Australia: Can reverse payments in patent settlements constitute criminal cartel conduct?

Life Sciences Spotlight (Asia Pacific)
Last Updated: 10 September 2013
Article by Simon Uthmeyer

It is a well-established and universally accepted principle of competition law that a payment by one competitor to another competitor not to enter a market is anticompetitive, and in Australia since 2010 a criminal offence.
In the US over the past decade pharmaceutical companies, the Federal Trade Commission (FTC) and class action applicants have battled the question of whether this established principle of competition law applies in the context of a settlement of a patent dispute. The answer is now clearly and unequivocally yes.

Recent decisions of the US Supreme Court and the Director General of Competition (DG Comp) in the EU have confirmed that reverse payments in patent settlements are subject to competition law and are potentially anticompetitive. If the Australian Federal Court were to follow these two clear decisions then a reverse payment could constitute criminal cartel conduct under the Competition & Consumer Act (CCA), in addition to potentially constituting an anticompetitive agreement. Therefore, such settlements could be at risk of criminal sanctions, pecuniary penalties and damages claims by private parties including class actions.

Whilst there is no Australian authority on this issue, the jurisprudence in the US is now very clear and strong.

The EU, whilst not having jurisprudence, has a very clear and strong prosecution by the DG Comp consistent with the US Supreme Court. Accordingly, it is inconceivable that the ACCC, State Governments, private health insurers and class action law firms can ignore the clear legal position now being adopted in both the US and the EU that reverse payment settlements are subject to competition law and are potentially anticompetitive. It can only be a matter of time before enforcement proceedings are brought by the ACCC or private proceedings by an affected party that a reverse payment is in breach of the CCA.

FTC v Actavis, Inc (Androgel)
US Supreme Court 17 June 2-13
Lundbeck (Citalopram)
European Commission 19 June 2013

Offending reverse payment settlement terms:

  • Generic Androgel would not be marketed for nine years with the period ending 65 months before the patent expired;
  • Generic company agreed to promote Androgel to urologists; and
  • Generic company receives annual payment of between US$19 million and US$30 million for nine years for "other services."

Offending reverse payment settlement terms:

  • Generic companies agreed not to market generic citalopram for agreed period;
  • Generic companies received guaranteed profit for distributing Citalopram; and
  • Lundbeck (innovator) acquired generic citalopram stock for destruction.

US Supreme Court finding:

  • The restraint "has the "potential for genuine adverse effects on competition".
  • Payment in return for staying out of the market – simply keeps prices at patentee-set levels, potentially producing the full patent-related US$500 million monopoly return while dividing that return between the challenged patentee and the patent challenger. The patentee and the challenger gain: the consumer loses.
  • Such payments are subject to antitrust scrutiny under a rule of reason approach and are not immune under 'scope of the patent' protection. Matter remitted to District Court to apply rule of reason test to the settlement terms.

European Commission finding:

  • It is unacceptable that a company pays off its competitors to stay out of its market and delay the entry of cheaper medicines. Agreements of this type directly harm patients and national health systems, which are already under tight budgetary constraints. The Commission will not tolerate such anticompetitive practices.
  • Lundbeck fined €93.8 million and each of the four generics fined €52.2 million.

In a nutshell what is the problematic conduct?

Both the US Supreme Court and the European Commission (EC) have ruled that a settlement of patent litigation proceedings which involves the innovator paying consideration for the delay of the entry of competing generic drugs raises competition law issues (pay for delay).

However, "where a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of non-infringement." Accordingly, where justifiable consideration is paid a limitation on the ability of a generic company to enter is unlikely to raise competition concerns.

Examples of problematic reverse payment settlements

Problematic reverse payment settlement agreements have two essential terms:

  1. Settlement agreement that the generic company will:
    • refrain from challenging the validity of the innovator company's patent(s) (non-challenge clause); and/or
    • refrain from entering the market until the patent has expired (non-compete clause); and/or
    • solely be a distributor of the innovator product concerned; and/or
    • source its supplies of API from the innovator company; and
  1. Unjustifiable consideration is paid by the innovator company to the generic company, which can take many forms:
    • payment of a lump sum for unspecified services;
    • payment for purchasing the generic company's stock of the generic drug; or
    • annual payments for distribution services.

How wide spread is the problem?

The EC over the period 2009 to 2011 reviewed a large sample of patent litigation settlements in the EU. The EC's analysis indicated that of the patent settlements it reviewed in 2011, 11 percent are problematic from an antitrust perspective. Therefore, these issues are not one off and are reasonably prevalent in the industry to attract scrutiny.

Exposure is to past and future reverse payment settlements

Both past and future reverse payment settlements are potentially subject to the CCA. Therefore, all past reverse payment settlements should be carefully reviewed to assess competition law risk, as it can only be a matter of time before the Australian Competition and Consumer Commission, State governments, private health insurers or class action applicants follows the clear and strong jurisprudence set by the US Supreme Court and the EC in June 2013.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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