An EU Competition Law Perspective on Reverse Payments

By Sean-Paul Brankin

The issues reviewed in this article by Sean-Paul Brankin, Counsel, Crowell & Moring, are considered in greater depth in an article by the author in the Journal of Intellectual Property Law and Practice, Volume 5, Issue 1 (Jan 2010), entitled “Patent Settlements and Competition Law: Where Is the European Commission Going?”

In the Final Report on its Pharmaceutical Sector Inquiry, the European Commission identified patent settlement agreements as a focus for European Union (EU) competition law enforcement in the industry. The Commission’s concerns relate to so-called “reverse payment” settlements. These are settlements involving a payment (or some other value transfer) from the patent holder to the generic company challenging the patent.

The Commission’s interest in reverse payment settlements has clearly been inspired by the activities of the U.S. Federal Trade Commission (FTC). For a number of years, the FTC has pursued reverse payment settlements as potential infringements of U.S. antitrust rules. Specifically, the FTC argues that reverse payment settlements should be presumed to be unlawful if:

• he reverse payment is substantial;
• the generic challenger is unable to immediately enter the market with a competing product; and
• there is no proof of any motive for the payment other than the delay to generic entry.

However, the FTC’s position is controversial. Senior U.S. courts have, to date, consistently rejected its approach, for example in the famous Schering-Plough Corp. v. FTC dispute, or in the Tamoxifen case.¹ Instead, as in the Tamoxifen case, courts have held that reverse payment settlements are generally lawful, provided generic entry is delayed only during the lifetime of the relevant patent and in relation to products that would infringe it.

This raises a number of questions for European lawyers. What is the FTC’s reasoning and is it right? How does that reasoning apply in an EU context? And, ultimately, what approach is the European Commission likely to adopt?

Is the FTC right?

Simply put, the FTC’s fundamental concern regarding reverse payments is that the patent holder is using part of the profits from its patent monopoly to buy off competitive entry. An advisor to FTC Chairman Jon Leibowitz recently said, “As a matter of economics, it will generally be most profitable if the brand and the generic firm avoid the possibility of competition and share the resulting monopoly profits.”²

Such concerns may not be misplaced. In fact, the issue may not be whether some reverse payment settlements are anti-competitive, but whether the FTC can effectively distinguish those settlements that are anti-competitive from those that are not. It is not clear that the presumption of illegality proposed by the FTC achieves this, or that there are workable alternatives available. Certainly the U.S. courts have not been convinced.

There appear to be three fundamental concerns with the FTC’s approach in the U.S. context. The first is that settlements are generally efficient and socially beneficial. They avoid unnecessary litigation costs and, more important, create certainty that allows parties to plan and invest for the future. U.S. antitrust law recognizes these benefits and, as a result, settlements are not generally considered to infringe antitrust rules even where they may have an adverse effect on competition (see, for example, the aforementioned Tamoxifen case).

The second relates to the extent to which there would be greater competition in the absence of a settlement. In other words, the counterfactual analysis. Initially, for example in the Schering-Plough dispute, the FTC argued that, absent the reverse payment, the parties would have reached a settlement involving an earlier generic entry date: “[If] the patent holder makes a substantial payment to the challenger as part of the deal, absent proof of other offsetting considerations, it is logical to conclude that the quid pro quo for the payment was an agreement by the generic to defer entry beyond the date that represents an otherwise reasonable compromise.” This argument is, however, problematic. As the FTC recognized in the Schering-Plough dispute, in some cases the parties may not settle at all absent a reverse payment. Indeed, the U.S. Court of Appeal for the 11th Circuit described the FTC’s counterfactual analysis in that case as “untenable.”

The FTC now argues that if no settlement could be reached then continued litigation would “yield a greater prospect of competition.”³ But this is also problematic. The existence of a reverse payment shows only that the patent holder believes there is some risk that the patent will be held invalid or not infringed. It does not show that the risk is greater than 50 percent. If the risk is less than 50 percent, then applying the balance of probabilities standard of proof in civil cases, the counterfactual argument would be that the patent is valid and infringed. In that case, the settlement will have no adverse effect on competition (unless generic entry is excluded beyond the lifetime or scope of the patent) since the patent entitles its owner to exclude the generic regardless of the settlement.

The third concern relates to the extent to which an individual settlement significantly restricts competition. As mentioned, if the patent is valid, a settlement that delays generic entry within its scope and duration should have no anti-competitive impact. Importantly, the position may be similar if the patent is invalid or likely to be so. As the U.S. Court of Appeal for the 2nd Circuit explained in the Tamoxifen case: “while the strategy of paying off a generic company to drop its patent challenge would work to exclude that particular competitor from the market, it would have no effect on other challengers of the patent, whose incentive to mount a challenge would also grow commensurately with the chance that the patent would be held invalid.” As the Court went on to observe, although in theory it might be possible to pay off all potential generic challengers, in practice this is unlikely to be economically viable.

On the face of it, the above three concerns appear to justify the position of the U.S. courts that reverse payment settlements should generally be treated as lawful. However, the FTC has a potential response to at least some of these concerns. Under the Hatch-Waxman Act, the first company to file with the U.S. Federal Drug Administration for generic approval obtains a 180-day exclusivity period during which other generic companies cannot enter the market.

As originally drafted, the 180-day period would begin only once the first filer launched its product. As a result, a settlement in which the first filer agreed to delay the launch of its product would effectively extend the exclusivity period and exclude all third party generic entry during that time. Such a settlement is potentially substantially anti-competitive. However, in 2003, the Hatch-Waxman Act was amended so that the first filer may forfeit its exclusivity period if, among others, it fails to launch its product promptly. The FTC argues that this amendment has not been effective and settlements can, in principle, still be used to extend the exclusivity period and blockade third party entry.⁴ Other commentators appear to take the view that the amendment has removed the concern.⁵

The EU context

The EU context differs from that in the U.S. in at least two important respects. First, EU competition law contains no equivalent to the U.S. rule that settlements are not generally unlawful even if they may have some adverse effect on competition. Instead, the European Court of Justice has held that settlements should be treated in the same way as other types of agreements.⁶

Second, there is no equivalent under EU rules to the Hatch-Waxman Act or the 180-day exclusivity period for the first generic challenger. As a result, the FTC’s potential response to concerns regarding its proposed presumption of illegality is not available in the EU context.

Overall, therefore, while EU competition law may seem to weigh in favor of a presumption of illegality, the differing EU regulatory context weighs against it.

The European Commission’s likely approach

Interestingly, it seems the Commission does not, currently, intend to follow the FTC and apply a general presumption that reverse payment settlements are unlawful. The Final Report of the Pharmaceutical Sector Inquiry indicates in §763 of the Technical Annex, that reverse payment settlements would not be “deemed” unlawful without a full investigation of the facts, and the head of the Inquiry Task Force recently said the Commission “will not take the view per se that patent settlements are probably illegal.”⁷

The U.S. Federal Circuit Court has held that reverse payment settlements are generally lawful, provided generic entry is delayed only during the lifetime of the relevant patent and in relation to products that would infringe it. (Photo: US Federal Government)

So what will the Commission do? First, it is likely to take the view that reverse payment settlements that delay generic entry beyond the period of patent exclusivity or in relation to products not covered by the patent automatically infringe competition rules. The U.S. courts do consider such settlements to be per se violations of antitrust law.⁸

Second, the Commission may pursue an approach originally proposed by the U.S. Department of Justice (DoJ). The DoJ initially strongly opposed the FTC’s presumption of illegality (although, following the appointment of a new head of its antitrust division by the Obama administration, it now supports the FTC line). As an alternative, it suggested an assessment of reverse payment settlements based on “a limited examination into the relative merits of the patent claims and other relevant factors surrounding the parties’ negotiations.”

This proposal raised concerns regarding the ability of courts or competition authorities to make any assessment absent a full trial on the merits and has not been pursued in the U.S. However, there is some precedent for such an approach under EU law. In assessing the compatibility of trademark delimitation agreements with EU competition rules, the Commission has previously made its own assessment of the ability of relevant marks to co-exist. Whether an equivalent approach is appropriate in the more technical patent context may be open to debate.

If the Commission does go down this path, it is likely to be particularly interested in the internal documents of the parties (particularly the patent holder) relating to patent validity, the assessment of likely success in litigation and the settlement negotiations. If it can identify cases where such documents suggest the patent holder is likely to lose the litigation and the purpose of the reverse payment is to avoid this, they may be tempting candidates for enforcement action. Interestingly, Servier’s patent in the case the Commission has announced it is investigating was found by the U.K. Court of Appeal to be “very plainly” invalid and “the sort of patent which can give the patent system a bad name”.

Finally, it should not be excluded that the Commission could ultimately pursue an FTC-style presumption of illegality. A second reverse payment case is currently before the U.S. Court of Appeal in the 2nd Circuit, Arkansas Carpenters Health and Welfare Fund et al. v. Bayer et al, and there are indications that the Court may consider overturning its previous case law and adopting the FTC approach. If this were to happen, the European Commission may also consider changing its view. It is to be hoped it does not.

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1 See also In re Ciprofloxacin Hydrochloride Antitrust Litig.
2 Michael Kades, Whistling Past the Graveyard: The Problem with Per Se Legality Treatment of Pay-for-Delay Settlements, supra.
3 FTC v. Cephalon
4 See Michael Kades, Ibid.
5 Anne Layne-Farrar, Reversing the Trend? The Possibility that Rule Changes may Lead to Fewer Reverse Payments in Pharma Settlements, Competition Policy International, Volume 5, No. 2, Autumn 2009.
6 Case 65/86 Bayer v. Süllhöfer [1988] ECR 5249.
7 Abigail Rubenstein, EU to Request Drug Patent Deal Details, Law 360, 19 November 2009.
8 In re Cardizem CD Antitrust Litig.