On June 30, 2009, EU Advocate General (AG) Trstenjak gave her opinion in the GlaxoSmithKline (GSK) case regarding restrictions of parallel trade before the European Court of Justice (ECJ). According to the AG, the determination by a pharmaceutical company of higher export prices for the purposes of restricting parallel trade would have the object of restricting competition. If the Opinion is upheld by the ECJ, the Opinion may represent a setback for the pharmaceutical industry. Under EC competition law, restrictions by object are almost per se illegal restrictions of competition. In this sense, the AG’s approach departs from the European Court of First Instance's (CFI) previous findings that restrictions of parallel trade could be illegal only if they have the effect of restricting competition (see Hogan & Hartson LLP Antitrust Update, Sept. 29, 2006). On the other hand, the AG recognizes that parallel trade restrictions may be exempt if they are necessary to ensure efficiencies (in particular, R&D budget savings). Although the AG’s Opinion is not binding for the ECJ, it is setting the direction of the expected judgment as the advise of the AG is generally highly persuasive to the court. Historically the ECJ has followed the Opinions of the AGs in 80% of cases.
- Background: Parallel trade in the pharmaceutical industry
Parallel trade is a familiar topic in the pharmaceutical industry. In the EU, because drugs prices are fixed by governments, prices tend to vary from one Member State to the next. Wholesalers in countries with lower drug prices such as Spain or Greece may obtain better prices by selling products in countries with higher drug prices, such as the United Kingdom or Germany.
The European Commission (EC) historically has nearly always treated restrictions of parallel trade as per se illegal restrictions under Article 81 EC. This means that such restrictions rarely involve efficiencies that would make them eligible for an exemption under Article 81(3) EC. For the Commission, restrictions of parallel trade run counter to the principle of free circulation of goods, which is at the heart of the EC Treaty and limits price competition to the detriment of end-users.
- The GSK case
In 1998, GSK (then Glaxo Wellcome) notified its General Sales Condition for wholesalers in Spain to the Commission. Under the General Sales Conditions, GSK’s domestic sales to wholesalers were regulated by the prices imposed on products by the Spanish health authorities. However, GSK charged a higher price to wholesalers for products intended for export to other EU Member States. The Commission considered that GSK’s General Sales Conditions had the object of restricting competition within the common market under Article 81(1) EC. In accordance with its settled approach, the Commission also considered that the ‘dual’ pricing system was ineligible for an exemption under Article 81(3) EC.
GSK appealed the Commission’s decision to the CFI. The CFI judgment of September 27, 2006 did not accept the Commission’s conclusion that GSK’s General Sales Conditions had the object of restricting competition. The CFI found, rather, that it cannot be automatically presumed that limitations of parallel trade in the pharmaceutical industry infringe Article 81(1) EC in the absence of an analysis of the effect of the agreement.
In particular, the CFI held that even if certain provisions have as their object the prevention of competition, the Commission could not rely on this mere fact to prohibit an agreement but was required to analyze whether the restriction had, in its legal and economic context, the object of restricting competition to the detriment of the end-user. For the CFI, the object of restricting competition could not be inferred from restrictions of parallel trade because it was by no means certain that parallel trade results in price reductions for end-users. Moreover, without reaching a conclusion on this issue, the CFI implied that restrictions of parallel trade could be eligible for an Article 81(3) exemption since restricting parallel trade could enable pharmaceutical companies to recover R&D costs and stimulate innovation.
GSK, the Commission and two trade associations appealed the CFI’s judgment to the ECJ in December 2006. The AG in her Opinion of June 30, 2009 concluded that the CFI was ultimately correct in annulling the Commission’s decision but did not completely agree with its reasoning. Therefore, the ECJ is expected to deviate as well from the CFI’s reasoning in its judgment, which is due presumably in early 2010.
- The AG’s Opinion and its implications for the pharmaceutical industry
The AG found that the CFI erred in law regarding its approach to the object of restricting parallel trade. The AG shared the opinion of the Commission that agreements which seek to restrict parallel trade have as their object the restriction of competition. For the AG, the existence of a restriction of competition by object cannot be made dependent on whether the agreement had as its object the restriction of competition specifically to the detriment of the end-user. In the view of the AG, this additional criterion is neither set out in Article 81(1) nor compatible with the possibility of a justification under Article 81(3) which requires that end-users are allowed a fair share of any resulting benefit.
The AG as well as the ECJ cannot make findings of fact. Accordingly, based on the facts found by the CFI, the Opinion comes to the conclusion that based on the so-called ‘standardized’ assessment, agreements or practices which restrict parallel trade have the object of restricting competition. Therefore, the Commission does not need to analyze whether the agreement also has the effect of restricting competition.
Regarding Article 81(3), the AGl agreed with the CFI that the Commission failed to conduct an adequate examination of the efficiencies that Glaxo’s pricing system could have involved. She pointed out expressly that no decision as to whether the General Sales Conditions were eligible for an Article 81(3) exemption had been taken.
As a result and subject to the ECJ’s expected confirmation of the Opinion, two key findings of the GSK Spain case may affect the pharmaceutical industry. First, the AG accepted the Commission’s approach of the standardized assessment of so-called ‘hardcore’ restrictions of competition. Thus, provisions of health care companies restricting parallel trade are likely to be found to restrict competition under Article 81(1), as there is no need for the Commission to demonstrate anticompetitive effects.
Second, the case leaves open the extent to which the Commission or the courts will accept any argument under Article 81(3) according to which end-users of pharmaceuticals may benefit from, for example, increased R&D efforts of the industry. However, if the ECJ follows the AG’s first conclusion, very clear evidence would be needed to justify that a restriction of competition by object qualifies for exemption.