Fresh challenge for pharma

The European Commission opened a pharmaceutical sector inquiry in January 2008 following concerns that companies were using the patent system in a market-distorting and unjustified way. Bonita Trimmer explains what its preliminary findings mean for the industry

In its Preliminary Report, issued on 28 November 2008, the European Commission does not draw any conclusions on the practices adopted by originator companies of pharmaceutical-related patents to maximise revenue streams from their rights, nor does it make any findings as to their compatibility with competition law. However, the European commissioner for Competition Policy, Neelie Kroes, has made her views clear. She highlights patent ‘clustering’, the large number of patent litigation cases and the use of patent dispute settlements as the ‘most damaging practices’ used to delay or block market entry of competitors.

Using statistical analysis and quotes from originator companies’ internal documents, the report provides ‘evidence’ of a ‘toolbox’ of patent-related practices. This toolbox includes the use of: (a) secondary patents, ie patents covering products containing active ingredients which are already protected by a primary patent, or covering new processes for the production of active ingredients already protected by a primary patent;
(b) ‘evergreening’, ie second-generation product patents which intend to ‘switch’ consumers through promotion, before the expiry of the base patent (and, therefore, the emergence of any competing generics); (c) defensive patenting, particularly the use of patent clusters; and (d) the use of patent litigation strategies and patent dispute settlements in order to create obstacles to market.

While the report indicates such practices are being employed, it doesn’t show there is anything necessarily abusive about them. Most internal documents quoted indicate originator companies are concerned about maintaining their exclusivity through true ‘innovation’ and about operating strictly within the law.

What’s the equivalent?
In fact, all the practices identified by the commission are far from new. Most are prevalent in all patent-intensive industries. The statistical findings may simply demonstrate that originator companies are concentrating their efforts on strengthening and/or prolonging their exclusivity for those products that are most profitable.

If a secondary patent (whether in respect of an evergreened product or not) relates to a genuinely innovative improvement, most would accept a further monopoly is justified. Market entry by generics and originators that do not make use of incremental innovation) will not be impeded.

The report notes that European courts frequently reach contradictory decisions on whether an equivalent patent is valid. This illustrates how complex this assessment can be. If originator companies are unaware and it’s unclear whether any of their patents are spurious rather than valid, how can they be at fault for attempting to enforce them?

Generally, it’s regarded as being in the public interest to encourage the settlement of patent disputes between parties either before litigation or trial. Without knowing the full content of the agreements the commission examined, it is impossible to judge whether they raise competition concerns which outweigh this public interest.

A KEY ISSUE APPEARS TO BE PATENT QUALITY. HOWEVER, IT IS UNAVOIDABLE THAT INVALID PATENTS CAN SOMETIMES BE GRANTED IN ALL INDUSTRIES

A key issue appears to be patent quality. However, it is unavoidable that invalid patents are sometimes granted in all industries. This is all the more so where the technologies involved are particularly specialised. This is not something that can be wholly resolved by better examination at patent offices; it’s an issue that can only be addressed by specialist patent courts with the benefit of expert evidence.

Is there a solution?
What comes next? Although it would help to resolve much of the conflict, progress on the Community Patent and the European Patent Court has stalled. The French presidency did not succeed in getting member states to agree a common position at the Competitiveness Council on 1 December 2008 in light of ‘political obstacles’. It doesn’t appear to be a priority for the new Czech presidency either. Against this backdrop, the Community Patent proposal might be put on hold for some time.

In the meantime, the pharmaceutical industry will just have to wait for the commission’s final report, which is expected this summer. The commission may then disclose more convincing and concrete evidence of competition abuses.

Originator companies should wait for this final report before reviewing patenting strategies. It’s difficult to predict which practice(s) the commission will choose to focus on if they do take action. Difficulties identifying truly abusive filings and enforcement actions may lead the commission to target patent dispute settlement agreements (especially those involving payments to generics to stay out of the market while the patent remains in force). No doubt the commission will be watching with interest the US Federal Trade Commission’s (FTC) increased activity in this area. It’s perhaps here that originator companies should be assessing their risks.


Bonita Trimmer is an associate and professional support lawyer in Wragge & Co LLP’s IP team


THE US PERSPECTIVE

To an American observer, the European Commission’s Preliminary Report eerily reflects the subject matter, analysis and political bent of parallel actions by the US Federal Trade Commission, say Robert P Reznick and James B Kobak Jr

The response to the European Commission’s Preliminary Report from the European innovator drug community was swift and unequivocal. The European Federation of Pharmaceutical Industries and Associations (EFPIA), the community’s principal trade association, argued that the practices cited in the Preliminary Report are lawful, and called the Preliminary Report a ‘missed opportunity’ to encourage innovation by increasing patent protection, and by wringing substantial healthcare savings out of the generic drug marketplace by increasing competition. The EFPIA pointed out that while Europeans pay less than their US counterparts for branded medicines, they pay more for generics.

What does it mean for pharma in the US?
Ordinarily, European competition enforcement actions are of limited importance to the American market. Many points of difference exist between US and European pharmaceutical antitrust law, including differences in the regulatory structures governing drug pricing and generic drug entry. The Preliminary Report notes that generic manufacturers won 60% of the patent infringement cases studied. In the US, a track record of that sort would hardly suggest that most such suits were ‘objectively baseless’, which is but one of the requirements for a patent infringement action to trigger antitrust consequences.

Consider these points, however: the commission’s inquiry followed announcement of a similar study by the FTC. While cataloguing the differences between US and EU law the Preliminary Report does what it can to minimise them. It gives a place of honour to the FTC’s enforcement position on patent settlements, while largely ignoring the growing body of US case law (and even the contrary position of the US Department of Justice) rejecting the FTC’s categorical legal analysis.

However, it would be wrong simply to presume that most of the legal theories reflected in the Preliminary Report will be imported to American shores. In the US, far more so than in Europe, control over legal theories as a practical matter rests not with the antitrust enforcers but with the courts, whose support for the FTC positions on IP issues has been inconsistent to say the least. Still, there seems no question that claims of IP-related abuses by innovator drug companies will increase, and the data collected in the Preliminary Report will provide a blueprint for industry-wide information-gathering or discovery in litigation. What remains open is whether differences among national patent and antitrust/competition law will defeat what looks like a coordinated global effort by regulators to change the commercial implications of drug industry patents.


Robert P Reznick and James B Kobak Jr are partners at Hughes Hubbard & Reed LLP


These articles first appeared in IP Review, issue 26