Update 1 August 2022
The following article refers to a December 2021 application to the ACCC for authorisation of a proposed settlement of certain patent infringement and validity proceedings, and the ACCC’s draft determination indicating an intention to decline authorisation. On 29 July 2022, prior to the ACCC issuing a final determination, the application was withdrawn.
Since the repeal of an exception to certain prohibitions in the Competition and Consumer Act 2010 (Cth) (CCA) in September 2019, industry participants have sought to manage the legal risks of entering into patent settlement agreements in different ways.
One option is Australian Competition and Consumer Commission (ACCC) authorisation. The ACCC can confer statutory immunity on certain conduct where the public benefit outweighs the public detriment, including any lessening of competition. In a recent draft determination, understood to be the first of its kind in the pharmaceutical industry, the ACCC proposes to decline to authorise a patent settlement agreement that sought to permit early entry for generic versions of two cancer treatment drugs. The draft determination demonstrates that, while ACCC authorisation remains an option, applications need to be supported with significant evidence to satisfy the ACCC.
Background to the application
Juno Pharmaceuticals Pty Ltd (Juno), Natco Pharma Ltd (Natco), Celgene Corporation and Celgene Pty Ltd (together, Celgene) are involved in legal proceedings in Australia in which Juno and Natco are seeking to invalidate Celgene patents relating to the cancer treatment drugs Revlimid® and Pomalyst®. Celgene has filed a cross-claim against Juno and Natco for threatening to infringe the Celgene patents. Following expiry of a compound patent in July 2022, the expiry dates of the relevant patents are 13 April 2023, 16 May 2023 and 2 August 2027.
Juno, Natco and Celgene (the applicants) sought authorisation for a patent settlement agreement made between them that seeks to end the proceedings and enable Juno and Natco to supply generic Revlimid® and Pomalyst® from a specified launch date (said by the applicants to be significantly earlier than would have been possible without the patent settlement agreement).
The applicants sought to avoid the risk that certain operative provisions of the patent settlement agreement may be found to substantially lessen competition or could give rise to possible cartel conduct, i.e. making or giving effect to a provision of a contract between likely competitors that has the purpose of preventing, limiting or restricting the supply of one or more products by one or more of them, which is strictly prohibited without regard to effect on competition in Australia.
The applicants submitted that the patent settlement agreement would result in a range of public benefits, including the early launch of competing generic products, increased competition, price reductions and litigation cost savings.
On 23 March 2022, the ACCC issued a draft determination proposing to deny authorisation.
Why did legal risk arise?
Prior to its repeal, s.51(3) of the CCA provided a limited exemption for conduct relating to intellectual property rights from the prohibitions in the CCA referred to above. Following its repeal, conduct involving intellectual property rights is subject to those prohibitions in the same manner as all other conduct.
The repeal enlivened a prospect of terms of patent settlements falling within the CCA prohibitions referred to above and requiring mitigation. The ACCC’s Guidelines on the repeal of s.51(3) suggest that where businesses are concerned that proposed conduct would or might contravene the CCA, they seek authorisation from the ACCC. If parties obtain authorisation from the ACCC, they receive statutory protection from legal action under the CCA for that conduct.
The ACCC may grant authorisation where proposed conduct is likely to result in a net public benefit (i.e. where the likely public benefit resulting from the conduct outweighs the likely public detriment).
Authorisation is a public process. Subject to confidentiality claims, the application, interested parties’ responses and the ACCC’s draft and final determination are publicly available.
Why did the ACCC propose to deny authorisation?
The ACCC considered the applicants’ claims that the patent settlement agreement would likely give rise to a public benefit in the form of increased competition and cost savings to the Australian Government, greater supply security and litigation cost savings.
The applicants claimed that the early launch of Juno/Natco’s generic products would trigger a 25% price reduction under the Australian Government’s Pharmaceutical Benefits Scheme (PBS). Further, the ACCC received a submission from a patient body and had meetings with government and other health-related parties, noting generally the benefits of early availability of a generic in increasing availability and bringing price down. It appears no pharmaceutical companies provided comment.
The applicants were unable, however, in the ACCC’s initial assessment, to provide sufficient evidence (including from relevant health authorities), as to the significance of any potential PBS savings. It was also uncertain whether and to what extent the patent settlement agreement in and of itself would be likely to result in cost savings. That was because, if the litigation proceeded and Juno/Natco were successful, it would still be open to the Australian Government to seek damages against Celgene to recover PBS expenditure, which would reduce the cost savings directly attributable to the patent settlement agreement. The ACCC also found no evidence of supply issues (in fact, third parties suggested that the proposed conduct itself could result in supply issues) and was not satisfied that the litigation would proceed without the patent settlement agreement.
While the public benefits were uncertain, the ACCC was able to identify public detriment. First, the ACCC found that the patent settlement agreement could reduce competitive tension. The ACCC drew this conclusion because Celgene would have greater control and certainty over the timing of generic entry by Juno/Natco, which would reduce Celgene’s commercial risk and provide it with the ability to better plan to account for that entry. It would allow Celgene to negotiate a ‘first mover’ advantage with Juno/Natco and conditions of entry (including timing), which in turn could dampen competition between Celgene and Juno/Natco.
Second, the ACCC said that a competitive process determining the outcome of who obtains a ‘first mover’ advantage could be beneficial for competition, e.g. if the first to enter achieved that lead because it is a more innovative or vigorous competitor than its rivals. The ACCC considered any ‘first mover’ advantage obtained by Juno/Natco may affect the investment decisions of other generic manufacturers which may deter or delay their entry into the market, to the benefit the applicants, but at a cost to competition.
A key driver of the ACCC’s decision appears to be a lack of evidence. The ACCC suggested that the applicants did not provide sufficient documentary evidence about what would occur in the absence of the patent settlement agreement (i.e. the ‘counterfactual’) or the claimed public benefits, and claimed confidentiality over much of the information provided to the ACCC. The ACCC said that it was ‘exceptional and unusual for the full details of the relevant counterfactual to be unable to be made public, to allow interested third parties to make fully-informed submissions on it’, and that the applicants provided very few internal documents. As such, the ACCC was unable to properly test the applicants’ propositions, including with market participants.
Given the lack of information received from interested parties, the ACCC could only conclude that the public benefits were ‘uncertain, minimal or unlikely to arise at all’, and identified public detriments that it was uncertain could be outweighed.
Learnings for future applications
The final determination is anticipated in May/June 2022. It remains to be seen whether the applicants can cure the deficiencies in the application and obtain authorisation. The applicants’ ability to prepare evidence addressing the deficiencies may be hampered by the fact that they remain engaged in a patent infringement proceeding in the Federal Court and, if authorisation is not granted by the ACCC, may well need to preserve their respective positions in the event of a contested interlocutory injunction application.
What is clear is that future applications will have to contend with significant forensic challenges, and provide significant documentary evidence relating to the counterfactual and claimed public benefit to satisfy the ACCC. This may include independent expert evidence from economists/econometricians as to the market parameters in the claimed counterfactual and from patent litigation experts as to the possible course of the litigation, if the settlement agreement is not authorised, so as to demonstrate the savings in court time and resources. Parties will need to allow for additional cost and time to gather such evidence.
Importantly, the evidence will likely need to include business records of forecasts and strategy planning for loss of market exclusivity, on the part of the patentee, and the cost/benefit assessment of at-risk entry and alternative options, on the part of the intending entrant.
Also, as to the terms of patent settlement agreements, it is unclear the extent to which the uncertainty about the timing of market entry and the duration of the first entrant’s “headstart” or first-mover advantage was a factor in the ACCC’s consideration and whether earlier entry and a shorter headstart may have provided a more promising basis for addressing the ACCC’s concerns.
More controversially, parties seeking authorisation of patent settlement agreements like this one, may need to consider whether, beyond providing for non-exclusivity, agreement terms should address the position of other potential intending generic entrants.
As to confidentiality, parties will also need to carefully consider the extent of their confidentiality claims to enable the ACCC to test their claimed benefits, and what would occur absent the proposed conduct, with a broad range of market participants and regulatory agencies.
 Celgene is the manufacturer of Revlimid® (active ingredient lenalidomide) and Pomalyst® (active ingredient pomalidomide), which are immunomodulatory drugs indicated for the treatment of some blood cancers.
 CCA, s.45 and 47, which respectively prohibit contracts, arrangements and understandings, and exclusive dealing, which has the purpose of effect of substantially lessening competition.
 CCA, s.45AD(3)(a)(iii) and/or (b). The CCA strictly prohibits the making of, or giving effect to, a provision of a contract, arrangement or understanding between competitors, or potential competitors, that has the: (i) purpose or likely effect of fixing, controlling or maintaining prices (including discounts, credits and allowances); or (ii) purpose of preventing, restricting or limiting the production, capacity, supply, or acquisition of goods or services.
 Conduct in breach of CCA s46 Misuse of Market Power was outside the scope of the exception, and the possible risk of such conduct continues to require consideration in the context of patent settlement agreements.
 Guidelines on the repeal of subsection 51(3) of the Competition and Consumer Act 2010 (Cth), August 2019, section 6.2.
 For example, Pharmacy Guild, Society of Hospital Pharmacies, and the Tasmania and Northern Territory Departments of Health.
 Draft determination, [4.40].
 Draft determination, [4.75].
 Contemplated regulatory changes to require that the patentee receive notice of the first regulatory approval sought by a generic, in advance of entry of a generic product on the Australian Register of Therapeutic Goods, have not yet been implemented.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.