On Janaury 30, 2020, the European Court of Justice (the “ECJ”) issued a potentially far-reaching preliminary ruling in response to a May 2018 preliminary reference made by the U.K. Competition Appeals Tribunal (the “CAT”).[1]

The case arose from an appeal brought by two generic drug manufacturers—Generics (UK) (“GUK”) and Alpharma—and GlaxoSmithKline (“GSK”), a pharmaceutical company that produces a variety of products, including patent-protected original drugs. GSK held the composition patent on paroxetine, a type of antidepressant drug belonging to the selective serotonin reuptake inhibitor (“SSRI”) group of molecules. GSK also held a variety of process patents on paroxetine, meaning that it was the only company with the ability to create the drug (through the composition patent) in a commercially viable method (through its process patents).

Following the expiration of GSK’s composition patent on paroxetine in 1999, the company became aware that GUK and Alpharma were attempting to enter the U.K. market with generic supply of the drug. In 2001 and 2002, GSK commenced litigation against these companies for infringing its process patents, before ultimately settling with both companies ahead of trial. As part of those settlements, GUK and Alpharma agreed not to produce, import, or sell generic paroxetine in the U.K. In return, GSK inter alia granted both companies (i) the rights to sub- distribute its paroxetine product in the U.K., as well as (ii) a “marketing allowance” and other payments, in excess of £5 million.

The U.K. Competition and Markets Authority (the “CMA”) launched an investigation into these settlements, and found in February 2016 that GSK and GUK, and GSK and Alpharma, had entered into agreements that restricted competition by object and by effect, within the meaning of Article 101 of the Treaty on the Functioning of the European Union (the “TFEU”) and its U.K. analogue. In addition, the CMA found that GSK’s decision to enter into the settlement agreements constituted an abusive strategy by a dominant firm to restrict competition by delaying generic entry, within the meaning of Article 102 TFEU. The CMA imposed fines totaling £45 million.

The parties appealed the CMA’s decision to the CAT, which made a preliminary reference on several questions of EU law. The ECJ’s judgment addresses a variety of issues, the most important of which are as follows.

Notion of potential competition

A key question in the case was whether GUK and Alpharma were to be considered potential competitors of GSK. The ECJ held that when determining whether a generic drug firm should be considered a potential competitor to a drug manufacturer that holds an expired composition patent (an “originator firm”), the key question was whether the generic drug firm “has a firm intention and an inherent ability” to enter the market with the previously patent-protected drug molecule, and that any barriers to entry are not “insurmountable,”[2] a position that was in line with previous case law calling for real and concrete possibilities of competition.

Remarkably, the ECJ also held that in the context of an expired composition patent allowing for potential generic entry, the existence of process patents, which the ECJ itself noted benefit from a presumption of their legality, “cannot, as such, be regarded as an insurmountable barrier.” The ECJ went even further to say that “the uncertainty as to the validity of patents covering medicines is a fundamental characteristic of the pharmaceutical sector,”[3] and the very existence of a dispute between a generic drug firm and an originator firm “rather constitutes evidence of the existence of a potential competitive relationship between them.”[4]

The judgment suggests that, at least in the context of a process patent covering a production method for a drug whose composition patent has expired, the Court considers any generic manufacturer who has demonstrated sufficient intent and capability to enter a market as a potential competitor to an originator, and that litigation of these process patents is merely an ordinary parameter of competition—rather than an attempt by an originator firm to assert its property rights.

The practical implication of this part of the judgment may be that any generic company attempting to enter a market with drug products will be considered a potential competitor even if its strategy is to dispute or disregard an otherwise presumptively lawful process patent, and that any attempt by an originator firm to litigate against a generic drug firm and protect its IP rights will, perversely, strengthen the presumption that the infringing firm is a potential competitor.

Restrictive object

While at least acknowledging that settlements between originator and generic firms could be legitimate even where the originator provided the generics firms with a financial payment, the ECJ nonetheless held these agreements would have a restrictive object where the payment (which could be non-pecuniary in nature) “can have no explanation other than the commercial interest of the parties to that agreement not to engage in competition on the merits.”[5] The Court’s position in this regard, much like its discussion of potential competition, appears to relegate intellectual property rights (for process patents, at least), to little more than a single parameter of competition, rather than a fundamental property right.

While it is unclear as of yet how this holding will be given effect by the CAT, the ECJ’s judgment appears to put significant restraints on a court’s ability to gauge the strength of a process patent when determining whether a settlement agreement has a competitively benign explanation. The judgment notes that (1) the presumption of validity afforded to a patent; (2) the existence of genuine litigation to enforce that patent; and even (3) the award of an interim injunction preventing a generic firm from producing drugs under that patent “sheds no light, for the purpose of application of Articles 101 and 102 TFEU, on the outcome of any dispute in relation to the validity of that patent,” which would appear to significantly restrict drug companies’ ability to motivate why they decided to settle litigation for justifiable reasons.

In sum, the judgment not only confirms that reverse-payment settlements can be considered by-object restrictions of Article 101, but sets a difficult test for companies to satisfy in defending any decision to settle, including by severely restricting the weight placed on a company’s decision to use its patents to exclude infringing behavior by other companies.

Abuse of Dominance

The judgment also addressed the approach to market definition that authorities may adopt in abuse of dominance cases involving a drug whose composition patent has expired. The traditional approach taken to the market definition of pharmaceutical products is to define products based on their therapeutic and chemical group— an approach that includes equivalent products that are capable of treating the same types of condition. Applied to the current case, such an approach would have included all SSRIs, which the CMA acknowledged would result in GSK not having a dominant position during the period of time covered by its decision. The CMA has instead defined the market at the molecule level (i.e., to include GSK’s paroxetine, and potential entry by generic firms).

The ECJ held that, provided generic drug companies “are in a position to present themselves within a short period on the market concerned with sufficient strength to constitute a serious counterbalance to the [originator firm],”[6] in cases where a composition patent has expired but a process patent has not, the relevant product market should comprise both the originator’s version of the product and generic products “even if the latter would not be able to enter legally the market before the expiry of that process patent.” This approach implies that any meaningful attempts at entry by generic firms following the expiry of a composition patent on a pharmaceutical drug will result in the originator firm being considered dominant, at least for the purposes of its conduct in managing its process patent rights.[7]

As to abuse, the ECJ held that where an originator firm holds process patents for a molecule that is no longer protected by composition patents, any strategy “which leads it to conclude … a set of agreements which have, at least, the effect of keeping temporarily outside the market potential [generic competitors] constitutes an abuse,” to the extent it restricts competition.[8] In reaching this conclusion, the Court acknowledged that the “exercise of [intellectual property rights] … cannot in itself constitute an abuse,” but immediately undermined this proposition by noting that “such conduct cannot be accepted when its purpose is precisely to strengthen the dominant position of the party engaging in it.”[9]

The limits of the judgment in this regard are entirely unclear. Presumably, the ECJ did not intend to define any concerted strategy to enforce patent rights (i.e., by litigating before a court) as an abuse. But as almost any exercise of a patent right necessarily involves excluding (or at the very least conditioning) competition by other players that rely on that patent, the extent to which dominant firms’ may rely on their process patents is in need of urgent clarification.

Conclusion – a concerning judgment in need of clarification

Overall, the ECJ’s judgment in Paroxetine is a loss for the robust protection of intellectual property rights across the EU. It now appears that, in the pharmaceutical sector at least, intellectual property rights have been fundamentally subordinated to competition policy. In addition to this overarching theme that permeates the judgment, the ECJ’s ruling also raises a number of questions as to what considerations companies may take into account when settling patent litigation, an issue made all the more problematic by the apparent ease with which an originator firm may now be characterized as dominant.

In light of the broad and aggressive approach the Court has taken in elevating competition law above property rights, additional guidance and clarity, hopefully to follow in the pending Servier and Lundbeck appeals, would be welcome. In the meantime, the judgment may well have a chilling effect on innovation in the European pharmaceutical sector.

[1]      See Generics (UK) Ltd and Others (Case C-307/18) EU:C:2020:52 (“Paroxetine”).

[2]      Paroxetine, paras. 44–45.

[3]      Paroxetine, para. 46.

[4]      Paroxetine, para. 52

[5]      Paroxetine, para. 90.

[6]      Paroxetine, para. 140.

[7]      The judgment also appears to suggest that the General Court’s judgment in Servier—currently under appeal before the ECJ, where that General Court rejected the Commission’s molecule-level approach to market definition in another reverse-payment settlement case—will at most be upheld only on factual grounds as a result of the Commission’s failure to substantiate its conclusions on market definition.

[8]      Paroxetine, para. 172.

[9]      Paroxetine, paras. 150, 151.