5 August 2025

The interplay between competition law and intellectual property law has garnered growing attention. This evolving relationship presents complex challenges – especially for developing countries, where there is limited experience in applying competition law frameworks to the use and enforcement of intellectual property rights.

Competition law should be applied in a way that promotes the protection and enforcement of competition on the merits, whilst acknowledging intellectual property rights and their potential to drive technological innovation, the knowledge economy, and facilitate the transfer and dissemination of technology to society, ultimately promoting social and economic progress.

Pay-for-delay agreements, also known as reverse payment settlements, illustrate how complex it is to deal with the tension caused by the interface of competition law and intellectual property law in a manner that does not disadvantage or discount either body of law.

Pay-for-delay agreements

Settlements between patent holders and firms infringing the patents or challenging their validity happen frequently and are encouraged, since it is seen as a legitimate, effective, inexpensive way to settle disputes and provide legal certainty. Kew explains that resolving complex patent disputes through settlements can yield substantial commercial and administrative advantages, particularly by reducing the significant costs and time demands typically associated with litigation.

Pay-for-delay agreements generally arise in the pharmaceutical sector during patent disputes between the patent holder (also known as the patent originator) and a generic manufacturer. The patent originator holds a patent and operates in a specific market, while the generic manufacturer seeks to enter that market, often by challenging the validity of the patent in court. As patent litigation are known to be risky and uncertain, the parties may choose to settle the dispute out of court.

In such settlements, the generic manufacturer agrees to delay its market entry until a specified date. In exchange, the patent originator agrees to provide some form of compensation – either in cash or in kind. These agreements benefit both parties: the patent originator gains extended market exclusivity, and the generic manufacturer gets paid. However, pay-for-delay agreements have the potential to block or postpone the entry of generic competitors into the market and have raised significant concerns regarding their impact on competition, prices, and consumer welfare.

Although settlement agreements are the most common type of pay-for-delay arrangement, such agreements may take various other forms. For example, a pay-for-delay provision can also be contained in a licensing agreement or be disguised as a licensing agreement (i.e. a licence that places limitations on the entry of the generic firm into the market).  This can occur where the patent originator agrees to license technology to the generic manufacturer at no or very low costs (which essentially amounts to payment), while the generic manufacturer agrees to delay its entry into a specific market.

Pay-for-delay agreements in the South African context

Competition law is growing and developing at a fast pace in Africa and all industries are facing more intense scrutiny from competition authorities. The pharmaceutical sector, in particular, is receiving heightened global attention, and it is likely that South African regulators will intensify their focus on this industry in the coming years. Given the universal need for accessible and affordable medicine, the intersection of competition law and patent law is becoming increasingly relevant.

South Africa currently still has a depository patent system, meaning the validity of a patent application is not determined by the substance or quality of the product or process itself.  Therefore, a patent application cannot be refused on the basis of the merits. It should be noted, however, that South Africa is in the process of introducing substantive search and examination of patent applications, which will allow the authorities to examine the substance of the patent application and ensuring it meets all the relevant requirements.

There are some commentators who believe that this depository patent system can result in an abuse of the system, which may lead to ever-greening practices (i.e. “practices which involve filing more than one patent on a single product, reformulating the same patent, and reverse payments taking place”). Reverse payments and pay-for-delay settlements therefore are a threat in the South African context, but unfortunately there has been no case law on this subject yet, so it is uncertain how courts in South Africa will approach these arrangements.

In its Intellectual Property Policy, the DTI placed much emphasis on access to affordable medicine.  Moreover, Section 2 and the preamble of the South African Competition Act contains a broad range of objectives, and the recent judgment of the Constitutional Court in Competition Commission of South Africa v Mediclinic Southern Africa Pty Ltd CCT 31/20 2021 ZACC 35 stressed that the protection of vulnerable consumers and the creation of greater access to markets by those who suffered exclusion will have to be taken into account throughout. Specifically, the Court rejected “seeking to record the highest profit margin possible by any means necessary, in wanton disregard for what that would do to the rest of humanity”.

While these comments do not expressly relate to pay-for-delay agreements, it provides valuable background which indicates that a pay-for-delay agreement that prevents generic manufacturers from entering the market for a particular pharmaceutical will likely be subject to competition scrutiny in the South African context.

Comments made in the case of Cipla Medpro v Aventis Pharma (139/12) Aventis Pharma SA v Cipla Life Sciences (138/12) should be noted though. In this case the court stated that “where the public is denied access to a generic during the lifetime of a patent that is the ordinary consequence of patent protection and it applies as much in all cases.”

Pay-for-delay agreements and the South African Competition Act

The Competition Act contains certain very specific per se prohibitions applicable to firms in a horizontal relationship, set out in section 4(1)(b) of the Act. These prohibitions are price fixing, market allocation and collusive tendering. Therefore, in order to prohibit pay-for-delay agreements per se, it is necessary to slot this conduct into one of the existing categories in the Competition Act.

Commentators note that, from a competition perspective, pay-for-delay agreements or comparable clauses will likely be considered to be anti-competitive. Specifically, pay-for-delay agreements may constitute per se prohibited market allocation.  Wood and Lötter support this approach, explaining that: “Reverse payment patent settlements have not yet been considered by the competition authorities, however, such an arrangement may well amount to a horizontal restrictive practice to the extent that it constitutes an agreement between competitors to divide markets – a per se contravention of the Competition Act”.

Sutherland and Kemp state that it is still unclear whether Section 4(1)(b) forbids a situation where one firm (that is an actual or potential competitor of another firm) agrees to not enter the market in which the other firm is active, and receives compensation in return.  However, they refer to US authority that supports the argument that the conduct of a pharmaceutical firm who agrees to stay out of the market for a specific pharmaceutical product made by another firm, in exchange for some sort of compensation, is per se prohibited as market allocation.  Therefore, Sutherland and Kemp proposes that a similar approach be followed in South Africa, “unless the exclusion is not naked, as in the case of a sale of goodwill coupled with a restraint on the seller of the goodwill”.

In summary, it is submitted that pay-for-delay agreements should, in most cases, be characterised as market allocation. The firms that are party to the agreement decides that the generic firm will not enter the market for that specific pharmaceutical product at that time, in exchange for compensation. The generic firm is a potential competitor, it does not enter the market, and by that exclusion the firm with the patent obtains or retains market power. It is very clear that, in essence, the market is being allocated.

If competition authorities adopt the proposed approach, entering into pay-for-delay agreements may attract substantial scrutiny and penalties under competition law.

Conclusion

In its Intellectual Property Policy of the Republic of South Africa Phase 1, the DTI held that competition authorities “regulate market conduct and intervene in the exercise of IPRs where market distortions are created to the detriment of consumer welfare”. Deciding whether competition authorities should intervene requires a case-by-case assessment, informed by established legal principles, comparative analysis across jurisdictions, and engagement with other regulatory bodies. This approach helps to ensure that interventions lead to long-term competitive advantages.

While reverse payments and pay-for-delay settlements may be a threat in the South African context, there has been no case law on this subject yet.  Thus, it is uncertain how courts would deal such arrangements. In relation to the interface between competition law and intellectual property law, South African law is still in its infancy, but there is the opportunity to grow and advance fields of work and guiding principles. It is submitted that pay-for-delay settlements should be characterised as market allocation.

In light of the potential for substantial scrutiny and penalties under competition law, entering into pay-for-delay agreements should be avoided.

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