UK: A Greek Drama? Parallel Trade: Recent Developments In The Pharmaceutical Industry

Recent events in the pharmaceutical industry have shown that, owing to state intervention leaving differing prices across the European market, the competition rules may be applied less stringently to conduct that interferes with parallel trade of pharmaceuticals than for other products. GlaxoSmithKline ("GSK") has been at the forefront of recent developments with its commercial response to parallel traders in Greece and in Spain.

GSK supplies medicinal products to a wholesaler, Syfait. In 2000, GSK discontinued supplies of three products alleging that Syfait’s export policy was leading to shortages on the Greek market. GSK reinstated supplies to Syfait in 2001, but still refused to meet Syfait’s orders in full. Following complaints from Syfait the Hellenic Competition Commission (HCC) commenced an investigation under Article 82.

In 2003, the HCC referred various questions to the ECJ for a preliminary ruling essentially asking whether all refusals to supply which are intended to interfere with parallel trade are automatically, or "per se", on abuse. Advocate General Jacobs gave his Opinion in 2004 arguing that refusal by a dominant pharmaceutical company to meet all orders does not automatically constitute an abuse of a dominant position contrary to Article 82. However, the ECJ declined to rule, holding that the HCC was not a "Court" under Article 234 EC and that the reference was therefore inadmissible.

In the absence of a formal ruling from the ECJ, the HCC followed the Advocate General’s guidance and held that a refusal to supply is not necessarily always abusive. The HCC found that GSK had infringed Article 82 only during the short period it had discontinued supplies; the mere restriction of supplies, or limitation of quantities supplied, did not amount to an abuse by GSK of its dominant position.

Despite the Advocate General’s opinion and the decision of the HCC, the legal position remained unclear. Many in the industry felt that only a ruling from the ECJ would give sufficient certainty for undertakings to implement commercial strategies securely. Following a recent series of references from the Greek Court, that certainty may eventually be forthcoming.

The recent questions referred by the Greek court are the same as those introduced by the HCC in 2003. The ECJ will rule substantively on the issues this time as the reference has been made by a national court, as required by the EC Treaty.

The ECJ’s judgment should clarify the application of Article 82 in circumstances where dominant undertakings restrict distribution to prevent parallel imports. It will consider whether Community competition law is to be applied in the same way to markets distorted by state intervention as to markets that function competitively. It will also consider whether an approach balancing interests is appropriate and, if so, which interests are to be "balanced" and how. The ECJ’s guidance will be of crucial importance to the pharmaceutical sector in particular.

GSK’s Spanish distribution practices are also in the limelight for similar reasons. In May 2001, the Commission adopted a decision finding that GSK’s Spanish subsidiary had infringed Article 81(1) of the EC Treaty by entering into an agreement with Spanish wholesalers whereby GSK charged lower prices for products to be sold to pharmacies and hospitals in Spain, than for products destined for export to other Member States. The Commission also held that GSK’s agreement did not satisfy the criteria for exemption under Article 81(3).

In September 2006, the Court of First Instance partially annulled the Commission’s decision. It held that the Commission was wrong to decide that the object of the pricing system was to restrict competition. However, it upheld the decision that the dual pricing arrangement did, in fact, have a restrictive effect and was, therefore, in breach of Article 81(1). The CFI also held that the Commission had failed adequately to examine the availability of an exemption for GSM under Article 81(3). Inevitably, neither the Commission nor GSK was satisfied with the outcome and each has lodged an appeal with the ECJ.

The ECJ’s findings in these two cases could have wide ranging implications for application of the competition rules in the pharmaceutical sector. They could finally provide some legal certainty for pharmaceutical companies when designing and implementing their distribution practices.