Patent settlement agreements – a risky business

Last week’s European court rulings on a series of patent settlement agreements bring some relief to multinational pharma business Servier. The fines imposed on it by the European Commission are reduced from €330.9 to €228.32 million. The Commission’s finding that Servier had abused a dominant position is overturned. But the message remains clear. Entering into patent settlement agreements with generic companies does involve risk. Patent owners must take great care to stay within the boundaries or risk expensive and reputationally damaging competition proceedings.

The problems stemmed from agreements entered into by Servier with a series of generic companies (Niche, Unichem (Niche’s parent company), Matrix (now Mylan Laboratories), Teva, Krka and Lupin). The generic companies agreed not to compete with Servier in selling ACE inhibitor perindopril, or to challenge Servier’s 947 patent protecting the erbumine salt and related manufacturing processes.

Concerns over pharmaceutical patent settlement agreements

The European Commission has been concerned about patent settlement agreements in the pharmaceutical sector for some years now. It kicked off a formal inquiry in 2008 and has been publishing annual monitoring reports ever since. Its proceedings relating to perindopril began in 2009, leading to a finding in 2014 that Servier’s activity was anti-competitive and the imposition of heavy fines.

The court annulled the Commission’s conclusion that Servier abused a dominant position largely because it disagreed with the market analysis. Perindopril should not be considered in isolation, but as one of a series of interchangeable medicines in the ACE inhibitor class. But it upheld with some exceptions the decision that the settlement agreements were restrictive of competition.

Does this mean that all patent settlement agreements with generic companies are ruled out?

No. The court recognised that the ownership and exercise of patent rights is perfectly lawful. Settlement agreements should be encouraged where they enable parties to resolve disputes without going to court, and businesses that bring infringement proceedings or challenge patents should not be forced to see the litigation through to the bitter end. And settlement agreements often contain non-marketing or no-challenge clauses.

“The Commission itself stated, in the contested decision, that non-marketing clauses and non-challenge clauses were generally inherent in any settlement. It thus considered that ‘when in a patent dispute or patent litigation, a settlement is reached on the basis of each party’s assessment of the patent case before them, such a patent settlement is unlikely to infringe competition law even though it may contain an obligation on the generic undertaking not to use the invention covered by the patent during the period of patent protection (e.g. a non-compete clause) and/or an obligation not to challenge the patent concerned in court (e.g. a non-challenge clause)’” Case T‑679/14, para 223

The problem arises when the agreement goes beyond a genuine settlement of the dispute. A patentee agreeing to make payments or give other advantages to a generic company in exchange for not entering the market or challenging the patents can be an indication of anti-competitive activity. It is difficult to be crystal clear about which clauses are permissible and which not – a competition analysis is heavily dependent on economic factors like the substitutability of products and the effect of an agreement on the market. Some assistance can also be found in the Commission’s Guidelines on the Technology Transfer Block Exemption Regulation.

What about Brexit?

As for the impact of Brexit on competition law as it applies in the UK, it is worth noting that UK competition law is founded on the European model. Rulings made before Brexit, like this one, will remain part of UK law for the time being. The UK’s flexibility to adopt a new direction will depend on what kind of relationship is hammered out over the coming months. But the UK has traditionally been supportive of the European approach to competition law and radical change looks unlikely.

What happens next?

This may not be the end of the story. Last week’s decision was issued by Europe’s General Court, leaving open the possibility of a further appeal to the Court of Justice. The companies involved have two months to make that choice.

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