A Russian appeal court has upheld Teva’s obligation to supply Copaxone to its distributor to compete against it at tender. The case endorses the Russian competition authority’s (“FAS”) tendency to define markets narrowly – and thus to find a supplier has a monopoly of this narrowly defined market – so as to force supply by “dominant” companies in circumstances that may make little economic sense.
In 2013 Teva decided to participate in a public tender for Copaxone, Teva’s multiple sclerosis medicine, through its Russian subsidiary. Copaxone is generally considered competitive to at least three other therapies (Avonex, Rebif and Betaferon) that slow the progression of multiple sclerosis.
These medicines are approved and recommended for multiple sclerosis treatment in Russia. Teva declined Biotec’s order for the bulk supply of Copaxone placed under its existing five year supply agreement with Teva. Biotec complained to FAS.
FAS defined the market at the brand name level and found Teva was dominant on the market of Copaxone. It refused to take account of other similar therapies as a competitive constraint to Copaxone.
FAS found there was no legitimate economic or technical justification for refusal to supply and fined Teva USD11,000 (RUB650,000). Biotec claimed USD7 million (RUB408 million) damages from Teva in a separate civil action.
FAS’s findings were upheld by the courts of second and third instance. The refusal was found to eliminate potential competition under the public tender. Teva should have accepted orders from all potential distributors on a condition that it would supply Copaxone to the winner of the tender.
In June 2015, FAS adopted recommendations on the development and implementation of commercial policies by dominant pharmaceutical and medical device companies. FAS recommends companies adopt and make public a commercial policy on dealing with business partners which should contain, inter alia an exhaustive list of grounds for refusal to deal and a detailed description of the decision-making procedure for supplying distributors (the employees responsible, deadlines and retention of relevant documents).
Aggrieved distributors are quick to complain in Russia. The threat of FAS intervention is powerful legal leverage in commercial disputes. FAS’ practice of defining markets at the level of international non-proprietary name (INN), or even brand name, means that pharmaceutical companies are often at risk of being found dominant, especially over any on-patent pharmaceutical. Russian rules on abuse of dominance are strictly applied and in many cases refusal to supply will be found abusive, even if there are good commercial reasons for doing so.
Suppliers should take (potential) distributors’ requests for supply seriously. Refusing off-hand may invite FAS intervention. It is better to engage in a dialogue with the distributor as to how to qualify the distributor to supply the products. And, if that is the decision, to ensure that the grounds for refusing to supply are suitably legally justified (e.g. creditworthiness, material breach, regulatory non-compliance or lack of authorisation, conflicts of interest).
Business colleagues should have guidelines to guide the company’s policy on appointing distributors and they should be warned to have refusals to deal with distributors appropriate documented and vetted by legal.
Companies should have regard to the FAS guidance on commercial dealings. While it may not be necessary or desirable to have an externally published distributor appointment policy, it is sensible to have the commercial grounds for vetting and accepting distributors documented internally. This may be used to show the authorities that the company engages in a bona fide manner with distributors.