Apotex Europe Ltd and its distributors in December 2003.
GSK, GUK and Alpharma brought appeals against the CMA decision before the CAT. On 8 March 2018, the CAT issued an intermediate judgment and dismissed certain grounds of appeal; but it decided to refer a number of questions to the CJEU before handing down its final judgment.
2. The CJEU Ruling
2.1 Article 101 TFEU
2.1.1 The Concept of ‘Potential Competition’
The CMA found that GUK and Alpharma were potential competitors of GSK and treated this finding as a condition for concluding that the Second and Third Infringement Agreements had the object of restricting competition. The appellants therefore challenged the CMA’s finding of potential competition. The CAT took the provisional view to dismiss those challenges. Nevertheless, it asked the CJEU whether the originator pharmaceutical company and generic pharmaceutical companies seeking to enter the market with a generic version of the originator drug are potential competitors.
The CJEU confirmed that they are potential competitors provided that the below two cumulative conditions are met:
i. The generic manufacturer has a firm intention and an inherent ability to enter the market.
ii. The market entry does not meet insurmountable barriers to entry.
(a) The First Condition
In order to satisfy the first condition, it is necessary for the generic manufacturer concerned to have taken sufficient preparatory steps to enable it to enter the market concerned within such a period of time as would impose competitive pressure on the originator manufacturer at the time when the agreement concerned was concluded. Such steps could include:
measures taken to obtain marketing authorisations;
an adequate stock of the generic medicine;
legal steps actually undertaken with a view to challenging process patents held by the originator manufacturer; and
marketing efforts to market the generic medicine.
The CJEU considered that when a generic manufacturer has taken sufficient preparatory steps, such as those, there are “real and concrete possibilities” of its entering the market, a requirement set out in the case law to consider a company that is not present in a market as a potential competitor of a company that is already present in that market.
In relation to ‘legal steps actually undertaken’, the CJEU noted that the existence of a genuine dispute as to whether a patent is valid or whether the generic medicine infringes that patent constitutes evidence of the existence of a potential competitive relationship.
The CJEU also found that the intention and the actual value transfers by an originator manufacturer to a generic manufacturer in exchange for the postponement of the latter’s market entry are strong indications of a competitive relationship between them and that “[the] greater the transfer of value, the stronger the indication”.
Moreover, the CJEU also added that “in the pharmaceutical sector, potential competition may be exerted before the expiry of a compound patent protecting an originator medicine, since the manufacturers of generic medicines want to be ready to enter the market as soon as that patent expires”.
(b) The Second Condition
With regard to the second condition, the CJEU remarked that the existence of a manufacturing process patent cannot, as such, be regarded as an insurmountable barrier.
2.1.2 Restriction by Object
The CMA found that the Second and Third Infringing Agreements had the object of restricting competition. All the applicants disagreed and argued that those Agreements brought about pro-competitive effects. Noting that such effects are “dwarfed by the effect that would flow from independent and unrestricted generic entry (“genericisation”), as indeed occurred from December 2003”, the CAT decided to refer to the CJEU a more fundamental question of whether a pay-for-delay agreement restricts competition by object.
The CJEU confirmed that a pay-for-delay agreement restricts competition by object:
i. if the net gain from the transfers of value by the originator manufacturer in favour of the generic manufacturer can have no other explanation than their commercial interest not to engage in competition on the merits;
ii. unless the agreement 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.
(a) The First Condition
Following its case-law, the CJEU assessed whether a pay-for-delay agreement displays, in itself and having regard to the content of its provisions, its objective, and the economic and legal context of which it forms part, a sufficient degree of harm to competition, for the view to be taken that it is not necessary to assess its effects for the purposes of applying Article 101(1) TFEU.
In carrying out such an assessment, the CJEU acknowledged that not all pay-for-delay agreements can be considered to be a restriction by object for two reasons. First, in light of its chances of success in the court proceedings, a generic manufacturer may decide to abandon entry to the market concerned and to conclude an agreement with the originator manufacturer to settle those proceedings. Second, transfers of value may prove to be justified, for instance, when they are made to compensate for the costs or disruption caused by the litigation or when they correspond to remuneration for the actual supply, immediate or subsequent, of goods or services.
However, the CJEU concluded that a pay-for-delay agreement must, in principle, be considered to restrict competition by object when it is plain that the transfers of value, whether pecuniary or non-pecuniary, cannot have any explanation other than the commercial interest of both the originator manufacturer and the generic manufacturer not to engage in competition on the merits.
The CJEU noted that there is no requirement for the finding of a restriction by object that the transfers of value should necessarily be greater than the profits which the manufacturer of generic medicines would have made if it had been successful in the patent proceedings. The CJEU underlined that “[a]ll that matters is that those transfers of value are shown to be sufficiently beneficial to encourage the manufacturer of generic medicines to refrain from entering the market concerned and not to compete on the merits with the manufacturer of originator medicines concerned”. In such a case, competitors deliberately substitute practical cooperation between them for the risks of competition, as required by the case law to characterize an agreement as a restriction by object.
(b) The Second Condition
The CJEU accepted that any alleged pro-competitive effects of an agreement must be taken into account when examining whether that agreement restricts competition by object. According to the CJEU, such effects must be “relevant and specifically related to the agreement concerned” and must be “sufficiently significant, so that they justify a reasonable doubt as to whether the settlement agreement concerned caused a sufficient degree of harm to competition, and, therefore, as to its anticompetitive object”.
The CJEU took the view that the pro-competitive effects of the Second and Third Infringing Agreements were not only minimal but probably uncertain and cannot be sufficient justification for holding a reasonable doubt that those Agreements revealed sufficient harm to competition. The CJEU based this conclusion mainly on the CAT’s finding that some benefits brought to consumers under the Second and Third Infringing Agreements were significantly less than the competitive benefits that would have followed an independent generic market entry.
2.2 Article 102 TFEU
2.2.1 Relevant Product Market
In its decision, the CMA found that the relevant market was the supply of paroxetine in the UK and that GSK held a dominant position in that market at least between January 1998 and November 2003. GSK challenged the finding of dominance, arguing that the relevant product market comprised all SSRIs and low dose venlafaxine. If that is the correct product market, the CMA accepted that GSK was not dominant. The CAT provisionally concluded that the relevant product market should encompass generic versions of paroxetine but not other SSRIs because significant competitive constraint on GSK’s Seroxat in economic terms came from paroxetine and not other SSRIs. The CAT decided to ask the CJEU to confirm whether the relevant product market should indeed encompass generic versions of an originator medicine when they would not be able legally to enter the market before the expiry of a process patent protecting the process of manufacturing of the originator medicine.
The CJEU confirmed that not only an originator medicine but also its generic versions must be taken into account for the purposes of definition of the relevant product market if the generic manufacturers concerned 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 originator manufacturer. For the CJEU, if generic manufacturers are in such a position, there is a sufficient degree of interchangeability between the originator medicine and the generic medicines concerned.
The CJEU noted that a generic manufacturer is in a position to enter the market immediately or within a short period on the expiry of the patent relating to the active ingredient concerned, or of the data exclusivity period of that active ingredient, particularly if it has formed a prior effective strategy for market entry, has taken the steps necessary to achieve it (e.g. the lodging of an MA application), or has concluded a supply contract with a third-party distributor. The CJEU added that the perception by the originator manufacturer of the immediacy of the threat of market entry by the generic manufacturers might also be taken into account in order to assess the significance of the competitive constraints imposed by the latter.
In its judgment, the CAT was inclined to take the position that for the purpose of finding an abuse, it was relevant to look at the three Infringing Agreements as a whole since GSK was pursuing a conscious strategy of seeking to preclude the risk of generic entry by concluding the Infringing Agreements. In this regard, the CAT asked the CJEU, in essence, whether the strategy of a dominant manufacturer of an originator medicine, which leads it to conclude a set of settlement agreements which have, at the least, the effect of keeping temporarily outside the market potential competitors who manufacture its generic versions constitutes an abuse of a dominant position within the meaning of Article 102 TFEU.
The CJEU answered affirmatively “provided that that strategy 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”.
In line with the case-law, the CJEU first confirmed that a contract-oriented strategy of a manufacturer of an originator medicine holding a dominant position in a market may be penalised not only under Article 101 TFEU by reason of each agreement taken individually but also under Article 102 TFEU for the possible additional damage that strategy may cause to the competitive structure of the market. The CJEU then found that a strategy of an originator manufacturer that leads to the conclusion of a set of settlement agreements that have at least the effect (if not the object) of delaying the market entry of generic medicines impedes, in principle, the growth of competition in the market of the originator medicine. The CJEU also noted that a significant foreclosure effect of such a strategy is liable to exceed the anticompetitive effects inherent in the conclusion of each of the settlements agreements that are part of it.
In its first judgment on pay-for-delay agreements, the CJEU presented a framework for the assessment of those agreements both under Article 101 TFEU and Article 102 TFEU.
First, the CJEU set out a test to see whether a generic company is a potential competitor to the originator. Under this test, generic companies are likely to be identified as potential competitors of the originator company where the patent covering the active ingredient has expired and generic entry is possible as long as process patents are not infringed, as in the UK Main Proceedings. The CJEU also recognized that it is also possible for generic companies to be recognized as potential competitors even before the expiry of the patent covering the active ingredient. It remains to be seen what sufficient preparatory steps generic companies need to take for them to be regarded as potential competitors in such a situation.
Second, the CJEU’s conclusion that a pay-for-delay agreement is, in principle, a restriction of competition by object if the net gain from the transfers of value can have no other explanation than their commercial interest not to engage in competition on the merits is in line with its case-law. The CJEU’s identification of ‘other explanations’ for value transfers, such as compensation for litigation costs or remuneration for the actual supply, would be helpful for companies in assessing the competitive impact of an agreement it is contemplating to conclude.
Third, the CJEU provided an important clarification that pro-competitive effects that are relevant, specific and sufficiently significant should be taken into account in the assessment of whether an agreement is a restriction of competition by object. According to the CJEU, this is “merely to appreciate the objective seriousness of the practice concerned” and is not in conflict with its settled case-law that EU competition law does not recognise a ‘rule of reason’, which would require a weighing of the pro- and anti-competitive effects of an agreement under Article 101(1) TFEU. This clarification could potentially be helpful in assessing agreements other than pay-for-delay agreements in the pharmaceutical sector.
Fourth, the CJEU’s conclusion as to the relevant product market in this judgment would be of little relevance to cases where the interchangeability of medicines beyond the active ingredient level is at issue, such as Perindopril. But its assessment gives some clarity on the assessment of the competitive relationships between the originator medicine and its generic versions.
Fifth, the CJEU’s finding that for a strategy of the originator company to be considered as abusive, it must have exclusionary effects is another testimony to the adoption of more economic approach to EU competition law following its judgments in e.g. Cartes Bancaires and Intel.
Overall, although some aspects of this ruling may only apply to cases such as the one in the UK Main Proceedings, these clarifications would be helpful in assessing an agreement between an originator company and a generic company that involves a value transfer. It would be interesting to see how the CJEU will apply the criteria set out in this ruling in the forthcoming judgments in Lundbeck and Perindopril and what guidance it will give in relation to pay-for-delay agreements that have been concluded in contexts different from the one in the UK Main Proceedings in these judgments.
This Judgment sends some clear signals to the parties in the Lundbeck and Perindopril cases on the factors which the CJEU will weigh and consider in deciding on the appeals in their cases. Indeed, most elements deliberated on by the CJEU in the Paroxine case are highly relevant to the outcome of the Lundbeck and Perindopril cases.
Judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52.
Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (OJ L 1/1, 4 January 2003) became applicable from 1 May 2004. This Regulation requires the CMA, when applying national competition law to agreements between undertakings which may affect trade between Member States, also to apply Article 101 TFEU.
Article 102 TFEU was not applied from 1 May 2004, since GSK’s dominant position ended when independent generic entry began in December 2003 following the judgment of the Court of Appeal which held that Apotex Europe Limited’s paroxetine anhydrate product did not infringe valid patent claims held by GSK (SmithKline Beecham Plc and others v Apotex Europe Ltd and others  EWHC 2939 (Ch)).
See the CMA’s case closure summary in respect of the IVAX-GSK agreement published on 10 August 2016.
Intermediate judgment of 8 March 2018 of the CAT in Paroxetine GSK v CMA  CAT 4.
See judgment of 28 February 1991 of the CJEU, Delimitis, C‑234/89, EU:C:1991:91, paragraph 21.
See judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52, paragraph 56.
See judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52, paragraph 51.
See intermediate judgment of 8 March 2018 of the CAT in Paroxetine GSK v CMA  CAT 4, paragraph 320.
See, for instance, judgment of 11 September 2014 of the CJEU, CB v Commission, C‑67/13 P, EU:C:2014:2204, paragraph 53.
See judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52, paragraph 94.
See judgment of 20 November 2008 of the CJEU, Beef Industry Development Society and Barry Brothers, C‑209/07, EU:C:2008:643, paragraph 34.
See judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52, paragraph 107.
See judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52, paragraph 107.
See judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52, paragraph 172.
See judgment of 13 February 1979, Hoffmann-La Roche v Commission, 85/76, EU:C:1979:36, paragraph 120.
See judgment of 30 January 2020 of the CJEU, Generics (UK) and others v Competition Markets Authority, C-307/18, EU:C:2020:52, paragraph 104.
See judgment of 12 December 2018 of the General Court of the European Union (the ‘GCEU’), Servier and Others v Commission, T-691/14, EU:T:2018:922. Appeal cases before the CJEU: C-176/19 P and C-201/19 P.
Judgment of 11 September 2014 of the CJEU, CB v Commission, C‑67/13 P, EU:C:2014:2204.
Judgment of 6 September 2017 of the CJEU, Intel v Commission, C-413/14 P, EU:C:2017:632.
Judgment of 8 September 2016 of the GCEU, Lundbeck v Commission, T-472/13, EU:T:2016:449. Appeal case before the CJEU: C-591/16 P.