Adjudicating Europe

Drugs in Europe, unlike most of other consumer goods, are purchased by the Member States (not by the final consumers). As a result their prices tend to be shielded from the free play of supply and demand. To what extent these specific and essential characteristics of the sector should play a role in the application of the European competition rules?

This question has increasingly been the subject of scrutiny by the European Commission, the national competition authorities and, finally, the European Courts, as ‘big pharmas’ struggle to reconcile all the time more restrictive national regulatory schemes fixing the price of prescription drugs at a given level with both Article 81 EC, outlawing restrictions of parallel trade, and Article 82 EC, prohibiting the abuse of dominant positions (see, e.g., Sot. Lelos kai Sia EE (C-468/06))

In 1998, the European Commission condemned GSK’ ‘dual price system’ which consisted in charging wholesalers in Spain different prices for the same medicines, depending on whether they planned to sell them domestically or export them to other European Union countries. This system is one of the possible tactics, together with export bans, quota systems, refusals to supply, adopted by the pharmaceutical industry to curb their major ghost: parallel trade. By relying on its constant practice, developed in the past in sectors such as the automotive industry, and endorsed by the ECJ, the Commission considered this system as prohibited by Article 81(1) in so far as it had as its object the restriction of parallel trade. But, can we presume that parallel trade in medicines reduces their prices to the final consumer, thus increasing consumer welfare? What if parallel traders by acting as free-riders keep the advantage in terms of price difference and don’t pass it on to consumers? What does it trigger the application of Article 81(1) to agreements concluded in the pharmaceutical sector? The mere existence of an anti-competitive object or is there a need to determine consumer harm?

Although the CFI upheld the Commission’s finding that Article 81 was infringed, it also found that the Commission had erred in concluding that a ‘dual pricing scheme’ set up by a pharmaceutical manufacturer to reduce parallel trade between EU Member States is a per se violation under EU competition law. In particular, according to the CFI, “having regard to the legal and economic context”, the objective of limiting parallel trade does not by itself establish a presumption that the agreement has an anti-competitive effect. In other words, the CFI said: “European Commission, be aware that NOT all provisions intended to restrict parallel trade constitute a restriction of competition by OBJECT; ergo you are required to look at both the legal and economic contexts in every individual case when analysing the object and the effect of an a agreement before catching it under Article 81(1)!”.

This was the first time a European Court recognized the ‘specificity’ of the pharmaceutical market when this is made subject to the application of European competition rules. The CFI also overturned the Commission’s conclusions under Article 81(3) as it has failed to properly consider the possible gains in efficiency arising from a pricing structure that helped fund investments in R&D.

On appeal, the ECJ, by building upon the AG’s opinion, reminded that - since 1966 - the anti-competitive object and effect are not cumulative but alternative conditions for assessing an agreement under Art. 81(1) EC. This explains why it is necessary first to consider the purpose of the agreement in its economic context and, only when no object restriction can be found, proceed to the examination of negative effects on competition. By rejecting the interpretation proposed by the CFI, the Court stated that all agreements – also those concluded in the pharmaceutical sectors – aimed at prohibiting or limiting parallel trade have as their OBJECT the prevention of competition. Therefore – it concluded – that the CFI erred in law in requiring proof that the agreement entails disadvantages for final consumers as a prerequisite for a finding of anti-competitive object. Nevertheless, the Court did not set aside the CFI’s judgment as other elements of the operative part of the judgment confirmed the Commission’s decision.

If the ‘specificity’ of the pharmaceutical sector has no role to play in the qualification of an agreement within the scope of Article 81(1), the Court recognised that arguments provided by the notifying party under Article 81(3) must be assessed in the light of factual arguments and evidence (para 102). In particular, one has to take into account the ‘nature and specific features of the sector concerned by the agreement’ every time these elements ‘are decisive for the outcome of the analysis’ (para 103). That’s where there the ‘specificity’ of the pharmaceutical market may (and should) play a role today. However, this does not result – one should notice – in any increase in the standard of proof (which still lies on the party invoking the exemption) or reversal of the burden of proof, but merely ensures that all appropriate information is properly taken into consideration and examined by the Commission in their proper economic context.

Drugs are like tyres and cars under Article 81(1) - the story goes - but they should be treated wit more care when it comes to assess whether the alleged pro-competitive effect (i.e. the protection of innovation) of their agreements could outweigh the anti-competitive effects under 81(3).

How to reconcile this approach to Article 81(1) with the current process of moving from the per se rule to the rule of reason in the application of Article 82 EC ? Have competition watchdogs received by now enough guidance to properly apply competition rules to “big pharmas”?

Readers, what’s your take on that?

Mancinus