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Effective patent strategies need to reflect the realities of operating globally, irrespective of whether the strategy is primarily commercial or litigation focused, or a blend of both. Operating in Europe requires a sophisticated appreciation of the nuances of European antitrust law (referred to in Europe as competition law) and how to deploy these to one's advantage or to a competitor's disadvantage.
Intellectual property law and competition law are two sides of the same coin. There is an inherent tension between the two. The first seeks to create and defend monopoly rights, whereas the second seeks to challenge and dismantle such monopoly rights. As a result, regulators are constantly trying to find a balance between the two, meaning that compliance with one does not necessarily mean that compliance with the other.
It is no secret that the UK and EU competition authorities have taken an active interest in the activities of life sciences companies in recent years. Following the European Commission's final report in July 2009 on its competition inquiry into the pharmaceutical sector, which identified a number of shortcomings in the pharmaceutical sector that it determined required further action, the Commission has been actively monitoring the sector and patent settlements in particular. In July 2012 the Commission stepped up its scrutiny of the industry by issuing “Statements of Objections” to a number of life sciences companies relating to agreements they had concluded to settle pharmaceutical patent disputes.1
Settlement agreements aside, in an industry where research and development costs are enormous and investors are constantly demanding more return from their investments, it has become increasingly necessary for competitors to enter into a variety of relationships with each other, or indeed to merge with each other, in order to pool resources, diversify and streamline existing business lines.
The following examines the convergence between competing life sciences companies and asks how competition law views these necessary business arrangements, and what should be done to minimise any competition law risk.
In practice, interaction between competitors takes many forms on the market, including R&D agreements, technology licensing, patent litigation settlements, and mergers. Additionally, companies need to consider the situation where there are no formal agreements in place between competitors, but where a dominant company interacts with its competitors in a way that may breach competition law.
The potential impact of competition law issues on a devising a pan-European patent strategy can be immense. The reach of competition law is such that assessing its impact on strategy setting is necessarily a multi-factorial exercise, often at a granular level. Each of the issues discussed below can potentially play a significant role in any strategy, irrespective of whether the context is litigation, determining how to respond -- proactively as well as reactively -- to commercial threats by competitors coming onto the market, or merely in how to come to commercial understandings with third parties.
Whilst so-called “pay-for-delay” settlement agreements in litigation are more ad hoc and less a part of everyday business life in the pharmaceutical industry in Europe than in the US2 and elsewhere, nonetheless such agreements have important EU competition law considerations. The normal prohibition on collusion between competitors can be triggered by agreements whose effect may be to allocate markets and/or customers.
This type of patent settlement agreement has been a focus of concern for the European Commission in recent years. Allegedly paying a generic manufacturer not to compete against a branded product is at the heart of the Commission's ongoing cases against Lundbeck and Servier. The Servier case also includes allegations that Servier breached the rules concerning the abuse of a dominant position by “unduly protect[ing] its market exclusivity by inducing its generic challengers to conclude patent settlements”. These cases follow on from the European Commission's 2009 Pharmaceutical Sector Inquiry, as well as following the trend set by the sustained efforts by the US Federal Trade Commission to litigate such agreements in the US courts3 and criticise them in its reports.4
Whilst the European Commission has taken the lead against such agreements within the EU, there are still no decided cases yet. It is therefore difficult to find any real guidance on these points. Caution is the best approach. Companies should hesitate before offering or accepting inducements to enter into settlement agreements or restrict generic entry onto a market. This will be particularly complex where there is a debate -- or indeed litigation -- over whether a patent is in force or not.
Moreover, where pharmaceutical companies may be in a dominant position they should take particular care to avoid any type of conduct which may potentially be construed as an abuse of the pharmaceutical regulatory system (see further below).
As far as competition law is concerned, it is not just agreements between competitors, but the way that companies interact with third parties, including regulators, that can land them in trouble.
In June 2005, the European Commission announced that it had fined the Anglo-Swedish group AstraZeneca EU€60m for misusing the patent system and the procedures for marketing pharmaceuticals to block or delay market entry for generic competitors to its ulcer drug Losec. The Commission decided that AstraZeneca's actions constituted serious abuses of its dominant market position in violation of European competition rules. AstraZeneca was held to have:
(i) Made misleading representations to national patent offices in Germany, Belgium, Denmark, Norway, the Netherlands and the UK, and to national courts in Germany and Norway, so that it could obtain supplementary protection certificates to extend its patent protection for its Losec drug; and
(ii) Deliberately sought to block the entry of generic products and prevent parallel trading by submitting requests for deregistration of the marketing authorisations (MAs) for Losec capsules in Denmark, Norway and Sweden coupled with withdrawing Losec capsules from the market and launching a different tablet formulation (Losec's Multiple Unit Pellet System) in those countries.
AstraZeneca appealed that decision to the European General Court, which largely upheld the Commission's decision in July 2010 (see “General Court Upholds Commission Decision in AstraZeneca Abuse of Dominance Case” [24 WIPR 33, 8/1/10]).5 On December 6, 2012 the Court of Justice of the European Union dismissed AstraZeneca's subsequent appeal, and confirmed that AstraZeneca had abused its dominant position by making misleading representations to patent offices, and had acted abusively in deregistering its MAs (see “Court of Justice Dismisses AstraZeneca Appeal in Abuse of Dominance Case” [27 WIPR 37, 1/1/13]).
The CJEU ruled that a dominant undertaking cannot use regulatory procedures to prevent or seek to make it more difficult for would-be competitors to enter the market, unless such steps can genuinely be objectively justified. It is irrelevant in these circumstances that withdrawing MAs is legally permissible under the regulatory framework. AstraZeneca had not shown how the additional pharmacovigilance burdens that it would have faced had it not deregistered its MAs in Denmark, Sweden and Norway would have been so significant that it would have constituted an objective ground of justification (it was significant that AstraZeneca had not requested deregistrations of its MAs in other member states).
The traditional “big pharma” model of “blockbuster” drugs has typically involved developing and selling one's own proprietary drug, protecting it with patents, and reaping the benefits accordingly. However, generic manufacturers have deployed a range of strategies to challenge these originator companies. They have increasingly mounted aggressive challenges to the originators' patents where they have seen opportunities to do so, and have also competed on off-patent drugs by manufacturing them in low-cost jurisdictions such as India without incurring the necessarily heavy upfront R&D investments. Worse still, from the originators' perspective, the pipeline of new and approved “blockbuster” pharmaceuticals has sharply reduced and the patent protection on many existing blockbuster drugs is close to or has recently expired -- the so-called “patent cliff” -- with a resultant sharp drop in income.
Combined with the general economic climate and healthcare reforms, this has put serious downward pressure on the prices of off-patent drugs, and has required originator companies to offer more competitive pricing. In some instances in Europe, national governments have reduced their reimbursement prices for prescriptions written by national health services to make substantial cost savings. As a result, originator companies have faced significant market and investor pressure to address their very expensive R&D costs.
Faced with these market pressures companies are exploring ways they can work together more closely. The business logic behind these interactions is that:
• R&D agreements allow companies to pool resources, benefiting from broader expertise and avoiding duplicating the purchase of expensive new equipment and staff;
• Technology licensing can increase the return on R&D, promote favourable industry standards, and allow entry into new markets. Cross-licensing can see a company gaining access to external knowledge to which it would otherwise not have had access.
• There have been corporate mergers and acquisitions to address the “patent cliff”, develop growing markets for drugs to combat particular diseases, enhance cost synergies, and access emerging markets or new areas.
The general prohibition in competition law against collusion between competitors can affect the conclusion of R&D agreements. By working together on a pipeline of future products, competitors may start sharing commercially sensitive information (“CSI”) in an anti-competitive manner.
The Commission issued a revised regulation on R&D agreements in December 2010. This legislation introduced a special exemption from the normal competition rules for R&D agreements (the so-called “R&D block exemption”), provided they meet certain strict conditions, including a combined 25% market share threshold. Further guidance was published in January 2011 on horizontal co-operation agreements, including R&D, which explains in detail how to assess any agreement's compliance with the competition rules.
Broadly, no R&D agreement can contain any “hardcore restrictions”, such as: restricting any one of the parties from carrying out unrelated R&D with third parties; limiting output or sales; fixing prices; restricting sales territories; limiting sales to certain customers; refusing to meet demand from customers in allocated territories; and making it difficult for users or resellers to obtain products from other resellers.
To avoid such competition risks, companies should introduce safeguards to prevent the sharing of CSI. As a general principle, there should not be a competition problem where there is an R&D agreement between competitors who do not have significant market shares, as the impact on competition is likely to be negligible.
Where a company does not benefit from the block exemption it may need to seek legal advice as self-assessment of the agreement is required. Where an agreement does not comply with the rules, it could be unlawful, potentially leaving it null and void.
The block exemption requires companies to assess their position under competition law and as a consequence review any knock-on effects to their intellectual property. Since the block exemption imposes certain time limitations (a 7-year duration for non-competitors) companies will need to consider who will have rights to do what and when.
Similar issues present themselves on technology licensing as with R&D agreements, as competition law prohibits collusion between competitors, including the sharing of CSI.
This area is governed by a separate piece of European legislation, the Technology Transfer Block Exemption (TTBE). The regulation and its guidance date from April 2004 and are currently subject to consultation on their revision -- new, updated legislation will be issued in 2014.
Companies entering into such technology licenses need to introduce the same types of CSI and intellectual property safeguards as above. They should also note that the TTBE includes different “hardcore restrictions”:
• Competitors are not allowed to restrict a party's ability to determine its prices when selling to third parties; nor limit output; nor allocate markets or customers, subject to further detailed rules.
• Non-competitors may not restrict a party's ability to determine its prices when selling to third parties or engage in resale price maintenance; nor restrict the territories or customers to which a licensee may “passively” sell, subject to further detailed rules.
Given that the TTBE and its accompanying guidance are notoriously complex documents, with the result that agreements in this field carry higher levels of risk, this is an area where companies must be vigilant in ensuring that they are compliant.
The European Merger Regulation clears or opposes transactions based on any resulting “significant effects on competition” which a transaction may cause. Whilst this may not be a problem for smaller companies with lower market shares, the high barriers to entry in the industry can make it particularly complex for larger companies to gain clearance. Such transactions are not impossible, as the clearance of Merck/Schering Plough and Pfizer/Wyeth demonstrates.
Given the pace of rapid market consolidation, a reasonably well-established method for assessing pharmaceutical mergers in the EU and US has now emerged. The key problem is generally defining the market. The nature of pharmaceuticals is that a company will not have a big market share of the pharmaceutical market as a whole, although one successful drug could be very dominant on a niche market for the treatment of a particular condition. Indeed, where a drug is the first to treat a medical condition it may even enjoy a monopoly status until competitors release rival treatments.
The competition authorities have generally adopted the Anatomical Therapeutic Chemical Classification System at the third level (the ATC3) to define product markets (ATC3 indicates a drug's therapeutic/pharmacological subgroup). The competition assessment then proceeds on that basis and where problems are identified, solutions may include undertakings, divestments, and compulsory licensing to competitors.
Jonathan Radcliffe is a partner in the IP practice at Mayer Brown's London office and has practised exclusively in this field for over 25 years. His work covers a wide range of technologies, with a particular focus on cases with a high scientific/technological content in the pharmaceutical, life sciences, medical devices, and high-tech sectors.
Gillian Sproul is head of antitrust and competition at Mayer Brown's London office and advises on EU and UK competition law matters. She has represented clients in cartel and abuse of dominance cases before EU and UK regulators and courts including the ECJ. Gillian advises on a broad range of business agreements, transactions and strategies.
1 See Case 39.226 Lundbeck and Commission press release IP/12/834 “Commission sends Statement of Objections to Lundbeck and others for preventing market entry of generic antidepressant medicine”, dated July 25, 2012. See also IP/12/835 “Commission sends Statement of Objections on perindopril to Servier and others”, dated July 30, 2012.
2 In the US, the controversy over pay-for-delay pharma settlements has been simmering since the introduction of the Hatch-Waxman Act of 1984. This established a regulatory framework for generics to bring their products to the market by filing new drug applications with the Food and Drug Administration, then litigating with originator companies over the validity of their patents. In practice, this legislation was quickly circumvented by pharma companies, who realised that by paying generics to drop litigation over the validity of their patents they could prolong the life of their monopolies.
3 See the current Supreme Court case FTC v. Watson Pharmaceuticals, Inc, No. 12-416.
5 See AstraZeneca AB and AstraZeneca plc v. Commission (Case T-321/05). However, the fine of EU€60m was reduced to EU€52.5m.
Strategic and Planning Considerations for Patent Litigation in Europe
This concludes our current six-part series on the strategic and planning considerations for conducting patent litigation in Europe. Readers are cordially invited to submit their comments, via the “Contact Editor” button online or by email to email@example.com.
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