Excessive pricing as abuse of dominant position
Gradual change towards enforcement
The acting director general of the Israeli Competition Authority (ICA) recently announced her intention to impose financial penalties against a local pharmaceutical distributor, MBI Pharma Ltd, and two of its officers, subject to a hearing. According to the ICA's publication, the grounds for these enforcement proceedings are that MBI set an unfairly excessive price for one of its portfolio drugs, registered under the name "Leadiant" (and previously, a similar drug called "Xenbilox"), which is a life-saving drug for patients who suffer from cerebrotendinous xanthomatosis (CTX).
If the ICA decides to impose penalties following the hearing process, this will be the first time that it takes enforcement measures against a monopoly for abuse of its dominant position by setting unfairly excessive prices.
Excessive pricing as abuse of dominant position
Section 29A(a) of the Economic Competition Law (the Law) stipulates a general prohibition that "a monopoly shall not abuse its position in the market in a manner which may reduce business competition or harm the public".
In addition to the general prohibition, section 29A(b) of the Law presents four types of behaviour that are regarded as creating a presumption of abuse of a monopoly position. One such behaviour is setting "unfair purchase or sale price levels for the monopoly asset or service".
Until recently, it was generally accepted that the aforementioned presumption prohibits the practice of "predatory pricing" by a monopoly (ie, reducing the price of the product provided by the monopoly below relevant costs, in order to drive competitors out of the market, only to later increase the price and recoup the losses after the competitors are driven out). The question of whether the term "unfair" also prohibits charging excessive prices was subject to much debate and disagreement. This is because an excessive price does not necessarily disrupt the competitive mechanism. A high price charged by a monopoly does not always impede the process of natural selection that lies at the heart of competition. On the contrary, such a price may be a catalyst for new entry because it incentivises players that are outside of the market and are sufficiently efficient to enter the market and compete with the monopoly (not only by means of the price, but also by other characteristics of the product or service).
As such, the prevailing practice of the ICA until recent years was to not enforce the prohibition of abuse of monopoly position against monopolies for charging unfairly excessive prices.
Gradual change towards enforcement
On 9 April 2014, the director general of the ICA at that time published a public opinion that concerned "the prohibition against the charging of excessive prices by monopolies" (Public Opinion 1/14). This public opinion completely contradicted the deeply ingrained policy not to deem high prices charged by a monopoly as unfair pricing by recognising the excessive pricing cause of action. In Public Opinion 1/14, it was announced, for the first time, that the prohibition against setting unfair prices also applies to the setting of excessive prices. Public Opinion 1/14 defined a "safe harbour" threshold of 20% (ie, profits of up to 20% will be regarded as entirely unsuitable for discussion a priori in the context of alleged excessive pricing) and proved controversial upon its publication.
Consequently, the next director general decided to re-examine Public Opinion 1/14 and hold a new public hearing on the subject. As a result, on 27 February 2017, a new public opinion was published, which concerned "the considerations of the director general in the enforcement of the prohibition against charging unfairly excessive prices" (Public Opinion 1/17). The normative starting point of Public Opinion 1/17 was that charging unfairly excessive prices might, under the right circumstances, be tantamount to abuse of a monopoly position. At the same time, Public Opinion 1/17 expressly recognised the practical and conceptual difficulties entailed in enforcing the excessive pricing cause of action, its considerable economy-wide costs (such as the inhibition of innovativeness and investments) and the fear that the careless implementation of it would harm competition and the public. Therefore, Public Opinion 1/17 explained under which circumstances the ICA would enforce this cause of action and, among other things, abolished the 20% safe harbour clause.
Since the first public opinion that recognised excessive pricing was issued nearly a decade ago, the ICA has taken no enforcement action. However, private enforcement has boomed in recent years – many class actions have been filed against local and international firms, alleging that they held monopoly positions in their respective lines of business and that they charged unfairly excessive prices.
The issue of whether excessive pricing is a valid, actionable cause of action has not been determined and is currently pending before the Supreme Court in appeal proceedings that were initiated by Central Bottling Company (the franchisee of Coca Cola in Israel) concerning the certification of an excessive pricing class action by the district court that targeted the pricing of 1.5-litre Coca Cola bottles.
On 8 June 2020, the attorney general (AG) of Israel submitted an opinion to the Supreme Court on the Coca Cola case, which concerned the proper implementation of the much-debated unfair pricing prohibition under the Law. The AG maintained that the Supreme Court should determine that the Law prohibits monopolies from setting unfairly high prices. At the same time, the AG asserted that the excessive pricing prohibition should be interpreted narrowly, enforced carefully and used only in cases where the benefits unequivocally outweigh the costs and risks associated with the implementation of the prohibition.
The Supreme Court is expected to issue its much-anticipated decision on the matter in early 2022.
According to the publication, the ICA has found that MBI was a monopoly in the provision of the Leadiant drug for CTX patients in Israel. CTX is a genetic, incurable disease, with approximately 50 patients in Israel and a few hundred worldwide. The patients in Israel are required to take a daily dosage of the drug. Initially named "Xenbilox", the drug was marketed by MBI at a price of 8,000 shekels (approximately $2,500) per packet. In 2017, the global manufacturer ceased the production of Xenbilox and started marketing Leadiant, which is a similar drug. According to the publication, Xenbilox was legally sold in Israel but was not formally registered in Israel. Leadiant, on the other hand, was registered by MBI in Israel and, according to health regulations, once it was registered, no other drug could be imported to Israel for treating CTX (subject to a few exceptions). The ICA found that the price of a packet of Leadiant was a few hundred percent higher than the price charged for the similar Xenbilox and was set at 50,000 shekels (approximately $15,690). Even after the admission of Leadiant to the health fund (which is a single buyer model that normally yields much lower prices subsequent to negotiations), the price was still much higher and was approximately 32,000 shekels (approximately $10,000).
Therefore, the acting director general is now contemplating whether MBI abused its monopoly position by charging unfairly excessive prices and whether to impose a financial penalty of 8 million shekels (approximately $2.5 million) upon it, as well as financial penalties on two of its officers of 614,450 shekels each (approximately $192,870). According to the publication, the proceedings were initiated following a complaint filed by the Ministry of Health.
This is the first time that the ICA has announced its intention to impose penalties (subject to a hearing process) for the excessive pricing of products by a monopoly. The case may serve as an important precedent, which indicates that the ICA intends to be a relevant enforcer of excessive pricing in the right circumstances. However, the MBI case is different to most class actions that have been filed in recent years, as the product in question is a fundamental life-saving drug with inflexible demand, and not a fast-moving consumer good (such as Coca Cola bottles). The price hike concerned is also exceptional (hundreds of percent), whereas many of the class actions filed to date contest operating profitability that is often far below 100%. Therefore, it can be concluded that the ICA's decision does not impact pending proceedings and should not be viewed as deviating from the careful position expressed by the AG.
For further information on this topic please contact Shai Bakal, Ayal HaCohen or Roi Krause at Tadmor Levy & Co by telephone (+972 3 684 6000) or email ([email protected], [email protected] or [email protected]). The Tadmor Levy & Co website can be accessed at www.tadmor.com.