Pay-for-Delay: The CJEU Confirms Teva/Cephalon and Defines the Limits of Patent Settlement Agreements

An offer you can refuse?

The recent judgment in Teva/Cephalon firmly anchors EU jurisprudence on pay-for-delay agreements. By upholding the sanctions imposed on the two companies for a series of side agreements concluded alongside a patent litigation settlement, the Court of Justice clarifies how to distinguish a legitimate resolution of a dispute from an arrangement whose real purpose is to postpone the entry of a generic competitor. The ruling does not inaugurate a new approach; rather, it consolidates a continuum that began with Lundbeck (Commission 2013), was consolidated in Servier (CJEU 2024), and refined in Generics (UK) (CJEU 2020) and the Commission’s Modafinil decision (2020). Teva/Cephalon therefore does not mark a rupture but the maturation of an analytical framework that has been built incrementally over a decade.

The Facts: A Settlement Surrounded by Commercial Agreements

The dispute originated in a conflict between Cephalon, holder of a patent nearing the end of its protection for modafinil, and Teva, which intended to launch a generic version. The parties settled the infringement action. This, in itself, was unremarkable. The difficulty arose from a set of parallel commercial agreements: supply of active pharmaceutical ingredients, cross-licensing arrangements, and distribution-related commitments. Their structure, timing, and financial magnitude led the Commission—and subsequently the General Court and the Court of Justice—to conclude that these agreements lacked credible standalone economic justification. Their real function was to delay Teva’s market entry, echoing the structural concerns first identified in Lundbeck, where unexplained transfers signaled a market-sharing arrangement “by object,” and confirmed in Servier, where ancillary agreements were evaluated under the same logic.

The Method Confirmed: Each Agreement Must Have Its Own Economic Rationale

Against this background, the Court reaffirms that such arrangements may qualify as restrictions “by object” when the advantages exchanged cannot be explained independently of the generic’s decision to stay out of the market. This principle is entirely consistent with earlier case law. In Generics (UK), the Court articulated a plausibility test: each advantage must have an autonomous commercial rationale. Modafinil later confirmed that, in complex settlements, authorities may examine the entire contractual package to detect whether several instruments together amount to a single inducement.

The central issue in the appeal concerned methodology. The companies argued that the General Court had improperly relied on a counterfactual analysis more appropriate for an effects-based assessment. The Court dismisses this objection. Considering what the parties would have done absent the agreement does not amount to measuring effects; it serves only to test the internal coherence and plausibility of the justifications offered. It is a tool of legal qualification, not an economic impact study. This approach has been present, implicitly or explicitly, since Lundbeck: the determination of unlawfulness flows not from the magnitude of the transfer but from the absence of a credible economic justification for it.

The principle is straightforward: a commercial agreement is legitimate only if it has its own economic reason for existing. If it makes sense solely because it delays market entry, its actual purpose becomes apparent—and unlawful.

This logic is reminiscent of the French law of obligations. Since the 2016 reform, the concept of “cause” no longer exists as an autonomous category, but its functions remain embedded in Articles 1162 and 1169 of the Civil Code: a contract must pursue a lawful purpose and be supported by a real, non-illusory consideration. An agreement with no objective justification—one whose only function is to defer entry—would be unlawful or devoid of substance. The parallel is useful for understanding the Court’s approach: scrutiny of an agreement’s internal coherence and identification of its true purpose.

The reasoning also aligns with principles found in the Draft Common Frame of Reference and related European codification projects, which emphasize that a contract is invalid when its declared purpose masks an incompatible underlying objective. Teva/Cephalon fits this pattern: transparency and autonomous justification become the conditions of legality.

Importantly, the ruling also illustrates the convergence between the EU approach and US antitrust law. While the EU relies on a “by object” qualification when unjustified advantages reveal an inducement not to enter, the US Supreme Court in FTC v. Actavis adopts a rule-of-reason framework that equally focuses on large and unjustified reverse payments. The legal structures differ, but the underlying intuition is the same: an unexplained transfer is treated as the purchase of non-entry.

Doctrinal Perspective: The Enduring Relevance of “Cause” as a Test of Justification

Although the Court frames its analysis within competition law, Teva/Cephalon implicitly revives a conceptual structure long familiar to contract theory: the idea that an agreement must possess a genuine and intelligible justification for the obligations it creates. In French law, this requirement was traditionally expressed through the doctrine of cause. Even after the 2016 reform abolished cause as an autonomous category, its core functions persist in Articles 1162 and 1169 of the Civil Code: a contract must pursue a lawful purpose, and the consideration must not be illusory or devoid of substance.

Classical jurisprudence had already developed this idea with considerable precision. The Cour de cassation repeatedly held that a contract lacking a real cause could be struck down, whether because its underlying objective was unlawful or because the consideration was purely fictitious. Decisions such as Civ. 1re, 7 April 1987 (nullity for absence of real consideration) or Com., 10 July 2007 (limits on judicial intervention for bad faith execution distorting contractual substance) illustrate this function clearly: the law seeks to ensure that the declared structure of a transaction corresponds to its substantive purpose. Post-reform rulings have pursued the same logic through the lens of Articles 1162 and 1169—for instance, Civ. 1re, 7 June 2023, reaffirming that a contract contravening public policy via illicit stipulations or purpose triggers absolute nullity, even if the purpose was unknown to one party.

Seen through this doctrinal lens, Teva/Cephalon is not merely a case about anticompetitive effects or reverse payments. It is an application of a deeper juridical intuition: that an agreement which cannot justify itself by reference to its own internal economic logic is not performing a contractual function but another, unstated one. What the Court calls a lack of plausible commercial justification echoes what French doctrine traditionally described as an absence of cause, or more precisely, as a divergence between the declared objective and the true function of the transaction.

The Court’s reliance on counterfactual reasoning fits naturally within this analytical tradition. It is not an inquiry into effects but a method for testing the internal coherence of the parties’ stated explanations. The question is identical to the question historically posed by French courts when examining cause: would the agreement still make sense if the purported consideration were removed? If the answer is no, the declared rationale collapses, revealing an incompatible underlying purpose.

In that sense, Teva/Cephalon reflects a broader European trend in which the legitimacy of a contractual arrangement depends not on its technical form but on the authenticity of its economic justification. The law resists being reduced to a purely mechanistic reading of instruments. It demands a substantive inquiry into the coherence of the transaction, its purpose, and its ability to stand on its own terms.

Practical Consequences: A Clearer Framework for the Sector

The ruling provides clarity for all actors. Patent holders retain full freedom to settle disputes, including through ancillary agreements, provided those agreements rest on genuine and intelligible economic rationales. The framework is more demanding, yet more predictable.

For manufacturers of generics, the judgment confirms the competitive significance of their potential entry: their withdrawal cannot be purchased through advantages lacking independent justification. Their ability to enter the market, however, is not absolute. It remains linked to the strength of the patent at issue; the risk of litigation over validity or infringement is the normal point of balance in the system. What the ruling prohibits is not this inherent tension, but its suppression through contractual incentives unconnected to any legitimate commercial purpose.

For competition authorities and courts, the decision stabilizes the analytical method: close examination of financial transfers, reasonable use of alternative-scenario reasoning to test credibility, and verification of the internal consistency of the contractual package. In doing so, Teva/Cephalon also closes the third wave of post-2013 pay-for-delay enforcement—Commission decisions (Lundbeck, Servier, Modafinil) and CJEU clarifications (Generics UK, Servier)—and cements the counterfactual test as a standard tool of legal qualification rather than an effects-based technique.

Taken together, the message is simple: settling a dispute is not the same as organizing an absence of competition. A settlement must resolve the litigation, not structure a negotiated market freeze. This distinction is what ultimately separates a lawful transaction from a pay-for-delay agreement.