Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Case C-307/18 Generics (UK) and others v CMA (Paroxetine), a major landmark in the case law (I): principles

with 10 comments

Generics

It is safe to predict that last week’s judgment in Paroxetine will be remembered as a major landmark in EU competition law. It is unusual due to the depth and the breadth of the contributions it makes to our understanding of some fundamental principles. We have had many judgments clarifying a discrete point of law. Unlike these, Paroxetine engages with several notions at the same time (the notions of competition, restriction by a object, effects and abuse), which is uncommon in the case law, and this, in depth.

A bit over a year ago I explained why the pay-for-delay saga would test the fundamental principles (see here) underpinning Articles 101 and 102 TFEU. I do not believe it was an exaggeration: it is sufficient to take a look at the questions raised by the national court in Paroxetine. The CAT asked whether the likelihood of a patent being declared invalid should be considered when evaluating the effects of an agreement. From a system that does not question the existence of intellectual property rights, I explained, we could be moving to one treating them as probabilistic titles.

Eventually, the case law has proved to be resilient. The judgment is in line with AG Kokott’s Opinion (see here for my take on it). The notions of competition and potential competition have not changed (they are still based on objective considerations), and the relationship between competition law and intellectual property is the same it has been since Consten-Grundig. It is not because nothing has changed that the judgment is not interesting. On the contrary.

I would not do justice to such a major landmark in a single post. This one is on principles. One will follow on pay-for-delay and the final one on issues of proof, where, now that the law is clear, the attention will move.

On restrictions by object

The law has been consistent from the very early days, but we have heard claims until not so long ago (including in Budapest Bank), that the pro-competitive aspects of an agreement are not relevant under Article 101(1) TFEU. Now we can definitely say that such claims did not reflect the reality of the case law. In paragraph 103 of the judgment, the Court clarifies that the pro-competitive effects of an agreement ‘must, as elements of the context of that agreement, be duly taken into account for the purpose of its characterisation as a “restriction by object”’.

The Court is prudent to state that such pro-competitive effects must be ‘demonstrated, relevant and specifically related to the agreement concerned’. In other words, claims about the pro-competitive effects must not be merely pretextual (as they were in cases like BIDS, which concerned a plain-vanilla crisis cartel).

What is the threshold to rule out that the agreement is a ‘by object’ infringement? I had suggested in the past that the threshold is one of plausibility. Paroxetine seems to confirm this interpretation of the case law. There is an express reference to plausibility in the assessment of the reverse payment (para 89). In addition, the Court explains that the pro-competitive effects of the agreement must cast a ‘reasonable doubt’ about the object of the agreement. This position is also in line with AG Bobek’s Opinion in Budapest Bank.

On competition, potential competition and the counterfactual

Prior to the release of Paroxetine, I explained that the notion of competition in the Treaty is best understood as meaning ‘actual or potential lawful competition which would have existed in the absence of the practices under consideration’.

The judgment confirms this definition. In paragraph 40 of the judgment, the Court makes it clear that, when considering whether a firm is a potential competitor, it is necessary to consider the ‘regulatory constraints that are characteristic of the medicine sector’, thereby confirming that only lawful entry counts as competition within the meaning of Articles 101 and 102 TFEU.

Second, it is necessary to consider the counterfactual in light of the relevant legal and economic context, and more precisely the market conditions in the absence of the practice under consideration. This position puts an end to the idea that the counterfactual is not relevant at the ‘by object’ stage. As AG Kokott explained, if the market conditions would not have been affected by the agreement, the practice does not restrict competition, whether by object or by effect.

Reasonably (para 38), the Court holds that potential entry must not be a ‘purely hypothetical possibility’. By the same token, it need not be shown that entry is certain or that the potential entrant ‘will be capable, thereafter, of retaining its place’ on the market.

Third, subjective considerations may be a factor, but the notion of competition is an objective notion. In this regard, the judgment confirms the case law. I understand it as meaning that subjective considerations are relevant insofar as they shed light on the objective ability of a firm to enter the market.

On the notion of effects

There has been no shortage of posts on this blog on the notion of effect under Articles 101 and 102 TFEU. One of the points that has always been emphasised is that not every competitive disadvantage and not every limitation of a firm’s freedom of action amounts to an anticompetitive effect within the meaning of the abovementioned provisions (Post Danmark I and II, as well as MEO, insist on this point).

Crucially, Paroxetine leaves no doubt. According to the Court (para 172), in order to establish an exclusionary effect under Article 102 TFEU it is necessary to show more than just the impact of the practice on the parties involved in the transaction. The analysis must ‘[go] beyond’ such effects and consider, the market as a whole (in past cases, the Court has already had the chance to identify the relevant factors to consider in this assessment).

On the notion of abuse

The bit on whether the practice amounts to an abuse deserves to be read closely. Interestingly, it refers to the object and effect to the conduct, thereby indicating that there can indeed be abuses by object.

Second, and more importantly, the Court points out that, whether the practice has as its object or effect the restriction of competition, the application of Article 102 TFEU ‘presupposes that that conduct was capable of restricting competition and, in particular, producing the alleged exclusionary effects’ (para 154).

Whether the impact on competition needs to be shown (as in Post Danmark II) or is implicit (as in Intel), a practice is not abusive within the meaning of Article 102 TFEU if it is incapable of having restrictive effects. This clarification also means that the panoply of arguments discussed above – relating to the counterfactual, or to the fact that the impact of the practice does not go beyond the relationship between the parties – would be relevant too.

Hopefully I will address the pay-for-delay aspects next week. As ever, your comments would be most welcome.

Written by Pablo Ibanez Colomo

7 February 2020 at 7:12 am

Posted in Uncategorized

10 Responses

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  1. I am having trouble reconciling your claim that paragraph 40 means that only lawful entry counts as competition, given the Court’s remarks in para. 46. The double negatives make it a bit hard to understand I admit, but the conclusion is clear: infringing parties can still be competitors:

    “In that regard, the existence of a patent which protects the manufacturing process of an active ingredient that is in the public domain cannot, as such, be regarded as an insurmountable barrier, and does not mean that a manufacturer of generic medicines who has in fact a firm intention and an inherent ability to enter the market, and who, by the steps taken, shows a readiness to challenge the validity of that patent and to take the risk, upon entering the market, of being subject to infringement proceedings brought by the patent holder, cannot be characterised as a ‘potential competitor’ of the manufacturer of originator medicines concerned.”

    Bram Nijhof

    7 February 2020 at 8:29 am

    • Hi Bram

      I do not believe there is any problem in reconciling the two. The judgment is very carefully crafted, and para 46 does not refer to just any patent, but to ‘ a patent which protects the manufacturing process of an active ingredient that is in the public domain’. It is referring, in other words, to a situation where the patent covers the process, but not the active compound itself. In such circumstances, I agree with the Court that the process patent may not be an insurmountable barrier to produce the drug, and that lawful entry can take place without breaching that process patent (for instance by developing an alternative process).

      Thanks so much for your comment!

      Pablo Ibanez Colomo

      7 February 2020 at 8:39 am

      • Dear Pablo, I really admire your skills in presenting any ECJ judgment as confirming your views. In reality, on potential competition (and the consequent paragraphs on market definition), the Paroxetine judgment appears on its face to follow the same approach/reasoning as the GC in Lundbeck, that you have (repeatedly) criticised on that point. The value of the judgment is not to say that competition must be “lawful” (something quite obvious, but it is certainly not said in para 40, which simply recalls that a marketing a medicine requires a marketing authorisation, big deal) but how to examine such potential competition in conditions of “uncertainty” as to what the actual legal barriers are/will be. On para 46, that Bram recalls, the ECJ go as far as saying that if you intend to challenge the validity of a patent, you can also be a potential competitor. It does not say that if you can go around the process patent there is potential competition (as you reinterpret in your comment), I am sorry. This is also clear in para 48. Para 50 makes it clear that, as regards potential competition, the competition authority must not assess the “strength of the patent” or make prognosis about outcomes. On the contrary, in the past you criticized Lundbeck because, under your own personal interpretation of that judgment, it would stand for the proposition that “potential competition may exist even when it would require infringing a presumptively valid patent”. You have expressed such view in several posts. Well yes, even an allegedly infringing product may be a potential competitor, in this particular market. BTW, the subjective elements that you have dismissed in the past (as incompatible with the “objective” notion of potential competition) are very present in the judgment as well (paras 42, 55-57, 135). The “objective notion” is not even a concept mentioned in the judgment. Not a big deal, but your post somewhat suggests the judgment refers to it. You add, on “subjective considerations”, that “I understand it as meaning that subjective considerations are relevant insofar as they shed light on the objective ability of a firm to enter the market”. Did anybody ever understand it in a different way? That’s how they were understood in Lundbeck, but at the time you were also critical of that.

        Joan

        7 February 2020 at 3:29 pm

      • Dear Pablo,

        Thank you for your post!

        Would you not say that it follows from paragraph 51 that the Court does not raise the bar so high that only lawfull entry qualifies as competition in the meaning of article 101 and 102? From paragraph 51 I understand that potential competition may be exerted also in the case of a compound patent. I believe the court is saying that the inherent ability to enter the market is not limited by the existence of a patent (not limited to process patents)?

        Best,
        Joris

        Joris Ruigewaard

        7 February 2020 at 4:36 pm

      • Thanks, Joris!

        I read para 51 as saying that uncertainty does not mean that entry is unlawful (or presumptively unlawful), and that there is no such thing as a presumption of infringement. What is more, the award of an MA does not require proof that entry will not amount to an infringement.

        So I would say: yes, entry must be lawful for it to count as ‘potential competition’ under Article 101 TFEU. In that regard, para 51 simply explains that entry can be lawful in spite of those factors.

        Pablo Ibanez Colomo

        7 February 2020 at 4:54 pm

  2. Pablo, as always very informative and thought provoking post. On the point of restriction by object and the relevance of pro-competitive effects to this assessment, it strikes me that this could be getting close to a US rule of reason type approach and therefore are we pre-empting the discussion to be had under article 101(3). I guess the distinction is in the degree to which we take into account anti-competitive effects as being limited to informing us on the context rather than for purposes of doing a full blown weighing up against the restrictive effects. Nevertheless in the same way as the legitimate purpose of an agreement is relevant to fall outside article 101(1), pro-competitive effects may take an agreement outside the ‘object’box and into the ‘effects’ box…the question I have is whether this is really a question of degree i.e.the more pro-competitive effects, the less likely the agreement will fall in the object box? Or is it simply that a pro-competitive effect of an agreement is one of the elements of the economic context to take into account and a ‘quick’glance into pro-competitive effects would suffice? I would expect the latter.

    Chantal Lavoie

    7 February 2020 at 8:34 am

    • Thanks so much, Chantal!

      Interestingly, the Court expressly rejects in the judgment that taking into account the pro-competitive effects of an agreement amounts to a rule of reason (see para 104). I agree with the Court that this is not tantamount to a rule of reason analysis.

      In my view, the pro-competitive effects shed light on the object of the agreement (what the rationale of the agreement is). In this sense, there is no weighing in any way.

      The Court, I believe, was stating something simple but crucial: how can one figure out what the agreement is all about without considering it may yield positive effects?

      Pablo Ibanez Colomo

      7 February 2020 at 8:42 am

  3. Thank you for an excellent blog post, and I hope to hear more from you about this very judgment!

    I think you are correct in saying that the test for finding a restriction ‘by object’ seems to be one of plausibility. However, I believe that is somewhat problematic from a legal certainty perspective. First, the Court appears to suggest that originators are allowed to compensate generics for avoided litigation costs, but not for the expected profits they would have reaped upon successful market entry. Thus, I think it is correct to assume that the red line is somewhere between the two, but where precisely? I believe there are a great many potential reasons for the parties wanting to settle and an originator being willing to compensate more than the mere costs of litigation. In this regard, I hope that the Court gives some clarification as to the meaning of ‘competing on the merits’ , as I am personally of the opinion that a generic can indeed be competing against an originator on the merits by accepting a lucrative settlement. This, of course, becomes more problematic when turned other way around: can an originator be competing on the merits by way of entering into a settlement, or from a competition law perspective, should it be forced to see through the litigation process?

    Second, regardless of the size of the value transfer, the scope/validity of a patent remains uncertain, and there will be continued absence of competition on the market. Thus, how is only the amount of value transferred a deciding factor for a finding of a restriction ‘by object’? Sure, the Court takes into consideration justifications for that payment etc., but if a restriction is only plausible, shouldn’t it then be analysed as a ‘by effect’ restriction?

    tommilahtinen

    7 February 2020 at 9:59 am


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