In May 2018, the Full Federal Court held that Pfizer did not misuse its market power under section 46 of the Competition and Consumer Act 2010 (Act) by engaging in a number of activities that sought to defend its market position in circumstances in which the patent for its highest selling drug, Lipitor, was due to expire.
While the court found that Pfizer enjoyed substantial market power prior to the expiry of the patent when it engaged in the relevant conduct, it did not have the proscribed anti-competitive purpose under section 46 of the Act when it took advantage of that power.
Although the decision is based on the old version of the misuse of market power prohibition (i.e. before the operation of the “effects” test), it is significant because it demonstrates that:
- owners of patents or other IP rights may continue to have substantial market power in the short time prior to the expiry of their patents or IP rights and accordingly their conduct during this period of time will be subject to section 46; and
- anti-competitive language in documents such as “blocking” rivals will not equate to the requisite anti-competitive purpose if the authors of such documents and the decision makers responsible for the relevant conduct can clearly explain (by way of written and oral testimony) the purpose for engaging in the relevant conduct – that is, the context to the alleged anti-competitive language is critical.
The facts of the case
Pfizer held a patent over its atorvastatin drug, Lipitor, which effectively reduced cholesterol in humans.
Pfizer’s patent was due to expire in May 2012. For a significant period of time prior to this date, Pfizer considered how it would respond to the availability of generic atorvastatin being available on the market post-May 2012. Lipitor was the biggest selling drug in Australia for many years and accordingly, rival companies were well aware of the date of the expiry of the patent and had been planning for many years to release generic products at this time. Pfizer too was aware of this and understood that from May 2018, buyers would switch from Lipitor, the monopoly patented product, to generic alternatives and would also switch between one generic and another.
By January 2012, Pfizer engaged in a range of activities to avoid being “slaughtered” in the market (as it had described in its own documents). Pfizer was:
- directly supplying pharmacies rather than using traditional wholesale channels;
- offering Lipitor and its generic atorvastatin to those pharmacies; and
- offering rebates based upon the volume of Lipitor and its generic atorvastatin purchased including bundled offers (to be paid at an unknown and unspecified later date).
(collectively, Relevant Conduct).
These activities were described in Pfizer’s internal documents as ways in which to “block” generic rival products from obtaining shelf space in pharmacies. In response to the Relevant Conduct, generic manufacturers themselves developed competitive responses including matching or bettering Pfizer’s offers.
By April 2012, Lipitor had lost 68% of its market share to Pfizer’s generic atorvastatin and by June 2012, 77% of market sales were for generic atorvastatin products.
The ACCC’s allegations
The ACCC alleged that the Relevant Conduct was a misuse of market power because Pfizer was taking advantage of its substantial market power in the atorvastatin market for the purpose of deterring or preventing competitive conduct from rival suppliers of generic atorvastatin.
The ACCC also alleged that the Relevant Conduct amounted to exclusive dealing under section 47 in breach of the Act.
The decision at first instance
The trial judge held that as expiry of Pfizer’s patent became imminent, its market power gradually decreased. The judge accordingly found that in light of the imminent competition from the large, well-funded generic manufacturers and their activity in approaching and marketing to pharmacies, Pfizer’s market power was not enduring and could not be sustained after January 2012.
The Court concluded that although Pfizer had a degree of market power until the expiry of the patent, that power was not “substantial” from January 2012.
The judge also found that Pfizer did not hold the proscribed anti-competitive purpose under sections 46 and 47.
The decision of the Full Court on appeal
When did Pfizer lose its substantial market power?
Pfizer had a patent and exclusive supply rights over Lipitor until May 2012 but when did it lose its substantial market power? The day of expiry of the patent or some time before?
The Full Court held that in January 2012 when Pfizer engaged in the Relevant Conduct, Pfizer enjoyed substantial market power. It made this finding on the following grounds:
- Pfizer was still a monopoly at this time offering Lipitor for very high prices and without competitive constraint;
- Pfizer introduced generic atorvastatin which rivals could not do until May 2012 giving Pfizer a significant competitive advantage over those rivals; and
- Pfizer made bundled offers for Lipitor and its generic atorvastatin giving it a strong foothold in the generic segment of the market post expiry of its patent (something it could only do given its dominant position).
The Full Court concluded that while Pfizer had substantial market power at the time of engaging in the Relevant Conduct it was not necessary for it to determine whether that degree of market power was substantial up to May 2012.
Why anti-competitive language does not constitute anti-competitive purpose
The Full Court accepted that Pfizer had used “colourful” language in its internal documents to justify the Relevant Conduct. In particular, Pfizer’s internal documents considered that the Relevant Conduct would stack the shelves of pharmacies with its own product thus “blocking” rivals.
Although words such as “blocking” appear to suggest an anti-competitive purpose, the Full Court held that such words must be read in their context and could be explained such that there should be no attribution of an anti-competitive purpose to the relevant conduct.
The Full Court accordingly held:
- inferences drawn from documents (i.e. anti-competitive purpose) could be explained away by oral testimony from witnesses responsible for those documents or the Relevant Conduct;
- many internal documents stating that Pfizer should “block” the shelves were draft versions of the document only and were not signed off by senior management; and
- oral testimony from relevant Pfizer employees demonstrated that the substantial purpose of Pfizer for engaging in the Relevant Conduct was to ensure that it remained competitive and managed market share erosion once its patent had expired.
For the reasons above, the Full Court held that Pfizer did not have the proscribed anti-competitive purposes of blocking or preventing competitive conduct (section 46) or substantially lessening competition (section 47).
What you need to know
While Pfizer was decided under the old version of section 46 (i.e. prior to the “effects” test), there are still a number of lessons that can be learnt from the case.
Substantial market power
- Owners of patents or other IP rights may continue to have substantial market power in the short time prior to the expiry of their patents or IP rights and accordingly their conduct during this period of time will be subject to section 46.
- It will depend on the circumstances of each case as to when the market power of an owner of a patent or IP right will no longer be “substantial” in the face of the impending expiry of its patent or IP right.
Anti-competitive language and anti-competitive purpose
- Anti-competitive language in documents such as “blocking” rivals will not equate to anti-competitive purpose if the authors of such documents and the decision makers responsible for the relevant conduct can clearly explain (by way of written and oral testimony), the purpose for engaging in the relevant conduct.
- Colourful language in internal documents may continue to provide the ACCC with a reason to investigate conduct.
- The effect of the alleged conduct can influence findings on purpose. In this case, generic manufacturers were successful in entering and taking market share from Pfizer rather than Pfizer maintaining its market position and deterring competitive activity.
What you need to do
If you have a substantial degree of market power and wish to engage in conduct to maintain your market position, it may be prudent to seek legal advice to determine whether you do, in fact and law, have substantial market power and whether your conduct is legitimate.
You should ensure all staff responsible for preparing internal business cases for conduct that will have a significant competitive impact are well versed in ensuring they accurately capture the purpose for the conduct. The wrong language may result in an ACCC investigation.