Antitrust Warning from the Chinese Supreme Court on Settlement between Pharma Patentee and Generic Challenger in Patent Invalidation Proceedings

3 March 2022

By Chen Fei, Attorney at ZY Partners

In AstraZeneca AB vs. Jiangsu Aosaikang Pharmaceutical Limited, the Chinese Supreme Court decided on 17 December 2021 that court should conduct anti-cartel review on settlement agreements reached between pharmaceutical patentees and generic drug applicants during the PRB invalidation proceedings.

AstraZeneca vs. Aosaikan is significant in two perspectives. First, it is the first time that the Chinese court expressed the judicial intent to review the legitimacy of settlement reached between a pharmaceutical patentee and a generic validity challenger during the PRB invalidation proceedings for purpose of curbing cartel agreement based on the PRC Antitrust Law.

Secondly, AstraZeneca vs. Aosaikang seems to have put an end to the conventional notion that the Chinese court would permit withdrawal of cases by plaintiff or appellant with no or little course.

In AstraZeneca, the Chinese Supreme Court reiterated the procedural rules and judicial opinions on conditions for permitting plaintiffs or appellants to drop their cases before court decisions are made. In case a party applies for withdrawal of a complaint or appeal, the court shall examine the withdrawal application according to the law, in particular the antitrust law. Permission for withdrawal may only be granted where no circumstances that bars permission for withdrawal are found. If a party applies for withdrawal of an on-going case, whether during trial or appellate proceedings, the court must examine the legitimacy of the withdrawal application. In the event that the withdrawal application is made during the appellate proceedings, the appellate court is required to examine not only the legitimacy of the withdrawal itself, but also the appropriateness of the trial decision. For legitimacy review, the court will look into whether the intended withdrawal is injurious to national, social and public interests and the rights and interests of third parties. For cases of special concerns, legitimacy review should be concentrated on stereotyped illegal behavior usually associated with particular types of cases.

In pharmaceutical patent cases involving drug patentees and generic drug applicants, settlement or contract based on which claims are made or decisions rendered, including settlement agreements reached by the parties for purpose of withdrawing complaint or appeal, if such settlement or agreement appears or smells "reverse payment” from a drug patentee to a generic drug maker, the court should examine whether the relevant settlement or contract violates the PRC Anti-monopoly Law.

Where the court finds that a settlement agreement or contract based on which the generic drug maker applies for withdrawing the complaint or appeal is suspected of violating the anti-monopoly law, the withdrawal application may be denied or granted subject to the court discretion that suspected violation is of no or little impact on competition. If the withdrawal application is denied, the court shall continue the proceedings or the court suspend the proceeding by transferring the cartel clues to the antitrust enforcement authorities for administrative antitrust review.

The Supreme Court defined "reverse payment agreement involving pharmaceutical patent" as an agreement whereby the patentee commits to give direct or indirect benefit as consideration for the generic drug applicant in exchange for the latter not to challenge the validity of the patent or for the purpose of delaying the process for others competitor to enter into the relevant drug market precluded by the patent.

The Supreme Court opined in AstraZeneca vs. Aosaikang that the core issue for finding whether the suspected reverse payment arrangement constitutes a cartel agreement is whether the reverse payment has the effect of excluding and restricting competition in relevant market. In this regard, the court would make comparison between the reality of reverse payment agreement and the hypothetical situation in the absence of the reverse payment arrangement, and therefore the invalidation proceedings against relevant patent were still on-going. By comparing the situations of having and not having the reverse payment, the court would evaluate the likelihood of success for the generic drug maker to get the patent invalidated. The more likely the patent being invalidated, the more probable competition being excluded or restricted. In principle, the court would find reverse payment a cartel arrangement if the patentee pays unreasonably high value without justification but for having the generic drug maker to put an end to the PRB proceedings by withdrawing the invalidation petition from the PRB administrative proceedings.

In terms of competition restriction arising from the reverse payment settlement, the court would focus on whether the settlement has substantially prolonged the market exclusivity of the patentee and whether the settlement has substantially delayed the market entry of other potential generic drug makers. On the other hand, if the patent is less likely to be invalidated even the invalidation proceedings were not terminated by the generic drug maker, the court would grant the withdrawal by finding that the reverse payment is of no material impact on competition.

Though the Supreme Court permitted AstraZeneca to withdrawal from the appellate proceedings to put an end to the infringement case in AstraZeneca vs. Aosaikang, the settlement is regarded as a reverse payment arrangement, which narrowly escaped from the range of antitrust law enforcement. The key factor that declines the Supreme to conduct more substantial antitrust review of the settlement is that the patent at issue had expired before the Supreme Court decision was made.

It is noted that although the Supreme Court analysis of reverse payment is concentrated on pharmaceutical patent, the test the court used as a measurement for competition harm applies to all field of patents.

Though the rationale of AstraZeneca vs. Aosaikang applies only to court cases for the time being, it may not be far that the SIPO may expand the court practice to the PRB invalidation proceedings and makes settlement in the proceedings subject to antitrust review. The likelihood of SIPO review of settlement legitimacy gets greater in that it is now one of the subbranches of the State Administration for Market Regulation (SAMR), the primary antitrust enforcement authority in China.