Competition law has often found itself in turbulence with intellectual property laws, especially the patent regime. The best description of this tussle possibly is by William Coston, who states that competition and intellectual property laws are like “legal tectonic plates – always in motion, occasionally converging, occasionally diverging, and occasionally moving in parallel.”[1] The debate of whether competition and intellectual property laws are divergent systems or are hybrid mix is age-old and is not the subject matter of this article. However, this article aims to study whether a particular practice prevalent in the pharmaceutical sector violates competition law principles.
This is the practice of big pharma giants entering into reverse payment agreements with the generic drug companies. Reverse payment agreements, more commonly called ‘pay-for-delay’ agreements, are agreements where pharma companies transfer a sum of money to generic drug manufacturers.[2] They, in return, delay the launch of their generic drugs in the market. These delay agreements can arise as a monetary settlement between the pharma company and the generic manufacturer, where the generic maker drops the challenge to the patent of the pharma company and delays the launch of its product, or they can be simply an arrangement where the pharma company wants to garner profits, even after the expiry of their patent.
Pay for delay agreements are a mutually beneficial arrangement between rivals. It allows the patent-holding pharma company to smoothly enjoy its patent over the product sans any competition, at the same time, the generic maker gets a decent sum, close to the potential revenue it would have earned had it entered the market.[3] It further prevents litigation costs for the generic maker that it would have spent on challenging the patent. For the patent holder, it simply prevents any challenge to its application and subsequent grant of patent.[4] From the sound of it, it is an ideal arrangement for two business enterprises, a perfect middle ground of mutual interest. However, from the consumer perspective, it takes away the accessibility to low-cost medicines, and causes huge detriment. Due to this, such agreements become a bone of contention in competition regimes across the world.
The General Court of the European Union (‘EU’) first recognized pay-for-delay agreements as being anti-competitive in 2016 in the case of Lundbeck where it found that such arrangements create limitations on market entry of potential competitors i.e. generic drug makers.[5] Further, it held that the agreement goes beyond the protection that comes with a patent, to even protect the holder from those generic manufacturers, whose drugs look to potentially infringe the patent but would not actually do so.[6] In the recent 2020 decision of the Court of Justice of the EU in the GlaxoSmitheKline (‘GSK’) case, the court held that pay-for-delay agreements could be anti-competitive if they prevent the entry of ‘potential competitors’ i.e. undertakings which show ‘a firm intention and an inherent ability to enter the market.’[7] For this, it considered that those generic makers, who start the process of drug production and ready themselves for market launch, as having the intention to pose competition. As per the GSK judgment, the enquiry would boil down to the facts of each case and the clause of each arrangement. If an arrangement amounts only to a pecuniary value, which prevents litigation from the generic maker, then it could be stated to be a measure to protect one’s patent. However, if the same arrangement goes beyond such costs to substantially include the potential market revenue, then it would be deemed as being an arrangement to incentivise generic makers to stay out of the market.
In India, such agreements can be scrutinised under Section 3 of the Competition Act, 2002, by arguing that they cause appreciable adverse effects to competition.[8] However, the devil lies in the details of each agreement. An agreement that has been entered into during the lifetime of the patent can be stated to be a reasonable agreement by the patent holder. The patent holder thus, would like to take the defence under the exception of Section 3(5), which allows for restrictions necessary to protect one’s intellectual property rights. Therefore, agreements entered into for each of these two periods needed to be understood separately for their anti-competitive effects.
Agreements during subsistence of Patent
Patents in India are awarded retroactively from the date of application,[9] which means that a person whose application made in 2010 gets accepted in 2020, the patent period of 20 years would be deemed to have started from the date of application in 2010, leaving the holder with only 10 years of future patent protection. While the Patents Act states that during the period of application to grant of a patent, the privileges accorded to the patent holder would be the same as if the patent had been granted,[10] however, a patent holder can only file against any infringement during this period after the actual grant of the patent.[11] Thus, practically the implementation of the patent is not retroactive, and any product in the market, such as generic drugs, which violates the patent of the patent holder, would only have to be withdrawn post the acceptance and not post the application. For pharma companies, by the time this opportunity to sue for infringement arises, the market gets flooded with cheap generic drugs. Hence, instead of pursuing infringement claims against generic drug manufacturers for retroactive violation of patent, pharma companies simply enter into a reverse payment agreement to delay the entry of these drugs from the period of application to the expiration of the patent period.
Such an additional measure undertaken by the patent holder can be argued as a reasonable condition imposed to protect the right granted under the Patents Act, and thus falling within the exception under Article 3(5)(b) of the Competition Act.[12] This is true since the Indian Competition Act allows for an express exemption for agreements that are entered to protect intellectual property rights, which is in contrast with Article 101 of the Treaty on the Functioning of the EU (in question in Lundbeck and GSK), where any such exemption is absent.[13] In light of this, it can be argued that as per the Indian competition regime, a patent-holding pharma company and a generic firm cannot be potential competitors, as during the subsistence of the exclusive right of patent, there cannot exist any lawful competition between the two entities. As the Competition Act only protects lawful competition, any arrangement that is entered in the assertion of exclusive right and to preclude unlawful competition should be valid.
Without the agreement, the generic company might not only decrease potential market revenue but might create litigation costs by challenging the patent application to prevent and delay the very grant of patent, creating unnecessary trouble for the pharma company. To prevent this, pay-for-delay agreements can act as an intensive for generic manufacturers to hold their stocks and let the patent holder enjoy its monopoly. The monopoly does not mean that the holder will use it to soar the prices, as has been held in Union of India v. Cynamide India Ltd.,[14] the state can always fix the price limit in the interest of the public. Moreover, should the situation be such that the drug is required for a public emergency or health crisis, then the Patent Act allows for the patent’s compulsory licensing.[15] In this situation, the monopoly fairly allows the holder to profit from the investment that it has put in securing a patentable process of drug manufacturing.
Agreement post the expiration of Patent
A second period for which companies enter into such agreements is the period post the expiration of the patent when pharma companies provide the generic manufacturers their potential revenue for the period of delay in exchange of them to stop the entry of their drugs in the market.[16] Post the patent period, the exclusive right of the patent holder does not remain and thus, both the original manufacturer and the generic manufacturer are effectively market competitors. Resultantly, any such reverse payment arrangement becomes a horizontal arrangement between two competitors. It leads to determination of sale prices and control over provision of services both of which are considered as appreciable adverse affect on competition as per Section 3(3) the Competition Act. Consequently, the agreement is anti-competitive.
Borrowing from the GSK case, it could be stated that in this period, the arrangement is solely to compensate the generic maker for market revenue, and is thus, a purely economic arrangement with no intention to protect any right. Such an arrangement, in its practical essence, becomes a scheme to extend the monopoly of the original manufacturer even beyond the expiry of the patent. Moreover, generic makers have all the means and rights to prepare themselves for market launch and show an intention to pose competition, and thus the agreement prevent market entry. While this may benefit the original pharma company and the generic manufacturer, it has real disadvantages for the consumers. Such arrangements become especially worrisome from a public policy perspective, in countries such as India, where a large chunk of the population cannot afford to buy original medicines and depend on cheap generic ones.[17] Not only is the pharma sector sensitive due to the subject matter being medicine and safety, but it is also unique as the prices are not determined by the ultimate consumer, i.e. the patient. This characteristic creates more risk of potential abuse stemming from anti-competitive practices, ultimately causing consumer injury.
Conclusion
To strike a balance between the intellectual property regime and the completion law, it is best that the reverse payment arrangements are allowed during the patent’s subsistence. Preventing such agreements during subsistence of the patent would water down the strength of intellectual property rights and would be a disincentive for companies to innovate. At the same time, any such agreements being allowed post the patent’s expiration should be held anti-competitive not only on account of preventing market entry but also for harming consumer interests.
This article has been authored by Aatmik Jain, Third-year student, The West Bengal National University of Juridical Sciences (WBNUJS), Kolkata
[1] William D. Coston, The Patent-Antitrust Interface: Are There Any No-No’s Today?, January 2013, available at https://www.venable.com/insights/publications/2013/01/the-patentantitrust-interface-are-there-any-nonos (Last visited on 6 September, 2020).
[2] Scott Hemphill, Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem, 81 N.Y.U. L. Rev. 1553 (2006)
[3] Ibid.
[4] Ibid.
[5] Lundbeck v. Commission, Case T-472/13.
[6] Ibid.
[7] GlaxoSmithKline plc, Case C-307/18.
[8] The Competition Act, 2002, Section 3 states that agreements which cause appreciable adverse effect to competition are void.
[9] The Patent Act, 1970, Section 53.
[10] The Patent Act, 1970, Section 11A(7).
[11] Ibid.
[12] The Competition Act, 2002, Section 3(5)(b) states that agreements reasonable conditions imposed for protecting the rights conferred upon under the Patents Act, 1970 are not restricted by the limits of Section 3.
[13] Article 101 of the Treaty on the Functioning of the EU prohibits any anticompetitive agreements that disrupt disrupt free competition within the internal market.
[14] Union of India v. Cynamide India Ltd, 1987 AIR 1802.
[15] The Patent Act, 1970, Section 92.
[16] Mondaq, Rebecca Mathai, India: Race to the Generic Launch, May 2019, available athttps://www.mondaq.com/india/patent/805478/race-to-the-generic-launch(Last visited on 7 September, 2020); Harvard Business Review, Erin Fox, How Pharma Companies Game the System to Keep Drugs Expensive, April 2017, available at https://hbr.org/2017/04/how-pharma-companies-game-the-system-to-keep-drugs-expensive (Last visited on 7 September, 2020).
[17] SS Joshi, YC Shetty, S Karande, Generic Drugs: The Indian Scenario, 65(2) J. of Postgrad. Med., 67 (2019).
Picture Source: Know Competition Hong Kong
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