"Pay-for-delay" Continued: Court Of Justice Rules On Appeal In Teva-Cephalon

On 23 October 2025, the Court of Justice of the European Union (CJEU) dismissed the appeal in Teva Pharmaceuticals Industries and Cephalon v European Commission (Case C-2/24 P). The CJEU upheld the General Court's (GC) judgment from 2023 (Case T-74/21), which had confirmed the European Commission (EC)'s decision (AT.39686 – Cephalon), imposing fines totalling €60.5 million in relation to a 2005 patent settlement concerning modafinil (see our previous blog posts on the EC decision and the GC judgment)."

This judgment is the most recent development in a series of CJEU cases concerning patent settlement agreements sometimes referred to by the EC as "pay-for-delay" agreements. Building on Generics (UK) (Case C-307/18) and Servier (Cases C‑176/19 P and C‑201/19), the CJEU further refines the criteria for assessing such settlements under Article 101 of the Treaty on the Functioning of the European Union (TFEU), particularly where they involve value transfers between originator and generic companies. The judgment reinforces the existing analytical framework and offers welcome guidance to pharmaceutical companies navigating patent litigation and structuring settlement agreements in compliance with EU competition law.

Background

In December 2005, Teva and Cephalon reached a settlement to resolve patent litigation concerning modafinil (a drug used to treat sleep disorders). By that time, Cephalon's key compound patent for modafinil had expired, and Teva had sought to enter the UK market with its generic version. Cephalon initiated proceedings to prevent that entry, relying on certain secondary and formulation patents that remained in force.

Under the settlement, Teva agreed to defer its independent market entry for a defined period and was granted a licence from October 2012, or earlier if another generic entered, in return for royalty payments to Cephalon. This agreement also included a number of accompanying commercial agreements, such as IP and data-access licences, API supply and distribution contracts, and reimbursement for litigation costs. Teva's entry under the licence ultimately did not occur because Teva acquired Cephalon in October 2011, and the two companies became part of the same group.

On 26 November 2020, the EC adopted a decision finding that the settlement restricted competition within the meaning of Article 101 TFEU and imposed fines totalling €60.5 million. The EC considered that, absent the agreement, Teva could have entered the market earlier, potentially increasing price competition for modafinil. Teva and Cephalon appealed that decision to the GC.

On 18 October 2023, the GC dismissed the action in its entirety, upholding the EC's conclusion that the settlement agreement constituted a restriction of competition "by object". The GC confirmed that the EC had correctly applied the two-part test from Generics (UK) and had been entitled to find no proven pro-competitive effects capable of casting reasonable doubt on the agreement's restrictive object. It also upheld the EC's findings on effects and on the calculation of the fines imposed.

Appeal

Teva and Cephalon appealed the GC's judgment to the CJEU, arguing that the GC had made several errors of law.

In particular, they argued that the GC had:

• misapplied the two-part test established in Generics (UK) for determining whether a settlement agreement constitutes a restriction of competition by "object"; and
• erred in law in finding that the settlement also restricted competition "by effect".

Teva and Cephalon therefore asked the CJEU to set aside the GC judgment and either refer the case back for a new judgment or decide the matter itself.

Judgment

On 23 October 2025, the CJEU dismissed the appeal in its entirety. The CJEU examined whether the GC had correctly applied the two-part test set out in Generics (UK) for identifying when a patent settlement involving value transfers constitutes a restriction of competition "by object".

Under that test, a settlement agreement may be classified as a restriction "by object" where:

1. the value transfers have no plausible explanation other than the parties' shared interest in avoiding competition on the merits; and
2. the agreement does not entail proven pro-competitive effects capable of creating reasonable doubt that it causes a sufficient degree of harm to competition.

The CJEU confirmed that the GC had been entitled to analyse the settlement and the related commercial arrangements together as part of a single contractual framework. It agreed that considering whether those arrangements would have been concluded on similar terms in the absence of the restrictive clauses was a legitimate way to assess the agreement's economic and legal context. This, the CJEU clarified, did not amount to a full "counterfactual" analysis of effects but confirmed that counterfactual elements may legitimately be taken into account to identify the agreement's objective purpose.

The CJEU further held that the GC had not misapplied the Generics (UK) test or reversed the burden of proof. The EC and the GC had both examined the explanations offered by Teva and Cephalon and found no alternative justification sufficient to displace the finding that the settlement restricted competition by object.

Lastly, the CJEU reiterated that the assessments of "object" and "effect" are alternative, not cumulative, under Article 101 TFEU. Having upheld the "by object" classification, the CJEU considered it unnecessary to examine Teva and Cephalon's second ground of appeal concerning a restriction "by effect".

Comment

The CJEU's judgment in Teva-Cephalon further clarifies the EU Courts' approach to patent settlement agreements involving value transfers between originator and generic companies. Alongside Generics (UK) and Servier, it provides additional guidance on when such agreements may be regarded as restrictions "by object" under Article 101 TFEU.

The judgment confirms that the mere existence of value transfers does not, in itself, render a settlement problematic. The key question remains whether those transfers can be objectively justified and whether the overall agreement gives rise to verifiable pro-competitive or efficiency-enhancing effects. Such transfers will, in principle, be classified as "by object" restrictions where they have no plausible explanation other than the parties' shared interest in avoiding competition on the merits.

The judgment also highlights the importance of ensuring that settlement agreements are supported by clear, contemporaneous evidence of their commercial rationale. Any payment, licence, or ancillary arrangement forming part of a settlement should be carefully documented and capable of demonstrating that the agreement facilitates, rather than delays, competition. Early competition law review during settlement planning therefore remains essential to mitigate enforcement risk and to strengthen the defensibility of legitimate business strategies.