Thou shalt not settle? Servier – the European Court of Justice’s Latest Chapter In the “Pay for Delay” Saga

The European Court of Justice (CJEU) handed down its judgment in Servier on 27 June 2024, agreeing with Advocate General Juliane Kokott’s opinion that the settlement and licensing agreements entered into by Servier with several generic pharmaceutical companies infringed the EU’s prohibition on anti-competitive agreements pursuant to Article 101 and may have formed part of an abusive exclusionary strategy in breach of Article 102 of the Treaty on the Functioning of the European Union (TFEU).

Servier affirms the status quo that so-called “pay-for-delay” agreements constitute “by-object” infringements of Article 101 TFEU. Furthermore, contrary to the judgment of the General Court (GC), the CJEU ruled that the grant of patent licences covering certain geographic markets in exchange for non-marketing and non-challenge in other geographic markets constitutes unlawful market sharing also restricting competition “by object”. For companies in sectors where patent licensing is prevalent, careful consideration must be had to ensuring that settlement agreements and related arrangements are based on a recognition of patent validity. 

The CJEU also overturned the GC’s findings in relation to market definition, putting a strong emphasis on cross-price elasticity of demand for pharmaceutical products. 

Can legitimate licensing agreements constitute a restriction of competition “by object”?

So-called “pay-for-delay” cases typically involve patentees settling challenges to the validity of their patents by compensating the challenging party through pecuniary or non-pecuniary transfers of value (reverse payments). In its “pay-for-delay” cases to date, the Commission found that such agreements constitute “by-object” restrictions of competition, meaning that it is not necessary to establish their adverse effects to find an infringement.

However, the CJEU repeatedly clarified (see our previous blog here) that reverse payments which are inherent in the settlement of a patent dispute will not constitute “by-object” restrictions unless they can only be explained through the commercial interest of the parties not to compete on the merits. To assess this, one must consider: (i) all transfers of value made between the parties; (ii) whether the net gain arising from those transfers in favour of the challenging party may be justified through a proven and legitimate quid-pro-quo of waivers by the patentee; and (iii) if not so justified, whether the net gain is sufficiently large to incentivise the challenging party not to enter the relevant market.

Servier raised a number of issues, including whether patent licencing agreements could restrict competition “by object”. The licencing agreements in question provided for: (i) Servier’s patents in seven countries to be licenced to Krka (a generic drugmaker), and (ii) for Krka to respect Servier’s patents in several other countries.

The GC held (see our previous briefing here) that the licencing agreements were connected to the settlement of a genuine patent dispute and that the Commission failed to show they were not at arm’s length because the 3% royalty payable was not abnormally low. The GC also annulled the Commission’s finding that Servier had abused its dominant position by pursuing an exclusionary strategy through, inter alia, drawing up and implementing the agreements in question. In the GC’s view, the Commission’s market definition was too narrow as it wrongly considered alternative drugs with similar mechanisms of action to differ in therapeutic use, underestimated patients’ willingness to switch medicines, and gave excessive importance to price constraints.

Yes, they can – says the CJEU

The CJEU held that the licence agreements between Servier and Krka ought to be examined jointly with their settlement agreements, as the former would not have been possible without the latter. Agreements allowing a licensee to enter certain geographic markets without risk of patent infringement in exchange for prohibiting it from entering other markets infringe competition “by object” contrary to Article 101 TFEU. This is the case even where the agreements pursue certain legitimate objectives and do not rule out the possibility of competition in the long run. In this context, the level of the royalty fee is irrelevant.

Definition of product markets continues to get narrower

The CJEU has also annulled the GC’s finding with respect to Article 102 TFEU on the basis that the Commission’s market definition was erroneous. The CJEU held that the assessment of product substitutability must not be limited to a functional analysis. Rather, one must assess whether the products are economically substitutable by considering their cross-price elasticity of demand. This holds true irrespective of the involvement of prescribing doctors and insurance mechanisms for pharmaceutical goods. Therefore, a lack of shifts in sales between different drugs intended for the same therapeutic indication in response to changes in their relative prices would indicate the existence of a distinct market for the patentee’s drug, in which the patentee is likely dominant. 

What’s next for reverse settlements?

The next opportunity for the CJEU to clarify the law on so-called “pay-for-delay” agreements will arise when it considers the appeal in Teva and Cephalon (lodged in January 2024). The GC will also have to consider whether the assignment and licence agreement between Servier and Krka constitutes a restriction of competition “by object”. 

If you would like to discuss any aspect of Servier and its implications for settlements and licensing agreements, please contact us or your usual contact in our Antitrust, Competition and Trade team. To read more about these and other antitrust developments, refer also to our Global antitrust in 2024: 10 key themes report.