On 6 October 2009, the European Court of Justice (ECJ) issued its judgment in the long-running wrangle regarding the legality of GlaxoSmithKline's (GSK) dual pricing arrangements with Spanish pharmaceutical wholesalers. As a result of the judgment, the European Commission (Commission) will have to conduct a fresh examination as to whether GSK's sales conditions, which were judged to restrict competition, are to be exempted on the basis of a possible contribution to the promotion of technical progress.
The ECJ's judgment affects all pharmaceutical companies that have similar arrangements in the EU. The ECJ's judgment is clear, sales terms that stipulate increased export prices in order to restrict parallel trade will infringe Article 81(1) and will only be permissible if they satisfy the requirements for exemption in Article 81(3).
In March 1998, GSK agreed to prices with its Spanish wholesalers for certain pharmaceuticals that differed depending on whether the wholesaler resold those products in Spain or exported them to another EU Member State. GSK's aim was to restrict parallel trade in its pharmaceuticals between Member States by those wholesalers. In Spain, GSK's pharmaceuticals were subject to maximum regulatory prices, imposed by Spanish law, and therefore Spanish wholesalers were able to purchase pharmaceuticals from GSK at lower prices than wholesalers based in other EU Member States. The wholesalers then resold GSK's pharmaceuticals in other EU Member States where the same product was more expensive.
GSK notified the dual pricing arrangements to the Commission for a declaration that either they did not infringe Article 81(1), on the grounds that they did not restrict competition, or that they were exempt under Article 81(3), on the grounds that they “contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit”. In May 2001, the Commission declared that the arrangements infringed Article 81(1) and did not qualify for exemption under Article 81(3). Accordingly the Commission decided that the arrangements were unlawful.
Appeal to the CFI
In September 2006, following an appeal by GSK of the Commission's decision, the European Court of First Instance (CFI) issued its judgment.
Article 81(1) –'by object' infringements
The CFI found in favour of the Commission insofar as it concluded that GSK's dual pricing arrangements infringed Article 81(1). However, its applied a different test to determine whether an agreement that aims to restrict parallel trade infringes Article 81(1). The CFI stated that whilst a dual pricing arrangement, such as GSK's, intended to limit parallel trade has in principle an anticompetitive object and therefore infringes Article 81(1), that principle only applies if the agreement can be presumed to deprive consumers of the advantages of effective competition in terms of supply or price. In other words, as well as proving an anticompetitive object, the Commission should also demonstrate an anticompetitive effect. Applying this test, the CFI decided, on an analysis of the facts, that GSK's dual pricing arrangements did have an anticompetitive effect and therefore they infringed Article 81(1).
Article 81(3) exemption
On the issue of whether or not the arrangements were deserving of an exemption under Article 81(3), the CFI found in favour of GSK. The CFI decided that, when the Commission was deciding whether the arrangements qualified for exemption under Article 81(3), the Commission had not adequately considered the facts presented to it by GSK. The CFI therefore annulled that part of the Commission's decision and told the Commission to reconsider.
Appeal to the ECJ
Both GSK and the Commission appealed the CFI's judgment. GSK argued that the CFI was wrong to conclude that the arrangements infringed Article 81(1). GSK argued that Article 81(1) was not infringed because GSK's pricing arrangements did not have an anticompetitive effect. The Commission argued that the CFI had applied the wrong legal test to determine whether or not the arrangements infringed Article 81(1). The Commission also appealed the CFI's decision that the Commission should reconsider the application of Article 81(3) to GSK's pricing arrangements.
Article 81(1) – 'by object' infringements
In its 6 October 2009 judgment, the ECJ agrees with the Commission that the CFI had applied the wrong legal test to determine whether or not the arrangements infringed Article 81(1). The test in Article 81(1) is not cumulative – it does not require an agreement to have an anticompetitive object and effect. Therefore, the CFI had erred in law by requiring proof that an agreement deprives consumers of the advantages of effective competition as a prerequisite for concluding that an agreement is anticompetitive ‘by object'. Rather, an agreement that aims to restrict parallel trade has, in principle, an anticompetitive object and therefore infringes Article 81(1). Accordingly, GSK's arrangements infringed Article 81(1).
Article 81(3) exemption
In its judgment the ECJ dismisses the Commission's arguments that the CFI was wrong to make the Commission reconsider the application of Article 81(3). In particular the ECJ stated that the CFI was right that, when assessing the application of Article 81(3), the Commission must:
- assess whether – in the light of the factual arguments and the evidence provided – it is probable that the agreement will result in appreciable advantages that outweigh its anticompetitive effects; and
- take into account the nature and specific features of the sector concerned by the agreement if its nature and those specific features are decisive for the outcome of the analysis – i.e. it was incumbent on the Commission to take into account particular structural features of the pharmaceutical sector and its failure to do so vitiated its Decision that GSK's pricing arrangement was not deserving of an exemption.
Impact on the pharmaceuticals sector
With particular application to this sector, it is clear from the ECJ's judgment that any agreement in the pharmaceuticals sector intended to limit parallel trade must in principle be considered to have an anticompetitive object and thereby infringe Article 81(1) EC Treaty.
In assessing whether or not the agreement may nevertheless qualify for exemption, efficiency gains do not need to be proven, it is sufficient that gains in efficiency may occur. Furthermore, in assessing the criteria in Article 81(3), consideration must be given to the particular structural features of the pharmaceutical sector which would include, for example, pricing issues and the way in which the sector is regulated in the EU.