May 10, 2021 additional judgment of the Competition Appeal Tribunal (CAT) in the Paroxetine case supports the EU’s approach to so-called “pay-for-delay” patent regulations and confirms the 2016 infringement decision issued by the Competition and Markets Authority (CMA). It also reduces fines imposed on parties.
However, the main point of interest may be the unusual approach the judgment takes to market definition. It seems that the only way to make sense of the judgment on this point is to recognize that the CAT takes a different legal test to determine the relevant market before and after when generic competitors are preparing to enter the market. In the opinion of the authors, this makes little legal or economic sense. It does, however, allow the CAT to respect EU case law while maintaining the original decision of the CMA. Indeed, a questionable approach to patent regulations seems to have led to a questionable approach to market definition.
In 2016, the AMC find than GlaxoSmithKline (GSK) and Alpharma Limited and Generics (UK) Limited (generics) had violated EU and UK competition law by entering into a series of agreements that delayed entry of the antidepressant drug paroxetine. The relevant agreements, dating back to 2001, settled disputes relating to patents held by GSK relating to paroxetine. In return for payments and other transfers worth over £ 50million, Generics agreed not to deliver paroxetine to the UK until 2004.
In March 2018, the CAT issued a provisional judgment largely dismissing GSK’s and generics’ appeals against the CMA’s findings. At the same time, the CAT referred certain questions to the European Court of Justice (CJEU) for a preliminary ruling on the application of Union law. The CAT deferred its final decision pending the CJEU’s response.
In january 2020 preliminary ruling, the CJEU has confirmed that this type of transactional agreement can constitute both (i) an infringement “by object” of the competition rules (requiring no proof of any effect on competition) and (ii) a abuse of dominant position by the patent owner.
The CAT judgment
The CAT judgment dismisses all substantive grounds of appeal against the CMA’s decision, while reducing some aspects of the fines imposed. In doing so, the CAT seeks to apply the CJEU’s preliminary ruling although, as we discuss below, this causes some tension in the approach to market definition and dominance. Before addressing this particular issue, the main conclusions of the CAT are as follows:
- Generics were potential competitors of GSK in the supply of paroxetine at the time of the relevant agreements. Applying the test established by the CJEU, the CAT found that generic manufacturers were identified as potential competitors because (i) they had the intention and inherent ability to enter the UK market; and (ii) there were no “insurmountable” barriers to such entry. GSK’s patents were not seen as an insurmountable barrier to entry since there was a real dispute as to their validity and infringement. Likewise, a provisional injunction against one of the generics could not be considered an insurmountable barrier to entry since this company had continued to prepare for the trial. The CAT left open the possibility that a different analysis might apply if the patents at issue were molecules patents rather than what it called “secondary patents”.
- The purpose of the settlement agreements was to restrict competition. They did so because they involved net gains for generics that were (i) not justified by “proven and legitimate” counterparts and (ii) large enough to encourage people to refrain from entering. The net gains did not have to be greater than the profits generics would have made if they had successfully entered.
- Market definition was limited to paroxetine at the material time. While this confirmed the CMA’s point of view, the analysis is different. The CMA had based its market definition on a quantitative analysis showing that once generic alternatives entered the market, the price of paroxetine fell sharply. Consequently, it found that at all times the relevant product market was limited to paroxetine. It rejected GSK’s argument that the relevant market extended to all SSRI antidepressants (incidentally, a group including Lundbeck’s citalopram, famous for its own “pay-for-delay” case, which did not, however, include any allegation of abuse of dominance). Instead, he considered that the qualitative evidence showing no significant therapeutic distinction between paroxetine and other SSRIs was only of theoretical value given the lack of price constraint between the different drugs. The CAT, on the other hand, found that the CMA was wrong to reject this qualitative evidence in the run-up to the emergence of generic competition. It was not critical that other SSRIs did not completely limit paroxetine prices, as the demand for prescription drugs is not price sensitive. However, the CAT took note of the CJEU’s finding that the definition of the relevant market may change once generic manufacturers prepare to enter. Consequently, at the time the relevant settlement agreements were signed, the relevant market was that of paroxetine alone.
- GSK was dominant and should have been aware that it was. The CMA had ruled that GSK should have known that it was dominant given the significant reductions in paroxetine prices following the entry into the generic market. Again, the CAT ruled that AMC’s approach was wrong. Significant price reductions on generic entry could not be sufficient proof of dominance. If they were then “almost all patent holders would be dominant”. Instead, the crucial question was whether there had been a separate relevant market for paroxetine. The CAT felt that the impact of parallel imports of paroxetine into the UK should have alerted GSK to its potential dominance once preparations for generic entry created a separate market for paroxetine.
- GSK had abused its dominant position. GSK had followed a deliberate strategy of seeking to prevent the entry of generics by entering into deals that prompted the generic challenger to delay its efforts to enter the market in exchange for a significant transfer of value. He had therefore abused his domination.
With regard to the penalties imposed, the CAT concluded that the parties should have been aware of the anti-competitive nature of the agreements. Nonetheless, it overturned the CMA’s decision to impose a fine for abuse of dominance, given the changing approach to market definition and the overlap with Chapter I issues. It also reduced Chapter I fines, in particular taking into account the lapse of time between agreements and the CMA’s statement of offense. In total, the CAT has reduced fines imposed on all parties by £ 27.1million.
Commentary – the problematic approach to market definition
As noted above, the CAT appears to identify two different time periods for market definition. Prior to the emergence of potential generic competition, the relevant market covered all SSRI antidepressants. Following the emergence of potential generic competition for paroxetine, a relevant market limited to paroxetine has emerged.
The CAT indicates that, during the first period, the market must be defined on the basis of qualitative elements, namely the elements (which the AMC had ruled out) that there was no significant therapeutic distinction between paroxetine and other SSRIs. During the second period, however, the other SSRIs were no longer in the market and the market was limited to paroxetine alone.
The CAT offers no direct explanation for this change – other than observing that market definitions may vary as market conditions change. That alone cannot be enough. The only justification for limiting the market to paroxetine is proof that the price of paroxetine fell sharply when generics entered. However, this does not simply reflect a change in the definition of the market based on a change in market conditions, but a change in the basis on which the market is defined. Concretely, the passage from a definition of the market based on qualitative criteria (function) to a definition based on quantitative criteria (price). That is problematic. A change in the relevant facts can justify a change in the legal outcome, it cannot justify a change in the legal test.
It appears that what is behind this uncomfortable outcome is the difficult position the CAT was in. On the one hand, the CAT was deeply uncomfortable with the idea of a market definition based solely on price effects, particularly in the context of pharmaceutical markets where price sensitivity is rarely a driver of the demand for prescription drugs. As the CAT observed, if a sharp price reduction on the entry of generics was a sufficient basis for market definition, then “almost all patent holders would be dominant”. On the other hand, the adoption of a market definition covering all SSRIs would have called into question both the initial decision of the CMA and the preliminary ruling of the CJEU. Reading between the lines, the CAT panel remains drawn to the testimony of Professor Shapiro (much praised in the first judgment, before the referral to Luxembourg) who suggested that market definitions could change depending on the behavior considered. As the CAT rightly observes in its May 2021 judgment, the CJEU has not adopted this approach. Nevertheless, this still seems to be a motivating factor for the final decision of the CAT. Rather than cast doubt on the overall approach to late payment settlements, the CAT has chosen to muddy the waters on market definition, reaching a conclusion that is not clearly supported by the facts but – may -be as an implicit recognition of the problematic nature of this business – the annulment of the fine imposed on GSK for abuse of a dominant position.
It is to be hoped that – for the sake of future legal certainty – the removal of the fine for the abusive aspect of the case does not constitute too much of an “incentive” for GSK not to appeal this aspect of the judgment.