The General Court’s judgment in Krka – some welcome clarity over licensing in the context of patent settlements

We reported on this blog about the General Court (GC)’s judgment in Servier on the day on which that judgment was handed down, noting in particular the rejection of the Commission’s novel approach to market definition. 

In this post, we focus on the analysis applied in one of the parallel judgments issued to the generic companies which were party to the infringements of Article 101.  While the finding of a ‘by object’ infringement was maintained in relation to the settlement agreements between Servier and other generic companies, the Krka judgment involved a full annulment of the relevant part of the Commission decision.  

What were the Commission’s findings?

The case concerned a patent settlement and licence agreement between Servier and Krka in relation to Perindopril, a cardiovascular medicine used (primarily) to treat hypertension). The settlement agreement put an end to UK patent litigation between Servier and Krka in October 2006, following the grant to Krka of a marketing authorisation for Perindopril earlier in the year. At the time there was no generic Perindopril in Western European markets, but Krka had launched its generic Perindopril “at risk” in certain central and eastern European (CEE) markets. On the same day as the settlement agreement, Servier and Krka entered into a royalty-bearing licence agreement in relation to the CEE markets where Krka had already entered.  This licence accorded Krka ‘sole’ licensing rights (i.e. while Servier itself also remained on the market, it committed not to grant licences to others).  

In its decision, the Commission treated the combination of these agreements as a form of market sharing arrangement.  According to this view, Krka obtained the licence in return for refraining from launching its generic product in a number of other European markets, notably the UK. The Commission considered that: (i) Servier and Krka were at least potential competitors at the time of entering into the agreements; and (ii) the sole licence which permitted Krka access to the CEE markets constituted an inducement to Krka to enter into the settlement agreement, under which it agreed to refrain from competing in the 18 restricted markets.

Findings of the GC

The GC rejected the Commission’s analysis that the mere conclusion on normal market conditions of a licence agreement could amount to an inducement, even if linked (whether legally and/or temporally) to a settlement agreement containing restrictive clauses. In the view of the GC, this would lead to a paradoxical outcome: the wider the scope of a licence agreement, the greater the inducement, and thus the easier it would be to find a restriction by object.

However, it accepted that a ‘side deal’ may amount to an inducement which renders any restrictive provisions in the linked settlement agreement unlawful where the side deal “serves as a vehicle for the transfer of value from the originator to the generic company”.  In that case, the restrictions in the settlement are considered not to reflect the parties’ recognition of the validity of the patent but rather to be the result of a (significant) inducement.  However, the GC went on to note that the Commission has to discharge its burden of proof that this is indeed so.  

In this case, the settlement itself did restrict Krka’s market access in the UK and other Western European markets while relevant patents remained in force; it was also clear that the licence agreement counted as a ‘side deal’ as it was temporally linked (the two agreements had been concluded on the same day; by contrast, a later assignment of patent by Krka to Servier was held not to be ‘indissociable’ from the settlement agreement).  A key question for the GC was therefore whether any value had in fact been transferred to Krka under the licence agreement.  The licence granted by Servier was royalty-bearing at the rate of 3%.  The GC emphasised that it was for the Commission to demonstrate that this rate was abnormally low, and thus not a commercial rate if it wished to prove that Krka had been induced to give up its other markets.  The GC found that the Commission had not demonstrated that this was the case – in fact, the Decision acknowledged that the rate was fair, albeit relatively low. 

The Decision was therefore annulled, insofar as it concerned restriction of competition by object.

The GC also reviewed the Commission’s conclusions that the agreement had an ant-competitive effect.  It again disagreed with the Commission’s conclusions, finding that absent the agreements, Krka would not have entered the French, Dutch and UK markets, based on Krka’s assessment of the strength of the ‘947 patent. The GC noted that, at the time of entering into the agreements, Krka was the subject of an interim injunction in the UK and that it was “very unlikely” that without a licence agreement Krka would enter other markets “at risk”. 

As with the cases concerning the other agreements between Servier and generic companies, the Court has sent an important message on the role of the concept of restrictions of competition ‘by effect’ under EU competition law.

The Court emphasised that where an agreement has been put into effect, it is not sufficient for the regulator to rely on the existence of ‘potential’ effects on competition.  To do so effectively obliterates the distinction between object and effect restrictions.  The GC conducted a careful analysis of past cases in which the consideration of effect restrictions has been limited to a consideration of potential effects, and distinguished this case from those earlier examples, which tended to concern preliminary references, or decisions in which no fine had been imposed.

Comment 

Whatever the ultimate outcome of any further appeals to the CJEU on the treatment of patent settlement agreements as restrictions of competition by object in the other Servier cases, in Lundbeck (where hearings have taken place within the past week) or in Paroxetine, the approach of the GC to side deals in the Krka case is to be welcomed. The GC has dialled back the risk of concluding a licence agreement where there is a link to a settlement of litigation, provided the licence itself can be demonstrated to be on commercial conditions.   

This sensible approach is likely to enhance the possibilities for companies in litigation to resolve those differences in a way which provides benefits to both parties, rather than requiring a total capitulation by one side or the other.


Canal+ finds copyright is no match for the EU single market

The EU General Court (GC) has rejected an appeal brought by Groupe Canal+ (a French pay-TV broadcaster) against commitments proposed by Paramount, and accepted by the Commission, to address competition concerns related to cross-border access to pay-TV content (see here – only available in French). 

The GC found that: (i) the commitments proposed by Paramount addressed the Commission’s competition concerns in relation to its content distribution licence with Sky UK; and (ii) that the competition-infringing provisions could not be justified on the basis of copyright protection.

The key competition law issue arose from provisions in the Paramount/Sky UK licence which guaranteed Sky UK absolute territorial exclusivity in the UK and also prevented Sky UK from making its pay-TV services available to consumers in other parts of the EEA in response to unsolicited requests (i.e. a restriction of “passive sales”, the bête noire of competition law).

Background 

In 2014 the Commission began investigating certain clauses in licensing agreements between the six major Hollywood studios (Paramount Pictures, Disney, NBCUniversal, Sony, Twentieth Century Fox and Warner Bros) and pay-TV broadcasters which prohibited the broadcasters from providing content via satellite or online streaming outside their specific EEA member states.

In 2015 the Commission sent a statement of objection to Sky UK and the six Hollywood major studios which considered that bilateral licences that prevented Sky UK from offering access to its pay-TV services to EEA customers outside the UK and Ireland breached competition law (see here). 

In 2016 Paramount gave commitments to the Commission in order to close the investigation.  Paramount committed to stop using clauses preventing broadcasters from responding to unsolicited requests from consumers based elsewhere in the EEA and agreed not to enforce any existing restrictions. These commitments were accepted by the Commission on the basis that they would last for five years (see here).  The Commission Decision accepting the commitments laid out the basis for the infringement; however, as is typical for the commitments process, it did so rather briefly.

Canal+ also had a contract with Paramount and appealed the commitments decision before the GC on the basis that: (i) territorial exclusivity is essential for the production of European cinema, which is mainly financed by TV channels; and (ii) territorial exclusivity is necessary to protect intellectual property rights.

The GC’s findings 

The GC rejected the Canal+ appeal in its entirety. 

It considered that the Commission’s commitments decision established competition concerns under Article 101(1) TFEU and that these were sufficiently addressed by the Decision.  The GC noted that the commitments did not prohibit the granting of exclusive broadcast licences to pay-TV broadcasters; rather, it prohibited only absolute territorial exclusivity.

The GC rejected the argument that territorial exclusivity is necessary to protect intellectual property rights. In particular, it found that copyright owners are free to demand a premium in exchange for a pan-EEA licence. However, if a premium is paid to guarantee absolute territorial exclusivity this is irreconcilable with the imperative of the EU single market. 

Arguments that the relevant clauses promote cultural production and diversity and that their abolition would endanger the cultural production of the EU were also rejected.

Finally, the GC rejected the Canal+ argument that the commitments violate the interests of third parties (such as Canal+) as third parties could still sue Paramount for breach of contract.

Comment

The case is a further illustration of the Commission’s determination to tackle measures that undermine the EU single market, such as absolute territorial protection. Consequently, the use of copyright arguments to justify partitioning the single market will be given short shrift. 

The approach of the GC may also encourage the Commission to press ahead with the pending case against the remainder of the Hollywood studios – despite evidence of considerable concerns (including among politicians) about the impact of any decision on the economics of European TV/cinema.

Having said that, it is unclear what the actual impact of the commitments given by Paramount will be: given the national nature of copyright, anything other than a pan-EU licence will leave the broadcaster exposed to the risk of infringement proceedings if it sells into countries not covered by the licence. 

Partial annulment of Servier decision by the General Court – some good news for pharma innovators at last

The General Court has today handed down its judgment in the long-running Servier patent settlement case.  

It remains a rare event that the European Courts annul Commission decisions under Article 101 and, in particular, Article 102.  In this case, the General Court has partially annulled the 900 page decision.  In doing so, it has – subject to the outcome of further appeals – considerably reduced the range of competition law risks facing pharmaceutical companies.

Of particular note for innovators is the complete annulment of the fine for abuse of dominance.  The General Court has found that the Commission has failed to substantiate the alleged relevant market, and thus wrongly found that Servier held a dominant position in the EU.  

In the Decision, the Commission had held that perindopril, a treatment for hypertension, was a relevant market in itself.  This was despite it being one of a large class of drugs (‘ACE inhibitors’) with an essentially identical mode of action, and in relation to which clinical guidance existed which treated the products as substitutable.  The General Court has held that the Commission was wrong to rely on Servier’s promotional materials to claim that differences existed between the different members of the class of drugs, under-estimated the amount of switching which took place between different ACE inhibitors (in some cases driven by cost considerations on the part of organisations such as Clinical Commissioning Groups in the UK) and attributed too much importance to price in its analysis.  In its decision, the Commission had carried out a so-called ‘natural events’ analysis, which found that the only significant impact on sales volumes was sustained when perindopril generics entered the market.  The General Court has held that this paid insufficient attention to clinical decision-making, something the Commission had explicitly ruled out when considering what was relevant for market definition.

Although the particular market definition in this case is of limited relevance to third parties, the Commission’s failure to demonstrate that perindopril competed only with generics of the same drug has significantly wider implications for competition authorities’ ability to bring future abuse of dominance cases which rely on artificial differentiations between drugs with an equivalent mode of action.  Subject to the outcome of any appeal by the Commission to the Court of Justice, the position should now revert back to that established in AstraZeneca, which focuses on prescribers’ considerations as to the different therapeutic uses of the different drugs.  While a first in class product may still give rise to a dominant position in a period before further similar products come to market, a later drug is likely sit within the same relevant market, and will therefore be less likely to gain a dominant position (subject to market share growth, and specific factors which may indicate that a separate market in fact exists in a given case).  

As well as annulling the Article 102 portion of the case in its entirety, the General Court has also annulled the fine in relation to one of the anti-competitive agreements identified by the Commission, which was alleged to consist of a withdrawal from litigation in the UK in return for the grant of a licence in another Member State.  This annulment will also be welcome news to the pharmaceutical industry, as it may permit greater flexibility for companies wishing to enter into licensing agreements in tandem with settlements.  Provided any licensing agreement remains an arm’s length arrangement, at commercial rates, the risk that this will be categorised as an ‘inducement’ to settle the litigation now appears lower.

We conclude with a welcome recognition from the General Court of the value of patent protection and of patent settlements: “…intellectual property rights are protected by the Charter of Fundamental Rights, to which the Treaty of Lisbon has conferred the same legal value as the Treaties. …As regards patents, … when granted by a public authority, a patent is presumed to be valid and an undertaking’s ownership of that right is presumed to be lawful. The General Court emphasises, lastly, the importance of settlement agreements, since the parties to a dispute should be authorised, indeed encouraged, to conclude settlement agreements rather than pursuing litigation. The General Court concludes that the adoption of settlement agreements in the field of patents is not necessarily contrary to competition law.

Case T 691/14, judgment of 12 December 2018, press release here, full judgment (currently available only in French) here.

Maintaining competition in online advertising: the US FTC’s 1-800 Contacts decision

In an important case on the intersection of IP and antitrust, the US Federal Trade Commission (FTC) has held that 1-800 Contacts, the largest online retailer of contact lenses in the US, unlawfully entered into a series of anti-competitive settlement agreements with its online rivals.  Issued on 7 November, the Commission’s Opinion provides useful insight into the mechanics of keyword search advertising and emphasises that such advertising is fundamental to competition between retailers in an e-commerce context.  The case also serves as a reminder – if any were needed – that companies cannot rely on IP settlements to shield their conduct from competition law scrutiny.

Background

Internet search engines such as Google typically generate two types of results in response to search queries: ‘organic’ results and ‘sponsored’ links.  The latter are advertisements, which are often displayed above or beside the organic results. As the name suggests, advertisers have to pay to have their sponsored links appear on a search engine results page.  To determine which ads appear (and in which order), search engines use auctions to sell advertising positions.  Advertisers bid on ‘keywords’ – words or phrases that trigger the display of ads when they are deemed to match a user’s search.  Advertisers can also specify ‘negative’ keywords. For instance, a retailer of eye-glasses might bid on ‘glasses’ but list ‘wine’ as a negative keyword to prevent its ad from appearing in response to a query for wine glasses.

Between 2004 and 2013, 1-800 Contacts sent cease and desist letters alleging trade mark infringement to a number of its competitors whose online search advertising displayed in response to queries involving ‘1-800 Contacts’ and similar terms.  It subsequently filed suit against a number of these online retailers (even if the retailers had not been bidding on the keyword ‘1-800 Contacts’ but on more generic terms such as ‘contacts’).  Rather than litigating the trade mark disputes to conclusion, 1-800 Contacts entered into settlement agreements with each of the competitors.  The agreements prevented the competitors from bidding for search advertising involving ‘1-800 Contacts’ and similar terms. The agreements also required the competitors to employ negative keywords to prevent their ads appearing whenever a search included the ‘1-800 Contacts’ trade mark (even in situations where the advertiser did not bid on the actual trade mark and the ad would appear due to the search engine’s determination that the ad was relevant and useful to the consumer). The settlement agreements were reciprocal: 1-800 Contracts agreed to the same bidding restrictions and negative keyword requirements in respect of its rivals’ trade marks.

The FTC’s decision

Anti-competitive restraints 

The FTC held that the settlement agreements prevented online contact lens retailers from bidding for online search ads that would inform consumers about the availability of identical products at lower prices.  According to the FTC, the agreements:

  • harmed competition in bidding for search engine key words, artificially reducing the prices that 1-800 Contracts paid for search advertising, as well as reducing the quality of search engine result ads delivered to consumers; and
  • resulted in price-conscious consumers paying more for contact lenses that they would have absent the restrictions.  
Whilst the FTC did not suggest that all advertising restrictions are necessarily anti-competitive, it emphasised that the restrictions in this case prevented the display of ads that would enable consumers to learn about alternative sellers of contact lenses and to make price comparisons at a time when they would be considering a purchase.  Significantly, the restrictions in the settlement agreements were not merely “limitations on the content of an advertisement a consumer would otherwise see”; they were restrictions on a “consumer’s opportunity to see a competitor’s ad in the first place”.  The restrictions were particularly harmful to retail price competition because the suppressed ads “often emphasise[d] lower prices”.

1-800 Contacts’ efficiency justifications

1-800 Contacts put forward two efficiency justifications for the restrictions: (i) avoidance of litigation costs though settlement and (ii) trade mark protection.  The FTC found that whilst these justifications were plausible, they were insufficient to outweigh the restrictions’ anti-competitive effects.  Further, the claimed pro-competitive benefits could have been achieved through less restrictive means.  In the agency’s analysis, “when an agreement limits truthful price advertising on the basis of trade mark protection, it must be narrowly tailored to protecting the asserted trade mark right”.  The settlement agreements in this case were not: they restricted advertising regardless of whether the ads were likely to cause consumer confusion (a key element of the test for trade mark infringement) and regardless of whether competitors actually used the trade mark term.

The FTC was also unimpressed by 1-800 Contacts’ argument that a trade mark settlement requiring non-use is immune from antitrust review because a prohibition on use is within a trade mark’s exclusionary potential.  Citing the US Supreme Court’s 2013 ruling in Actavis, the FTC emphasised the importance of considering “both antitrust and intellectual property policies”.  According to the agency, the “crux” of the Actavis decision was that there could be antitrust liability for settlement of litigation, regardless of whether the agreement’s anti-competitive effects fall within the scope of the exclusionary potential of the IP right in question.  1-800 Contacts’ argument “look[ed] only to half of the equation, i.e. trade mark policies, and did not withstand a thorough understanding of Actavis”.

Comment 

The decision sends a clear signal that the FTC takes a dim view of agreements between competitors that restrict online search advertising to the detriment of consumers.  Whilst agreements to limit advertising are not per se illegal in the US, it seems that such agreements will likely fall foul of the antitrust rules unless the parties can establish robust pro-competitive justifications for the restrictions.  The FTC’s position is clear: online search advertising plays a crucial role in the effective functioning of retail competition in the modern internet economy.

Competition authorities on this side of the Atlantic have also shown an interest in the links between online advertising and competition in recent years. The European Commission’s Final Report in the E-Commerce Sector Inquiry noted that almost one in ten retailers were contractually restricted from advertising online. The French competition authority published a report on the functioning of the online advertising sector in March this year.  And in the German Asics case, the Bundeskartellamt found that the sports equipment manufacturer’s prohibitions on the use of price comparison websites and Asics brand names in online advertisements amounted to a hardcore restriction of competition under the Vertical Agreements Block Exemption.  That decision was ultimately upheld by Germany’s highest court, the Federal Court of Justice.  Given the continuing growth of e-commerce, it would hardly be surprising to see further cases in this area in the future.

Depression delayed: CMA’s paroxetine pay-for-delay case heads to Luxembourg

On 8 March 2018, the Competition Appeal Tribunal (CAT) gave an initial judgment (see here) in the appeals brought by GlaxoSmithKline (GSK) and a number of generic manufacturers against the Competition and Markets Authority’s (CMA) 2016 Paroxetine decision (see here and here).   As explained further below, the CAT has (in a move which perhaps goes against the prevailing zeitgeist) not reached final conclusions on the appeals, but has rather referred a number of questions to the Court of Justice in Luxembourg.

Background

The infringements identified by the CMA in its Paroxetine decision arose out of three patent settlement agreements made in 2001 and 2002 between GSK and various generic manufacturers of paroxetine.  

Paroxetine is an anti-depressant (selective serotonin reuptake inhibitor “SSRI”), marketed by GSK under the brand name “Seroxat”, which during the infringement period was one of its highest selling products, accounting for £71.6 million (10% of revenue) in 2001.

The CMA’s investigation into paroxetine was the first UK case to grapple with the contentious area of patent settlement agreements which limit generic companies’ ability to bring their own product to market.  The investigation was formally launched by the OFT in 2011 on the basis of information obtained by the European Commission through its pharmaceutical sector inquiry (2009). 

Following a significant further period of investigation, the CMA in 2016 issued a decision fining GSK, Alpharma and Generics (UK) a total of £44.99 million for agreeing to delay the entry of generic paroxetine in breach of Chapter I and/or Article 101 TFEU.  GSK received the largest penalty, being fined £37,606,275 for its parallel infringement of the Chapter II prohibition:

  • The CMA found that between 2001 and 2004 GSK agreed to make payments and other value transfers of over £50 million to generic suppliers of paroxetine; this amounted to a restriction of competition by object and/or effect. 

  • The CMA also found that GSK’s conduct induced generic providers to delay their efforts to independently enter the UK paroxetine market, abusing its dominant position in breach of Chapter II of the Competition Act.

The CAT Judgment 

The essential element of the CAT’s March 2018 judgment is the reference of five issues to the CJEU for a preliminary ruling.  As things stand, the exact text of the questions has not been formulated (and will no doubt be the subject of fierce debate among the parties).  However, the issues referred will relate to the following areas: 

  1. Potential competition: whether the existence of an interim injunction against generic manufacturers was an insurmountable barrier for entering the market.

    The provisional view of the Tribunal was to find that it was not (since, for example, it could have been discharged). However, it decided to refer a question to the CJEU as the question was similar to one raised in Lundbeck’s appeal (see here). This reference raises issues not dissimilar to those at play in the recent Roche judgment of the CJEU, which considered whether potentially unlawful products could be viewed as potential competitors (see here).

  2. Restriction of competition by object: when the strength of a patent is uncertain, does a transfer of value from the originator to a generic of an amount substantially greater than avoided litigation costs, under a settlement agreement in which the generic company agrees not to enter the market with its generic product and not to challenge the originator’s patent, constitute a restriction by object?

    The CAT emphasised a number of points in connection with this question, including a notable recognition that (a) the uncertainty over patent strength means that a possible outcome of the litigation was that the generic challengers would be held to infringe a valid patent; and (b) an outcome of litigation which upheld the patent should not be viewed as a less competitive outcome than the situation where the patent was overturned.

    A second related question was also identified, which seeks to establish whether a settlement comprising a value transfer which also provides some benefits to consumers (in the form of limited supplies of authorised generic products) should also be viewed as restrictive by object. Again, the preliminary view of the Tribunal was that such limited competitive benefits are not sufficient to draw into question the overall categorisation of the agreement as a by object infringement. If that is correct, it is necessarily a conclusion which will have to be considered in detail for any specific patent settlement agreement, and suggests that a blanket ‘by object’ approach will not be warranted.

  3. Restrictions by effect: in order to show a restriction by effect is it necessary to establish that the counterfactual would have been more competitive? The Appellants argued that the CMA’s Decision did not sufficiently consider the potentially pro-competitive effects of GSK’s agreements with generic manufacturers, for example the savings to the NHS compared to the situation where no authorised generics were on the market.

    The CAT also started to grapple with an issue which has been underplayed in the European decisions to date, namely the relevance of the outcome of the underlying patent litigation. If one realistic outcome of that litigation was success for GSK, the approach proposed by the CMA would be to reduce the test for identifying effects to “the probability of a possibility”. On the other hand, the CAT did not seem to acknowledge the risk of creating a situation where an agreement is considered restrictive of competition by object yet does not possess the requisite degree of probability for an effects finding that is not made out. This is surely an issue that will have to be fully played out before this, and similar cases, are finally resolved. (Damages litigation in relation to patent settlement agreements is likely to bring this issue to the fore, even if the CJEU elects to side-step the question.)

  4. The correct approach to defining the relevant product market: is the relevant product market paroxetine or all SSRIs? While the Tribunal supported the CMA’s finding of dominance on the basis of a market limited to paroxetine, it criticised its reasoning. It considered the CMA to have taken an overly narrow approach to market definition, based on the impact of generic entry on the price of paroxetine - following the Commission’s ‘natural events’ approach used in its AstraZeneca Decision (2005) (see here). However, the CAT supported the view that from the time when there were potential generic entrants, the market was limited to paroxetine and its generics. It recognised that this preliminary view, which suggests a significant change in the relevant market over time (despite no suggestion that the view of prescribing professionals was subject to a similar change) was a departure from existing case law. In the authors’ view, this approach will lead to legal uncertainty and, more importantly, inappropriately substitutes an analysis based on perceived competitive constraints for an assessment based principally on objective demand factors. As the CAT itself notes, this approach would suggest successful drugs will almost always be found to constitute a distinct market at least from the time when generic entry becomes likely. As the Tribunal notes, this approach would amount to a material change to the “IP bargain” which “might adversely affect the economic purpose of patent legislation”.

    Nevertheless, in making the reference on this point, the CAT has flagged some significant issues which should weigh in the CJEU’s eventual analysis.

  5. Abuse: are potential benefits to the NHS relevant to the assessment of whether GSK had abused a dominant position by entering into the agreements?

    The final question on abuse is limited to an allusion back to the questions referred in relation to the object and effect of anti-competitive agreements. The central issue is again the question of whether the limited pro-competitive benefits derived from the presence of the generic companies as distributors of an authorised generic product are sufficient to undermine the main finding as anti-competitive effects.

Although the judgment is provisional in nature, there is much to absorb. We will report further when the agreed text of the questions to be referred has been published.

FTC settles abusive acquisition of pharma licensing rights

On 18 January, the FTC announced that Mallinckrodt ARD Inc. (formerly Questcor Pharmaceuticals, Inc.) and its parent company have agreed to pay $100 million to settle FTC charges that they violated antitrust laws when Questcor acquired the rights to a drug that threatened its monopoly in the U.S. market for adrenocorticotropic hormone (ACTH) drugs.  The announcement was made concurrently with the release of the FTC's complaint.

Antitrust (as opposed to merger) cases about acquisitions of competing technology are not an everyday occurrence.  However, this complaint has something of the flavour of the EU Commission’s Tetra Pak 1 decision.  In that case, the EU Commission objected to Tetra Pak’s acquisition (through a merger) of exclusive rights to what was at the time the only viable competing technology to Tetra Pak’s dominant aseptic packaging system.  The Commission (and subsequently the EU courts) held that this would prevent competitors from entering the market and therefore amounted to an abuse of a dominant position.  

The FTC’s Mallinckrodt complaint alleges that while benefitting from an existing monopoly over the only U.S. ACTH drug, Acthar, Questcor illegally acquired the U.S. rights to develop a competing drug, Synacthen (a synthetic ACTH drug which is pharmacologically very similar to Acthar).  This acquisition stifled competition by preventing any other company from using the Synacthen assets to develop a synthetic ACTH drug, preserving Questcor’s monopoly and allowing it to maintain extremely high prices for Acthar.  

To judge by the FTC’s complaint, the case appears to contain some pretty stark facts which may have contributed to the immediate settlement of the proceedings by Mallinckrodt.  Those facts also bring the case squarely into line with the US and EU competition regulators’ current concern over excessive pricing in pharma.

First up is the finding that Questcor had a 100% share of the U.S. ACTH market and that it took advantage of that monopoly to repeatedly raise the prices of Acthar from $40 a vial in 2001 to more than $34,000 per vial today – an 85,000% increase.  The complaint details that in August 2007 Questcor increased the price of Acthar more than 1,300% overnight from $1,650 to $23,269 per vial and that it has taken significant and profitable increases on eight occasions since 2011 pushing the price up another 46% to its current $34,034 per vial.  Acthar is a speciality drug used to treat infantile spasms, a rare seizure disorder affecting infants, as well as being a drug of last resort (owing to its cost) for a variety of other serious medical conditions.  According to the FTC, Acthar treatment for an infant with infantile spasms can cost more than $100,000.  In Europe, Canada and other parts of the world doctors treat these conditions with Synacthen which is available at a fraction of the price of Acthar in the U.S. (Synacthen is not available in the U.S. as it does not have FDA approval.)  The FTC relies on the supra-competitive prices charged in the U.S. for Acthar as evidence of Questcor’s monopoly power as well as its 100% market share and the existence of substantial barriers to entry.

It is also part of the FTC’s case that Questcor disrupted the bidding process for Synacthen when the rights came up for acquisition.  According to the complaint, Questcor first sought to acquire Synacthen in 2009, and continued to monitor the competitive threat posed by Synacthen thereafter.  When the U.S. rights to Synacthen were eventually marketed in 2011, dozens of companies expressed an interest in acquiring them with three firms proceeding through several rounds of detailed negotiations.  All three firms planned to commercialise Synacthen and to use it to compete directly with Acthar including by pricing Synacthen well below Acthar.  In October 2012, Questcor submitted an offer for Synacthen and subsequently acquired the rights to Synacthen for the U.S. and thirty-five other countries and did not subsequently bring the product to market in the US.

In addition to the $100 million payout, the proposed court order requires that Questcor grant a licence to develop Synacthen to treat infantile spasms and nephrotic syndrome to a licensee approved by the FTC, a pretty far-reaching remedy.  

This case is the latest in a string of cases on both sides of the Atlantic relating to escalating pharma prices (as discussed in our previous blog posts here and here).  While companies retain significant scope to price products as they see fit, it reaffirms that pharma companies should be wary of implementing very significant price increases in the absence of good objective reasons for doing so.  This is particularly so where the increase is facilitated by commercial strategies such as acquiring IP rights to existing/potentially competitive products.  In the EU, it is also worth remembering that – as established by Tetra Pak I (on appeal to the General Court) – an agreement which falls within a block exemption can at the same time constitute an infringement of Article 102.  So companies and their advisors should remember to wear Article 101 and 102 hats when reviewing agreements.

Helen Hopson

A decision of Paramount importance to independent film financing…?

In the latest instalment of the pay-TV saga, the French pay-TV operator Canal Plus has asked EU judges to overturn a commitments decision agreed earlier this year between Paramount and the European Commission.  Those commitments (on which we reported here) ended Paramount’s involvement in the Commission’s antitrust investigation into the distribution arrangements between Sky UK and the six Hollywood film Studios, with no infringement finding or fine. 

The Commission’s investigation into Disney, NBCUniversal, Twentieth Century Fox and Warner Bros remains ongoing.  In the background is the Commission’s Digital Single Market Strategy which aims to break down barriers preventing cross-border E-commerce.

What has been agreed with Paramount? 

Paramount has agreed to remove restrictions on customers trying to access content from another EU country.  In practice, this means it will no longer insert “geoblocking” obligations in its licensing contracts with EU broadcasters. 

As we previously commented, the Commission considered that the Studios bilaterally agreed restrictions with Sky UK that prevented it from both making active sales in to other EU territories and from accepting passive sales requests. 

These restrictions effectively granted Sky UK ‘absolute territorial exclusivity’ in the UK and Ireland, eliminating cross-border competition between Sky and other pay-TV broadcasters in other Member States.

Why is Canal Plus appealing?

Canal Plus wants the General Court to annul the Paramount settlement, as – in common with other EU broadcasters – it considers that the terms agreed with the Commission risk undermining the EU system of film financing which relies on broadcasters being able to use different pricing and release strategies for different EU counties.  

The appeal seems likely to face an uphill struggle; the General Court has only recently underlined the high hurdle for a successful appeal against a commitments decision in its Morningstar judgment.  Nevertheless, the Commission appears to be seeking to understand (or at least to address) this issue – it is understood to have requested further information from Sky and the remaining Hollywood Studios about the potential impact of a decision on the financing of independent films. 

Last thoughts 

Sky has also been in the news of late in relation to the recent bid by Twentieth Century Fox for the 61% of Sky that it does not already own.  If cleared, Sky’s future distribution arrangements with the film arm of Twentieth Century Fox are likely to fall outside of any future competition remedy imposed by the Commission in the Hollywood Studios investigation. Once their production and distribution businesses are vertically integrated, the rules on anti-competitive agreements will no longer apply, as there will no longer be any agreement between separate undertakings. 

Case T-873/16 Groupe Canal + v Commission

This summer’s (not so) light reading – the CMA’s published Paroxetine decision (GSK/generics)

Some 6 months after issuing its infringement decision against GSK and a number of generic companies, the CMA has released a non-confidential version.  This comes in at a weighty 717 pages.  

Other than the grounds of appeal (on which we reported in the final paragraphs of this post), this is the first chance for companies and their advisors who weren’t involved in the proceedings to see the approach the CMA has taken, and to compare it with the current Commission approach.  First impressions are that the CMA has closely aligned itself with the Commission’s patent settlement decisions, such as Lundbeck**. The CMA and the parties will therefore be particularly keen to see the General Court’s forthcoming judgment in that case – indeed, the case management directions set down by the Competition Appeal Tribunal in the appeal proceedings against the CMA’s decision require the parties to prepare submissions on the relevance of the GC’s judgment to the case.

For those who aren’t keen on such weighty holiday reading, but can’t stand the suspense, below are a few pointers to the parts of the CMA’s legal reasoning which may be worth dipping into:

  • Paragraphs 1.3  1.20: A high level summary of the decision for those who only have an appetite for some light reading.
  • Paragraphs 3.65 – 3.84: The CMA’s view of patents, expanded upon at paragraphs 6.19-6.22.  The Windsurfing case law on the ‘public interest’ in removing ‘invalid patents’ is key: patents are treated as ‘probabilistic’ (although the term isn’t used) and are not guaranteed to be valid. Like the Commission, the CMA treats legal challenges to patent validity as part of the competitive process, and argues that the market is ‘in principle’ open to generic entry after expiry of patent protection over an API.  
  • Paragraphs 4.17 – 4.26: Overview of the market definition section which finds that, while other antidepressants may be substitutable for paroxetine, consumption patterns suggest that the actual competitive constraint is limited.  For market definition geeks, the full analysis is at paragraphs 4.29 – 4.97.  It is notable that paroxetine’s position within the ATC features only briefly, with the focus being on actual competitive constraints, including a ‘natural events’ analysis to look at the relative impact of generic entry in relation to the candidate competitor molecules (such as citalopram – the subject of the Lundbeck decision), and entry by generics of paroxetine itself (see para 4.73 in particular).
  • Once the narrow market definition is established, there isn’t much suspense as to the dénouement of the dominance ‘chapter’ (paragraphs 4.98 – 4.127).  In this context, the section on why the PPRS does not constrain pharmaceutical companies’ dominance is again unsurprising, but perhaps worth a read (paragraphs 4.124 – 4.126).
  • Paragraphs 6.1 – 6.9 and 6.204 – 6.206 contain a summary and the conclusion of the ‘object assessment’ under Article 101/Chapter I: while generally Lundbeck-esque, the reference to “the effective transfer from GSK [to GUK/Alpharma] of profit margins” strikes me as a novel way of expressing an old idea.
  • Paragraphs 7.1 – 7.3, 7.61 – 7.62 and 7.114 – 7.115 contain the summary and conclusions of the effects assessment under Article 101/Chapter I.  Even though the agreements were actually operated in the market, the CMA has confined itself to looking at their ‘likely’ effects – presumably to try to account for the fact that the outcome of the discontinued litigation is unknowable. It also concludes that the agreements assisted GSK to “preserve its market power” (paragraphs 7.63 – 7.64 and 7.116 – 7.117).
  • Leading on from that conclusion, paragraphs 8.1 – 8.3 summarise the case on abuse of a dominant position.  Central to the abuse case is the concept of inducement by GSK.  The allegations span not only the agreements in respect of which fines are issued under Article 101, but also an agreement with IVAX (for those with time on their hands, Annex M seeks to explain the discrepancy). GSK raised a number of objective justification arguments, notably around its right legitimately to defend its patent rights and to defend the company’s commercial position.  Paragraphs 8.61 – 8.67 reject these arguments, in particular on the basis that the conduct was not ‘competition on the merits’ (as per AstraZeneca) and that the conduct “went beyond the legitimate exercise of its patent rights to oppose alleged infringements”.  
  • Finally, and again for the more technically minded, at paragraphs 10.43 – 10.53, the relevance of the Vertical Agreements Block Exemption is dismissed, on the basis that the agreements were between potential competitors rather than being true ‘vertical’ arrangements.  At paragraphs 10.54 – 10.97, the parties’ Article 101(3) exemption arguments are also dismissed (spoiler alert: the exemption criteria are not found to have been fulfilled).  One curiosity is the lack of an infringement decision in relation to the agreement between GSK and IVAX.  This was held to benefit from the (now repealed) UK-specific Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000 (now repealed).  In other words, that agreement is treated as vertical, unlike those between GSK and each of the other generic companies, even though the decision recites that IVAX did have plans to launch its own paroxetine generic.  The difference appears to be based on the context in which the agreements were reached: whereas the agreements with GUK and Alpharma related to the settlement (deferral) of litigation, that was not the case for the supply deal agreed with IVAX.  This is addressed at paragraphs 10.36 – 10.47 and in Annex M.
The paragraphs listed above focus on the legal analysis.  Those who prefer their reading less dry will want to look also at the descriptions of the agreements, and will note in particular that the ‘settlements’ considered in the decision did not finally resolve the litigation, but rather deferred it for the duration of the agreements entered into by GSK and the generic companies. Those who like tales of retribution will wish to read about the calculation of fines in section 11 – note that GSK received separate fines in relation to each of the agreements and the abuse of dominance.

The appeal hearing before the CAT is due to start next February, and to last for around a month.  By that time, the General Court will have issued its rulings in the various appeals against the Commission’s Lundbeck decision – which will doubtless be another weighty 
read for the Autumn.

** For more on Lundbeck, please see here (the abridged version) or here (the full analysis).  

The CMA still has pharma and medical devices in its sights

The CMA has been slowly but surely opening a raft of new investigations in the pharma and medical devices industries.  

It announced last week that it is investigating suspected anti-competitive conduct in the medical equipment sector under Chapter II CA 98 and Article 102 TFEU.  An initial 6-month timetable is set down, with the CMA hoping to be in a position to decide whether to take the investigation into the Statement of Objections phase by around October.

Last week also saw the CMA announce that it is investigating anti-competitive arrangements in the pharmaceutical sector under Chapter I CA and Article 102. This will follow the same timetable. 

Just a few weeks earlier, the CMA announced another separate investigation into suspected abuses of a dominant position in the pharma sector.

The CMA recently closed a possible market investigation into possible anti-competitive causes of medicines shortages and it is possible that at least some of these investigations will be shelved before more public information is made available.  However, at least two other longer-standing pharma-industry-focused investigations remain on foot, including:

  • The investigation into possible excessive prices charged by Pfizer for phenytoin sodium, which we have been following here on The CLIP Board: a formal Statement of Objections has been sent in this case, and an oral hearing held; last week Pfizer was fined £10,000 for a procedural infringement in connection with a failure to provide information, a salutary reminder for those involved in CMA investigations in any industry, as the CMA itself points out (“The imposition of an administrative penalty [on Pfizer] […] is critical to achieve deterrence, ie to impress both on the party under investigation, and more widely, the seriousness of a failure to comply with a statutory deadline, without a reasonable excuse.”…).  A decision is due in around August 2016.
  • An investigation into possible abusive discounts which is coming towards the end of its initial phase, and should be the subject of a decision to close or proceed next month.
One case which was not shelved was the Paroxetine patent settlements case (see our earlier post here).  Following the CMA’s imposition in February of £45 million of fines, it has been confirmed that GSK and all of the generics have appealed to the CAT.  The full text of the infringement decision has still not been published by the CMA, but the notices of appeal against the CMA’s decision have appeared on the website of the Competition Appeal Tribunal.  

GSK’s appeal encompasses eight separate grounds, six of which are on issues of substantive law (with two subsidiary grounds on the fining decision).  It is evident from GSK’s appeal that the CMA has followed the Commission in proceeding on the basis of both object and effect analyses in their Article 101/Chapter I infringement decisions, as well as in claiming an abuse of dominance arising from the set of facts.  GSK is unsurprisingly appealing the finding of dominance, which arose from the identification of a relevant market limited to a single molecule.
The CMA is clearly keeping a close eye on the pharmaceutical and medical industries – and we will continue to keep a close eye on the CMA’s activities in this area.

UPDATE: International spring cleaning time to review those IPR Guidelines

For those of you who read my blog post from earlier this month on the recent flurry of international IPR guidelines announcements (see here), we thought some of you might be interested in a more in depth look at the Canadian IPR Enforcement Guidelines written by Canadian law firm McCarthy Tétrault (for a link to their interesting article see here).  

The article summarises the most notable new guidance in the Canadian guidelines – namely in relation to pharma patent litigation settlements, product switching, standard setting and SEPs and patent assertion entities.  It also contains links to previous articles discussing the evolution of the guidelines.  There are many parallels to ongoing IPR policy developments in Europe but a few differences also stand out (e.g. express discussion of the potential for criminal liability for pharma patent litigation settlements (not something that has reared its head in Europe… (yet?)) and a helpful distinction between so called ‘hard’ and ‘soft’ product switching).