Pharmaceutical settlement agreements and competition law A litigation perspective on the Commission Sector Enquiry

Pharmaceutical settlement agreements and competition law A litigation perspective on the Commission Sector Enquiry Dr Denis Schertenleib Avocat & Solicitor Partner Hirsch & Associés Paris France ds@hirschlex.com

An introduction to the findings of the Sector Enquiry HIRSCH & PARTNERS

Patent monopoly bears a cost for the public Price drop following generic entry HIRSCH & PARTNERS

On average a delayed entry of 7 months past loss of exclusivity HIRSCH & PARTNERS

An asymmetry in settlement payments from originator to generic and generic to originator HIRSCH & PARTNERS

Settlements were criticized in the preliminary report HIRSCH & PARTNERS

The final report does not purport to issue guidance on settlements HIRSCH & PARTNERS

However the final report maintains a suspicion over settlements HIRSCH & PARTNERS

Reverse payments and profit sharing: HIRSCH & PARTNERS

A litigation perspective on the conclusions of the Sector Enquiry HIRSCH & PARTNERS

Classification of settlement agreements • A: no limitation on generic entry. • B.I: limitation on generic entry but no value transfer from the patentee. • B.II: limitation on generic entry with a value transfer from the patentee. HIRSCH & PARTNERS

Settlement agreements • Patent litigation “axioms”: • Any person having locus standi can challenge a patent. • Parties to a litigation can end it by a settlement. • Settling consists in mutual compromises on legal rights and claims. HIRSCH & PARTNERS

Settlements involve compromise • Winning is obtaining 100% of one’s claims. • Losing is obtaining 0% of one’s claims. • Anything in between is a compromise. • By definition, settling litigation involves each party accepting to obtain less than 100% of its original claims. HIRSCH & PARTNERS

Parties have the freedom to settle • The strength of both the patentee’s and the infringer’s case is liable to change during the litigation. • It is a principle of civil proceedings that parties have the freedom to discontinue proceedings. • Such termination involves bargaining on the parties’ original claims. HIRSCH & PARTNERS

Settling claims is equivalent to abandoning them • Settling claims made in Court is equivalent to not seeking the enforcement of the corresponding rights. • It is economically equivalent to not making these claims or not engaging in litigation. • Not engaging in litigation should not be deemed anticompetitive. • Thus merely making a compromise on Court claims should not be deemed anticompetitive. HIRSCH & PARTNERS

Settlements on bona fideCourt claims should be lawful • Arguably a settlement should not be anticompetitive, if it involves only remedies that a Court could order. • It is submitted that any judicial remedy that can be granted by a Court, could form the subject matter of a bona fide settlement without infringing EU competition law. HIRSCH & PARTNERS

Remedies that can be obtained by a patentee • Injunctions preventing the infringer from manufacturing and selling the subject matter of the patent: • limited to the scope of the patent, • at least for the duration of the patent, • but some jurisdictions allow for injunctions covering the “spring board” effect. • Damages for infringement. • Legal costs. HIRSCH & PARTNERS

Remedies that can be obtained by an infringer • Revocation of the patent. • Legal costs. • Damages for threats, loss of image, abuse of process, disruption to the market. • Damages covering the cost of being kept out of the market by a non-final Court decision (e.g. interim or first instance decision). HIRSCH & PARTNERS

Settlement agreement limiting generic entry – type B • The Commission Report appears to cast some suspicion on settlement agreements that limit generic entry. • Para 742: “The generic company’s entry can be limited in several ways. The clearest limitation of generic entry is when the settlement agreement contains a clause explicitly stating that the generic company recognizes the validity of the originator company’s patent(s) and refrains from entering the market until the patent(s) have expired” (emphasis added). HIRSCH & PARTNERS

The source of the patentee’s monopoly is patent law • It should be recalled that it is patent law that prevents generic entry and not an eventual settlement agreement. • Type B.I. settlements merely recognize existing IP rights. • Accepting the validity of a patent and not entering the market until after its expiry, should not be deemed anticompetitive as it involves merely complying with the monopoly granted by patent law. HIRSCH & PARTNERS

Common settlement provisions that exceed judicial remedies • Limitations extending beyond the scope of the patent. • Limitations extending beyond the duration of the patent. • Commercial “side deals” (supply, exclusivity…). • Market and customer sharing. HIRSCH & PARTNERS

Potential indicia of anticompetitive settlements • Limitation on generic companies: • Beyond the scope of a patent (e.g. different products). • Beyond the duration of a patent. • Reverse payments. HIRSCH & PARTNERS

Reverse payments – type B.II. settlements • A reverse payment is a value transfer from an originator to a generic company. • A value transfer may be a monetary payment but can also be: • the purchase of an asset; • a distribution agreement; • a commercial benefit granted to the generic company (e.g. to enter the market before patent expiry in another geographical area or with another product); or • the grant of a patent licence to the generic company. (Para 742) HIRSCH & PARTNERS

Reverse payments • If they involve a sum commensurate with what could be ordered by a Court against a patentee, then reverse payments should not be anticompetitive. • Difficulties arise when this payment involves: • sums related to the “value” of the patent that may be revoked; • in exchange for a delay in market entry. HIRSCH & PARTNERS

The value of patent monopoly • The “value” of the patent is the commercial value of the monopoly. • The value of the patent monopoly is commensurate with: • The profits that the patentee obtains through the exclusion of others. • The profits that the generic company could make by entering the market. HIRSCH & PARTNERS

Reverse payments • Reverse payments that involve a share of the value of the patentee’s monopoly, may be suspicious. • However, in the context of revocation proceedings, • unless the generic company has a revocation case so weak that it simply seeks to avoid Court costs, • what significant incentives would there be for settling a case without a reverse payment? HIRSCH & PARTNERS

Reverse payments - a “safer” approach • To reduce competition law risks, reverse payments could be linked to remedies that can be ordered by a Court, such as: • legal costs; • damages for loss of image; or • the cost of being kept out of the market by a non-final Court decision. HIRSCH & PARTNERS

Side deals - a “safer” approach • Side deals have to be analyzed as any commercial agreement. • There is no clear evidence that they will be treated more leniently than standalone commercial agreements. • Guidelines on the Technology Transfer Block Exemption: “Licensing in the context of settlement agreements is treated like other licence agreements”(Para 204, 2004/C 101/02). HIRSCH & PARTNERS

Pharmaceutical settlement agreements and competition law A litigation perspective on the Commission Sector Enquiry