‘Pay-for-delay’ – CJEU sheds light on how to assess patent settlements from a competition law perspective

On 23 October 2025, the Court of Justice of the European Union (CJEU) delivered its judgment in the seminal pay‑for‑delay case of Teva/Cephalon (Case C‑2/24 P). The case lies at the intersection of patent settlements and Article 101 TFEU. Building on previous cases such as Generics (UK), Lundbeck, and Servier, the CJEU clarifies when a settlement constitutes a restriction of competition “by object”, how to assess potential competition and how to distinguish legitimate considerations from unlawful inducement not to compete.

Background

The case concerns a settlement agreement between Cephalon (originator of the drug modafinil) and Teva (generic challenger) intended to end a patent dispute between the parties. Under the settlement, Teva agreed not to enter the modafinil market in exchange for a package of value transfers and side arrangements.

The European Commission found that the settlement infringed Article 101 TFEU and imposed fines on both parties (EUR 60.5 million in total) in 2020. On appeal, the General Court of the European Union largely upheld the decision; the General Court’s judgement was appealed to the CJEU on two points of law:(i) the definition of “by object” infringements in relation to settlements and licence agreements and (ii) the notion of restrictions of potential competition. The CJEU’s judgment sheds more light on these points and provides guidance for national courts and authorities assessing similar fact patterns.

Cephalon and Teva agreed on the settlement regarding modafinil in December 2005. The European Commission formally opened its investigation in April 2011. The CJEU’s judgment therefore relates to conduct dating back two decades. In the interim, in October 2011, Teva acquired Cephalon.

The CJEU’s reasoning

First, the CJEU confirms that certain settlement agreements can, in principle, restrict competition. This applies where a generics producer acknowledges the validity of an originator’s patent, agrees not to challenge it and delays its own market entry. Such agreements may be anti-competitive because patent litigation forms part of the normal competitive process in innovation-driven sectors. However, such agreements are not automatically restrictive by object: value transfers may be compatible with competition law if they reflect legitimate considerations, such as compensation for litigation costs or payment for genuine goods or services, as these form part of a normal market exchange.

In light of this, the judgment establishes that assessing whether a settlement agreement constitutes a restriction by object requires a structured analysis, including the following:

• Justification test: Evaluate whether the value transferred is entirely justified by legitimate reasons (e.g. litigation expenses).
• Incentive test: If not justified under 1, determine whether the value transfer provides an incentive for the generic not to compete.
• Sole‑plausible‑explanation test: Assess whether the sole plausible explanation for the value transfer is the commercial interest of both parties not to engage in competition on the merits.

For this assessment, the agreement must be evaluated as a whole, rather than in terms of individual clauses, to determine whether it restricts competition by object. In this respect, the CJEU upheld the General Court’s approach and confirmed that incentives created for the generics producer not to compete should be evaluated. It holds that when the net value transferred from the originator is likely to cause the generic to refrain from entering the market or from pursuing independent competitive efforts – and the transfer is not strictly limited to compensating objective costs or providing proportionate stand‑alone consideration – this indicates that the settlement agreement constitutes a restriction by object. Moreover, the CJEU emphasises that labels such as “licence”, “supply”, or “co‑promotion” are not determinative; what matters is the economic reality, including timing, valuation and linkage to non‑entry obligations. Where side arrangements are concluded in temporal and contractual proximity to a non‑entry commitment and are inexplicable by independent commercial logic, they will be assessed as part of a single overall plan.

Specifically, the CJEU found no error in the General Court’s determination that, in the case at hand, commercial transactions in the settlement agreement served no purpose other than to increase the overall inducement for the generic to accept non‑compete clauses. However, in future cases, the burden remains on the Commission to prove the absence of any plausible pro‑competitive explanation for the value transfers.

As the parties denied that they were even potential competitors in the situation at hand, the CJEU adopted a practical approach to assessing potential competition. A generic company is considered a potential competitor where it has both the firm intention and the ability to enter the relevant pharmaceutical market within a short period, as demonstrated by concrete preparatory steps. Ongoing patent litigation does not negate potential competition, as competition law assumes legal uncertainty until a final ruling is made.

Last but not least, the CJEU reiterates that even if an agreement constitutes a restriction by object, parties may still attempt to demonstrate actual pro‑competitive effects, but such arguments rarely overcome an object qualification.

Finally, in relation to fines, the judgment endorses a differentiated analysis reflecting each party’s role, level of knowledge and duration of the infringement.

Key takeaways

• Reverse‑payment settlements: In patent litigation, settlements that include a value transfer from the originator to the generic are a restriction by object where the net transfer is liable to induce delayed or foregone entry and is not justified by a proportionate quid pro quo. Legitimate features – such as compromise on the scope of IP rights or bona fide licences – do not shield a settlement if those features are ancillary to an overall non‑compete.
• Potential competition: An originator and a generic can be potential competitors even amid patent uncertainty, provided the generic has a real and concrete possibility of entry, evidenced by objective steps such as regulatory filings, supply arrangements and preparatory investments.
• Side agreements under scrutiny: Side deals concluded contemporaneously (e.g., distribution, supply, R&D collaborations) are scrutinised as part of a single overall arrangement when they lack an independent commercial rationale or are disproportionate in value or duration. Parties cannot rely on patent strength alone to justify restrictive effects; competition‑law assessment proceeds on the basis of patent uncertainty, without presuming validity or infringement.
• Liability and fines: Both originators and generics can be held responsible for participating in an anticompetitive agreement, with gravity assessed in light of the agreement’s object, market context and duration.

In summary, the judgment brings clarity to the distinction between legitimate settlement payments and those that serve as improper inducements to exclude competition. The CJEU sets a structured analytical standard, requiring companies and competition authorities to assess whether payments or advantages are proportionate to bona fide litigation costs or reflect genuine commercial value. Benefits that exceed a plausible settlement or lack an independent commercial rationale are strong indicators of anticompetitive intent.

Practical implications for life sciences and beyond

Originators in the pharmaceutical and other innovation‑driven sectors should expect intensified scrutiny of any settlement components that confer monetary or in‑kind advantages on generics and other potential competitors, especially when coupled with broad territorial and temporal non‑entry covenants. Generics must carefully document independent commercial motivations for any side deals to avoid the appearance of a disguised reverse payment. Licensing can remain a viable settlement tool, but valuations must be contemporaneously justified, benchmarked to comparable transactions and clearly severable from non‑compete obligations. Outside pharma, this reasoning reinforces how competition authorities are likely to assess dispute settlements that involve value transfers and restrictions on market access, particularly in innovation‑driven sectors.

What does this mean for your business?

The CJEU’s judgment has practical implications for how companies structure and document settlement agreements. To mitigate antitrust risk, consider the following actions:

• Review existing and contemplated (patent) settlement templates for reverse‑payment risk, focusing on net value transfer, proportionality and linkage to non‑entry commitments.
• Implement a robust valuation protocol for licences, supply and service agreements concluded in settlement contexts, including contemporaneous documentation, third‑party benchmarks and audit trails.
• Calibrate non‑entry and scope clauses to the specific disputed claims and geographies; avoid overbroad restraints that outstrip litigation risk.
• Align antitrust and IP litigation teams early in settlement planning to ensure competition‑law‑compliant structuring.