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Clifford Chance

Clifford Chance

HEALTHCARE & LIFE SCIENCES

Talking Tech

Antitrust review of reverse payment agreements to settle patent disputes – the emerging legal landscape in Mainland China

Antitrust Intellectual Property Healthcare & Life Sciences 27 November 2023

A new Judicial Interpretation on Antitrust Civil Litigation (published in draft) unveils the People's Republic of China (PRC) Supreme People's Court's inclination to view reverse payment (also known as "pay-for-delay") agreements between pharmaceutical originators and generic entrants in the context of patent dispute settlements as a violation of the PRC's Anti-Monopoly Law. In the following sections we consider the emerging PRC legal landscape for reverse payment agreements and their potential anti-competitive effects, compared with established practices in the European Union and the United States.

What is reverse payment / pay-for-delay?

The concept of reverse payments emerged from patent litigation within the pharmaceutical sector. When a generic drug provider challenges the patent validity of a brand-name drug, the brand-name drug manufacturer may, to avoid risking the loss of its patent, be incentivised to settle with the generic supplier with the latter agreeing not to challenge the patent and/or put the generic product to the market before the patent expires. In exchange, the generic manufacturer may receive some form of payment or value transfer from the originator – known as a "reverse payment", or "pay-for-delay" settlement, in the sense that the originator pays the generic provider for delaying its entry into the market.  These settlements benefit the brand-name drug manufacturer with patent exclusivity that maintains higher drug prices, and the generic manufacturer with the payment received or value transferred. However, this practice has sparked controversy and undergone legal scrutiny for potential antitrust violations, as it may limit the competition between the originator and generic drug provider that could potentially lead to patent invalidation and a delay in the reduction of the drug's price provided by an earlier generic market entry, ultimately hurting consumers.

EU Practice

In Europe, patent dispute settlements with reverse payment/"pay-for-delay" agreements have been under antitrust scrutiny and may risk being deemed as restricting competition "by object" under Article 101(1) of the Treaty on the Functioning of the European Union (TFEU).  A "restriction by object" refers to actions inherently detrimental to the functioning of competition without the need to demonstrate actual or potential anti-competitive effects.  

In a series of recent cases, including Generics (UK) Ltd and Others v. Competition and Markets Authority (Case C‑307/18), Lundbeck v. Commission (Case C-591/16 P) and Servier SAS and Others v. Commission (Case T-691/14), the European Commission (EC), the General Court (GC) and the Court of Justice of the European Union (CJEU) consistently ruled that reverse payment agreements constitute restriction to competition "by object" if the value transferred to the generic company by the originator "cannot have any explanation other than the commercial interest of both the holder of the patent and the party allegedly infringing the patent not to engage in competition on the merits".

In this context, the CJEU has considered or confirmed the reasoning that:

  • the presumption that a granted patent is valid under patent law does not exclude the existence of potential competition from a generic medicine manufacturer, which can be achieved by challenging the patent and entering into the market with a generic version of that medicine.
  • the background that the agreements at issue derive from the settlement of genuine patent disputes, the outcome of which is uncertain, shall not preclude the application of antitrust law, but rather shows the existence of potential competition between the parties.
  • it is not for the competition authority to review the strength of a patent or the probable outcome of a dispute between the patent holder and the generic manufacturer were it to be brought to an end.  

The CJEU ruled, rather, that the competition authorities, in their assessment of whether there is a "restriction by object" under Article 101(1) of the TFEU, are to consider:

  • whether it is established that the manufacturer of the generic medicine has in fact a firm intention and an inherent ability to enter into the market, and that its market entry does not meet barriers that are insurmountable; and
  • whether it is clear that the net gain from the transfer of value by the originator to the generic manufacturer can have no explanation other than the commercial interest of the parties not to engage in competition on the merits.

However, the CJEU acknowledged that a generic manufacturer could decide to abandon a patent challenge and market entry after assessing the chance of success in the legal proceedings, and that the mere fact of a settlement involving the transfer of value does not mean the agreements should in all cases be a "restriction by object".  The CJEU acknowledged such "justifiable" value transfers may include, in particular, (1) compensation for the costs or disruption caused by litigation between the parties; (2) remuneration for the actual supply of goods or services; or (3) the manufacturer of the generic medicine discharging undertakings, particularly financial, given by the patent holder to it, such as a cross-undertaking in damages. (See para. 84-86, Generics case.)

Following the reasoning of the EU antitrust authorities in these cases, the "competition interest" that should not be jeopardized by unjustifiable reverse payments is interpreted broadly as the freedom for generic manufacturers to challenge patents and enter into the market, while the actual probability of success of challenge – in view of the strength of the patents – are not considered.  Hence, the possibly "justifiable" reasons for reverse payments are limited.

US Practice

In the landmark US decision FTC v. Actavis, Inc., the US Supreme Court established that reverse payment agreements are not presumptively unlawful and require a "rule of reason" analysis: such agreements can be deemed anti-competitive if they are 'large and unjustified'.

In the Federal Trade Commission v. AbbVie Inc case, the Third U.S. Circuit Court of Appeals adhered to the Actavis standard that the reverse payment or other consideration must be 'large and unjustified'.  It was determined, however, that a plaintiff could meet this pleading standard without having to: (i) provide a detailed description of the hypothetical scenario assuming no reverse payment, (ii) calculate the exact size of the payment or (iii) pre-emptively address every possible justification for the payment.

More recently, in the In re Opana ER Antitrust Litigation, despite the transfer of value, the jury found for the defendants, taking the view that the settlement agreement provided for an earlier entry date and broader licence agreement than otherwise would have occurred, and thus it did not harm competition.

When compared it appears that the EU maintains a more stringent regulatory stance than the US regarding reverse payment agreements. While both jurisdictions consider these agreements under antitrust laws, the European authorities have established that such agreements can be seen as "by object" infringements. On the other hand, the US approach is not to presume these agreements to be unlawful, but rather to apply a "rule of reason" analysis. The judgment is often based on whether the reverse payments are 'large and unjustified'. 

Trend in China

Prior to the publication of the Draft Judicial Interpretation, the PRC Supreme People's Court first addressed a reverse patent settlement in the 2021 AstraZeneca v. Jiangsu Aosaikang Pharma case, and confirmed that reverse patent settlements are subject to antitrust scrutiny by the courts.

In the court's analysis, reverse payment agreements are not automatically considered violations of antitrust law. Instead, their legality will be evaluated based on the following factors: (i) the possibility of the relevant drug patent rights being deemed invalid if no such settlement were reached; (ii) the degree to which such reverse patent settlement extends the monopoly period of the patent holder or delays the market entry of generic drugs, without a justifiable reason. This decision marks a significant development in confirming the PRC courts' intention to extend antitrust judicial review to reverse patent settlements. Notably, this judicial stance aligns more closely with US practice, which does not presume the invalidity of reverse payment agreements "by object" although, in the US, the validity of the patent(s) in dispute is not a primary factor that must be reviewed. In AstraZeneca, the Supreme People's Court suggested that counterfactual analysis be conducted when assessing the competitive effects of a given reverse payment agreement; however, the court set out its view on the rules of analysis without applying such analysis to the specific case facts to reach a conclusion, as it found such further analysis or conclusion was not necessary to determine the case.

The Supreme People's Court has further clarified – or somewhat modified – its position on reverse patent settlements under Article 23 of the Draft Judicial Interpretation, which provides that a reverse payment agreement can be deemed a monopolistic agreement if:

  • the owner of the originator drug patent provides or commits to provide the generic manufacturer with a high-value payment or other form of interest transfer
  • the generic manufacturer undertakes not to challenge the validity of the patent or delays entry into the relevant market of the branded drug.

Except that such agreements can be justified if there is evidence proving that the value transfer is solely for indemnifying the cost of patent disputes concerning the reference drug, or if there exist other justifiable reasons.

Such a position does not entirely align with the position in the AstraZeneca case and seems to follow more closely the EU's stance, where reverse payment agreements may be viewed as "by object" infringements if they potentially restrict market competition.  Nevertheless, the language of Article 23 of the Draft Judicial Interpretation seems to replace the more complicated antitrust legal analysis of reverse payment agreements with certain simplified elements that would lead to a presumption of violation.  Following the release of the Draft Judicial Interpretation and the AstraZeneca case, there have been no further updates or developments in either judicial practice or administrative enforcement with respect to the antitrust scrutiny of reverse payment agreements. It is yet to be seen whether the Draft Judicial Interpretation will be revised in its further legislative review and approval process.