The European Court of Justice (“ECJ”) has given judgment on the appeals of the European Commission, GSK and two trade associations against the judgment of the European Court of First Instance (“ECFI”) in the GSK dual pricing parallel exports case, Joined Cases C-501/06P, C-515/06P and C-519/06P, GlaxoSmithKline Services Unlimited, formerly Glaxo Wellcome plc v Commission and Commission, EAEPC and Aseprofar v GlaxoSmithKline Services Unlimited, formerly Glaxo Wellcome plc.
The ECJ has dismissed all of the appeals. This means that the European Commission’s decision of May 2001 that the Spanish dual pricing arrangement of GSK (then Glaxo Wellcome) infringes Article 81(1), is upheld. However, the annulment of the Commission’s decision to refuse exemption under Article 81(3) is confirmed. In this respect the ECFI’s judgment is now upheld by the ECJ.
The dual pricing scheme was contained in GSK sales conditions providing for dual pricing for supplies in Spain, with a higher price being charged for sales for exports, so as to avoid the low prices imposed by Spanish regulation for the domestic market. The case is of considerable interest on a number of levels, especially the statements in the ECFI judgment concerning the importance of assessing the full economic and regulatory context of the pharmaceutical sector as regards the eligibility of an agreement in the pharmaceutical sector for Article 81(3) exemption. The Article 81(3) exemptions criteria can be applied where, broadly speaking, the benefits of an agreement through improved efficiency and benefits to consumers outweigh the disadvantages of the agreement’s restrictive effects.
The ECFI also went further in the context of the Article 81(1) assessment, stating that some disadvantage to consumers must be shown in order for the agreement to infringe Article 81(1) by object. However, it is noteworthy that the ECJ has held that an agreement that impedes parallel exports is to be treated generally as having a restrictive object and as therefore infringing Article 81(1) without need to assess the existence of any restrictive effect. The ECJ stated that issues of consumer disadvantage fall to be considered only as part of the Article 81(3) assessment. (The ECJ thus followed the Opinion of the Advocate General Trstenjak of June 2009, as summarised in the July issue of this Bulletin).
Glaxo Wellcome notified its conditions for the sale of products to wholesalers in Spain to the European Commission in 1998, seeking Article 81(3) exemption. These sales conditions required higher prices for products to be exported, though Glaxo Wellcome argued that this was in reality a single price for all sales in Spain subject to reductions in prices imposed by regulation for sales for domestic consumption (reimbursed by the Spanish health authorities). The company aimed to prevent “export” of the artificially low price imposed by regulation on the Spanish market, in order to preserve revenue for future research and development. The European Commission found that the arrangement infringed Article 81(1) and refused Article 81(3) exemption, stating that “a pricing policy which makes it economically uninteresting for wholesalers to indulge in parallel trade must be considered to be at least as effective as an outright contractual export ban”. GSK argued that parallel trade primarily benefitted parallel traders rather than the consumers of the healthcare system of the importing state, whilst reducing manufacturers’ capacity to finance R&D. The Commission concluded that Glaxo Wellcome had failed to prove any causal link between parallel trade and R&D investments, or that parallel trade had disrupted its distribution system or, most importantly, that the exemption criteria of Article 81(3) were fulfilled.
On appeal, the ECFI concluded that the contractual conditions did not have the object of restricting parallel trade, but did have the effect of restricting competition. The ECFI concluded that a finding of a restriction by object would require an indication of a reduction of the welfare of consumers, in terms of price. It also concluded that the Commission had been wrong to reject GSK’s arguments in favour of Article 81(3) exemption concerning the strong levels of pharmaceutical sector competition of innovation, the need for sufficient levels of profitability for R&D investment (innovation), and the need for such profits to be generated globally despite the significant differences between Member States’ health systems and price controls. Therefore, the ECFI annulled the Commission’s rejection of GSK’s Article 81(3) application. It held that the Commission was required to undertake a prospective analysis to determine whether the disadvantages to intra-brand competition were offset by efficiency advantages through improved inter-brand competition at the innovation level. The ECFI held that the Competition should balance the restrictive effects of the agreement against the evidence of likelihood of the Article 81(3) arguments being fulfilled.
The most interesting aspect of the ECJ judgment is the ruling on GSK’s claims that the ECFI had interpreted Article 81(1) incorrectly in finding that the agreement had an anti-competitive effect. GSK argued that the agreement could not have the effect of restricting competition in the sense of reducing consumer welfare, against the background that parallel importers retained most of the margins for themselves (as between the prevailing price levels in the Member States of export (Spain) and import). By contrast, the Commission argued in its appeal that the ECFI’s findings concerning restrictive effect showed that the agreement actually had a restrictive object and that the ECFI had misinterpreted the term “object” in Article 81(1). The European Commission and the trade associations also appealed against the ECFI’s annulment of the Commission’s rejection of GSK’s application for Article 81(3) exemption.
The ECJ stated that in order to assess the anti-competitive nature or object of an agreement, it is necessary to consider the content of its provisions, the objectives it seeks to attain and the economic and legal context of the agreement. The ECJ treated it as an established principle that agreements aiming to prevent or limit parallel exports have the object of restricting competition contrary to Article 81(1), as has been held by the ECJ in several previous cases. Further, the ECJ stated that there is nothing in Article 81(1) to indicate that agreements must deprive consumers of certain advantages in order to have an anti-competitive object, as had been stated by the ECFI. Rather, Article 81EC aims to protect not only the interests of competitors or of consumers, but also the structure of the market. Therefore the ECFI had committed an error of law in failing to conclude that GSK’s agreements had such an anti-competitive object.
On the basis that the ECFI did find that the agreement infringed Article 81(1) (albeit by means of its restrictive effect), and on the basis that the anti-competitive object and effect of an agreement are not cumulative but alternative conditions for assessing whether an agreement is within the scope of Article 81, the ECJ concluded that GSK’s claim that the agreement did not have an anti-competitive effect was unfounded.
The European Commission and the trade association appellants made various further claims to the effect that the European Commission had committed errors of law or reasoning in relation to the application of Article 81(3). The Commission alleged that the ECFI had misapplied the case law relating to the allocation of the burden of proof and the standard of proof and the causal link necessary for the application of Article 81(3), as between the restrictive features of the agreement and the claimed advantages or efficiencies in terms of research and development or innovation.
In its judgment on the Article 81(3) claims, the ECJ stated that the ECFI’s role as an appeal court carrying out a review of the European Commission’s decision must be limited to verifying whether the rules on procedure and on the statement of reasons have been complied with, whether the facts have been accurately stated and whether there has been any manifest error of assessment or misuse of powers. The ECFI could carry out only a limited review of the merits of the case and it was not for the ECFI to substitute its economic assessment for that of the Commission. The ECJ concluded on each of the Commission’s (and the appellant trade associations’) claims that the content of the ECFI’s judgment did not reveal any error of law or inadequate reasoning.
The ECJ held that the Commission had erroneously failed to take into account the specific structural features of the pharmaceutical sector highlighted by GSK in its notification, and that the Commission had failed to demonstrate whether or not GSK’s sales conditions would entail a gain in efficiency of competition. It accordingly held that the European Commission’s assessment had been insufficient for Article 81(3) purposes.
With regard to the benefits of the arrangement for the financing of R&D, the ECJ specifically held that, contrary to the Commission’s assertions, the existence of an objective advantage for Article 81(3) purposes did not require that all of the funding resulting from the operation of the GSK sales conditions must be invested in R&D. The ECFI had been entitled to conclude that it was sufficient that part of the increase in profits resulting from the restriction of parallel exports would go to R&D expenditure.
The ECJ rejected the Commission’s further claim that the ECFI had created a new category of reviewable error (“lack of serious examination”) which is outside the scope of a proper review in an Article 81(3) context. Rather, the ECJ concluded that the ECFI had merely found that the Commission had not taken into account all of GSK’s factual arguments and relevant evidence. The Commission’s examination was held not to be sufficient to support the conclusions it had reached, by reference to GSK’s claims concerning the need for R&D to be funded globally despite the differing price and regulatory controls as between the Member States.
The judgment of the ECJ re-establishes the case law prior to the ECFI judgment, that restrictions of parallel trade, in particular parallel exports, will generally be regarded as a per se infringement of Article 81(1), as a restriction of competition by object. This avoids any need to assess the existence of any anti-competitive effects of such an agreement.
As regards the application of the Article 81(3) exemptions criteria to an agreement restricting parallel exports, the ECJ confirmed the ruling of the ECFI that a prospective analysis of the efficiencies and other advantages of such an agreement (in terms of R&D and innovation) needs to be made as against the disadvantages of the restrictive effects of such an agreement. For this purpose, a court or body applying Article 81(3) to such an agreement needs to balance the benefits to inter-brand competition at innovation level with the restrictions of competition at intra-brand level, by comparing the benefits to R&D funding (resulting from the restriction of parallel trade) with the loss of choice of alternative supplies which can result from the restriction of parallel imports. Most significantly, the ECJ has confirmed that the specific legal and economic context of the pharmaceutical sector should not be taken into account in assessing whether an agreement has the object of restricting competition under Article 81(1), but rather is relevant in the application of Article 81(3).
The result of the ECJ’s judgment in relation to GSK’s sales conditions is that there is still no valid European Commission decision on GSK’s notification for exemption. The Commission is now supposed to reassess its original decision even though, since the introduction of the “modernisation”, selfassessment regime as from May 2004, the Commission no longer operates a notification-based system of Article 81(3) decisions.