EU General Court Issues Judgment in Teva/Cephalon Patent Settlement Case

On October 18, 2023, the General Court of the European Union (GC) issued its judgment in Case T-74/21, Teva Pharmaceutical Industries and Cephalon v Commission. The GC upheld the infringement decision of the European Commission (EC) against Teva and Cephalon finding that the patent settlement agreement between the companies restricted competition “by object” and “by effect,” thereby infringing Article 101 of the Treaty on the Functioning of the European Union (TFEU).

The Settlement Agreement and the “Package” of Commercial Transactions

Teva and Cephalon concluded a settlement agreement in 2005 whereby Teva committed not to enter the market for the sleep disorder drug modafinil independently and not to compete with Cephalon in that market. In addition, Teva committed not to challenge Cephalon’s modafinil patent rights. While Cephalon’s compound patents for modafinil had expired, it still owned several patents considered by the EC as “secondary” and other modafinil-related patents.

The Commission had found that the patent settlement agreement between the parties infringed EU competition rules because it delayed Teva’s entry on several modafinil markets in the European Economic Area in exchange for significant value transfers from Cephalon to Teva.

The transfers of value from Cephalon to Teva in this case consisted not so much in cash payments but rather in a “package” of commercial transactions including (i) Cephalon’s agreement to purchase from Teva a license to Teva’s intellectual property rights in modafinil; (ii) a modafinil API supply agreement from Teva to Cephalon; (iii) the granting to Teva of a license for clinical and safety data co-developed by Cephalon in connection with studies on the treatment of Parkinson’s disease, thus having no connection with modafinil; (iv) a distribution agreement appointing Teva as the exclusive distributor in the United Kingdom for all of Cephalon’s modafinil products for five years; and (v) payments to Teva to cover litigation costs.

In its infringement decision, the EC had fined Teva €30 million and Cephalon €30.5 million with the duration of the infringement ranging from the date of the agreement until Teva’s acquisition of Cephalon in 2011.

The GC’s Findings in a Nutshell

The GC found that the EC’s analysis was in line with the legal tests previously fleshed out by the Court of Justice of the European Union (CJEU) (notably in Case C-307/18 Generics (UK) and Others (Generics (UK)).

The GC reiterated in particular that a patent settlement will restrict competition “by object” “when it is plain from the examination of the settlement agreement concerned that the transfers of value provided for therein cannot have any explanation other than the commercial interest of both the holder of the patent at issue and the party allegedly infringing the patent not to engage in competition on the merits” (para. 39). The GC found that it has to be assessed on a case-by-case basis whether the net gain of the transfers of value from the originator to the generic company was sufficiently large to incentivize the generic company to refrain from entering the market concerned.

The GC added that transfers of value may take various forms, including a direct or indirect payment, which are incorporated into business transactions between the originator and the generic companies (para. 44). Such a business transaction will raise concerns if it provides the generic company with benefits it would not obtain “under normal market conditions, either because such a transaction would not have been carried out under normal market conditions or because that transaction was carried out under more favourable conditions than normal market conditions.” The GC clarified that under normal market conditions, it is “not usual for the consideration for a transaction to consist of a non-compete and a non-challenge commitment.”

The GC further confirmed that the assessment to establish whether an agreement restricts competition “by object” is intended to determine the “objective seriousness” of a practice and ensure that agreements are not characterised as a “restriction by object” solely because of their complexity (para. 50).

Regarding the EC’s assessment of the commercial transactions as a “package,” the GC noted that the settlement agreement and the transactions included therein formed part of “a single contractual framework” (para. 56). The GC noted that what matters is the net gain from the value transfers within the transaction package (para. 56).

The GC then went on to assess the alleged plausible explanations provided by the parties for each of the transactions, finding that the EC had applied the appropriate legal test and agreeing that each of the transactions at issue had no other purpose than to increase the level of the overall transfer of value to Teva under the settlement agreement with a view to inducing it to agree to the non-compete and non-challenge clauses (para. 162).

The GC also rejected the parties’ assertions that the settlement agreement had pro-competitive effects. The GC for example rejected the parties’ argument that the agreement allowed Teva to enter the modafinil market earlier, finding that Teva’s entry as a result of the settlement was not a pro-competitive early entry but a “contractually agreed entry” (para. 179).

The GC similarly rejected the parties’ plea that the EC had erred in finding that the settlement agreement restricted competition “by effect” and found that the EC rightly held that the conditions for an exception under Article 101(3) TFEU were not fulfilled. The parties’ arguments regarding the EC’s alleged errors in calculating the fines were collectively rejected as well. The parties did not challenge the EC’s finding that Teva was a potential competitor of Cephalon.

What’s Next?

The parties may appeal the case to the CJEU. The CJEU’s rulings in the appeal proceedings regarding patent settlement agreements between Servier and several generic companies and the compatibility of those agreements with EU competition law are also still pending (Cases C-201/19 P and C-176/19 P).

In addition, the EC has opened new investigations against companies for other types of practices involving patents that may be in violation of EU competition rules. One such investigation involves Teva and relates, among others, to an alleged misuse of patent procedures by Teva and whether Teva’s conduct may have amounted to an abuse of dominance under Article 102 TFEU. 

Thank you to Bronwyn Tonelli, trainee for Sidley's Antitrust practice, for her significant contribution to this Sidley Update.