31 July 2003

Olivier Fréget

On 22nd May this year, Advocate General Tizzano presented his conclusions in the so-called “Adalat” case, pending before the ECJ; his conclusions are of considerable importance in that they address one of the fundamentals of competition law, the definition of what amounts to ‘an agreement’ under Article 81 EC. Indeed, antitrust law addresses two forms of behaviours, respectively covering so-called (i) anti-competitive agreements (Article 81 EC) and (ii) abuses of a dominant position (Article 82 EC). As far as agreements are concerned, Article 81 prohibits “all agreements between undertakings...and concerted practices which may affect trade between Member States, and which have as their object or effect the prevention, restriction or distortion of competition within the Common Market”. Therefore, the scope of what amounts to an agreement between undertakings, and the extent to which such an agreement can be held to be anti-competitive is of considerable practical importance, as it ultimately determines the types of relationships that undertakings may or may not build, in order to abide with competition law rules.

The Adalat case is also of significance in that its outcome may influence the entire sector of parallel trading. To recall, parallel importing consists of bringing an authentic labelled product to a market through distribution channels other than those approved by the manufacturer. Such trade usually results from significant price differences existing for a given product in various countries: parallel importers purchase the goods in question at low prices in one country and subsequently resell them at higher prices in another one. Parallel imports are traditionally regarded as positive from a competition law standpoint; not only do they provide retailers with labelled goods at a cheaper price, thus decreasing prices at the consumer level, but they also prevent producers from setting up differentiated pricing policies throughout the EU, which can lead to artificial partition of the Internal Market. For these reasons, agreements between undertakings aimed at limiting parallel trade are usually analysed as having an anti-competitive effect and, fall under the Article 81 prohibition.

However, such an analysis may only be developed provided that an ‘agreement’ exists in the first place. Or should the overall objective of Internal Market integration – and the consequent prohibition of any hindrance to parallel trade – supersede the possible difficulties inherent in identifying and establishing the existence of an agreement, and bring all looser forms of understandings within the scope of Article 81? These are the issues addressed by AG Tizzano.

The Factual and Legal Background

The price of Adalat, a medicine manufactured and marketed by Bayer AG, is set by national health authorities, (in particular on the basis of internal reimbursement policies), and consequently differs substantially from one Member State to another; prices in France and Spain being 40% lower than in the United Kingdom. Wholesalers, taking advantage of this price difference, began exporting Adalat to the UK, leading to a sharp downfall in “national” Adalat sales by Bayer’s UK based subsidiary, and causing a significant loss in Bayer’s turnover. Bayer reacted by changing its delivery policy to cease fulfilling all of the increasingly large orders placed by wholesalers in Spain and France with its Spanish and French subsidiaries. The question to be decided was whether such a change could amount to an agreement falling within the scope of Article 81?

The Commission, in its decision of 10 January 1996, found an agreement to exist. It considered that the prohibition on the exportation of Adalat to other Member States had been agreed between Bayer and its wholesalers, as part of their ongoing business relations, and fined Bayer €3 million.

However, a few months later, the Commission’s decision was first suspended, by the President of the Court of First Instance, (“CFI”) and subsequently overturned by the CFI on appeal in October 2000. In this respect, the CFI considered that a manufacturer faced with an event harmful to his interests, could adopt the solution which seems to him to be the best, provided that he does so without abusing a dominant position. In view of the facts of the case, the CFI considered that there had not been any “concurrence of wills” between Bayer and its wholesalers, which was revealed inter alia, by the fact that the wholesalers had tried to circumvent the delivery policy that Bayer had set up, and even went so far as to oppose it.

Therefore, even though Bayer’s aim was to hinder parallel imports, its policy could not fall under Article 81. The CFI went on to hold that the Commission should not try to reach a goal, however worthy it may be (in this instance, harmonisation of prices in the medicinal products market), by stretching the application of competition rules, which were not made for that specific purpose. The Commission and a group of parallel importers (the “Bundesverband der Arzneimittel-Importeure” or “BAI”) lodged an appeal against that judgment.

The issue to be determined therefore is the extent of the concept of an ‘agreement’: should it be limited only to a policy actually agreed upon and expressed by a concurrence of wills, as the CFI seems to maintain, or should it be extended to the mere implementation of a given distribution policy and thereby be construed as a catch-all for anti-competitive distribution behaviour?

The Conclusions of Advocate General Tizzano

In his conclusions, AG Tizzano clearly opts for the same path as that followed by the CFI, and rejects all arguments put forward by the Commission.

On the merits, the Advocate General summarised the case as being the issue of determining whether an export ban “agreement” may be considered as having been entered into where:

  • the manufacturer sets up a specific quota system on sales, with the objective of impeding or limiting parallel imports, and enabling it to deliver quantities which correspond only to the national consumption of the goods at stake;
  • the manufacturer and the wholesaler has a long-lasting commercial relationship, which is not governed by an overall distribution agreement, but rather which takes place pursuant to successive sales agreements on ordered products;
  • wholesalers continue to place orders with the manufacturer, even after the above-mentioned distribution policy has been set up; and
  • wholesalers attempt to circumvent that policy by trying to obtain the maximum quantities possible of the product at stake.

Going beyond the factual background of the case, the Advocat General also underlined the sensitivity of the issue raised and its crucial importance, in general, in that the outcome of the case will ultimately condition the scope that is to be given to Article 81, and may even lead to the questioning of previous EU policy aimed at promoting the development of the Internal Market and parallel imports.

According to the Advocate General, the present case should be distinguished from previous case law which had identified agreements as existing either: (i) where distributors co-operated with (anti-competitive) policies set up by the manufacturer; or (ii) where an anti‑competitive policy was “added” to an overall distribution agreement.

Indeed, in the present case, Bayer had never asked for any particular behaviour of its wholesalers as to the final destination of the ordered products. On the contrary, Bayer alone devised an autonomous strategy which enabled it to limit parallel imports, without requiring any form of collaboration from its wholesalers. There was therefore no form of “tacit acceptation” from the wholesalers. The Advocate General also considered it to be impossible to infer the existence of an export limitation agreement from the mere fact that wholesalers keep on ordering from a manufacturer; according to the Advocate General, any conclusion to the contrary would lead to “absurd” results as it would deduce the existence of an agreement from the tacit acceptance of an offer which itself had never been formulated.

Therefore, in the present case, the Advocate General considered that not only had Bayer not required any “adherence” from its wholesalers for the implementation of its export limitation policy, but also that this policy did not come under the umbrella of any overall agreement between them. As a result of these conclusions, it thus appears that the notion of agreement should be limited to an actual concurrence of wills between the parties.

The Issues Left Open: The specific case of distribution of pharmaceuticals in Europe

Should the ECJ follow the opinion of its Advocate General, then the issue of the definition of what is an “agreement” under Article 81 would be solved, and the boundaries of the notion of agreement would cease to be stretched extensively.

However, solving these issues may only be the tip of the iceberg as far as the distribution of medicines is concerned. Indeed, the distribution of pharmaceuticals involves complex public health issues, which makes one wonder about the very extent to which competition law should apply to that field of activity.

For instance, parallel trade in medicines may be considered as fundamentally different from other classic forms of parallel importing. In other consumer goods, the price difference between two countries, leading ultimately to parallel trade, results from the manufacturer’s pricing policy. This origin of the price difference legitimates the activity of parallel importers, as (i) they contribute to putting an end to such forms of market partitioning while (ii) enabling consumers to benefit from lower prices obtained in other Member States. But is that analysis appropriate when the price difference results not from a specific pricing policy from the manufacturer, but from differences in prices imposed at State level?

Such is the case of pharmaceuticals, the prices of which are determined by national governments on the basis of public policy considerations. Such prices are therefore not the result of a demand and supply interaction. In these circumstances, can it be sustained that parallel imports of medicines can still lower prices? Since the medicines will ultimately be sold at the national set price, can the consumer benefit from parallel trade at all? Should this be the case, then how can one legitimately require an undertaking not to hamper parallel trade – thereby necessarily harming its own financial interests - if such behaviour is not directly beneficial to end-consumers, but exclusively to parallel traders?

The complexity of the problem becomes greater if one considers the various regulatory controls that different Member States impose upon the pharmaceutical sector. Indeed, national regulations limit the margins of actions left to the players on the market. Wholesalers may have obligations in terms of stock, prices and quantities, manufacturers may have obligations in terms of production, marketing and research, and pharmacists may have obligations in terms of stock. How can competition law apply in such a regulated industry? How can producers or laboratories be forced to deliver unrestricted quantities, while capping at the same time the maximum amount of medicines they can produce?

These issues are currently arising, by analogy, before national competition authorities, who may in turn adopt different points of view. It may therefore be time for the European Commission, despite the setback suffered from the Advocate General’s conclusions, to adopt a clear-cut position for the sector.

Written by Olivier Fréget and Charlotte de Panafieu.