India Pay For Delay Agreements On The CCI Radar.

12 September, 2014
Legal News & Analysis Asia Pacific - India - Competition & Antitrust
Introduction
In 2005, India revised its patent law to bring the same in line with its obligations under
the Trade Related Intellectual Property Rights Agreement of the World Trade
Organization (TRIPS). The flourishing domestic generic pharmaceutical industry, better
known as the pharmacy of the poor world, now had to wait for the patent to expire
before it was able to introduce a generic(and therefore cheaper) variant of the patented
drug into the market.
A patentee has the right to exploit its patent to the exclusion of all others, and where
the patent is for a life-saving or widely used drug, the patentee stands to earn
considerable revenue from sales of the drug. Given these significant earnings, patent
holders are often willing to offer settlements to generic manufacturers instead of
defending their patents through long-drawn and expensive patent infringement litigation.
Such payments, made to a generic manufacturer during a patent infringement suit
initiated by the patent holder, are often referred to as reverse payment settlements.
Unlike typical litigation scenarios where settlements involve payments by a defendant to
the plaintiff, reverse payment settlements are made the other way around, i.e., from the
plaintiff (patentee alleging infringement of its patent) to the defendant
(generic manufacturer accused of infringing the patent). Such reverse payment
settlements in the pharmaceutical industry are increasingly being subject to antitrust
scrutiny to investigate whether the purpose of the settlement is to delay the entry of a
generic drug in the market (popularly referred to as pay for delay), which would
otherwise have competed with, and been available at a fraction of the cost of the
patented drug. It has been reported1 that the Competition Commission of India (CCI) is
presently investigating such payments for evidence of possible anti-competitive
conduct.
Any agreement between competing pharmaceutical companies to delay the entry of a
drug in a market may be scrutinized under the Competition Act, 2002 (Act) and is
presumed to cause an adverse effect on competition in India. If however, such an
agreement is entered into during the life of the patent, the patentee may claim a limited
right of defense under Section 3(5) of the Act, as long as the restriction is necessary to
protect its intellectual property rights. The very purpose of an intellectual property right
is to grant the inventor the ability to exclusively exploit a novel invention, and this could
arguably include compensation paid to maintain the exclusivity of that right.
The possible exclusion of settlement agreements between pharmaceutical companies
during the life of a valid patent from the purview of antitrust scrutiny is the subject of
considerable debate globally and is likely to frame the discussions in India as well.

Lessons From The US Supreme Court Decision In Actavis

In the United States, the Federal Trade Commission (FTC) has been prosecuting
reverse payment settlements between patent holders and generic drug manufacturers
as being anti-competitive for several years. But it was only in April 2013 that the US
Supreme Court found a settlement between pharmaceutical companies anticompetitive, even though it was during the scope of the patent, i.e., the period of
validity of the patent. In this case, Solvay Pharmaceuticals (Solvay) initiated patent
infringement litigation against two generic manufacturers, Actavis and Paddock, when
they filed an application for a generic drug modeled after Solvays AndroGel. Actavis
and Paddock argued that Solvays listed patent was invalid and as a result, their drugs
did not infringe it. However, several months after the US Food and Drug
Administration approved Actavis first-to-file generic product, the parties decided to
settle. As per the terms of the settlement, Solvay paid an estimated USD 19 to 30m
annually, for 9 years, to Actavis, and in return, Actavis agreed, (i) not to market its
generic drug until only 65 months before Solvays patent expired (unless someone else
marketed a generic sooner); and (ii) to promote Solvays AndroGel. Before the US
Supreme Court, the parties argued that Solvays payment to Actavis was remuneration
for services rendered by Actavis, whereas the FTC contended that the payments were
to compensate the generic manufacturer for agreeing not to compete against Solvays
patented product until 20152.
The US Supreme Court rejected the argument that a reverse payment during the term
of a patent would be automatically shielded from antitrust scrutiny, absent patent fraud.
It was held that while a patentee has the right to exclude others from infringing its
patent, compensation to foreclose any possible challenge to that patent and keep
competitive pricing at bay might have significant adverse effects on competition.
In holding so, the US Supreme Court strove to strike a balance between antitrust
enforcement and the rights conferred by a patent, and held that, while there can be no
dispute that a valid patent confers the patentee with the right to exclusive use, the
genuineness of a settlement payment would need to be assessed for possible anticompetitive effects on a case-by-case basis. The factors to be examined when
analyzing such settlement payments would include the quantum of settlement, its scale
in relation to the patentees anticipated future litigation costs, its independence from
other services for which it might represent payment, and the lack of any
other convincing justification.
Experience Of The European Commission (EC)
Following the US Supreme Court decision in the Actavis case, in June 2013, the EC
imposed hefty fines on Lundbeck and four generic pharmaceutical companies, including
Ranbaxy, for delaying the entry of generic medicines into the market3. The EC found
that soon after Lundbecks primary patent over the Citalopram molecule expired, its
remaining process patents could not prevent the manufacture of generic Citralopram.

Lundbeck therefore entered into agreements with generic manufacturing companies to

delay the launch of the generic drugs. The agreements included payment of significant
lump sum amounts to the generic companies, purchase of the generic manufacturers
stock for the sole purpose of destroying it, and the offer of guaranteed profits in
distribution agreements running into several million euros 4.
However, unlike in the Actavis case, where the patent in question continued to exist,
Lundbecks main patent had expired, and the EC was simply required to show that the
generic companies delayed the sale of generic Citralopram pursuant to the
agreements5, and link such delay to the payments made to the aforementioned generic
companies. The ECs stand on reverse payment settlements during the pendency of a
patent remains unexplored.
Future Of Reverse Payment Settlements In India?
The widely reported case of patent infringement brought by Swiss pharmaceutical
company, Hoffman-La Roche (Roche) against domestic manufacturer, Cipla, raises
concerns about the possible conflict between antitrust law and intellectual property. The
focus of the proceeding is the alleged infringement by Cipla of Roches patent on
Erlotinib Hydrochloride Tablets (Tarceva) by preparing to launch generic versions of
Tarceva. Cipla filed a counter-suit arguing that Roches patent was invalid and as were
the claims of infringement. In September 2012, a single judge bench of the Delhi High
Court upheld the validity of Roches patent but found Cipla had not infringed it.6
On appeal, the division bench of the Delhi High Court, without considering the merits
of the appeal, directed the parties to use mediation to reach an amicable settlement.
Currently, settlement talks are underway, and the outcome remains unknown. If the
parties were to reach a settlement that has the effect of incentivizing Cipla not to market
its generic product (since Roches patent has been upheld by the Delhi High Court), it is
debatable whether CCI would have the requisite jurisdiction to scrutinize the terms of a
court-sanctioned settlement agreement without risking a possible challenge. Moreover,
the principles laid down in the Actavis case may not apply squarely to this case since as
a matter of law, Roches patent has been held to be valid, and therefore a settlement
would arguably not be to mitigate the risk of a challenge.
Conclusion
The Roche-Cipla saga does not stand alone, and Merck has also initiated settlement
talks, pending an ongoing litigation, with the Indian generic manufacturer, Glenmark, to
settle its patent infringement suit involving the drug Januvia (Sitagliptin). This could
raise similar concerns of jurisdictional overlap. While there is no clear answer on these
issues thus far, it would be interesting to see if and how CCI reconciles the terms of a
legally sanctioned mediation settlement with its powers to investigate potentially anticompetitive practices under the Act.

End Notes:
1 http://www.livemint.com/Companies/RVVDhRh7oTfpqlIphkb6jM/CCI-to-scan-drugpatent-settlements.html
2 FTC v. Actavis, Inc., 133 S. Ct. 2223 (2013)
3 More recently, Laboratories Servier and five generic drug makers, including Indias
Lupin, were fined more than USD 570m for allegedly delaying the availability of a
generic blood pressure drug. In this case too, Laboratories Serviers main patent had
expired in 2003, leaving only secondary patents in place which would not have
hindered the entry of generic versions of the drug.
4 http://www.ashurst.com/publication-item.aspx?id_Content=9338
5 Although the heart of Lundbecks case was that the patents covering the drug Celexa
were still in force at the time the agreements were entered into and accordingly the
agreements did not restrict competition in the market beyond the protection already
offered by the rights conferred by the European Patent Office (EPO) by granting the
patent; accessed at:
http://www.pmlive.com/pharma_news/ec_fines_pharma_companies_146m_for_generic
_celexa_delay_484658
6 F. Hoffmann-La Roche Ltd v. Cipla Ltd; CS (OS) No.89/2008 and C.C. 52/2008,
decision dated 7 September 2012. The decision held that since Roche was marketing a
particular manifestation of the compound (polymorph A and B) and Cipla sold another
form (Polymorph B of Erlotinib Hydrochloride), Cipla did not infringe Roches patent.