An update on Pay-for-Delay

So-called pay-for-delay cases are on their way to becoming a classic in the intersection of pharma and antitrust. As anything in this space, they are also somewhat political given the interest of public national health systems in lower prices. An opinion delivered this week by Advocate General Rantos to the European Court of Justice confirms the European Commission’s approach to these cases. A good opportunity for a recap of the underlying case, the legal issues, and an outlook of what might lie ahead.

Background on Pay-for-Delay Cases

Pay-for-delaycases involve agreements based on which the manufacturer of a formerly patent-protected pharmaceutical compensates a generic drug manufacturer to delay the entry of a generic pharmaceutical into the market. Such agreements usually come in the form of settlements following patent disputes, and have been subject to significant fines.

Regulators are primarily concerned that pay-for-delay agreements can restrict competition, maintain high drug prices, and harm consumers who would benefit from cheaper generic alternatives.

Case at Hand: Teva/Cephalon

The case now in front of the European Court of Justice (ECJ) relates to an agreement between Teva and Cephalon, who were fined EUR 60.5 million in 2020 by the European Commission for concluding a pay-for-delay agreement concerning the drug modafinil. Modafinil is used to treat sleep disorders and was a significant product in Cephalon’s portfolio. When Teva (and others) wanted to enter the market with a generic equivalent, a patent dispute ensued, and ultimately the parties settled. What makes this case special: The main compensation for Teva agreeing not to compete in the modafinil market did not consist of a flat-out payment but of a bundle of measures, including license and supply agreements.

In its fining decision, the Commission concluded that the settlement agreement between Teva and Cephalon constituted a restriction of competition both by object and by effect.

Teva (not a stranger to our keen readers, see inter alia here) and Cephalon appealed the Commission’s decision to the EU’s General Court, which upheld the Commission’s findings in October 2023. Teva and Cephalon then appealed to the ECJ. As part of the proceeding in front of the ECJ, Advocate General Rantos issued an opinion on the appeal this week.

Legal Issues

The primary legal issues in this case revolve around the characterization of the settlement agreement as a restriction of competition by object and by effect. The appellants argued that the Commission and the General Court erred in their assessment, particularly in applying the legal tests for identifying a restriction by object and by effect:

• Restriction by Object: The appellants contended that the Commission and the General Court incorrectly applied the relevant legal test from previous case law, which requires demonstrating that the only plausible explanation for the commercial transactions in the settlement agreement was to induce Teva to refrain from competing with Cephalon. They argued that the commercial transactions had plausible pro-competitive explanations, such as compensation for litigation costs and legitimate commercial arrangements.
  
• Restriction by Effect: The appellants also challenged the finding that the settlement agreement had restrictive effects on competition. They argued that the Commission failed to demonstrate actual negative effects on competition, such as the removal of potential competition from the market.

However, in his opinion, Advocate General Rantos, supports the Commission’s and the General Court’s findings. The opinion holds that the commercial transactions in the settlement agreement could not be justified by any plausible pro-competitive explanations and that the agreement constitutes a restriction of competition by object. This is primarily because the commercial transactions within the agreement cannot be justified by any plausible pro-competitive explanations. Rantos points to the General Court’s finding that the transfers of value from Cephalon to Teva was not linked to legitimate compensation for litigation costs or genuine commercial arrangements. 

Rantos also finds that it was not necessary to demonstrate potential anti-competitive effects of the agreement since it can already be classified as a by object-infringement.

Outlook

The opinion of Advocate General Rantos is not binding on the ECJ, but such opinions are often highly influential. If the ECJ follows the Advocate General’s recommendation, it will uphold the General Court’s judgment and thus the Commission’s decision, thereby reinforcing the – very strict – stance against pay-for-delay agreements in the pharmaceutical sector. This would underscore the importance of ensuring that settlement agreements do not restrict competition – which would (continue to) be very tricky if the ECJ sides with Rantos.

The case also highlights the vigilance of antitrust regulators in scrutinizing agreements in the pharma space. Pharma companies must carefully consider the competitive implications of their agreements and ensure compliance with antitrust laws to avoid substantial fines and legal challenges.


Photo by Brett Jordan on Unsplash