(by ) Over the last year the European Commission has stepped up its enforcement efforts against pay for delay settlements. In June 2013 they imposed a fine for the first time totalling €152 million, on a brand company and a number of generic companies for delaying the market entry of a cheaper generic version of Citalopram, an antidepressant drug. In subsequent decisions, the Commission imposed a fine of €16 million on and Novartis for the delay of a generic pain-killer based on Fentanyl, and a fine in excess of €427 million on and five generic companies in relation to the delay of generic version of the blood pressure drug Perindopril in July 2014 .

Although the full decisions are not yet in the public domain, it has become evident from the appeals against the Lundbeck decision that the Commission regards these pay for delay settlements as restrictions by object; they are assumed to be illegal without any effects analysis. This blog post suggests that such an approach could prove costly for the Commission in the long run.

In its recent judgment in , the European Court of Justice (ECJ) heavily criticised the General Court (GC) for its finding that the concept of restriction of competition by object must not be interpreted ‘restrictively’. Instead, the EJC held that

“[t]he concept of restriction of competition `by object’ can be applied only to certain types of coordination between undertakings which reveal a sufficient degree of harm to competition that it may be found that there is no need to examine their effects otherwise the Commission would be exempted from the obligation to prove the actual effects on the market of agreements which are in no way established to be, by their very nature, harmful to the proper functioning of normal competition”. [para. 58]

The ECJ does not expressly define the ‘sufficient’ degree of harm but, in the words of AG Wahl “only conduct whose harmful nature is proven and easily identifiable, in the light of experience and economics, should therefore be regarded as a restriction of competition by object”. [para. 56 of the Opinion]

The problem, as I have argued in my doctoral thesis and related publications, is that European pay for delay settlements are a lot less likely to have an anti-competitive effect than their US counterparts and should not therefore be regarded as restrictions by object.

First of all, it is not self-evident that the pay for delay settlement itself should be regarded as anticompetitive. These settlements can be entered into by two parties for the perfectly legitimate purpose of ending patent infringement litigation. Even value transfers from the brand company to the generic entrant in return for non-entry into the market – which is regarded as a strong indicator for anticompetitive conduct – can potentially be justified by the parties. In the United States, the complex nature of these arrangemenst and the possibility of convincing justifications led the US Supreme Court to reject not only the possibility that such settlements should be treated as per se illegal, but even the possibility to regard them as presumptively illegal . It stated that a presumption of illegal conduct would only be appropriate where “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on consumers and markets.” [at 2242 quoting California Dental Ass’n v. FTC 526 U.S. 756 (1999) 770]

Hence it is necessary in the US to show the anticompetitive effects of pay for delay settlements, even though the brand company can foreclose the entire market by paying off a single generic entrant.

In Europe, the situation is even more complex than in the United States. Brand companies here cannot foreclose the market by paying off a single generic competitor. A regulatory bottleneck akin to the US Hatch Waxman Act, which facilitates the foreclosure of the market in the US, does not exist under European pharmaceutical regulation. Foreclosure could only be achieved in Europe if the brand company enters into pay for delay settlements with all potential generic entrants. The potential anticompetitive effect of a European pay for delay settlement is thus dependent on the actual market structure. If only one or very few potential generic entrants exist, foreclosure would be possible. However, if a large number of generic companies could enter, it is unlikely that a pay for delay settlement with one or even a few generic entrants would cause anticompetitive harm.

Based on the complexity of pay for delay settlements themselves and the reduced anticompetitive potential of these settlements pose in Europe it is therefore questionable whether the Commission is likely prevail on appeal with the object approach that it has taken in Lundbeck.

However, rejecting an object approach to pay for delay settlements should not generally lead to the assumption that the Commission has to conduct a full effects-based analysis. The courts have shown in the past that one can potentially infer anticompetitive effects from circumstantial evidence, for example with regard to the information exchange between competitors in RPM cases. The EU courts should therefore not be opposed to the idea of a truncated effects-based approach.

In research pending publication, this author has developed a ‘structured effects-based’ approach to pay for delay settlements that extends and adapts the underlying rationale of the US Supreme Court’s decision in FTC v Acatvis to the European regulatory framework. In basic terms, the approach infers market power from the size of the value transfer from the brand company to the generic company (similar to the US), but only regards the relevant settlement to be anticompetitive if the settlement itself contributes substantially to the foreclosure of the relevant market. In essence the approach combines the rationale in FTC v. Actavis with the ECJ’s requirements for an effects-based analysis in Delimitis. Ultimately, this approach satisfies the Commission’s need for procedural efficiency without being overly restrictive or even over-inclusive in relation to legitimate patent settlements and could thus be the solution to the Commission problems with regard to the enforcement of pay for delay settlements in Europe.

Pay for delay settlements are used in the pharmaceutical sector to delay the entry of generic versions of brand drugs. In order to achieve such a delay in entry, a brand company pays the potential generic entrant as part of a patent settlement for not entering the market. It is argued that the generic’s admission not to enter the market in not based on the validity of the contested patent of the brand company, but rather on the value transfer from the brand company to the generic.

Case T-460/13 Ranbaxy Laboratories and Ranbaxy (UK) v Commission [28 August 2013] OJ C 325/71; Case T-472/13 H Lundbeck and Lundbeck v Commission [28 August 2013] OJ C 325/76; Case T-470/13 Merk v. Commission [30 August 2013] OJ C 325/74; Case T-471/13 Xellia Pharmaceuticals and Zoetis Products v Commission [30 August 2013] OJ C 325/75

Sven Gallasch, ‘The anticompetitive misuse of intellectual property rights in the pharmaceutical sector’ (doctoral thesis); Sven Gallasch, ‘Adapting Actavis to pay for delay settlements in Europe – The proposal of a ‘structured effects-based’ approach under Art. 101 TFEU’ (forthcoming).

E.g. Case C-7/59 John Deere, Ltd. v. Commission [1998] ECR I-3111. (The ECJ accepted the evidence for actual anticompetitive effects might not be required, if a careful evaluation of circumstantial evidence in relation to information exchange between competitors can be provided; at [para 78, 90])