French competition authority fines pharma company for its anti-generic ‘commando’ sales tactics

On 20 December 2017, the French competition authority, the Autorité de la Concurrence (ADLC) announced that it had fined Janssen-Cilag and its parent company Johnson & Johnson €25 million for having delayed the entry and subsequent development of generic alternatives to the drug Durogesic.  The ADLC focused on two distinct types of behaviour:  repeated attempts to persuade the French regulatory body, the Agence française de sécurité sanitaire des produits de santé (AFSSAPS), which were characterised as frivolous and without merit; and a sustained marketing campaign by Janssen-Cilag aimed at undermining the efficacy of the generics before medical practitioners.  

Background.  Durogesic is a powerful opioid analgesic, marketed in France by Janssen-Cilag, a subsidiary of Johnson & Johnson.  It is prescribed in cases of severe pain, including those suffering from cancer and is administered in the form of a skin patch.

Interventions with medical authorities. Following authorisation in Germany of its generic formulation, Ratiopharm sought to obtain mutual recognition across the European Union to enable distribution of its new medicine.  The European Commission gave its approval in October 2007, requiring member states to comply within 30 days.  However, Janssen-Cilag wrote on several occasions to AFSSAPS, requesting meetings and calling into question both the European Commission’s decision and its legal status in France.  Seeking to argue that the generics were not identical to Durogesic, Janssen-Cilag went so far as to question the efficacy and quality of the generic medicine, despite its bioequivalence having already been established.  Janssen-Cilag also raised potential public health concerns, questioning the impact that substitutions could cause to some patients.  This campaign was successful in delaying entry as AFSSAPS initially refused to recognise the generic drug, with authorisation following only one year later in 2008.

Targeted marketing campaign.  Following authorisation, Janssen-Cilag engaged in a marketing exercise which the ADLC found was aimed at casting aspersions on the efficacy and quality of the generic versions with doctors and pharmacists.  Its sales representatives were told to emphasise that generic alternatives did not have the same composition, nor quantity of active ingredient fentanyl as its Durogesic patch.  This involved Janssen-Cilag training a specialist team of 300 sales representatives known as “commandos” and sending out numerous newsletters direct to medical practitioners, supported by statements in the trade press.  In particular, Janssen-Cilag distorted the warning messages that had been issued by AFSSAPS, providing an incomplete and essentially alarmist message.  The campaign also resulted in screensavers installed on doctors’ computers giving a special warning, complete with warning triangles.  The campaign was so successful that a very low flat-rate reimbursement price was imposed by the French public authorities, fixing the price of the generic and the originator at the same low level.

Impact.  The ADLC considered these practices to be very serious, delaying the entry of the generic in France by several months, whereas the ‘smear’ campaign was successful in ensuring a low penetration rate of the generic alternatives even after their launch.  The ADLC report that 12,800 pharmacies, accounting for just over half of all French pharmacies, were subject to direct discussions.  Janssen-Cilag itself conducted a survey to evaluate the effects of its campaign which concluded that 83% of pharmacists had memorised the risks associated with switching between fentanyl products.  In addition, 12,000 French doctors have the screensaver installed on their computers.

Comment.  This is not the first time that the ADLC has fined pharmaceutical companies for defamatory practices, with both Sanofi-Aventis and Schering-Plough being fined in 2013 for similar activities (see here).  The question of misleading statements about product safety has also recently been addressed at EU level in the context of anti-competitive agreements, with Advocate General Saugmandsgaard concluding that an agreement to present scientific information in a misleading or unbalanced fashion is likely to restrict competition by object (more details here – and watch this space for the CJEU ruling due in a couple of weeks).

Nor is it the first time that Janssen has got into hot water over the marketing of Fentanyl – the marketing of this drug in the Netherlands was central to the European Commission’s 2013 decision in which fines totalling €10.7M were issued (the parties did not appeal this finding).

However, whilst there can be little surprise in the ADLC seeking to sanction the behaviour of Janssen-Cilag in the post-launch phase (particularly given the misleading nature of the communications to medical practitioners), its success in delaying entry onto the market in the first place seems to be as much the fault of AFSSAPS as a consequence of Janssen-Cilag’s regulatory interventions.  The case appears very different from the conduct sanctioned in AstraZeneca, where patent authorities had no reason to doubt the factual information provided.  Although the ADLC refers in this case to ‘legally unjustified’ arguments being presented, it also makes clear that the European Commission’s approval was binding on the French authority, something which should have been clear to AFSSAPS.


Online sales bans in the sports equipment sector: the CMA’s Ping decision

In August last year, the UK Competition and Markets Authority (CMA) announced that it had imposed a fine of £1.45 million on Ping Europe Limited (Ping) for breaching the EU and UK competition rules.  The CMA found that Ping had infringed the Chapter 1 prohibition of the Competition Act 1998 and Article 101 of the Treaty on the Functioning of the European Union (TFEU) by entering into agreements with two UK retailers which banned the sale of its golf clubs online.  The CMA chose to apply Rule 10(2) of its procedural rules and addressed the decision only to Ping.  A non-confidential version of the decision was published in December 2017, revealing the UK competition authority’s detailed reasoning for the first time.  

Background. Ping is a manufacturer of golf clubs, golf accessories and clothing.  It operates a selective distribution system in the UK, supplying only retailers which meet certain qualitative criteria. Ping considered that ‘dynamic face-to-face custom fitting’1 was the best way to enhance golf-club choice and quality for consumers, and that such custom fitting could not take place over the internet.  As a result, Ping instigated an ‘internet policy’ which banned its authorised retailers from selling any of its golf clubs online.

The CMA’s competition assessment.  Relying on the CJEU’s judgment in Pierre Fabre, the CMA held Ping’s online sales ban restricted competition ‘by object’.  In the UK authority’s analysis, the ban reduced retailers’ ability to reach customers outside their local geographic areas and to win customers’ business by offering better prices online.  The CMA also relied on Advocate General Wahl’s Opinion in Coty (the CMA’s decision pre-dated the CJEU’s Coty judgment, which we commented on here).  AG Wahl had contrasted the contractual clause at issue in that case (which prevented authorised retailers from selling on third-party online platforms) with more serious restrictions, such as the outright internet sales ban that gave rise to the Pierre Fabre ruling.

Ping had argued that its online sales ban was objectively justified under the competition rules for three main reasons:

  1. The aim of the ban was to promote face-to-face custom fitting, which fosters inter-brand competition by enhancing product quality and consumer choice;
  2. The ban was necessary to protect Ping’s brand image.  Selling non-custom-fitted clubs would result in an inferior product being placed in consumers’ hands, which would damage Ping’s reputation;
  3. The ban enabled Ping to resolve a ‘free rider’ problem by ensuring that authorised retailers had appropriate incentives to invest in custom fitting. It would be commercially unsustainable for retailers to make investments in appropriate facilities if a potential customer could obtain a custom fitting in a bricks-and-mortar store and then buy the clubs online.

Noting that other high-end golf club manufacturers such as Callaway and Titleist did not restrict online sales of custom-fit clubs, the CMA dismissed Ping’s submissions on objective justification.  Whilst the CMA accepted that the promotion of custom fitting was a “genuine commercial aim”, it thought Ping could have achieved this through alternative, less restrictive means.  According to the CMA, the “main alternative” available to Ping was to permit authorised retailers to sell online if they could “demonstrate [their] ability to promote custom fitting in the online sales channel”.2

Ping’s appeal to the CAT.  Ping has appealed against the CMA’s decision.  In its press release responding to the decision, Ping stated: “Our Internet Policy is an important pro-competitive aspect of our long-standing commitment to custom fitting”.  It also argues in its Grounds of Appeal that the CMA was wrong to find that the online sales ban was disproportionate: the CMA’s proposed alternative measures would, in Ping’s view, be impractical and less effective at maximising rates of custom fitting.  The appeal is due to be heard by the UK Competition Appeal Tribunal (CAT) in May this year.

Comment.  The Ping decision is the latest in a line of recent cases in which suppliers have sought to restrict retailers’ ability to sell products over the internet.  As we noted here, the German Bundeskartellamt has taken a particularly dim view of online sales restrictions in a number of decisions concerning brand owners’ selective distribution systems.  The publication of the Ping decision also comes hot on the heels of the CJEU’s preliminary ruling in the Coty case, in which it was held that manufacturers of luxury goods can, in principle, prevent their authorised retailers from selling via third-party online platforms such as Amazon and eBay, provided that certain conditions are fulfilled (see here).

Also of note was the CMA’s decision to set out in an ‘Alternatives Paper’ its provisional considerations of ‘realistic alternatives’ to achieve the legitimate aims identified by Ping.  Whilst the CMA states that the evidential burden of establishing whether the online sales ban was justified was Ping’s and despite the CMA’s assertion that it was not required to do so, it is interesting that the CMA was willing to engage in its own alternatives assessment.

It remains to be seen what the CAT will make of Ping’s justifications for its online sales ban.  In the meantime, however, the CMA’s decision again highlights the competition law risks of imposing an outright ban on internet sales.  Like other national competition authorities, the CMA has frequently emphasised the importance of the online sales channel in intensifying intra-brand price competition.  As Senior Director for Antitrust Enforcement Ann Pope put it in the CMA’s press release of August 2017: “The internet is an increasingly important distribution channel and retailers’ ability to sell online, and reach as wide a customer base as possible, should not be unduly restricted.

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1 Dynamic face-to-face custom fitting generally involves: an initial interview; a static fitting in which the golfer’s basic measurements are taken; the fitter identifying potential club shafts for the golfer; a dynamic fitting, including a swing-test assessment of how the golfer is hitting the ball; purchasing advice; and grip fitting.

2 In particular, Ping could (according to the CMA) require its retailers to display on their websites a prominent notice recommending that customers take advantage of custom fitting; and it could determine that only retailers with an appropriate website providing a range of Ping custom fit club options would satisfy its selective distribution requirements.

USA v. UK – a united approach to FRAND? Comparing the new judgment in TCL v. Ericsson with Unwired Planet v. Huawei

On 21 December 2017, Judge Selna of the US District Court for the Central District of California released a judgment which is likely to be the most significant US FRAND decision yet. In a case brought to end the global dispute between two giants, TCL (the seventh largest manufacturer of mobile phones worldwide) and Ericsson (holder of one of the largest mobile telecommunications SEP portfolios), Judge Selna set a FRAND royalty rate for Ericsson’s 4G, 3G and 2G patents as part of a five year global licence agreement.

The judgment is of comparable length and complexity to last year’s UK Unwired Planet decision (which we discussed here and here). The approach taken by Judge Selna shares a number of similarities with that of Birss J in Unwired Planet, making use of a top-down methodology and comparable licences. However there are also a number of key differences that, if applied in future judgments, could have a significant impact on how FRAND rates are calculated.

Key differences at a glance 


Analysis

Due to the wealth of detail contained in the TCL judgment, we have picked out just a few key points in this article. For a more detailed analysis, we recommend a post by Professor Contreras (here).

Ericsson’s offers: Judge Selna concluded that Ericsson’s offers were not FRAND, but that (as in Unwired Planet) offering a rate higher than that ultimately determined as FRAND was not a breach of FRAND obligations. Interestingly, Judge Selna also explicitly stated that royalty floors proposed in Ericsson’s offers, aimed at ensuring minimum levels of revenue despite the low prices of TCL’s products, were discriminatory and non-compliant with FRAND. 

Top-down Approach: Both judgments made use of a top-down analysis, but in slightly different ways. In TCL, the focus was on the aggregate royalty burden, established by reference to statements about aggregate rates made by Ericsson and a number of other significant IP holders at around the time the standard was adopted. Whereas Birss J considered such statements to be unenforceable statements of intent, Judge Selna noted the role that they played in ensuring adoption of a particular standard (resulting in global use of LTE rather than WiMax for example), and considered it appropriate to tie the aggregate royalty rate for the standard to those rates. 

Having determined the industry total number of essential patents (a considerably lower number than the total number of declared patents, due to the problem of over-declaration, also considered in detail in Unwired Planet), the Judge then established Ericsson’s share of the total royalty rate.  This was cross-checked with an analysis of comparable licences to ensure a FRAND rate – in principle this was particularly important for 4G, where the ex ante statements pointed to a range of aggregate royalty rates (of between 6 and 10%) – but in practice, it was the 3G top down rate which was adjusted as a result of the comparator licences review. In Unwired Planet the opposite approach was taken, determining a rate using comparable licences, and cross-checking against the implied aggregate royalty. 

Expired Patents: When determining Ericsson’s share of the relevant standards, any of its patents which had expired prior to the date of closing arguments were excluded from its share. However, expired patents were left in the number of total SEPs used as the denominator. The judge argued that removing them would unfairly reward those patentees who still had patents remaining in the standard rather than the public.  While the exclusion of such patents was in part motivated by specific considerations of US law (the prohibition on paying royalties on expired rights), there also appears to be a sound economic basis for ensuring that patentees holding later-expiring patents are not over-rewarded for their rights. This is also arguably in line with the recent Commission Communication on SEPs (discussed here) which suggests that the value of technologies declines over time.

Non-Discrimination: In assessing the non-discrimination aspect of FRAND, both judges agreed that licensors cannot discriminate against similarly situated licensees. Judge Selna looked in some detail at what ‘similarly situated’ means and concluded that the basis for comparison must be all firms reasonably well-established in the world market. This excludes ‘local kings’ – firms that sell most of their products in a single country – but includes industry giants such as Samsung and Apple, despite their greater market share and brand recognition. This approach is good news for licensees whose products retail at lower price points, as it means they should benefit from the same level of rates they do.  Judge Selna explicitly dismissed the relevance of competition law (in this case the US Sherman Act) for this assessment – whereas Birss J. applied Article 102 in determining that – if his primary conclusion about benchmark rates was incorrect – Huawei would still need to show harm to competition resulting from any discrimination between it and other similarly situated licensees. (Coincidentally, the same approach to discrimination has recently been endorsed in the IP – albeit not the SEP – context by Advocate General Wahl in Case C-525/16 MEO – Comunicaçoes e Multimédia.)

Multi-mode: The issue of multimode devices was dealt with differently in the two cases. In Unwired Planet, Birss J computed separate multimode rates based on a set of ratios. In TCL, it was implicit that the rates were single mode, but they appear to apply to multimode products.  Notably, the top-down figures established by the Judge were held to be implicitly multimode rates.

Geographical Regions: Judge Selna considered Ericsson’s patent portfolio strongest in the USA, so applied a discounted rate elsewhere. He divided the world into three regions – USA, Europe and the Rest of the World and established a precise discount rate for each region and each standard. This was clearly a fact-specific exercise, and would depend on the particular; while the Judge indicated that it could have been helpful to break the regions down further, he also noted that any royalty regime should be reasonably straightforward.  
 
Compare this to Birss J in Unwired Planet where the world was divided into only two regions – major markets (for countries where Unwired Planet held 3 or more patents) and other markets.  One striking similarity between the two judgments was that both treated China (where the licensees in each case manufactured their products) as a floor for global royalties, allowing the licensors to claim rates on all global sales, even if there is no local patent protection.  In the case of the TCL judgment, this meant that for 3G, Ericsson’s lower patent holdings in Europe compared to China led to the Rest of World rate applying in Europe as well.

FRAND Rates: The aggregate patent numbers and final rates as determined in both cases are set out below:


It’s worth noting that once Unwired Planet’s and Ericsson’s respective shares of the total relevant SEPs are taken into account, the rates in TCL are more favourable to the licensee than those in Unwired Planet. The comparison between the cases is all the more interesting, given the provenance of the Unwired Planet portfolio which was drawn from Ericsson’s.  In Birss J’s judgment, the Unwired Planet portfolio was considered to be representative of a subset of Ericsson’s, while Ericsson’s 4G benchmark royalty rate was held to be 0.80%.  Given that Judge Selna calculated total industry patent numbers of close to double those found by Birss J, the fact that the Ericsson per patent rate in TCL was almost half that found in Unwired Planet is mathematically unsurprising, and points to considerable convergence on other parts of the analysis.

While the TCL judgment may be welcomed by implementers, an appeal is to be expected.  Meanwhile the appeal in Unwired Planet is due to come before the English Court of Appeal in May 2018, so there is no doubt there will be further developments in this field in the near future. Whether the outcomes of those appeals will further align both sides of the Atlantic or draw them further apart is something that we will have to wait to find out. 

In a froth: Trademark licensing fails to disguise anti-competitive market sharing arrangement

The CMA has today issued a £1.71m fine against two laundry companies for market sharing.  Micronclean Limited was fined £510,118 and Berendsen Cleanroom Services Limited was liable for £1,197,956. The companies both specialise in laundering clothes worn in ‘cleanrooms’.  These are highly sterile environments, with meticulous rules on the cleanliness of equipment and clothing, which are vital in the manufacture of pharmaceuticals and medical devices.

The two companies had established a joint venture agreement in the 1980s where both traded under the ‘Micronclean’ brand.  However it was only in 2012 that they started the market sharing arrangement, attempting to mask it as a reciprocal trademark licence arrangement.

This arrangement had two problematic elements.  First an artificial line was drawn between London and Anglesey; customers south of that line were reserved for Berendsen, whilst those to the north were allocated to Micronclean.  Second, over and above the territorial restrictions, companies decided to reserve specific customers to themselves and agreed not to compete for them.

Geographic market sharing and customer allocation is illegal (other than where legitimate exclusivity arrangements are concluded as part of a broadly pro-competitive agreement such as technology licensing). In this instance, the CMA did consider whether the arrangement, when taken as part of the wider joint venture agreement, could be justified.  Unfortunately for Micronclean and Berendsen the CMA concluded that it could not.  In particular the CMA found that the companies were competitors and two of the biggest players on the market. This left customers, including the NHS, with few options in choosing service providers. 

The existence of the trade mark agreement did nothing to change that fundamental position. Trade mark licences do not generally fall within the scope of the Technology Transfer Block Exemption.  In any event, the EU Commission’s Guidelines on Technology Transfer, which provides broad guidance on the analytical approach to the competitive effects of IP licensing, make clear that sales restrictions agreed between competitors in a licensing arrangement are likely to be regarded as market sharing, particularly where the licence is a cross licence (or “reciprocal” in the language of the block exemption) – and so it proved here.

This case serves as a reminder that anti-competitive practices which take place under the guise of an IP licence will not avoid scrutiny by the competition authorities.  In this instance the arrangement came to light in the context of two related merger reviews in the industry undertaken by the CMA – also a reminder of the importance of due diligence and early review of competition issues in the context of corporate transactions. As Ann Pope, Senior Director at the CMA added to the press release: “Companies must regularly check their trading arrangements, including long-running joint ventures and collaborative agreements, to make sure they’re not breaking the law.

Third-party platform bans justified for genuinely luxury brands

The Court of Justice of the European Union (‘CJEU’) has today ruled that third-party platform bans may be justified in the selective distribution of luxury goods. The CJEU’s decision in the Coty Germany reference proceedings broadly follows the opinion of Advocate General Wahl which was handed down earlier this year (see here, and further background here). 

The Court makes a number of rulings which will be of interest to brand owners:

  • Selective distribution may be justified for luxury goods to protect the ‘allure and prestige’. This clears up the uncertainty which arose following the Pierre Fabre judgment which seemed to suggest that the preservation of a luxury image could not justify a restriction of competition. The CJEU has confirmed that the judgment in that case should be confined to the particular facts at issue.
  • Third party platform bans may be justified in the selective distribution of luxury goods. The CJEU has ruled that, in the context of selective distribution, a supplier of luxury goods can, in principle, prohibit authorised distributors from using ‘in a discernible manner’ third-party platforms such as Amazon. Any third-party platform ban must have the objective of preserving the luxury image of the goods, be applied uniformly and not in a discriminatory fashion, and be proportionate to the objective pursued.

This ruling certainly gives some more leeway for brand owners of luxury goods, but should not be seen as an absolute green light for third-party platform bans. In particular, such restrictions must be justified by the goods in question (i.e. they must have a genuine ‘aura of luxury’) and must be a proportionate means of preserving the luxury image. This will be for national courts and authorities to interpret, and we can expect a fairly high threshold. The German Competition Authority, the Bundeskartellamt, has already said that it considers the CJEU’s decision to be limited to genuinely prestigious products. That said, the ruling does make clear that third-party platform bans do not amount to a hardcore restriction of competition, and thus it will be open to brand owners to seek to justify their use on a case-by-case basis.  

Commission Communication on SEP Licensing – where has the Roadmap led?

Following around a year of lobbying and intensive debate, the Commission has today (29 November 2017) published its Communication on ‘The EU Approach to Standard Essential Patent Licensing’.  

As we reported back in April when the Commission published its initial ‘Roadmap’ for this area, the Communication is intended to address some of the uncertainties in SEP licensing left unresolved following Huawei v ZTE (see e.g. here), and to drive progress for the EU-wide adoption of 5G.  

And as we predicted a couple of months ago, the intensity of the debate surrounding the key issues in SEP licensing means that the Communication is far from overly prescriptive. 

The Communication will take a little while to digest in full, but for now the headline points are:

  • The current declaration system needs modernising to ensure greater transparency about which SEPs are actually essential and – in an era of great patent liquidity – who owns them. A new EU body may become involved in this.  And if this all seems rather aspirational, to be noted that the Commission is aware of the (not inconsiderable) costs implications, and suggests that changes may only be possible prospectively, e.g. for 5G…
  • There remains significant flexibility in how FRAND values are established, but a couple of preferences emerge from the guidance
    • ‘In principle’, FRAND values should not include any value attributable to the inclusion of the technology in the standard.  This is in line with previous statements in the Commission’s Horizontal Guidelines, and diverges from the approach in Unwired Planet, where both parties accepted that some such value could be taken by the patentee (see para 97).  However, where technology “has little market value outside the standard” (hardly an infrequent situation), other techniques may be needed, such as comparisons between types of contribution.
    • Aggregate royalty rates are important, and should be taken into account.  The Commission proposes that FRAND value should reflect the  “present value added” by the SEP, bearing in mind that this can change over time, and that it should not include value attributable to market success of the product.
  • Non-discrimination between similarly situated licensees remains fundamental, and evidence of non-discrimination forms part of the information that SEP holders should provide to licensees.  
  • Chipset licensing remains possible – but is not mandated.  One of the key areas of dispute in industry was whether the FRAND obligation required SEP holders to license all comers, including component manufacturers, or whether they can decide to license end manufacturers (thus giving a higher potential royalty base) to the exclusion of those higher up the value chain.  The report does not come off the fence on this issue, save to say that business models may vary from sector-to-sector.  Cases such as Apple v. Qualcomm will therefore have to continue to fight this issue out from first principles.
  • Use-based licensing is not mandated – but nor is it wholly out of the question.  This is another area of significant dispute in industry, with a deep split between rights holders and potential licensees (see the Fair Standards Alliance’s response to the Communication here…).  The concept behind use-based licensing is that it allows SEP holders to charge different rates for different uses (e.g. compare a smart car, a smartphone and a smart thermostat).   The Communication does conclude that FRAND is not a one-size-fits-all concept, and may differ from sector-to-sector and over time.  However, it also emphasises the need not to discriminate between similarly–situated parties.  
  • Safeguards against the inappropriate use of injunctions are still needed to prevent both exploitation (using threats to extract unfairly high licence terms) and exclusion.  Companion papers giving guidance on ‘certain aspects’ of the IP Enforcement Directive (here) and on ‘A balanced IP enforcement system’ (here) have also been published.
  • The Communication confirms that non-practising entities should be subject to the same rules (including on transparency and injunctions) as other SEP holders.  As with many of the points in this paper, there is no big surprise here.
And overall?  The Communication will be pored over by industry, and – while not binding in any strict legal sense – will no doubt feature in arguments on both sides of the FRAND debate.  There are certainly some common-sense points in here, as well as some regulatory aspiration.  But if this is a roadmap, it is certainly not the end of the road – and we will continue to watch as the debate unfolds in the UK, Europe and beyond.

Deciding on terms of privacy policies – what are the risks of anti-competitive collusion?

Big data is the talk of the town in competition circles.  But it is perhaps a more mundane concern which could pose greater risks for a larger number of companies.  An article by a couple of regular CLIP Board contributors published earlier this year in Privacy Law International notes the increasing tendency to regard privacy as a parameter of competition, and explores the risks of collusive conduct being identified in relation to the terms of privacy policies. Is there a risk of a future information exchange case around the treatment of data privacy?  Could a concerted practice be found where companies benchmark their privacy policies against each other? Would this be as serious a concern as exchanges relating to future pricing intentions? 

Read on for our views on all of these questions here

Dutch Health Council’s proposal of compulsory licensing as solution to high pharma prices

Shortly before becoming the new home of the EMA, the Netherlands piqued the interest of the pharma industry with a controversial move on drug pricing.  The move consisted of a recommendation by the Dutch Council for Public Health and Society (“RVS”) that the government should use compulsory licences when a medicine is priced too high, or in RVS’s words, does not have a “socially acceptable price”. In this article, we touch upon the significance of such a proposition in the regulatory sphere, as in our regulatory colleagues’ eyes this could result in a violation of the established IP regulatory rights enacted in EU legislation.  However, for now our focus is on the significance of the move from a competition law standpoint.

Readers of this blog will be more used to thinking about price reduction measures and compulsory licensing issues through the lens of competition law.  However, the RVS bases its recommendation in part on Article 8 of the TRIPs Agreement, which allows measures that protect public health or prevent the (anti-competitive) abuse of intellectual property rights resulting in the unreasonable restraint of trade or of international transfer of technology.  Further provisions relevant to compulsory licensing are covered in Article 31 of TRIPs, which provides for certain rights to use the subject matter of a patent without the rights holder’s authorisation, provided rights holders are remunerated for the licence based on the “economic value of the authorisation”. 

In recent years, considerable attention has been given by competition authorities to possible instances of excessive pricing.  To date, those cases (such as Pfizer/Flynn, currently on appeal before the UK’s Competition Appeal Tribunal, or the latest Statements of Objections issued by the Competition and Markets Authority (“CMA”) to Actavis and Concordia) have focussed on prices of legacy generic products. By contrast, the RVS’s proposal is firmly focussed on cost containment measures for new, patent-protected, medicines, but is not limited to potential blockbusters.  

The RVS’s criticism of current prices and consequently its recommendations extend to orphan drugs (medicines for very rare diseases affecting less than five out of 10,000 people in the EU population), which by definition benefit only a very small part of the population. The relatively high cost of R&D and production for orphan drugs, juxtaposed against the narrower reach/ patient pool and thus lower profit margin, has resulted in the EMA providing additional incentives for the development and commercialisation of those products. The Dutch authority’s recommendations therefore appear somewhat contrary to the spirit of the EMA’s policies aiming at encouraging investment by innovators in these areas, but is perhaps motivated by concerns expressed by some around the increasing use of orphan drug status (the concept of ‘orphanizing’, alluded to here). 

There is an absence of any definition of or set of criteria to determine what might constitute ‘high’ or ‘socially unacceptable’ pricing. The RVS proposal is not a new concept and in fact the subject of high or ‘excessive’ pricing in the pharma industry has occupied European stakeholders and has been the subject of investigations on a national and European level over the past few years. In June 2015, in response to a European Parliament  member’s (MEP) suggestion of compulsory licensing as a means to lower drug prices, the Commission stated that this is a matter to be dealt with at national level and that neither the Commission nor the EMA are competent to take such action.

The UK’s approach to compulsory licensing differs significantly from the Dutch proposal. Compulsory licensing is a rare breed in the UK, as it is only a measure to be taken for an abuse of monopoly stemming from patent rights – and it is very often the case that the relevant authorities prefer alternative means. Where new drugs are concerned, the question of cost effectiveness of medical treatments lies primarily in the hands of NICE.  As noted above, the CMA has been particularly active over the past year in pursuing practices which result in elevated prices for generic pharmaceuticals  But rather than automatically holding that very high prices are inherently anticompetitive, the CMA appears to draw a distinction between abusive ‘excessive pricing’, which is artificially and unjustifiably inflated pricing or increased pricing once a gap in competition on the market is identified, and high pricing which properly reflects the cost of development and production of a new drug. 

Our (not excessively priced) two pennies’ worth on this proposal is that imposing a compulsory licensing system for drugs which are not priced in a ‘socially acceptable way’ is, at best, a vague proposition which is likely to alarm and be met with adamant opposition by the industry. With much uncertainty as to what may constitute ‘excessive pricing’ or the ‘appropriate remuneration’ for the rights holder, there will be great scope for dispute. From a regulatory perspective, the fact that this measure might make it possible for governments to bypass rights such as the regulatory data protection (RDP) is a concerning prospect.  More generally, this proposal strikes at the heart of the delicate balance between long-run innovation incentives in a high risk/high reward sector, and short-term costs considerations around access to existing medicines.  The struggle between both sides of this debate looks set to continue.

EU reaches agreement to end unjustified geoblocking

On 20 November the European Parliament, the Council and the Commission reached an agreement to adopt the proposed Geoblocking Regulation, which will come into force nine months after its publication in the EU Official Journal.

The Regulation is a key plank of the Commission’s Digital Single Market Strategy and it is intended to end unjustified geoblocking for consumers wishing to buy products or services online within the EU. 

The Commission’s other measures in relation to the digital single market include its e-commerce sector inquiry (here and here) and its antitrust investigation into absolute territorial restrictions in the distribution arrangements between Sky UK and the six Hollywood film studios (on which we have commented extensively here, here and here).

What about competition law?

An important rationale for the Regulation is that restrictions to cross-border sales by online traders are often unilateral and so do not constitute an “agreement or concerted practice” within the meaning of Article 101 TFEU.  Rather, a restriction on cross-border trade will only be caught by competition law if it is due to an agreement with a supplier, or the online trader is in a dominant position. 

Competition law’s limited ability to take action against unilateral conduct is underlined by the Commission’s closing of its investigation into Apple’s differential pricing policy for downloads, that resulted in UK consumers paying more than consumers in other Member States.  The issue was ultimately resolved by voluntary commitments from Apple in 2008 (here).

What is geoblocking?

Geoblocking is a term given to the practical and technical measures used by online traders to deny access to websites, or online services, to consumers based in Member States other than the website domain.  The Commission considers that these restrictions often result in consumers being charged more for products or services purchased online.

A well-known example of geoblocking is the car rental market: renting a car from a company in the UK can cost up to 53% more than renting from the same company in Poland, but a UK consumer cannot access the Polish site for the cheap deals.

What does the Geoblocking Regulation prohibit?

The Regulation prohibits unilateral commercial behaviour which discriminates on the basis of where a person is from, where they live or where a business is established. 

It does not (currently) apply to copyright protected works, nor does it harmonise prices between different EU Member States, or impose an obligation to sell. It also prohibits agreements containing passive (or unsolicited) sales restrictions which violate the rules.

The specific prohibitions are:

  • Geoblocking: A trader must not block or limit customers' access to websites because of a customer's nationality, residence or place of establishment.
  • Redirecting a customer without permission: A trader must seek permission before redirecting based on nationality or location.  Even if a customer agrees to the redirection the trader must make it easy to return to the website originally searched.
  • Discrimination: On the grounds of nationality/residence/place of establishment is prohibited; for applying example different terms and conditions on such grounds will not be permitted.  This prohibition applies to: 
    • sales of goods when the trader is based in a different Member State to the customer (for example buying a car or a refrigerator);
    • all electronically-supplied services, other than copyright-protected works, (for example internet hosting services); and
    • the sale of services provided in a specific physical location (for example buying a trip to an amusement park in another Member State). 
When is geoblocking justified? 

The Regulation accepts that some forms of geoblocking may be justified, for example in relation to specific national VAT obligations or different legal requirements.

French Pharma – French Competition Authority launches new sector enquiry

The CMA has opened an unprecedented number of new investigations in the pharmaceutical sector in the past month, with 4 new investigations during October 2017 (see the ‘update’ section here).  However, the CMA is not the only national competition authority to be focusing its attention on the pharmaceutical sector, as, on 20 November 2017, the French Autorité de la concurrence announced a new enquiry into the industry. The issues set to be addressed have been recently covered by the French authorities in a 2013 sector enquiry (and see our earlier post here), so it will be interesting to see whether any progress has been made.

The new enquiry will again examine the pharmaceutical distribution chain.  First, it will look at the changing role of intermediaries. The previous enquiry had found that intermediaries such as wholesale distributors and purchasing group networks often struggled to counter the market power of the large manufacturing companies.  A particular source of difficulty arose from the decision of many pharmaceutical companies to start selling direct to the large pharmacy chains. This is particularly challenging to smaller pharmacies who are unable to match the buying power of the chains and then offer their customers competitive prices. The current enquiry will investigate whether the intermediaries are playing a greater role compared to 2013, particularly in regard to sale price dynamics.

This issue was also addressed by the UK authorities in an OFT Medicines Distribution Market Study in 2007. Traditionally, branded medicines for which a price had been agreed under the Pharmaceutical Price Regulation Scheme (PPRS) were supplied to the NHS via intermediaries such as wholesalers. However, some manufacturers were starting to implement ‘Direct to Pharmacy’ (DTP) schemes and the OFT examined the potential impact of these new arrangements. The study found that whilst DTP schemes could bring efficiency benefits, there were also risks of cost increases to the NHS due to the lack of purchasing choice available to pharmacists who frequently have no choice over which medicine to dispense (for an example of this in action see the Pfizer/Flynn excessive pricing case which we covered here). 

Second, the new enquiry notes that France has heavy regulatory restrictions on the sale of non-prescription medicines. The Autorité has previously recommended that such restrictions be gradually removed, and in particular that online sales be permitted. This was in response to the finding that the “intensity of competition between dispensing chemists is relatively low, as demonstrated by major differences in pricing observed for medicinal products that are not reimbursed”. However these recommendations have not yet been implemented, whereas many of France’s European neighbours do allow online sales. The enquiry will therefore examine this topic again, taking into account new developments and ideas such as the creation of pharmacy chains and their flotation, and the relaxation of rules around advertising.

As reflected by the CMA’s recent investigations (see Pfizer/Flynn above, as well as the statements of objections sent to Actavis (in December 2016) and to Concordia (within the past week)), the Autorité will also look at pricing.  In France there are two categories of pharmaceuticals: reimbursable products where the price is set by negotiation between the French Economic Committee for Healthcare Products and the manufacturers, and generic medicines where prices are set by the market (as in the UK, until the recent passing of new legislation).  In 2013 the Autorité had observed that some generic products were subject to inflated prices due to the “existence of considerable ‘disguised’ rebates”.  Since 2013, a scheme has been implemented under which rebates have to be declared to the regulatory authorities. This new enquiry will therefore examine whether this scheme has been successful, and whether the heavy discounts often given by the pharmaceutical companies to the dispensing chemists are passed onto consumers. The enquiry also plans to examine the criteria used in the negotiation of reimbursable medicines, as well as the bargaining power of hospitals when negotiating prices with pharmaceutical companies.

In due course we will report further on how the Autorité views the current state of the French medicines distribution market and whether it leads to any infringement investigations following on from the sector inquiry.