Anti-monopoly review of pay-for-delay agreements

By Li Qin, Zhilin Law Firm
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The Intellectual Property Division of the Supreme People’s Court’s (SPC) civil appeal ruling in the pharmaceutical patent infringement case AstraZeneca v Jiangsu Aosaikang Pharmaceutical (2021), in which the court proactively conducted a review of whether a pay-for-delay agreement could constitute a monopoly, is the first of its kind by the SPC.

Definition

Li Qin, Zhilin Law Firm, Anti-monopoly review of pay-for-delay agreements
Li Qin
Associate
Zhilin Law Firm

A pay-for-delay agreement is one where a pharmaceutical patent holder undertakes to directly or indirectly offer benefit compensation to a generic drug applicant (including disguised compensation, such as reducing the adverse effect on the generic applicant) and the generic applicant undertakes not to challenge the validity of the patent for a pharmaceutical, or delay entry into the market for the patented pharmaceutical.

As the payment direction under such agreements is opposite to that of royalties under normal patent licensing contracts, they are known as reverse payment agreements, and the form of payment is not limited solely to the payment of fees, but can include dividends, stock and rights to sell the pharmaceutical.

Pay-for-delay agreements made their debut in the US, where an original pharmaceutical manufacturer would delay marketing a generic version by offering a generic drug manufacturer benefit compensation, to achieve its objective of maintaining high drug prices. As such agreements can eliminate or restrict competition in the industry, they can readily be found to potentially constitute a monopoly.

EU and US principles

Illegal per se rule. In the Cardizem CD drug case, the original pharmaceutical manufacturer, HMR, and the generic drug manufacturer, Andrx, entered into a pay-for-delay agreement during the patent infringement action. The agreement provided that HMR would pay Andrx a benefit as consideration for Andrx undertaking to delay its entry into Cardizem CD’s patented pharmaceutical market.

Subsequently, a downstream drug wholesaler took the two to court, and the courts at each level found the settlement agreement entered into by both had an anti-competitive effect, and the acts provided for in the agreement were unlawful per se, and therefore did not require substantiation of the harm caused to competition.

Scope of the patent test. In the Valley Drug case, pay-for-delay agreements entered into by the original pharmaceutical manufacturer, Abbot, and generic drug manufacturers Geneva and Zenith, were similar to the Cardizem CD case. The circuit court held that the criteria for determining the illegal per se principle were too capricious and failed to consider the exclusive and monopolistic features of patents themselves.

Accordingly, during a trial it is necessary to consider whether the exclusive right specified in the agreement exceeds the patent’s existing scope. The circuit court found the scope of exclusion specified in the agreement did not exceed the patent’s scope of exclusion, and therefore found the agreement not to be a monopoly agreement.

Expedited review principle. In the K-Dur case, the circuit court held that presuming the validity of a patent using the scope of the patent test would lead patent holders to believe that excluding generic drugs from the market was a matter of course, therefore constituting erroneous guidance.

Accordingly, the circuit court applied the expedited review principle, holding that the plaintiff only needed to show that the patent holder had made payments to the generic drug manufacturer, after which the burden of proof would shift to the original pharmaceutical manufacturer. The original manufacturer did make payments to the generic drug manufacturer, but was unable to demonstrate that the payments were reasonable, so the circuit court ultimately held that the agreement entered into by the two parties was a monopoly agreement.

Reasonableness principle. In FTC v Actavis (2013), Solvay, the original pharmaceutical manufacturer, entered into separate pay-for-delay agreements with generic drug manufacturers including Actavis, for the drug AndroGel. The FTC instituted a legal action on the grounds they were monopoly agreements.

The supreme federal court held that the scope of the patent test was too heavily weighted towards examination during the patent term, and neglected determinations made based on antitrust laws, and that a comprehensive determination on whether such agreements restricted competition should be rendered in light of antitrust laws.

The supreme federal court also pointed out the following factors to be considered when conducting an antitrust review: (1) the potential impact of the agreement on competition; (2) the market dominance of the original pharmaceutical manufacturer; and (3) whether other means were available to the parties to resolve the conflict.

Judgment takeaways

In the AstraZeneca case, the SPC principally pointed out that: (1) the core for determining whether a pay-for-delay agreement with the purpose of avoiding challenges to the validity of a patent potentially constitutes a monopoly agreement regulated by antitrust law lies in whether it potentially eliminates or restricts competition in the relevant market; (2) concerning the harm to competition caused by the agreement, it is necessary to examine whether it substantively prolongs the duration of the patent holder’s market exclusivity and delays or excludes market entry by actual and potential generic drug applicants; (3) the point of focus of the examination of a settlement agreement under which “not challenging the patent serves as the consideration” is whether, had the generic drug applicant not withdrawn its petition for invalidation, the drug-related patent could have been invalidated because of such petition for invalidation; and (4) where the patent holder, with a view to having the generic drug applicant withdraw its petition for invalidation, offers it high benefit compensation without legitimate reasons, it can serve as an important factor when determining invalidation, as it showcases that the patent would likely have been invalidated.

Risk warning

The implementation of the patent linkage system provided for in the Implementing Measures for the Mechanism for the Early Resolution of Pharmaceutical Patent Disputes (for Trial Implementation), which were officially implemented in July 2021, has contributed to the appearance of pay-for-delay agreements in China to a certain extent. As there is a risk that preliminary anti-monopoly reviews of settlement agreements will be conducted for pharmaceutical patent infringement litigation, pharmaceutical companies are reminded to consider anti-monopoly compliance reviews when entering into settlement agreements.

Li Qin is an associate at Zhilin Law Firm

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