Greenberg Traurig February 2022 Competition Currents: China and Japan
A. China’s Supreme Court Clarifies Standard of Review over “Reverse Payment” Provisions.
On Dec. 17, 2021, China’s Supreme People’s Court (SPC) rendered a decision for an appellate review of a patent litigation between an international patent-holding pharmaceutical company and a Chinese generic drug maker. In the decision, SPC for the first time opined that a “reverse payment” provision also known as a “pay for delay” provision, by which a drug patent holder compensates generic drug makers in exchange for the generic maker’s promise not to challenge the patent at issue or to delay the generic maker’s entry into market, may have an anti-competitive effect, and thus warrants a special court review under the Anti-Monopoly Law (AML) including for non-AML litigations like patent infringement. If the SPC finds any anti-competitive effect, it may reject a request to withdraw the case based on any settlement agreement containing such a provision, and as SPC has indicated, it also may refer the case to AML enforcement agency for further investigation.
In the decision, SPC established a two-pronged approach to evaluate whether a reverse payment provision has an anti-competitive effect: (i) as the first part of the analysis, the court will evaluate whether the generic drug maker will invalidate the patent at issue, and if the likelihood of invalidation is low, the the court will presume the provision is without anti-competition effect; and (ii) if the likelihood of invalidation is high, the court should proceed to the second part of the analysis, i.e., whether entering into a settlement containing such a provision will substantively prolong the patent holder’s market exclusivity or will hinder or delay the entry into market by potential generic drug makers; if the answer to either question is yes without other justifiable reasons, an anti-monopoly effect will be found to exist.
For the patent dispute at issue, SPC allowed the patent holder to withdraw the case, noting the patent at issue already expired in March 2021, and there was consequently no need to evaluate the anti-monopoly effect. As background, SPC’s clarification of its standard of review came a few months after China unveiled its own “patent linkage” system in 2021, under which generic drug makers are allowed to declare their patent status, and patent-holding pharmaceutical companies are given the chance to litigate against the generic makers. The system is expected to spawn a series of patent disputes during which settlements including “reverse payment” provisions may abound.
Notably, in the Anti-Monopoly Guideline for the Active Pharmaceutical Ingredient (API) Industry published by the State Anti-Monopoly Bureau in November 2021, compensation for non-production or non-sale covenants between API manufacturers or distributors are categorically prohibited as a type of horizontal agreement under the AML. Such non-production or non-sale covenants resemble reverse payment provisions discussed above.
B. State Anti-Monopoly Bureau Publishes 13 Penalties for Failing to Report Concentrations including Certain Minority Investment.
On Jan. 5, 2022, the State Anti-Monopoly Bureau (SAMB) published 13 decisions penalizing certain Chinese internet giants for alleged failure to report concentrations to SAMB. In each case, the party was fined RMB 500,000, the maximum monetary penalty allowed under the current AML for failing to report the transaction without other anti-competition issues.
Notably, a majority of the transactions involved were minority investments under which investors acquiring less than a 10% share were found to have gained control or joint control over the target business, thus triggering a mandatory merger control filing under AML. In a majority of the decisions, SAMB based its findings over the contractual terms provided in the investment agreements, shareholders agreements, and/or articles of association at issue. SAMB did not disclose which terms it reviewed and led to its findings of the existence of “control” or “joint control” in such minority investment cases.
A. JFTC begins discussions on pre-regulation of IT giants.
On Dec. 23, 2021, the Japan Fair Trade Commission (JFTC) announced that government authorities, including the JFTC, have started to discuss a rule on pre-regulating IT giants. These regulations are expected to supplement the current Antimonopoly Act that regulate incidents ex post facto. Generally speaking, digital businesses are seen as prone to monopolies by the companies that hold data. The EU already has introduced a type of pre-regulation of IT giants.
The JFTC chairman said they were aware that the current Antimonopoly Act framework might not deal with matters regarding IT giants whose business developed so rapidly. The chairman also said they would need to discuss the necessity of adopting some regulations introduced in other countries.
B. Follow-up – major medicine wholesalers again suspected of bid-rigging.
On Nov. 9, 2021, JFTC conducted an on-site inspection of six major medicine wholesalers in Kyushu suspected of bid-rigging pharmaceuticals ordered by the National Hospital Organization. According to the JFTC, from around 2016 at the latest, six medicine wholesalers are suspected of trying to coordinate orders for 31 hospitals drugs by selecting in advance the winning bidder. The annual order size is around JPY 20 billion.
On Jan. 7, 2022, three of the six medicine wholesalers were convicted of engaging in bid-rigging for pharmaceuticals made by the Japan Community Healthcare Organization in violation of the Antimonopoly Act in 2019. The JFTC fined each of the three companies 250 million yen and imposed a suspended sentence on seven former company executives.