FACULTY OF LAWLund University

Nazlı Günay

Sweetheart Deals between Pharmaceutical Companies Consumer Welfare Effect of Pay-for-Delay Settlements through

Competition Law and Patent Law

JAEM03 Master Thesis

European Business Law30 higher education credits

Supervisor: Professor Hans Henrik Lidgard

Term: Autumn 2014

ContentsAbstract IVSummary VPreface VIAbbreviations VII1 Introduction 1

1.1 Background 1

1.2 Purpose 2

1.3 Methodology and Materials 2

1.4 Delimitations 32 PAY-FOR-DELAY SETTLEMENTS IN GENERAL 4

2.1 IPRs, Competition Law and Pharmaceutical Sector 4

2.2 Companies Behaviors, Settlements and Pay-For-Delay Settlements 6

2.3 Consumer Welfare Through Competition 83 PAY-FOR-DELAY SETTLEMENTS IN THE EU 11

3.1 Historical Approach to Pay-for-Delay Settlements 11

3.2 The European Commission’s Pharmaceutical Sector Inquiry 12

3.3 The European Commission’s Investigations on Pharmaceutical Companies 15

3.3.1 Les Laboratoires Servier 16

3.3.2 Lundbeck 17

3.3.3 Johnson&Johnson and Novartis 18

3.3.4 Cephalon and Teva 19

3.3.5 AstraZeneca 20

3.4 Reflections of the Investigations on the Member States and Current Situation

in the EU 22

3.4.1 Reflections on the Member States 23

3.4.2 Current Situation in the EU 254 PAY-FOR-DELAY SETTLEMENTS IN THE US 27

4.1 The Federal Trade Commission 28

4.2 Litigations on Pay-for-Delay Settlements 30

4.2.1 Pay-For-Delay Settlements From Circuit Courts’ Perspective 31

4.2.2 Pay-For-Delay Settlements From the Supreme Court’s Perspective 36

5 LAW AND ECONOMICS OF PAY-FOR-DELAY AGREEMENTS AND ITS CONSUMER EFFECT 416 CONCLUSION 49Bibliography 50

AbstractThe use of pay-for-delay settlements in the pharmaceutical sector, by which the entry of

a generic drug into the market is delayed by way of a value transfer from the originator

company to generic companies, have raised intense scrutiny by the EU and the US

authorities. This thesis reviews the way it has been analyzed under European and the US

competition and patent law. Also, the law and economics discussion underlying pay-for-

delay settlements will be explored. Through these analyses, the thesis concludes that

pay-for-delay settlements have a detrimental impact for consumer welfare.

Keywords: competition, patent, consumer welfare, pharmaceuticals, generic delay, pay-

for-delay settlements

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SummaryPay-for-delay settlements are agreements between an originator company and generic

companies in which the entry of generic drug into the market is delayed by way of a

value transfer from the originator company to generic companies. The difficulty over

the evaluation of these agreements stems from the unique character of the

pharmaceutical sector, in addition to the clashes of different interest groups such as

consumers, companies and governments. Between these interest groups consumers can

be counted as the weakest link. The question is whether a fair market can be formed

through out of an unbalanced practice which bring doubtful patents, demotivation to

innovation and competition in its wake to weaken the weakest link even more. To

answer this question properly, the examination has to be done through different bodies

of law such as competition law and patent law which is not an easy task.

This thesis will first establish the various assessments in the EU and the US which

aspire to attribute them as legal or illegal. Although, recent developments in the EU and

the US made it clear that they can be anticompetitive, there is no legal standard which

can guide the companies and the courts regarding the assessment of this kind of

agreements.

In this regard, this thesis will shed some light on the issues which form the

backbone of pay-for-delay settlements. In order to establish the reason why settlements,

particularly pay-for-delay settlements, exist, the historical background that precedes the

legal frameworks in the EU and the US will be established. Then, in order to be able to

explain why companies opt for delaying the entry of generic drugs after the patent

expiry in their settlement agreements, the economic background of the companies will

be addressed. Due to the major role of the patent rights in this practice, this thesis will

inspect the problems related to patents and its validity, and how pay-for-delay

settlements affect the quality of patents. Another impact of this practice is on

innovation, since the payment from the originator company keeps the generic

companies out of the market which can reduce the incentive of the companies to

compete, and therefore to produce innovative drugs, thus, an assessment of innovation

will be conducted. Finally, stemming from the direct interaction of the consumers with

the market, the detrimental consequences of this practice on consumers will be

examined.

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PrefaceThis master thesis, which is the final step towards completing the two years of my

master study on European Business Law at Lund University, has been produced during

my scholarship period, thanks to a Swedish Institute scholarship. During these two

years, I was granted with valuable knowledge in a different variety of subjects regarding

European Law and, at the same time, with wonderful people which influenced my life in

a positive way. Perhaps the person who influenced me the most was my respectful

supervisor professor Hans Henrik Lidgard.

Although, I have always had great interest towards competition law, the

Competition Law Dynamics course augmented my interest towards the problems of this

field of law. Among the topics that were carried out, parallel trade in the context of

pharmaceuticals got my attention most and brought me one step further towards my

thesis topic. I knew that I want to focus on pharmaceutical sector but in which aspect.

Then, an assignment was given and introduced me with my thesis subject. I needed to

conduct research on ‘settlements’. With the guidance of my professor Hans Henrik

Lidgard, my way was led to ‘pay-for-delay settlements’. The awareness that I have

developed in relation to different aspects of this specific kind of settlement encouraged

me to pursue further research on it as a thesis subject. Perceiving this practice as cycle,

which starts with the policies of the governments, I became very interested in

investigating this cycle and how it affects the consumers, which are located at the end of

the cycle.

Furthermore, when I started to write this thesis, there was an ambiguity over the

assessment of pay-for-delay settlements. However, when I was in the course of

completing my study, the US Supreme Court decision came and then the decision of the

European Commission which enriched the process of finishing this thesis by making me

to add these leading decisions. Even though, the last developments that I considered in

my thesis are these decisions, I am looking forward to see the future assessments of this

topic and how the authorities in the EU and the US formulate their legislation in relation

to the clashes between competition law, patent law and consumer protection.

Last but not least, I owe a thank to my parents and my twin sister who have

supported me all the way through my journey and my friends who made this foreign

country like home to me.

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AbbreviationsANDA Abbreviated New Drug Applications

CJEU The Court of Justice of the European Union

EC European Community

EEA European Economic Area

EU European Union

FDA Food and Drug Administration

FTC The Federal Trade Commission

IPR Intellectual Property Right

NHS National Health System

OFT The Office of Fair Trading

R&D Research and Development

SPC Supplementary Protection Certificate

TFEU The Treaty on the Functioning of the European Union

UK United Kingdom

US United States of America

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1 Introduction

1.1 Background

The pharmaceutical sector has a fundamental role in the improvement of human life. At

the same time, it has become a vastly lucrative and strategic sector of the economy. This

significance puts the pharmaceutical sector in a position where competition plays a

major role, since the first company which enters into the market with a new patented

drug gains enormous advantages over its competitors. This fact has shaped the overall

strategies of the companies in this sector, inducing strategies in which companies can

extend the commercial life of medicines. This thesis will deal with one of those

strategies known as ‘pay-for-delay’ agreements.

Pay-for-delay agreements are used as a way to prevent the entry of cheaper

versions of a drug to the market by a value transfer from an originator company to

generic companies.1 In return for the value transfer, generic companies keep their

lower cost drugs off the market and do not challenge the patent rights of the

originator company. The use of this kind of agreements has sparked heated

debates on both sides of the Atlantic as to whether pay-for-delay agreements,

which settle the patent related disputes, should be deemed as anti-competitive.2

This is a very difficult question to answer, since pay-for-delay settlements have

many assets. Some of them can be beneficial to the market while others are

detrimental.

On the one hand, extended patent life of drugs supplies a longer monopoly

to the originator companies by granting them a questionable patent protection.

This situation impedes the contestability of the patented drugs by generic

companies, which in turn leads to a problem in the context of Patent Law.

Moreover, extended patent life of drugs delays the entry of generic products into

the market. Ultimately, this situation forces consumers to purchase the patent

protected drug which costs more than the generic version of the same patent

protected drug.3 1 European Commission, ‘3rd Report on the Monitoring of Patent Settlements (period: January-December 2011)’ (2012) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report3_en.pdf>accessed 6 August 2012 (3rd Report on Monitoring), Para 4.2 Brankin S., ‘Patent settlements and competition law: where is the European Commission going?’ (2010) Vol.5(1) Journal of Intellectual Property Law & Practice 23, 23, para 2.3 3rd Report on Monitoring (n 1), Para 4.

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On the other hand, some advantages of these kinds of agreements appear.

When the patent is contested by the parties, the outcome of the litigation is

unpredictable for both the patent owner company and the generic company and

the litigation process is very long and expensive. Therefore settling the dispute

with pay-for-delay agreements comes with some economic and temporal benefits

to the companies. Furthermore, in the long-term, removing the disputes and the

possibility of contesting the patented products encourages companies to spend

more money and time on research and development and promotes innovation that

can benefit the consumer.

In brief, as underlined above, to decide whether pay-for-delay settlements

are detrimental is not an easy task and this thesis will shed some light on various

aspects of these settlements.

1.2 Purpose

This thesis, by providing an in depth investigation of pay-for-delay settlements both in

the European Union (EU) and the United States (US), will analyze the effects of pay-

for-delay settlements for the originator company, the generics, consumers and general

welfare to find out whether pay-for-delay settlements are detrimental to consumers.

1.3 Methodology and Materials

A traditional dogmatic method will be used to describe the legal situation both in the

EU and the US. Existing laws, reports and case-law on this issue will be used as

reference. Cases will be chosen in accordance to the relevance and not all the cases

related to the topic will be addressed. Since the effect on consumers of pay-for-delay

settlements is tied to surrounding legal aspects, such as the company or market aspect,

these aspects will be laid out to fully understand the situation. In this respect, a law and

economics perspective will be added and the market will be investigated through

companies’ behavior and consumer welfare to find out whether pay-for-delay settlement

is detrimental for consumer. Economic discussion will be kept in a general level and

used to test the findings of the thesis.

Since the genesis of the developments in Europe and in the US followed

different paths, these developments will be considered in separate sections. A

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comparative method will be used to present the differences and to establish the

positive and negative features of the pay-for-delay mechanism.

1.4 Delimitations

The research will be limited to the analysis of pay-for-delay settlements in the EU and

the US.

The section regarding the EU, will not include information with regard to

the outcomes of the Pharmaceutical Sector Inquiry other than those strictly related

to pay-for-delay agreements and its competition concerns, including market

analysis and consumer effect of these agreements.

The section concerning the US will include a brief overview of the Hatch-

Waxman Act which is necessary to comprehend the causes of pay-for-delay

settlements in the US. Furthermore, following the Federal Trade Commission’s

(FTC) approach and its report on the issue, cases decided by the US courts and the

US Supreme Court’s stance will be expressed.

Consequently, in compliance with the above mentioned limitations, section

two will identify the pay-for-delay agreements in general. Section three will

illustrate the situation in the EU, while section four will assess the situation in the

US. A law and economics discussion on the pay-for-delay agreements effects on

consumers in relation to other subjects of the market will be provided in section

five. The final section will present the conclusions and perspectives on the issue

discussed.

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2 PAY-FOR-DELAY SETTLEMENTS IN GENERAL

Pay-for-delay settlement is a practice where intellectual property rights (IPRs),

particularly patent law and competition law clash. This chapter will shed some light on

this practice. Therefore, a very brief remark will be made on the relationship between

IPRs and competition law. Even though this practice can occur in any sector, pay-for-

delay settlements have a distinctive role in the pharmaceutical domain. Thus, by

focusing on the pharmaceutical sector, usage of patents and anticompetitive effects of

this usage will be established. However, the discussion will be kept at general level in

this chapter and an in depth analysis will be conducted in the fifth chapter.

2.1 IPRs, Competition Law and Pharmaceutical Sector

The relationship between intellectual property law and competition law has been

discussed for a long time and it has finally been settled that they both serve the same

purpose: the production of new or substitute products which comes along with

innovation.4 IPRs serve for the well-being of companies, while competition law serves

for the well-being of the market and consumers. IPRs grant ‘pioneer’ inventors and

creators with exclusivity while establishing some limits and exceptions for innovators to

prevent copying, while simultaneously encouraging substitution to provide a

competitive environment.5 Under this exclusivity, owner of the IPR can opt for selling

or licensing the rights to the third parties6 since these rights are identified as subjects of

trade which promotes investments in research and development (R&D) and innovation.7

However, the application of these rules in the pharmaceutical sector has

caused some problems. These problems stem from the complicated structure of

the pharmaceutical sector. This is because, “perhaps more than any other industry

- [the pharmaceutical industry] sits on the fault lines dividing a number of policy

objectives - competition policy, intellectual property policy, state regulation, and 4 Anderman S., ‘EC Competition Law and Intellectual Property Rights: The Regulation of Innovation’ (1998) Oxford University Press 5, para 3.5 Anderman S., ‘The IP and Competition Interface: New Developments’, edited by Anderman S. & Ezrachi A., Intellectual Property and Competition Law (2011) Oxford University Press 4, paras 2,4.6 Shurmer M., ‘Standardisation: A New Challenge for the Intellectual Property System’, edited by Andrew Webster &Kathryn Packer, ‘Innovation and the Intellectual Property System’ (1996) Kluwer Law International 47-64, 48, para3.7 Anderman, ‘EC Competition Law and Intellectual Property Rights: The Regulation of Innovation’ (n 4) 6, para 2.

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social welfare.8” The interaction of these objectives shapes the formation of the

market and the practices of the companies.9

To simplify, this sector can be separated into two groups. Originator

companies and generic companies are located on the supply side; and prescribing

doctors, pharmacist and consumers are located on the demand side.10 Furthermore,

the most important feature of this sector is that it is highly regulated and driven by

R&D. Originator companies are involved in the research, development and

innovation in order to be able to obtain patent protection on their drugs11 since the

monopoly provided by patent protection is more lucrative for the companies.

However, the patent protection is limited in time.12 Therefore, while originator

companies try to come up with innovative drugs in the shortest time possible to

secure their position in the market, generic companies try to enter into the market

with equivalent but less expensive generic medicines following the expiration of

patent.13 Furthermore, companies have to meet the needs of the consumers which

changes with medical developments.14 On the other hand, governments affect this

sector with regulations. Hence, although the development of new products is

promoted, due to the public health expenditures, choices are made by the

governments which sometimes lead to price intervention in the market.15

This structure of the pharmaceutical sector aggravates the tension between

originator and generic companies. At this point the definition of generic product is

crucial, since classification of drugs as generics and originals is not an easy task

due to similar substances that they include. According to the EU Directive

2001/83/EC a generic drug is defined as:

“medicinal product which has the same qualitative and quantitative composition

in active substances and the same pharmaceutical form as the reference

medicinal product, and whose bioequivalence with the reference medicinal

8 Priddis S. & Constantine S., ‘The Pharmaceutical Sector, Intellectual Property Rights, and Competition Law in Europe’, edited by Anderman S. & Ezrachi A., Intellectual Property and Competition Law (2011) Oxford University Press 241, para 1.9 Priddis and Constantine (n 8) 241, para 1.10 European Commission, ‘Executive Summary of the Pharmaceutical Sector Inquiry Report’ (2009) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/communication_en.pdf > accessed 10 June 2013 (Executive Summary of the Inquiry) 7, para 5.11 Ibid.12 Bentley L. & Sherman B., Intellectual Property Law (3rd edition, 2009) Oxford University Press, 335, para 2.13 Executive Summary of the Inquiry (n 10).14 Priddis and Constantine (n 8) 241, para 2.15 Ibid.

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product has been demonstrated by appropriate bioavailability studies. The

different salts, esters, ethers, isomers, mixtures of isomers, complexes or

derivatives of an active substance shall be considered to be the same active

substance, unless they differ significantly in properties with regard to safety

and/or efficacy. … Bioavailability studies need not be required of the

applicant if he can demonstrate that the generic medicinal product meets

the relevant criteria as defined in the appropriate detailed guidelines. 16”

2.2 Companies Behaviors, Settlements and Pay-For-Delay Settlements

If the above mentioned objectives are viewed from the perspective of the

pharmaceutical sector, it can be revealed that patented drugs owned by originator

companies are important economical assets and offer a lawful and lucrative monopoly

in the market. However, originator companies’ incentive to produce strong-patented

drugs change depending on the legal standards of the market. While a patent owner

company enjoys the benefits of this monopoly, generic companies desire to market a

generic version of a patented drug as a first mover to the market, preferably before the

expiration of the patent.17Yet, generic companies have to confront the patent or patents

of the original drug before marketing. They have two options at this point: to wait until

these patents expire, or to find a way in which they can grasp some economic

advantages in the market. Therefore, some strategies were developed by generic

companies such as challenging the patent by initiating legal proceedings against the

patent owner companies in which generic companies can invalidate the patent or can

prove that the generic version does not infringe the patents of the patent owner

company’ drug.18 However, due to the inherent uncertainty of litigation and the heavy

burden of litigation costs, both of the parties opt for an agreement through which they

can solve the patent related dispute.19

16 Council Directive 2001/83/EC of 6 November 2001 on the Community code relating to medicinal products for human use 2001 OJ L311/67, art 10/2/b.17 Hemphill S., An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition’ (2009) Vol 100(2) Columbia Law Review 101, 103, para 3. 18 Kesselheim A., Murtagh L & Mello M., ‘“Pay for Delay” Settlements of Disputes over Pharmaceutical Patents’ (2011) Vol.365 (15) The New England Journal of Medicine 1439, 1439, para 4. 19 Günay N., ‘Patent Settlement Agreement is a Way to Settle Patent-Related Disputes; How about Pay-for-Delay Settlements?’ (2013) (Paper for Competition Law Dynamics Course, Lund University) 1, para 3.

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Therefore, companies settle the dispute with a patent settlement agreement.

These agreements can take various forms depending on the strength of the patent.

Generic manufacturers may agree to market the generic drug before the patent

expiry, with the patent expiry or after the patent expiry.20 As well as deciding on a

date to market the drug, these agreements can include a value transfer from the

generic company to the patent owner company or vice versa. In the latter form,

the patent owner company pays a sum to generic companies and in return generic

companies agree not to challenge the patent (the so-called non-challenge clause)

in addition to not entering the market for a specific period of time (the non-

compete clause).21 In this process, while the patent owner company is prolonging

its monopoly and power to require high prices, in addition to keeping the generic

company off the market, the profit that the patent owner company exclusively

gains is much higher than the profit that the patent owner company and generic

company can make together in the case of a duopoly.22 Furthermore this practice,

by bypassing litigation, provides additional advantages. This is because the length

of patent litigation itself imposes costs on the patent owner company by

hampering the marketing of drugs, R&D processes, and other business planning,

all the while the outcome of the case remains uncertain.23 Therefore, with the

exclusion of the litigation costs and concomitant benefits of this prevention, the

profits become higher.24

Despite all of the advantages that settlement agreements provide,

settlements between patent owner company and a generic company which include

a value transfer from the patent owner company to the generic company are

subject to an increased scrutiny which can be hampered by competition rules. In

some cases, competition authorities perceive them as monopoly rents in which

originator companies use their monopoly profits to buy competitors so that they

20 De Margerie S., ‘‘‘Pay-for-Delay’ Settlements: In Search of the Right Standard’ (2013) Vol.36 (1) World Competition 85, 85, para 2. 21 Ibid 86, para 6.22 Mungan M., ‘Reverse Payments, Preserve Incentives’ (2013) FSU College of Law Public Law Research Paper <http://ssrn.com/abstract=2214170 > accessed 23 April 2013 7, para 2.23 Crane D., ‘Ease Over Accuracy in Assessing Patent Settlements’ (2003) Vol.88(3) Minnesota LR 698, 704, para 1.24 Mungan (n22) 7, para 2.

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can either keep generic companies away from the market or delay the entry of

generics.25

Besides settlement agreements being investigated under the light of distinct

legal regulations on both sides of the Atlantic, Hatch-Waxman Act in the US and

Treaty on the Functioning of the European Union (TFEU) in the EU, the

interpretation of settlements have also been different for many years. Even though

patent settlement agreements were addressed in the US a considerable period

before they were in the EU, the European approach to patent settlement,

especially to pay-for-delay settlements, has become much clearer in a shorter

space of time than the US’s approach.

Circuits split in two in the US and two different tests, namely the “scope of

the patent” test, which basically stated that pay-for-delay settlements are per se

legal, and the “quick look” test which draws the opposite conclusion, were applied

in order to decide whether pay for delay settlement agreements are per se legal or

not. However, this inconsistency between circuits which will be explained in

detail in chapter four has been resolved by the US Supreme Court very recently

with its decision in the Federal Trade Commission v. Actavis (Actavis) 26 case. In

stark contrast, the situation in the EU has been made clearer than the situation in

US from early on. In the wake of the Sector Inquiry launched by the European

Commission, pay-for-delay settlements were found as anticompetitive and the

Commission has sent a statement of objections to some of the pharmaceutical

companies. Furthermore, just two days after the Supreme Court decision in the

Actavis case, the European Commission fined several pharmaceutical companies

for the pay-for-delay agreement in total 145 million euros.27

2.3 Consumer Welfare Through Competition

As stated above, competition rules regulate the behavior of companies. However, the

line which is drawn by the competition authorities may change since “every competition

law system has a number of objectives that it seeks to achieve, some of which may be

particularly linked to the peculiarities of the economy of the country or region and 25 De Margerie (n 20). 26 FTC v. Actavis, Supreme Court of the US, 12-416, 570 U.S. ___ (2013)27European Commission, ‘Commission fines Lundbeck and other pharma companies for delaying market entry of generic medicines: statement by Vice-President Almunia’ SPEECH/13/553 <http://europa.eu/rapid/press-release_SPEECH-13-553_en.htm> accessed 18 July 2013, 2, para 2.

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others that might change with passage of time or with changing political or scholarly

ideologies.28” Among these objectives, only one of them can be regarded as universal,

which is the consumer welfare in the sense of consumer interest with respect to price,

service, quality and choice.29 This objective is based on the vulnerable position of

consumers, hence, requires the governance of the market through companies’ practices.

However, different assessments of consumer welfare are made under different legal

systems, which modify the application of competition law.

The difficulty of assessing the consumer welfare can stem from the long and

short term effects of companies’ behaviors or practices on the consumers which

mostly need a case by case analysis. For instance, an agreement may have a

negative effect in the short term, by raising the prices in the market but it can

enhance the quality, the choice of the consumer and maybe even price in the long

run.30

Stemming from the distinctive structure of EU law, which aims at the

market integration, the approach towards the consumer welfare has been different

from the US.31 However, neither of them is focused solely on consumer welfare in

the context of pay-for-delay settlements.

In the US, the FTC made its stance already clear and concluded that “pay-

for-delay agreements have significantly postponed substantial consumer savings

from lower generic drug prices.32” Furthermore, as it is well-known, the existence

of the FTC is based on the protection of consumers. Notwithstanding, the US

Supreme Court did not find a direct relationship between the pay-for-delay

agreements and its detrimental effect on consumer welfare as the FTC did, and

therefore, did not applied the per se illegal rule in the Actavis case. Instead, it was

held that pay-for-delay agreements can sometimes violate the antitrust laws.

In the EU, Article 81 of the EC Treaty [now Article 101TFEU]33 deals with

competition in general. Article 101(1) prohibits agreements that prevent, restrict

or distort competition in the internal market. However, Article 101(3) makes some

28 Buttigieg E., Competition Law: Safeguarding the Consumer Interest: A Comparative Analysis of US Antitrust Law and EC Competition Law (2009) Vol 40, International Competition Law Series (Kluwer Law International) 1, para 129 Ibid, para 2.30 Ibid, 46, para 2.31 Ibid, 47, para 1.32 FTC Staff Study, Pay-for-Delay: How Drug Company pay-Offs Cost Consumers Billions, (2010) <http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf> accessed 13 July 2013 2, para 3.33 Treaty on the Functioning of the European Union 2001 OJ C115/49

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kind of exemption to the agreements “which contributes to improving the

production or distribution of goods or to promoting technical or economic

progress, if they are allowing consumers a fair share of the resulting benefit.”

Nevertheless, under Article 101(3) there are some additional requirements for an

agreement to be considered as pro-competitive. One of them is the restriction

provided by the agreement, in which it has to be indispensable, which means that

the restriction has to be necessary to be able to achieve the efficiency.34 The other

requirement is that the agreement must not eliminate the competition regarding a

substantial part of the products. In this sense, besides actual competition, potential

competition has to be taken into consideration while assessing the anticompetitive

effects.35 To simplify, the main aim of the Article 101 is to protect the market36;

hence, the core element is the protection of the competitive activity37.

Although it is predictable from the case line that consumer welfare is

achieved through competition, the situation in the pharmaceutical market in

relation to pay-for-delay agreements has not been clear. The reason for that is that

the assessment of this kind of agreements is complicated due to various elements

that they possess. Courts in the US and the EU admitted the negative effects of

this kind of agreements on consumers; however, no per se rule is established

which can cause illegalization of all pay-for-delay settlements.

34 Hildebrand D., The Role of Economic Analysis in the EC Competition Rules (3rd Edition, 2009) Vol 39 International Competition Law Series (Kluwer Law International) 308, para 1. 35 Ibid 309, para 3.36 Zimmer D., ‘Protection of Competition v. Maximising ( Consumer) Welfare’, edited by Basedow J. & Wurmnest W., Structure and Effects in EU Competition Law (2011) Vol 47 International Competition Law Series (Kluwer Law International) 23, 38, para 2.37 Ibid, 35, para12.

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3 PAY-FOR-DELAY SETTLEMENTS IN THE EU

3.1 Historical Approach to Pay-for-Delay Settlements

Even though the crucial role of settlement agreements was underestimated in Europe at

first, and they were considered and treated as any other agreements, this approach has

been gradually changed in time.38 The case which considered the settlements as any

other agreements dates back to the 1980’s to Bayer v Süllhöfer39 case. The Court of

Justice of the European Union (CJEU) in Bayer v Süllhöfer, by not drawing a line

between settlement agreements and any other agreements, stated that “Article 81(1) EC

Treaty [now article 101(1) TFEU] makes no distinction between agreements whose

purpose is to put an end to litigation and those concluded with other aims in mind”40.

However, this approach has been an obstacle before settlement agreements in general,

since settlement agreements include no-challenge clauses which were acknowledged as

anti-competitive by the CJEU in the Windsurfing case.41 In this case, the CJEU ruled

that “it is in the public interest to eliminate any obstacle to economic activity which may

arise where a patent [is] granted in error”.42 Therefore, if the settlement agreements are

considered as the same as any other agreements, given the fact that no-challenge clauses

are intrinsic in settlement agreements and deemed as the essentials of this kind, it would

not be possible to circumvent the Article 101(1) TFEU with no-challenge clauses.43

Although some limits were established, with the impact of economic issues

on today’s judges, the above mentioned perception which was underestimating the

value of settlements agreements was abandoned.44 The European Commission has

drawn a line between settlement agreement and any other agreements in its

Guidelines on Technology Transfer Agreements and stressed the different statute

of settlement agreements from any other agreements which enable parties to put

38 Brankin (n 2) para 4.39 Case 65/86 Bayer AG v Maschinenfabrik Hennecke GmbH and Heinz Süllhofer [1988] ECR I- 524940 Ibid, para 15.41 Brankin (n 2) para 5.42 Case 193/83 Windsurfing International Inc v. Commission [1986] ECR 611, para 92.43 Günay (n 19) 3, para 3.44 Batchelor B., ‘EC Tones Down its Final Report into the Pharma Sector, But Ramps up Enforcement Activity’, (2010) Vol.31(1), European Competition Law Review 16, 16, para 3; Ibid.

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no-challenge clauses in settlement agreements without any concerns on anti-

competitive restrictions. This distinction was made because “in the context of a

settlement and non-assertion agreement, non-challenge clauses are generally

considered to fall outside Article 81(1) [now Article 101(1) TFEU]”, since “… the

very purpose of the agreement is to settle existing disputes and/or to avoid future

disputes”45. Even though the distinction was made between settlement agreements

and other agreements, the treatment method of settlement agreements in the

context of licensing agreements which demand the same treatment method like

other license agreements was not modified by the Commission.46

The most remarkable move which formed today’s perception in the

pharmaceutical sector was taken with the Pharmaceutical Sector Inquiry47 by the

European Commission. Advantages of settlement agreements were not ruled out

by the Commission given the fact that they influence the sector in a positive and

mending way. Therefore, settlement agreements are in general considered as

lawful, unless their aim is to delay the entry of the generics into the market and to

extend the exclusivity of the originator’s patent with a value transfer from an

originator company to generic companies unlawfully.48 This outcome has marked

the pay-for-delay settlements as unlawful which is not acceptable in the sense of

competition law.

3.2 The European Commission’s Pharmaceutical Sector Inquiry

The European Commission detected a decline in novel medicines in the market and

suspected a potential systemic problem in this decline.49 Therefore, a comprehensive

inquiry into the pharmaceutical sector was launched on 15 January 2008 which was

seeking an answer to the question as to why new entries of drugs were fewer in the

45 Guidelines on the application of Article 81 of Article 81 of the EC Treaty to technology transfer agreements 2004 OJ C 101/02, para 209. 46 Ibid, para 204.47 European Commission, ‘Pharmaceutical Sector Inquiry - Preliminary Report’ (2008) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf> accessed 28 July 2013.48 Günay (n 19) 4, para 1.49 European Commission, ‘Antitrust: Commission opens formal proceedings against Les Laboratoires Servier and a number of generic pharmaceutical companies’ MEMO/09/322 (08 July 2009) < http://europa.eu/rapid/press-release_MEMO-09-322_en.htm> accessed 15 April 2013, (MEMO/09/322) paras 2-4.

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market and why generic entries of the off patent drugs seemed to be delayed.50 To find

out the answer, competitive relationships between originator and generic companies and

amongst originator companies had to be monitored; therefore, 43 originator companies

and 27 generic companies were selected.51 Selected companies were characteristically

larger scale companies which were denoting 80% of relevant turnover in the EU and

active in more than one Member State.52 Practices that were used to block or delay

competition on producing generic drugs and to block or delay the development of

competing originator products were the focus point of the Inquiry.53 The first step was

taken with dawn raids on several originator and generic companies the day after the

initiation of the Inquiry where some data was collected, although the aim of dawn raids

were not directed to suspected breaches.54

A preliminary report was published on 28 November 2008 and the

conclusion was that behaviors and practices of the originator companies

contributes to generic delay and constitutes obstacles to innovation.55 The Inquiry

was concluded with the Final Report on 8 July 2009 which expressed that there is

variety of instruments to extend the commercial life of medicines used by

originator companies56 and identified the strategies such as: patent clusters, which

means a large number of patents in relation to a single medicine; patent litigation;

patent settlement agreements; intervening in national procedures for the approval

of medicines and launching of follow-on products.57

Above all, the importance of applying increased scrutiny under the EC

competition law was mentioned, and the need for monitoring of settlements that

limit generic entry which aim at a value transfer from an originator company to a

50 European Commission, ‘Antitrust: Shortcomings in pharmaceutical sector require further action’ IP/09/1098 (8 July 2009) < http://europa.eu/rapid/press-release_IP-09-1098_en.htm?locale=fr> accessed 15 March 2013, 3, para 1.51 Executive Summary of the Inquiry (n 10) 4, para 2.52 Ibid.53 Ibid, 5, para 5.54 Berg W., ‘European Commission Launches Dawn Raids Against Pharmaceutical Companies Despite Having No ‘Specific Evidence of Wrongdoing’’ (Crowell Moring, 17 January 2008) <http://www.crowell.com/NewsEvents/AlertsNewsletters/Antitrust-Law-Alert/European-Commission-launches-dawn-raids-against-pharmaceutical-companies-despite-having-no-specific-evidence-of-wrongdoing> accessed 07 May 2013 para 1.55 Executive Summary of the Inquiry (n 10) 7, para 6.56 European Commission, ‘Pharmaceutical Sector Inquiry Final Report’ (2009) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/staff_working_paper_part1.pdf> accessed 17 March 2013, (Final Report) 520, para 1557.57 Final Report (n 56) 521, para 1558; MEMO/09/322 (n 49) para 6.

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generic company for delaying the entry of generics was highlighted.58 Following

the Inquiry, the Commission did not lose time in taking action towards the

monitoring of patent settlements. A monitoring exercise was launched in January

2010 in which pharmaceutical companies were asked to submit copies of their

patent settlement agreements.59

In the wake of those efforts of the Commission, investigations started and

settlements were monitored. In light of the collected data, reports were published.

While the period from July 2008 to December 2009 was monitored after the

Inquiry, the Inquiry covered the period from January 2000 to June 2008.60

Percentages show that only 10% of the settlements from the later period might be

problematic from a competition law perspective while 22% of the settlements

reported as problematic for the earlier period.61 The period from January to

December 2011 was covered and assessed in the 3rd Report of the Monitoring of

Settlements. In this report, a clear classification of patent settlements was

established in details.62

According to this classification, settlements were divided in two types: A-

type settlements, which do not restrict the generic company’s ability to market its

own product and B-type settlements, which do limit generic entry.63 B-type

settlements were subdivided in two groups: B.I-type settlements, which do not

include a value transfer from the originator company to the generic company and

B.II-type settlements, which provide a value transfer from the originator company

to the generic company.64

In this classification A-type settlements are deemed as unproblematic and

therefore can circumvent the competition law scrutiny since immediate market

entry of generics is not restricted.65 Even though the same rule applies to B.I-type

58 Final Report (n 56) paras 1573-1574.59 European Commission, ‘Antitrust: Commission Launches Monitoring of Patent Settlements Concluded Between Pharmaceutical Companies’ (12 January 2010) IP/10/12 < http://europa.eu/rapid/press-release_IP-10-12_en.htm> accessed 16 March 2013 (IP/10/12) para 1.60 European Commission, ‘Antitrust: Commission welcomes decrease of potentially problematic patent settlements in EU pharma sector’ (5 July 2010) IP/10/887 < http://europa.eu/rapid/press-release_IP-10-887_en.htm> accessed 16 March 2013, (IP/10/887) para 1.61 IP/10/887 (n 60) 2, para 1.62 3rd Report on Monitoring (n 1) Para 6. 63 3rd Report on Monitoring (n 1) Para 11.64 Ibid.65 Ibid, para 12.

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settlements, they can be subject to competition law scrutiny if they are not

concluded within the exclusionary zone of the patent and the patent is sham.66

B.II-type settlements have the potential of attracting competition law scrutiny the

most among this category.67

Aside from the classification, some possible forms of value transfer from

the originator company to the generic company were pointed out. According to

the Commission, direct monetary transfer is the most notable form which might

be done with the purpose of purchasing an asset of the generic company but at the

same time with the purpose of delaying the generic entry or suppress the challenge

of the patent.68 Moreover, it can take the form of distribution agreement or side

deals which involve some benefits to the generic company, such as giving an

opportunity to market generics before patent expiry in different geographical area

or to market another product of the originator company.69 License agreements can

also involve value transfer which can be caught by competition rules.

Consequently, the Inquiry proved that settlements which limit generic entry

and provide a value transfer from the originator company to a generic company

are problematic70 and established that there is an increase in B.II-type of

settlements which require continuing attention of the Commission and further

examination71.

Reacting to the Inquiry and its findings, the Commission took action against

some of the international pharmaceutical companies for suspected breaches of

antitrust law which will be explained with details under the subsequent sub-title.

Hence, with these actions, importance of competition was shown.

3.3 The European Commission’s Investigations on Pharmaceutical Companies

As stated earlier, in the wake of the Inquiry investigations were launched against some

of the pharmaceutical companies. An investigation against Les Laboratoires Servier

66 Ibid, para 13.67 Ibid, para 14.68 Ibid, para 9.69 Ibid.70 IP/10/887 (n 60) para 6.71 3rd Report on Monitoring (n 1) para 50.

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(Servier) was the first to deal with pay-for-delay settlements and which was followed by

the investigation against Lundbeck. These investigations were followed by a statement

of objections of the Commission, first to Lundbeck and then to Servier. Yet the

Commission was not content with those investigations and initiated investigations

against other pharmaceutical companies such as Cephalon and Teva and

Johnson&Johnson, Novartis and its generic brand Sandoz for their possible

infringement of the EU competition rules.72 The latest statement of objection was sent to

Johnson&Johnson and Novartis on delayed entry of a generic pain-killer drug.73

Furthermore these investigations had some reflections in the Member States such as the

United Kingdom (UK) and France which will also be explained. Finally, very recently,

the European Commission decided one of the investigations and sanctioned Lundbeck

along with several other pharmaceutical companies to pay 145 million euros for

entering into an anticompetitive pay-for-delay agreement.74

Before disclosing the outcomes and the facts of the investigations it is worth

noting that a statement of objection of the Commission does not prejudge the final

outcome of the investigations.75 It lays out the existing situation and the

preliminary view of the Commission with regard to the practices of the

companies. Nevertheless, the European Commission’s decision in the Lundbeck

case is final and indicates the Commission’s perception against pay-for-delay

settlements which can be used as precedent.

Even if the above mentioned investigations and developments are sufficient

to lay out the perception in the EU, the AstraZeneca76 case is also important in the

context of competition law and pharmaceuticals. This case was the first case

dealing with delayed medicines which dates back before the Inquiry was

72 European Commission, ‘Commission enforcement action in pharmaceutical sector following sector inquiry’ ( 30 July 2012) MEMO/12/593 < http://europa.eu/rapid/press-release_MEMO-12-593_en.htm> accessed 29 March 2013, (MEMO/12/593) para 10.73 European Commission, ‘Antitrust: Commission sends Statement of Objections to J&J and Novartis on delayed entry of generic pain-killer’ (31 January 2013) IP/13/81 < http://europa.eu/rapid/press-release_IP-13-81_en.htm> accessed 29 March 2013 (IP/13/81)74 SPEECH/13/553 (n 27) para 2.75 European Commission, ‘Antitrust: Commission confirms supplementary Statement of Objections sent to Intel’ (17 July 2008) MEMO/08/517 < http://europa.eu/rapid/press-release_MEMO-08-517_en.htm> accessed 30 August 2013, para 5.76 Case C-457/10 P, AstraZeneca AB and AstraZeneca plc v Commission, decided on 6 December 2012.

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launched.77 The findings of the AstraZeneca case, coupled with the findings of the

Inquiry, can be used as a route map by pharmaceutical companies.

3.3.1 Les Laboratoires Servier

Following the inquiry, the first investigation was started against Servier and related to

Servier’s patent protected, cardio-vascular drug Coversyl, containing perindopril as its

active ingredient which was substituted with second generation perindopril with the

same active ingredient when the first generation perindopril was still under patent

protection and was sought to be de-listed from some markets.78 The usage of this drug

requires repeated prescriptions stemming from the need of longtime and daily treatment

and patient compliance.79 These features fostered the use of perindopril as well as anti-

competitive behaviors of Servier. Therefore, many law suits opened against the French

pharmaceutical company Servier in different national courts, in addition to the

investigation of the Commission.80 In July 2012, the Commission sent its statement of

objection to Servier on perindopril.

Patent settlement agreements concluded by Servier with other

pharmaceutical companies were found anti-competitive by virtue of agreeing on

delaying or preventing the entry of the generic version of perindopril on the

market, since payments were made to generic companies in which these generic

companies agreed not to challenge the validity of the patents that protected

perindopril and not to enter the market with the generic form of perindopril as

well.81 Furthermore, it was articulated that Servier has acquired competing

technologies in the market for perindopril in which Servier has a dominant

position and has unduly preserved its market exclusivity by giving rise to patent

settlement agreements which was concluded with its generic challengers.82

Therefore, patent settlement agreements concluded by Servier with generic

companies have the potential of infringing Article 101 TFEU and may have

77 De Souza N., ‘Competition in Pharmaceuticals: the challenges ahead post AstraZeneca’ Competition Policy Newsletter, (Spring 2007- Number 1) <http://ec.europa.eu/competition/sectors/pharmaceuticals/2007_1_39.pdf > accessed 30 August 2013, para 1.78 Faunce T., ‘New Forms of Evergreening in Australia: Misleading Advertising, Enantiomers and Data Exclusivity: Apotex v Servier and Alphapharm v Lundbeck’ (2008) Vol.12(2) Journal of Law Medicine 220, 221, para 1. 79 Ibid.80 Les Laboratoires Servier v. Apotex Inc (2007) EWHC 1538 (Pat) (11 July 2007) in the UK.81 European Commission, ‘Antitrust: Commission sends statement of Objection on Perindopril to Servier and others’ (30 July 2012) IP/12/835 < http://europa.eu/rapid/press-release_IP-12-835_en.htm> accessed 29 March 2013, para 182 Ibid, para 3.

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caused substantial consumer harm by reducing competition in the market for the

supply of relevant drugs and ensuring higher prices and reduced choice for

consumers.83

3.3.2 Lundbeck

Following Servier’, another investigation was started against the Danish pharmaceutical

company, Lundbeck, in January 2010 who had a patent on a drug known as citalopram.

Although the investigation was initiated later than that into Servier’, a statement of

objection was sent to Lundbeck before one had been sent to Servier. The problem was

related to Lundbeck’s drug citalopram which is used for depression, more specifically

major depressive disorder which is a common psychological problem.84 Lundbeck’s

citalopram and two more medicines by other companies belonged to the same class

which was known as selective serotonin reuptake inhibitors (SSRIs) and the expression

selective is used due to the lack of undesirable side-effects of the medicine in which

citalopram is the most selective one among SSRIs.85 Following the initiation of formal

proceedings in 2010, the Commission indicated that agreements were concluded

between Lundbeck and some of its generic competitors following the patent expiry of

citalopram.86 These agreements foresaw different forms of substantial value transfer

from Lundbeck to the generic competitors, in which generic competitors agreed to

refrain from entering into the market with a generic form of citalopram.87 The value

transfer took the form of direct payments to Lundbeck’s generic competitors as well as

the purchase of generic citalopram stock for destruction or guaranteed profits in

distribution agreement.88 On the strength of those facts, the statement of objection was

sent to Lundbeck and some of its competitors and it was stated that those practices may

infringe Article 101 of TFEU and cause substantial consumer harm by delaying the

entry of generic citalopram for up to two years, and at the same time maintaining the

high price of citalopram.89

83 European Commission, ‘Antitrust: Commission enforcement action in pharmaceutical sector following sector inquiry’ (31 January 2013) MEMO/13/56 < http://europa.eu/rapid/press-release_MEMO-13-56_en.htm> accessed 29 March 2013 (MEMO/13/56) 2, para 4.84 Faunce (n 78) para 2.85 Faunce (n 78).86 MEMO/13/56 (n 83) para 3.87 Ibid.88 Ibid.89 European Commission, ‘Antitrust: Commission sends Statement of Objections to Lundbeck and others for preventing market entry of generic antidepressant medicine’ (25 July 2012) IP/12/834 < http://europa.eu/rapid/press-

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3.3.3 Johnson&Johnson and Novartis

Subsequent investigations were initiated in October 2011 against the US-based

pharmaceutical company Johnson&Johnson and the generic branches of Swiss-based

pharmaceutical company Novartis for the possible infringement of the EU competition

rules.90 The investigations were focused on the delayed entry of generic fentanyl into the

Dutch market. Fentanyl is a strong pain-killer, even stronger than morphine, that is used

to treat patients with severe pain which gives an important market position to this drug.

In July 2005, Janssen-Cilag, the subsidiary of the Johnson &Johnson who supplies

fentanyl in the Netherlands, entered into an agreement with a subsidiary of Novartis

called Sandoz who was Janssen-Cilag’s close generic competitor.91 The agreement

involved monthly payments from Janssen-Cilag to Sandoz to prevent the launch of the

generic version of fentanyl in the Dutch market. It was alleged that the agreement was a

co-promotion agreement in which parties avoided competing and sought to block the

entry of fentanyl to the Dutch market even though there were no regulatory barriers to

develop and market generic fentanyl patches so that there were no barriers for Sandoz to

enter the Dutch market.92 After all, throughout the duration of the agreement, from July

2005 to December 2006, Sandoz refrained from entering to the Dutch market with

generic fentanyl.93

At the end of January 2013, the Commission informed Johnson&Johnson

and Novartis of its objections in relation to the agreement concluded between their

subsidiaries which can be caught by the EU competition rules since the agreement

may unduly delayed generic entry and kept prices artificially high in the

Netherlands.94

3.3.4 Cephalon and Teva

In addition to the above mentioned investigations in which the Commission has issued

statement of objections, more investigations are ongoing in relation to other

pharmaceutical companies such as Cephalon and Teva. This investigation has opened

release_IP-12-834_en.htm> accessed 30 August 2013 (IP/12/834) para 3.90 European Commission, ‘Antitrust: Commission opens proceedings against Johnson&Johnson and Novartis’ (21 October 2011) IP/11/1228 < http://europa.eu/rapid/press-release_IP-11-1228_en.htm> accessed 29 March 2013, page 1, para 1.91 IP/13/81 (n 73) 1, para 3.92 Ibid, para 1-2.93 Ibid, para 3.94 Ibid, para 4.

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against the US-based pharmaceutical company Cephalon and Israel-based generic

company Teva by the Commission regarding an agreement concluded between them

which may have blocked the entry of generic Modafinil, which is used for sleeping

disorder, into the European Economic Area (EEA).95

Even though it is not a development that can tip the scale of the

Commission’s investigation, subsequent to the launch of the investigation against

these pharmaceutical companies, Cephalon was owned by Teva and now operates

as a subsidiary of Teva.96 The investigation focused on the agreement which was

concluded to settle the dispute that arose from patent infringement concerning

Modafinil in the United Kingdom and the US.97 Pursuant to the provisions of the

agreement, Teva accepted to abstain from selling the generic form of Modafinil in

the EEA markets which is subject to the Commission’s scrutiny under

competition rules, as well as series of side deals that were included in the

settlement agreement.98 Although the Commission has not given its opinion nor

sent its statement of objection yet, the agreement can be deemed as anti-

competitive since Article 101 TFEU prohibits business practices which have the

object or effect of hindering the entry of generic drugs. Furthermore, it is worth

underlining the fact that settlement agreement at stake is also subject to antitrust

litigation in the US which was brought to the court by the FTC.99

3.3.5 AstraZeneca

Although the biggest step forward in the pharmaceutical sector was taken after the

inquiry, the first case which shows the Commission’s concern about pharmaceutical

sector practices was the AstraZeneca case. This case, by being the first case in which

the Commission showed its concern on the issue of blocked or delayed generic entry,

can shed some light on the approach of the Commission in its investigations.

Furthermore, existing law and the way it was tailored by AstraZeneca shows some

95 European Commission, ‘Antitrust: Commission opens investigation against pharmaceutical companies Cephalon and Teva’ (28 April 2011) IP/11/511 < http://europa.eu/rapid/press-release_IP-11-511_en.htm> accessed 30 August 2013 (IP/11/511) 1, para 1.96 Teva Completes Acquisition of Cephalon (14 October 2011) <http://www.tevapharm.com/Media/News/Pages/2011/1617357.aspx?year=2011&page=2> accessed 16 July 2013.97 IP/11/511 (n95) para 3.98 Ibid.99 Ibid.

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strategies can be anti-competitive and pharmaceutical companies can be deemed as

responsible for the use of those strategies.

The legal process against AstraZeneca, initiated in 1999, was a result of a

complaint which was made by the competitors of AstraZeneca. In 2005 the

Commission published its decision which was appealed to the General Court and

then to the CJEU. This lengthy process was finally concluded with the long-

awaited judgment of the CJEU on 6 December 2012.100 The problem was related

to AstraZeneca’s behavior in the market for its therapeutically effective

blockbuster drug Losec. Losec had become the preferred treatment for gastro-

intestinal acid-related conditions such as ulcers since it contained the active

substance omeprazole, which is known as proton pump inhibitor (PPI).101 The

original Losec was in capsule form, later replaced in some markets with the tablet

form which is dissolvable in water. The first infringement was the misleading

representations of AstraZeneca before some patent offices in Europe in order to

obtain Supplementary Protection Certificates (SPCs).102 SPCs are legal

certificates under the EU SPC Regulation103 that are used for the extension of

patent protection for five years104. Even though the Regulation was not clear at the

time of the attainment of the certificates by AstraZeneca, the CJEU held that the

reasonableness and bona fides of AstraZeneca’s interpretation of the SPC

Regulation was not enough to prevent AstraZeneca’s responsibility in the market

as a dominant company.105 Furthermore, as it was underlined by the Advocate

General, behaviors as such are not free from competition scrutiny in the EU,

specifically the Article 102 TFEU, even though they can be justified by other

regulations.106 Therefore, AstraZeneca’s conduct of obtaining SPCs in different

countries to which AstraZeneca was not entitled to or which was entitled for a

shorter period of time was found consistent and linear and therefore highly 100 Case C-457/10 P (n 76)101 Ibid, para 15.102 Ibid, para 18.103 EC Regulation No 469/2009 of the European Parliament and of the Council of 6 May 2009 concerning the supplementary protection certificate for medicinal products 2009 OJ L152/1 104 Van Malleghem P. & Devroe W., ‘Astrazeneca: Court of Justice Upholds First Decision Finding Abuse of Dominant Position in Pharmaceutical Sector’, Journal of European Competition Law & Practice, published online on 26 April 2013, <http://jeclap.oxfordjournals.org/content/early/2013/04/25/jeclap.lpt009.full.pdf+html> accessed 11 May 2013 1, para 4.105 Ibid, 2, para 5.106 Case C-457/10 P, AstraZeneca AB and AstraZeneca plc v Commission, Opinion of Advocate General Mazák, delivered on 15 May 2012

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misleading and manifestly deprived from transparency.107 It therefore resulted in

an anti-competitive effect in the market.108

The second abuse was related to the withdrawal of market authorization.

The Directive which was applicable to Marketing Authorization was amended

with a new one, which now enables generic companies to use previously granted

Marketing Authorization of the original medicine even if they are withdrawn.109

However, at the time of the case, it was possible for a generic company to obtain

the related data from the originator company if the reference product was still on

the market or its authorization still prevailed and that helped generic companies to

reduce the cost and speed up the process for the generic entry of medicines.110

When we consider this fact, withdrawal of marketing authorization of the Losec

capsule was a legal right of AstraZeneca; however, the use of this right by a

dominant company like AstraZeneca produced an anti-competitive effect.111

Therefore, the CJEU found that AstraZeneca’s withdrawal constituted an

infringement of the EU competition rules, more specifically the Article 102

TFEU, since it has prevented and delayed the introduction of generics and parallel

imports.112

As stated before, the AstraZeneca case is the first case in the pharmaceutical

sector which deals with delayed generics. When this case is assessed with the

findings of the Inquiry and investigations of the Commission in the

pharmaceutical sector, particularly in Servier, it can be concluded that dominant

companies should be more careful in their practices, because even legal practices

can be caught by competition rules provided that they have the purpose of

blocking the entry of generics.

3.4 Reflections of the Investigations on the Member States and Current Situation in the EU

107 Case C-457/10 P (n 76) para 93.108 Case C-457/10 P (n 76) para 107-108.109 Westin J., ‘Product Switching in the Pharmaceutical Sector- an abuse or legitimate commercial consideration?’ (December 2011) Vol 32(12) European Competition Law Review 595, para 2110 Van Malleghem & Devroe (n 104) para 5.111 Case C-457/10 P (n 76) para 132,140.112 Case C-457/10 P (n 76) para 139.

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The Commission’s findings and statement of objections with regard to the

investigations had a broad repercussion in the pharmaceutical sector. On the EU base,

Member States seized allied actions. For instance in the UK, following the General

Court’s decision in the AstraZeneca case in 2010, the Gaviscon113 case was brought up

which was settled with an agreement between the originator company Reckitt Benckiser

and the Office of Fair Trading (OFT). This case is a good example of the OFT’s

approach to pharmaceuticals which follows the findings of the inquiry. However, with

regard to the pay-for-delay settlements, the first investigation was launched against

GlaxoSmithKline (GSK) in April 2013.114 In addition, in France, the French

Competition Authority launched a sector inquiry which is examining the functioning of

competition throughout the medicinal products distribution chain.115 One of the issues

that the French Competition Authority deals with is the development of generic

medicines in which a recommendation will be issued on the development of generics to

promote the competition.116 After all, the last and the most remarkable development was

brought with the decision of the European Commission in Lundbeck investigation,

which revealed the facts of a pay-for-delay agreement between Lundbeck and several

pharmaceutical companies and fines these companies in line with this agreement.

3.4.1 Reflections on the Member States

The OFT’s statement of objection in the Gaviscon case which was issued in February

2010, is indicative of the fact that the OFT followed the footsteps of the European

Commission.117 Even though the case was not related to pay-for-delay agreements per

se, it was related to the abuse of dominance which was similar to the AstraZeneca case.

The problem in this case stems from National Health System (NHS) of the UK and

Reckitt Beckiser’s conduct in relation to its over-the-counter medicine Gaviscon

Original Liquid and its upgraded version Gaviscon Advance Liquid. Reckitt Beckiser

113 OFT, Press Release 106/10 (15 October 2010) <http://www.oft.gov.uk/news-and-updates/press/2010/106-10> accessed 14 May 2013 (OFT 106/10)114 OFT, Press Release 36/13 (19 April 2013) <http://www.oft.gov.uk/news-and-updates/press/2013/36-13> accessed 15 May 2013 (OFT 36/13)115 Competition Authority of the French Republic, Press release (25 February 2013) <http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=483&id_article=2051> accessed 14 May 2013 (French Competition Authority Press Release) para 1.116 Ibid, para 5.117 OFT 106/10 (n 113) para 4.

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replaced its Gaviscon Original Liquid with its patent protected medicine Gaviscon

Advance Liquid in the NHS, which resulted as an infringement of competition rules.118

This is because, according to the NHS, the generic version of the medicine

becomes available to the searches on the database following the expiration of the

patent of the original medicine which allows the prescribing doctor to see and

prescribe the medicine with its generic options or the pharmacist to assist the

consumer better.119 Thus, when Reckitt Beckiser replaced the patent protected

version of Gaviscon in the database of the NHS, even though both versions of

Gaviscon were in the market with the generic versions of the original Gaviscon,

the generic version of original Gaviscon did not appear in the database when it

was searched by pharmacies or prescribing doctors and this conduct limited

consumer’s choices by reducing the prescriptions for generic version.120 In the

light of these findings the case was settled with an agreement between Reckitt

Beckinser and the OFT and the fine reduced from £12 million to £10.2 million.121

Even though many issues stayed hidden due to the settlement procedure, the

OFT’s approach to the case is enough to establish that the outcomes of the

Pharmaceutical Sector Inquiry and AstraZeneca case were accepted by the

authorities of the UK.

Regarding pay-for-delay settlements, the first investigation in the UK was

launched into GSK in 2011 by the OFT. The alleged infringement is based upon

the agreements concluded between GSK and its generic competitors Alpharma

Limited, Generics (UK) Limited and Norton Healthcare Limited in the market for

GSK’s bestselling paroxetine product, Seroxat which was used as an

antidepressant.122 These agreements were concluded to solve the dispute,

following GSK’s challenge of the generic paroxetine that generic companies were

attempting to market in which GSK alleged that these generic drugs infringe

GSK’s patent on Seroxat.123 In April 2013, a statement of objection was issued

with regard to the investigation. It was found that these agreements involved

substantial payments from GSK to its generic competitors and the generic 118 OFT 106/10 (n 113) para 3.119 OFT, Press release 20/10 (23 February 2010) <http://www.oft.gov.uk/news-and-updates/press/2010/20-10> accessed 14 May 2013 para 3. 120 OFT 106/10 (n 113) para 4.121 OFT 106/10 (n 113) para 1.122 OFT 36/13 (n 114) para 2.123 OFT 36/13 (n 114) para 3.

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companies complied to delay the supply of generic paroxetine in return.124 Even

though the final decision has not been published yet, equivalent to Article 101

TFEU, agreements or concerted practices that have the object and effect of

harming competition are prohibited under the Competition Act 1998.125 Therefore,

as can be understood from the statement of objection, it is highly likely that GSK

and its competitors will be found liable for these agreements which are infringing

the national law by delaying generic entry, apart from the highly likely

identification of GSK’s dominant position in the paroxetine market as abuse of

competition rules.

In the light of above mentioned investigations, it is clear that the

Commission’s inquiry into the pharmaceutical sector led to further investigations

both on the EU level and on the Member State level and created awareness with

regard to the pay-for-delay agreements having harmful effect on competition, in

addition to other problems of the pharmaceutical sector. For now, from Member

States it is only the UK which has dealt with pay-for-delay agreements. However,

the inquiry that French Competition Authority started is an indicator of the

acknowledgement of competition concerns which certainly will spread in the EU

on Member State level.

3.4.2 Current Situation in the EU

The last remark has to be made with regard to the European Commission’s recent

decision in the Lundbeck investigation which reinforced the perception against pay-for-

delay settlements. This decision can be considered as a landmark decision since the

Commission has, for the first time, fined pharmaceutical companies on the basis of

anticompetitive effect of pay-for-delay agreements. Some of the reasons with regard to

the anticompetitive features of the agreements were expressed in section 3.3.2 and

therefore won’t be repeated here. However, the Commission has revealed some

additional information with regard to the monopoly rents shared between companies

such as the internal document which “speaks of this group of companies as a ‘club’ and

refers to ‘a pile of dollars’ being shared among participants126”. Furthermore, the

harmful effect of this kind of agreement on patients, taxpayers and health system was 124 OFT 36/13 (n 114) para 4.125 Competition Act 1998, Part I, Chapter I, Article 2, <http://www.legislation.gov.uk/ukpga/1998/41/enacted> accessed 30 August 2013.126 SPEECH/13/553 (n 27) 2, para 5.

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underlined.127 Therefore, the agreement which was concluded between Lundbeck and its

competitors was deemed as unacceptable in the frame of EU competition law and the

Commission fined them in total 145 million euros, 93 of it to be paid by Lundbeck.128

All of these developments, the Commission’s decision in the AstraZeneca

case, the statement of objections of the Commission and other developments in

the Member States are enough to illustrate the fact that Europe is in the process of

removing obstacles to competition in the pharmaceutical sector. Therefore,

companies should be mindful of the competition rules and pursue their strategies

in a way in which they do not delay the entry of generics to the market. Moreover,

agreements must be concluded attentively, since some clauses such as royalty

clause or payments can fall within the scope of Article 101 TFEU as payments

which delay the generic entry.129 Dominant companies should bear in mind that

they have a special responsibility not to impair competition and they cannot

therefore “use regulatory procedures in such a way as to prevent or make more

difficult the entry of competitors on the market130”. Furthermore, from the decision

of the European Commission in the Lundbeck’s case, it is apparent that more fines

will be imposed on pharmaceutical companies for the pay-for-delay settlements,

since the Commission has made it clear that paying for delay cannot be legalized

under intellectual property rights.131 Hence, as stated before, future practices of

companies should be tailored in line with this perception carefully.

127 Ibid, para 6.128 Ibid, para 2and7.129 Günay (n 19) 7, para 2.130 Case C-457/10 P (n 76) 134.131 SPEECH/13/553 (n 27) 3, para 5.

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4 PAY-FOR-DELAY SETTLEMENTS IN THE USPharmaceutical sector in the US is subject to more complex regulations compared to

those of the EU. The reason for this is that antitrust policies in the pharmaceutical sector

have been regulated by the Drug Price Competition and Patent Term Restoration Act

(known as Hatch-Waxman Act) in the US, which has no equivalent in the EU.132 The

Hatch-Waxman Act gives 180 days exclusivity to the first generic manufacturer who

files Abbreviated New Drug Applications (ANDA) for the approval of a drug by the

Food and Drug Administration (FDA).133 This exclusivity can be gained either by

waiting until the patent expiry or by challenging the patent.134 If generic manufacturers

opt for challenge, it is not necessary to invalidate the patent to gain the exclusivity.135

This characteristic of the Hatch-Waxman Act has aimed to provide generic companies

with an economic incentive to challenge the patent which will augment the generic

entry while lowering the prices of medicines.136 However, the expected result could not

be reached through the Hatch-Waxman Act since it encouraged filing an application,

but did not required follow up patent litigation.137 Therefore, companies favored

concluding an agreement in which the originator company pays the generic company for

delay to avoid the negative effects of litigation. Even though the legal frame is different

in the US from the EU, companies’ behaviors are identical which results with pay-for-

delay agreements.

When these legal regulations are put aside, the main feature in the US has

been the enduring assessment of pay-for-delay settlements by administrative

bodies and courts.138 The FTC has the long reiterated perspective on pay-for-delay

settlements which has been considering settlements of this kind as anticompetitive

since the early twenties.139 To examine and evaluate the overall situation

132 Westin (n 109) 598, para 2.133 Hemphill S. & Lemley M., ‘Earning Exclusivity: Generic Drug Incentives and the Hatch-Waxman Act’ (2011) Vol 77 Antitrust Law Journal 947, para 1.134 Ibid.135 Ibid, para 3.136 The Boston Globe, ‘Supreme Court should end drug firms’ ‘pay for delay’’ (30 March 2013) <http://www.bostonglobe.com/editorials/2013/03/29/supreme-court-should-end-drug-firms-pay-for-delay/H3jqFE3odnqv6FEprkCziK/story.html> accessed 30 August 2013 para 3.137 Kutcher M., ‘Waiting is the Hardest Part: Why the Supreme Court Should Adopt the Third Circuit’s Analysis of Pay-for-Delay Settlement Agreements’ (12 January 2013) <http://ssrn.com/abstract=2202816 > accessed 16 July 2013 12, para 1.138 De Margerie (n 20) 88, Para 1. 139 FTC Staff Study on Pay-for-Delay (n 32) 1, para 3.

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concerning pay-for-delay agreements in the US, the following sections will shed

some light on some approaches which have been taken by different bodies, such

as, the FTC, different Circuits and the Supreme Court.

4.1 The Federal Trade Commission

This chapter will shed some light on the FTC’s role in the US and its administrative and

judicial actions which were taken against pay-for-delay settlements. Among the other

agencies the FTC is the only one assigned by the Congress for investigating and

prosecuting antitrust infringements, as well as protecting consumers, therefore the focus

will be on the FTC’s actions.140 Since some of the actions of the FTC caused litigation,

they will be explained in the following section in more detail.

In 2002 the FTC’s study on Generic Drug Entry Prior to Patent Expiration

found that some patent litigation cases have settled with agreements concluded

between the originator companies and the generic companies in order for the

generic company to delay the generic entry in return for compensation from the

originator company.141 The FTC has made some recommendations for the

Congress with regard to this finding. In line with the finding, the Medicare

Prescription Drug, Improvement, and Modernization Act 2003 was enacted which

imposes requirement on pharmaceutical companies to file certain agreements with

the FTC and with the US Department of Justice, in which the FTC publishes

annual reports with regard to the settlements under these agreements.142

Annual reports have shown that there is an increase in pay-for-delay

agreements in the US; in 2004 none of the agreements which were filed to FTC

involve pay-for-delay agreements while following years are displaying an

increasing graphic.143 For instance, in the 2005 fiscal year, from the agreements

which were concluded between originator and generic companies 3 agreements

out of 11 include payments to generic companies144, while in 2006 this number

140 FTC’s web page, About the Federal Trade Commission <http://www.ftc.gov/ftc/about.shtm> 141 FTC Staff Study on Pay-for-Delay (n 32) 3, para 4. 142 FTC, Annual Filing Reports (2004) <http://www.ftc.gov/os/2005/01/050107medicareactrpt.pdf> accessed 16 July 2013 1, para 1. 143 Treacy P. & Hopson H., ‘Patent settlements: will the European Commission follow in the FTC’s footsteps…?’ (2008) Vol 3(10) Journal of Intellectual Property Law & Practice 622, Para 1.144 MMA Drug Settlement Reports, Annual Filing Reports, <http://www.ftc.gov/bc/healthcare/drug/index.htm> accessed 16 July 2013, 2005, page 3, figure II.

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increases and 14 agreements out of 28 puts restriction on generic entry by

including payments to generic companies145. Building on this, in the 2010 fiscal

year the number of final settlements increases to 113 with 31 of these having the

potential of paying for delay.146 Even though in August 2012 the split among the

Courts became clearer and pay-for-delay settlements moved in to the controversial

zone of competition law, the FTC’s report for the fiscal year 2012 showed an

increase in the number of settlements that was made, and 40 out of 140 were

potentially pay-for-delay settlement.147

In addition to published reports of the FTC, numerous actions which were

taken against some pharmaceutical companies before different courts can be

considered as an indicator of the FTC’s longstanding position against pay-for-

delay settlements.148 Since the early days of these agreements, they were

monitored by the FTC and, in 2000, the first challenge to a settlement agreement

was brought by the FTC which gave rise to Valley Drug Co. v. Geneva

Pharmaceuticals (Valley Drug)149 dispute.150 Settlements were not identified as

being per se unlawful by the FTC, however parties were informed that future

agreements should be monitored, since they had the potential of being illegal if

they had the underlying intention to block generic challenges or go beyond the

relevant patent.151 This vague position was elucidated in Schering-Plough and the

FTC took the view that settlement agreements are illegal in cases where they

include terms which oblige the generic company to delay the entry and the patent

owner to provide financial support to the generic in return of the delay.152 The

logic behind this view was “the quid pro quo for the payment was an agreement

by the generic to defer entry beyond the date that represents an otherwise

reasonable litigation compromise. 153”

145 Ibid, 2006, page 3, figure II.146 Ibid, 2010, page 2, figure I.147 Ibid, 2012, page 2, figure I.148 Treacy and Hopson (n 143) para 7.149 Valley Drug Company v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003).150 Cook T., ‘Pharmaceutical Patent Litigation Settlements:Balancing Patent & Antitrust Policy Through Institutional Choice’ (2011) Vol 17 Michigan. Telecommunications and Technology Law Review <http://www.mttlr.org/volseventeen/cook.pdf> 417, 437, para 2. 151 Ibid.152 Ibid, 438, para 1.153 FTC v. Schering-Plough Corporation, Petition for a Writ of Certiorari, http://www.ftc.gov/os/2005/08/050829scheringploughpet.pdf > 9, para2.

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As discussions were going on in the US, a very clear statement which

explains the rationale behind the opposition of the FTC to pay-for-delay

settlements was given to some of the administrative bodies of the US. It was

stated that: “…agreements to eliminate potential competition and share the

resulting profits are at the core of what the antitrust laws proscribe, and for that

reason (…) pay-for-delay settlements should be prohibited under the antitrust

laws. 154”

Even though the FTC’s position was reiterated in many cases, circuits had

different opinions on the issue. Therefore, the FTC had the aim to create a circuit

split which might form a basis for Supreme Court review.155 To this end, in In re

K-Dur Antitrust Litigation156 which stems from the same settlement agreement in

Schering-Plough v. FTC can be deemed as a victory of the FTC in which the FTC

reaped the fruits of its efforts157. This is because the agreement at stake was found

legal in Schering-Plough, whereas it was found illegal in In re K-Dur Antitrust

Litigation years later,158 leading to a divergence amongst the courts. Even though

the FTC was not a party to the K-Dur case, the decision was a reflection of the

FTC’s longstanding efforts in which the Third Circuit found the settlement

agreement anti-competitive, which afterwards caused an obvious split between

circuits.159 At the end of this line of cases, as the FTC had intended, the Supreme

Court accepted to hear a case with regard to pay-for-delay settlements which is

known as FTC v. Actavis. This can be considered as an important step which leads

to a formation of a standard in settlement agreements.

4.2 Litigations on Pay-for-Delay Settlements

154 Prepared statement of the FTC to the Committee on the Judiciary of the US House of Representatives, Subcommittee on Courts and Competition Policy, Anticompetitive Pay-for-Delay Settlements in the Pharmaceutical Industry: Why Consumers and the Federal Government Are Paying Too much for Prescription Drugs (3 June 2009) < http://www.ftc.gov/os/2009/06/P859910payfordelay.pdf > 2, para 3.155 Protecting Consumer Access to Generic Drugs: Hearing on H.R. 1902 Before the Subcomm. on Commerce, Trade, and Consumer Protection of the H. Comm. on Energy and Commerce, 110th Cong. 3 (2007) (Statement of FTC Commissioner Jon Leibowitz) <http://www.ftc.gov/speeches/leibowitz/070502reversepayments.pdf> (“It’s public knowledge that we’re looking to bring a case that will create a clearer split in the circuits, and we’re hopeful that the Supreme Court will review the Tamoxifen decision.”)156 In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012) 32, para 3.157 Ibid, 22, para 2.158 Ibid, para 1.159 De Margerie (n 20) 91, para 6.

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As highlighted before, there was no unified standard in the US for pay-for-delay

settlements until the US Supreme Court’s decision in FTC v. Actavis case. These

agreements were subjected to different interpretations of antitrust law by different

Courts of Appeal.

To illustrate the changes in the case line of the settlement agreements and

the perspective of the courts, the above mentioned cases will be explained in the

following subchapters. The first subchapter will deal with the perspectives of

circuit courts and the following chapter will shed some light on the perspective of

the Supreme Court.

4.2.1 Pay-For-Delay Settlements From Circuit Courts’ Perspective

The first case concerning pay-for-delay settlement agreements dates back to the In re

Cardizem CD Antitrust Litigation160 which was investigated by the Sixth Circuit.

Hoechst Marion Roussel (HMN) was the originator company for Cardizem CD with its

active ingredient diltiazem hydrochloride which is used for the treatment of angina and

hypertension and for the prevention of heart attacks and strokes.161 HMR had a patent

over diltiazem hydrochloride which expired in 1992 and, in November 1995 HMR

obtained a license for dissolution profile of Cardizem CD which was owned by Carderm

Capital L.P. (Carderm).162 A month before the second patent was obtained, Andrx

Pharmaceuticals (Andrx), who aspired to market the generic form of the drug, had taken

the necessary measures towards this but was interrupted by a patent infringement law

suit by HMR and Carderm on the base of Carderm’s patent in 1996.163 Even though this

law suit did not gravitate to a preliminary injunction or compensation for damages, it

initiated the complex process in which Andrx had to wait for the FDA’s approval to

market the generic version of Cardizem CD at the end of the thirty-month waiting

process or the court’s decision.164

Prior to the expiration of waiting period, HMR and Andrx entered into an

agreement. Andrx agreed on not to market the generic form of Cardizem CD until

the court clarifies whether the patent was infringed or not or until HMR enters 160 In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).161 In re Cardizem CD Antitrust Litigation (n 160), para 14.162 Ibid, para 14,16.163 Ibid, para 17.164 Ibid.

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into a licence agreement with Andrx or any other generic company, as well as not

to terminate its exclusivity period.165 In return, HMR agreed to make quarterly

payments following FDA’s marketing approval and to make annual payment for

staying off the market provided that the agreement Andrx’s product did not

infringe the patent or HMR’s infringement suit was withdrawn.166

The Sixth Circuit had the view that the agreement “protected HMR from

competition from both Andrx and other potential generic competitor because

Andrx’s delayed market entry postponed the 180-day exclusivity period, which it

had agreed not to relinquish or transfer167”. Therefore, the Court held that the

horizontal agreement which eliminated competition in the Cardizem CD market

was “a classic example of a per se illegal restraint of trade”168. In essence, the

Sixth Circuit’s method for settlements bases its findings on the antitrust rules and

shows that regardless of the scope of the patent, agreements can be

anticompetitive169.

Nevertheless, this approach was altered by the Eleventh Circuit in the

subsequent major case of Valley Drug Co. v. Geneva Pharmaceuticals and then in

Schering-Plough v. FTC. The court in Schering-Plough referred to the Valley

Drug case and indicated that the following points have to be analyzed to lay out

the anticompetitive features of settlement agreements; “(1) the scope of the

exclusionary potential of the patent; (2) the extent to which the agreements exceed

that scope; and (3) the resulting anticompetitive effects170”. Furthermore, the

intrinsic tension on pay-for-delay settlements was expressed in Valley Drug case

as;

“If this case merely involved one firm making monthly payments to potential

competitors in return for their exiting or refraining from entering the

market, we would readily affirm the district court’s order (which addressed

the agreements as anticompetitive). This is not such a case, however,

because one of the parties owned a patent. 171”

165 Ibid, para 19.166 Ibid.167 Ibid, para 24.168 Ibid, para 46.169 Cook (n 150) 431, para 2.170 Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1056–76 (11th Cir. 2005), para 27.171 Valley Drug Company v. Geneva Pharmaceuticals, Inc. (n 149) para 30.

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Therefore, the court had the view that neither a payment from the patent

owner to the infringer, nor the exit payments, can be a direct indicator of a

practice which exceeds the scope of the patent or infringes antitrust rules.172

Furthermore, it was indicated that pay-for-delay settlements are free from antitrust

liability unless the patent is procured by fraud or patent is invalid.173 Based on this

reasoning, pay-for-delay agreements were found legal by the Eleventh Circuit.

Subsequently, the settlement agreement concluded between AstraZeneca

Pharmaceuticals and Barr Laboratories gave rise to the case of In re Tamoxifen

Citrate Antitrust Litigation, which concerns the most widely prescribed breast

cancer drug having tamoxifen citrate as its patented active ingredient which is

owned by AstraZeneca.174 The settlement agreement included a payment from

AstraZeneca to Barr and a non-exclusive licence which enabled Barr to sell

authorized generic during the exclusivity period; in return Barr agreed to change

its type of application from ANDA paragraph IV to ANDA paragraph III175.

Stemming from this change in the type of application to FDA, the agreement

allowed Barr to market the generic drug after the patent expiration. The court

focused on the three aspects of the settlement agreement: first, it “did not extend

the monopoly by restraining the introduction or marketing of unrelated or non-

infringing products176”; second, it “ended all litigation between Zeneca and

Barr177” and last it “did not foreclose competition in the market for tamoxifen178”

since it allows Barr to market Zeneca’s version of tamoxifen. Furthermore, it was

emphasized that settlement can damage competition if the patent is procured by

fraud, although this was not the case in this dispute.179 Therefore, in line with the

dominant view, the pay-for-delay agreement was found to be legal in this case.

The enduring adherence to the settlement of a litigation was explained by the

Second Circuit with the principle that settlements promote certainty which

contributes to innovation and therefore should be bolstered by the courts.180

172 Ibid, para 49.173 Ibid, note 19.174 In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006).175 Ibid, para 2, 14.176 Ibid, para 67.177 Ibid, para 69.178 Ibid, para 72.179 Ibid, para 64.180 Ibid, para 34.

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The same perception was adopted by the Federal Court in In re

Ciproflaxacin. The case emerged after the application of Barr Labs (Barr) with

FDA for a generic form of Ciproflaxacin in which Barr claimed that the patent

was invalid and unenforceable.181 As explained previously, this application gave

Barr a 180-day exclusivity period under the Hatch-Waxman Act. Thereupon,

Bayer sued Barr on the ground of infringement of its patent on Ciproflaxacin

which gave rise to a settlement agreement.182 The first agreement was concluded

between Barr and another generic company which agreed to support Barr

economically during its litigation process against Bayer.183 Then Bayer entered

into multiple agreements with generic companies and prohibited them from

challenging the validity of its patent on Ciproflaxacin.184 The settlement

agreement which Bayer entered into with Barr included terms such as: Barr would

withdraw its claim that Bayer’s patent is invalid and replace it with another

(ANDA III) in which they can market the generic form after patent expiry.185

Among the agreements which possessed complex structures and foresaw different

benefits to the parties, the most significant one in the sense of pay-for-delay

agreements was concluded between Bayer and Barr whereby Bayer acknowledged

either to supply Ciproflaxacin for resale or make quarterly payments to Barr until

few weeks after the patent expiry to Barr and Barr acknowledged to abstain from

manufacturing Ciproflaxacin in the US territories in exchange.186

After these agreements were sued by different pharmaceutical companies,

the issue was addressed by the Federal Circuit which concluded that, in order to

accept these agreements as per se illegal, they should have a “predictable and

pernicious anticompetitive effect, and … limited potential for procompetitive

benefit”187. Furthermore, the same opinion which was used by the Second and

Eleventh Circuit was adopted and the Federal Circuit where it held that “in the

absence of evidence or fraud before the PTO [Patent and Trademark Office of the

US] or sham litigation, the court need not consider the validity of the patent in the

181In re Ciproflaxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008) 3, para 3.182 Ibid 4, para 2.183 Ibid.184 Ibid 5, para 2.185 Ibid.186 Ibid 5, para3.187 Ibid, 11, para 1.

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antitrust analysis of a settlement involving a reverse payment”188 and therefore,

parties had “the right to exclude others from profiting by the patent invention”189.

Years after In re Cardizem CD Antitrust Litigation, the dominant position in

the US was challenged by the decision of the Third Circuit and, once again, pay-

for-delay settlements were regarded as anti-competitive in In re K-Dur Antitrust

Litigation. The agreement at stake was the same agreement which was subject to

an antitrust scrutiny in Schering-Plough v. FTC case in which the agreement was

found lawful.190 The medicine K-Dur 20, which was produced with a different

patented process, is used to treat potassium deficiencies on a daily basis with one

sustained-release tablet which is owned by Schering.191 Before Schering’s patent

expired, pharmaceutical company Upsher wanted to produce a generic version of

it and filed a claim to ANDA saying that the patent was invalid and that the

generic version did not infringe the patent.192 Thereafter, Schlering filed a patent

infringement action which was settled just hours before the District Court decided

on the dispute.193 The conditions mandated Upsher to stay off the market and in

return, Schering to acquire licenses from Upsher for its 5 product and to make

some payments to Usher under the name of up-front royalties, milestone payments

and royalties for net sale of licensed products.194 While these negotiations were

pending, ESI Lederle filed an ANDA application and claimed that the patent was

not infringed by their generic drug.195 This claim gave rise to a settlement

agreement between Schering and ESI Lederle in which Schering granted ESI

Lederle a royalty free license to market the generic form for more than a year

before K-Dur’s patent expiration date and, in return, Schering paid $10 million in

case the FDA approved ESI Lederle’s application before a date which parties

agreed.196

After these agreements were concluded, an antitrust suit was filed by some

private parties and the agreements were found legal by the District Court of New

Jersey and later reversed by the Third Circuit with its decision that found the 188 Ibid, 20, para 1. 189 Ibid, 21, para 3. 190 In re K-Dur Antitrust Litigation (n 156) 20, para 3.191 Ibid, 10, para 2.192 Ibid, 11, para 1.193 Ibid, para 4.194 Ibid.195 Ibid, 13, para 1.196 Ibid, para 2.

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settlements to have been unlawful.197 The Third Circuit held that a “quick look”

test should be applied by the District Court instead of the scope of the patent test

and under this test “any payment from a patent holder to a generic patent

challenger who agrees to delay entry into the market as prima facie evidence of

an unreasonable restraint of trade, which could be rebutted by showing that the

payment (1) was for a purpose other than delayed entry or (2) offers some pro-

competitive benefit.”198 Additionally, the court pointed out that, prior to this case,

the application of antitrust rules was disproportionately restricted by the scope of

the patent test.199

4.2.2 Pay-For-Delay Settlements From the Supreme Court’s Perspective

Even though the Third Circuits decision in the In re K-Dur case has become one of the

remarkable ones in the pharmaceutical sector, due to the fact that the scope of the patent

test was rejected and pay-for-delay settlements were found anticompetitive; the

Eleventh Circuit’s decision in FTC v. Watson Pharmaceuticals200 can be deemed as the

most cause celebre case in this sector since it was the first case in which the Supreme

Court agreed to investigate pay-for-delay agreements and to solve the contradiction

between circuits.

Subsequent to the Eleventh Circuit’s decision, a petition for writ of

certiorari was sent to the Supreme Court by the FTC in which the Supreme Court

was asked to review the decision of the Eleventh Circuit.201 The case was

reviewed by the Supreme Court with the name of FTC v. Actavis.

The settlement agreements which formed the basis of the Supreme Court

decision concerned Solvay Pharmaceuticals’ prescription medicine AndroGel, a

drug in gel form and used to treat the symptoms of low testosterone in men.202 197 Ibid, 33, para 3.198 Ibid, para 1.199 Ibid, page 27, para 1.200 FTC v. Watson Pharmaceuticals, 677 F.3d 1298 (11th Cir. 2012).201 FTC v. Watson Pharmaceuticals, Petition for a Writ of Certiorari by the FTC Before the Supreme Court of the US <http://www.ftc.gov/os/caselist/0710060/121004watsonpetition.pdf> 202 FTC v. Watson Pharmaceuticals, US Court of Appeals, No.10-12729 (25 April 2012) (11th Circuit) 10, para 3.

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Shortly after Solvay got the approval from the FDA to sell its new medicine in the

US, first Actavis, Inc. (known as Watson Pharmaceuticals) and then Paddock

Laboratories, filed an ANDA application with the FDA for the generic version of

AndroGel.203 They claimed in their application that their drug did not infringe

Solvay’s patent and Solvay’s patent was invalid.204 Furthermore, another

pharmaceutical company Par Pharmaceutical agreed to share litigation costs with

Paddock providing that Paddock share its profits in the case of their drug being

approved by the FDA.205 Thereupon, Solvay claimed that the generics infringed its

patent and initiated litigation which was settled with an agreement between

Solvay and the above mentioned generic firms.206 When the parties were settling

the dispute, Actavis assented to delaying the generic entry until the end of August

2015 unless the generic form was marketed by another generic firm and to

recommend AndroGel to doctors which would foster increased sales, in return for

the transfer of a huge amount of money from Solvay to Actavis.207 Similar

conditions were accepted by the other parties in the dispute in return for payments

from Solvay.208 The FTC argued that these agreements violated antitrust law and

consequently filed a lawsuit in the District Court in which the District Court did

not accept the antitrust allegations.209 Thereafter, the Eleventh Circuit heard the

case and indicated that their “decision focus on the potential exclusionary effect of

the patent, not the likely exclusionary effect”210 and held that the patent allowed

the owner to exclude competitors and therefore “the settlement is immune from

antitrust attack”211. Following this decision, the FTC filed a petition for writ of

certiorari to the Supreme Court in which the Supreme Court announced that the

case would be heard.

Very recently, in June 2013, the judgment was delivered by the Supreme

Court in which pay-for-delay settlements were taken out from the secure zone of

the scope of patent law and put in a position whereby they cannot be immune

203 FTC v. Actavis (n 26) 5, paras 2-3.204 Ibid, para 3.205 Ibid.206 Ibid, para 4.207 Ibid.208 Ibid, 6, para 1.209 Ibid, para 2.210 FTC v. Watson Pharmaceuticals, US court of Appeals, (n 202) 32, para 2.211 Ibid, 30, para 1.

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from antitrust scrutiny.212 However, the Supreme Court decision did not address

pay-for-delay settlements as presumptively unlawful agreements.213 Furthermore,

the FTC’s point of view which replaced ‘rule of reason’ analysis with ‘quick look’

rule was found as erroneous by the Supreme Court and it was instead held that the

‘rule of reason’ analysis should be carried out by the lower court according to the

circumstances in the case.214

Yet the decision was not taken with unanimity. Therefore, it is not wrong to

say that the split between the circuits continued between the judges of the

Supreme Court. Five of the judges agreed on the lawfulness of settlements and

rejected the scope of the patent test; however, the potential anticompetitive effect

was taken into consideration and it was pointed out that the case should be

reviewed under the rule of reason.215 Therefore, the judges in question took the

view that the Eleventh Circuit should have given the FTC the opportunity to

ascertain its antitrust claims.216 This view of the Supreme Court was based on five

sets of considerations which can be used as a guide by the pharmaceutical

companies and circuits.217

The first of these considerations was related to the restraint on the market

entry and it was considered as a practice possessing the “potential for genuine

adverse effects on competition”218. The anticompetitive feature of this practice was

explained as: in some circumstances, the money which is paid to a generic

challenger can greatly exceed the possible profit that the generic challenger can

gain in the case of early market entry, on the one hand, and the patentee

circumvents some negative consequences of litigation such as invalidation of its

patent and keeps prices at any level pursuant to its own will, on the other.219 This

results in a loss on the consumer side of the relationship and gains on the

company side, including the patent owner and generic companies, in terms of

profit.220 The court opined that agreements at stake eliminated the most willing

212 FTC v. Actavis (n 26) 8, para 1.213 Ibid, 20,para 2.214 Ibid.215 Ibid, 21, para 2.216 Ibid, 14, para 3.217 Ibid.218 Ibid, para 4.219 Ibid, 15, para 2.220 Ibid.

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challenger or the closest potential challenger which would have served the

purpose of creating a fair competitive environment.221

The second consideration was related to the justification of anticompetitive

consequences. Here, the court stated that “these anticompetitive consequences will

at least sometimes prove unjustified”222. Not all pay-for-delay settlements have to

lead to an anticompetitive consequence but it should be clarified that FTC’s

complaint should not have been dismissed and the chance should have been given

to the FTC in which non-anticompetitive consequences can be shown.223

The third consideration concerned the market power of patentees and it was

indicated that “where a reverse payment threatens to work unjustified

anticompetitive harm, the patentee likely has the power to bring about that harm

in practice”224. This was explained with the market power of an important patent

which leads the patentee to make payments to the potential generic company and

so that generic company can set very high prices and as a consequence market

entry becomes more difficult to other competitors.225

The fourth point considered by the court was that “an antitrust action is

likely to prove more feasible administratively than the Eleventh Circuit

believed.”226 The Eleventh Circuit’s approach eliminates the examination of

antitrust issues and also ignores the importance of litigating the validity of the

patent except as to whether it is a sham.227 This approach makes it easier for the

patent owner to pay off the challenger and avoid the invalidation of the patent.228

However, a high level of payment from the patent owner to the challenger shows

the doubts of the owner with regard to the strength of the patent and its survival

following the litigation.229 Therefore, a high level of payment can be seen as an

indicator of a weak patent, which would probably become invalid after the

litigation.

The last consideration was made with regard to settlement which can be

done without paying for delay and it was stated that “the fact that a large, 221 Ibid, 16, para 1.222 Ibid, 17, para 2.223 Ibid.224 Ibid, 18, para 2.225 Ibid.226 Ibid, para 3.227 Ibid.228 Ibid.229 Ibid.

39

unjustified reverse payment risks antitrust liability does not prevent litigating

parties from settling their lawsuits230”. It was recommended by the Supreme Court

that parties settle the dispute differently, for instance by deciding on an early entry

date, because most of the reasona for pay-for-delay settlement stem from the high

monopoly profit that the patent in question brings and the will of the parties to

share this monopoly’s profits.231

In summation, the Supreme Court took the view that the Eleventh Circuit

should reassess the case and the structure of the rule-of-reason.232 The emphasis

was made on the size of the payment and it was stated that higher payment

amounts carry bigger anticompetitive risks.233 Even though settlements are often a

desirable way to end the litigation, this fact should not endow settlement

agreements with direct immunity from antitrust rules.234

To properly evaluate this decision, it is also important to examine the

dissenting opinion and analyze their reasons for critiquing the majority. Firstly,

the scope of the patent test was deemed as the preferable test to apply since the

exclusivity given by the patent protects some of the practices from antitrust

scrutiny unless they go beyond the patent.235 Contrary to the majority’s opinion, it

was stated that the question of patent validity should not be assessed under the

antitrust rules. The majority’s rule prevents parties from settling the dispute since

it reasons that they lack the proper incentives to settle due to the necessity of

follow-on litigation after settlement which will clarify the validity of the patent.236

In addition, the legal situation in pharmaceuticals which was given with

Hatch-Waxman Act was addressed. Under Hatch-Waxman, the first applicant

holds an advantageous position since the first company gains a 180 day

exclusivity period. However, it was emphasized that this exclusivity can be given

to all applicants that apply on the first day.237 It was stressed that for the year 2005

an average of 11 applications were filed per drug within the first day and between

2002 and 2008 it never dropped below 3 per drug.238 Stemming from this, the 230 Ibid, 19, para 2.231 Ibid.232 Ibid, 21, para 2.233 Ibid, 20, para 3.234 Ibid, para 1.235 FTC v. Actavis, (n 26), ROBERTS C.J. dissenting, page 8, para 2.236 Ibid, 11, para 3.237 Ibid, 16, para 1.238 Ibid.

40

attitude of the majority was criticized and the position which perceives payments

from the patent owner company to the first filer company as possibly

anticompetitive was found erroneous since more than one very motivated generic

company can exist.239

After all, it was decided that pay-for-delay settlements are lawful but can

take competition concerns on. Thus, as things stand today, it is up to the circuits to

make necessary assessment. However, pharmaceutical companies should bear in

mind that the Supreme Court’s decision in this case makes it more difficult for

companies to conclude pay-for-delay agreements and it is on the companies

themselves to assess whether it is worthwhile to settle or not since the value of

settling might not be as profitable as settling for delay.

239 Ibid.

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5 LAW AND ECONOMICS OF PAY-FOR-DELAY AGREEMENTS AND ITS CONSUMER EFFECTIt is undeniable that economics have an enormous effect on the formation of pay-for-

delay settlements and the laws which are applied to them. Therefore, this chapter will

first cover some fundamental economic reasons which create a backbone for pay-for-

delay settlements. In this frame some market dynamics will be assessed. Following this

assessment, a discussion on law will be conducted and the issue of the legality and

illegality of pay-for-delay settlements will be evaluated. In addition, the impact of this

kind of practices on the pharmaceutical market, parties and consumers will be

addressed.

As stated in the second chapter, the main actors of the pharmaceutical

industry are originator companies and generic companies. While the former

mainly focuses on R&D and innovation, the latter has little interest in investing in

R&D and innovation. Instead of investing on R&D, generic companies invest in

manufacturing a bioequivalent version of blockbuster medicines which offer them

a share of the market since the cost of producing bioequivalents is notably lower

than the cost of innovation.240 However, it is not easy to enter the market with the

generic form of the drug since patents protect medicines and give 20 years of legal

monopoly to the owner of the drug, as already established in chapter 2. This

monopoly right which is known as the right to exclude lets originator companies

recoup their costs and obtain profits.241 Nevertheless, it takes time for originator

companies to launch their product into the market and the average exclusivity

provided by patent decreases to 5 to 8 years.242 This finding reveals that in order to

be successful on marketing the original product, years of extremely costly

research has to be carried out in addition to the costly approval process.243 Some

kinds of drugs are particularly subject to longer development periods, while, for

instance antibiotics need a shorter development period which gives a longer patent

240 Grabowski H. & Vernon J., ‘Effective Patent Life in Pharmaceuticals’ (July 2000) Vol 19 International Journal of Technology Management 98, para 1.241 Carrier M., ‘Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality’ (October 2009) Vol 108(37) Michigan Law Review 37, 40 , para 4. 242 Jackson M., ‘IPR and the Pharmaceutical Industry: Hopes Based on Hopes’, edited by Webster A. & Packer K., Innovation and the Intellectual Property System (1996) Kluwer Law International 66, para 2.243 Grabowski and Vernon (n 240) 98, para 1.

42

life to the originator.244 Furthermore, many products cannot break through the

development process and, even if they do, most of them cannot recoup R&D

costs.245 After the original drug has been introduced to the market, it is very

simple to produce the generic form and this fact increases the importance of the

patent.246 Following the patent expiry, market entry becomes possible for the

generics and competition begins. At this point the first mover holds considerable

market advantages. This fact encourages generic firms to eliminate their

competitors, and therefore, before the exclusivity has expired, they either

challenge the patent or risk to be challenged and enter the market.247

These challenges mostly bring about settlements due to the various

detrimental impacts which litigation has on companies. First of all, litigation

expenses are very high, especially in jurisdictions which require cross

examination and documentary disclosure.248 Furthermore, there are other costs

which are inevitable such as the cost of time, of the uncertainty surrounding the

outcome of the litigation and its consequent effect on production and strategic

planning of reputation.249 Therefore, settlements which help to reduce these

negative effects were recognized as legal. Even though valuable contributions of

settlements to the market and to the judiciary process led to legalization, settling

with an agreement is not always safe for companies.

Pay-for-delay settlements which foresee a value transfer from the originator

company to generic companies have been perceived as problematic in relation to

antitrust rules. It was revealed that these agreements harm consumer welfare and

violate antitrust rules by blocking the entry of generics into the market. To be able

to understand the full extent of the impact of pay-for-delay settlements, settlement

agreements without payments should be analyzed as well.

Settlement agreements without payments provide early competition and a

fall on the prices which expand the prospective static consumer welfare which

244 Grabowski H. & Kyle M., ‘Generic Competition and Market Exclusivity Periods in Pharmaceuticals’(June 2007) Managerial & Decision Economics 501, note 7.245 Priddis and Constantine (n 8).246 Grabowski and Vernon (n 240).247 Benneth M., ‘The Economics of Pay-for-Delay Cases’ (May 2013) <http://www.coleurope.eu/sites/default/files/uploads/event/patent_settlements_-_bennett_0.pdf> accessed 30 August 2013 3, para 3.248 Treacy P. & Lawrance S.,’Intellectual Property Rights and Out of Court Settlements’ edited by Anderman S. & Ezrachi A., Intellectual Property and Competition Law (2011) Oxford University Press 278, para 2.249 Somaya D., ‘Strategic Determinants of Decisions not to Settle Patent Litigation’ (2003) Vol 24 strategic Management Journal 17, para 3.

43

stems from the competition among existing medicines.250 The reason for consumer

welfare to be probabilistic stems from the reduced incentive of the parties to settle

due to lack of payment in the settlement. This reduced incentive reflects on the

parties’ selection which will likely result in litigation. However the outcome of

the litigation is unknown and if the originator company wins the law suit and the

patent concerned is declared as valid, market entry cannot be achieved by the

generic company.251 However, if the litigation ends with victory for the generic

company, estimated market entry does not let the consumer fully enjoy the

benefits due to the long judicial process.252 Therefore, a settlement without

payment does not guarantee the early market entry nor increased consumer

welfare since the parties can opt for litigation.

When settlements foresee a payment from an originator company to a

generic company, they become more attractive to the parties involved. This

characteristic eliminates the chance of litigation and directly shifts the entry date

later than the probable date in case of litigation which will result with a fall in the

consumer welfare.253 Furthermore this payment will have an obstructive impact on

the possibility of having early entry date for generics.

Even though the interests of companies may change in connection to the

legal status of pay-for-delay settlements, in order to clarify the economics of pay-

for-delay settlement, the question of legality has to be disregarded under the

assessment of companies’ economic interests. When the issue of legality is put

aside, the main issue which drives the pay-for-delay settlement is the strength of

the patent.254 The confidence of the originator company regarding its patent affects

the possibility of settlement and also the level of the payment that the settlement

holds. However, one should bear in mind that concessions that are made in

settlements are based on estimations of the parties. On the other hand, patent

litigation is always efficient in assessing the strength of the patent and if it is

invalid, to protect consumers from its the adverse effects.255

250 Hemphill, (n 17) 107, para 2.251 Ibid.252 Ibid.253 Ibid.254 Mungan (n22) 41, para 5.255 Carrier (n 241) 64 , para 2.

44

In order to be able to understand companies’ economic incentives to settle,

different conditions from the company’s perspective should be addressed. The

generic challenger opts for a pay-for-delay settlement only if the offer of the

originator company is bigger than the total sum of their expected return from

litigation and the litigation cost that they need to undertake in case of litigation.256

When the possibility of patent validity increases, the generic company’s expected

return from settlement decreases; because, the higher probability of having a valid

patent has the power of postponing the entry date of the generic and cutting down

the amount of value transfer for the generic company.257 When it comes to the

originator company’s incentive to settle, this incentive is determined by the

assessment of monopoly and duopoly profits and the possible outcome of the

litigation in addition to litigation cost.258 However, an originator company mostly

has an incentive to settle. This is based on the perpetual risk of invalidation of the

originator’s patent. Even if the confidence of an originator company on its patent

is almost absolute, it is better for the company to avoid this small risk by paying a

reasonable sum to the generic challenger.259 Nevertheless, this pay off which

exceeds the patent term is possible only if pay-for-delay settlements are deemed

as legal by law.

As explained above, the economics of pay-for-delay settlements explain the

reason why parties opt for this kind of settlement. Whatever the economic reasons

which encourage parties to delay the entry date beyond the patent term, in the end,

it is left to the laws of individual countries or regions to decide whether

companies are allowed to settle disputes with a delayed entry date. The legal

framework controls the practices of the companies; legalizing settlement in any

manner gives incentive to the companies to postpone entry as much as possible,

even until after the patent expiration.260 To form the legal framework some

characteristics of pay-for-delay settlements in connection to market and patent

assessments are taken into consideration.

256 Mungan (n22) 42, para 2. 257 Gratz L., ‘Economic Analysis of Pay-for-delay Settlements and Their Legal Ruling’ (4 January 2012) < http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1979699 > 9, para 4.258 Mungan (n22) 42, para 3.259 FTC v. Actavis, (n 26), ROBERTS C.J. dissenting, 13, para 3.260 Mungan (n22) 45, para 2.

45

The most important aspect of pay-for-delay settlement is that the payment is

made to exclude the competitor and it is “not ancillary to anything”’ since generic

company does not produce anything.261 By paying for delay, the originator

company preserves its monopoly while the monopoly profits are shared by the

parties. Moreover, in this kind of settlement, validity or invalidity of the

originator’s patent cannot be revealed and parties continue to benefit from the

doubtful prolonged monopoly over the consumers.

However, studies have shown that a considerable amount of patents are

invalid and this invalidity can be revealed subsequent to litigation.262 In this sense,

permitting pay-for-delay settlements can only foster the number of weak patents

which will in the end have some adverse effect on consumers who are required to

pay more for medicines which are under the patent protection of invalid patents.

When pay-for-delay settlements are illegalized, the chance of the parties to use

this mechanism vanishes and this provides a fairer and more competitive

market.263 Even though delayed entry is not an option for the parties anymore,

settlement continues as a valid option because of expensive litigation costs.

Furthermore, parties can still agree on an entry date prior to the patent expiration

without a value transfer.

However, it was claimed that illegalizing pay-for-delay settlements removes

companies’ ability to control and limit their risk which has a chilling effect on

R&D of new drugs.264 This argument was mostly brought by the pharmaceutical

companies themselves, illustrating that they are in favor of the legalization of pay-

for-delay settlements. They based their claim on the fact that among the original

medicines which seek market approval, very few manage to gain the requisite

approval from the authorities to enter the market.265 Furthermore, similar claim

was brought by the European Federation of Pharmaceutical Industries and

Associations (EFPIA) following the European Commission’s decision against

261 Hovenkamp H., ‘Antitrust and Patent Law Analysis of Pharmaceutical Reverse Payment Settlements’ (15 January 2011) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1741162> 8, para 2. 262 Carrier (n 241) 64 , para 4.263 Mungan (n22) 46, para 2.264 Dickey B. & Rubinfeld D., ‘Would the per se Illegal Treatment of Reverse Payment Settlements Inhibit Generic Drug Investment?’ (2012) Vol 8 (3) Journal of Competition Law and Economics 624, para 1265 Priddis and Constantine (n 8) 244, para 3.

46

Lundbeck, and it was addressed that this decision can harm R&D and the growth

of the Sector by increasing legal uncertainty.266

To elucidate, the cost of developing a new drug has been estimated at over

$1000 million per approved new drug, including the preclinical and clinical trial

period.267 Many products cannot make it through the development phase and very

few tested products actually reach the market.268 From these products, 80 per cent

fail to recoup their R&D expenditures due to the drug commercialization costs

(such as; new product promotion, regulatory pricing, reimbursement

adjudication).269 Furthermore, as previously stated, after the original drug is

developed it takes years to introduce the drug into the market which postpones the

income of originator companies. In light of the challenges that companies face, a

monopoly is the only profitable avenue available to them and also serves to foster

their investments in R&D and incentives to innovate. Therefore, pay-for-delay

settlements which provide the longest extension for the patent not only extend the

monopoly over the drug, but also encourage future innovation and development in

the long run.

Nevertheless, the quality of new drugs becomes doubtful since challenges

against drugs are eliminated by pay-for-delay settlements. This can be explained

under the dynamic efficiency assessment. Dynamic efficiency in competition law

indicates competition through the invention of new products.270 Under the

assessment of dynamic efficiency, allowing pay-for-delay settlements results in a

payment which is made to protect only the monopoly throughout a complicated

practice. While generic competitors of the originator company stay away from the

market, the originator company derives profits from the settlement which will

foster its incentive to innovate.271 However, this will harm the quality of patents

since it allows the acquisition of high profits with weak patents.272 Therefore,

266 Van Acker J. & Ansari D., ‘The European Commission imposes fines totaling €145 M on Danish pharmaceutical group over ”pay-for-delay” agreements (Lundbeck)’, <http://www.kluwercompetitionlaw.com/document.aspx?id=KLI-KCL-ECOMP-201353996&query=content%3A%22patent%22 > accessed 30 August 2013, para 11.267 DiMasi J. & Grabowski H., ‘The Cost of Biopharmaceutical R&D: Is Biotch Different?’ (2007) Vol 28 Managerial and Decision Economics 477, para 1; The calculation of the cost is made in relation to biopharmaceuticals and can vary depending on the drug type and technology. Also cost of biopharmaceuticals is less costly and the estimate is made on this type of pharmaceuticals. 470 para 1.268 Priddis and Constantine (n 8) 244, para 3.269 Ibid.270 Gratz (n 257) 4, para 4.271 Ibid.272 Ibid, 9, para 4.

47

contrary to pharmaceutical companies’ claims, legalization of pay-for-delay

settlements removes the incentive of having strong patents and acts to sustain

weak patents on new drugs.

At this point, one fact about the quality of medicines in relation to its patents

should be underlined and that is that pharmaceutical patents are issued mostly “on

dosage variations, usage variations, or in some cases changes in the form or

manufacturing process of the drug, and many of these patents are much more

dubious quality273”. Therefore, companies make small changes on drugs before

the patent expiration to obtain additional patents which are mostly doubtful and

with these patents extend their exclusivity.274 This practice is a way to ‘ever-

greening’ companies’ drugs.275 If the chance of paying for delay is given to the

companies, “ever-greening” becomes easier to maintain since it removes the

control mechanism over this kind of practice by allowing all kinds of settlement.

It also acts to reduce the incentive of producing innovative drugs which makes

breakthrough changes.

Even though all the indicators (including courts and authorities) show that

legalizing pay-for-delay settlements causes many problems, implementation of the

laws can also cause problems. In spite of the European Commission’s finding

which deemed Lundbeck’s practice anticompetitive and the US Supreme Court’s

decision which held that settlements can infringe antitrust laws, there is no

regulatory framework in existence to assess settlements. First of all, a standard

has to be identified. Therefore, authorities should decide on which kind of

agreements should be considered as anticompetitive; the ones which have the

object or effect of being anticompetitive or both.276 When companies settle, given

the fact that a patent is exclusionary and settlements have some benefits,

settlements have to be deemed as legal in general. However, agreements might

include confidentiality clauses which make it difficult to detect anticompetitive

features of the agreement. Agreements can be deemed as anticompetitive by

273 Hovenkamp (n 261) 6, para 1.274 Hemphill S. and Sampat B., ‘Evergreening, patent challenges, and effective market life in pharmaceuticals’ (2012) Vol 31 Journal of Health Economics 327, para 4. 275 Dwivedi G., Hallihosur S. & Rangan L., ‘Evergreening: A deceptive device in patent rights’ (November 2010) Vol 32(4) Technology in Society 324, para 2 “Evergreening is a term referring to the numerous ways in which patent owners of pharmaceutical products use the patent laws to extend their monopoly privileges beyond periods that are normally allowed by law, particularly over high-revebue-earning drugs”276 Treacy and Lawrence (n 248) 292, para 4.

48

object if the delay exceeds the scope of the patent or the patentee has knowledge

on the invalidity of its patent.277 Furthermore, it is easier to prove that agreements

have an anticompetitive objective. However, if an agreement involves payment

and also delays the entry of generics, entry dates of generics become the important

matter. If the agreement delays the entry after the patent expiry, the

anticompetitive effect is easily identifiable. If an agreement allows generics to

enter the market before the patent expiry then that agreement can be deemed as

procompetitive.278 However, only a case by case analysis can lead to an accurate

evaluation in this instance.

Nevertheless, the assessment of settlements can likely bring about litigation.

This is because, the biggest part of the problem stems from the validity of the

patent and this problem can be solved only with an in depth analysis which can be

provided by courts. Hence, a standard has to be formed for the assessment of the

validity of patents in relation to settlement agreement. Otherwise, the comfort

provided by a settlement disappears and companies’ incentives to settle are

reduced with the possibility of patent assessment through litigation.

In summation, when consumer welfare is considered alongside the entry

date of medicines, medicines reach the market with an early entry date in case of

illegalization of pay-for-delay agreements.279 This fosters consumer welfare by

decreasing the prices. Thus, when consumer welfare is considered in accordance

with their access to better quality medicine, restricting pay-for-delay settlements

does not have a negative impact on the abilities of companies to invest into the

R&D and innovation since they still have the chance to settle. This restriction on

settlements compels companies to have stronger patents on their original drugs.

As a result, parties’ incentives to settle are preserved but the possibility of

settlement with a weak patent is excluded and it naturally increases the consumer

welfare.

277 Ibid.278 Ibid.279 Mungan (n22) 47, para 2.

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6 CONCLUSIONThe complexity of pay-for-delay settlements where different interest groups and

different laws clash makes it more difficult to balance the formation of settlement

agreement. Among these interest groups consumers are the most vulnerable and among

these different laws antitrust laws exist to maximize consumer welfare. Consumer

welfare can be achieved with an early entry date. The way to enable early entry date

passes through the regularization of settlements which restricts pay-for-delay

settlements.

In working, toward the regularization of settlements, the most important

phase has been completed both in the US and EU. After a long discussion and

investigation period, an awareness of the negative impacts of pay-for-delay

settlements has developed. Very recently, in the US, the Supreme Court held that

pay-for-delay settlements can sometimes violate the antitrust laws. Two days after

the Supreme Court’s decision, the European Commission, for the first time, fined

the Danish pharmaceutical company Lundbeck and other companies for entering

into an anticompetitive agreement to delay the entry of the generic medicine to the

market280. Even though the uncertainty surrounding pay-for-delay settlements has

not been completely removed, at least one thing has become very clear and that is

that settlement agreements can be deemed as anticompetitive in cases involving

pay-for-delay. However, these rulings are not enough to remove the ambiguity

over the assessment of validity of patents.

When summarized, it is clear that the recognition of pay-for delay

settlements as anticompetitive will help to foster consumer welfare. However, this

recognition increases the risk to companies and the responsibility of competition

authorities. To be able to avoid infringement of antitrust laws, competition

authorities and pharmaceutical companies should assess agreements and question

whether it was possible to reach to a better agreement through alternative

avenues281.

280 European Commission, ‘Antitrust: Commission fines Lundbeck and other pharma companies for delaying market entry of generic medicines’ (19 June 2013) IP/13/563 < http://europa.eu/rapid/press-release_IP-13-563_en.htm> accessed 30 August 2013, para 1.281 De Margerie (n 20) 95, Para 1.

50

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Van Malleghem P. & Devroe W., ‘Astrazeneca: Court of Justice Upholds First Decision Finding Abuse of Dominant Position in Pharmaceutical Sector’, Journal of European Competition Law and Practice, published online on 26 April 2013, <http://jeclap.oxfordjournals.org/content/early/2013/04/25/jeclap.lpt009.full.pdf+html>

Westin J., ‘Product Switching in the Pharmaceutical Sector- an abuse or legitimate commercial consideration?’ (December 2011) Vol 32(12) European Competition Law Review, 595-601.

Working papers/Research papersMungan M., ‘Reverse Payments, Preserve Incentives’ (2013) FSU College of Law Public Law Research Paper, <http://ssrn.com/abstract=2214170 >

Reports and DocumentsEUEuropean Commission, ‘Executive Summary of the Pharmaceutical Sector Inquiry Report’ (2009) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/communication_en.pdf >

European Commission, ‘Pharmaceutical Sector Inquiry Final Report’ (2009) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/staff_working_paper_part1.pdf>

European Commission, ‘Pharmaceutical Sector Inquiry - Preliminary Report’ (2008) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf>

European Commission, ‘3rd Report on the Monitoring of Patent Settlements (period: January-December 2011)’ (2012) <http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/patent_settlements_report3_en.pdf>

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USMMA Drug Settlement Reports, Annual Filing Reports, <http://www.ftc.gov/bc/healthcare/drug/index.htm>

FTC Staff Study, Pay-for-Delay: How Drug Company pay-Offs Cost Consumers Billions, (2010) <http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf>

FTC, Annual Filing Reports (2004) <http://www.ftc.gov/os/2005/01/050107medicareactrpt.pdf>

Speeches/Conference Papers/Press releaseEUEuropean Commission, Press Release ‘Antitrust: Commission confirms supplementary Statement of Objections sent to Intel’ (17 July 2008) MEMO/08/517 <http://europa.eu/rapid/press-release_MEMO-08-517_en.htm>

European Commission, ‘Antitrust: Commission opens formal proceedings against Les Laboratoires Servier and a number of generic pharmaceutical companies’ (8 July 2009) MEMO/09/322 < http://europa.eu/rapid/press-release_MEMO-09-322_en.htm>

European Commission, ‘Antitrust: Shortcomings in pharmaceutical sector require further action’ (8 July 2009) IP/09/1098 < http://europa.eu/rapid/press-release_IP-09-1098_en.htm?locale=fr>

European Commission, ‘Antitrust: Commission Launches Monitoring of Patent Settlements Concluded Between Pharmaceutical Companies’ (12 January 2010) IP/10/12 < http://europa.eu/rapid/press-release_IP-10-12_en.htm>

European Commission, ‘Antitrust: Commission welcomes decrease of potentially problematic patent settlements in EU pharma sector’ (5 July 2010) IP/10/887 < http://europa.eu/rapid/press-release_IP-10-887_en.htm>

European Commission, ‘Antitrust: Commission opens investigation against pharmaceutical companies Cephalon and Teva’ (28 April 2011) IP/11/511 < http://europa.eu/rapid/press-release_IP-11-511_en.htm>

European Commission, ‘Antitrust: Commission opens proceedings against Johnson&Johnson and Novartis’ (21 October 2011) IP/11/1228 < http://europa.eu/rapid/press-release_IP-11-1228_en.htm>

European Commission, ‘Antitrust: Commission sends Statement of Objections to Lundbeck and others for preventing market entry of generic antidepressant medicine’ (25 July 2012) IP/12/834 < http://europa.eu/rapid/press-release_IP-12-834_en.htm>

European Commission, ‘Commission enforcement action in pharmaceutical sector following sector inquiry’ ( 30 July 2012) MEMO/12/593 < http://europa.eu/rapid/press-release_MEMO-12-593_en.htm>

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European Commission, ‘Antitrust: Commission sends statement of Objection on Perindopril to Servier and others’ (30 July 2012) IP/12/835 < http://europa.eu/rapid/press-release_IP-12-835_en.htm>

European Commission, ‘Antitrust: Commission sends Statement of Objections to J&J and Novartis on delayed entry of generic pain-killer’ (31 January 2013) IP/13/81 <http://europa.eu/rapid/press-release_IP-13-81_en.htm>

European Commission, ‘Antitrust: Commission enforcement action in pharmaceutical sector following sector inquiry’ (31 January 2013) MEMO/13/56 < http://europa.eu/rapid/press-release_MEMO-13-56_en.htm>

European Commission, ‘Antitrust: Commission fines Lundbeck and other pharma companies for delaying market entry of generic medicines’ (19 June 2013) IP/13/563 < http://europa.eu/rapid/press-release_IP-13-563_en.htm>

European Commission, ‘Commission fines Lundbeck and other pharma companies for delaying market entry of generic medicines: statement by Vice-President Almunia’ SPEECH/13/553 <http://europa.eu/rapid/press-release_SPEECH-13-553_en.htm>

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OFT, Press Release 106/10 (15 October 2010) <http://www.oft.gov.uk/news-and-updates/press/2010/106-10>

OFT, Press Release 36/13 (19 April 2013) <http://www.oft.gov.uk/news-and-updates/press/2013/36-13>

FranceCompetition Authority of the French Republic, Press release (25 February 2013) <http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=483&id_article=2051>

US Prepared statement of the FTC to the Committee on the Judiciary of the US House of Representatives, Subcommittee on Courts and Competition Policy, ‘Anticompetitive Pay-for-Delay Settlements in the Pharmaceutical Industry: Why Consumers and the Federal Government Are Paying Too much for Prescription Drugs’ (3 June 2009) <http://www.ftc.gov/os/2009/06/P859910payfordelay.pdf >

Protecting Consumer Access to Generic Drugs: Hearing on H.R. 1902 Before the Subcomm. on Commerce, Trade, and Consumer Protection of the H. Comm. on Energy and Commerce, 110th Cong. 3 (2007) (Statement of FTC Commissioner Jon Leibowitz) <http://www.ftc.gov/speeches/leibowitz/070502reversepayments.pdf>

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Other SourcesThe Boston Globe, ‘Supreme Court should end drug firms’ ‘pay for delay’’ (30 March 2013) <http://www.bostonglobe.com/editorials/2013/03/29/supreme-court-should-end-drug-firms-pay-for-delay/H3jqFE3odnqv6FEprkCziK/story.html>

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Günay N., ‘Patent Settlement Agreement is a Way to Settle Patent-Related Disputes; How about Pay-for-Delay Settlements?’ (2013) (Paper for Competition Law Dynamics Course, Lund University)

Teva Completes Acquisition of Cephalon (14 October 2011) <http://www.tevapharm.com/Media/News/Pages/2011/1617357.aspx?year=2011&page=2>

Table of CasesEU Case-LawCase C-457/10 P, AstraZeneca AB and AstraZeneca plc v Commission, decided on 6 December 2012

Case 65/86 Bayer AG v Maschinenfabrik Hennecke GmbH and Heinz Süllhofer [1988] ECR I- 5249

Case 193/83 Windsurfing International Inc v. Commission [1986] ECR 611, para 92.

Opinion of Advocate General

Case C-457/10 P, AstraZeneca, Opinion of Advocate General Mazák, delivered on 15 May 2012

US Case-Law

In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003)

In re Ciproflaxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008)

FTC v. Actavis, Supreme Court of the US, 12-416, 570 U.S. ___ (2013)

FTC v. Watson Pharmaceuticals, 677 F.3d 1298 (11th Cir. 2012)

In re K-Dur Antitrust Litigation, 686 F.3d 197 (3d Cir. 2012)

Schering-Plough Corp. v. FTC, 402 F.3d 1056, 1056–76 (11th Cir. 2005)

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In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006)

Valley Drug Company v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 (11th Cir. 2003)

Petitions and Other Court Documents in the US

FTC v. Schering-Plough Corporation, Petition for a Writ of Certiorari, http://www.ftc.gov/os/2005/08/050829scheringploughpet.pdf > 9, para2

FTC v. Watson Pharmaceuticals, US Court of Appeals, No.10-12729 (25 April 2012) (11th Circuit)

FTC v. Watson Pharmaceuticals, Petition for a Writ of Certiorari by the FTC Before the Supreme Court of the US <http://www.ftc.gov/os/caselist/0710060/121004watsonpetition.pdf>

In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003) , 908____ United States Court of Appeals for the Sixth Circuit, In re Cardizem CD Antitrust Litigation, 2003 FED App. 0195P (6th Cir.)

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