Case Law: Licensing agreements in the pharmaceutical sector

Judgement of the Court of Justice (First Chamber) of June 27, 2024, Servier SAS and others v Commission (C-176/19)

The Court of Justice has delivered its judgment in case C-176/19, in which upholds the appeal lodged by the Commission against the General Court’s decision in the Servier case, which deals with the complex interplay between intellectual property rights and competition law within the fast-changing pharmaceutical sector.

 Case summary:

Servier, a laboratory specialized in the development of originator medicines, developed perindopril, a drug for the treatment of hypertension and heart failure. Since 1981, the company has filed different patents aimed at protecting the product and its manufacturing process. From 2003, after the first patent had formally expired –although some Member States had prolonged the protection– to 2009, Servier was involved in a series of legal battles with generic manufacturers. The majority of the proceedings were sealed before the final rulings, as a result of settlement agreements concluded between Servier and some generic medicine manufacturers.

In the UK, Servier sued Krka, a Slovenian company, for patent infringement before the High Court of Justice of England & Wales, who in turn filed a counterclaim seeking the invalidation of another patent related to perindopril. Finally, a settlement agreement was reached whereby Krka agreed not to challenge the above patents and not to market generic perindopril. Nevertheless, by means of a license agreement, Servier granted Krka an exclusive right to use the '947 patent – related to the alpha crystalline form of perindopril and the process for its manufacturing– in Krka's core markets (Czech Republic, Latvia, Lithuania, Hungary, Poland, Slovenia and Slovakia), subject to payment of a royalty of 3%. In addition, Krka assigned to Servier two patent applications related to the production of perindopril for EUR 30 million. In May 2009, however, the Technical Board of Appeal of the EPO revoked patent 947.

In July 2014, the Commission found that Servier had infringed both Article 101 of the Treaty on the Functioning of the EU (“TFEU”), by entering into a market-sharing agreement with the generic medicine manufacturers, and Article 102 TFEU, by implementing an exclusionary strategy covering the perindopril market, and imposed fines of EUR 289 727 200 and EUR 41 270 000, correspondingly. Servier challenged the decision, which was partially annulled by the General Court. In particular, the General Court (i) found that the Commission had not established the existence of a restriction of competition by object or effect in the Krka agreements, and (ii) invalidated the findings related to the abuse of dominant position by Servier, as it found errors of assessment made by the Commission when defining the relevant market for perindopril. On 22 February 2019, the Commission appealed in cassation to the Court of Justice, which has now upheld the appeal and referred the case back to the General Court for reconsideration.

Key points of the judgment:

The Court of Justice's judgment clarifies certain rules concerning the application of competition law to licensing agreements in the pharmaceutical sector:

•  When a market for a medicine is being opened up to generic manufacturers, in order to determine whether one of those manufacturers is a potential competitor of a manufacturer of originator medicines, it is necessary to determine whether there are real and concrete possibilities for the former to enter that market and compete with the latter. The precedent for this assessment comes from the case Generics (UK) and Others (C-307/18). In this respect, while the General Court had found that "there were consistent indications which could have led the parties to believe that the '947 patent was valid", suggesting that there was no potential competition between the companies, as the market was protected by such patent, the Court of Justice determined that the General Court breached its obligation to state the reasons for its judgment (under Article 36 of the Statute of the Court of Justice) by failing to examine all the evidence relied on in this respect.
• The existence of a patent protecting an originator medicine or one of its manufacturing processes is highly relevant when analyzing the competitive relationship between an originator and a generic manufacturer. According to the judgment of the Court of Justice, the correct analysis must focus on whether, despite the existence of that patent, the generic company has real and concrete possibilities of entering the market at the relevant time. In the present case, the General Court limited its analysis to the issue of whether the royalty rate provided for in the Krka license agreement was abnormally low, as it would evidence that the settlement agreement was in fact masking a reverse payment. Instead, says the Court of Justice, the General Court should have examined whether the benefits for Krka resulting from the agreement, which allowed it to market the product in its core markets without risk of infringement of the patent, were sufficiently significant to actually persuade Krka from entering Servier's core markets, thus equaling to a market allocation through a payment.
• Settlement agreements whereby a generic company wishing to enter a market recognizes, at least temporarily, the validity of a patent held by an originator company and consequently undertakes not to challenge that patent and not to enter that market could amount to a restriction of competition by object. According to the Court of Justice, the fact that the agreement pursues a legitimate objective does not exclude in itself the application of competition law (Article 101.1. TFUE), especially if the agreement also has the aim of sharing markets or restricting competition in other ways. 
• In line with the previous point, an agreement that reserves certain markets for an originator manufacturer in return for the grant of a patent license to a generic manufacture in other markets, may amount to an anticompetitive market sharing. The fact that a market-sharing agreement does not create a 'hermetic' partition between the parties does not in any way prevent it from being characterized as a restriction of competition by object. According to the Court of Justice, the General Court was therefore wrong to hold that there was no market sharing because the settlement and license agreements did not expressly reserve any part of the market to Krka. Furthermore, the judgment states that the General Court misapplied Article 101(1) TFEU when it relied on the pro-competitive effects that the License Agreement might have on Krka's core markets, as it is a well-established doctrine that any positive or pro-competitive effects of a conduct cannot be taken into account when determining whether such conduct should be characterized as a restriction of competition by object under Article 101(1) TFEU.
• As far as Article 102 and market definition are concerned, in the pharmaceutical sector, economic substitutability between medicinal products must be assessed in the light of the shifts in sales between medicinal products intended for the same therapeutic indication caused by changes in the relative prices of those medicinal products. A finding that there is no such substitutability indicates the existence of a distinct market, whatever the reasons are for that finding. According to the judgment, the General Court erroneously held that the relevant product market was not limited to perindopril alone, but included other ACE inhibitors.

All things considered, the Court of Justice refers back the case to the General Court, for it to rule again on the characterization of the licence agreement concluded between Servier and Krka as a restriction of competition by object as well as on the existence of an abuse by Servier of its dominant position.