The CJEU’s Intel judgment – First thoughts and some predictions

Today’s Intel judgment from the Court of Justice does not strictly concern the Competition Law/IP interface.  However, it is a case which has considerable interest for potentially dominant companies, as well as a strong technology thread. 

At the basis of today’s judgment is the European Commission fine of €1.05bn, imposed on Intel back in 2009, and upheld by the General Court in 2014, for abusing a dominant position by granting exclusivity rebates to customers.  
 
In brief, the CJEU has today held that the General Court did not sufficiently analyse all of Intel’s arguments that its conduct did not foreclose competitors. The General Court’s failure to analyse the results of the ‘as efficient competitor’ (AEC) test was a particular focus of the criticism. The CJEU has therefore remitted the case to the lower court for further consideration on the central abuse of dominance question.  

Much ink will no doubt be spilled in analysing this judgment, but for now, the points below seem to be key:

  • Relevance of ‘as efficient’ competitors. The Court emphasises that Article 102 applies when conduct foreclosure of “as efficient competitors”; in other words, the provision is not intended as a tool for protecting entities which lack the ability to compete effectively and which are therefore likely to be less attractive to consumers.  
Strictly speaking, the CJEU’s remittal to the GC only requires it to look again at the AEC test because the Commission had in fact carried out such a test, and the GC had not responded to all of Intel’s arguments about it (143-144).  However, the fact that the Court embraces a reference to “competitors considered to be as efficient as [the dominant company]” within its general legal framework (133, 136) suggests that it will not be easy for competition authorities (or indeed private action claimants) to walk away from this test. This is mirrored in the Court’s description of the abuse finding which must be reached before an assessment of objective justification can take place (140).

  • Form vs. effects. On a first read, the judgment is a shot in the arm for effects- rather than form-based analysis (136-140).  On this reading, the mere fact that an exclusivity rebate exists is not enough in itself to establish anti-competitive foreclosure. The extent of dominance plays a role here, as well as the market coverage and duration of the practice (both the market coverage and duration were considered by the Advocate General to be ‘inconclusive’ in themselves).  
However, there are a couple of stings in the tail.  First, to avoid a formalist approach, a company under investigation must adduce evidence during the initial investigation to show that its conduct was not in fact capable of affecting competition (138).  Past cases (e.g. AstraZeneca) suggest that this evidence should be contemporaneous with the conduct.  Second, evidence of a strategy to exclude will be considered relevant (139).  While case law establishes that a company’s intention is less relevant than the objective effects of the conduct, it seems to us that clear evidence of an anti-competitive strategy will make it much more difficult to support an argument that the conduct was incapable of affecting competition. 

It’s perhaps too early to predict what impact this judgment will have on future cases – not least because a further referral back to the CJEU in this case remains possible.  However, a couple of possible consequences are:

  • Reduced options for formalistic short-cuts in establishing infringement – arguably this is of greater relevance in the private litigation context, given that competition authorities have tended to carry out extensive analysis of effects as a fall-back (or have closed cases where such evidence cannot be established, as with the CMA’s recent decision on impulse ice creams).
  • Again in the private litigation context, the practice of splitting questions of dominance and abuse into separate trials may not be the best solution for conduct of this kind, given that the degree of dominance may affect whether the conduct is in fact anti-competitive or not.
As for Intel’s fate when it comes back before the GC, all bets are off.  But given the CJEU’s indication of the significance of evidence of an anti-competitive strategy, we wouldn’t like to bet against a further confirmation of the Commission’s original conclusions…

Apple’s battle with Qualcomm spreads to the UK

On 19 May 2017 Apple issued a major claim against Qualcomm in the English Court. This is part of a widely reported global dispute between the two giants. The English action includes an Article 102 abuse of dominance claim as well as a FRAND licensing claim and was issued just a month after the English Court’s first FRAND valuation in Unwired Planet v Huawei (Bristows’ blog post here and here). The particulars of the claim are now available and make fascinating reading. 

On the FRAND licensing front, Apple seeks a declaration that Qualcomm has breached its obligations to ETSI, by failing to offer a FRAND licence for Standard Essential Patents (SEPs), seeking excessive and non-FRAND royalties. 

As far as competition law and Article 102 is concerned, Apple makes a number of arguments. 

It claims that Qualcomm is abusing its dominant position in the markets for LTE, CDMA and UMTS chipsets by refusing to license its SEPs to competing chipmakers. This means that if a chipset is purchased from a company other than Qualcomm, the purchaser must then obtain a licence from Qualcomm for use of Qualcomm’s standard-essential IP. Apple asserts that Qualcomm’s practices exclude chipset competitors from the market, as well as being in breach of its contractual FRAND obligations.

Apple also complains about various aspects of agreements between itself and Qualcomm. These expired in 2015, and in 2016 Apple began to purchase chipsets from Intel. This has doubtless affected the nature and timing of the litigation.

As mentioned above, Apple contends that Qualcomm’s royalties are excessively high. It then argues that to reduce the effective royalty rate it had to pay, it had no commercial alternative other than to conclude rebate agreements which involved granting Qualcomm exclusivity over Apple’s chipset supply. Apple maintains that one consequence of this arrangement has been to limit the emergence of other chipset manufacturers, who have been precluded from competing for Apple’s custom. Because of Apple’s importance as a purchaser of chipsets this is argued to have foreclosed a significant part of the potential demand. Qualcomm’s practice of forcing customers to take a licence and to agree to exclusionary terms is said to further reinforce the exclusionary effects. 

A particular feature of the rebate agreement which is criticised by Apple is that it was conditional on Apple agreeing not to pursue litigation or governmental complaints that the royalties were ‘non-FRAND’. 

Apple explains that Qualcomm’s royalties are charged in addition to the price of the chipset itself, and are based on the price of the end device being sold by the licensee, rather than on the price of the chipset in which it is argued that all the patented technology is practised. Apple takes the position that in order to be acceptable the royalty should be calculated by reference to the smallest saleable patent practising unit (SSPPU) – in this instance the chipset, rather than the phone. This is said to guard against situations where two phones that use the same Qualcomm technology could incur significantly different royalty obligations for use of the same SEPs based only on their different end sales prices. Those sales prices which differ because of completely different aspects of the phones, such as design or additional functionalities. This issue was not considered by Birss J in Unwired Planet v Huawei. The argument was raised in Vringo v ZTE, but was dropped before trial. 

Apple makes several arguments which are in tension with the recent Unwired Planet v Huawei Judgment. These include: that licensees can be acting in a FRAND manner even though they refuse to take a licence of an entire patent portfolio of declared SEPs, irrespective of validity or essentiality; that the FRAND royalty for an SEP should reflect the intrinsic value of the patent; and that the standard (of which that technology is a part) constitutes value that Qualcomm has not created and which it should not seek to capture through its FRAND licensing. 

Finally, in an attempt to demonstrate that Qualcomm’s royalty is not FRAND, Apple states that Qualcomm holds a quarter of the declared SEPs for the LTE standard and compares Qualcomm’s royalty with the (presumably lower) licence fee it pays other SEP holders, who combined hold one third of the relevant SEPs.

Ultimately, Apple claims that Qualcomm’s undertaking to ETSI is ineffective to constrain its dominance as an SEP owner. This may be a direct response to comments by Birss J in Unwired Planet v Huawei that an SEP holder may not always hold a dominant position, for example, because of the FRAND obligation and the risk that implementers may engage in patent hold-out. 

Conclusion

Developments in this case will be interesting when set against the recent judgment in Unwired Planet v Huawei, in which Birss J considered many of the issues raised by Apple. But Apple also makes arguments that go well beyond the issues considered in that case. For example, Apple’s arguments about exclusionary rebates may be affected by the Intel judgment, due to be handed down by the EU’s Court of Justice on 6 September 2017.  It also sits alongside parallel antitrust litigation in the US, including retaliatory actions by Qualcomm designed to exclude Apple’s handsets from import to the US. How this case, and the global dispute, evolves will be fascinating to follow – and not only for those with an interest in SEP and FRAND issues.

Excessive Pricing: Aspen lose their appeal in Italy – and are in the Commission’s crosshairs

Last year we reported the Italian’s take on excessive pricing (here), where South African pharmaceutical Aspen was in the firing line for increasing the price of four cancer drugs by a hefty 300% – 1500%. The Italian Market Competition Authority (AGCM) found that this amounted to an abuse of dominance by artificially inflating the price of the drugs, which had long been off patent. The company was fined €5.2 million in October 2016. 

On 14 June 2017 Aspen lost all grounds of its appeal against the AGCM decision (the judgment – in Italian only – is here).

This loss for Aspen was set against a troubling back drop for the company: not only had the South African Competition Commission announced an investigation into Aspen, Pfizer and Roche for suspected collusion over cancer drug prices just days earlier, but on 15 May 2017 the European Commission opened a formal investigation into Aspen in relation to excessive pricing of five cancer drugs. 

The Commission’s press release states that – in addition to investigating the apparently ‘significant and unjustified’ price hikes applied to Aspen’s products – the Commission is also looking at the way in which Aspen threatened to withdraw the drugs in issue from Member States.  This was also an influential fact in the AGCM decision and subsequent appeal ruling by the Italian Appeal Court. 
 
The separate statement recording the opening of proceedings suggests that the Commission’s focus is wider than simply the negotiation of prices with national health authorities. It notes that Aspen’s negotiation practices “have included reducing the direct medicine supply and/or threatening supply reductions, as well as defining EAA-wide stock allocation strategies and implementing them in cooperation and/or agreement with local wholesalers”. It has been a while since stock management has been subject to scrutiny by the Commission, and this is likely to be an unwelcome development for the industry more widely. For now, it is probably safe to assume that this aspect of the investigation is ancillary to the primary case on pricing issues.

Meanwhile, back in the UK, the date for an appeal of the (now-published) Pfizer/Flynn decision has been set by the Competition Appeal Tribunal – a four-week hearing is due to start on 30 October. 

Online auction commitments demonstrate digital markets are central to CMA’s priorities

The CMA has accepted commitments from ATG Media, the largest provider of online auction sites in the UK, to bring an end to practices which it considered hinders competition from rival bidding platforms (press release and decision here and here). 

ATG’s Live Online Bidding (LOB) platforms cover a wide range of markets, including: antiques and art; industrial and insolvency; and construction and agricultural equipment. 

LOB platforms are aggregators that host live auctions run by multiple auction houses. They aim to attract both individual bidders and auction houses to list live auctions. Traditionally live bidding was available only by attending in person or by telephone.

The CMA’s investigation began in November 2016 and focused on three practices:

  • obtaining exclusive deals with auction houses, so that they do not use other providers;
  • preventing auction houses getting a cheaper online bidding rate with other platforms through Most Favoured Nation clauses; and
  • preventing auction houses promoting or advertising rival live online bidding platforms in competition with ATG Media.
In order to bring the investigation to an end ATG has given the CMA legally binding commitments under the Competition Act 1998 to stop all three practices. 

The CMA’s Annual Plan 2017/18 (here) stresses the importance of digital markets in its enforcement priorities: “Online aspects of markets have become a major focus of our work, as many industries have become more digital in how they trade, raising important questions of policy and law.”

Online platforms (particularly those with market power) are likely to face increased scrutiny as competition authorities across the world focus ever more of their resources on the digital economy.   

The Commission steps into the excessive pricing arena

An announcement by the European Commission last week resolves an open question about its view on the recent spate of pharma sector excessive pricing cases that have been seen in Italy and the UK.  The Commission has now confirmed that, following dawn raids across four member states in February, it has opened an investigation into Aspen Pharma for suspected breach of Article 102.  The concern is that Aspen’s pricing practices in relation to off patent drugs containing five ingredients used for treating cancer has led to unjustified price increases.  This overlaps with the Italian Market Competition Authority’s decision in October 2016 to fine Aspen €5.2 million for unfair price increases, which covered four of the five ingredients now under investigation (see here for our report).

This is the Commission’s first excessive pricing case in the pharma sector, following a trend set by the national competition authorities (including in the UK and US – although given that US antitrust does not apply to pure pricing issues, the US cases have tended to focus on another form of abuse (e.g. here) which led to the excessive prices).  

The EU NCAs have been well placed to deal with such conduct, as pharma markets are national in scope, and subject to significant regional differences resulting from the different formation of public health services.  However, setting the benchmark price is a difficult – and controversial – aspect in any investigation (see here for our thoughts on the CMA’s recent approach) and it will be of interest to see how the Commission tackles the issue, as its approach may well be followed by other NCAs.  

Bearing these points in mind, we will be particularly keen to see how the Commission deals with the following two points: 

  1. The definition of the relevant market and whether a company is dominant – before assessing whether its prices are excessive, a pharma company must first know whether it is dominant.  With diverging approaches on product market definition (definitions have been drawn from therapeutic / molecular / dosage level and from regulatory guidance), it can be difficult to make an assessment of dominance.  In Aspen’s case, it has found itself  one of few companies willing to manufacture low volume generic drugs, and despite low barriers to entry, no other companies have entered the market to exert a form of price control on Aspen.  It has perhaps therefore become dominant as a result of market failures.    
      
  2. How the Commission determines an acceptable level of profit (i.e., what is the meaning of ‘excessive’?).  While under patent protection, pharmaceutical product prices are generally constrained in some way (e.g. through profit caps under the UK PPRS), but in theory, profits could be competed upwards following patent expiry, even if overall prices decline (this is a key part of the argument raised by Pfizer and Flynn in their appeals of the CMA infringement decision).  The recent opinion of AG Wahl considering unfair prices (albeit in a copyright licence context) concluded that there is no single method of determining the benchmark, and acknowledges that there is a high risk of error, but a price should only be excessive if it is significantly and persistently above whatever benchmark is determined.  Whilst AG Wahl was unable to point to any guaranteed failsafe methods of analysis, he stated that an authority should only intervene when there is no doubt that an abuse has been committed. 

The investigation does signal that the Commission is keen to address the fairness of pricing in the pharmaceutical industry, but as with all such investigations, its approach should not be one of a price regulator.  Indeed, the Commission is at pains to point out that it is looking at a case where the price increases were extremely significant (100s of percent uplift).  It may reveal that a case-by-case approach is not appropriate, and the real issue is regulatory failure that will need to be corrected by legislation (such as that currently before the UK Parliament). 

Back to the future: the Commission opens e-commerce competition investigations

True to its current focus on all things digital, the European Commission has recently announced that it has launched three separate investigations into whether certain online sales practices prevent, in breach of EU antitrust rules, consumers from benefiting from cross-border choice in their purchases of consumer electronics, video games and hotel accommodation at competitive prices.

The context to the investigations is the Commission's Digital Single Market Strategy and its related sector inquiry on e-commerce, which suggested that the use of online sales restrictions were widespread throughout the EU (previous posts here and here).

The Commission is now examining whether the companies concerned are breaking EU competition rules by “unfairly restricting retail prices” or by excluding customers from certain offers because of their nationality or location (geo-blocking). 

The Commission’s rationale for the inquires is that these practices may make cross-border shopping or online shopping in general more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower online prices.  Whether the evidence gathered from the investigations ultimately bears out this hypothesis is very much an open question. 

Whatever the wider benefits to the Commission of the sector investigation, it is questionable whether these investigations in themselves justify the full arsenal of an antitrust sector inquiry.  To judge by the press release, at least a significant part of the Commission’s concern appears to relate to classical infringements of competition law – resale price maintenance and contractual barriers to parallel trade – which merely happen to have come to light through the sector inquiry.  Time will tell whether this hypothesis is correct, or whether more specific types of online anti-competitive conduct are in fact concerned.

FTC settles abusive acquisition of pharma licensing rights

On 18 January, the FTC announced that Mallinckrodt ARD Inc. (formerly Questcor Pharmaceuticals, Inc.) and its parent company have agreed to pay $100 million to settle FTC charges that they violated antitrust laws when Questcor acquired the rights to a drug that threatened its monopoly in the U.S. market for adrenocorticotropic hormone (ACTH) drugs.  The announcement was made concurrently with the release of the FTC's complaint.

Antitrust (as opposed to merger) cases about acquisitions of competing technology are not an everyday occurrence.  However, this complaint has something of the flavour of the EU Commission’s Tetra Pak 1 decision.  In that case, the EU Commission objected to Tetra Pak’s acquisition (through a merger) of exclusive rights to what was at the time the only viable competing technology to Tetra Pak’s dominant aseptic packaging system.  The Commission (and subsequently the EU courts) held that this would prevent competitors from entering the market and therefore amounted to an abuse of a dominant position.  

The FTC’s Mallinckrodt complaint alleges that while benefitting from an existing monopoly over the only U.S. ACTH drug, Acthar, Questcor illegally acquired the U.S. rights to develop a competing drug, Synacthen (a synthetic ACTH drug which is pharmacologically very similar to Acthar).  This acquisition stifled competition by preventing any other company from using the Synacthen assets to develop a synthetic ACTH drug, preserving Questcor’s monopoly and allowing it to maintain extremely high prices for Acthar.  

To judge by the FTC’s complaint, the case appears to contain some pretty stark facts which may have contributed to the immediate settlement of the proceedings by Mallinckrodt.  Those facts also bring the case squarely into line with the US and EU competition regulators’ current concern over excessive pricing in pharma.

First up is the finding that Questcor had a 100% share of the U.S. ACTH market and that it took advantage of that monopoly to repeatedly raise the prices of Acthar from $40 a vial in 2001 to more than $34,000 per vial today – an 85,000% increase.  The complaint details that in August 2007 Questcor increased the price of Acthar more than 1,300% overnight from $1,650 to $23,269 per vial and that it has taken significant and profitable increases on eight occasions since 2011 pushing the price up another 46% to its current $34,034 per vial.  Acthar is a speciality drug used to treat infantile spasms, a rare seizure disorder affecting infants, as well as being a drug of last resort (owing to its cost) for a variety of other serious medical conditions.  According to the FTC, Acthar treatment for an infant with infantile spasms can cost more than $100,000.  In Europe, Canada and other parts of the world doctors treat these conditions with Synacthen which is available at a fraction of the price of Acthar in the U.S. (Synacthen is not available in the U.S. as it does not have FDA approval.)  The FTC relies on the supra-competitive prices charged in the U.S. for Acthar as evidence of Questcor’s monopoly power as well as its 100% market share and the existence of substantial barriers to entry.

It is also part of the FTC’s case that Questcor disrupted the bidding process for Synacthen when the rights came up for acquisition.  According to the complaint, Questcor first sought to acquire Synacthen in 2009, and continued to monitor the competitive threat posed by Synacthen thereafter.  When the U.S. rights to Synacthen were eventually marketed in 2011, dozens of companies expressed an interest in acquiring them with three firms proceeding through several rounds of detailed negotiations.  All three firms planned to commercialise Synacthen and to use it to compete directly with Acthar including by pricing Synacthen well below Acthar.  In October 2012, Questcor submitted an offer for Synacthen and subsequently acquired the rights to Synacthen for the U.S. and thirty-five other countries and did not subsequently bring the product to market in the US.

In addition to the $100 million payout, the proposed court order requires that Questcor grant a licence to develop Synacthen to treat infantile spasms and nephrotic syndrome to a licensee approved by the FTC, a pretty far-reaching remedy.  

This case is the latest in a string of cases on both sides of the Atlantic relating to escalating pharma prices (as discussed in our previous blog posts here and here).  While companies retain significant scope to price products as they see fit, it reaffirms that pharma companies should be wary of implementing very significant price increases in the absence of good objective reasons for doing so.  This is particularly so where the increase is facilitated by commercial strategies such as acquiring IP rights to existing/potentially competitive products.  In the EU, it is also worth remembering that – as established by Tetra Pak I (on appeal to the General Court) – an agreement which falls within a block exemption can at the same time constitute an infringement of Article 102.  So companies and their advisors should remember to wear Article 101 and 102 hats when reviewing agreements.

Helen Hopson

Patent licensing and antitrust – Qualcomm in the firing line

Ten years after the European Commission opened an investigation into Qualcomm's royalties for 3G essential patents, and 8 years after it closed that investigation without any finding of infringement, the US FTC last week week (January 2017) brought a new complaint against the chipset manufacturer's patent licensing practices.

In the meantime, Qualcomm has not been long out of the competition authorities' sights, with statements of objections in the EU on exclusivity payments and predatory pricing, an infringement decision and $853m fine by the Korean FTC (the second imposed on the company by that agency) just after Christmas last year, and a settlement worth over $900m with the Chinese antitrust authorities in 2015.  It has also attracted private actions, as we reported here (Icera’s 2016 claim in the English courts) and as has been further reported in recent days (Apple’s new lawsuit in California, alleging overcharging for chips and failure to pay rebates due).

The FTC complaint focusses on three main areas*:

  • Requiring customers for its baseband processors (in which Qualcomm is said to have a dominant position for both CDMA (3G) and LTE (4G)) to take a patent licence, thus achieving elevated royalties;
  • Refusing to license its essential patents to competitors (such as Intel), contrary to Qualcomm’s FRAND commitments;
  • Exclusive dealing, notably with Apple, to cement its position in the 4G smartphone market

In combination, this conduct is said to impose a “tax” on mobile phone manufacturers, even when using non-Qualcomm processors.   The complaint also notes that licensees are passing up the opportunity to challenge whether Qualcomm’s rates are FRAND.  The FTC lists a number of reasons why Qualcomm’s licences might not be FRAND, such as the maintenance of Qualcomm’s royalty rates at a significant level despite its reduced patent share; the charging of royalties on the selling price of the whole handset, even though this includes many features not subject to Qualcomm’s patent claims; and the extraction of onerous cross-licensing terms.

But why is this occurring? – why is it that licensees do not litigate Qualcomm’s royalty demands, as they do with other significant SEP holders?  The answer lies – according to the FTC – in the cost to licensees of litigation with Qualcomm.  It argues that rational licensees will be willing to litigate if the cost of doing so appears likely to be outweighed by the prospect of reduced royalties.  In this instance, however, it is said that the cost of litigation for prospective Qualcomm licensees is usually too great: as Qualcomm’s licensees are also customers of Qualcomm’s chipsets (for which there are few – if any – substitutes), they not only have to bear the cost of the litigation itself, but also, potentially of significantly impeded market access, arising from difficulties in obtaining Qualcomm chips. 

Patent licensing, once regarded as a largely benign or even pro-competitive business model, is now at the forefront of the antitrust authorities' attention around the world.  The fact that Qualcomm’s conduct is perceived to have effects on a market as valuable and crucial to the economy as the smartphone market have served to make it a particularly attractive target for the antitrust authorities.  This is not without controversy, however: US DOJ officials have previously expressed concerns about investigations seeking to  curb royalties would be liable to affect innovation, and – as Qualcomm has emphasised – the present FTC Complaint was launched on the basis of only 2-1 agreement by the FTC commissioners, in the face of opposition from Maureen Ohlhausen.  Whatever the divergence of views, it appears inevitable that Qualcomm will continue to appear in the antitrust headlines for some time to come.

* One further area has been identified by the FTC, but is subject to protective order.  

When the price isn’t right – CMA fines Pfizer / Flynn for excessive pricing

The year is 2011.  The Office of Fair Trading (the predecessor to the current Competition and Markets Authority) contributes to an OECD round table on excessive pricing, concluding that: “firms should not face fines for excessive pricing, and should not face the risk of private damages actions in respect of such behaviour”.

Five years later, in early December this year, the CMA announced that its investigation into the supply of phenytoin sodium capsules by Pfizer and Flynn had concluded with its highest ever fine (£90 million), and ordered the companies to reduce their prices within 4 months.  How times change…

Excessive pricing is one of the more controversial types of abuse of dominance – the lack of a bright line test between competitive and anti-competitive pricing has meant that infringement decisions in relation to this form of abuse have been rarely pursued.  Indeed, this is the first UK competition authority decision based on excessive pricing by a pharmaceutical company since the 2001 Napp decision, which involved differential pricing in the hospital and community sectors.

As we have previously reported, however, something of a sea change in competition policy currently appears to be taking place, at least for certain parts of the pharmaceutical sector. 

The full reasoning of this decision will therefore be closely reviewed.  For now, however, the text of the decision remains unpublished.  While we wait for a non-confidential version, the following 4 points seem to us to be worth noting:

  1. Phenytoin sodium is not a new drug – it has been off patent for many years, although only entered as a generic following the conclusion of a UK supply deal between Pfizer and Flynn.  The case – as with other high profile excessive pricing investigations in the EU and beyond (see here/here) – concerns a sudden and significant jump in previously established market pricing, in this case of around 2,600%.  This is an entirely different legal and commercial context to that applicable for new or branded drugs: it would be extremely surprising if this decision provides any new basis for future intervention in relation to drugs which are subject to the PPRS, even at the stage of free initial pricing.  

  2. Although two companies are involved, no anti-competitive collusion has been alleged.  Rather, the case is based only on abuse of dominance.  It is rare for such cases to involve two separate companies.  Here, the allegation appears not to be that Pfizer and Flynn are jointly dominant, but that each holds a separate dominant position and has separately proved it.  This is a surprising feature of the investigation – proving excessive pricing is notoriously difficult, and the CMA given itself the task of pulling that off twice, with each company being held separately to have extracted supra-competitive prices.  Flynn is at once the ‘victim’ of Pfizer’s excessive pricing, and the perpetrator of an abuse of its own. 

  3. The basis for the findings of dominance is also far from obvious.  While details of how the market has been defined have not yet been released, it appears from a 2015 parallel trade case also relating to Flynn Pharma’s phenytoin sodium product that the drug is only a third line treatment for certain specific types of epilepsies, and that its sales have been in decline for a number of years.  It appears that the CMA’s dominance finding may be based on clinical guidance that stabilised patients should remain on one specific brand of product rather than being switched between different formulations even of the same API.  The trend to ultra-narrow market definition in the pharma sector thus appears to be continuing (see Perindopril, Paroxetine…) – but query whether it will survive review in the Competition Appeal Tribunal. 

  4. And finally, compliance with the price reduction remedy may not be straightforward – the companies will have to calculate what measure of reduction is sufficient to bring the infringement to an end.  Pfizer has already been subject to a procedural fine for failure to comply with a procedural order; if the companies miscalculate their price reductions, further fines could follow – in addition to the now inevitable follow-on claims from, at least, the Department of Health.

Excessive pricing: the Italian version

Pricing issues in the pharmaceutical industry have continued to keep competition authorities busy, this time with the Italian Market Competition Authority (AGCM) fining the multinational South African pharmaceutical company Aspen near €5.2 million on 14 October 2016, following its finding that Aspen abused its dominance to artificially inflate the price of four of its cancer drugs.

In its press release/statement, the AGCM stated that Aspen, which had acquired the rights to the four essential drugs (Leukeran (chlorambucil), Alkeran (melphalan), Purinethol (mercaptopurine) and Tioguanine (tioguanine)) from GlaxoSmithKline (GSK), had threatened to interrupt their supply to the Italian market in order to compel the Italian Medicines Agency to accept price increases for the drugs of between 300%-1,500% of the initial price. The drugs were described by the AGCM as “irreplaceable” and central to the treatment of blood cancers especially for children and elderly patients. In the relevant period Aspen was the only supplier of these drugs in the Italian market, which led to the finding that Aspen held a dominant position in the relevant national market and had unfairly increased the prices.  The AGCM noted in particular that there was no direct substitute for the drugs, the patents had been expired for years and no economic justification for the price increases could be established.

The antitrust authority applied a two-step test to determine whether the increase in pricing amounted to unfair pricing in contravention of Article 102. The AGCM first established that there was an excessive discrepancy between the manufacturing costs and the final prices of the products and secondly considered that the pricing was excessive and unfair, by reference to factors such as the change in prices and any economic basis for this change, any potential benefits for patients, and conversely any harm to the Italian National Health Service.

There is no easy method for competition authorities (or indeed companies) to determine what constitutes excessive pricing, due to the number of variables involved.  A justified price increase might be due to increased manufacturing costs or could be the reflection of a profitable market or a high-risk marketing strategy, among other factors.  Ultimately, the determination of when a price is excessive remains challenging, and – where pharmaceuticals are involved – may well vary from country to country.  As yet, the impact of excessive pricing on reference prices has not been examined.

Italy is not the only country to look at excessive pricing of off-patent drugs, however.  Another example from the UK (on which we have reported here and here) is the ongoing CMA investigation into the pricing of the anti-epilepsy drug Epanutin by Pfizer and Flynn Pharma (the latter having acquired the marketing rights of Epanutin by Pfizer in late 2012).   The CMA has recently updated its case file to push back the expected date of the conclusion of the investigation, to November 2016. The focus of the investigation is understood to be whether the pricing for phenytoin sodium capsules is excessive and unfair and thus constitutes an Article 102 and Chapter II abuse.

On the other side of the Atlantic, the antitrust authorities have considered similar issues with the 50-fold increase in the price of Turing Pharmaceuticals’ Daraprim and the more recent Mylan EpiPen controversy, caused by a six-fold price rise in the popular emergency allergy treatment.  In September 2016, Mylan became the subject of a congressional hearing on this subject. The allegations about increased pricing were followed by suggestions that Mylan had been misclassifying EpiPen as a generic, as opposed to as a branded product, in order to benefit from the lower rebate rate available (13%) than the equivalent for branded drugs (23%).  In this case, it was of significance that Mylan had a market share of around 90%, and the increase in pricing was accompanied by a direct increase in Mylan’s profits. The US FDA itself was criticised for not intervening more effectively in order to allow competing products to reach the market.

The complex topic of excessive pricing continues to be an issue in the EU more generally.  The announcement of the Aspen investigation has led to calls by public interest bodies such as the BEUC for the Commission to carry out EU-wide investigations into whether companies use similar tactics to increase pricing.  No doubt, as the case law develops, so will our understanding of when a company’s pricing tactics risk being in breach of Article 102.