Patently uncertain: developments in pay-for-delay agreements in Australia

Published On 11/06/2020 | By Christopher Kew | Cartels, Enforcement, Reform

Pay-for-delay agreements in the pharmaceutical sector have attracted significant scrutiny from competition regulators in the United States and the European Union over the past decade. With the repeal of the intellectual property exemption in the Competition and Consumer Act 2010 (Cth) (CCA) last year, these types of agreements are now also at greater risk of regulatory attention in Australia.

However, despite the Federal Government indicating in August 2017 that it intended to introduce reforms that would enable the ACCC to better monitor these types of agreements, it is unclear—almost three years on—whether and when these reforms will ultimately come to fruition.

What are pay-for-delay agreements?

Generally speaking, pay-for-delay agreements involve an arrangement between an originator manufacturer (i.e. the patent holder) and a generic pharmaceutical manufacturer (that is seeking to market its generic drug) to settle a patent infringement dispute. Under the settlement agreement, the generic manufacturer receives a monetary payment (or some other transfer of value from the originator to the generic). In return, the generic manufacturer agrees to delay marketing its version of the originator’s drug.

There are often significant commercial and administrative benefits to settling complex patent disputes, especially due to the cost and time associated with litigation. However, competition regulators, particularly in the EU and US, have increasingly scrutinised these arrangements due to their potential to prevent or delay generic competition from entering the market (especially in circumstances where a patent is not valid or has not been legitimately infringed). In some instances, enforcement action has led to very substantial penalties. For example:

  • In June 2013, the European Commission (EC) imposed a €93.8 million fine on Lundbeck and a total fine of €52.2 million on four generic pharmaceutical companies for entering into a pay-for-delay agreement, which was affirmed by the General Court in September 2016. Lundbeck is currently appealing its fine to the European Court of Justice.
  • In July 2014, Servier was fined €331 million by the EC for entering into a pay-for-delay agreement with five generic manufacturers of high blood pressure medication. Servier’s fine was subsequently reduced to €228 million by the General Court in December 2018.
  • In May 2015, Cephalon agreed with the US Federal Trade Commission (FTC) to make a total of US$1.2 billion available as compensation to purchasers of its sleep-disorder drug that overpaid because of a pay-for-delay agreement it entered into with four generic manufacturers. Under the pay-for-delay arrangements, the generic competitors abandoned their challenge to Cephalon’s patent and agreed to stay off the market for six years, in return for monetary payments.

Monitoring of pay-for-delay agreements in the United States and EU

In light of these concerns, competition regulators in the US and EU have played an ongoing role in monitoring pay-for-delay agreements in the pharmaceutical sector.

  • In Europe, the European Commission has undertaken monitoring exercises on an annual basis from 2010 to 2018. As part of this, the EC has issued formal requests for information to a sample of originator and generic companies, requesting copies of all relevant patent settlement agreements. The last report on the EC’s monitoring exercise was published in March 2018. This report found that the proportion of patent settlements involving some payment from the originator to the generic company (or some other value transfer) had continued to decrease.
  • In the United States, originator and generic pharmaceutical manufacturers are required to provide the FTC and the Department of Justice with copies of patent settlements that they enter into within ten business days of executing the settlement agreement. A failure to file with the FTC may result in civil penalties of up to US$11,000 per day. Like in Europe, the FTC has noted, in its last report published in May 2019, that the number of settlements involving a payment from the originator to the generic manufacturer has declined.

The delay in Australia

Entering into a pay-for-delay agreement may contravene Australia’s competition laws if it involves a company making or giving effect to contract, arrangement or understanding that contains cartel provision. In addition, these types of agreements will be prohibited if they have the purpose, effect or likely effect of substantially lessening competition in a market.

To date, the ACCC has not taken any action against a pharmaceutical company for entering into a pay-for-delay agreement. However, in the Productivity Commission’s (PC) Final Report into Intellectual Property Arrangements in Australia (published in September 2016), the PC raised concerns that these types of settlements could limit the number of products on the market and any price reductions associated with competition, to the detriment of both consumers and the Government.

The PC described Australia as having taken a “see no evil” approach to these settlements: while it noted that there was no evidence of these settlements occurring in Australia, it considered that this may simply reflect a lack of monitoring arrangements. It noted that, in jurisdictions where monitoring occurs, pay-for-delay is found to be costly.

To address this, the PC recommended a mandatory reporting regime, where settlements between originator and generic pharmaceutical companies would be reported to the ACCC to enable it to detect anti-competitive pay-for-delay agreements. This system would be based on the model used in the US and would be in place for a period of at least five years, after which it recommended that the Federal Government should review the regulation for pay-for-delay agreements (and other potentially anti-competitive arrangements in the pharmaceutical sector). The ACCC would also be responsible for issuing guidance on its approach to monitoring these types of arrangements.

In August 2017, the Federal Government announced, in its response to the PC’s Report, that it would support this recommendation in principle, and acknowledged that pay-for-delay agreements have the potential to seriously harm competition and innovation in the pharmaceuticals industry. In particular, it noted that pay-for-delay arrangements reached overseas between foreign companies have the very real potential to impact markets in Australia.

In its response, the Government stated that a reporting and monitoring regime would improve transparency and better equip the ACCC to detect anti-competitive behaviour. It noted that it was considering how to design the system in order to:

  • address issues associated with capturing agreements reached overseas that have an impact on Australian markets; and
  • ensure that the scheme has suitable mechanisms to ensure that companies comply with their obligation to lodge these agreements with the ACCC.

In its 2017-18 Annual Report, published in October 2018, the ACCC noted that it had been working with the Intellectual Property Policy Group to inform the Government’s future consideration of a legislative response. However, while the Government has implemented some of the proposals in the PC’s Report, including the repeal of the intellectual property exemption from the CCA, it has yet to announce any formal proposals to implement this recommendation almost three years on.

What’s next for Australia?

While pay-for-delay agreements have continued to attract scrutiny in the EU and the US, they have not drawn the same level of public attention in Australia and the Asia-Pacific region.

However, the repeal of the intellectual property exemption in the CCA potentially now means that there is an increased risk that these types of arrangements may contravene Australian competition law or, at the very least, attract greater attention from the ACCC.

In addition, while regulators overseas have focused on settlements in the pharmaceutical industry, it is possible that the same concerns may arise in the context of other settlements involving intellectual property.

The regulation and monitoring of pay-for-delay settlements is likely to raise a number of complex legal questions relating to how Australia’s competition laws apply to these settlements. For example, what factors will a Court consider to infer whether the arrangement has the ‘purpose’ of preventing, restricting or limiting the supply of pharmaceutical products? What inferences will the Court make about the size of the value transfer from the originator to the generic manufacturer? To what extent will the Court interrogate the validity of a patent as part of its competition assessment? While the US and EU have had the benefit of a decade’s worth of case law, it may be some time before these issues are fully ventilated in Australia.

Image credit: Medications by / Flickr / CC0 1.0 / Remixed to B&W and resized

About The Author

is a Solicitor based in the Sydney office of King & Wood Mallesons in the Competition practice.

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