Opinion of the Advocate General in the GSK dual pricing case pending before the European Court of Justice

25 September 2009

Richard Eccles

Advocate General Trstenjak has delivered her opinion 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 opinion of the Advocate General is the final stage in the appeal proceedings before the European Court of Justice (ECJ) gives its judgment, possibly early next year.

The Advocate General has recommended that all of the cross-appeals be dismissed, thereby upholding the judgment of the ECFI that the GSK sales conditions providing for dual pricing for supplies in Spain, with a higher price being charged for sales for parallel exports, infringed Article 81(1) EC but that the European Commission’s decision to reject GSK’s application for exemption under Article 81(3) be annulled. However, the Advocate General proposes a restatement of the grounds of infringement of Article 81(1) and recommends that much of the reasoning deployed by the ECFI in relation to the existence of an infringement by object of Article 81(1) be applied in assessing whether the criteria of Article 81(3) were met. As regards the question of an infringement of Article 81(1) by object, the Advocate General’s opinion opposes the approach of referring to the legal and economic context of the pharmaceutical sector, concluding that the European Commission’s standardised approach, that an agreement restricting parallel exports infringes Article 81(1) by object, was appropriate in this case. However, the Advocate General agreed with the full application of the legal and economic context of the pharmaceutical sector in determining whether the criteria of Article 81(3) exemption were met.

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 or 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 argument in favour of Article 81(3) exemption concerning the strong levels of pharmaceutical sector competition by 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 Competition should balance the restrictive effects of the agreement against the evidence of likelihood of the Article 81(3) arguments being fulfilled.

The European Commission appealed against the ECFI’s judgment, primarily as regards the annulment of its rejection of GSK’s application for Article 81(3) exemption. GSK cross-appealed against the ruling that Article 81(1) had been infringed (in terms of restrictive effect as opposed to object). The two trade associations, EAEPC and Aseprofar appealed in relation to the ECFI’s assessment of the Article 81(3) exemption criteria.

Regarding GSK’s appeal, the Advocate General has examined the grounds overall for finding that Article 81(1) was infringed, and concludes that the ECFI had been wrong to find that there was no restriction by object and that it was therefore unnecessary to examine GSK’s arguments as to whether there was any restrictive effect. The Advocate General confirms that where an agreement has the object of restricting parallel trade, a restriction of competition by object must in principle be considered to exist. She states that it was not appropriate, as the ECFI had done, to require an analysis of the disadvantages for final consumers before finding a restriction of competition by object in such a case. Consumer benefit was to be taken into account only in assessment of the agreement under Article 81(3), and she considers it an error of law by the ECFI to take into account consumer harm in the Article 81(1) context.

The Advocate General also criticises the ECFI judgment for making what she regarded as an erroneous assumption that Spanish wholesalers would keep for their own benefit the price advantages resulting from parallel trade and not pass on such benefits to consumers. The Advocate General considered it inconsistent of the ECFI judgment also to state that wholesalers which export pharmaceuticals would undercut the prices charged by wholesalers in the Member State to which the products are exported.

The Advocate General considers that there were no particular circumstances of the pharmaceutical sector that affect the general principle of EU competition law that agreements limiting parallel trade have as their object a restriction of competition. She points out that competition throughout the EU takes place under conditions that differ at national level and that the exploitation of favourable conditions in certain Member States constitutes one of the benefits of the EU internal market. Accordingly, she considers that the ECFI should have upheld the Commission’s decision that the Glaxo Wellcome sales conditions were a restriction of competition by object.

On the European Commission’s appeal regarding the application of the Article 81(3) criteria, the Advocate General considers that although there were some deficiencies in the ECFI’s findings regarding the content of the Commission’s decision, the ECFI was overall correct to find that the Commission should not have rejected GSK’s arguments and evidence without providing arguments in support of its case. Whilst the ECFI had failed to recognise that the Commission had examined in detail whether there was a sufficient probability that Glaxo Wellcome’s sales conditions would lead to efficiency gains for purposes of Article 81(3), she concludes that overall, the Commission had not adequately stated its reasons for the conclusion that there was no evidence of a causal link between the financial resources gained from restricting parallel imports and R&D expenditure. The Advocate General considers that where a party makes arguments which are backed up in a detailed and relevant manner, the Commission must deal with the arguments in a detailed manner and not dismiss them in a generalised fashion. Accordingly, the ECFI was correct to find that the Commission should not have rejected GSK’s arguments and evidence without providing reasoning and argument in support of doing so.

The appeals by the two trade associations EAEPC and Aseprofar concerning the Commission’s reasoning in relation to the Article 81(3) criteria were both rejected. In relation to Aseprofar’s appeal, the Advocate General states that the Commission must carry out an appropriate examination and not merely require evidence from the notifying party to prove fulfilment of the Article 81(3) criteria. The Commission was not required to provide that the conditions for exemption were not fulfilled, but it should not reject an application for exemption without providing substance and reasoning in its decision.

If the ECJ rules in accordance with the Advocate General’s opinion (and upholds the ECFI’s judgment in this respect), then the position will continue to be that no valid decision on GSK’s (Glaxo Wellcome’s) notification for exemption under Article 81(3) has been made. This may remain an open question since under the “modernisation”, self-assessment regime that has existed since May 2004, the European Commission no longer operates a notification-based system of Article 81(3) decisions. Most significantly, the Advocate General is recommending 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 (as per the ECFI judgment) but rather should only be relevant in the application of Article 81(3).

Source

Opinion of Advocate General Trstenjak in 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.

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