Paying for delay and patent settlement arrangements - the European Commission (at last) publishes the Lundbeck decision

16 minute read
29 January 2015

On 19 June 2013, the European Commission (the Commission) announced that it had imposed fines totalling €146 million upon H. Lundbeck A/S (Lundbeck) and certain producers of generic medicines in respect of infringements of Article 101 on the Treaty on the Functioning of the European Union and Article 53 of the EEA Agreement (together Article 101 TFEU).

Some 19 months after this announcement, the Commission has finally published the non-confidential version of its decision, setting out the basis for the infringements of Article 101 TFEU found by the Commission. The Commission's decision is already subject to appeals before the General Court by Lundbeck and a number of the generic producers.

The contested decision arises from agreements concluded between Lundbeck and generic producers in the context of disputes relating to Lundbeck's process patents for the anti-depressant drug, citalopram.

The agreements were only operative for a relatively short time period (operating at various times from January 2002 to December 2003). Nonetheless, the magnitude of the fines reflects the Commission's view that they constituted a serious infringement of EU competition law in restricting potential competition between Lundbeck and the generic producers.

The broader implications of the decision as regards the interplay between patent settlement agreements and EU competition law are considered further below, together with an outline of certain aspects of the Commission's decision.

No immunity from the application of EU competition law

The decision reiterates that agreements relating to patents, including agreements addressing or settling disputes in respect of patents, are not immune from the application of EU competition law.

Consequently, companies entering into private agreements in relation to a dispute must take care that they do so in compliance within EU competition law, or face potential risks including fines of up to ten per cent of group worldwide turnover, as well as actions for damages before national courts.

The means by which a patent holder defends its rights matter

The decision confirms that the means a patent holder uses to defend its granted rights may be the subject of challenge under EU competition law.

The fact that a patent (if found to be valid and infringed) grants the patent holder a right to exclude products falling within the scope of the patent does not mean that the patent holder necessarily complies with EU competition law by using any method to achieve the same exclusionary outcome.

Moreover, the decision asserts the Commission's position that, pending determination by a competent court, competing products may only be regarded as "potentially infringing" a granted patent.

Within the specific context of the pharmaceutical sector, this is deemed to present a very different situation to one in which a competent court has held that a competing product infringes a granted patent (i.e. where the right to exclude is obtained through the objective strength of the patent).

Where a patent is only "potentially infringed", the Commission considers that a settlement agreement concluded without "any transfer of value" is likely to comply with EU competition law. This is provided that this agreement has been reached on the basis of each party's objective assessment of the strength of the patent, and has not resulted from or been induced by aspects "extraneous to the issue of the likely validity and infringement of the patent in question".

In circumstances where these aspects are satisfied, the decision provides that a settlement agreement may legitimately impose an obligation upon the generic producer "not to use the invention covered by the patent during (part of) the period of patent protection".

Assessing the impact of a value transfer from an originator company to a generic producer

By contrast, where a generic producer's incentives for market entry are reduced (or eliminated) by virtue of a transfer of value from an originator company, market exclusion may be obtained by the originator company through the size of the value transfer, rather than the objective assessment of the strength of its patent. The Commission considers this to be particularly so when the value transfer broadly matches the profit that the generic producer expected to achieve had it entered the market.

Where a transfer of value results in market exclusion, the originator company is deemed to eliminate the uncertainty of possible generic entry, and to secure instead the certainty of no such entry. In relation to the pharmaceutical sector, the Commission considers that it is this uncertainty in relation to the possibility of generic entry that reflects the potential competition to which an originator company is exposed. If an originator company is able to remove this potential competition, it benefits from the certainty of no competition.

Importantly, the Commission takes a holistic approach to determining the existence of a "transfer of value"; this could take the form of a specific cash payment, or be a more covert form of value transfer to the generic producer that "cannot be adequately explained by, or which considerably exceeds" the value to the originator company of any counter-performance by the generic producer. For example, the Commission found there to be a transfer of value where Lundbeck entered into an agreement pursuant to which a generic producer agreed to distribute citalopram in accordance with certain obligations so as to secure a significant level of profit guaranteed by Lundbeck.

Within the context of the competitive dynamics of the pharmaceutical sector, the Commission considers that transfers of value delaying (or removing) generic entry could still prove profitable for both the originator company and the relevant generic producers. This is as the profits generic producers could expect to receive on entry would likely be lower than the overall loss of profit that the originator company would experience as a result of generic entry. On this basis, it could remain commercially viable for an originator company to preserve the "monopoly rent" associated with its patent, and to share a proportion of this with generic producers in exchange for their holding off market entry with generic products.

As such, the Commission indicates that transfers of value aimed at persuading generic producers to desist from efforts to enter the market have the clear potential to infringe Article 101 TFEU. Moreover, the Commission asserts that even when generic producers agree to limit their activities by reference to the scope of a potentially infringed patent, such agreements are likely to breach Article 101 TFEU where such limitations cannot be justified (i.e. pursuant to Article 101(3) TFEU), and do not result from the parties' assessment of the strength of the patent, but rather from a "transfer of value overshadowing this assessment and inducing the generic undertaking not to pursue its independent efforts to enter the market".

Possibility of legitimate transfers of value

Notwithstanding this, the Commission acknowledges that, in specific legal and commercial circumstances, transfers of value between originator companies and generic producers may be instrumental to concluding an acceptable and legitimate settlement.

For example, this may be the case where the generic producer does not initially enter the market as a result of threats or litigation commenced by the originator company, but subsequently each party reaches the conclusion that it is highly likely that the patent will be held invalid or not infringed (or both).

In such circumstances, the decision provides that a settlement agreement allowing immediate market entry by the generic producer could also legitimately include a payment from the originator company to the generic producer in respect of damages as result of this delayed entry.

Agreement of exclusions beyond the scope of a "potentially infringed" patent

Further, the Commission considers that the agreement of exclusions beyond the scope of a patent (e.g. in relation to a future production processes not covered by the disputed patent) provides greater clarity that the generic producer's willingness to desist from attempting market entry is based upon financial incentives, rather than an objective assessment of the strength of the patent. Per the Commission, "such restrictions are all the more likely to be illegal".

The significance of parties' internal documents

It is apparent that the Commission's assessment of the agreements entered into between Lundbeck and the generic companies was framed by reference to the parties' contemporaneous internal documents.

This highlights the need for companies to ensure that their internal documents properly reflect their actual position and intentions, and that employees fully understand that the documents they create could later be reviewed in the context of an investigation by a competition authority into suspected infringements of national and/or EU competition law or be the subject of disclosure in national court proceedings.

For example, Lundbeck's own internal documentation included an estimate that there was a 60% chance that a process patent it was asserting against generic producers would be found invalid by a judge in the United Kingdom. Further, a number of Lundbeck's internal documents appear to express concerns regarding competition law compliance in relation to "deals" being done with the generic producers (e.g. "We have made a number of deals; although it is tricky… it is illegal to block competition").

In view of the significance of companies' contemporaneous internal documents to competition law investigations, it would be prudent for companies to ensure that:

  • they establish and adhere to a clear protocol in relation to the nature of the information they record internally; and
  • wherever appropriate, they take active steps to ensure that relevant documents attract and retain legal privilege.

The commercial significance of citalopram to Lundbeck

In the 1970s, Lundbeck's scientists invented a new pharmaceutical molecule, now known by the international non-proprietary name 'citalopram'. Citalopram is an anti-depressant drug in the class of molecules known as selective serotonin reuptake inhibitors.

Lundbeck is the proprietor of patents relating to citalopram. In addition to the patent relating to the molecule itself, which was filed in 1977, Lundbeck also developed and patented a number of processes to produce citalopram more efficiently and in purer form than the original process described in the first molecule patent.

With additional protection from a supplementary protection certificate, Lundbeck's patent protection for the citalopram molecule lasted until 2002 - 2003 in various EU countries; the company's patent protection for its proprietary processes for manufacturing citalopram extended beyond this period.

Success of citalopram in Europe

As with all pharmaceutical products, the process of conducting clinical tests and trials to demonstrate the safety and efficacy of the product as a medicine (in this case, an anti-depressant) took a significant amount of time.

Lundbeck did not introduce citalopram onto the European pharmaceutical market until 1989, when it was introduced in Denmark. However, sales of citalopram in most of the rest of Europe (and in particular the larger country markets) were not introduced until the mid-1990s.

By 1996, sales of citalopram in Europe were in the order of €100 million per annum and accounted for about 50-60% of all Lundbeck's European sales. By 2002, European sales of citalopram were in the order of €500 million and accounted for 80-90% of all Lundbeck's European sales. Citalopram was therefore an extremely important product for Lundbeck's business, notwithstanding the expiry of the molecule patent in 2002 - 2003.

From Lundbeck's internal documents, the Commission concluded that the company had significant concerns regarding the threat of generic entry following the expiry of patent protection for the citalopram molecule. In particular, the Commission found that, by the end of 1998, Lundbeck had identified launching 'escitalopram', a successor product to citalopram, as a key strategy to counter the threat of generic entry.

Escitalopram was developed and patented by Lundbeck as separate molecule. That molecule was an isomer of citalopram, but held to be a separate product from citalopram, by both regulatory and patent authorities around the world, and the validity of patents protecting escitalopram have been found to be valid in jurisdictions around the world. Escitalopram is not the subject of the Commission's decision.

Given the strategy to launch escitalopram as a successor to citalopram, the Commission considered that Lundbeck had a clear motivation to attempt to delay the entry of generic citalopram until after this "successor launch". Such a delay would enable Lundbeck to attempt to maximise the number of patients switching from citalopram to escitalopram as the successor product, and to seek to ensure that the escitalopram achieved a price reimbursement level relative to that for citalopram prior to any price erosion resulting from generic entry.

While Lundbeck's process patents did deter certain generic producers from seeking to sell generic citalopram, it appears that a number of producers remained intent upon attempting to enter with a generic product.

Given perceptions of Lundbeck's process patents, this is perhaps unsurprising; placing particular reliance upon the parties' internal documents and public statements, the Commission concluded that the process patents were not regarded as strong. In any event, the Commission held that Lundbeck's process patents could not cover every process by which citalopram could be produced.

Safeguarding citalopram revenues and securing the launch of escitalopram

Where generic producers remained intent upon attempting entry, the Commission found that Lundbeck opted to conclude agreements with these producers.

Although these agreements did not conclusively resolve any patent disputes, they saw Lundbeck make transfers of value to the generic producers (taking into account the turnover or profit that each producer expected to achieve on successful entry), and the generic producers delay their attempts to sell generic citalopram.

The Commission found that the operation of the agreements during this period served to safeguard citalopram revenues for Lundbeck running to many millions of Euros, which could otherwise have been eroded by the price competition of generic entry. Further, the delayed generic entry enabled Lundbeck to secure the launch of escitalopram as the successor product to citalopram.

As such, on the specific facts on the case, the Commission held that Lundbeck and the generic producers had not entered into the various agreements on the basis of their own assessments of the strengths of Lundbeck's process patents for citalopram. Rather, the Commission considered that these agreements were concluded on the basis of the transfers of value made by Lundbeck to the generic producers, with these value transfers overshadowing the assessment of the process patents, and inducing the generic producers not to pursue their efforts to enter the market.

On this basis, the Commission concluded that the agreements had removed at least the potential competition resulting from possible generic entry, and by their very nature had the object of restricting competition. Insofar as the Commission did not consider that the parties were able to evidence the fulfilment of the cumulative criteria for exemption provided by Article 101(3) TFEU, the Commission held that the "transfer of value" agreements concluded between Lundbeck and the generic producers infringed Article 101 TFEU.


As the Commission's decision makes clear, while a patent holder has the right to oppose possible infringement of its patent, patent law does not provide a right to pay actual or potential competitors to stay out of the market or to refrain from challenging a patent prior to entering the market. Furthermore, the means used by patent holders to defend their rights may be incompatible with their obligations under EU competition law - as the Commission states in the decision: "the means used by patents holders to defend their rights matter."

Notwithstanding the appeals pending before the General Court, the Commission's decision, in conjunction with the size of the fines imposed, sends a salutary warning for all pharmaceutical companies and their advisers on the need to consider compliance with EU competition law, particularly in the context of settling disputes in respect of "potentially infringed" patents (i.e. patents which a competent court has not held to be valid and infringed).

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