Competition law challenge to orphan drug prices in the Netherlands

Some months back, we reported on an initiative by the Dutch Council for Public Health and Society which considered measures for containing high drug prices.  Of particular note were the proposals for compulsory licensing, and the application of the new measures to orphan drugs as well as to more mainstream products (orphan drugs are those which are applicable to rare diseases affecting less than 0.05% of the population).  

Now a newly formed Dutch foundation for “pharmaceutical accountability” (the Stichting Farma ter Verantwoording, or SFV) has announced that it has presented a dossier to the Dutch competition authority requesting that it take action against Leadiant Pharmaceuticals in relation to the price of chenodeoxycholic acid (CDCA) which is used for a metabolic disease affecting around 60 people in the Netherlands (report in English here).  The focus of the complaint is on the difference between the current price of CDCA (€140 per capsule), and the price of the same drug which was formerly used in the treatment of gallstones (c. €0.28 per capsule).  According to the SFV’s report, the orphan designation was secured in Leadiant only  last year, following a two-year period when the drug was not on the market.  The orphan designation means that Leadiant will have market exclusivity for a 10-year period.  However, unlike some orphan drugs, CDCA was not a new product, but was used off-label for the disease in question for a number of years before withdrawal.  

This complaint highlights the competing policies of effective protection and incentivisation of drug development, including for small patient populations, and that of cost containment for health budgets.  Assuming the Dutch Competition Authority agrees to investigate, it will have to grapple with questions as to the appropriate return on an orphan product (bearing in mind the limited patient population which presumably means that fixed costs of producing the drug will have to be allocated at a much higher rate than for non-orphan drugs), and the question of whether the drug’s previous use for treatment of gallstones is comparable to its current use under the orphan designation.  There is no doubt that the prior off label use was more cost effective for treating Dutch patients, but on the other hand the orphan designation should assure the continued availability of the drug in circumstances where it was otherwise withdrawn from the market, and will have involved additional testing to ensure that appropriateness of the treatment.  

Whether these policy tensions are questions that are appropriately answered through the application of competition law is a wider question that will no doubt continue to stimulate discussion and dissent.

Concordia and the CMA – a drama in (at least) three parts

Last week, Concordia International released a management report in which it announced the names of six drugs currently under investigation by the Competition and Markets Authority (“CMA”).  This relates to an investigation into Concordia’s UK activities, which is the third launched by the CMA into Concordia’s business since April 2016, and forms part of a wider inquiry into the UK pharmaceutical sector. 

The investigation was launched in October 2017, and we now know that it involves the following products: 

  • Carbimazole, used to treat hyperthyroidism; 
  • Nitrofurantoin, an antibiotic;
  • Prochlorperazine, used to treat nausea and psychosis;
  • Dicycloverine, a gastrointestinal muscle spasm relaxant;
  • Trazodone, an antidepressant; and 
  • Nefopam, an analgesic. 
According to Concordia, the CMA has confirmed that it will be continuing its investigation into Nitrofurantoin and Prochlorperazine. It is currently assessing whether to continue its investigation into Trazodone, Nefopam and Dicycloverine. This investigation is still at an early stage, unlike a couple of others. 

The other current investigations involving Concordia are an abuse of dominance case about alleged excessive pricing of Concordia’s ‘essential’ thyroid drug, Liothyronine, and a case involving a possible ‘pay-for-delay’ agreement between Concordia and Actavis for hydrocortisone tablets (we previously discussed this here). Both cases have progressed to an advanced stage, with statements of objections having been issued by the CMA, but progress appears to have been delayed, perhaps because of the CAT’s June judgment in the Pfizer/Flynn case, which overturned the CMA’s controversial excessive pricing decision (covered here).

This latest announcement re-emphasises the CMA’s continued interest in the pharmaceutical sector and its eagerness to weed out anticompetitive practices in this industry, including the more novel, sector-specific forms of abuse and collusion such as ‘pay-for-delay’ strategies. It will be interesting to see whether the CMA follows a similar approach in these cases to that taken in other recent pharmaceutical cases, such as Pfizer/Flynn and the Paroxetine (GSK) case (discussed here). We will be keeping a close eye on any developments over the coming months…

Pharma stock management - nothing extraordinary in limiting parallel trade?

Pharmaceutical stock management – the brand-owner practice of limiting quantities sold to levels required for the local market in a bid to limit parallel exports – has been a feature of European markets for at least much of the past two decades. 

It was the 2004 Bayer (Adalat) decision of the Court of Justice, coupled with the continued supply obligations in Article 81 of Directive 2001/83 (as amended) which opened up a route for brand owners to effectively limit exports from lower price Member States without risking engaging the prohibition on anti-competitive agreements for limiting parallel trade.  That route essentially rested on unilateral conduct by the brand owner – but as such left open the risk of abuse of dominance rules applying.  As pharma markets are often narrowly drawn by competition regulators, this remained a significant concern.

It was another year before the first case raising the question of how Article 102 applied to stock management came before the Courts (Syfait, 2005).  That case was a referral to the CJEU from the Greek Competition Commission – but the request was stymied by a procedural point, and the Court declined to respond to the request for a preliminary ruling.  It was another few years before the same case came back before the CJEU.  This time the CJEU endorsed the benefits to consumers from parallel trade, and clarified that it may be an abuse of a dominant position for a pharmaceutical manufacturer to refuse to meet ‘ordinary orders’ from existing customers (Lelos, 2008).

Surprisingly, it took 10 years before the next development in the saga, when the Hellenic Competition Commission (“HCC”) found that GlaxoSmithKline (“GSK”) had abused a position of dominance in the market for migraine medicines in Greece by refusing to fulfil any orders in their entirety of Imigran and by refusing to meet ‘ordinary orders’ from wholesalers.  As a result, the HCC fined GSK a total of just over €4 million.  In reaching that decision, the HCC clarified that orders from wholesalers which were out of all proportion to a previous order history, could legitimately be refused as being of an ‘extraordinary’ character.  Assessing whether an order was ‘ordinary’ within the meaning set out in Lelos required a review against the annual size of previous orders and supplies per wholesaler, total national consumption per year and the pattern of previous business relations between the pharmaceutical manufacturer and the wholesaler in question.  Despite its findings on abuse, the HCC indicated that orders of significant quantities of products intended primarily for the parallel export market are likely to qualify as ‘extraordinary’, and rejected other parts of the complaints against GSK on that basis.

It seems that stock management issues in general may once again be an area of particular focus for regulators – it is interesting to note that in its case opening report initiating formal antitrust proceedings against Aspen Pharmacare, the Commission cites stock management alongside unfair and excessive prices.  Whatever the outcome of that case, it is clear that even a dominant firm can legitimately refuse orders that are ‘extraordinary’, but in doing so, the manufacturer must be able to justify this decision by reference to national market requirements and previous business relations with the wholesaler in question.

CAT judgment in Pfizer/Flynn: Was the CMA ‘unfair’ in its assessment of Pfizer and Flynn’s prices?

The principal issue is excessive pricing; … the reason for our conclusion is that the judge erred in holding that the economic value of the pre-race data was its competitive price based on cost +. This method of ascertaining the economic value of this product is too narrow in that it does not take account, or sufficient account, of the value of the pre-race data … and in that it ties the costs allowable in cost+ too closely to the costs of producing the pre-race data.

Thus concluded the Court of Appeal some 10 years ago in overturning a High Court judgment identifying an abuse of dominance through excessive pricing, in that case of pre-race data about British horse races.

The chequered history of excessive pricing cases has repeated itself in 2018, with the Competition Appeal Tribunal’s 7 June judgment in the appeals by Pfizer and Flynn of the CMA’s excessive pricing Decision in relation to phenytoin sodium capsules (we’ve previously covered this here, here, and here).   In a blow to the CMA’s ground-breaking case, the CAT has taken issue with the CMA’s analysis of abuse. As a result, it is considering whether to remit this part of the Decision (and consequential findings, such as the penalties imposed) back to the CMA, and essentially let the CMA try again.  

The CAT has succinctly summarised its main conclusions here.  The findings on market definition and dominance have been upheld, but the controversial findings on abuse have been set aside.  This post guides readers through the key points.

What was the CMA actually arguing?

In its Decision, the CMA sought to apply the Court of Justice’s United Brands ‘two-limb’ test for excessive and unfair pricing, and it was on this that the grounds of appeal focussed.  

During the appeal hearing, however, the CMA seemed to place greater emphasis on the comparison of prices before and after the Pfizer-Flynn agreement, perhaps in reliance on AG Wahl’s opinion in the AKKA/LAA case that competition authorities should have flexibility to determine their own framework for assessing prices.  While the CAT acknowledged that significant price increases over time may be a useful indicator of a potential competition problem, and a reason for starting an investigation, this “should not be confused with the test for unfair pricing itself” (439).  This therefore does not seem to be an easy route for the CMA to take on remittal.

The CAT’s analysis of the United Brands test

Taking the CAT’s approach to the two limbs of the United Brands test separately:  

(i) Whether the difference between the costs actually incurred and the price actually charged is excessive 

The CAT did not conclude that facts established by the CMA could not give rise to a finding of excessive prices.  Rather, it was the CMA’s narrow approach to the assessment of excessive pricing which could not support such a conclusion.  The CMA’s use of only a Cost Plus methodology resulted in a price that would have existed under conditions of “idealised competition”, rather than in the ‘real world’.  If the Cost Plus figure was not the normal competitive price, then it was not the right price for the purposes of the United Brands test.  Instead, the CAT should have looked at wider evidence to establish a benchmark price (or range) based on circumstances of “normal and sufficiently effective” competition.  If the Decision is remitted back to the CMA, it may use Cost Plus as part of the methodology, but it will also need to put those theoretical figures in their full market and commercial context.   

As to the benchmark figures themselves, which used the PPRS derived 6% return on sales, the CAT seemed to accept the PPRS was a potentially relevant indicator, but found the CMA placed too much reliance on it – particularly as Department of Health evidence expressed doubts as to its relevance.  The CAT cautioned that the PPRS was intended to apply in different circumstances to those in this case.  

(ii) Whether a price has been imposed which is either unfair in itself or when compared to competing products

The second limb of the United Brands test appears to give regulators two options: the issue here was whether these were genuine alternatives (as the CMA had only considered the first, ‘unfair in itself’), or whether the CMA should have considered both.  The CAT found that, although the CMA did not need to succeed under both to show a price was unfair, it did need to consider whether the alternative would show a price is one that undermines the basis of a finding of unfairness, in particular where a party under investigation has raised the issue.  While the CAT does not refer to the recent Intel judgment of the CJEU, there is a flavour of its ruling here.  

The CMA had determined that there were no products which could provide a ‘meaningful comparison’, but the CAT found that the CMA’s argument to support this was at fault, and it should have considered the suitability of comparators in more depth.  In particular, tablets produced by Teva were around twice the price of the Pfizer-Flynn Capsules; but this price came from an agreement with the Department of Health which reflected the economic value of the Teva tablets.  Even though those tablets were accepted by the CAT to be outside the relevant market as defined, they appeared to be sufficiently comparable to be worthy of more in-depth consideration.  The contrast drawn between the narrow function of market definition and the wider consideration of competitive constraints relevant in considering abuse is an important and sensible contribution to Article 102 case law generally.

The CAT found that the question of the ‘economic value’ of the Pfizer-Flynn Capsules (which the CMA had considered separately) was best addressed in the context of the ‘Unfairness Limb’.   The CMA had found that the economic value did not exceed the Cost Plus price it had calculated, and considered that there were no non-cost factors which served to increase it.  However, the CAT expressed concern that the evident economic value derived from the benefit patients received had been rejected.  Although the CAT acknowledged that patients did only have limited choices, the CAT found that the CMA should still have attempted a qualitative assessment of this benefit.  Assigning a monetary value to this benefit and assessing by how much it should be reduced due to patients’ limited choices is likely to be difficult.    

Findings of abuse set aside

The CAT decided that further assessment of competitive conditions using information beyond the scope of the Decision would be required.  For that reason, the CAT could not make its own findings as to whether there was an abuse by either company.  Instead, it has provisionally proposed to remit the abuse section Decision back to the CMA, but will now fix a further hearing for the parties to address it on this point.  

Given the policy issues surrounding price increases in the pharmaceutical sector, remitting the Decision for more a comprehensive analysis with the benefit of further clarity in a novel area (from the CAT and the CJEU in AKKA/LAA) is probably the best outcome for all concerned – although the recent closure of the regulatory ‘loophole’ that allowed unregulated price-rises perhaps reduces the long-term benefit.  This ‘have another go’ approach was also the outcome in the CAT’s first hearing for a collective proceedings order – another novel area where policy objectives would have been frustrated by an outright refusal.    

There have been immediate knock-on effects: the CMA has indicated that other active investigations it has in the area may now be severely delayed.  The end of the CMA’s investigation into hydrocortisone seemed to be in sight, and it will be interesting to see how the CMA proceeds with that, as well as the Pfizer / Flynn case.  

The CAT’s difficulties in applying the United Brands test are also likely to be of interest to the Commission, given that it has opened an excessive pricing investigation (into Aspen Pharma) – its first of that type in the pharmaceutical industry.

But while the CMA will clearly have its work cut out (assuming the CAT goes ahead with the remittal), it should not be assumed that this judgment is the end of the story for excessive pricing cases in the UK.  

The CJEU guidance in MEO on price discrimination in licensing may also impact FRAND / SEP licences

Introduction

AG Wahl began his Opinion in MEO v Autoridade da Concorrência by noting that it presented the CJEU with an opportunity to clarify the law on differential pricing. Under Article 102(c) TFEU it can be an abuse for a dominant undertaking to apply “dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage”. Discrimination has always been a tricky issue under Article 102 (it is one of relatively few competition issues to have received a thorough discussion by the English Court of Appeal - see British Horseracing Board, paragraphs 265-278)  and it has never been entirely clear to what extent the EU authorities consider that the practice of price differentiation necessarily results in a finding of competitive disadvantage, or how much disadvantage is required to infringe Article 102. 

Price differentiation is a topical issue. The increasing use of pricing algorithms offers the potential for companies to engage in ‘personalised’ pricing on a mass scale, offering different prices to different consumers based on an algorithmic assessment of the highest price each individual is likely to pay. But they may also facilitate anti-competitive price coordination and so could give rise to concerns (see here and here).

Similarly, as the Internet of Things and 5G lead to new market entrants requiring SEP licences, it will be important for licensors to consider how to charge different licensees different prices without infringing the non-discrimination limb of FRAND.

Can it be assumed that price differentiation is likely to distort competition? Should a competition authority have to demonstrate that the competitiveness of any business placed at a disadvantage by differential pricing has suffered? The CJEU decision in MEO offers some useful guidance on these questions.

Facts

MEO is a mobile / telecoms service offered by Portugal Telecom. As part of this service MEO provides television content, and therefore pays royalties to the Portuguese collecting society that manages the rights of artists and performers, GDA.  In 2014 MEO made a complaint to the Portuguese Competition Authority that GDA had abused its dominant position by (amongst other things) applying different terms and conditions (including price) to MEO compared to another entity also providing television content, NOS. The Portuguese Competition Authority found that GDA had applied different tariffs to different customers between 2009 and 2013. However, it concluded that this price differentiation had no restrictive effects on MEO, and so took no action against GDA. MEO appealed this decision to the Portuguese Regulation and Supervision Court, which referred a number of questions regarding differential pricing to the CJEU.

CJEU decision

The CJEU referred to its previous decisions in Intel and Post Danmark II in setting out three key principles that applied:

  1. Proof of actual, quantifiable deterioration of a particular customer’s competitive position is not required for a finding of competitive disadvantage.

  2. All the relevant circumstances must be examined to determine whether price discrimination produces or is capable of producing a competitive disadvantage

  3. The mere presence of an immediate disadvantage affecting operators who are charged more does not mean that competition is distorted or capable of being distorted.

The CJEU also noted that when assessing particular prices charged by a dominant undertaking, the authorities may assess the undertaking’s negotiating power, the conditions and arrangements for charging any tariffs, their duration and amount, and the existence of any strategy aimed at excluding companies from a downstream market. The CJEU also reaffirmed that there is no de minimis threshold for the purposes of determining whether there is an abuse of a dominant position, albeit this will feed into the analysis of potential effect (paragraph 29). 

Impact

This decision offers helpful clarifications on how Article 102(c) should be interpreted. Although relatively narrow in scope, it has broad implications, particularly in the FRAND context; price discrimination between licensees is a controversial topic that has received relatively little judicial or regulator attention to date.  

As we describe in this article, in its Communication on SEPs, the Commission appeared to endorse a specific non-discrimination obligation in FRAND, stating that SEP holders cannot discriminate between implementers that are ‘similarly situated’. However, it did not specifically say that there is a requirement for distortion of competition between those similarly situated licensees (as for example the High Court had held in Unwired Planet, though this issue is being appealed), or whether harm to an individual firm rather than harm to competition might be sufficient (as a US court recently decided in TCL v Ericsson).

The CJEU’s MEO decision suggests that price discrimination will only be abusive if it leads to a distortion of competition (paragraph 27). So it seems there is scope for licensors to charge similarly situated licensees different royalty rates without breaching their FRAND obligations, as long as they do not distort competition by doing so.

Depression delayed: CMA’s paroxetine pay-for-delay case heads to Luxembourg

On 8 March 2018, the Competition Appeal Tribunal (CAT) gave an initial judgment (see here) in the appeals brought by GlaxoSmithKline (GSK) and a number of generic manufacturers against the Competition and Markets Authority’s (CMA) 2016 Paroxetine decision (see here and here).   As explained further below, the CAT has (in a move which perhaps goes against the prevailing zeitgeist) not reached final conclusions on the appeals, but has rather referred a number of questions to the Court of Justice in Luxembourg.

Background

The infringements identified by the CMA in its Paroxetine decision arose out of three patent settlement agreements made in 2001 and 2002 between GSK and various generic manufacturers of paroxetine.  

Paroxetine is an anti-depressant (selective serotonin reuptake inhibitor “SSRI”), marketed by GSK under the brand name “Seroxat”, which during the infringement period was one of its highest selling products, accounting for £71.6 million (10% of revenue) in 2001.

The CMA’s investigation into paroxetine was the first UK case to grapple with the contentious area of patent settlement agreements which limit generic companies’ ability to bring their own product to market.  The investigation was formally launched by the OFT in 2011 on the basis of information obtained by the European Commission through its pharmaceutical sector inquiry (2009). 

Following a significant further period of investigation, the CMA in 2016 issued a decision fining GSK, Alpharma and Generics (UK) a total of £44.99 million for agreeing to delay the entry of generic paroxetine in breach of Chapter I and/or Article 101 TFEU.  GSK received the largest penalty, being fined £37,606,275 for its parallel infringement of the Chapter II prohibition:

  • The CMA found that between 2001 and 2004 GSK agreed to make payments and other value transfers of over £50 million to generic suppliers of paroxetine; this amounted to a restriction of competition by object and/or effect. 

  • The CMA also found that GSK’s conduct induced generic providers to delay their efforts to independently enter the UK paroxetine market, abusing its dominant position in breach of Chapter II of the Competition Act.

The CAT Judgment 

The essential element of the CAT’s March 2018 judgment is the reference of five issues to the CJEU for a preliminary ruling.  As things stand, the exact text of the questions has not been formulated (and will no doubt be the subject of fierce debate among the parties).  However, the issues referred will relate to the following areas: 

  1. Potential competition: whether the existence of an interim injunction against generic manufacturers was an insurmountable barrier for entering the market.

    The provisional view of the Tribunal was to find that it was not (since, for example, it could have been discharged). However, it decided to refer a question to the CJEU as the question was similar to one raised in Lundbeck’s appeal (see here). This reference raises issues not dissimilar to those at play in the recent Roche judgment of the CJEU, which considered whether potentially unlawful products could be viewed as potential competitors (see here).

  2. Restriction of competition by object: when the strength of a patent is uncertain, does a transfer of value from the originator to a generic of an amount substantially greater than avoided litigation costs, under a settlement agreement in which the generic company agrees not to enter the market with its generic product and not to challenge the originator’s patent, constitute a restriction by object?

    The CAT emphasised a number of points in connection with this question, including a notable recognition that (a) the uncertainty over patent strength means that a possible outcome of the litigation was that the generic challengers would be held to infringe a valid patent; and (b) an outcome of litigation which upheld the patent should not be viewed as a less competitive outcome than the situation where the patent was overturned.

    A second related question was also identified, which seeks to establish whether a settlement comprising a value transfer which also provides some benefits to consumers (in the form of limited supplies of authorised generic products) should also be viewed as restrictive by object. Again, the preliminary view of the Tribunal was that such limited competitive benefits are not sufficient to draw into question the overall categorisation of the agreement as a by object infringement. If that is correct, it is necessarily a conclusion which will have to be considered in detail for any specific patent settlement agreement, and suggests that a blanket ‘by object’ approach will not be warranted.

  3. Restrictions by effect: in order to show a restriction by effect is it necessary to establish that the counterfactual would have been more competitive? The Appellants argued that the CMA’s Decision did not sufficiently consider the potentially pro-competitive effects of GSK’s agreements with generic manufacturers, for example the savings to the NHS compared to the situation where no authorised generics were on the market.

    The CAT also started to grapple with an issue which has been underplayed in the European decisions to date, namely the relevance of the outcome of the underlying patent litigation. If one realistic outcome of that litigation was success for GSK, the approach proposed by the CMA would be to reduce the test for identifying effects to “the probability of a possibility”. On the other hand, the CAT did not seem to acknowledge the risk of creating a situation where an agreement is considered restrictive of competition by object yet does not possess the requisite degree of probability for an effects finding that is not made out. This is surely an issue that will have to be fully played out before this, and similar cases, are finally resolved. (Damages litigation in relation to patent settlement agreements is likely to bring this issue to the fore, even if the CJEU elects to side-step the question.)

  4. The correct approach to defining the relevant product market: is the relevant product market paroxetine or all SSRIs? While the Tribunal supported the CMA’s finding of dominance on the basis of a market limited to paroxetine, it criticised its reasoning. It considered the CMA to have taken an overly narrow approach to market definition, based on the impact of generic entry on the price of paroxetine - following the Commission’s ‘natural events’ approach used in its AstraZeneca Decision (2005) (see here). However, the CAT supported the view that from the time when there were potential generic entrants, the market was limited to paroxetine and its generics. It recognised that this preliminary view, which suggests a significant change in the relevant market over time (despite no suggestion that the view of prescribing professionals was subject to a similar change) was a departure from existing case law. In the authors’ view, this approach will lead to legal uncertainty and, more importantly, inappropriately substitutes an analysis based on perceived competitive constraints for an assessment based principally on objective demand factors. As the CAT itself notes, this approach would suggest successful drugs will almost always be found to constitute a distinct market at least from the time when generic entry becomes likely. As the Tribunal notes, this approach would amount to a material change to the “IP bargain” which “might adversely affect the economic purpose of patent legislation”.

    Nevertheless, in making the reference on this point, the CAT has flagged some significant issues which should weigh in the CJEU’s eventual analysis.

  5. Abuse: are potential benefits to the NHS relevant to the assessment of whether GSK had abused a dominant position by entering into the agreements?

    The final question on abuse is limited to an allusion back to the questions referred in relation to the object and effect of anti-competitive agreements. The central issue is again the question of whether the limited pro-competitive benefits derived from the presence of the generic companies as distributors of an authorised generic product are sufficient to undermine the main finding as anti-competitive effects.

Although the judgment is provisional in nature, there is much to absorb. We will report further when the agreed text of the questions to be referred has been published.

The BKA’s Facebook investigation: new frontier or regulatory overreach?

At the end of 2017, the German competition authority (BKA) provisionally concluded that certain Facebook polices in relation to users’ data are an abuse of its dominant position in the German market for social networks.  It published an accompanying position paper

The BKA’s provisional dominance finding takes into account Facebook’s 30 million monthly users in Germany (with 23 million using Facebook on a daily basis), as well as the allegedly high barriers to entry for new social networking platforms (a point to which we return below).  

It considers the terms and conditions Facebook imposes on its users to be abusive, requiring them to choose between accepting “the whole Facebook package”, including an extensive disclosure of personal data, or not using Facebook at all. 
 
Specifically, the BKA takes issue with the requirement for users to accept Facebook’s right to collect data from third party websites: data which is made available to Facebook by operators that have embedded the Facebook ‘like’ or ‘login’ options.  Data is collected by Facebook even where users do not click on such options, and is then associated with the user’s Facebook account.  According to Cliqz, Facebook’s reach may stretch to over 25% of all websites. 

The BKA considers that users could not meaningfully consent to Facebook’s data processing requirements, as they have no alternative but to consent if they wish to access Facebook’s platform.  The BKA characterises this as "exploitative business terms”. 

As we have previously noted, the investigation is a test case on the interplay between big data, consumer protection and competition law (here and here). But is this investigation an opening salvo in a new frontier for competition enforcement, or more of a modish dalliance with the hipster zeitgeist?

It certainly concerns an unusual alleged form of abuse, since it does not appear to depend in any meaningful sense on Facebook’s dominance (save perhaps in the extent of the data collection).  Nor does it readily seem to fulfil the classical requirement of an abuse which uses “methods different from those governing normal competition [which …] has the effect of hindering the maintenance of the degree of competition existing in the market or the growth of that competition” (Case 85/76, Hoffmann La Roche).

It is not uncommon for investigations which challenge the boundaries of antitrust to be relatively clear about the potential harm to competitors, but much less clear about the harm to consumers or the competitive process.  This case is rather the converse – with its most controversial aspect perhaps being the BKA’s theory of consumer harm, which is based on users’ loss of control of their data: “Facebook offers its service for free.  Its users therefore do not suffer a direct financial loss from the fact that Facebook uses exploitative business terms.  The damage for the users lies in a loss of control: they are no longer able to control how their personal data are used”.  This theory necessarily assumes that users are sufficiently tied into the platform to be unwilling or unable to ‘click away’ and select an alternative messaging service.  Indeed, in Facebook’s public statement about the recent development in the BKA’s investigation, it strongly emphasised its lack of market power, which is both a pre-condition for any abuse finding and in this case is closely tied to the nature of the abuse itself.

The BKA’s position paper seeks to redress this apparent focus on consumers, noting the high economic value of the data gathered by Facebook, and its relevance for targeted advertising which in turn makes Facebook more attractive to advertisers, a concept referred to as “identity-based network effects”.  The interest in online advertising is of course not limited to the BKA, but is an increasingly hot topic in competition policy generally – see for example the ongoing French competition authority sector inquiry (see here and here). 

It is also questionable how the case can be reconciled with the Court of Justice’s more orthodox position in Case 238/05 Asnef-Equifax (here): “any possible issues relating to the sensitivity of personal data are not, as such, a matter for competition law”.  The BKA’s answer will have to be that its investigation does not relate to the sensitivity of personal data “as such”, but rather to Facebook’s use of the data.

In terms of next steps, Facebook can defend its positon and/or offer solutions.  A final decision in expected in the summer.

Excessive pricing spreads to Denmark - a cautionary tale about exclusive licensing

Following cases in Italy, the UK and before the European Commission, the Danish authorities have reached an abuse of dominance finding against CD Pharma (CDP). 

CDP was found to have imposed price increases of up to 2,000% on supplies of Syntocinon, without any justification in terms of increased costs. The product, used in connection with childbirth, is long off patent. 

Two points mark this case out from other excessive pricing investigations.

First, this is as much a cautionary tale about exclusive licensing as it is about excessive pricing. In acquiring an exclusive licence to what appears to be a ‘must stock’ product for hospitals CDP acquired a dominant position, leading to the risk of abuse. 

While exclusive licensing between non-competitors generally does not raise competition concerns, it is notable that Commission guidance refers specifically to the justification for exclusive licensing as the bringing of a new product to market. In the case of an old product which does not require further development, the basic justification for the exclusivity appears to be missing. In this case, if competitor Orifarm had been able to approach the manufacturer of Syntocinon rather than having to purchase from CDP as the local distributor, there would have been a greater chance of price competition on the Danish market. 

Second, the Danish authority is alive to the wider (umbrella) harm caused by the pricing strategy which extend beyond the period of direct infringement. The press release refers to the risk of permanent price increases - in particular where products are procured through periodic tender processes. This could be a significant point in any attempt by the Danish authorities to seek damages in  respect of the abuse. 


The chips are down! The Commission fines Qualcomm for abuse of dominance

The Commission has fined Qualcomm €997 million for abuse of dominance. The Commission found that Qualcomm had paid Apple to use only Qualcomm LTE baseband chips in its smartphones and tablet devices (see here) and that this was exclusionary and anti-competitive. 

Commissioner Vestager has said Qualcomm “denied consumers and other companies more choice and innovation – and this in a sector with a huge demand and potential for innovative technologies”, as “no rival could effectively challenge Qualcomm in this market, no matter how good their products were.

LTE baseband chips enable portable devices to connect to mobile networks. The Commission considers Qualcomm to have had a market share of over 90% between 2011 and 2016 (the period of the infringement). 
 
The Decision centres on an agreement between Qualcomm and Apple in force from 2011 to 2016 under which Qualcomm agreed to make significant payments to Apple. The payments were conditional on Apple not using chips supplied by Qualcomm’s rivals, such as Intel, in Apple’s mobile devices. Equally, Apple would be required to return a large part of Qualcomm’s previous payments if it decided to switch chip suppliers. The Commission also identifies Qualcomm’s IP rights as contributing to the significant barriers to entry in the chip market, reinforcing Qualcomm’s dominance.

The Qualcomm Decision is similar to the Commission’s 2009 Decision to fine Intel €1.06 billion for giving rebates to major customers in return for them exclusively stocking computers with Intel chips – a decision recently remitted by the CJEU to the General Court for further consideration of the ‘as efficient’ competitor analysis (see here and here). 

Applying the CJEU’s reasoning in Intel, Qualcomm sought to justify its rebate arrangements with Apple on the basis of the ‘as efficient competitor test’. However this attempt was rejected by the Commission as there were “serious problems” with Qualcomm’s evidence (see here).

Separately, Apple has also argued that Qualcomm’s dominance may be reinforced by its strategy for licensing its standard essential patents (SEPs) to competing chip manufacturers. Apple is bringing cases against Qualcomm around the world, alleging that it has engaged in “exclusionary tactics and excessive royalties”. In litigation launched in the English Patent Court in 2017, Apple alleges that Qualcomm is unwilling to license its SEPs to competing chip manufacturers, offering only patent non-assert agreements (see here) which could have a foreclosing effect on other chip manufacturers. (We understand that this case is subject to a jurisdiction challenge, due to be heard in the coming months.)

Qualcomm’s patent licensing arrangements are described (by Apple in its pleadings) in the diagram below:

The Qualcomm Decision reiterates the aggressive approach adopted by the Commission to policing rebates given by dominant companies and potential foreclosure effects. Following the Qualcomm Decision, Commissioner Vestager said “[t]he issue for us isn't the rebate itself. We obviously don't object to companies cutting prices. But these rebates can be the price of an exclusive relationship – the price of keeping rivals out of the market and losing the rebate can be the threat that makes that exclusivity stick” (see here). 
 
As litigation and antitrust clouds swirl around Qualcomm’s business model, in a separate case filed in the Northern District of California in 2017, the US Federal Trade Commission has similarly alleged that Qualcomm is using anti-competitive tactics to maintain its monopoly of baseband chips and has rejected requests for SEP licenses from Intel, Samsung and others (see here and here).

In parallel, competition authorities in China, South Korea, Japan and Taiwan have fined the company a total of $2.6 billion in relation to its SEP licensing policies and pricing (see here).

In summary, while the EU Commission fine is significant, and interesting for competition lawyers as it perhaps suggests that the significance of the Intel CJEU judgment may be more limited than anticipated, it is only part of the overall picture for Qualcomm (and for the sector as a whole). Indeed, even with today’s decision, the Commission has not brought its interest in Qualcomm to an end, as it is still investigating a separate predatory pricing complaint which was filed in 2015.  

The cumulative impact of these legal issues (as well as Qualcomm’s rejection of Broadcom’s takeover bid) may have contributed to a fall in Qualcomm’s share price – although Qualcomm had better news from DG Comp recently when its proposed acquisition of NXP was cleared by Brussels on 18 January (see here and here).

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.