The IPO in Wales - the new epicentre for IP lobbying after Brexit?

The AmeriKat has been having a blissful few weeks away from the UK and the Brexit nightmare.  Her head has instead been filled with palm trees, ocean waves and beautiful Pacific blue skies.  That was until she looked at her email yesterday with news from the UK Intellectual Property Office alerting her to new guidance entitled "Intellectual Property and the Transition Period".

Tomorrow is Brexit Day.  What does that mean for IP lawyers?  It means that after tomorrow we will be in what is called the "the transition period".  The period starts as of 1 February 2020 and will end on 31 December 2020.  The UK will remain in both the EU customs union and the single market, and, for IP, business will continue as normal, e.g., the UK will remain part of the EU trade mark, registered and unregistered Community design systems.

As the Guidance states:

"There will be no disruption to IPO services or changes to the UK IP system during this transition period. The IPO will convert almost 1.4 million EU trade marks and 700,000 EU designs to comparable UK rights at the end of the transition period. These will come into effect on 1 January 2021. 

The arrangements in the IP section of the Withdrawal Agreement take effect at the end of the transition period. These arrangements provide legal certainty and protect the interests of rightsholders and users of the IP framework. 

The Withdrawal Agreement ensures continued protection of existing EU-level IP rights in the UK after the end of the transition period. 

This will ensure existing UK IP rights can be managed appropriately in line with existing domestic arrangements."

In today’s decision in Generics (UK) v. Competition and Markets Authority [C-307/18, here], the Court of Justice of the European Union (CJEU) ruled that pay-for-delay agreements may violate Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU). Under a pay-for-delay agreement, the holder of a pharmaceutical patent pays generics to stay off the market or delay their entry on the market. The decision is significant because it is the first time the CJEU addresses this issue.
The judgment follows very closey the Opinion of Advocate-General (AG) Kokott, which was only handed down last week [here]. [Says Merpel: perhaps the Court is clearing its docket of important UK referrals before some Brits “celebrate” Brexit Day tomorrow…]

Case background
The case concerns an antidepressant medicine, paroxetine, developed by GlaxoSmithKline (GSK) and protected under various patents. Between 2001 and 2003, GSK entered into agreements with three generics companies. In short, the agreements: (i) put in place distribution arrangements whereby the generics companies would resell GSK-produced paroxetine; (ii) provided for various payments of GSK to the generics companies; and (iii) precluded the generics companies from making, importing or supplying paroxetine in the UK.

In December 2003, another generics company obtained a marketing authorization (MA) for paroxetine in the UK and successfully defended itself against a patent infringement suit brought by GSK. Consequently, the three generics companies terminated their agreements with GSK. The independent market entry of these generics companies had a significant impact on prices: by December 2005, average prices of paroxetine had fallen by around 74%.

Comment by Katfriend Gaëlle Béquet

Any mention of pay-for-delay makes this Kat think of his old friend Gaëlle Béquet, with whom he spent many cheerful evenings when they were both young associates before the Amsterdam patent bar. Gaëlle specializes in competition law and has kindly agreed to share some thoughts on today’s decision by the CJEU.

Play around, but don't kill the competition (Meme Credit: Makeameme.org)

Over to Gaëlle:

The scenario of Generics (UK)is familiar to that in Servier and Lundbeck, heard by the General Court (GC) and Johnson&Johnson a European Commission decision: an originator trying to protect its market position for a blockbuster from generic entry. The CJEU followed the line previously set by the European Commission, the GC and the AG. The decision therefore comes as no surprise for readers following developments in this area.

Originator and generic are potential competitors

The CJEU reiterated that the prohibition to restrict competition pursuant to article 101 TFEU with respect to horizontal cooperation only applies to competitors or potential competitors (§32). Whether a generic, which is not yet on the market, must be considered as potential competition for an originator, depends on its real and concrete possibilities to enter the market, absent the settlement agreements (§37).

Such possibilities require that the generic has taken the necessary preparatory steps to enter the market (e.g. MA, stock of generics,patent litigation), and that there are no insurmountable barriers to entry (§44-45). In line with the AG’s Opinion, the CJEU considered that patents are no such insurmountable barrier because of the uncertainty around the validity of patents and the possibility for a generic to launch-at-risk (§46-51). Unsurprisingly given the overall approach, the CJEU also held that the fact that an interim injunction had been granted does not preclude potential competition (§53).

Taken at face value, there are quite a number of commonly recognized entry barriers present in this case: the medicines sector is characterized by strong entry barriers and is strictly regulated. Also, a launch “at risk” of a generic competing against a blockbuster could lead to a huge exposure of the generic if the patent turns out to be valid and infringed. It follows from established case law that regulatory barriers, access to infrastructures and IP rights can create a so-called “blocking position” on the market (Guidelines Technology Transfer §32-33).

Nevertheless, the CJEU ruled that a competitive relationship was present in this case. The reason for the decision is relatively intuitive: if market players feel the need to conclude an agreement to keep one of them out of a specific market, this is a strong indication that a competitive relationship exists between them (§55). In other words, in a pay-for-delay case, the competition law assessment of the agreements almost precedes the question whether the parties to the agreement are competitors. The CJEU (and before it the GC and AG) seemed to be reasoning to the goal that it wished to achieve.

The CJEU’s considerations around potential competition show that patent-related matters remain a source of constant struggles for competition law. On the one hand, patents are presumed to be valid, creating entry barriers; on the other hand, there is a constant uncertainty regarding the outcome of validity proceedings, which limits the relevance of patent validity as a factor when applying competition law. The economic and legal context around patents makes it difficult to establish whether they are capable of restricting competition that would otherwise have existed – a phenomenon known from cases involving Standard Essential Patents (SEPs).

Agreements that have the object or effect to restrict competition

Also in line with the AG, the CJEU considered that pay-for-delay agreements may have the object to restrict competition (as opposed to agreements having the effect of restricting competition). Qualifying an agreement of restriction by objectreleases a competition authority of the obligation to prove that competition is in fact distorted by the agreement. Hence, the agreement is considered to be harmful to competition by its very nature.

Although the AG condemned the present agreements, the CJEU nuanced the nature of the agreements, stating that they cannot be regarded as agreements bringing to an end entirely fictitious disputes, or designed with the sole aim of disguising a market-sharing or market-exclusion agreement (§76).

The fact that a settlement involves transfers of value (pecuniary or non-pecuniary) by the originator to the generic (a so-called reverse payment) is not sufficient ground to classify it as a “restriction by object”, since those transfers of value may prove to be justified, e.g. to compensate the litigation costs (§85-86). This reverse payment, however, is to be qualified as a restriction by object when it cannot have any explanation other than the commercial interest of both originator and generic (§87).

If the agreement has pro-competitive effects for consumers, those may be taken into account, provided that those are sufficiently significant, so that they justify a reasonable doubt as to whether the settlement agreement harmed competition (§107). A slight reduction in the price of the medicine is in any case no such pro-competitive effect (§109).

A settlement that may not be qualified as a restriction by object may still be a restriction by effect and, therefore, prohibited. This however requires a more thorough analysis of the effects of the agreement for the competition. The CJEU mentioned that the likelihood of success in the validity proceedings, i.e. the validity of the patent in general, is not relevant for this assessment (§121).

Abuse of dominance

After Servier, this is the second EU case where abuse of dominance by the originator was established by the relevant competition authority, next to infringement of the cartel prohibition. In Servier, the GC annulled the Commission decision with respect to the finding of abuse of dominance because the Commission had failed to establish the existence of a dominant position. To that end, the Commission in its assessment of dominance had not sufficiently considered the competitive pressure exerted by other molecules for the treatment of the same disease. The UK Competition Authority seems to have taken this competitive pressure into account and now requests guidance on the concept of the abuse itself.

The CJEU unsurprisingly considered that a dominant undertaking, entering an agreement restricting article 101 TFEU, may at the same time abuse its dominant position. The cumulative effects that restrict competition arising from the conclusion of the various agreements with the different generics may be considered to have a foreclosure effect on the market, ultimately harming consumers.

Take-away message

The take-away message from this decision may be summarized as follows:

• If a generic has taken any preparatory steps to enter the market, it is likely to be considered a potential competitor of the originator. Roughly said, the existence of a horizontal (settlement) agreement between originator and generic already shows potential competition.

• If there is a reverse payment from originator to generic, that has no explanation other than the commercial interest of both parties, it is very likely to be anticompetitive, also when there are certain pro-competitive effects. 

For interested readers, the GC's Servier and Lundbeck decisions provide additional interesting insights on this topic in relation to what should be considered as a value transfer and when licensing and distribution agreements may be considered anticompetitive. For Kats and readers proficient in Dutch, my case notes on the Serviercase can be found hereand here.

Because the decision has much to offer, the analysis will proceed in two parts. This post concerns the issue of trade mark registrations suffering from a lack of clarity. A follow-up post will be dedicated to the issue of bad faith registrations in the absence of an intention to use.

The CJEU decision

The first two questions referred by Arnold J (as he then was) were whether a trade mark can be invalidated if one or more of its specified goods lack sufficient clarity and precision to enable third parties to determine the extent of protection sought. The referring court wondered if specifications like "computer software" might be so general, and potentially cover so many different goods, that they may not be compatible with the trade mark's function as an indication of origin.

The CJEU held that the list of absolute grounds of invalidity provided in Directive 89/104 and Regulation 40/94, superseded by but in this respect identical to Directive 2015/2436 and Regulation 2017/1001 (the EU Trade Mark Regulation), is exhaustive. Since lack of clarity is not in the list, it cannot be considered a ground for invalidity under EU trade mark law [par. 58-60].

The CJEU further held that trade mark registrations allegedly lacking clarity cannot be attacked on the basis of the requirement of graphic representation and compatibility with public policy, since those grounds of invalidity do not apply to the types of cases the referring court had in mind [par. 67]. In this respect, it parted ways with AG Tanchev, who had suggested that trade mark registrations lacking sufficient clarity might be contrary to public policy.

At the end of this part of the decision, however, the CJEU suggested a solution: a trade mark "registered for a range of goods and services designated in a manner which lacks clarity and precision is, in any event, capable of being protected only in respect of the goods and services for which it has been put to genuine use" [par. 70]. Thus, the CJEU seemed to indicate that, after expiry of the five-year period within which the trade mark must be put to genuine use, trade marks lacking clarity can be revoked insofar as they have not been put to use.

On its face, the solution offered by the CJEU to the problem of unclear and potentially overbroad trade mark specifications sounds reasonable. But the way this Kat reads it, it raises quite a number of new issues that will require sorting out in future decisions. Thus, it may fall short as an immediate solution to the problem of unclear trade marks.

Only trade marks subject to use requirement

To start with, the solution only helps for trade marks that have become subject to the use requirement of Article 18 EU Trade Mark Regulation. Thus, for a period of five years following registration of a trade mark for a term like "computer software", the trade mark proprietor shall in any event be entitled to "a monopoly of immense breadth which cannot be justified by any legitimate commercial interest of the proprietor" as the referring court put it [par. 171].

That is particularly worrisome where trade marks are "evergreened", i.e. re-registered after expiry of the five-year term. To be sure, the European Union Intellectual Property Office (EUIPO)'s Board of Appeal has recently ruled that such a re-registration, if "manifestly intended to circumvent the obligation to prove use of earlier marks", can be made in bad faith [R 1849/2017-2, par. 82, covered by The IPKat here]. But this line of case law is still being developed and it is not clear that it will always be possible for defendants in infringement suits to rely on it.