European Union: Refusal To Supply As A Mechanism For Controlling Parallel Trade In Pharma Products: Advocate General´s Opinion

On 28 October 2004, Advocate General Jacobs handed down his opinion¹ on a preliminary reference from the Greek Competition Commission requesting a ruling on the question of whether (and in what circumstances) a dominant pharmaceutical company may refuse to meet in full orders it receives from wholesalers in order to limit parallel trade.

If the opinion is followed by the European Court of Justice ("ECJ") when it hands down its final judgment, it could further inhibit the legal avenues available to the European Commission under the competition rules to prevent pharmaceutical undertakings taking unilateral actions to restrict parallel trade. The ECJ recently held (in the Bayer case) that the action taken by Bayer to limit supplies to wholesalers constituted unilateral conduct that fell outside the scope of the Article 81 prohibition on anti-competitive agreements.

The present case arises from GlaxoSmithKline's (GSK) policy of refusing supplies of one of its products (known as Syfait) to wholesalers in Greece. Until November 2000, GSK had fully met orders placed by its Greek wholesalers. However, having become aware that a number of wholesalers were subsequently exporting a large proportion of those orders to other Member States where prices were much higher, GSK stopped supplying the wholesalers and stated that it would only supply hospitals and pharmacies directly. It alleged that the export of the products by the wholesalers was leading to shortages on the Greek market. GSK subsequently reinstated supplies to wholesalers, but in limited quantities.

The wholesalers complained to the Greek Competition Commission about GSK's refusal to meet their orders. During the course of its inquiry, the Commission referred to the ECJ a number of questions relating to the circumstances in which a dominant pharmaceutical company may refuse to meet orders in full, in order to limit the parallel trade in its products.

Advocate General Jacobs was essentially asked to consider two issues, as follows:

• where a dominant pharmaceutical company fails to meet in full all orders placed with it with a view to limiting customers' export activity, should it always be regarded as abusing its dominant position within the meaning of Article 82 of the EC Treaty?
• If not, what factors are relevant in determining whether or not such conduct should be considered abusive?

Whilst recognizing that the ECJ has on a number of occasions held that a dominant company may in some circumstances be obliged to supply its products or services, Advocate General Jacobs rejected the proposition that a refusal to supply by a dominant pharmaceutical company would be an automatic abuse. He noted that an obligation to supply only arises in exceptional circumstances and that a dominant company is not obliged to meet orders that are out of the ordinary and is entitled to take such steps as are reasonable in order to defend its commercial interests.

When considering whether particular behaviour should be considered abusive, the Advocate General underlined the importance of considering the specific economic and regulatory context of each case. He therefore examined the impact of parallel trading in the particular context of the European pharmaceutical sector. He noted that:

The Advocate General concluded that a refusal by a dominant undertaking to meet orders in full was capable of objective justification (and thus of not constituting an abuse) where the price differential giving rise to the parallel trade was the result of state intervention in the Member State of export to fix the price there at a level lower than that which prevailed elsewhere in the Community. He stressed that his conclusion was made on the basis of the specific circumstances of the European pharmaceutical sector at the current stage of its development, and in particular the following:

• Price differentials caused by state intervention. Within the EU, national governments play an important role in fixing or influencing the price at which pharmaceutical products are sold. This has the effect of creating price differentials between different EU Member States. Against this backdrop, when pharmaceutical companies attempt to block parallel trade, they are not thereby seeking to entrench price differentials of their own making, but rather to avoid the consequences which would flow if the very low prices imposed on them in some Member States were generalized across the EU.
• Nationally segregated regulation of the distribution of pharmaceuticals. The regulation of the distribution of pharmaceutical products is based around nationally segregated schemes. These aim to ensure that sufficient supplies are available in each country and public service obligations are imposed on both pharmaceutical companies and wholesalers. Parallel traders cut across this scheme and, in doing so, risk destabilizing it.
• Potentially negative consequences of parallel trade for competition, the common market and incentives to innovate. Unregulated parallel trade would lead to pressure in low-price Member States to increase their prices. If prices rose, this would lead to reduced output and consumer welfare in Member States were the price rises occurred and would effectively lead to a redistribution of resources from consumers in the low-price Member States to those in the high-price Member States. If low-price Member States were able to resist the pressure for price rises, parallel trade flows would adversely impact pharmaceutical companies' revenue and their incentive to invest in research and development.
• No benefit to end consumers or public authorities. On the one hand price competition as a result of parallel trading is not discernible to the end consumers (ie patients) which in many Member States make only a small flat-rate contribution towards the overall price of the products which are prescribed to them. On the other hand parallel trade does not always result in price competition to the benefit of the public bodies that in fact purchase the traded products or of the taxpayers which contribute to those funds.

The Advocate General Jacobs essentially considers the unilateral restriction in the supply of pharmaceutical products as a proportionate measure that could be used also by a dominant pharmaceutical undertaking in order to defend its commercial interest, regardless of the fact that it aims thereby to limit parallel trade.

If the ECJ follows the approach set out in the Advocate General's opinion, it would be likely to make it significantly more difficult for the European Commission and other competition authorities to attack a unilateral refusal to supply by a dominant pharmaceutical company aimed at limiting parallel imports. Such a decision would compliment the ECJ's decision in the Bayer case which found that Bayer's actions to limit supplies to wholesalers constituted unilateral conduct and was, therefore, outside the scope of the Article 81 prohibition on anti-competitive agreements. The two cases would provide a robust legal basis for supply quota systems other measures constructed and operated on a unilateral basis.

The Advocate General's opinion makes clear that his opinion relates specifically to the pharmaceutical sector and is unlikely to apply to other industries.

The ECJ's judgment in the matter is unlikely to be delivered before spring or early summer 2005.

Footnote

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