Could competition law and patent law successfully tie the knot? June 2017

By DARYL DINGLEY AND JARRAD KNOETZE, Published in Competition - Intellectual Property Law

South Africa has one of the most developed pharmaceutical manufacturing industries in Africa and it can be argued that patent law and competition law have contributed significantly to the success of this sector. That being said, competition law is rapidly evolving in Africa and currently all industries are attracting scrutiny from the competition authorities. Globally, the pharmaceutical industry is but one of the industries in the spotlight. It is, therefore, only a matter of time before the pharmaceutical sector will be examined more closely in South Africa. The driving force behind the increased scrutiny may be the ever growing basic need, by people all over the world, to have access to affordable medicine. This makes the intersection between competition law and patent law relevant.

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The South African Competition Act (89 of 1998), as amended, derives its jurisdiction on intellectual property matters from Article 40 of the Agreement on Trade Related Aspects of Intellectual Property (TRIPS). Article 40 of TRIPS allows for a member state to enforce their competition legislation in so far as it concerns the abuse of a patent. The Competition Act deals with patents in so far as s10(4) allows for an exemption application to be made exempting the patent holder from the anti-competitive consequences which may arise from the exercise of their patent. However, the Act lists no substantive grounds for this exemption. Unlike s10(4), which deals specifically with intellectual property rights, s10(3)(b) of the Competition Act details grounds under which an exemption may be brought for anti-competitive conduct.

So even though exemption applications can be made, the law in this regard has not been settled. A possible reason for this may be because the patent right holder, in their application, has to admit that the "exercise of its right" amounts to an infringement of competition law, which then ultimately requires competition law exemption. This suggests that the mere exercise of a patent right, that is use or non-use of this right, is a cause for concern under the Competition Act. The uncertainty evident in s10(4) creates significant risk for a patent holder as an admission of anticompetitive conduct, in circumstances where the exemption is not granted, may result in challenges and harmful precedent for future cases.

In the absence of any exemption guidelines, (currently being drafted by the Competition Commission of South Africa), the limited case precedent in South Africa, and statements made by the Competition Commission, indicate that the interface between competition law and patent rights be approached using the rule of reason standard that is applied to firms accused of abusing their position of dominance in a paticular market. Consequently, patent holders remain reluctant to apply for an exemption and, should the "exercise of a patent right" be challenged, the patent holder will probably attempt to justify this exercise following a rule of reason approach afforded to parties in the Competition Act. This is because the patent holder will only need to demonstrate that the conduct does not affect competition negatively by weighing the prevention or lessening of competition against the pro-competitive or efficiency based considerations. It is clear that patent law and the Competition Act are two systems which are in conflict with each other. On the one hand, you have the patent right which gives the holder exclusive rights over a product. It grants the patent holder the right to exclude other persons from making, using, exercising, disposing or offering to dispose of, or importing the invention, so that he or she shall have and enjoy the whole profit and advantage accruing by reason of the invention. On the other hand you have the competition authorities saying that although such exclusivity is anti-competitive, a holder should apply for an exemption to allow such conduct to continue. This conflict puts the process of invention at risk, bordering futility.

The admission of a contravention through the exercise of a patent right is not the only potential challenge when competition law and patent law intersect. Others include the issue of exclusivity. A patent grants the patent holder exclusivity over a product for the duration of the patent. Another challenge is that a patent right can be voluntarily licensed to a competitor. Further, by having a grant-back clause in a licensing agreement, this facilitates that a dominant firm remains in a dominant position in the market without having to innovate itself. A further challenge is that cross-licensing arrangements have the ability to create anti-competitive monopoly positions through a system of royalty payments and can facilitate tacit collusion between firms.

These challenges have lead competition authorities to conclude that although a patent grants a holder a legal monopoly in certain circumstances, patent holders should not abuse their right. These challenges may also encourage support for the notion that competition law be interpreted narrowly so that it does not threaten the existence of patents.

Compulsory licensing is an area of intellectual property law which provides some relief to some of the challenges discussed above. Compulsory licensing, as the term suggests, refers to a scenario where an authority or the state authorises itself or third parties to use a patented subject without the authorisation of the rights holder. Put differently, compulsory licensing forces the rights holder to accept the use of the patent by a third party or the state. It has been accepted that compulsory licensing can remedy the anticompetitive effects of particular types of abusive conduct but not without complication.

Article 31 of TRIPS, along with s56 of the Patents Act (57 of 1978), as amended, makes provision for the possibility of compulsory licensing when patent holders abuse their rights. Although these provisions are in place, there have been no applications in the context of pharmaceutical products, as it is difficult to prove an abuse of a patent right due to the grounds being narrowly interpreted by South African courts.

It is also worth noting that currently the patent system in South Africa is a depository system – the validity of the patent application is not established on the basis of the substance or quality of the product or process. This system makes no provision for refusing a patent registration on the basis of merits. There are a number of issues which arise as a result.

It is also worth noting that currently the patent system in South Africa is a depository system – the validity of the patent application is not established on the basis of the substance or quality of the product or process. This system makes no provision for refusing a patent registration on the basis of merits. There are a number of issues which arise as a result.

These issues can be viewed from the "reformists" view point and the "traditionalists" view point. The former argues that the depository system leads to an abuse and that a substantive system should be implemented. This is founded on the basis that patents are being granted, not on the basis of their novelty or inventive step, but simply due to the fact that they supplied the necessary documentation required by legislation. Further, the local market for pharmaceutical manufacturing, particularly generics, has been negatively impacted by the straightforward process and low cost of applying for patents. This they believe facilitates "ever- greening practices" – practices which involve filing more than one patent on a single product, reformulating the same patent and reverse payments taking place.

The traditionalists state that the current system is the correct system and it works well in practice.

In 2013, government published for comment their "Draft National Policy on Intellectual Property". This Draft Policy indicates government's aim to move towards a substantive patent examination system. This, they believe, will reduce the price of medicines, grow the local generics industry and will also resolve many of the competition concerns associated with the depository system. Parliament has now approved the implementation of a substantive search and examinations process which will replace the current depository system. This new intellectual property consultative framework, in line with its predecessor, the "Draft Policy", makes it clear that patent applications in the pharmaceutical sector require examination before the patent right will be granted. This may allow for anti-competitive behaviour to be pointed out and potential abuse of patents to be prevented. There is no certainty as to when the application of this process will commence.

If this route is not favoured by South African patent and competition authorities', there may be a call for a provision to be inserted into the Competition Act that substantially deals with patents and the potential for abuse of such patents. This may stem from the implementation of substantive search and examinations process as already discussed.

Abroad, the European Commission has been more active in the adjudication of matters dealing with both patent law and competition law. The EC has in recent years investigated attempts by originator companies to delay or hamper the introduction of generic medicines or of new, innovative drugs that may compete with their products. In 2008, the EC launched an inquiry into the pharmaceutical sector aimed at uncovering the reasons behind low levels of competition in the sector. Since the sector inquiry, the Commission has carried out annual patent settlement monitoring exercises; its purpose is to understand the use and evolution of patent settlements in the European Union and, if possible, identify those that potentially unduly delay market entry of generic medicines to the detriment of EU consumers. The Commission's approach to these sorts of agreements is to focus on the anti-competition aspects. In other words, if an agreement prevents entry into the market this would contravene the EU competition rules and would require an investigation into the settlements.

European competition authorities have also adjudicated and investigated excessive pricing complaints against pharmaceutical manufacturers. The UK Competition Markets Authority made provisional findings against both Pfizer and Actavis UK for excessive pricing as a result of their dominant position. A similar finding was made against Concordia. A further finding worth noting is that which was made in Aspen. The Italian competition authorities found that Aspen (a South African pharmaceutical manufacturing company) had abused its dominant position by increasing prices of its anti-cancer drug. It was concluded that the pharmaceutical company took advantage of its position as sole distributor to leverage favourable prices.

In the United States, one of the Federal Trade Commission's top priorities was to investigate a costly legal tactic that more and more branded drug manufacturers were using to suppress competition from lower-cost generic medicines. The tactic used by these drug makers is what is termed "pay-for-delay" patent settlement agreements. These agreements essentially prevent all other generic drug manufactures from entering the market with their generic drug for a certain period. However, in 2013, a Bill relating to the "Protection of Consumer Access to Generic Act" was reintroduced in the House of Representatives. This Bill seeks to prohibit brand-name drug companies from compensating generic drug companies to delay the entry of a generic drug into the market. It is not clear when this Bill will come into effect.

In South Africa, our competition authorities have been less active. There has only been one case which deals with patent rights and that is in relation to an exemption application in terms of s10(4) of the Competition Act. The findings of this decision in relation to the exemption application are not clear. One interpretation of the case is that that s10(4) was not intended for such an agreement and that Visa SA (a branch of Visa International Service Association Incorporated, Case number 2001JUL4) most likely applied under this section knowing it would not obtain an exemption under s10(3)(b).

What is encouraging to consumers is that the South African competition authorities have made progressive strides by initiating a health-market enquiry. This inquiry includes an analysis of patents and the patent system. A number of stakeholders have made submissions that the patent system has contributed to cost, price and expenditure increases in the private healthcare sector. Amended Terms of Reference for the healthcare market inquiry were released on 9 December 2016. In terms of the amendment, the final inquiry report, which may include recommendations, will be completed by 15 December.

As a consequence of the lack of jurisprudence, it is evident that the relationship between competition law and patent law, particularly in the context of pharmaceuticals, is undeveloped in South Africa.

However, the overriding principle appears to be that the South African competition authorities will most likely analyse the vast majority of conduct involving patent rights using a flexible rule of reason approach. This approach will allow for both the efficiencies of a particular activity relating to the exercise of a patent right as well as any anticompetitive effects it may create to be considered. Further, the authorities are vested with considerable power to remedy an abuse of the exercise of a patent right should it be found that the rights holder has abused its monopoly position or entered into a restrictive vertical or horizontal practice with a competing pharmaceutical firm for purposes of restricting competition.

We can expect activity in the pharmaceutical sector dealing with this intersection between competition law and patent law very soon. This industry will never escape scrutiny and the need for affordable medicine will only spur on this activity. We need, therefore, to remain glued to our screens and wait for the competition and patent authorities to make their next move.

Dingley is a Partner and Knoetze a Candidate Attorney with Webber Wentzel.