The European Court of Justice (ECJ) has given a ruling indicating limits that dominant companies must observe when taking measures to restrict parallel trade. The judgment provides important guidance to the pharmaceuticals sector and emphasises the continuing importance of the single market integration aim in the interpretation of EU competition law.
GlaxoSmithKline (GSK), in common with other pharmaceuticals companies, sells its medicines in a number of EU member states. These markets are heavily regulated, and States control prices in a way that means the prices charged for these products vary greatly from one State to another. Consequently there is a strong incentive for parallel traders to export large volumes of these products from ‘low price’ countries such as Greece to ‘high price’ countries such as Germany and the UK. In November 2000 GSK temporarily stopped fulfilling Greek wholesalers’ orders for certain medicines and instead made supplies directly to hospitals and pharmacies. In February 2001 it resumed supplies to wholesalers, but in limited quantities. The wholesalers complained to the Greek competition authority that this was an illegal abuse of GSK’s dominant position under national and EU competition law. In the course of these proceedings the authority made a request to the ECJ for a preliminary ruling on the application of article 82 EC Treaty, which prohibits abuse of a dominant position, to GSK’s conduct. However, the request was rejected as inadmissible on the grounds that the authority was not a ‘court or tribunal’ and so had no right to ask for such a ruling.
The wholesalers also took court action, requesting that GSK be ordered to restore previous levels of supply and claiming damages. Their cases are now before the Greek Court of Appeal, which itself made a request to the ECJ for a preliminary ruling. In so doing it raised the same questions as had the authority previously. This time the ECJ gave a substantive answer, which is the subject of this latest judgment.
The Greek court’s questions
The Greek court asked the ECJ whether the refusal by a dominant undertaking to meet fully orders from pharmaceuticals wholesalers, with the intention of limiting damage caused to it by parallel trade, is necessarily an abuse, contrary to article 82. It also asked whether the high level of State intervention in this market was relevant to this issue. In the event that such conduct did not automatically constitute abuse, the Greek court wanted to know what the relevant factors were in assessing whether or not there was an abuse.
The ECJ’s judgment
The ECJ starts by affirming that it is an abuse for a dominant company, in the absence of objective justification, to refuse to meet orders from an existing customer in circumstances that would eliminate that customer as a competitor. It refers to cases in other market sectors where hindrance of parallel trade has been held to be an abuse, and states that ‘parallel imports enjoy a certain amount of protection in Community law because they encourage trade and help reinforce competition’.
The ECJ goes on to consider and reject the argument that special characteristics of the pharmaceuticals market mean that different considerations apply in this particular market. It rejects the claim that final consumers do not benefit from parallel trade in medicines and holds that, despite State price regulation, there is still room for competition to operate. It refers to the importance of the Treaty objective of ‘integration of national markets through the establishment of a single market’ and concludes that ‘there can be no escape from the prohibition laid down in article 82 for the practices of an undertaking in a dominant position which are aimed at avoiding all parallel exports from a Member State to other Member States, practices which, by partitioning the national markets, neutralise the benefits of effective competition…’. It also affirms that it is for the national authorities and not for a dominant company to address any supply shortages caused by parallel trade.
The ECJ next considers whether objective justification is present. It holds that a dominant company is entitled to take reasonable and proportionate steps to protect its commercial interests. In this case, whether GSK’s measures are reasonable and proportionate depends on whether the wholesalers’ orders are ‘out of the ordinary’. The ECJ refers to the 1978 United Brands case and notes that a dominant supplier is obliged to continue to supply a long-standing customer ‘if the orders placed by that customer are in no way out of the ordinary’. It will not be reasonable to cease supply because a wholesaler has exported part of its ‘ordinary’ order, but counter measures will be permissible in the case of orders for ‘significant quantities of products that are essentially destined for parallel export’. It is for the national court to decide whether the orders are ‘ordinary’: relevant factors are the size of those orders in relation to the requirements of the domestic market and the previous business relations between that undertaking and the wholesaler concerned.
Impact of the judgment
This judgment brings some clarification as to the limits that pharmaceuticals producers must respect when taking action to combat parallel trade, providing guidance to dominant companies who wish to adjust supply volumes in the light of the parallel export trade, although questions will inevitably arise as to how the test applies in practice. However, its comments on objective justification are closely linked to the specificities of the pharmaceuticals market and may not apply to other markets.
The ECJ’s reasoning appears to be in contrast to that of the Court of First Instance (CFI) in a 2006 case, also involving GlaxoSmithKline, but based on article 81 EC Treaty, which prohibits anti-competitive agreements. The CFI there accepted the argument that the application of the competition rules in the pharmaceuticals market might need to be nuanced, given its specific characteristics. That case is currently on appeal to the ECJ.
Finally, the judgment is also interesting in broader terms, for the way that it emphasises the importance of single market integration in the interpretation of EU competition law. Though the statements about market integration, including the extracts cited above, are combined with assertions of the benefits of competition, this judgment is a reminder that the ECJ continues to treat the promotion of cross-border trade as of paramount importance in applying EU competition rules.