South Korea: Korean Supreme Court Finds Generic Company Not Liable For Damages Caused By At-Risk Launch Of Generic Drug

(Supreme Court Decision No. 2016Da260707 dated November 26, 2020, Decision No. 2018Da221676 dated November 26, 2020)

On November 26, 2020, the Supreme Court of Korea held that generic drug manufacturers were not responsible for damages incurred by an original pharmaceutical company resulting from the automatic price reduction of the original drug caused by the at-risk launch of a generic drug, i.e., its commercial entry before expiration of a patent that was not finally determined to be invalid.

[Case Background]

According to the "packaged medicine price reduction policy" implemented in April 2012, the maximum price of an original drug on the reimbursement drug list is reduced according to the notice issued by the Minister of Health and Welfare, if (i) a generic drug manufacturer designates or changes the expected sales date to "immediately after listing" in the application for drug approval and (ii) such drug enters the market before the expiration of the patent covering the original drug.¹

The controversy stems from the question of who will be responsible for the damages for reduced maximum price of an originator drug and lost sales when a generic manufacturer launches at risk (i.e., before the patent expires) and the generic product is later found to have infringed the originator's patent. This damages analysis is in addition to the conventional patent infringement damages. This case provides the first in-depth analysis of this controversial issue.

Generic drug manufacturers Hanmi Pharmaceutical and Myung In Pharm. Co. Ltd. launched their generic drugs after the Patent Court held invalid the patent covering Zyprexa (an antidepressant), which was developed by Eli Lilly. However, the Korean Supreme Court later reversed and found the patent valid, thereby overturning the earlier Patent Court Ruling of invalidity. In this case, while the conventional compensation amount for the reduction in original drug sales was relatively small, the reduction in the original drug price was tens of times larger.

The timeline of facts is provided in the table below.

Accordingly, Eli Lilly and Lilly Korea (the Korean subsidiary of Eli Lilly) filed a compensation claim against the generic drug manufacturers for the price reduction of Zyprexa.

The main legal issues addressed in this case are as follows: (i) whether Lilly Korea, which was the de-facto exclusive distributor of Zyprexa in the market, was an exclusive license holder, (ii) whether it was legal for the generic drug manufacturers to file an application to change the expected sales date of the generic drugs to "immediately after listing" before the original patent was confirmed to be invalid, and (iii) whether there was a causal relationship between the acts of the generic drug manufacturers and the price reduction of Zyprexa.

[Case Holding]

1. Whether Lilly Korea was an exclusive license holder
   The Supreme Court held that, while it is true that Lilly Korea was the de facto exclusive distributor of Zyprexa, there were no clauses in the patent license agreement that would prevent Eli Lilly from granting a non-exclusive license to a third party. Therefore, the Supreme Court held that Lilly Korea was not an exclusive license holder.
2. Whether the application for change of expected sales date was legal
   The Supreme Court held that the generic drug manufacturers properly changed the expected sales date to immediate sales following the notice issued by the Minister of Health and Welfare, pursuant to one of the permissible reasons of "a strong chance of winning a patent dispute," which was properly based on the Patent Court's decision of invalidity based on lack of inventive step. Therefore, the Supreme Court held that it is difficult to consider illegal the application for change of expected sales date.
3. Whether a causal relationship is recognized
   The Supreme Court held that the reduction in the maximum price of Zyprexa was the result of the notice issued by the Minister of Health and Welfare, not the result of the manufacturing and sales activities of the generic manufacturers. In other words, the actual cause of the decrease in maximum price was the result of the actions taken by the Ministry of Health, not by the generic drug manufacturers. Therefore, the Supreme Court held that the reduction in the drug's upper price limit could not be viewed as attributable to the generic manufacturers' actions. We expect this portion of the opinion to be controversial.

[Future Implications]

The Supreme Court decision held that, even though the patentee did not grant a license to any third party other than the concerned license holder, it is difficult to recognize Lilly Korea as the exclusive license holder. In this case, the patentee and the license holder were the foreign drug manufacturer and its Korean subsidiary, respectively, and it is highly likely that the patentee had no intention to grant a license to any other Korean companies. Nevertheless, the Supreme Court adopted a strict standard for recognizing an exclusive license holder even under these facts. As a result, we recommend (i) including clear provisions to expressly grant an exclusive license (even as to the patentee) in future license agreements and (ii) registering the exclusive license with the Korean Intellectual Property Office.²

Following this decision, there is an increased likelihood that generic drug manufacturers will challenge existing patents more proactively in view of the lowered risk of a damages compensation claim for drug price reductions, which will hasten the release of generic drugs in the market. Therefore, original drug manufacturers will need to prepare vigorous defenses against potential patent disputes in view of the risk of drug price reductions.

Before this decision, the original drug manufacturers dealt with the risk of reductions in drug prices by filing lawsuits seeking cancellation of drug price reductions and requesting suspended execution thereof when a court held invalid the patents of the original drug manufacturers. In several of the cases, the court accepted the requests for suspension of execution of the decrease in maximum price pending final resolution of the particular legal issues. However, there is a possibility that this decision may bring changes to this trend of court decisions granting a suspension of execution.

In addition, the Ministry of Health and Welfare is currently investigating the need for legislation that could recapture the profits earned by original drug manufacturers during the exemption of a drug price reduction resulting from the suspended execution of a drug price reduction. As a result, interested stakeholders would be well-advised to continue to monitor these and related developments. Yulchon is experienced in advising pharmaceutical companies on such issues, and is also well-equipped to assist in advocacy throughout the legislative process to ensure that the voices of all interested parties can be properly heard.

Footnotes

1. In Korea, consumers purchase medicine through a partial payment system, where the National Health Insurance Corporation (NHIC) pays for the remainder of the drug price. The NHIC prescribes the prices of all medicine on the reimbursement drug list, which sets a maximum price that will be reimbursed for drugs by the NHIC to the seller of the drug, e.g., pharmacies, hospitals, etc. In Korea, every resident and care facility in the country is registered with the National Health Insurance. The price of medical products, therefore, is determined according to the National Health Insurance system.

2. Under the Korean Patent Act, a patentee or an exclusive license holder may assert a claim for an injunction against infringement and/or request damages for patent infringement by a third party. However, an exclusive license can be considered a non-exclusive license if it is not registered as an exclusive license with the Korean Intellectual Property Office, and the contractual terms will determine who has the right to sue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.