The General Court’s judgment in Servier

The judgment of the General Court was issued on 18 December 2018. The decision is interesting in itself, however its most interesting parts – overruling the Commission’s market definition and consequently the findings related to Servier’s abuse of its dominant position – fall out of the scope of our research. With regard to the Article 101 part of the judgment, the General Court annulled the Commission decision for the part relating to settlement between Servier and Krka, reduced the fine imposed on Servier for the Matrix settlement by 30%, otherwise – related to the Niche/Unichem, Teva, and Lupin settlements – maintained the Commission’s decision.

Since certain elements of the judgment have already been discussed in details related to the General Court’s Lundbeck judgment, it seems reasonable to not repeat them here. My analysis is going to focus on the following points:

a) short discussion of the Lundbeck criteria (to determine whether patent settlements constitute restrictions of competition by object) upheld by the General Court;

b) potential competition vis-à-vis the presumption of patent validity c) reverse payments and costs inherent to patent settlements

d) side deals concealing value transfers vs. the Krka licensing and assignment agreements

840 C-591/16 P Lundbeck v European Commission para. 139-140

841 Idem. para 143

193

The General Court’s Lundbeck judgment discussed above set up the following three criteria to determine whether patent settlements between originators and generics constitute a by object restriction of competition law:

- the originators and the generics are at least potential competitors;

- settlements contained non-challenge and non-commercialisation clauses;

- such clauses were obtained by the originator in return for a value transfer (reverse payment).

The General Court reviewed the Commission’s decision based on that structure and found that the Lundbeck criteria was fulfilled by the Commission’s examination in that respect.⁸⁴² The General Court also rejected the appellant’s claims related to the ancillary restraint nature of the non-challenge and non-commercialisation clauses.

With regard to the amount of the value transfer, the General Court’s analysis is somewhat different from those figured out in Lundbeck: “in order to establish whether or not the transfer of value from the originator company to the generic company constituted an inducement to accept non-marketing and non-challenge clauses, the Commission rightly examined whether the value transfer corresponded to the specific costs of the settlement for the generic company.

The relevant criterion […] in the identification of the costs borne by the generic company that are inherent in that settlement and not in any asymmetry of information existing between the parties or in their respective commercial interests.”⁸⁴³

Concerning the inducive nature of the value transfere in four agreements, the General Court confirmed that a value transfer in itself is not problematic, only inducive value transfers are, which are defined by the judgment as follows: “In order to establish whether or not a reverse payment […] constitutes an inducement to accept nonmarketing and non-challenge clauses, it is necessary to examine, taking into account its nature and its justification, whether the transfer of value covers costs inherent in the settlement of the dispute […] If a reverse payment provided for in a settlement agreement containing clauses restrictive of competition is aimed at compensating costs borne by the generic company that are inherent in that settlement, that payment cannot in principle be regarded as an inducement. Nevertheless, a finding of an

842 Case T-691/14 Servier and others k European Commission. ECLI:EU:T:2018:922 para 391, para 406, para 418

843 T-691/14 Servier para 416

194

inducement and of a restriction of competition by object is not ruled out in such a case. It means however that the Commission must prove that the amounts corresponding to those costs inherent in the settlement, even if they are established and precisely quantified by the parties to that settlement, are excessive.”⁸⁴⁴

The General Court expressed clearly that “specific costs of the settlement”, or “costs inherent to the settlement” are generally accepted, and if the amount of the reverse payment corresponds to the amount of such costs, the burden of proof switches to the Commisssion, and it has to prove that such a reverse payment has incucive nature, and therefore, is anticompetitive. As a typical example of costs inherent to the settlement, the General Court refers to litigation costs⁸⁴⁵. By contrast, the General Court does not consider as inherent costs certain categories, but “too extraneous to the dispute and to its settlement to be regarded as inherent in the settlement of a patent dispute.” Such costs include, pursuant to the wording of the judgment: “for example, the costs of manufacturing the infringing products, corresponding to the value of the stock of those products, and research and development expenses incurred in developing those products.

The same is true of sums which must be paid by the generic undertaking to third parties as a result of contractual commitments which were not undertaken in the context of the dispute (for example supply contracts).” However, it seems the General Court does not want to outrule such costs entirely, but places the burden of proof on the parties to the agreement, “if they do not wish the payment of those costs to be regarded as an inducement, and indicative of a restriction of competition by object, [they need to] demonstrate that those costs are inherent in the dispute or in its settlement, and then to justify the amount. They could also, to the same end, invoke the insignificant amount of the repayment of those costs which are a priori not inherent in the settlement of the dispute,” showing that that amount is insufficient to constitute a significant inducement to accept the clauses restricting competition stipulated in the settlement agreement.⁸⁴⁶ After detailed discussion of different type of costs of the agreements at issue, the General Court found that value transfers in the Niche, Matrix, Teva and Lupin agreements had an inducive nature.⁸⁴⁷

844 Idem.para 527-529

845 Idem. para 530, para 682

846 Idem. para 531, para 683, para 828

847 Idem. para 532

195

With regard to the existence of potential competition, Servier confirms Lundbeck’s – and Cartes Bancaires’s – findings referring to the necessity of real concrete possibilities to enter the market⁸⁴⁸. Lundbeck is also confirmed in the respect that the existence of market barriers such as patents and the obligation to obtain a marketing authorisation does not call into question the generics intention, nor their ability to enter the marker, therefore, they do not call into question the existence of real concrete possibilities to enter.⁸⁴⁹

Interesting elements of the judgment are the findings related to the incumbent’s perception: “the criterion of the incumbent operator’s perception is a relevant, but not sufficient, criterion for assessing the existence of potential competition. […G]iven its subjective, and thus variable nature — which depends on the operators in question, their knowledge of the market and their contacts with their possible competitors — the perception of these operators, even experienced ones, cannot by itself lead to the conclusion that another operator is one of their potential competitors. However, that perception may support the conclusion that an operator has the ability to enter a market and, accordingly, may contribute to its classification as a potential competitor”⁸⁵⁰ This statement is welcome, the General Court seems to accept – at least to an extent – the reality of the markets: information asymmetry in several cases rules out rational judgments on the perceived competitor’s position or intent, and therefore, enables it even to bluff the incumbent.

A very important part of the reasoning of the General Court relates to the presumption of patent validity. In that respect, in my view, Servier goes farther and clarifies certain points of Lundbeck: the Court not only clarifies that the existence of potential competition does not question the presumption of patent validity – and therefore cannot be considered as presumption of invalidity – but specifies the case in which the existence of potential competition is excluded:

“a court has confirmed the validity of the patent and a court has ruled that the valid patent was infringed.”⁸⁵¹ Moreover, the court later adds, that “a judgment on the merits finding the existence of an infringement is itself provisional as long as the possible remedies have not been exhausted.”⁸⁵² Therefore, the judgment ruling the patent valid and infringed is required to be

848 Idem. para 318-320

849 Idem. para 321

850 Idem. para 347

851 Idem. para 360

852 Idem. para 368

196

final and binding – otherwise generics can still contest patent’s validity and infringement, therefore, potential competition exists.

The judgment also sophisticates certain requirements relating to the generics intentions to enter the market: on a supplementary basis, they are relevant in the assessment of the existence of potential competition: “while the intention to enter the market is neither necessary in order to find that there is potential competition on that market […] nor capable of calling that finding into question, nevertheless, when such an intention is established, it may support the conclusion that a given operator has the ability to enter the market and thus contribute to its classification as a potential competitor.”⁸⁵³

Otherwise the judgment confirms Lundbeck related to the issues of potential competition, finding the existence of viable strategies and that it was sufficient for the Commission to establish the existence of a marketing authorization application and of the active participation of the generics in the application procedure. To question the existence of potential competition, the burden of proof would shift to the undertakings to show that there were problems which objectively prevented the grant of a marketing authorisations.⁸⁵⁴

Concerning side-deals – as it was already introduced in the part discussing the Commission’s decision, the conduct of Servier included a complex system of side- deals, e.g. licensing, distribution and acquisition agreements – and the Krka agreement the General Court highlights that the presence of a ‘side deal’ “may constitute, as regards the settlement of a patent dispute, a strong indication of the existence of an inducement and, consequently, of a restriction of competition by object”.⁸⁵⁵ The General Court’s judgment determines the definition of side deal as “a normal commercial agreement linked to a settlement agreement which contains clauses which are by themselves restrictive. Such a link exists, in particular, where the two agreements are concluded on the same day, where they are legally linked, the binding nature of one of the agreements being conditional upon the conclusion of the other agreement, or where, in the light of the context in which they are concluded, the Commission is able to establish that they are

853 Idem. para 382

854 Idem. para 478-479

855 Idem. para 797

197

indissociable. It may be added that, the shorter the time between the conclusion of each agreement, the easier it will be for the Commission to establish that indissociable nature.”⁸⁵⁶ The General Court adds that “the fact that a commercial agreement, which does not normally have the settlement of a dispute as its subject matter […] and which serves as a vehicle for a transfer of value from the originator company to the generic company, is […] linked with a settlement agreement containing competition-restricting clauses is a strong indication of the existence of a reverse payment”⁸⁵⁷

Important that restrictive side-deals discussed above are clearly separated form lawful agreements by the judgment stipulating that “the linking of a normal commercial agreement to a settlement agreement containing non-challenge and non-marketing clauses no longer constitutes a strong indication of a reverse payment where the commercial agreement in question is a licence agreement concerning the patent in dispute.”⁸⁵⁸ With respect to the Krka agreement, the General Court acknowledged that licence agreements are appropriate means of resolving a dispute, and “[l]inking a licence agreement to a settlement agreement is all the more justified since the presence, in a settlement agreement, of non-marketing and non-challenge clauses is legitimate only where that agreement is based on the parties’ recognition of the validity of the patent.” The conclusion of a licence agreement makes sense only if the licence is actually used and based on a valid patent. Therefore, the licence agreement supports the legitimacy of the settlement agreement, which fully justifies the linking of the two.⁸⁵⁹

The judgment also determines certain requirement for the future cases of the Commission: “It is therefore for the Commission to rely on indicia other than the mere linking of the licence agreement and the settlement agreement for the purpose of establishing that the licence agreement was not concluded at arm’s length and that it actually masks a reverse payment inducing the generic company to accept the non-marketing and non-challenge clauses.⁸⁶⁰ Since in Krka the Commission did not prove that the royalty for the license was abnormally low, and therefore the value transfer was not proven, it cannot be concluded that it was intended

856 Idem. para 798

857 Idem. para 803

858 Idem. para 943

859 Idem. para 946-947

860 Idem. para 949

198

to compensate for the costs inherent in the settlement and constitutes an inducement.

Consequently, the Krka agreement did not reveal a sufficient degree of harm to be classified as by object restriction.⁸⁶¹ The General Court also found that the allaged potential effects were based on hypothetical circumstances which were not objectively foreseeable at the time of the conclusion of the agreement.⁸⁶² Therefore, the part of the Commission’s decision relating to Krka was annulled.