Yesterday, the European Court of Justice ("ECJ") held in Sot. Lelos Kai Sia EE (and Others) v GlaxoSmithKline AEVE (Joined Cases C-468/06 to C-478/06), that whether a dominant pharmaceutical company's refusal to supply wholesalers involved in parallel exports is an abuse of a dominant position is dependent on whether the orders are "ordinary".

Summary and business impact

  • Refusal by a dominant pharmaceutical company to supply wholesalers involved in parallel export will be an abuse of the pharmaceutical company's dominant position if the wholesalers' orders are "ordinary". 
  • However, a dominant pharmaceutical company must be able to protect its own commercial interests if confronted with orders "out of the ordinary in terms of quantity", for example if out of all proportion to those previously sold by the wholesalers to meet demand in the relevant Member State. 
  • Whether such orders are "ordinary" is an issue for national courts to determine, taking into account both previous business relations between the parties and also the size of the orders with respect to the market requirements in the relevant Member State. 
  • Whilst the decision lacks some certainty as to what is to be considered "ordinary" and will probably lead to further litigation in national courts on the matter, the decision is broadly positive for research-based pharmaceutical companies. In particular, the ECJ has linked "ordinary" to the size of the order in relation to the requirements of the national market. Therefore, it appears that dominant pharmaceutical companies may refuse to supply wholesalers quantities out of all proportion to those previously sold by the same wholesalers to meet the needs of the market in that Member State.

Background 

Until November 2000, pharmaceutical wholesalers in Greece purchased pharmaceuticals from GlaxoSmithKline AEVE ("GSK") for both domestic supply and for export to other Member States where the price for those products was higher. From November 2000, GSK ceased supplying Greek wholesalers and stated instead that it would supply hospitals and pharmacies directly. It subsequently reinstated supplies to wholesalers, but refused to meet their orders in full.

The pharmaceutical wholesalers complained to the Greek Competition Authority, which referred questions to the ECJ regarding whether the conduct constituted an abuse of dominant position in breach of Article 82 EC. Advocate General Jacobs gave an opinion in 2004 that the conduct in question did not automatically constitute an abuse, given the particular circumstances of the EU pharmaceutical sector (see our e-bulletin of November 2004). However, the ECJ ultimately found that it could not rule for jurisdictional reasons (see our e-bulletin of May 2005).

The matter has come before the ECJ through a preliminary reference from the Appeal Court of Athens. Advocate General Ruiz-Jarabo delivered an Opinion on 1 April 2008 that a dominant pharmaceutical company's refusal to supply all orders placed by wholesalers, with a view to reducing the harm caused by parallel trade, could, in theory, be objectively justified and therefore not be abusive, but he concluded that the particular circumstances of the EU pharmaceutical sector did not merit such objective justification (see our e-bulletin of 1 April 2008).

Refusal to meet orders does constitute an abuse of a dominant position, unless it can be justified objectively

The ECJ followed existing case law that the refusal by a dominant undertaking to meet the orders of an existing customer constitutes an abuse of that dominant position under Article 82 EC where, without objective justification, that conduct is liable to eliminate a trading partner as a competitor.

It was accepted by the parties that, by refusing to meet the Greek wholesalers' orders, GSK was seeking to limit parallel exports by them to other Member States where the price for those products was higher. In relation to such an intention to restrict parallel trade, the ECJ noted that this type of conduct could lead to the elimination of effective competition from the wholesalers in the distribution of the products on the markets of the other Member States.

Protection of the dominant undertaking's own commercial interests can constitute objective justification

The ECJ considered whether the particular circumstances of the EU pharmaceutical sector – with State invention leading to different prices for the products in the Member States – may justify a refusal to meet wholesaler orders.

The ECJ held that, whilst the degree of price regulation in the EU pharmaceuticals sector cannot preclude the Community competition rules from applying, when assessing whether the refusal of a dominant pharmaceutical company to supply medicines to wholesalers involved in parallel exports constitutes an abuse it cannot be ignored that State intervention in the pricing of pharmaceuticals is one of the factors liable to create opportunities for parallel trade. Furthermore, the ECJ held that European Community competition laws cannot be interpreted to mean that, in order to defend its own commercial interests, the only choice for a dominant pharmaceutical company is not to place its products on the market at all in a Member State where prices of those products are set at a relatively low level.

The ECJ held that dominant pharmaceutical companies must be in a position to take steps that are reasonable and in proportion to the need to protect their own commercial interests. In relation to whether the refusal by a dominant pharmaceutical company to supply wholesalers involved in parallel exports constitutes a reasonable and proportionate measure in relation to the threat that those exports represent to its legitimate commercial interests, it must be ascertained whether or not the orders of the wholesalers are out of the ordinary, as follows:

  • A dominant pharmaceutical company cannot be allowed to cease to honour the "ordinary orders" of an existing customer for the sole reason that, in addition to supplying the domestic market, the customer intends to parallel export some of the products supplied.
  • However, a dominant pharmaceutical company must be able to protect its own commercial interests if confronted with orders "out of the ordinary in terms of quantity", for example if out of all proportion to those previously sold by the wholesalers to meet demand in the relevant Member State.

Therefore, in order to determine whether GSK's refusal to supply the wholesalers did fall within the scope of Article 82 EC, it must be determined whether the orders placed by the wholesalers were "ordinary". The ECJ held that the issue of whether the orders in question were "ordinary" is one for the Greek national court to determine, taking into account both previous business relations between the parties and also the size of the orders with respect to the market requirements in the relevant Member State.

Conclusion

It is clear from the judgment that in order to determine whether a dominant pharmaceutical company's refusal to supply wholesalers involved in parallel exports falls within the scope of Article 82 EC, it must be determined whether the orders placed by the wholesalers are "ordinary". The implication of this is that, if the orders are out of the ordinary, then the dominant pharmaceutical company is permitted to refuse supply, on the basis that such refusal constitutes a reasonable and proportionate measure in relation to the threat that those exports represent to its legitimate commercial interests.

The only guidance given by the ECJ on how to establish whether or not an order is "ordinary" is that previous business relations between the parties and also the size of the orders with respect to the market requirements in the relevant Member State should be considered. The ECJ does explicitly state that an order would be "out of the ordinary in terms of quantity" if it is out of proportion to those previously sold by the wholesalers to meet demand in the relevant Member State.

Whilst the decision lacks some certainty as to what is to be considered "ordinary" and will probably lead to further litigation in national courts on the matter, the decision is broadly positive for pharmaceutical companies. In particular, the ECJ has linked "ordinary" to the size of the order in relation to the requirements of the national market. Therefore, it appears that dominant pharmaceutical companies may be able to refuse to supply wholesalers quantities out of all proportion to those previously sold by the same wholesalers to meet the needs of the market in that Member State.

To date, the Commission has refused to take the specific features of the EU pharmaceutical sector into consideration when applying the Community competition rules in the pharmaceutical sector. In this judgment, the ECJ appears to have acknowledged that the particular features of the EU pharmaceutical sector can be relevant when applying the Community's competition laws.