Chillin'Competition

Last week, the General Court delivered its judgment in Lundbeck. It is the first ruling on the pay-for-delay saga. As most of you know, the GC dismissed the action for annulment. It confirmed that, in the specific circumstances of the case, the payments to generic producers amounted to a restriction of competition by object. It also confirmed that generic producers were potential competitors on the relevant market.

The judgment is very long. I will certainly not try to summarise it in around 1,500 words. A substantial part of the analysis is devoted to factual questions. I will thus focus on the issues of law that may feature in an appeal and which are more relevant to draw conclusions that go beyond the peculiarities of the case.

Most readers will remember that the Commission claimed in its decision that Lundbeck had paid generic producers to delay the launch of their version of the drug once the basic patent had expired. At the time of the agreements, Lundbeck still held related process patents.

The fundamental question, against this background, is whether the generic producers were ‘potential competitors’ within the meaning of the case law. If these producers are indeed found to be potential competitors in the relevant economic and legal context, it is inevitable to conclude that the agreements are restrictive of competition by object. They would be cartel-like arrangements without a plausible explanation other than the restriction of competition.

My impression, however, is that the General Court may not have fully appreciated the complexity of the economic and legal context. Accordingly, the qualification of the agreements as restrictive by object seems controversial.

Were generic producers potential competitors?

The judgment correctly defines the applicable legal test in this regard. The relevant question is whether there would have been ‘real concrete possibilities’ for generic producers to enter the market (paras 98-99). This question, as many others, must be assessed against the counterfactual. What would have happened in the absence of the agreements?

One can think of various reasons why a firm may not have the ability and/or the incentive to enter a market. For instance, the applicable regulatory framework may preclude actual or potential competition between the parties to the agreement. This is the issue considered by the General Court in E.On Ruhrgas, which is abundantly cited in Lundbeck.

Potential competition and patent protection

Pay-for-delay cases are peculiar in which the pharmaceutical company typically benefits from patent protection. As a result, these cases often involve an instance in which market entry by a generic producer is precluded by an intellectual property right. In this sense, they are similar to E.On Ruhrgas. In the latter, exclusive rights (ie a legal monopoly) also precluded market entry.

Can one really say that a generic producer is a potential competitor if it needs to infringe a patent in order to enter a market?

According to the General Court, even when market entry depends on the use of a patented process, a generic producer that enters the market without the authorisation of the patentee would be a potential competitor.

It is worth summarising the reasoning of the General Court. It notes (para 120) that generic producers in Lundbeck were potential competitors because it was not certain (i) that they would necessarily have infringed the patent(s); (ii) that the patent(s) holder would have brought an action for infringement and (iii) that the patent(s) would have been found to be valid.

As I understand the ruling, the General Court suggests that a generic producer is a potential competitor so long as there is uncertainty around any of the above three points. For instance, the generic producers may not see the prospect of an injunction as realistic, either because they believe they would be successful in the event of a challenge (para 125) or because they do not believe that the patent holder would bring an action in the first place (para 126).

I admit I struggle with this part of the judgment, having read it a few times. I believe it is premised on a contradiction. To use a graphic example: the position taken by the General Court is tantamount to saying that Schrödinger’s cat is alive because it may be alive. A generic producer is a potential competitor, in other words, because it may successfully enter the market.

The General Court equates probability with certainty. As a result, it draws a somewhat simplified picture of the economic and legal context of which the agreements are part. Coming to the analogy used above, it is a bit like applying the logic of classical physics to quantum phenomena. Inevitably, this simplification leads to errors in the analysis. I can think of two main inconsistencies:

• Presumption of validity: The General Court accepts that patents are presumed valid. On the other hand, it emphasises that they may be declared invalid at a subsequent stage (para 122). These two statements cannot be reconciled. I struggle to see why the latter should play a role in the analysis. EU law does not dispute the existence of intellectual property rights. As a result, the assessment of a restriction should be based on the assumption that the patent is valid.
• Temporal aspects: The General Court seems to conflate ex ante and ex post considerations. It suggests that the generic producer is a potential competitor because it may appear, ex post, that it was able to enter the market without infringing the patent. These considerations seem to ignore that the very point of a genuine pay-for-delay agreement is to deal with ex ante uncertainty. By the same token, the nature of an agreement of this kind must be evaluated in an economic and legal context of uncertainty, not in light with an ex post reality that may or may not be manifested at a subsequent stage.

The Lundbeck judgment against the applicable case law

I have already pointed out that pay-for-delay takes place in a very peculiar economic and legal context. Traditionally, the Court of Justice has addressed similar issues in a way that differs significantly from the approach taken by the General Court in Lundbeck.

As the case law stands, an agreement is not restrictive of competition by object if it remains within the substantive scope of the intellectual property right. Think of a few examples, which I analyse in detail in this article of mine:

• Generally, an export prohibition is restrictive by object. This is not the case, however, where it remains within the substantive scope of the relevant intellectual property right (Erauw-Jacquery). Interestingly, the Commission submission in Erauw-Jacquery made exactly this point.
• Similarly, an agreement providing for absolute territorial protection is not restrictive by object when the licence does not go beyond the scope of the relevant intellectual property right – right of communication to the public (Coditel II).
• In the context of technology transfer agreements, an open exclusive licence, which remains within the substantive scope of the intellectual property right, is not restrictive by object (Nungesser).

I have to confess I do not understand why these cases are not discussed at length in the judgment. The most relevant of these precedents is perhaps BAT v Commission. The case concerned a trade mark delimitation agreement. These agreements are used to address the risk of confusion. In many ways, the underlying issues are the same as those found in pay-for-delay agreements.

In BAT v Commission, the Court of Justice held that such delimitation agreements cannot be compared with a market sharing cartel. Thus, they are not restrictive by object. They would only infringe Article 101(1) TFEU by their very nature when they fall outside the substantive scope of the trade mark. This is precisely what happened in BAT v Commission. The Court found that the agreement was restrictive by object because it gave BAT protection that it would not have enjoyed by virtue of the trade mark. In other words, it went beyond the substantive scope of the intellectual property right.

Another major ruling is Ideal Standard. In that case, the Court held that the assignment of a trade mark is not necessarily restrictive by object. It is also a judgment that shows that there is no potential competition where an intellectual property right can be invoked to prevent market entry.

What I would like to see in an appeal

As I was drafting this post, I was thinking that it would be great if legal academics were given the chance to challenge General Court judgments to clarify certain points of law. These are the issues of principle that I would love to see addressed in an appeal:

• Confirmation of the existence/exercise dichotomy: It would be important if the Court confirmed the long-standing principle according to which EU law does not question of the existence of an intellectual property right. In the same vein, considerations about the probability of a successful challenge should not play a role in the analysis.
• Article 101 TFEU and scope of intellectual property protection: Lundbeck departs from the principle whereby an agreement is not restrictive by object where it remains within the substantive scope of an intellectual property right. This principle, which explains the case law discussed above, is based on a venerable legal doctrine: qui peut le plus, peut le moins. If the holder of an intellectual property right can bring an action against a third party, it should by definition be able to settle with it.
• The notion of potential competition: The relevant precedents (Coditel II, Ideal Standard, BAT v Commission) suggest that potential competition does not exist where market entry depends on the infringement of an intellectual property right. The fact that the right in question may be declared invalid at a subsequent stage is not a relevant consideration under this case law.
• The analysis of the counterfactual: The Court of Justice has long taken the view that the analysis of the nature of the agreement and of the relevant economic and legal context must consider the counterfactual. In line with this case law, the General Court evaluates the counterfactual at various stages. Strangely enough, the General Court also denies doing what it does. It suggests in para 473 that the analysis of the counterfactual is only relevant for the analysis of the effects of an agreement. The Court of Justice should be given the chance to address this misunderstanding and clarify – in line with its long-standing case law – that it is impossible to determine whether an agreement restricts competition by object without considering the counterfactual.