On 18 October 2023, the European General Court (GC) delivered its judgment in Teva Pharmaceuticals Industries and Cephalon v European Commission (Case T-74/21). The GC upheld the European Commission’s (EC) decision from 2020 (Case AT.39686), which imposed a combined fine of €60.5 million on Teva and Cephalon for their involvement in a “pay-for-delay” agreement dating back to 2005 (see our previous blog post on the EC’s decision here).
This latest ruling is part of a broader series of “pay-for-delay” cases brought before the EU Courts, which have attracted significant attention in recent years. Notably, Servier and Others (Case C-201/19 P), currently awaiting appeal before the Court of Justice of the European Union (CJEU), is one such case (for further insight into this and other recent competition law developments in the pharmaceutical sector, see our recent blog post here). While not ground-breaking, the recent GC ruling serves as an important reminder for pharmaceutical companies engaged in patent litigation and/ or prospective settlement negotiations with competitors, highlighting certain practices to avoid and key considerations to take into account when engaging in such activities.
Background
This case centred on an agreement concluded between Teva and Cephalon in December 2005 to settle a patent dispute over modafinil (a drug used to treat sleep disorders). By 2005, Cephalon’s key modafinil patents had expired, and Teva had sought to enter the UK modafinil market with its own generic version. Cephalon responded to Teva by initiating legal proceedings to block Teva’s entry, relying on its secondary and other modafinil-related patents that had not yet expired. The two companies ultimately resolved their dispute by entering into a settlement agreement, which included the following provisions:
- Teva agreed not to enter the relevant modafinil markets independently and not to challenge Cephalon’s modafinil patent rights.
- Teva was appointed as the exclusive distributor of Cephalon’s modafinil products in the UK for five years.
- The agreement also encompassed a package of specific commercial transactions that benefited Teva (the “side deals”), including:
- Cephalon’s acquisition of Teva’s licence for its modafinil patents.
- Cephalon’s purchase of Teva’s raw materials.
- The granting by Cephalon to Teva of access to its clinical and safety data for another drug unrelated to modafinil.
- Payments by Cephalon to Teva to cover its legal costs.
Under the terms of the agreement, Teva could have started selling generic modafinil in October 2012 on the basis of a licence granted by Cephalon in return for substantial royalty payments by Teva. However, Teva’s limited entry under this licence did not ultimately materialise as Teva acquired Cephalon in October 2011, and the two companies became part of the same group.
The EC Decision
After a lengthy investigation lasting more than ten years, the EC concluded in November 2020 that the settlement agreement infringed Article 101 TFEU because it effectively eliminated Teva as Cephalon’s competitor in the modafinil markets in the European Economic Area (EEA). The EC’s analysis focused on Teva’s delayed entry into the modafinil markets in the EEA in exchange for value transfers from Cephalon, noting that in the absence of the agreement, Teva would have been able to enter the market earlier, potentially leading to lower prices for modafinil products. As a result, the EC imposed fines of €30 million on Teva and €30.5 million on Cephalon.
The GC judgment
The recent GC ruling follows Teva and Cephalon’s challenge to the EC’s decision. In its judgment, the GC fully rejected the parties’ arguments and upheld the EC’s finding that the settlement agreement was a “pay-for-delay” agreement constituting a hardcore restriction of competition “by object” under Article 101 TFEU.
The GC based its analysis on the two-part test established by the CJEU in Generics (UK) and Others (Case C-307/18). In particular, the GC examined (i) whether there was a plausible explanation for the value transfers underlying the parties’ agreement other than to induce Teva to accept the non-compete and non-challenge commitments and, (ii) whether there was a lack of “proven” pro-competitive effects attributable to the agreement capable of raising reasonable doubt that it caused a sufficient degree of harm to competition in the modafinil markets in the EEA.
The GC examined the parties’ arguments and found that the sole purpose of the value transfers underlying the settlement agreement was to induce Teva to accept the relevant non-compete and non-challenge commitments. In its analysis, the GC considered the agreement and the related “side deals” formed part of a single contractual framework and concluded that the net benefit of the value transfers underlying the agreement (i.e. the value flowing from both the monetary and non-monetary aspects of the above-mentioned “side deals”) was sufficiently large to have acted as an incentive for Teva to refrain from entering the relevant modafinil markets and, consequently, from competing on the merits with Cephalon in respect of those markets. The GC also rejected the parties’ arguments that the settlement agreement had pro-competitive effects by providing for Teva’s early entry into the modafinil market because this was a “contractually agreed entry” and only “early” in the sense that it took place before patent expiry.
Moreover, in the remainder of the judgment, the GC rejected the parties’ challenges to the EC’s findings that the settlement agreement restricted competition “by effect”, that the parties did not fulfil the conditions for an exemption under Article 101(3) TFEU, and that the EC had correctly applied the methodology for calculating the fines imposed on the parties.
Comment
While the parties still have the option of appealing to the CJEU, it should be noted that this latest GC ruling underlines the increasing convergence of EU Courts in their treatment of pay-for-delay agreements, which is expected to be further clarified by the CJEU’s forthcoming Servier judgment. This recent judgment underscores, once again, that companies engaged in patent settlement negotiations with their (actual or potential) competitors should tread very carefully and avoid value transfers which induce a company to stay out of the market for a period of time without any pro-competitive plausible explanation. The EU Courts’ case law and the Commission’s classification of settlement agreements (see our related blog posts here and here) continue to provide helpful guidance for companies and their advisors when reviewing settlement agreements to ensure they stay on the right side of the line.
For further information, please contact:
Kyriakos Fountoukakos, Herbert Smith Freehills
kyriakos.fountoukakos@hsf.com
