Background of the case

1. Global Competition Law Centre College of Europe, Brussels,18 December 2008Parallel imports of pharmaceuticals and EU competition law following the Glaxo Greece judgment Case C-468/06Dr. José Luis Buendia SierraPartner, Garrigues, Brussels Professor, Vrije Universiteit Brussel

2. Background of the case • The facts: refusal to supply wholesalers • Glaxo’s position: refusal motivated by the elimination of parallel trade • The wholesalers’ position: they did not request unlimited supplies; only the maintenance of previous quantities plus a percentage 72 (…) the appellants in the main proceedings have demanded not that GSK AEVE should fulfill the orders sent to it in their entirety, but that it should deliver them quantities of medicines corresponding to the monthly average sold during the first 10 months of 2000. In 6 of the 11 actions in the main proceedings, the appellants asked for those quantities to be increased by a certain percentage, which was fixed by some of them at 20%. • Need to read the judgment in its legal and factual context

3. Preliminary questions • The questions as reframed by the ECJ (par. 28-29): whether there is an abuse of a dominant position contrary to Article 82 EC if a pharmaceuticals company occupying such a position on the national market for certain medicinal products refuses to meet orders sent to it by wholesalers on account of the fact that those wholesalers are involved in parallel exports of those products to other Member States. In that context, the referring court asks the ECJ about the relevance of a series of factors, such as • the degree of regulation to which the pharmaceuticals sector is subject in Member States, • the impact of parallel trade on pharmaceuticals companies’ revenues, and • whether parallel trade is capable of generating financial benefits for the final consumers of the medicinal products.

4. General case law on refusal to supply • General case law on refusal to supply by dominant undertakings (par 33-37; par 49-50) • Refusal to supply ordinary orders to existing customers is a prima facie abuse (Cases 6&7/63 Commercial Solvents; Case 27/63 United Brands) • OK to take reasonable steps to protect commercial interests but not if the purpose is to reinforce dominance. • Aim of eliminating parallel trade -> “mortal sin”. • Parallel imports enjoy a certain amount of protection in Community law because they encourage trade and help reinforce competition. • So, on the face of it, it does not look good for Glaxo …

5. Is the pharmaceutical sector different? • Glaxo’s position: the “specific factors” present in the pharmaceutical industry should lead to a different analysis of competition. • The so-called “specific” factors are the following: • The impact of PT on final consumers • The impact of price intervention by Member States • The impact of PT on R&D spending • The impact of PT on shortages • These arguments have been used systematically by the pharmaceutical industry. • Not specific to this industry. Many other sectors could make similar claims. • In any event, these arguments had some success: • Accepted by AG Jacobs in Syfait (Case C-53/03), but no judgment. • Largely accepted by the CFI in Glaxo Spain (Case T-168/01) but four appeals pending before ECJ.

6. The Pharmaceutical sector is not so different • These arguments were however totally rejected by AG Ruiz Jarabo in his opinion in this case. • More importantly, they have been clearly rejected by the ECJ in this judgment. • The rejection of all the “specificity” claims made by the laboratories is probably the most important part of the judgment. • It follows that the pharmaceutical industry is subject to the same standards of Competition Law as any other industry. In other words: the “Guantanamo” for parallel trade has been closed. • It also follows that the conclusions of this judgment apply to any undertaking in a dominant position irrespective of its sector.

7. The positive impact of parallel trade • The impact of PT on final consumers (par 52-57): • Is this a relevant factor? Doubtful. • In any case, final consumers and social security systems do benefit from PT; more choice, less price • [Indirect price pressure much greater] • The impact of price intervention by Member States (par 58-64): • Supply and demand, genuine negotiations, • Negotiated prices take all costs into account. • PT the only form of competition than can be envisaged for patented medicines (par 64): “[W]here a medicine is protected by a patent which confers a temporary monopoly on its holder, the price competition which may exist between a producer and its distributors, or between parallel traders and national distributors, is, until the expiry of that patent, the only form of competition which can be envisaged”

8. No impact on R&D • The impact of PT on shortages (par 74-75): • Wholesalers were also under PSOs • It is up to Member States to deal with this issue (paragraphs 74 and 75) • PT alternative source of supply in the other Member States (par 56). • [the laboratory’s policy may well be the origin of the shortages] • The impact of PT on R&D spending (par 70): • The ECJ rightly re-classifies this claim as the impact “on the pharmaceuticals companies’ revenues” (par 29), • It treats it as objective justification to protect a legitimate commercial interest, not as an efficiency argument. • It attaches much less importance to it. No basis for total refusal, only to limit the amount of increase. • Efficiency defense is implicitly but clearly rejected as an argument for total refusal (paragraph 70) • [AG Ruiz-Jarabo: In any case, the R&D argument is totally unfounded “misleading argument aimed at seducing public opinion”. No causal link. Par 106-115]

9. Return to the general rules • Return to the general rules applicable to all sectors of the economy: • Refusal to supply ordinary orders to existing customers is an abuse • The aim to eliminate parallel trade remains a “mortal sin”… • …In relation to Article 81: In relation to the application of Article [Article 81 EC], the Court has held that an agreement between producer and distributor which might tend to restore the national divisions in trade between Member States might be such as to frustrate the objective of the Treaty to achieve the integration of national markets through the establishment of a single market. Thus on a number of occasions the Court has held agreements aimed at partitioning national markets according to national borders or making the interpenetration of national markets more difficult, in particular those aimed at preventing or restricting parallel exports, to be agreements whose object is to restrict competition within the meaning of that Treaty article…. • Interesting reminder in view of the pending Glaxo Spain appeal (the CFI did not consider the restrictions of PT as restrictions of competition by object…).

10. “No escape” for the practices aimed at avoiding all parallel exports • In relation to article 82: 66. In the light of the abovementioned Treaty objective as well as that of ensuring that competition in the internal market is not distorted, there can be no escape from the prohibition laid down in Article 82 EC for the practices of an undertaking in a dominant position which are aimed at avoiding all parallel exports from a Member State to other Member States, practices which, by partitioning the national markets, neutralise the benefits of effective competition in terms of the supply and the prices that those exports would obtain for final consumers in the other Member States. 71 (…) a pharmaceuticals company in a dominant position, in a Member State where prices are relatively low, cannot be allowed to cease to honor the ordinary orders of an existing customer for the sole reason that that customer, in addition to supplying the market in that Member State, exports part of the quantities ordered to other Member States with higher prices, (…) • So the ECJ seems to maintain a strong negative attitude to practices aimed at avoiding parallel exports.

11. The protection of commercial interest • Contrary to (even) AG Ruiz Jarabo the judgment does not expressly accept the possibility of “efficiency defenses” such as the R&D argument or the impact on final consumers. • It only partially accepts the “objective justification” linked, not to any alleged efficiency, but to the legitimate commercial interests (i.e. profits) of the undertaking. • Back to the general case law: • OK to take reasonable steps to protect commercial interests but not if the purpose is to reinforce dominance. • Only to the extent that the response is reasonable and proportionate. • Orders by an existing customer must be met unless they are “out of all proportion”. • This is reasonable: no dominant operator in any sector can be forced to accept unlimited requests from one customer. • However, in this case the maximum requests were previous quantities plus 20%. Nobody ever asked for unlimited supplies.

12. “Ordinary orders” • “Ordinary orders”. General criteria applicable to all markets. Those orders that are not “out of all proportion” to the previous business relations and market requirements in the Member State concerned. • “73 In those circumstances it is for the referring court to ascertain whether the abovementioned order are ordinary in the light of both • the previous business relations between the pharmaceuticals company holding a dominant position and the wholesalers concerned and • the size of the orders in relation to market requirements in the Member State concerned” • Previous business relations: starting point for existing customers. • Plus a reasonable margin. Logistics constraints. • Progress of the market – grown. • No product specific data, but rather the overall portfolio.

13. What about new customers? • The case relates to “existing” customers and, for this reason, the judgement only refers to those. • The judgment does not mean a contrario that orders by newcomers can be refused. • According to normal competition law new customers may also be entitled to supplies • In periods of shortages new customers may be provided with less quantities than existing customers (BP). • In normal situations obligation on dominant suppliers not to apply different conditions to equivalent transactions with different trading parties, thereby placing them at a competitive disadvantage(Article 82(c)EC).

14. Conclusions • The laboratories may perhaps be tempted to ‘deconstruct’ this case law and ignore its logic. • This is after all what they have been doing in all previous cases. • If so, they should remember that… • PT is the only form of competition than can be envisaged for patented medicines • The measures protecting commercial interests cannot reinforce a dominant position • Refusal to supply is a prima facie abuse and • Burden of proof for the Laboratory of the reasonable and proportional nature of any limitation • Thanks for your attention