Pharma patent settlements: Will yours withstand Australian competition law scrutiny?

In a number of jurisdictions, settlements of patent challenges have attracted competition law scrutiny, particularly in cases of "pay for delay" – where the generic challenger accepts restrictions on its market entry and/or is rewarded in some way for abandoning its challenge to the patent. Most recently, the European Court of Justice considered these issues, on referral from the UK Competition Appeal Tribunal in relation to patent settlements between GSK and various generic companies concerning paroxetine, an antidepressant in the Selective Serotonin Reuptake Inhibitor (SSRI) group.

Here in Australia, the Courts have yet to rule on the legality of restrictions imposed by patent settlements under competition law. However, recently there are some signs the Australian Competition and Consumer Commission (ACCC) has focused attention on the competition implications of patent settlements involving pharmaceutical products, where these impact Australia's Government-funded Pharmaceutical Benefits Scheme (PBS). Given that Australia has some of the strictest competition laws in the world, and this uncertainty surrounding patent settlement arrangements, careful attention should be given to Australian competition law when negotiating settlements.

Australia's Pharmaceutical Benefits Scheme: the interplay with patent litigation

Under the PBS, the Australian Government subsidises the cost for many prescription medicines once "listed". Furthermore, the "approved prices" that may be charged for these listed medicines (and the cost to the Government), reduce significantly, on the listing of the first generic brand/biosimilar of the medicine.

Often the PBS listed medicine is the subject of registered patents, eg. for the active ingredient, the process of manufacturing it, method of treatment or administration of the active ingredient. While there is no patent linkage in Australia and the generic/biosimilar company may therefore apply for listing on the PBS of its generic/biosimilar medicine at any time once its medicine is registered on the Australian Register of Therapeutic Goods, if a generic or biosimilar version enters the Australian market “at risk”, without the licence of the patent holder or without the patent(s) being held to be invalid, the generic/biosimilar company risks proceedings being brought against it for patent infringement and being exposed to a potentially significant damages claim.

Consequently in Australia, challenges by generic/biosimilar companies to the validity of pharma patents are not uncommon, either prior to launch or by way of cross-claim after proceedings by the patent holder for threatened or actual infringement. Similarly, it is not uncommon for proceedings to be brought by the patent-holder for threatened infringement and for an interlocutory (preliminary) injunction to be sought to prevent the generic/biosimilar company from supplying its medicine until after the final hearing (and prevent price cuts for the listed medicine by reason of the listing of the first generic/biosimilar medicine).

However, there are significant risks to the generic/biosimilar company and the patent holder from patent litigation. If the generic/biosimilar company is unsuccessful in its patent challenge then it may not be able to enter the market until the patent expires or it will face a significant damages claim if it has launched “at risk”. If the patent holder is ultimately unsuccessful in the litigation (e.g. the patent is found invalid or not infringed), then it may not be able to prevent market entry of a number of generics/biosimilars in the wings and resulting erosion of its market share and price for its medicine. Further, if the patent holder has obtained a preliminary injunction preventing the generic/biosimilar company from supplying its medicine pending the outcome of the litigation, the patent holder is exposed to a potentially significant damages claim from the generic/biosimilar company pursuant to the usual undertaking as to damages given to the Court as a price of obtaining the preliminary injunction. The patent holder is also exposed to a potential claim for compensation from third parties, including the Commonwealth Government, under the usual undertaking as to damages. These claims are not insignificant. The first Australian decision on a Commonwealth Government claim of this type was recently considered here. The Commonwealth sought compensation of approximately $325 million essentially for the loss of opportunity to benefit from price cuts to pharmacies it claimed it would have achieved if the generic’s PBS listing had not been delayed by reason of the preliminary injunction.

Because challenges to the validity of a patent or patents may take years to be determined and due to the risks to both the generic/biosimilar company and the patent holder if they are unsuccessful in patent litigation, some challenges may be resolved by a settlement agreement. In the settlement of patent disputes, the generic/biosimilar company may be granted a licence by the patent holder which may be subject to certain restrictions and in return it agrees it will not pursue its challenge to the validity of a patent(s) to trial.

The effect of such a settlement and licence may speed up market entry of the generic/biosimilar medicine and avoid long and uncertain litigation. Or the settlement may cause a delay or restriction in the planned market launch of the generic/biosimilar medicine, when compared to expectations by customers or health authorities of an earlier generic/biosimilar launch. Settlement of one potential challenge to a patent may also deter other generic/biosimilar companies from launching and challenging the validity of the patent.

A core issue is the effect of granting the licence on competition in the Australian market... in this context the CCA cartel provisions broadly define "competitors" to include possible competitors. 

Competition law scrutiny of patent settlements

In the United States, antitrust scrutiny of settlements accelerated, following the decision of the Supreme Court in FTC v Actavis 570 U.S. 136 (2013), which ruled that "reverse payment" patent settlements, under which the patent holder pays or provides benefits to the alleged infringer in return for delaying entry plans, are subject to antitrust scrutiny from the Federal Trade Commission and the Antitrust Division of the US Department of Justice. Such settlements need to be filed with the Federal Trade Commission and Department of Justice to allow for this scrutiny. There is no similar filing requirement or monitoring of patent settlements in Australia although the Productivity Commission has recommended it.

Where the parties conduct business in Australia or own patents registered under the Australian Patents Act, any settlement will need close scrutiny to ensure compliance with Australia's strict competition laws governing agreements between competitors or which affect competition (the Competition and Consumer Act (CCA)).

There is no exemption in the CCA for settlements of patent litigation, and a limited safe harbour for restrictive conditions in patent licences was removed from the CCA in September 2019 with immediate effect, with no grandfathering protection for prior licences. There are three main areas for consideration of any patent settlement under the CCA:

• the prohibition on making or giving effect to cartel agreements;
• the prohibition on making or giving effect to any agreement that has a purpose or an effect, or likely effect, of substantially lessening or hindering competition in an Australian market (including a concerted practice); and
• the prohibition on conduct by a corporation, which has a substantial degree of market power in an Australian market, where the conduct may have a purpose or an effect, or likely effect, of substantially lessening or hindering competition in Australia (Australia's equivalent law for an "abuse of dominance").

Any patent settlement on terms which includes a grant of a licence permitting entry from a future date, combined with a restraint on the generic/biosimilar company from launching its own product before the licence date (and a promise not to challenge the patent) is reviewable under Australian competition laws. This is so irrespective of whether the settlement involves any payment to the generic/biosimilar challenger, although the fact of any payment will attract more scrutiny.

A core issue in the application of the CCA to any patent settlement is the effect of granting the licence on competition in the Australian market; whether "but for" the settlement, the parties to the settlement would have "likely" been in competition with each other, earlier than the agreed licence date.

In this context the CCA cartel provisions broadly define "competitors" to include possible competitors. This test is lower than whether earlier entry by the generic (than agreed) was "more probable than not". In two recent merger cases, one at first instance (ACCC v Vodafone) and one on appeal (ACCC v Pacific National), the Court ruled that "likely" in relation to competitive entry means a "real chance" or "real commercial likelihood" not "more probable than not".

A key question, therefore, is whether, absent the settlement agreement, was there a real possibility that otherwise the generic/biosimilar company may have supplied its version of the medicine to the Australian market at an earlier date? This requires an assessment of the prospects the generic/biosimilar company may have prevailed in the patent challenge, had it proceeded to trial and all the surrounding factors.

Because there is a purpose test in the CCA, a court will focus on the purposes of the patent holder at the time of the settlement. Did the settlement have a purpose of preventing the possible supply of the generic/biosimilar occurring before any licence date it offered? Was the patent holder confident of the validity of its patents being upheld at the time of settlement?

The EU approach in the GSK settlement

In the EU decision concerning the GSK settlement, the European Court of Justice said the assessment must consider whether "notwithstanding the existence of the patent the manufacturer of generic medicines has real and concrete possibilities of entering the market at the relevant time". Relevant factors included:

• uncertainty of the validity of a patent is a fundamental characteristic of the pharmaceutical sector;
• a patent does not guarantee protection against actions seeking to contest validity and such actions commonly take place;
• in the pharmaceutical sector, potential competition may be exerted before the expiry of a patent since the manufacturer of a generic wants to be ready to enter the market as soon as that patent expires; and
• the existence of a genuine dispute, particularly subject to court proceedings, does not preclude the existence of competition between the parties but rather constitutes evidence of the existence of potential competition between them.

Withstanding competition scrutiny of your patent settlement in Australia

The GSK case highlights factors which will be relevant in Australia to whether the generic/biosimilar had a real chance of entering the market before any date agreed with the patent holder. These factors include whether the generic or biosimilar company has taken sufficient steps to be able to get on the market in terms of seeking marketing authorisations, had adequate stock or manufacturing capacity, had completed other necessary legal steps in order to challenge the patent, and had indicated a "firm intention and an inherent ability" to enter the market.

In Australia at present there is no guidance from the courts or the ACCC as to how competition laws will be applied to a patent settlement. The GSK case gives some general guidance as do the decisions in the United States since Actavis.

In these circumstances, parties considering settlement of a patent dispute in the pharma sector which relates to Australia should give careful consideration to the application of Australian competition laws.