On 26 June 2015, the UK Competition and Markets Authority (CMA) announced the closure of its year-long investigation into a suspected breach of competition law by a pharmaceutical company. The investigation had looked into a loyalty-inducing customer discount scheme – a potential infringement of the competition rules if the company offering the scheme has a dominant position.

While the CMA closure statement does not provide much detail of the investigation (and the company under investigation has not been identified), the CMA must have sought significant documentary evidence in order to reach its provisional conclusion. The CMA evidently concluded that expending further resources on this case would have had limited value. This could be due to a number of possible factors: e.g., the infringement was very small scale; or there were factors which would have made it difficult for the CMA to prove a breach; or the company offering the rebates may not have been dominant. The CMA ultimately sent a warning letter to the investigated company, which constitutes neither a finding of wrongdoing, nor a bar to the investigation being re-opened in future.

CMA guidance on rebate schemes

Although the CMA did not pursue this case, the authority has sought to make clear that there will be situations where the offering of rebates will engage the competition rules. To assist companies to identify such situations, the CMA has provided some general guidance on the use of rebate/discount schemes.

The guidance acknowledges that such schemes can be mutually beneficial for customers and suppliers and that not all rebates or discounts offered by dominant suppliers will engage competition law. For example, a scheme offering rebates/discounts which apply only to units above a certain volume threshold is unlikely to raise competition concerns. This kind of offering is usually justifiable on the basis of the savings to the supplier from selling increased volumes.

However, the CMA guidance also notes that rebate/discount schemes may constitute an abuse of dominance where they have a ‘loyalty-inducing’ or ‘fidelity-building’ effect, which may exclude or limit competing firms’ ability to enter the market. This, in turn, may limit the incentives for firms to innovate, with customers potentially facing higher prices in the long term. In the context of the pharmaceutical industry, this concern is of particular relevance for wholesale supply (e.g., to hospitals/pharmacies), where governmental price regulation / reimbursement schemes do not prevent such rebates or discounts being offered.

One particular scheme highlighted by the CMA is a ‘roll-back’ rebate (also known as a ‘retroactive’ scheme). Under such a scheme, a customer which reaches a specified volume will receive discounts in respect of units purchased both above and below the threshold. The CMA considers this may be capable of ‘inducing’ customer loyalty. This may be an abuse of a dominant position in particular where the grant of the rebate/discount is conditioned on the customer purchasing from the dominant company in circumstances where it might otherwise have decided to buy from a competitor.

The CMA further highlighted that where a scheme results in effective prices charged by the dominant company which are below its production costs, it is likely to be concerned that competitors could be prevented from competing for some/all of the customer demand.

Comment

The content of the CMA’s guidance is in line with EU law in this area, and, as such, should not be seen as a significant new legal development. However, the CMA’s decision to provide guidance on this topic in the context of a pharmaceutical industry investigation suggests that it recognises that such schemes may be commonly used in this industry.

The CMA evidently has a renewed interest in pricing issues for pharmaceutical companies, as it has also recently opened a formal investigation into Pfizer and Flynn to consider possible excessive pricing of the anti-epilepsy drug Epanutin. 

CMA closure statement

For further information on the Pfizer/Flynn case, please see here.