On 23 October 2025, the Court of Justice of the European Union (CJEU) upheld the Commission’s 2020 decision fining Teva and Cephalon a total of €60.5m for entering into a patent settlement agreement that delayed the market entry of a generic version of the sleep-disorder drug Provigil. The judgment serves to cement the approach to so-called “pay-for-delay” agreements set out in recent high-profile judgments, as well as to highlight the risks that can arise where parties conclude commercial side-agreements as part of a patent settlement.
Background
The case centred on Cephalon’s Provigil product (the active ingredient in which is modafinil), which accounted for 40% of Cephalon’s global turnover. Although the main patents expired in 2005, Cephalon relied on secondary formulation patents to preserve its exclusive right to market the product.
Teva developed its own process patents and launched a generic modafinil in the UK in mid-2005, prompting infringement proceedings from Cephalon. The dispute was settled that December, and the terms of the settlement later became the focus of the Commission’s investigation. In 2011, Cephalon was acquired by Teva after the transaction was notified to and approved by the Commission.
The Commission’s findings: a transfer of value with a restrictive purpose
According to the Commission, the settlement contained two key restrictive clauses:
- a non-compete clause, pursuant to which Teva agreed not to market generic modafinil in the EEA until 2012; and
- a non-challenge clause, pursuant to which Teva agreed not to contest Cephalon’s modafinil patents.
In return, Cephalon provided Teva with several financial and commercial benefits, including in the form of an up-front payment for avoided litigation costs, and agreements to: (i) purchase modafinil API from Teva at a premium; (ii) grant Teva UK distribution rights for Cephalon’s products; (iii) grant Teva access to Cephalon’s clinical data for a separate product; and (iv) grant Teva a licence to market generic modafinil in the EEA starting in 2012.
The Commission found that these transactions represented a transfer of value with no legitimate business rationale beyond inducing Teva to stay out of the market. This eliminated potential competition, allowing Cephalon to maintain supra-competitive prices after patent expiry.
The Commission therefore concluded that the settlement arrangements comprised an agreement whose object and effect was to restrict competition, in breach of Article 101 of the Treaty on the Functioning of the European Union (TFEU). In doing so, it applied the principles established in the leading case of Generics (UK), which articulated the following two-limb test for determining whether a patent settlement agreement amounts to a restriction of competition “by object”.
i. First, authorities must assess whether the transfers of value provided for by the agreement have any explanation other than the parties’ shared commercial interest not to compete on the merits. If they do not, a by-object restriction is prima facie established.
ii. Even where that first limb is met, the agreement will not be a by-object restriction if it has proven pro-competitive effects capable of creating reasonable doubt that it causes a sufficient degree of harm to competition.
The Commission imposed fines of €30m on Teva and €30.5m on Cephalon.
Appeal before the General Court
Teva and Cephalon appealed. In October 2023, the General Court dismissed the challenge, confirming that the Commission had correctly applied the framework from Generics (UK).
The General Court found that the side-deals were economically irrational for Cephalon absent Teva’s agreement not to compete, and formed a single contractual framework whose object was to restrict competition. Assessing whether the arrangements would have been concluded on similar terms without the restrictive clauses was, according to the General Court, a legitimate part of the “by-object” analysis. Claimed efficiencies – such as litigation cost savings or supply stability – were deemed to be unsubstantiated.
The CJEU confirms the finding of infringement
Teva and Cephalon submitted two grounds in support of their further appeal, alleging that the General Court had erred when: (i) applying the legal test from Generics (UK) to establish that there was a restriction of competition by object; and (ii) assessing whether there was a restriction of competition by effect.
In short, the CJEU dismissed Teva and Cephalon’s appeal in full, upholding the General Court’s conclusion that the parties’ settlement agreement was a restriction of competition by object. The CJEU’s findings on each ground of appeal were as follows.
Ground 1: Alleged errors of law in classifying the settlement as a restriction by object
The appellants claimed that the General Court had misapplied both parts of the test in Generics (UK).
In relation to the first limb of the test, the parties’ arguments and the CJEU’s conclusions were as follows:
By comparing what was concluded in the settlement with what would have been agreed between the parties absent the restrictive non-compete and non-challenge clauses, the General Court had conducted a counterfactual analysis – something that should be done when assessing whether an agreement has restrictive effects, rather than a restrictive object. This amounted to an error of law on the General Court’s part, including because it had failed to establish that each of the commercial transactions in the settlement would not have been agreed absent the restrictive clauses.
The CJEU noted that, when deciding whether a patent settlement amounts to a by-object restriction, it is necessary to conduct a detailed, overall assessment of the agreement and its context – including the parties’ interests and the incentive effect of any transfers of value. The presence of restrictive clauses, such as non-compete and non-challenge clauses, is not in itself sufficient.
That being the case, whilst the General Court’s assessment of the incentives flowing from the settlement agreement involved a hypothetical scenario, that didn’t mean it was actually carrying out a counterfactual assessment of anticompetitive effects. Rather, the General Court was seeking to establish that, as a whole, the value-transfers to Teva could be explained only as an inducement for it to stay out of the market, in line with limb one of the Generics (UK) test. Further, there was nothing to prevent counterfactual elements being taken into account when making a finding of infringement by object.
a. The General Court formulated a stricter legal standard than the test in Generics (UK) and reversed the burden of proof, by requiring the appellants to show that they would have entered into the same commercial arrangements, on equally favourable terms, absent the restrictive clauses.
The CJEU concluded that the General Court had made no such error of law in its assessment. Rather, the appellants having argued that each of the side-deals could legitimately be explained, the General Court had examined whether their purpose was in fact to serve as consideration for Teva’s non-compete and non-challenge commitments. This examination led the General Court to conclude that, by establishing that the value-transfers to Teva had no purpose other than to induce it to agree to the restrictive clauses, the Commission had duly discharged the burden of demonstrating that the side-deals had no plausible explanation other than the interest of both parties not to compete on the merits.
b. By considering the conclusion of the commercial transactions in isolation from Cephalon and Teva’s patent dispute, the General Court had applied a test that was effectively impossible for the appellants to meet.
The CJEU concluded this complaint was unfounded. The General Court had not, as the appellants argued, required them to justify the side-deals on a standalone basis, absent the patent settlement. Rather, the General Court had evaluated the relevant commercial transactions against the context of the settlement of the parties’ disputes and found, on the facts, that these transactions increased the overall transfer of value to Teva, in order to induce acceptance of the restrictive clauses. This assessment was in line with the correct legal test.
In relation to the second limb of the Generics (UK) test, the appellants submitted that the General Court had failed adequately to address their arguments that the settlement’s pro-competitive effects cast reasonable doubt on the degree of harm it caused to competition. In this regard the parties pointed to the Teva/Cephalon merger clearance decision, in which the Commission stated that the settlement agreement between the parties had removed the IP barriers preventing entry and would enable Teva to become Cephalon’s most significant competitor on the modafinil market (once the licence between them took effect in 2012).
The CJEU found that the appellants’ arguments were: (i) inadmissible, as new arguments; and (ii) ineffective, as they blurred the distinction between the analytical framework for merger control and for assessments under Article 101 TFEU. Additionally, the General Court had in effect previously examined and rejected this argument, classifying Teva’s entry to the modafinil market as “delayed, controlled and limited”, as a result of the patent settlement.
Ground 2: Alleged errors in finding a restriction by effect
Given that a restriction of competition by object was established, the CJEU found it was not necessary to then examine the anticompetitive effects of the concerned agreement.
Key takeaways
The CJEU’s judgment further consolidates the Generics (UK) framework as the governing standard when assessing reverse-payment patent settlements under EU competition law.
The judgment also reaffirms that, where value-transfers to a potential generic entrant take the form of favourable commercial side-agreements rather than a monetary payment, they will be assessed in their totality with a view to determining whether their value is such that they can only be explained as an inducement for the generic manufacturer to stay out of the market. In this regard, the CJEU again emphasised (as it did in last year’s Perindopril judgment) that value-transfers that exceed what is necessary to compensate the generic manufacturer for litigation expenses and disruption and/or for the supply of goods or services are unlikely to be capable of being justified.
Therefore, whilst the CJEU affirmed in the judgment that the Generics (UK) test does not preclude the conclusion of commercial side-agreements as part of an overall patent settlement, parties entering into such agreements should take care when assessing and documenting their value and rationale – even where the settlement itself does not provide for a cash payment to the potential entrant.