The imperfect European patent enforcement system creates incentives for reverse payment settlements between drug originators and generics. There are three key issues with the system: 1) limited availability of preliminary injunctions to block infringing generic entry, 2) originators are only partially compensated for losses from infringement even if they win litigation, and 3) enforcement efforts are scattered without a unified patent judiciary. This leads to an "invisible" value transfer from originators to generics. Reverse payments may counterbalance generics' incentives to enter under this flawed system, rather than being an indicator of anticompetitive behavior per se. The existence and size of payments alone cannot be the standard to assess settlements.

1. © 2014 Cleary Gottlieb Steen & Hamilton LLP. All rights reserved.
Throughout this presentation, “Cleary Gottlieb” and the “firm” refer to Cleary Gottlieb Steen & Hamilton LLP and its affiliated entities in certain jurisdictions, and the term “offices”
includes offices of those affiliated entities.
Romano Subiotto QC
Partner, Cleary Gottlieb Steen & Hamilton LLP, Brussels and London
The Implications Of The Imperfect European Patent
Enforcement System On The Assessment Of Reverse
Payment Settlements
OECD – Roundtable on “Generic Pharmaceuticals II”, June 18, 2014

2.  Settlements of patent disputes between originators and generics that
contemplate a value transfer from the originator to the generic (a/k/a pay-for-
delay)
 EU Commission’s assessment based on two key criteria:
• Does the settlement restrict generic entry?
• Does the settlement foresee a value transfer from the originator to the
generic?
 In Lundbeck the EU Commission found that reverse payment settlements =
restrictions of competition by object
 In Actavis the U.S. Supreme Court held that reverse payment settlements
subject to rule of reason
Reverse Payment Settlements
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3.  Three key factors potentially leading to a hold-up of an originator company that
create incentives to make reverse payments to generics even if the originator’s
patent position is strong:
• Ex ante enforcement. Limited availability of effective preliminary injunction
preventing the sale of infringing products
• Ex post enforcement. Partial compensation for the harm caused by an
infringing entry if the originator ultimately wins in litigation
• No unified patent judiciary. Absence of a unified patent judiciary leads to
enforcement efforts scattered across all EU countries where the originator’s
patent rights are infringed
The Imperfect European Patent Enforcement System
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4.  Considerable hurdles and delays in obtaining preliminary injunctions
 Preliminary injunctions may not be available if:
• The patent infringement case is complex (e.g., the Netherlands)
• The patent is challenged in contradictory proceedings – EPO oppositions, or
nullity actions (e.g., Germany)
• Abusive or delaying tactics by defendants
Limited Availability Of Effective Preliminary Injunctions
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5.  Difficulties with ex ante enforcement would not matter if an originator could
protect itself through damages awards (ex post enforcement)
 Yet, an originator is rarely fully compensated for the harm caused by infringing
entry, even if the generic infringes the originator’s patent:
• Actual financial loss not fully compensated: Prevalence of reasonable royalty
rates as a yardstick for damages
• Loss caused by irreversible regulatory price cuts
• Losing party not fully liable for litigation costs
• Judgment-proof problem: generic companies may avoid payments of awarded
damages due to low capitalization or liquidation
Insufficient Compensation
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6. “Invisible” Value Transfer
6
Originator’s Actual
Total Loss Loss Compensated
by Generic
Uncompensated
Loss
“Invisible” Value Transfer
 Difference between originator’s actual loss and partial compensation obtained from the
generic = an “invisible” value transfer from the originator to the infringing generic
 This “invisible” value transfer means the generic does not fully internalize the harm
resulting from its infringing entry and may therefore have a distorted incentive to enter the
market even if it believes its products infringe valid patents
 To prevent the invisible value transfer, the originator may need to make a “visible” value
transfer to the generic company in the form of a settlement payment

7. To Enter, Or Not To Enter
Effective Patent Enforcement System
Originator fully (100%) compensated for
its losses due to infringing entry
Generic’s profit/loss from entry:
- €5.5M (€20M - €30M * 100% * 85%)
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• 85%: probability of the generic’s product to be found infringing
• €20 million: the generic’s expected profit from sales
• €30 million: expected total loss incurred by the originator
Flawed Patent Enforcement System
Originator partially (e.g., 70%)
compensated for its losses due to
infringing entry
Generic’s profit/loss from entry:
+ €2.15M (€20M - €30M * 70% * 85%)

8.  The assessment of patent settlements must take into consideration the functioning of the
patent enforcement system
 Reverse payments may be explained by the imperfect patent enforcement system and
the need to counterbalance the generic’s incentive to enter even if its products are likely
to infringe (i.e., the originator pays not to be unlawfully harmed)
 Because the “invisible” value transfer (the originator’s under-compensation) and the
“visible” reverse payment are strongly correlated, and both flow in the same direction
(i.e., from the originator to the generic), the direction of the payment is neither conclusive
nor indicative as to the existence of a restriction of competition
 Reverse payments have no general probative value as regard the strength or weakness
of the originator’s patent
 No presumption of a restriction of competition can be attached to the existence of a
reverse payment
Implications For The Competitive Assessment
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9.  The existence or the size of a reverse payment cannot be the main
legal standard to assess patent settlements
 Legal uncertainty: difficult to draw the line between pro-competitive and
anti-competitive payments
 As long as the restrictions in the settlement are within the exclusionary
scope of a valid patent, the settlement achieves the same result that
the patent holder could have obtained by enforcing its patent in court
were the patent enforcement system efficient
Conclusion
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