EU: Common Exclusive Purchase Obligations null and void?

16 October 2008

Dr Matthias Meyer

1. Introduction

The pharmaceutical market is currently undergoing severe changes due to the imminent or past expiration of patent protection for many blockbuster pharmaceuticals and political pressure for cheaper pharmaceuticals as considered by the European Commission’s sector inquiry into competition in the pharmaceutical sector which started in January 2008.

Against this background, the supply of generic pharmaceuticals has become increasingly important from an economic perspective and the corresponding agreements have recently undergone close legal scrutiny.

2. Facts

Pharmaceutical companies can either develop a generic pharmaceutical on their own or use the assistance of a supplier who will – against payment of a license fee – provide it with the corresponding dossier required for regulatory approval. Some suppliers of generic pharmaceuticals have licensed their dossiers only if the marketing company undertakes to exclusively purchase the generic pharmaceutical, which is subject-matter of the dossier, from the supplier for several years (i.e. an exclusive purchase obligation). Such an exclusive purchase obligation may violate European antitrust law and may therefore be void.

3. Legal evaluation

According to Art. 81 (1) EC all agreements are prohibited which have as their object or effect a restriction of competition. An agreement restricting competition may be exempted according to Article 81 (3) EC in connection with one of the so-called Block Exemption Regulations issued by the European Commission. The described supply agreements regarding generic pharmaceuticals fall within the scope of the Block Exemption Regulation for Vertical Agreements (Commission Regulation (EC) No 2790/1999 of 22 December 1999; “VBE”).

An exclusive purchase obligation is a non-compete obligation according to Article 1 lit. b) VBE and therefore a restriction of competition. However, such a non-compete obligation may be exempted and therefore may be admissible according to Articles 2 (1) and 5 lit. a) if its duration does not exceed five years.

The term of a supply agreement must be determined on basis of the applicable law. A term of more than five years can normally be concluded from the text of the agreement. However, according to Art. 5 lit a) sentence 2 VBE, a non-compete obligation which is tacitly renewable beyond a period of five years is to be deemed to have been concluded for an indefinite duration with the consequence that it would not be exempted. Sometimes it can be questionable whether the agreement only allows the renewal of the agreement upon its expiration without imposing any corresponding obligations on the parties or whether the clause already provides for a tacit renewal. The decisive question here is whether the term of the agreement is longer than five years if the parties take no further activities after signing it. In case of a tacit renewal, the exclusive purchase obligation, but not the entire agreement would be void.

4. Conclusion

Supply agreements commonly concluded with regard to generic pharmaceuticals must be drafted under consideration of the relevant issues of EC antitrust law. These issues may also become relevant during the lifetime of the agreement if for example the marketing company considers purchasing the generic pharmaceutical from a different supplier using another regulatory approval.