06 April 2014

Patents, Competition and Anticompetitive Conduct

Free CompetitionAustralia’s competition regulator, the Australian Competition and Consumer Commission (ACCC), has instituted Federal Court proceedings against Pfizer Australia Pty Ltd (Pfizer) for alleged anticompetitive conduct (misuse of market power and exclusive dealing) in relation to its supply to pharmacies of blockbuster cholesterol drug atorvastatin.

Until May 2012, Pfizer held an Australian patent on atorvastatin, and was therefore the sole supplier of the drug to the Australian market, under the brand name Lipitor.  The drug was prescribed to over a million Australians, and had annual sales exceeding A$700 million.  Put simply, the ACCC alleges that Pfizer misused the market power it held during the term of its patent to restrict competition from generic substitutes after the patent expired.

A patent is, of course, inherently ‘anticompetitive’, in that it provides the patentee with exclusive rights to exploit the claimed invention commercially.  The intervention in the free market represented by a patent is justified on the basis that providing a limited-term monopoly-style right is an incentive for people and companies to invest in research, development and commercialisation of innovative new products and services.

However, once the patent expires, other suppliers are free to enter the market with competing products or services based on the formerly-patented invention.

The rights grated by a patent do not, however, permit a patent-owner to do anything they like during the term of the patent.  The term ‘exclusive right’ means a right to exclude others from exploiting the invention.  A patent does not grant the patentee the right to use the invention in ways that are contrary to the law, or that infringe upon the rights of others.

The Allegations Against Pfizer

The ACCC alleges that in early 2012, prior to the expiry of its patent on atorvastatin, Pfizer offered pharmacies significant discounts and the payment of rebates previously accrued on sales of Lipitor.  In order to receive these benefits, the pharmacies were allegedly required to acquire minimum quantities of a generic atorvastatin product, also supplied by Pfizer, corresponding with up to 12 months’ supply.  The arrangements involved Pfizer supplying prescription medicines to pharmacies without going through an intermediate wholesaler.

In other words, according to the ACCC’s allegations, Pfizer was seeking to tie up a large part of the market for the generic drug for a period that would extend significantly beyond the end of the patent term.  Since the patent was still in force at the time the offers were allegedly made, other generic manufacturers were prevented from making competing offers to pharmacies.

The ACCC contends that Pfizer’s conduct contravenes section 46 of the Competition and Consumer Act 2010 (‘CCA’), which prohibits the misuse of market power, and section 47 of the CCA, which prohibits the practice of exclusive dealing.

Patent Law Versus Competition Law

Clearly there is a tension between patent law and competition law, and the practices of which Pfizer has been accused represent just one example of the kinds of abuse that might be perpetrated.

In an effort to strike an appropriate balance, the CCA contains specific exclusions in relation to patents, while the Patents Act 1990 includes specific limitations on the use of patents to restrict certain forms of anticompetitive conduct.

Section 51(3) of the CCA creates exclusions for certain conditions of intellectual property transactions (including patent licences and assignments) that might otherwise comprise illegal restrictive trade practices.  Conversely, Chapter 14 of the Patents Act (sections 144-146) limits the ability of patent owners to impose certain anticompetitive provisions in contracts relating to the sale and licencing of patented inventions.

‘Tying’ Provisions in Contracts Relating to Patented Inventions

Section 144 of the Patents Act provides that certain ‘tie-in’ or ‘tie-out’ conditions in a contract relating to the sale or lease of, or a licence to exploit, a patented invention, are automatically void.  Subject to some limited exclusions set out in section 146, the patentee cannot:
  1. prohibit or restrict a purchaser or licensee of a patented invention from using a product or process supplied or owned by a third party; or
  2. compel a purchaser or licensee of a patented invention to acquire other, unpatented, products from the patentee,
unless the purchaser or licensee either:
  1. has been given the option of acquiring, or licensing, the patented invention on reasonable terms without the relevant condition being imposed; or
  2. has the benefit of a provision in the contract allowing termination on three-months notice, and with fair compensation to the patentee.

Right to Terminate Contracts After Patent Expiry

I have written recently about section 145, which was at issue in the recent decision of the Federal Court in MPEG LA, L.L.C. v Regency Media Pty Ltd [2014] FCA 180.  Since I have a client involved in that matter, I shall allow the court to explain the effect and purpose of section 145 (at [14]-[15]):

[Section 145] confers a statutory entitlement to terminate a “contract relating to the lease of, or licence to exploit, a patented invention…” upon the giving of notice “at any time after the patent, or all the patents, by which the invention was protected at the time the contract was made, have ceased to be in force”.
… the object and purpose of such provisions is relatively clear. That object and purpose, at least in part, is to prevent the holder of a patent from taking potentially unfair advantage of the statutory monopoly conferred by a patent after it has expired. Like s 144, s 145 is aimed at anti-competitive conduct. A licensee wishing to use a patent may have no commercial option other than to enter into an agreement with a patent holder to pay royalties whilst the patent remained in force and for a period of time thereafter.

Conclusion: A Patent Is Not a Carte Blanche

It is often said, casually, that a patent confers a monopoly upon its owner.  At one level this is a sufficiently accurate description for everyday purposes, but taken at face value it can be a misleading description.

In fact, a patent confers an exclusive right to exploit the claimed invention.  The term ‘exclusive right’ is to be taken literally – it is the right to exclude others from engaging in commercial activities falling within the scope of the patent right.

It does not, however, confer upon the patentee an unfettered right either to exploit its own invention, or to use the exclusive rights to distort a competitive market within which it operates in ways that go beyond the privileges provided under the Patents Act.  Competition law exerts an influence even within the area of the statutory exceptions provided by patent law.

Pfizer stands accused by the ACCC of abusing its market power during the term of its patent on atorvastatin to obtain a continuing benefit after expiry of the patent, in contravention of the Competition and Consumer Act 2010.  I am no expert on competition law, so it is not clear to me how strong the ACCC’s case might be.  But, whatever the outcome, it serves as a useful reminder to patent owners, and others, that ownership of a patent is not a carte blanche to ignore the fundamental principles of the competitive marketplace.

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