What is Parallel Trade and How Does it Affect Pharma?
We’ve heard a lot about the single market recently. Following 24 June, it’s now a commonly known fact, and not just the preserve of EU lawyers, that the creation and maintenance of the EU single market is central to the EU project – and that applies in the field of competition law as well as everything else. As Thomas Kramler from DG Comp recently put it: “The priorities of EU competition policy cannot be decoupled from the broader EU policy goals such as the establishment of an internal market (see Protocol 27 to the TFEU).” To put it a bit more snappily, the EU single market means that there should be no unnecessary barriers to products, including pharmaceuticals, being traded freely between EU/EEA Member States. For governments, this means that they must not put in place tariff barriers to trade (e.g. custom duties) or non-tariff barriers to trade (e.g. unnecessary regulatory requirements). For companies, this means that they should not create barriers to parallel trade between EU countries whether through the agreements they conclude or, for dominant companies, by their unilateral conduct.
What is parallel trade?
Parallel trade is the cross-border sale of goods within the EU by traders outside of the manufacturer’s distribution system, without the manufacturer’s consent. Parallel traders generate profits through buying goods in one EU Member State at a relatively low price and subsequently reselling them in another Member State where the price is higher. In the case of pharmaceuticals, such arbitrage is incentivised by the considerable variations in drug prices between EU/EEA Member States because of government priorities or regulation.
The EU Commission’s policy position is that parallel imports increase price competition, and that this in turn increases consumer welfare as the import of goods from a country with lower prices forces sellers in the country of destination to reduce prices. The Commission’s overall approach is based on two principles (Competition Policy Newsletter 1, 2007):
- The single market in pharmaceuticals requires the unhindered free movement of products – private companies cannot erect barriers to undermine this without distorting intra-brand competition.
- The efficiency claims defence advanced by the research based pharmaceutical industry is unsubstantiated – i.e. there is no evidence that partitioning the common market would spur on global investment in inter-brand competition.
The Commission has consistently found pharmaceutical companies to have infringed competition law by preventing parallel trade. The Court of Justice of the EU (“CJEU”) has on occasion taken a more nuanced approach, which seeks to balance the competing interests of the pharmaceutical sector and national health systems. However, it is notable that neither the Court nor the Commission has strayed far from the guiding principle of maintaining the single market when applying the competition rules, including in the pharmaceutical sector. This has evolved in the case law, under both Article 101 and 102 of the EU Treaty.
Article 101(1) TFEU
Restriction of resales
Naked export bans in agreements are likely to be problematic. In Sandoz v Commission (1990) the CJEU considered that the sending of invoices by a supplier bearing the words “export prohibited” infringed the competition rules. An interesting point about this case is that the Commission and Court both held that simply sending invoices marked with those words gave rise to an agreement which could be caught by the prohibition in Article 101, and was not unilateral abusive conduct, which is only prohibited if pursued by a dominant company. The Court held that Article 101 can be engaged when conduct forms part of continuous business relations governed by a general agreement drawn up in advance, based on the consent by the supplier’s customers to the conduct of the supplier. That consent is demonstrated by renewed orders placed without protest on the same conditions.
Stock management programmes
Stock management programmes (“SMPs”) which are designed to ensure that the correct quantity of product is available to meet the needs of each individual market can reduce excess stock holding on a national level. In the context of pharmaceuticals, Article 81 of Directive 2001.83/EC imposes a requirement on market participants to maintain sufficient supplies for their own national market. Where the quantity of stock reaching the market is controlled by the supplier at a level which is sufficient to satisfy national market demand (usually with a significant margin for error), the obligations under Article 81 prevent those in the market from simply dispatching all the products they are allocated into parallel trade channels.
The competition implications of SMPs were assessed in the General Court’s judgment in Bayer (Adalat) (2000), which was subsequently upheld by the CJEU. This case concerned the parallel export of Bayer’s ‘Adalat’ product by French and Spanish wholesalers to the UK. Bayer implemented an SMP under which French and Spanish wholesalers would be supplied only with a quantity of Adalat calculated on the basis of orders made in the preceding year. The Commission found that Bayer had entered into an agreement with the wholesalers to prevent exports to the UK, thereby infringing Article 101 TFEU.
The General Court overturned the Commission decision, holding that there was no agreement on which Article 101 could ‘bite’, on the basis that there was no genuine ‘concurrence of wills’ between the parties because, rather than agreeing with Bayer, the distributors had objected to Bayer’s policy of reducing the quantity of drugs available for parallel trade: “For an agreement within the meaning of Article 101(1) of the Treaty to be capable of being regarded as having been concluded by tacit acceptance, it is necessary that the manifestation of the wish of one of the contracting parties to achieve an anti-competitive goal constitute an invitation to the other party, whether express or implied, to fulfil that goal jointly, and that applies all the more where, as in this case, such an agreement is not at first sight in the interests of the other party, namely the wholesalers” (paragraph 25).
Interestingly, the Commission’s 2010 Vertical Restraints Guidelines appear to take a more expansive view of the meaning of ‘unilateral conduct’ than the Court in Bayer/Adalat. The Guidelines say that where there is no explicit concurrence of wills, the Commission may still show that the unilateral policy of one party received the acquiescence of the other party. Unlike the Court in Bayer/Adalat, the Guidelines do not mention any need for an invitation from one party to the other party or for a joint goal between the parties.
Dual pricing
Pharmaceutical companies have also implemented dual pricing systems which stipulate that distributors must sell products in a particular Member State at the local list price but that a supplement will be payable for products sold elsewhere in the EU/EEA.
Dual pricing strategies have been the subject of a long-running CJEU case concerning GlaxoSmithKline’s (“GSK”) Spanish distribution model. GSK originally notified its dual pricing model to the Commission for approval (available before Regulation 1/2003 entered into force). The Commission’s initial Decision was that the agreement amounted to an export ban and so restricted competition by object.
This assessment was overturned by the General Court, but was reinstated by the CJEU in GSK v Commission (Spain 2009). The CJEU held that “an agreement between producer and distributor which might tend to restore the national divisions in trade between Member States might be such as to frustrate the Treaty’s objective of achieving the integration of national markets through the establishment of a single market. Thus […], the Court has held agreements aimed at partitioning national markets according to national borders or making the interpenetration of national markets more difficult, in particular those aimed at preventing or restricting parallel exports, to be agreements whose object is to restrict competition within the meaning of that article of the Treaty”. However, the CJEU agreed with the General Court, that the Commission had not properly considered whether the agreement could have benefited from an individual exemption under Article 101(3) TFEU, even though the CJEU had found the agreement was a restriction by object. In particular, the CJEU noted that that the Commission failed adequately to assess whether dual pricing could have benefited research and development. GSK withdrew its notification and an outstanding complaint was rejected in 2014. The decision rejecting the complaint has been appealed, but not yet decided.
Article 102 TFEU
When can a dominant company refuse to supply parallel traders?
The Lelos v GSK (Greece 2008) case provides scope for dominant pharmaceutical companies to adopt SMPs or otherwise to refuse to supply in some circumstances, even where that has an impact on parallel trade. In this case, on a reference from the Greek Court, the CJEU held that even if GSK were dominant it might be permissible for it to refuse to meet orders in certain circumstances. The Court suggested that manufacturers may refuse orders from wholesalers that are ‘out of the ordinary’ and threaten its own legitimate commercial interest and are essentially destined for parallel export, “Although a pharmaceuticals company in a dominant position, in a Member State where prices are relatively low, cannot be allowed to cease to honour the ordinary orders of an existing customer for the sole reason that that customer, in addition to supplying the market in that Member State, exports part of the quantities ordered to other Member States with higher prices, it is none the less permissible for that company to counter in a reasonable and proportionate way the threat to its own commercial interests potentially posed by the activities of an undertaking which wishes to be supplied in the first Member State with significant quantities of products that are essentially destined for parallel export.” This suggests that manufacturers can refuse orders from distributors that appear disproportionate to previous business dealings between them or to the projected requirements for the relevant national market.
As can be seen from the above, various methods have been developed by pharmaceutical companies to mitigate the effects of parallel trade. Insofar as these are in conflict with the single-market object of the EU/EEA, competition law has tended to take a strict approach and some of these approaches have been found to be unlawful. Nevertheless, other strategies may work effectively, if appropriately implemented and have tended to receive a more sympathetic hearing from the Court than the Commission.
Earlier this month the CJEU again considered the question of unjustified restrictions on the free movement of pharmaceuticals within the EU single market (Deutsche Parkinson v ZBW, Case C- 148/15). This time a government regulation was under scrutiny. The context was a German regulation that set a system of prices for the sales of medicines by pharmacies. A bonus system for purchasing Parkinson’s medication from pharmacies based outside of Germany was challenged on the basis that it infringed the German regulation. The issue before the CJEU was whether the price legislation itself was compatible with EU law. The CJEU found that the legislation affected the pharmacies based outside of Germany (i.e. in other EU Member States) more than the pharmacies within the German national territory, because lack of price competitiveness might function as a market barrier to these foreign pharmacies. The Court accordingly held that the German price control regulation violated the principle of the EU single market – in technical terms, it was a measure having equivalent effect to a quantitative restriction on imports between Member States (within the meaning of Article 34 TFEU). Once again, the court noted that the free movement of goods is a fundamental principle and that quantitative restrictions on imports between Member States and equivalent measures are incompatible with that principle.
It remains to be seen what impact Brexit will have on parallel trade into the UK. If the UK remains inside the single market pharmaceutical companies will almost certainly be unable to limit parallel trade. However, if the UK ultimately withdraws from the single market this may provide greater scope for limiting parallel trade from EU/EEA countries.
