On October 18, 2023, the General Court dismissed[1] the appeals of Teva Pharmaceutical Industries Ltd (“Teva”) and Cephalon Inc. (“Cephalon”) against the Commission’s decision imposing a €60.5 million fine on both pharmaceutical companies for pay-for-delay agreements.[2]  The General Court confirmed the Commission’s conclusion that Teva and Cephalon’s patent settlement agreement was aimed at preventing Teva from entering the market with its generic modafinil drug, and therefore restricted competition by object and by effect.

I. Background

Modafinil, marketed under the brand name Provigil, is a medication for the treatment of excessive daytime sleepiness linked to narcolepsy.  The sales of this product constituted over 40% of Cephalon’s global revenue in the years immediately prior to the settlement agreement.[3]  In 2003 Provigil lost patent exclusivity in the EU for its primary patents.  Teva launched a generic modafinil product in the United Kingdom in 2005.  Cephalon responded by filing a lawsuit, alleging infringement of its secondary patents still in force related to modafinil’s pharmaceutical composition.[4]  Teva filed a counterclaim for revocation.

This legal dispute culminated on December 8, 2005, with Teva and Cephalon entering into a worldwide patent settlement agreement effective on December 4, 2005.  Teva committed to refrain from selling its generic modafinil products in Europe until 2012 and agreed not to contest Cephalon’s patents.  In return, Cephalon provided Teva with financial compensation and a suite of commercial arrangements including: (i) an agreement for the distribution of Cephalon products by Teva in the UK; (ii) acquiring a license for a number of Teva’s modafinil patents; (iii) procuring modafinil raw materials from Teva; (iv) payment to Teva for litigation costs; and (v) access to clinical data for an unrelated treatment.  Ultimately, in October 2011, Teva acquired Cephalon.[5]

In 2020, the Commission issued a decision finding that this patent settlement agreement restricted competition by object and by effect within the meaning of Article 101 TFEU, and was aimed at delaying the entry of cheaper generic versions of Provigil.  The Commission fined Teva and Cephalon a total of almost €60.5 million.[6]  Both companies appealed the Commission decision.

II. Judgment

The General Court ruled that the Commission rightly applied the two-step test set out by the Court of Justice in Generics (UK)[7] to determine when a reverse patent settlement agreement amounts to an infringement.  According to this test, an agreement constitutes a by-object infringement if: (i) the only plausible explanation for the settlement was to refrain from competition on the merits; and (ii) the agreement does not entail proven pro-competitive effects capable of giving rise to a reasonable doubt that it causes a sufficient degree of harm to competition.[8]

As to the first prong, the General Court noted that the analysis of an agreement’s objective must be an “overall assessment” including whether any of the agreed commercial terms would not be expected under “normal market conditions.”  It noted that non-compete and non-challenge obligations do not qualify as “normal market conditions” unless the benefits granted to the generic supplier under these agreements would have been equally favorable in the absence of those obligations.[9]  This overall assessment allows the Commission to analyze the counterfactual as part of the first limb of the Generics (UK) test, but does not amount to an effects analysis.[10]  The General Court also noted that the net value of any “side deal” agreements other than the restrictive non-marketing and non-challenge clauses must be considered separately.  If the net value of the side deal is positive for the generic manufacturer, those agreements will be considered to have influenced the generic supplier’s acceptance of the other conditions.[11]

For the second prong of the by-object test, there must be no reasonable doubt that the agreement caused a sufficient degree of harm to competition.  The Commission had rejected the parties’ claims that the settlement had pro-competitive effects, including allowing Teva to enter the market earlier than it would have been able to had it lost its court proceedings against Cephalon.  The General Court agreed with the Commission, noting that Teva was Cephalon’s most advanced potential competitor and had concrete possibilities to enter the modafinil market as early as 2005 – seven years before the settlement agreement allowed it to enter – and finding that the Commission was not required to consider scenarios such as alternative outcomes of the patent litigation in assessing potential pro-competitive effects of the settlement.[12]  Moreover, even after its entry, under the settlement agreement Teva had to pay significant royalties to Cephalon, limiting the possibility for strong price competition between them.[13]  The parties therefore failed to demonstrate pro-competitive effects sufficient to rebut a by-object finding.

Although the agreement was found to constitute a by-object infringement, the General Court also examined its effects.  First, the Court upheld the Commission’s conclusion that the settlement agreement had restrictive effects on competition based on the agreement’s potential effects, so long as the anticipated developments were realistic and sufficiently appreciable.[14]  Second, the Commission was not required to determine that the generic medicine supplier would “probably have been successful” in the patent proceedings or that the parties would “probably have concluded” a less restrictive settlement agreement as a result of that litigation.[15]

III. Conclusion

The judgment of the General Court follows the precedents set in Lundbeck v. Commission,[16] Generics (UK) Ltd and Others, and Commission v. Servier and Others,[17] the last of which is pending before the Court of Justice.  It noted that non-compete and non-challenge obligations agreed between actual or potential competitors will be presumed to restrict competition by object where they are in consideration for the benefits granted to the restricted party.  In connection with the by-effect analysis, the Commission does not have to assess the chances of success of such litigation as long as the likely negative outcomes of the settlement are realistic and sufficiently large.

[1]           Teva and Cephalon v. Commission (Case T‑74/21) EU:T:2023:651.

[2]           Cephalon (Case COMP/AT.39686), Commission decision of November 26, 2020.

[3]           Cephalon (Case COMP/AT.39686), Commission decision of November 26, 2020, para 14.

[4]           Teva and Cephalon v. Commission (Case T‑74/21) EU:T:2023:651, paras. 8, 12 and 13.

[5]           Ibid., paras. 16–19, and 107.

[6]           The Commission imposed a €30.5 million fine on Cephalon and a €30 million fine on Teva. 

[7]           Generics (UK) Ltd and Others (Case C-307/18) EU:C:2020:52.

[8]           Teva and Cephalon v. Commission (Case T‑74/21) EU:T:2023:651, para. 28.

[9]           Ibid., paras. 43–45.

[10]          Ibid., paras. 46–47.

[11]          Ibid., para. 56.  The net value of the additional agreements was deemed to be positive for Teva, among others, because: (i) Cephalon had shown no interest in licensing Teva’s IP before the settlement (paras. 72 and 86); (ii) Cephalon did not need Teva’s supply of raw materials, because its existing capacity for the agreed period was sufficient (para. 105); (iii) the arrangement to provide data on an unrelated treatment was of large value to Teva and the conclusion of the settlement was conditioned upon the provision of this data (paras. 115 and 117); (iv) because of the Cephalon UK distribution agreement, Teva withdrew its own product and committed not to bring it back until 2015 (paras. 128 and 135); and (v) some parts of the compensation for litigation costs were not linked to costs incurred by Teva (para. 152).

[12]          Ibid., paras. 177–178.

[13]          Ibid., para. 180.

[14]          Ibid., paras. 223–224.

[15]          Ibid., paras. 232–236.

[16]          Lundbeck v. Commission (Case C-591/16 P) EU:C:2021:243.

[17]          Servier v. Commission (Case T-691/14) EU:T:2018:922, which has been appealed and is pending before the Court of Justice.  See Commission v. Servier and Others (Case C-176/19 P).