The CJEU’s judgments in Servier
On the 27th of June 2024, the EU Court of Justice (CJEU) issued their judgments in the Perindopril(Servier). The judgments are in response to a European Commission (EC) decision from 9 July 2014 and a series General Court (“GC”) judgements from 12 December 2018 relating to appeals against this EC decision. The case involves important questions about core concepts of EU competition law, including the concepts of “agreement”, “restriction by object”, and market definition in pharmaceutical markets. The case deals with important questions around core concepts of EU competition law, including the concepts of “agreement”, “restriction by object”, and market definition in pharmaceutical markets.
In this blog post, I first discuss the background to the case, after which I focus on three key arguments raised in the CJEU appeal: (i) Servier and the generic manufacturers’ arguments against the GC’s judgment insofar as it upheld the EC’s findings that their agreements restricted competition by object; (ii) the EC’s appeal against the GC’s judgment insofar as it annulled the EC’s decision that Servier’s agreement with Krka restricted competition by object; and (iii) the EC’s appeal against the GC’s annulment of its decision that Servier had abused its dominant position.
Background
In January 2008, the EC launched a sector inquiry
into pharmaceutical markets. The EC launched a sector inquiry into pharmaceutical markets in January 2008, and one of its key concerns was the issue of reverse payments or “pay for delays” made as part of patent settlement agreements that related to drugs nearing the expiration of their patents. The theory of harm is that these agreements artificially prolong the exclusivity period of the patents by “buying off” potential competitors who would otherwise have launched generic versions in competition with the patent holder’s product around the expiry of the patents.
Shortly after issuing its final report in the sector inquiry, the EC formally initiated three antitrust investigations into this type of agreement: Lundbeck, Fentanyl and Perindopril (Servier) finding, in each case, that there had been anti-competitive coordination between the patent holder (known as the “originator”) and potential entrants agreeing to delay the launch of generic versions of the relevant drug as soon as it came off patent (known as “generic manufacturers”). The UK Competition Authority (CMA), in its case Paroxetine, began its own investigation. The EC’s Fentanyl ruling was not challenged. However, all other cases were appealed and eventually ended up before the CJEU. In the CMA case, this was via a preliminary referral. The CJEU first ruled on CMA’s case, in its Generics UK pre-ruling, which confirmed that ‘pay for delay’ agreements are restrictions of competition by object, so long as (i) they are between at least potentially competitors; (ii), involve The CJEU then upheld the GC judgment, which in turn had upheld the EC decision in Lundbeck. The GC then upheld the EC decision in. These cases, however complex and slow they may have seemed, were a great success for the EC and CMA. (Although the appeal against the GC’s judgment in Cephalon remains pending at the CJEU). The Servier case was different. It involved some arguably “conventional”, pay-for-delay agreements between Servier, as the original manufacturer of perindopril (a drug that treats heart failure and hypertension), and several generic manufacturers. The EC also characterized a complex three contract arrangement between Servier, generic manufacturer Krka and other generic manufacturers as a restriction to competition both in terms of object and effect. The EC also found that Servier’s abusive strategy violated Article 102 TFEU. The GC upheld this decision in its subsequent appeal. The GC’s judgements were appealed against by six generic manufacturers, Servier and the EC. The CJEU has now released its judgments in these appeals:
Seven judgments dismissing the appeals by Servier and the generic manufacturers against the GC’s judgment upholding the EC’s findings that each of their agreements represented a restriction of competition by object (although Servier secured a reduction in the penalty imposed for its agreement with Lupin from EUR 37 million to EUR 34 million);
Two judgments upholding the appeals by the EC against:
the GC’s annulment of its finding that the agreements between Servier and Krka represented restrictions of competition by object and by effect; and
the GC’s annulment of its decision under Article 102 TFEU, on the basis that the EC had erred in defining the relevant market.
- Below, we discuss (i) the dismissal of the appeals by Servier and the generics, (ii) the successful EC appeal on the Servier/Krka agreements, and (iii) the successful EC appeal on market definition.
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- The appeals by Servier and the generic manufacturers
- Servier and the generic manufacturers faced the difficult task of convincing the CJEU after Generics UK and Lundbeck that their situation was different and the agreements at issue should not have been found to be restrictions of competition by object. In this blog post, I focus on Servier’s appeal (Case C-209/19 P
).
The appeal took issue with the EC’s findings, upheld by the GC, that Servier and the generic manufacturers were at least potential competitors, and that Servier had made payments to those manufacturers that were sufficiently significant to induce those manufacturers to refrain, even if only temporarily, from entering the perindopril market.
Potential competition is a key aspect of pay for delay cases because, in most cases, the party with which the originator has entered into the agreement is not yet active on the relevant market. The harm theory is the delay in competition. The originator is accused to have “bought off”, the generic manufacturer who delays its entry for the payment they receive. Not all undertakings are potential competitors. These agreements are often based on exclusivity, which may be harmless if the contracting party does not exert any competitive pressure on the originator for that product. These agreements are often based on exclusivity. This may be harmless as long as the contracting party doesn’t exert any real competitive pressure on that product’s originator. In Generics UK vs. Lundbeck, CJEU confirmed patents are part the economic and legal context within which agreements should be assessed. The assessment of a Patent must not be based on the strength of a patent or the likelihood that a court will find the patent valid and infringed. The assessment should focus on whether the generic manufacturer, despite the patent, has real and tangible possibilities of entering into the market at the relevant moment. Other factors, such as an agreement reached between the parties while the generic manufacturer wasn’t on the market or the existence and value of transfers to that manufacturer for delaying its entry into the market can also be relevant. Therefore, as is often the case, competition law focuses on the economic reality.
Among Servier’s arguments on potential competition, one stands out. It relates whether the GC failed to take into account the subjective perceptions by generic manufacturers about the strength of Servier’s patents. A generic manufacturer may perceive that the patent is strong enough to prevent it from entering the marketplace, even if there has not been a formal decision made on infringement or validity. The CJEU ruled that the GC was right to reject this argument. The perception of the strength of a patent, which is subjective by nature, does not play a role in determining the ability of a generic manufacturer to enter the market. The perception of the strength of a patent, which is by nature subjective, is not relevant for the purpose of assessing the inherent ability of the generic manufacturer actually to enter the market, nor is it relevant for assessing the objective existence of insurmountable barriers to entry.Servier also took issue with the GC’s findings relating to the anticompetitive object of the agreements between it and the generics. According to Servier the term “anticompetitive” is reserved only for agreements whose harmful nature is easily identifiable and proven. This characterisation is not appropriate for agreements in respect of which the potential effects are ambivalent.
However, the CJEU finds that it is in no way necessary that the same type of agreement has already been censured by the EC for such agreements to be considered to be restrictive of competition by object. The CJEU has also included a nugget of information for those who have followed the CJEU’s decisions in Superleague, International Skating Union, and Royal Antwerp. (For an analysis of these three cases on this blog, click here). In these cases, the CJEU ruled that the defence of ‘objective necessity’ to achieve a legitimized objective, which was recognised in cases such as Meca-Medina or Wouters, could not be raised in cases where there are restrictions of competition based on object. The CJEU’s ruling was not clear as to whether it also applied to ancillary restraints, where “objectively necessary”, is also used. The CJEU does not dismiss Servier’s argument in the Servier judgement on the basis that these agreements restricted competition by their object. The CJEU, in the Servier judgment, does not dismiss Servier’s argument that the agreements between Servier & the generic manufacturers were ancillary. Instead, it assesses them against the doctrine of ancillary restriction and finds that the object restrictions therein are not ancillary. The EC’s appeal relating the agreements between Servier & Krka
The EC appealed to the GC the annulment of their decision relating the agreements between Servier & one generic manufacturer, Slovenian company Krka.
The EC appealed to the GC the annulment of the GC’s decision relating the agreements between Servier & one generic manufacturer, Slovenian company Krka. Servier and Krka signed three agreements between October 2007 and January 2008:
The settlement agreement of October 2006, where Krka agreed not to contest certain Servier patents and to withdraw all claims against them. Krka also was not allowed to launch a generic perindopril that would infringe on one of the patents during the validity of the patent, unless it was expressly authorized by Servier. Servier agreed to withdraw its lawsuits against Krka in exchange for the withdrawal of its patent infringement actions. In return, Krka would pay Servier 3% royalties on its net sales in those territories.
The January 2007 assignment and licence agreement, under which Krka assigned two patent applications to Servier relating to a process for the synthesis of perindopril and to the preparation of formulations of perindopril. Servier paid Krka 30 million euros in return for this assignment. The EC determined that these agreements constituted a continuous and single infringement. Their purpose was to divide the EU into Krka’s core market and Servier’s core market by authorizing Krka to release a generic version perindopril on its core markets in exchange for Krka’s commitment to not compete in Servier’s core markets. In other words, the licence agreement formed the payment from Servier to Krka, for Krka to accept the restrictions agreed in the settlement agreement.
The EC also found that the EUR 30 million paid by Servier to Krka under the January 2007 assignment and licence agreement was unconnected with the income that Servier could expect from the exploitation of the technology transferred by Krka. Therefore, the 30 million was viewed by the EC as a sharing of the revenues resulting from the reinforcement of market allocation between Servier and Krka.
However, on appeal, the GC considered that if there is a genuine patent dispute that is settled through a settlement agreement, the fact that there is a connected licence agreement does not in and of itself constitute a strong indication that there was a reverse payment. According to the GC the EC would have to prove that a licence agreement “masks a reverse payment” by showing that the royalty that is paid by the generic producer under the licence contract is “abnormally small” and that it was not a transaction at arm’s length. The GC found that the settlement agreements and licence agreements did show a sufficient level of harm to the competition for the EC to conclude that they constituted a limitation by object. CJEU said that the GC should not have focused on whether or not the EC proved the royalty rate to be abnormally low, but rather examine the infringement as a whole. The GC ignored the essential elements and failed to examine whether the licence agreement could have induced Krka not to compete with Servier, taking into account the parties’ reciprocal obligations and incentives. The GC would have been wise to analyse the value transfer that was created by the licence agreement that allowed Krka’s products to be sold on its core markets, without the risk of infringement. The GC should also have assessed whether that value transfer was sufficiently large to induce Krka not to enter (or postpone entry into) Servier’s core markets.
Thus, the GC had too quickly dismissed the EC’s analysis on the basis that the licence agreement appeared to be “at arms’ length”, and therefore could not be an inducement to Krka to refrain from entering Servier’s core markets. The premiss that a licence agreement concluded at arm’s length cannot constitute an inducement to conclude a dispute settlement agreement containing competition-restricting clauses was not correct, said the CJEU. Therefore, the GC had failed properly to assess the EC’s analysis of all the arrangements that were in place between Krka and Servier.
The EC’s appeal relating to market definitionThe EC also appealed the GC’s annulment of the EC’s findings under Article 102 (Case C-176/19 P
- ). The EC found that Servier had adopted a single, continuous strategy to delay the entry of generic versions perindopril on the market by combining the acquisition and settlement of patents for the active ingredient of perindopril with reverse payment. In Article 102 cases, defining the correct relevant market plays a crucial role. The EC had defined the relevant market as being the perindopril market, to the exclusion of other angiotensin-converting enzyme (“ACE”) inhibitors. The EC’s reasons were twofold: (i) perindopril had certain special characteristics; and (ii) the sharp fall in the prices of other ACE products following the arrival of generic versions had not led to a decrease in the prices of perindopril, while the volumes of perindopril sold actually increased.
- The EC’s killer argument had been that despite the sharp fall in the prices of ACE inhibitors for the same therapeutic use as perindopril, the price of perindopril had remained stable and its sales volumes had increased. The GC, however, found that the EC’s argument was not supported by the fact that there were no qualitative or non-price competitions in the pharmaceutical industry. Competition is not based solely on price but also on the quality of the product. The EC had attached excessive importance to prices when determining the relevant market.
- However, the CJEU annulled the GC’s judgment on market definition. The CJEU ruled that the CJEU’s ruling on the definition of the market was invalidated by the CJEU. It also depends on the economic aspect of whether these products are actually substitutable. The price and quantity of a product do not represent a different type of competition from that of quality. Economic substitutability reflects all
all
characteristics of the product, including its quality and promotional activities. The economic substitutability of pharmaceutical products should be assessed by comparing the sales of products with the same therapeutic indication. This is based on the changes in relative prices. The GC was wrong to claim that the EC placed too much emphasis on price. The fact that Servier could continue to charge higher prices for the same therapeutic indication, while other ACE-inhibitors were available at a lower cost, and yet Servier was able maintain (and even grow) its sales volumes, was indicative that perindopril formed a distinct market from those other ACE-inhibitors. The CJEU set aside the GC findings on market classification.
What comes next
This marks the end of the road in relation to the pay-for delay agreements. The CJEU’s judgments regarding the Krka agreements, and market definition are as follows:
It has given final judgment on several of the arguments that Krka, Servier, and the EC raised in first instance. It found that Krka is a potential competitor and that three agreements can be characterised as a sharing of the market between Krka’s core markets and Servier’s core markets. It also found that the agreements have anti-competitive effect, and that they cannot This has therefore been remitted to the GC.
It could also not yet give final judgment in relation to the infringement of Article 102, so this has also remitted this back to the GC.
Comment
Many debates were had about pay for delay that were no longer hotly contested by the time of these judgments. CommentMany debates were had about pay for delay that were no longer hotly contested by the time of these judgments. As an argument against infringement findings, the legitimacy of settling litigation has also been cited. By the time the CJEU examined the appeals of Servier, and the six generic manufacturers, these debates were already over. The judgments contain no surprises in this respect.
However, there are some key points in the Court’s judgments that risk being snowed under due to the length of the judgments. The first is that the complexity of an agreement does not prevent a conclusion that it restricts competition. The CJEU rejected Servier’s claim that the designation of an “anticompetitive item” is reserved only for agreements whose harmful nature is easily identifiable and proven. The CJEU has stated that it is not required that the same agreement type has been found to be a limitation by object. It is also clear that a detailed analysis of the agreements, their goals, and the legal or economic context in which they are part, may be needed to establish whether they are a limitation by object. Object restrictions do not just include those restrictions that appear to be illegal on a “cursory glance”. It took a thorough analysis of the agreements to determine that they did in fact result in a market sharing between Servier and Krka, who are, both legally and economically, potential competitors. Although it is now for the GC to decide on the object of the agreements, the CJEU has left the door wide open for such a finding in relation to a complex three-contract arrangement.
The second key point relates to the flexibility of the concept of “agreement” in competition law. The CJEU’s analysis on the three Servier/Krka contracts shows that the anti-competitive agreements are not always identical with the written contract. This is not a new concept. The anti-competitive clause can also be part of a larger contract, such as a noncompete. When the relevant clause is not annexed to the larger arrangement, it is assessed separately, so the anticompetitive contract is actually smaller than written contract (a good case is the non-compete of the Portugal Telecom
case).
Here the anticompetitive is bigger than each written agreement between Servier and Krka. The GC made a mistake by focusing on the settlement agreement and then examining whether the licence agreement was somehow a payment for restrictions that Krka had accepted in the settlement contract. It should have taken a holistic approach to the three agreements, which together constituted the infringement of competition laws. The concept of agreement is flexible and it stretches in both directions.The final key point is, of course, the market definition for pharmaceutical products. The CJEU chooses between economic substitutability or functional substitutability, and uses the latter to determine the market definition. The CJEU makes a clear choice between functional substitutability and economic substitutability, and chooses the latter as determinative for market definition. The economic reality is what matters. Author advises companies in the pharmaceutical industry on competition law matters at Geradin Partners. The author has not been involved in any of these cases discussed in this post.
