In October 2010, FAS issued a decision in relation to Novo Nordisk LLC, held to be dominant in the wholesale market for certain medicines, which is an important factor in FAS’s practice under Article 10 of the Competition Law. This decision may impact the practice of many companies selling products through a selective distribution network, even if they are not held to be dominant.
The background to this case is that in 2008 Novo Nordisk LLC (“Novo Nordisk”) a Russian subsidiary of Novo Nordisk A/S, a Danish, pharmaceutical company) restructured its distribution network, reducing the number of distributors from 20 to five and conferring the status of permanent partner on the distributors. The selection of these distributors was based on their conformity to the requirements of a Novo Nordisk policy (including compliance with anticorruption laws) and was subject to a complex screening procedure. All other wholesale buyers—including its former distributors—not selected as permanent partners were invited by Novo Nordisk to enter into contracts with Novo Nordisk’s permanent partners, and, if these potential buyers insisted upon a direct contract with Novo Nordisk, Novo Nordisk proposed that the buyers undergo the screening procedure. None of the applicants, other than the five permanent partners, successfully completed the screening.
FAS reviewed this case and concluded that Novo Nordisk had infringed Clauses 5 and 8 of Article 10.1 of the Competition Law (unjustified refusal to enter into contracts and the creation of discriminatory conditions). FAS’s conclusion was based in particular on FAS’s view that Novo Nordisk did not have any criteria for assessing potential distributors in terms of their conformity to its requirements and some of those requirements (e.g., regarding the transportation and storage of products) duplicated the requirements for the issuance of a license for pharmaceutical activities, which each of the applicants already held, meaning that Novo Nordisk was thereby effectively arrogating the functions of the licensing authority to itself. FAS believed that applying these requirements created the possibility that Novo Nordisk would evade concluding agreements with wholesale buyers other than its five permanent partners. FAS issued a prescription to Novo Nordisk requiring Novo Nordisk to repeal any requirements Novo Nordisk had imposed on distributors that are “not provided for by [Russian] law.”
It is noteworthy that FAS deemed it impermissible for a dominant supplier to include in its distribution agreements requirements for distributors to provide sales reports or forecasts. FAS stated that this was a service “which can be rendered on the basis of separate service contracts and shall be subject to 18% VAT.” It could be argued that FAS was thereby arrogating to itself a fiscal function that does not properly belong to it.
Based on its review of the case, FAS imposed a fine on Novo Nordisk in the amount of 1.6% of the total proceeds from sales in the markets to which the violation applied (1.5% of total sales proceeds), which amounted to RUB 85,934,025.
FAS’s decision in the Novo Nordisk case left open the question of whether FAS permits the use by a dominant undertaking of any legitimate criteria for selecting distributors. This decision might have become a precedent not only in the context of dominance but also in the context of applying Article 11 of the Competition Law to interaction between manufacturers and distributors, because Article 11 bans an activity analogous to that banned in Clause 5 of Article 10.1 of the Competition Law (unjustified refusal to enter into agreements). Nevertheless, there remain reasons to believe that clear and well established selection criteria and transparent procedures for assessing compliance mitigate the risk of violating Article 10 and/or Article 11 of the Competition Law.