CJEU ruling in Servier case: Never settle for just anything

Servier, the manufacturer of perindopril, and five manufacturers of generic versions of perindopril took the risk and all companies involved were fined by the European Commission in 2014. The European Court of Justice (“ECJ”) largely confirmed the judgment of the Court of First Instance (“CFI”) that their patent settlements were designed to delay the market entry of generic versions of perindopril and thus violate EU competition law.

But that is not all: the CJEU referred the case back to the General Court (i) to re-assess the European Commission’s allegations that Servier had abused its dominant position and (ii) to rule on the third settlement agreement between Servier and generic medicines manufacturer Krka.

For now, pharmaceutical companies should use this ruling, as well as prior case law, as a guide in the antitrust evaluation of their patent settlements, keeping in mind that the relevant pharmaceutical markets may be narrowly defined, which may involve risks of dominance.

Background

Servier is the original manufacturer of perindopril, a cardiovascular drug. After Servier’s patent on the active substance perindopril expired, Servier invoked a “secondary” patent covering processes for manufacturing the active substance perindopril seek interim injunctions against companies attempting to sell a generic version of perindopril. The validity of the secondary patent was challenged in court by five generic manufacturers, Niche/Unichem, Matrix, Teva, Lupin, and Krka. All of the companies ultimately settled their disputes with Servier by agreeing to refrain from entering the market or challenging Servier’s patent. In return, the generic companies received payments from Servier. In addition to these settlement agreements, Servier also acquired certain technology from the generic companies, which led to the termination of a number of generic projects. In addition to the settlement agreement, Servier licensed perindopril to Krka in seven markets. In addition, an assignment and license agreement was entered into, under which Krka assigned two patent applications to Servier.

According to the Commission, this technology acquisitions and a series of patent settlements breached EU antitrust rules. The Commission imposed fines for Servier and generic companies for a total value of EUR 427.7 million.

In the appeal proceedings, the Supreme Court partially annulled Commission decision and reduced the total amount of fines to EUR 315 million (see our January 2019 newsletter). The Court upheld the Commission’s findings that the agreements with the four generic companies constituted a restriction of competition “by object”. However, it found that the agreements with Krka were not anticompetitive but were based on Krka’s legitimate expectation that Servier’s patent was valid. Servier, as part of the settlement, granted Krka a license to commercialize perindopril in seven markets. The Court found that in this context, the settlement linked to the license agreement could only constitute a restriction “by object” if the Commission showed that the license agreement was not concluded under normal market conditions and therefore masked a reverse payment (i.e. a payment made by the originator company to the generic company in order to remain outside the market). The Commission did not do so.

In addition, GC annulled the Commission’s finding that Servier had, in addition to infringing the cartel prohibition in Article 101 TFEU, abused its dominant position by designing and implementing, through technology acquisitions and settlement agreements, an exclusionary strategy aimed at preventing generic market entry. According to GC, the Commission had given too much weight to price differences in its market definition on which it based its finding of Servier’s dominance.

The European Commission, Servier and the generic companies have all appealed the Supreme Court ruling to the CJEU. The CJEU ruling essentially concerns two issues: (i) the legal framework for assessing settlement agreements in the pharmaceutical sector under Article 101 TFEU and (ii) the definition of the relevant market for assessing dominance under Article 102 TFEU in the pharmaceutical sector.

(i) CJEU ruling on patent settlements

CJEU confirmed GC ruling that patent settlements with Niche/Unichem, Matrix, Teva, Lupin constituted restrictions of competition “by object”. However, it reduced Servier’s fine for the Lupin agreement from EUR 37 million to EUR 34 million because of a shorter infringement period than the Commission took into account in its calculation of the fine.

In its judgment, the CJEU followed the practical rules on the antitrust assessment of patent settlements set out in its previous case law (see our January 2021 Bulletin):

• in order to assess whether an undertaking is a potential competitor, it is necessary to check whether there are “real and concrete possibilities” for it to enter the market and compete with the undertakings present on it;
• Settlement agreements offering significant value transfers from the originator to the generic company that provide an incentive for the latter to refrain from entering the market are likely to be considered restrictions “by object” and
• any pro-competitive effects associated with the settlement agreements cannot overturn their qualification as restrictions “by object”. Interestingly, the CJEU seems to have clearly departed from its previous case law in which pro-competitive effects may play a role when examining the anti-competitive object of an agreement.

Applying these principles, the CJEU found that GC had wrongly rejected the Commission’s argument that the settlement and licensing agreements between Krka and Servier constituted an infringement by subject matter. GC had ignored the fact that the infringement attributed to Servier and Krka was not limited to the patent settlement agreement. Instead, it had pursued a broader objective of dividing markets between the two companies, and that Krka’s licensing agreement had constituted an incentive for Krka to undertake not to compete with Servier on its core markets.

The CJEU therefore found that the Commission’s appeal on this point was well-founded and referred the case back to the General Court for a ruling on the assignment and licence agreement concluded between Krka and Servier.

(ii) CJEU ruling on the relevant market for the purposes of abuse of dominant position

In response to the Commission’s objection, the CJEU he didn’t agree with GC’s finding that the Commission had relied too heavily on price to find that the relevant market for the assessment of dominance consisted solely of perindopril. The CJEU held that, irrespective of the specific characteristics of the pharmaceutical sector, a separate market exists where a change in price does not result in a shift in sales between medicinal products intended for the same therapeutic indication. GC therefore erred in law in holding that the Commission had wrongly based its assessment of dominance on too narrow a market definition.

The CJEU annulled the Supreme Court’s decision and referred the case back to the Supreme Court for a ruling on the alleged abuse of a dominant position by Servier.

Application

Perindopril saga continues, with modafinil paying for delay story on the tail. However, pharmaceutical companies may already be finding that markets can be defined quite narrowly, thereby increasing the risk of a dominant position being established. Furthermore, playing by the above-mentioned rules of thumb when entering into patent settlement agreements will protect those agreements from raising antitrust flags.

Pharmaceutical companies should also remember that the Commission has moved on to other topics: the current main topic is denigration (see our May 2024 newsletter) along with the current investigation in the pharmaceutical cartel. More events are yet to come.