Pharmaceuticals companies can consider pursuing a variety of contractual and unilateral means to attempt to forestall parallel exports. Companies can find themselves faced with sharp and sudden increases in demand for their products from wholesalers seeking to capitalise on price differentials between the member states considered to be the "low price" countries, mainly in Southern Europe and the acknowledged higher price countries, which include the UK.
One can consider the following means by which pharmaceutical companies may seek to prevent parallel exports:
- Contract terms or express agreement;
- Price discrimination in favour of domestic sales or resales;
- Allocations (i.e. limitations on quantities supplied) by reference to:
- quantities previously ordered prior to an upsurge in demand for parallel export
- the wholesaler's market share on the national market,
considering separately the situations in which the pharmaceuticals supplier is not in a dominant position and the situations in which it is in a dominant position for the relevant products;
- An outright refusal to supply wholesalers, again distinguishing between situations in which the pharmaceutical company is not dominant and those in which it is in a dominant position.
One of the policy questions raised by the parallel exports debate is the question of whether a pharmaceutical company should be compelled as a matter of competition law to produce greater quantities than its own interests would require, purely for the sake of meeting demand from parallel exporters.
This paper will analyse each of the above methodologies that could be used by pharmaceutical companies, reviewing the present case law and the arguments that could be used by such companies in future cases, following the conclusions that can be drawn from the recent cases. The position will be analysed by reference to the EC prohibition of restrictive agreements in Article 81(1) EC and the rule against abuse of dominant position in Article 82. At UK level, corresponding rules are contained in sections 2 and 18 of the Competition Act 1998.
It will also be appropriate first to carry out a brief review of the intellectual property position in relation to parallel imports.
2. Background: European Commission Communication and Parliament Resolution
The differential price controls on pharmaceutical products in the different member states result in inevitable tensions between on the one hand, the needs of pharmaceutical companies to generate adequate profits to fund future research and development and to provide the expected return to their shareholders, and on the other hand, the interests of parallel exporter companies and the alleged consumer benefits that are allegedly brought through lower prices.
This tension was debated at some length in three round table discussion sessions involving representatives of the European Commission and the pharmaceutical industry, in 1998, which resulted in a Commission Communication on the Single Market in Pharmaceuticals dated 25 November 1998 and a European Parliament Resolution dated 4 May 1999. The Commission Communication recognises that it would prove "extremely difficult" to remove the parallel import "problem" by establishing single price levels across the Community, but equally that allowing the current situation to develop would result in long term segmentation of the EC pharmaceutical markets and the need for continuous monitoring of member states' compliance with the EC Treaty and continuous enforcement of the EC competition rules and companies seeking to limit parallel trade. The Commission concluded that it was "doubtful whether such monitoring activities are, in themselves, the simplest way to achieve the proper functioning of the Single Market".
The Communication identified a "middle way" involving co-operation between member states and health care service providers in respect of three distinct sectors of the market, namely:
- Non-prescription products: The remaining price controls on pharmaceuticals sold without prescription could be removed (subject to accompanying measures to take into account different therapeutic, economic and social circumstances of patients and their need to access a wide range of medicines);
- Out of patent products: Since from an economic point of view, out of patent products are closer than in-patent ones to normal product markets, consideration could be given to the possibility of removing price control whilst stimulating competitive arrangements;
- In patent products: A sustainable solution for the longer term may need to reduce the reliance on price fixing as a means to meeting budgetary objectives but also to introduce other forms of regulation in order to balance the need to fund research and development and to ensure that a more relaxed pricing regime would not, in the absence of high levels of competition, simply result in increased profits for pharmaceutical companies.
The Commission suggested a move from the current mechanism whereby prices are fixed by public authorities, to one of dialogue between public authorities and pharmaceutical companies, to reconcile considerations of price liberalisation and costs containment, which would need to cover the entire turnover obtained within the company's pharmaceutical portfolio and prices, volumes, promotion, research and development spending and priority choices in respect of public health.
In its Resolution the European Parliament urged the Commission to pursue the completion of the Single Market following the proposed distinction between non-prescription, out of patent and in-patent products, and in particular called upon the Commission to bring forward legislation to end government controls on manufacturers' prices in the sector. With regard to the in-patent sector, the Parliament acknowledged the need for prices to reflect clinical and cost effectiveness criteria and that there are tensions created by parallel trade in a price controlled market which are offer little advantage to the consumer. Parliament further recognised that in the context of parallel trade, "domestic prices cannot be fixed wholly independently of market considerations and that parallel trade provides only limit market dynamics".
Since this Communication and the Parliament's Resolution, there has been no legislative proposal from the Commission. Rather, the Commission has adopted the negative decision in the Glaxo-Wellcome dual pricing case (OJ 2001 L302/1). Meanwhile the European Court of First Instance ("ECFI") has adopted a judgment favourable to Bayer in the Adalat case (Case T-41/96, Bayer AG v Commission, ECR (2000) II – 3383), overturning the Commission's previous decision that Bayer had unlawfully suppressed parallel exports of Adalat by reducing volumes supplied to known "exporter" wholesalers. The ECFI concluded that in the absence of a "concurrence of wills", ie. definite evidence of acceptance by wholesalers of an intention of the supplier to prevent parallel exports, there could be no infringement of Article 81(1). The Commission is appealing to the full European Court of Justice ("ECJ") and the ECJ judgment can be expected later this year.
3. Intellectual Property Considerations
3.1 General principles of EC exhaustion of intellectual property rights
There is an important distinction between EU countries and non-EU countries with regard to the ability, under EC law, of an owner of intellectual property rights to invoke those intellectual property rights to prevent parallel importation into an EU Member State of products protected by the relevant intellectual property. As regards products already placed on the market within the EC by the rights-holder or with his consent (for example by a licensee or affiliate), the intellectual property rights in question are exhausted and therefore cannot be enforced against parallel imports of such products between EU Member States. However, they are not exhausted and can be enforced in relation to such products which have so been placed on the market by the rights holder or with its consent outside the EU and are being imported into the EU; this is because EC law prohibits "international exhaustion".
The EC principle of (intra-EC) exhaustion of intellectual property rights is well-established. The holder of a patent or trade mark in one EU Member State may not rely on its national patent rights to prevent the importation into that Member State of goods manufactured and placed on the market in another EU Member State by the rights holder or with its consent (for example by a licensee), under corresponding patent or trade mark rights held by such rights holder or by another company in the same group: Centrafarm v Sterling (Case 15/74,  ECR 1147), and Centrafarm v Winthrop (Case 16/74,  ECR 1183). In respect of patent rights, this applies even where the products were placed on the market by the patentee or with its consent (for instance by a licensee) in another Member State in which patent protection was not available for the products in question at the relevant time Merk v Stephar (Case 187/80,  ECR 2063) and Merck v Primecrown Ltd (Case C-267/95 and C-268/95,  ECR I-6285).
As regards the enforcement of trade marks to prevent importation, the position is more complicated where the products in question have been repackaged by the parallel importer in order to fulfil the legal or practical requirements of marketing products in the EU Member State concerned. The position in respect of repackaged products will be considered in section 3.3 below.
3.2 International exhaustion of rights
In relation to international exhaustion of rights, the ECJ decided in the case of Silhouette v Hartlauer (Case C-335/96,  ECR I-4799) that the provisions of Article 7(1) of the EC Trade Marks Directive 89/104 prevent any Member State of the EU or EEA from applying the principle of international exhaustion of rights. Exhaustion of rights was expressly treated as a European Community concept only, and trade mark owners were required to be permitted under the national law of the Member States to invoke their trade mark rights to prevent the importation into the relevant Member States of products bearing their trade marks from outside the EEA, even if the products in question had been placed on the market there by the trade mark owner or with its consent. This is provided that the trade mark owner has not consented to products being imported into the EU. This was reinforced in the case of Sebago & Maison Dubois v GB Unic (Case C-173/98,  ECR I-4103), when the ECJ stated that any consent given by the trade mark owners for the marketing of products in question in the EU must relate to the specific items of the products imported from outside the EU, and that it was not sufficient (for consent to exist) that other items of the same products under the same brand were being marketed elsewhere in the EU by the trade mark owner.
The ECJ further confirmed in the cases of Zino Davidoff SA & Levi Strauss v Tesco (Joined Cases C-414, 4215 and 416/99, judgment of 20 November 2001, not yet reported), that the question of consent to the marketing of products in the EU is a Community concept which cannot be determined by the national contract law of the Member State in question which governs the original or subsequent supply contracts and that the rights owners' consent to marketing of the products in question in the EEA must be express or otherwise "unequivocally demonstrated" but cannot be implied. Accordingly, such consent cannot be implied by silence, by the goods being put on the market with no warning of total restrictions, by goods being placed on the market under supply contracts without contractual restrictions, or by any failure by the rights owner to communicate territorial resale restrictions to subsequent purchasers in the supply chain.
This line of case law from the ECJ appears to be conclusive in favour of brand owners with regard to their rights to invoke their trade mark rights to prevent the importation of products into a Member State from outside the EU, where they have not expressly consented to the products being marketed by the parallel importer in the EU.
It is considered likely that the ECJ rulings preventing international exhaustion of rights will also be applied to other types of intellectual property, for example, patents and copyright. This is particularly likely as regards copyright, taking into account the provisions of the EC Directives in the copyright area which are in similar terms to Article 7(2) of the EC Trade Marks Directive.
3.3 EC exhaustion of rights in relation to repackaged products
The fact that a trade mark owner's products may have to be repackaged to meet the labelling requirements of the EU Member State of importation will not necessarily be a deterrent under EC law to a parallel importer. There has been a series of ECJ cases which have established the principles on the extent to which a trade mark owner should be allowed to invoke trade mark rights to prevent parallel importation under Article 30 EC between Member States, where the products are not imported in their original labelling and packaging but have been repackaged to meet the legal or practical commercial requirements in the member state of importation. The leading cases in this respect concern the interpretation of Article 7(2) of the EC Trade Marks Directive; these cases refine and develop the previous case law.
Article 7 (2) of the Trade Marks Directive provides that the rights in a trade mark will not be exhausted "where there exist legitimate reasons for the proprietor to oppose further commercialisation of the goods, especially where the condition of the goods is changed or impaired after they have been put on the market. "
The repackaging of pharmaceutical products for parallel importation purposes has typically been achieved by overlabelling the original foreign package with a sticker containing the necessary information in the language of the Member State of importation, and changing the foreign patient information leaflet for the appropriate version for the Member State of importation. The leading case following the EC Trade Marks Directive is Bristol Myers- Squibb v Paranova A/S (Joined Cases C-427, 429 and 436/93,  ECR I-3457). The ECJ stated that a trade mark owner may rely on his trade mark to prevent the marketing of repackaged products unless:
- Reliance on the trade mark contributes to artificial partitioning of the market;
- Repackaging does not affect the condition of the product;
- Repackaging is not liable to damage the reputation of the trade mark;
- The new repackaging clearly states the identity of the original manufacturer and the repackager;
- The importer gives notice to the trade mark owner of the intended distribution of the repackaged product and provides a sample on request (so as to allow the trade mark owner the opportunity to object if there is a fault with the packaging).
Further, the repackaging must not go further than is "necessary". If all of these requirements are fulfilled, parallel importation should be permitted and the trade mark owner would not normally be able to invoke his trade mark to prevent such importation.
Recently, parallel importation of trade-marked products has been further considered in a new group of cases in which the ECJ gave judgment in April 2002 pursuant to preliminary references from the English courts: Boehringer Ingelheim & Others v Swingward (Case C- 143/00, judgment of 23 April 2002). In these cases, Boehringer Ingelheim, GlaxoSmithKline and Eli Lilly took action against parallel importers who had engaged in a variety of types of repackaging, in particular total reboxing (i.e. replacement of the outer packaging) in combination with the removal of the manufacturer's trade mark and/or addition of the importer's trade marks and get up. Although the ECJ's ruling (which was directed to the original English courts to be applied to the facts of the case) left various questions open, the ECJ stated the following:
- It is not necessary for a trade mark owner to demonstrate damage to the actual specific subject matter of his trade mark in order to oppose parallel imports.
- The legitimate interests of the trade mark owner must be respected, which in particular means that repackaging must not affect the original condition of the product and must not "harm the reputation" of the trade mark.
- Reboxing (or replacement packaging, as opposed to relabelling) is objectively necessary if without such repackaging, effective access to the market, or a substantial part of it, would be hindered as a result of strong resistance from a significant proportion of consumers to the relabelled product. However, resistance to the relabelled products does not always constitute an impediment to effective market access. It is for the national court to determine whether effective market access exists.
- A parallel importer must give reasonable prior notice to the trade mark owner of his intention to repackage, failing which the trade mark owner may oppose the marketing of the repackaged product. Normally 15 working days would be considered a reasonable period of notice, but it is for the national court to determine whether this is reasonable in each case.
The judgment is helpful to brand owners insofar as it provides the argument that parallel importation could be resisted if there is evidence that the reputation of the trade mark would be damaged by the importation of the repackaged products. On the other hand, the judgment allows for purely commercial factors, in particular the likelihood of consumer resistance to relabelled products, to be taken into account in determining whether full repackaging (rather than relabelling) is necessary on the part of the parallel importer, although the ECJ left open for national courts to determine whether consumer resistance would on the facts constitute a denial of effective market access to the parallel importer (so as to support importation being allowed).
3.4 Conclusion concerning intellectual property rights
The Bristol Myers/ Paranova and Boehringer Ingelheim/ Swingward series of cases will provide grounds in some cases for a pharmaceuticals supplier to invoke its trade marks to prevent parallel importation of repackaged products between Member States. However, as a general rule, the doctrine of exhaustion of rights will prevent a pharmaceuticals supplier from being able to use its patent or trade mark rights to oppose parallel importation within the EC of products marketed by the supplier or with its consent within the EC.
4. Contract Terms deterring Parallel Exports
4.1 Express terms
The use of a contract term prohibiting exports will almost inevitably infringe Article 81(1) EC. The same applies when a restriction on exports is included in invoices or other contract-related documentation as opposed to an actual agreement, where on the facts such invoices or documents form part of a set of continuous business relations governed by an agreement between the parties. This was confirmed by the ECJ as regards to the pharmaceutical industry in Case C-277/87, Sandoz v Commission, ECR (1990) I – 0045. Customers were considered to have accepted by their conduct a prohibition on exports contained in the supplier's invoices, through placing renewed orders with knowledge of the condition contained in previous invoices.
On this basis, the provision was considered to be the expression of the intention of the parties even though it was not itself contained in a binding contract. Further, the fact that Sandoz had not taken any steps to enforce the provision did not prevent it from being a restriction of competition contrary to the prohibition in Article 81(1) EC.
In Johnson and Johnson (Commission Decision 80/1283 of 25 November 1980, OJ L377 31.12.80), the Commission found Ortho UK and Cilag Alsbach (two subsidiaries of Johnson and Johnson) to have concluded an export ban in the price lists they applied for sales of their products to pharmaceutical dealers, because the clause formed an essential part of the contracts between each company and its dealers. Ortho changed the wording so that formally only exports to non-EU countries were still prohibited, but in reality exports to EU countries were still not allowed. It made threats to withhold or delay supplies and instituted a system of checks on dealers. The dealers knew that deliveries were obtainable only if they complied with the request not to export. The Commission stated that Article 81(1) was applicable even if the export prohibitions were not always enforced, as the exporting dealers’ supplies were constantly at risk in the event of the exports becoming known to the supplier.
Further, in Case C-279/87, Tipp-Ex v Commission (1990) ECR I-261, the ECJ upheld the Commission’s finding of an infringement of Article 81(1) where a prohibition on parallel exports was contained in written and oral agreements between the supplier and distributors. The Tipp-Ex standard form of distribution contract contained inter alia the following clauses:
- Each authorised dealer undertook not to sell the contract products to customers having their place of business outside the contract territory with the exception of EU Member States. It also undertook not to sell the products to customers who to its knowledge intended to re-sell them in areas outside the contract territory.
- With regard to EU Member States not included in the contract territory, each distributor undertook not to engage in active sales efforts.
- The supplier could not supply the goods to distributors who in his knowledge intended to re-sell them in the contract territory. He had to examine with the diligence of a prudent businessman whether there was any danger of distributors re-selling in the contract territory.
- The supplier undertook to impose on the parties to his other Authorised Dealer Contracts the same obligations as the authorised dealer assumed.
The evidence showed that the distributors had clearly acquiesced in the supplier's intentions, in particular Tipp-Ex' threats and pressure, with the result that at least one of them had provided actual proof of co-operation.
4.2 Unilateral behaviour in the context of supply arrangements
The ECFI decided clearly in the Bayer/Adalat case that the case law shows that a distinction should be drawn between cases in which an undertaking has adopted a genuinely unilateral measure, and those in which a measure appears to be unilateral but is actually part of an agreement between the parties. However, apparently unilateral conduct which is claimed to be part ofan agreement cannot be so treated unless there is evidence of actual acquiescence by the other party, either express or implied, in the attitude adopted by the manufacturer.
Accordingly, the ECFI concluded that the concept of an agreement for purposes of Article 81(1) EC centres around the existence of a "concurrence of wills” between the parties, which can take any form, as long as it constitutes a true expression of the parties’ intention (paragraph 69).
On this basis, the ECFI concluded (paragraph 109) that the Commission had not proved that Bayer France or Bayer Spain had imposed an export ban on their respective wholesalers or that Bayer had established a systematic monitoring of the actual final destination of the products after adoption of its new supply policy, or that it made supplies of the products conditional on compliance with the alleged export ban, or that it penalised exporter wholesalers. The available documentation did not support these allegations, nor did it rebut Bayer’s claims that its new supply policy involved limited supplies in accordance with the national needs of the wholesalers by reference to the historic purchases of the wholesaler concerned (increased by 10% and taking no account of any possible exportation).
The ECFI made it clear that in order for a policy of restricting parallel exports to be treated as a term of an agreement for Article 81(1) purposes, the wholesalers in question must be shown by their conduct to have acquiesced in, or aligned themselves with, such a policy (paragraphs 151 and 173). The Commission had failed to prove that Bayer had demanded or negotiated the adoption of any particular line of conduct on the part of the wholesalers concerning the exportation of Adalat or that it had penalised exporting wholesalers.
In particular, the ECFI made it clear that where a supplier introduces a new supply policy which is designed to restrict parallel exports, the mere continuation of commercial relations with the relevant wholesalers is not by itself sufficient evidence of an agreement to implement the policy on parallel exports, for Article 81(1) purposes (paragraphs 173 and 182).
5. Exclusive Distribution Agreements
5.1 The application of Regulation 2790/1999
The block exemption Regulation for vertical agreements, Regulation 2790/1999, automatically exempts distribution agreements which conform to specified criteria, inter alia that the relevant market share (generally that of the supplier) is less than 30% of the relevant market within the EC and that no black-listed clauses are included. Accordingly, where a pharmaceuticals supplier wishes to appoint a single distributor for a defined territory within the EC, rather than supply its products to a number of different wholesalers, it is possible for such a grant of sole or exclusive rights to be brought within the benefit of the block exemption Regulation.
Further, again provided that the relevant criteria of the block exemption Regulation are in each case respected, it will also be possible for the pharmaceuticals supplier to impose corresponding restrictions on its wholesalers and distributors in other member states preventing them from making active sales of the same or equivalent products into the territory which has been exclusively allocated to such exclusive distributor. Where the requirements of the block exemption Regulation are fulfilled for the suppliers' agreements both with the exclusive distributor and with wholesalers and distributors in other member states, it will be possible for the supplier, in this way, to prevent such other wholesalers and distributors from actively making parallel export sales into the territory allocated to the exclusive distributor.
However, it must be stressed that, in addition to complying with the other requirements of Regulation 2790/1999, the supplier cannot impose either of the following types of obligation on such other distributors or wholesalers:
- Restrictions against making passive sales (ie. sales in response to unsolicited orders) into the exclusive distributor's territory; or
- Restrictions which purport to limit or control sales by such distributors or wholesalers to third party purchasers which intend to resell the products (actively or passively) into the exclusive distributor's territory.
Subject to these requirements and the provisions of Regulation 2790/1999 (including the 30% market share test), it is possible for a pharmaceuticals supplier to make judicious use of exclusive distribution as a strategy to control, as far as possible, parallel exports and imports.
5.2 Territorial restrictions in distribution or wholesale supply agreements operating outside the EEA
Where a territorial sales restriction on a distributor limiting its sales to a non-EC territory will have an appreciable effect on the resale of such products into the EC and on competition in respect of the relevant products within the EC, then such an obligation, though contained in an agreement for non-EU rather than EU countries, will infringe EC competition law (Article 81(1) EC).
This was decided by the ECJ in Javico International v Yves Saint Laurent Parfums SA (Case C-306/96,  ECR I-1983), when it concluded that such a restriction will infringe Article 81(1) EC where:
- the relevant product market within the EC is oligopolistic or where there is an appreciable price difference as between the EU Member States and the relevant non EU countries; and
- in view of the market position of the supplier within the EU, the contractual restriction risks having an appreciable effect on trade between Member States.
This issue and the considerations addressed in the Javico International case are currently relevant as regards the accession countries prior to their respective accessions to the EU scheduled for 1 May 2004.
It is very likely that during the period prior to the EU accessions of the candidate countries, the above criteria will be fulfilled as regards many pharmaceutical products where the supplier has a market share in the EU or in the relevant substantial part of the EU which is appreciable, i.e. in practice above 10%, and especially if the market share is above 15%. This is because the structure of many pharmaceutical product markets is oligopolistic and because of the appreciable differences likely to continue at least prior to EU accession, between price levels within the EU and in CEE countries.
After EU accession of the candidate countries, the above type of contractual restriction will need to be assessed in the same way as territorial restrictions in such agreements involving the present EU Member States, and will generally infringe Article 81(1) EC unless the market effects of the agreement concerned are de minimis.
Therefore, EU-based undertakings should exercise caution in imposing any contractual restrictions in distribution agreements for accession countries on re-exports of the contract products to the EU Member States.
6. Discriminatory Pricing to deter Parallel Exports
6.1 Discriminatory pricing contrary to Article 81(1) EC
The application of differential prices or discount regimes in the context of supply contracts or arrangements will generally infringe Article 81(1) where they involve discrimination against exporter wholesalers or purchasers. Within the pharmaceuticals sector, the EC has reached such conclusions in the Organon and Glaxo Wellcome cases. However, as will be explained below, the Commission’s refusal to grant Glaxo Wellcome any latitude in response to the constraints imposed on it by the price controls in the member state of export (Spain), is open to criticism.
6.1.1 The Organon case
In 1994, the European Commission intervened against a price regime introduced by Organon in respect of oral contraceptive products, whereby pills intended for export from the UK no longer qualified for a 12.5% discount which applied to pills marketed with and consumed within the UK (25th Report on Competition policy, 1995). The price regime was contained in a circular sent by Organon to its British wholesalers stating that the discount would be available only on orders which they could prove were intended for the UK and would not be re-exported. Organon also sent wholesalers involved only in UK distribution a letter asking them not to supply, at the discounted UK price, to wholesalers re-exporting the product. One of them had acceded to this request.
This discriminatory pricing based on geographical destination removed the price advantage of parallel imports of the products in the Netherlands. Organon had notified the European Commission of the arrangement which had also been the subject of three complaints. As a result of the Commission's investigation, Organon was compelled to discontinue the practice and to reinstate this previous pricing regime.
6.1.2 The Glaxo Wellcome case
Glaxo Wellcome's practice which was condemned by the Commission in the well known Glaxo Wellcome dual pricing case (OJ 2001 L 302/1) was similar, in that it involved higher prices being charged for exports than the prices charged for products supplied and consumed within the home market, Spain. Glaxo Wellcome's scheme was contained in an express provision, clause 4, of its contracts with its Spanish wholesalers, under which products supplied for consumption within Spain would be subject to the maximum price established by the Spanish health authorities where the pharmaceutical products were subsequently marketed at national level, i.e. through Spanish pharmacies or hospitals, and were financed by Spanish public health or social security schemes. In other cases, the Spanish health authorities' price controls did not apply and Glaxo Wellcome charged a higher wholesale export price. The Commission found that the Spanish regulated domestic price was around at least 90% of the EC average price, but also that prices of the same products in the UK, the primary parallel export destination, were at least 20% higher than the EC average price. This had been exacerbated by significant currency movement whereby the rise in value of the pound sterling had made parallel imports significantly more attractive for consumers and significantly more profitable for parallel importers in the UK.
The Commission stated (paragraph 118 of its decision) 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 in excluding such trade because it involves in principle no cost of monitoring compliance." Nonetheless, the reasoning of the Commission shows that if appropriate evidence could be provided in support of key arguments raised on behalf of Glaxo Wellcome as the pharmaceutical supplier, the Commission might in another case have to conclude differently. On some points, the Commission's reasoning on the actual facts stated in the decision could be open to question:
- Although the Commission stated (in paragraph 118, above) that the dual pricing scheme involved in principle no cost of monitoring compliance, it also quoted Glaxo Wellcome elsewhere in the decision as emphasising that its (Glaxo Wellcome) "had no practical means of ensuring strict compliance" with the dual pricing provision.
- It was fundamental to Glaxo Wellcome's case that its sales conditions were "intended to remedy the adverse effects created by differences between Spanish and UK systems of pharmaceutical price regulation by limiting the impact of the lower prices mandated by the Spanish government to Spain". Glaxo Wellcome claimed that the provision could not be compared with dual pricing because the Spanish national authorities determined and imposed the price levels for the Spanish domestic market. The Commission stated that this argument overlooks the fact that pharmaceutical companies have negotiating power when discussing domestic sales prices with the Spanish authorities, and referred to the fact that Glaxo Wellcome had managed to negotiate substantial price increases for four of the eight relevant products, even though the price of another product, Zantac, had simultaneously been reduced. However, the Commission's position seems to overlook the fact that notwithstanding the degree of flexibility which appears to have existed within the Spanish system, ultimately the prices are limited by national regulatory authorities, and any price increases for certain products may also have to be offset at least in part by price reduction for others. Ultimately, due to the Spanish price controls, the permitted Spanish prices for the relevant products were significantly below the price levels which Glaxo Wellcome was able to negotiate under the UK PPRS system.
- The Commission stated that the segmentation between Spanish domestic and export market prices did not result from national legislation, by virtue of the fact that the Spanish price control measures left it open to the manufacturer in question to apply the same price to exports (paragraph 139). The logic of this statement by the Commission is questionable. It purports to deny the regulatory impact of the national price control measures on the basis that it does not prevent export prices from voluntarily being brought to the same level notwithstanding the fact that export prices are in any event outside the scope of the national price control regime. If one starts from the premise that as a general rule, in the absence of regulation, companies should generally be free to set their own prices, then Glaxo Wellcome's argument that it was not dual pricing ought to be accepted. Glaxo Wellcome’s position could be summed up as being that it was charging a single price for all sales made in Spain, subject to the enforced reductions in prices that it was required to maintain for sales for domestic consumption reimbursed by the Spanish authorities, for which sales Glaxo Wellcome had to apply the maximum price that it had been able to negotiate with the Spanish authorities. Moreover, the Commission accepted (paragraph 186) that the UK reimbursement system, which provides for fixed reimbursement fees and a clawback system of 4.5% of the agreed price in respect of presumed parallel import benefits to pharmacists, de facto provides an incentive for intermediaries and pharmacists to purchase cheaper parallel-traded products.
The Commission's position on this point is further open to question by reference to a ruling of the Spanish Tribunal for Fair Trade of 5 December 2001 (Resolution Doc. R488/01, Pharmaceutical Laboratories) in which the Tribunal upheld a decision of the Spanish Competition Authority to the effect that various pharmaceutical suppliers, including Glaxo Wellcome, had not infringed the Spanish rules on abuse of dominant position in refusing to supply pharmaceutical products to an exporter wholesaler, DIFAR. The Tribunal expressly stated that Glaxo Wellcome's ability to negotiate prices with the Spanish authorities does not mean (for purposes of assessing whether it was in a dominant position) that it enjoyed any independence in fixing its prices, given that the Spanish legislation requires authorisation of prices of pharmaceutical products in all phases of commercialisation.
- The Commission further argued that the appreciation of the pound sterling against the Spanish peseta meant that Glaxo Wellcome could not maintain that the price differences between the two countries results entirely from differences between the Spanish and British regulatory systems (paragraph 141). However, the economic reality is that exchange rates fluctuate and have to be accepted as a given factor for the period in question, and during the relevant period of the Commission's investigation, there was a significant difference between the permissible price levels in Spain and the UK, after taking into account the exchange rate. Since national regulatory controls are the primary factor limiting price levels in each country, Glaxo Wellcome's argument concerning the effect of the Spanish controls on its pricing system should have been accepted.
The various elements of Glaxo Wellcome's case which the Commission found were not supported by the evidence and the particular facts, include the following. These factors suggest that in other circumstances, arguments such as those put forward by Glaxo Wellcome could be successful if the facts and evidence were marshalled in the particular case:
- The Commission stated that no causal link was proven between the effects of parallel trade and R&D investments, and that any savings that might be made by preventing parallel trade would therefore not automatically lead to higher R&D investments. The Commission based this assertion on the fact that approximately only 15% of Glaxo Wellcome's turnover was accounted for by R&D costs. The Commission stated that Glaxo Wellcome could equally cut other costs that were within its control, or spend a greater part of its profits on R&D expenditure. (This, it may be said, is presumptuous about the feasibility of cutting other costs and the expected returns required by shareholders.) Glaxo Wellcome's turnover and R&D expenditure had both reduced over the relevant period, but the R&D expenditure had reduced by a lower proportion which meant that between 1996 and 1998 it came to account for a slightly increased proportion of Glaxo Wellcome's turnover.
- Glaxo Wellcome did not demonstrate that the volume of parallel trade into the UK from Spain had increased in greater proportion than the volume of parallel imports from other EC member states between 1996 and 1998.
- Glaxo Wellcome argued that parallel trade was disadvantageous in that it could result in shortages of supply in the domestic market and also delays in introduction of new pharmaceutical products in low-priced countries due to the risk of parallel exports to higher-priced countries. However, the Commission found that there to be no evidence of a causal link between parallel trade and any alleged shortage of supply in Spain (paragraph 172) or of any delays in launches of Glaxo Wellcome products in Spain (paragraph 176).
The Commission stated (paragraph 153) that although the restriction at issue in the case constituted "a particularly serious attempt to partition the common market", there is in principle no restriction which cannot be exempted under Article 81(3) (paragraph 153). Glaxo Wellcome was stated to have failed to provide sufficient evidence to support its claim for an exemption. This suggests that a pharmaceutical supplier could justifiably claim the benefit of Article 81(3) to validate a similar differential pricing regime where all the requisite evidence can be assembled to demonstrate the benefits of such a pricing scheme along the lines of those argued by Glaxo Wellcome.
6.2 Discriminatory pricing contrary to Article 82 EC
Discriminatory pricing as between equivalent customers is a classic abuse of dominant position, as shown by the United Brands case. However, in principle, it should be possible for pharmaceuticals suppliers to argue that differential pricing as between wholesalers reselling on the domestic market and parallel exporter wholesalers should be acceptable as a proportionate response to price controls in the member state of export. Therefore, the type of arguments pursued by Glaxo Wellcome in its above dual pricing case in the context of Article 81 EC could also be put forward by a dominant pharmaceuticals supplier under Article 82 EC, albeit that Glaxo Wellcome’s experience before the Commission suggests that an appeal to the ECFI and possibly also the ECJ may be necessary in order for such arguments to be sustained.
A dominant pharmaceuticals supplier wishing to differentiate its prices between wholesalers reselling on domestic and export markets could also possibly be justified on the basis that these different types of wholesaler activities are not equivalent or involve different product and geographic markets. These issues are discussed in section 7.2.1 below.
7. Allocations and Limitations on Supplies to Parallel Exporters
7.1 The position as regards non-dominant suppliers
The position with regard to pharmaceutical suppliers which are not in a dominant position is currently governed by the ECFI's judgment in the Bayer/Adalat case. In essence, if the supplier is not in a dominant position and its conduct is unilateral and does not reflect the shared intentions of two or more parties, neither Article 81 nor Article 82 EC can apply. The criteria to determine whether a supplier's conduct is to be treated as part of an agreement with the wholesaler and as to when it is to be treated as purely unilateral conduct, on the basis of the ECFI's judgment in Bayer/Adalat, are explained in Section 2 above.
On the basis that Bayer's conduct in limiting supplies of its Adalat product to wholesalers was unilateral conduct, outside the scope of the contractual relations between supplier and wholesaler, the ECFI stated the following in an already famous passage (paragraph 176 of the judgment):
"…the right of a manufacturer faced, as in this case, with an event harmful to his interests, to adopt the solution which seems to him to be the best is qualified by the Treaty provisions on competition only to the extent that he must comply with the prohibitions referred to in Articles [81 and 82]. Accordingly, provided he does so without abusing a dominant position, and there is no concurrence of wills between him and his wholesalers, a manufacturer may adopt the supply policy which he considers necessary, even if, by the very nature of its aim, for example, to hinder parallel imports, the implementation of that policy may entail restrictions on competition and affect trade between Member States."
In the Bayer case, the ECFI found that there was no evidence that Bayer was coercing its wholesalers not to export its products or that its wholesalers were acquiescing in any such policy, and given that there was no evidence to contradict Bayer's claim that it was merely limiting supplies of the product by reference to the historic purchases of the wholesalers concerned. This enables the conclusion that, faced with a sharp upsurge in demand for products for parallel exportation purposes, it will be lawful for a non-dominant supplier to limit its supplies to its wholesalers by reference to the historic purchases of the product by the respective wholesalers.
7.2 The position as regards dominant suppliers
In the Bayer/Adalat case, the ECFI confirmed that under the case law of the ECJ, even an undertaking in a dominant position may, in certain case, refuse to sell or may change its supply or delivery policy, without infringing Article 82 (ex 86), as shown by Case 27/76 United Brands v Commission (1978) ECR I-207, paragraphs 182 – 191).
It is necessary to consider the various elements of an abuse of dominant position, in order to clarify whether and in what circumstances a refusal to supply or a limitation of supplies to parallel exporters may constitute abuse of a dominant position. This involves:
- first, defining the relevant product and geographic markets in order to determine whether the supplier is in a dominant position, and
- second, verifying whether, by reference to the established case law, the refusal or limitation of supplies constitutes abuse of dominant position, and
- third, verifying whether, even if the conduct may prima facie be abusive, there is any objective justification in support of the refusal or limitation of supplies.
7.2.1 The relevant market
The relevant market for pharmaceutical products, for EC competition law purposes, is invariably defined by reference to the specific indications targeted by the type of product in question. This derives from the leading case, Case 85/76, Hoffman–La Roche v Commission (1979) ECR 461, in which the ECJ confirmed that each group of vitamins, having different uses, constituted a separate product market.
The approach of the ECJ in the Hoffman-La Roche case has been followed in numerous cases under the Merger Control Regulation in the pharmaceutical sector. In these cases, the Commission has defined pharmaceutical product markets by reference to the anatomical therapeutic classification ("ATC") used by the World Health Organisation, in particular the third level class of the ATC classification. This provides a grouping of medicines according to their therapeutic properties, i.e. their intended use, although the Commission has also recognised the need in appropriate cases to descend to narrower classes at the fourth level. (See, for example, Case IV/M.495 Behringwerke AG/Armour Pharmaceutical Co, Case IV/M.555 Glaxo/Wellcome, Case IV/M.500 American Home Products/American Cyanamid and Case IV/M.457 Hoffman-La Roche/Syntex, Case IV/M.950 – Hoffman-La Roche/Boehringer Mannheim, Case IV/M.1229 - American Home Products/Monsanto; Case IV/M.1378 - Hoechst/Rhone–Poulenc; Case IV/M.1835 - Monsanto/Pharmacia & Upjohn; Case IV/M.1878 - Pfizer/Warner-Lambert and Case IV/M.1846 – Glaxo Wellcome/SmithKline Beecham.
In the Spanish Tribunal for Fair Trade's ruling of December 2001 mentioned above (Doc. R488/01, Pharmaceutical Laboratories), the Spanish Tribunal followed this approach to market definition. However, in addition to considering the market shares of the pharmaceutical suppliers concerned, the Tribunal stated that in view of the regulation of the market and the purchasing power of the National Health System, the suppliers did not have the independence of action associated with a dominant position. The regulatory controls referred to were in particular the fixing of prices, obligations to supply the market and limitations on advertising. Such an analysis can be considered to have considerable credibility for purposes of the analogous EC and national rules of other Member States on abuse of dominant position in the pharmaceutical sector, insofar as similar regulatory controls apply at national level in other Member States.
Further, and more generally, as regards the conventional approach to product market definition in the pharmaceutical sector by reference to the therapeutic characteristics of the relevant products, one can reasonably ask the question of whether this approach is appropriate in relation to parallel exports and imports of pharmaceutical products. This is because parallel traders do not select or formulate their requirements of products by reference to their therapeutic qualities or facets, or by reference to the actual demand for medicines from patients or doctors. Rather, parallel traders seek to purchase products purely by reference to price differences between Member States, and on the basis of opportunities for profit from the availability of specific products in low-priced Member States through reselling them below the normal price in a higher-priced Member State. On this basis, arguably a much wider product market definition for pharmaceutical products would be appropriate rather than the narrow market definition by reference to the specific therapeutic properties of the relevant products. The supplier would then be much less likely to be considered to be in a dominant position.
A further question arising in relation to the geographic market in which the supplier operates. Geographic markets for pharmaceutical products are treated as national in scope, as shown by the above EC decisions, because of the differing regulatory regimes for price approvals and reimbursement and different packaging and distribution systems that exist between different Member States. Even if it is accepted that a supplier has a dominant position for a particular type of product in a low-priced Member State, wholesalers which predominantly purchase for purposes of parallel exportation can be said to be operating on a different geographical market, i.e. outside the market of the Member State of export, and rather as suppliers into the higher-priced Member State of import, or possibly even on a wider geographic market covering the whole of the EC or a whole region of the EC, taking into account the fact that the operations of the parallel trader are equally dependant upon market conditions in each of at least two Member States. In any event, rather than operating within the Member State of export, whose national regulatory requirements have in large part given rise to that Member State normally being treated as a distinct geographic market, the parallel trader exploits the results of that Member State's national regulatory regime in order to take advantage by arbitrage of differing price regulatory conditions in other Member States. On this basis, the geographic scope of the relevant market arguably cannot be assessed by conventional competition law methodology and should be reassessed with reference to the specific characteristics of parallel exports and imports.
7.2.2 The question of whether there is an abuse
220.127.116.11 EC case law:
It can be an abuse dominant position for a dominant supplier to refuse to supply and established customer, without objective justification, particularly where the aim is to reserve a downstream market to the dominant supplier. In Commercial Solvents v Commission (1974) 1 CMLR 309, the dominant supplier was held to have abused its dominant position by limiting supplies of a raw material to existing customers in order to reserve to itself the market for derivative products made from that raw material. The Commission has in individual cases applied a similar policy, for example, Polaroid/SSR Europe (13th Commission Report on Competition Policy (1983) point 157). A similar conclusion was reached by the ECJ in relation to services, in the Telemarketing case (1996) 2 CMLR 558, when the ECJ condemned a policy of the Luxembourg television operator of refusing to supply advertising space involving telephone marketing unless its own telephone marketing subsidiary was used, thereby refusing access to a related, ancillary market.
However, it is appropriate to set out some key pronouncements by the ECJ in previous leading cases: in Case 85/76 Hoffman-La Roche v Commission (1979) ECR 461 and in Case C-62/86, AKZO Chemie BV v Commission (1991) ECR I-3359, the ECJ stated that the concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a