Case study facts (fiction): Let's suppose that Offensive v Defensive enter an agreement to sell pharmaceutical products and breach competition rules as per TFEU 101 and 102... How does one go about answering such a question?
1. Infringement of Article 101 (1) TFEU
Case study solution:
Initially, it is worth mentioning Case C‑307/18, which refers to pharmaceutical products, competition and barriers to the entry on the market of generic medicines arising from settlement agreements. The Court was asked, among other things, if there is a restriction of competition “by object” for the purpose of Article 101(1) [TFEU], when the parties make an agreement to settle that litigation whereby:
(a) the generic company agrees not to enter the market with its generic product and not to continue its challenge to the patent for the duration of the agreement (which is no longer than the unexpired period of the patent), and (b) the patent holder agrees to make a transfer of value to the generic company in an amount substantially greater than the avoided litigation costs (including management time and disruption) and which does not constitute payment for any goods or services supplied to the patent holder.
The Court remembered that the concept of restriction of competition ‘by object’ must be interpreted strictly, but it is present when there is a sufficient degree of harm to competition. In addition, the Court held that “such a characterisation as a ‘restriction by object’ must be adopted when it is plain from the analysis of the settlement agreement concerned that the transfers of value provided for by it cannot have any explanation other than the commercial interest of both the holder of the patent and the party allegedly infringing the patent not to engage in competition on the merits.”
Concerning the transfer of value, the Court explains:
In that regard, taking into account the uncertainty as to the outcome of those proceedings, there is no requirement that the transfers of value should necessarily be greater than the profits which the manufacturer of generic medicines would have made if it had been successful in the patent proceedings. All that matters is that those transfers of value are shown to be sufficiently beneficial to encourage the manufacturer of generic medicines to refrain from entering the market concerned and not to compete on the merits with the manufacturer of originator medicines concerned. If such is the case, the agreement concerned must, in principle, be characterised as a ‘restriction by object’, within the meaning of Article 101(1) TFEU.
The case study presented has a similar situation. Offensive and Defensive made an agreement due to patent issues, which had the commercial interest as principal object. Therefore, taking into account Case C‑307/18 decision, it configures an infringement of the TFEU article 101, §1 (b), because postponing the production of the medicine eliminates the competition between the undertakings temporarily. This can have, thus, as a direct effect, the rise of the price in the relevant market during this period. Moreover, the mentioned agreement cannot be considered irrelevant according to the Minimis notice once the aggregate market share held by the parties exceed 10% of the relevant market, since the companies together represent 60% of the market.
Infringement of Article 102 TFEU
Introduction
Article 102 TFEU regulates unilateral conduct. Due to the fact that Offensive has a larger share of the pharmaceutical market (40% > 20%), that is the company that will be evaluated. It is assumed that the market share refers to a percentage of the market share on the relevant market because otherwise, this evaluation would be very complex.
Chalmers et al. clarified that “When the Commission seeks to establish an infringement of Article 102 TFEU, it must show the following: (i) that an undertaking is dominant in a given market; (ii) that it has abused its dominant position; (iii) that the abuse has an effect on trade between Member States; and (iv) the absence of any objective justification for the abuse.”
Undertaking
The first criteria relevant for an evaluation of a potential infringement of competition law under Article 102 TFEU is to declare whether the subject is an undertaking or not. The CJEU clarified in Firma Ambulanz Glöckner v. Landkreis Südwestpfalz that “[T]he concept of an undertaking, in the context of competition law, covers any entity engaged in an economic activity, regardless of the legal status of the entity or the way in which it is financed. (Joined Cases C-180/98 to C-184/98 Pavlov and Others [2000] ECR I-6451, paragraph 74). Any activity consisting in offering goods and services on a given market is an economic activity (Pavlov and Others, paragraph 75).” Offensive offers goods (medicine) on a given market and is, therefore, an entity engaged in an economic activity and is, therefore, an undertaking.
Dominant position – The relevant market
The next step is to evaluate whether Offensive has a dominant position on the market or not. The CJEU held that “The dominant position referred to in [Article 102 TFEU] relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.” The steps taken when evaluating if an undertaking has a dominant position is to: (i) assess the undertaking's market share on the relevant market, and (ii) evaluate other factors that affect the undertaking's position concerning its consumers, customers and competitors.
According to cases United Brand v Commission and British Airways v Commission it is, under certain circumstances, sufficient for an undertaking to have 40-45% of the market shares of the relevant market and still hold a dominant position on the market. Offensive has 40% of the market shares and is, therefore, on the brink of being able to have a dominant position.
The second step of evaluating if Offensive has a dominant position is to consider other relevant factors, for example: “[1] the relationship between the market shares of the undertaking concerned and of its competitors, especially those of the next largest, [2] the technological lead of an undertaking over its competitors, [3] the existence of a highly developed sales network and [4] the absence of potential competition” These factors will be evaluated in regard to Offensive from one to four: (1) The market shares of the competitors to the undertaking under evaluation is of relevance when determining if the undertaking has a dominant position. In the assignment given we know only of two companies on the market, for the purpose of reaching a conclusion they will be considered having a majority of the market shares on the relevant market. Defensive also has a large market share (20%) and does, therefore, most likely, impose competition on the market. (2) However, it seems like Offensive has an advantage on the market in regard to R&D, considering that it supposedly has the IPRs for the substance in the medicine for the pandemic. (3) Unfortunately, there is no known information about the sales network, therefore, this factor cannot be evaluated. (4) The nature of the pharmaceutical sector imposes the following barriers of entry: achieving Food and Drug Administration (FDA) approval, high R&D costs and intellectual property challenges. Therefore, the extent of potential competition is probably very limited.
In conclusion, an overview of above-mentioned arguments proves that Offensive potentially has a dominant position. Mostly because of the arguments regarding R&D/IPR, Offensive’s fairly large market share on the relevant market and the absence of potential competition. An evaluation of whether Offensive has a dominant position or not is consequently conducted.
Abuse
Assuming that Offensive has a dominant position, the next step is to evaluate whether Offensive has abused its dominant position or not. The question is, therefore, if entering the deal is an abuse. According to Article 102 TFEU: Abuse may, in particular, consist in: (a) directly or indirectly imposing unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers.
This could be the case of exclusionary abuse (inflict harm on competitors). Whether Article 102 TFEU should cover exclusionary abuses or not depends on if; (1) the undertaking uses exclusionary abuse to facilitate exploitation of dominance and to safeguard its dominant position, or; (2) the undertaking uses exclusionary abuse to eliminate or weaken competitors. Regarding the second criterium “there is no need to show likely consumer harm, nor indeed a need to show that the exclusionary tactic was or will be successful” However, this situation would probably not be considered being an abuse of dominant position due to the facts of the situation.
The effect of the deal could be the one of delaying competitors market entry. However, the opposite is true if Offensive, in fact, has the patent for the active substance in the medicine that Defensive has developed. The reason for this is that according to the deal Defensive is allowed to launch its medicine after only one year (instead of three). Meanwhile, Defensive will also enjoy the 100 million EUR from Offensive. It would be very interesting to hear how the CJEU would argue in this case, however, we do not think that this act is an abuse of a dominant position because the deal does not have a negative effect on consumer welfare, it might even have positive effects. The positive effects: General perspective - The medicine will reach the consumers faster; economic perspective – there will be competition on the market within one year instead of risking to postpone competition for three years.
This case differs from AstraZeneca v Commission because Offensive did not provide misleading information to extend the timeframe regarding protection of IPRs (what we know of). However, such an act would probably indicate an abuse.
Exceptions
Exception for Article 101 TFEU
Article 101(3) can be applied in individual cases or to categories of agreements and concerted practices through block exemption regulation.
The EU guidelines focus on individual cases and provide for each of the 4 conditions to satisfy Article 101(3) indications as to how they will be applied.
These 4 conditions are:
it must contribute to improving the production or distribution of goods or to promoting technical or economic progress;
consumers must receive a fair share of the resulting benefits;
the restrictions must be essential to achieving these objectives; and
the agreement must not give the parties any possibility of eliminating competition in respect of substantial elements of the products in question.
Article 101(3) acknowledges that some restrictive agreements may generate objective economic benefits that outweigh the negative effects of the restriction of competition, and exempts those agreements from these prohibitions.
Article 10, Council Regulation 1/2003: “Where the Community public interest relating to the application of Articles 81 and 82 of the Treaty so requires, the Commission, acting on its own initiative, may by decision find that Article 81 of the Treaty is not applicable to an agreement, a decision by an association of undertakings or a concerted practice, either because the conditions of Article 81(1) of the Treaty are not fulfilled, or because the conditions of Article 81(3) of the Treaty are satisfied. The Commission may likewise make such a finding with reference to Article 82 of the Treaty”.
INDIVIDUAL EXEMPTION
Decision of the Commission pursuant to Article 101(3) of the TFEU to exempt notified agreements between companies from the prohibition of Article 101(1) of the TFEU, on the basis of an individual assessment. In broad terms, restrictive agreements qualify for exemption if their benefits to general welfare (product improvement, technical or economic progress, benefits to consumer) outweigh their restrictive effects on competition.
The assessment for qualifying for an agreement under Article 101(3) TFEU consists of two parts:
The first step is to assess whether an agreement between undertakings that is capable of affecting trade between EU countries has an anti-competitive object or actual or potential anti-competitive effects. Article 101(3) TFEU becomes relevant only when an agreement between undertakings restricts competition within the meaning of Article 101(1) TFEU. In the case of non-restrictive agreements there is no need to examine any benefits resulting from the agreement.
The second step, which becomes relevant only when an agreement is found to be restrictive of competition, is to determine the pro-competitive benefits produced by that agreement and to assess whether these pro-competitive effects outweigh the anti-competitive effects.
The balancing of anti-competitive and pro-competitive effects is conducted exclusively within the framework laid down by Article 101(3) TFEU. The present guidelines examine the four conditions of Article 101(3) TFEU: (i) efficiency gains; (ii) fair share for consumers; (iii) indispensability of the restrictions; (iv) no elimination of competition. Given that these four conditions are cumulative, it is unnecessary to examine any remaining conditions once it is found that one of them is not fulfilled. In individual cases it may therefore be appropriate to consider the four conditions in a different order. It is considered appropriate to invert the order of the second and the third condition and thus deal with the issue of indispensability before the issue of pass-on to consumers. The analysis of pass-on requires a balancing of the negative and positive effects of an agreement on consumers. It should not include the effects of any restrictions that already fail the indispensability test and are, for that reason, prohibited by Article 101 TFEU.
Exception for Article 102 TFEU
In general, the regulation of exception for provision of the dominance position based on article 102 TFEU is not specific and clear if comparing with the measures of anti-competition action in Article 101 TFEU that has recognized more robust criteria of exceptions in the third paragraph of the provision. Nevertheless, according to cases and manual guidance, several approaches have been used as objective justifications when the undertaking has a dominant position and potentially conducts abuse of action. All of these approaches should use a proportionality test to consider between the ultimate goal of the dominance provision measure and the valid justifications. This part will use the precedent of justifications based on a proportionality approach to scrutinize the case between Offensive v Defensive.
Firstly, the public interest justification can be used as a justification of action related to Article 102 TEFU. In the Bromer case, the corporation could use environmental justification to refuse supply a necessary input because it could make high pollution when the supply was continuing. In the scope of public interest, public health issues are clearly part of public interest, particularly from the point of view of the European Union. In the case Offensive v Defensive, the Offensive could escape from liability if the company has a capability to show the public of interest reason when pay some of the money to impede the release of the new drugs, for example comparing between probability between one year in settlement dispute scenario and three years if both companies follow national court scenario. However, this probability is minuscule because the data from the case study show that the pandemic condition is still happening, and in this condition, more option of drugs could give a greater chance of success when handling the pandemic from a public health perspective. The delay of more option for one year could make a severe impact on society.
Secondly, business efficiency that gives benefit to the consumer as a justification. In the Intel Corporation Inc. v. Commission, the case prevailed ‘efficiency which also benefit the consumer’ as a justification for the corporation. The prevention of consumer harm also recognized by Guidance of European Commission through putting the case that gives a serious impact on the consumer as a priority when handling dominant position case related to abusive exclusionary conduct. The guidance is strengthening consumer protection rather than protecting competition. For this reason, the company could challenge the commission for consumer harm evidences while the commissioner has wide discretionary when investigating the cases. The settlement between Offensive v Defensive gives high probability to harm consumer when the enforcers enforce the law because the Offensive could intervene the market of Defensive that likely impacting consumer at least for a year by limiting the option and price of drugs. Nevertheless, the Offensive could argue the settlement option is more efficient if compared with the risk of both companies if the litigation option is favourable due to at the end of settlement consumer will receive a greater benefit after one year rather than the potential loss of option at all or at less waiting for three years.
Finally, the protection of commercial interest is another argumentation to defend potential abuse of dominance position. Nevertheless, Advocate General Sir Francis Geoffrey Jacobs explained a limitation of this exception that should be reasonable and appropriate to protect its commercial interests and has no ultimate goal strengthening position. In the case study, the company could explain that Defensive was attacking their commercial interest through infringement of intellectual property and make a settlement as appropriate and reasonable action to protect the commercial interest of the Offensive. This argumentation has a problem because the evidence of the infringement should refer to decision from another court and the question is how to measure one year is appropriate and reasonable time, particularly in pandemic condition. Moreover, the strategy to impede research release new product of competitor through patent litigation scenario is not new in drugs industry, for example, in the case Boehringer Ingelheim GmbH.
The three justifications and proportional test have elaborated show that the Offensive has a little probability to use exceptions to avoid liability of abuse of dominance position.
Bibliography
Books
C, Damian, D, Gareth and M, Giorgioi, European Union law : text and materials (4th ed, Cambridge University Press 2019)
D, Chalmers, G. Davies and G, Monti, European Union Law (4th ed, Cambridge University Press 2019)
Journals
D, Niamh, ‘Public Interest and EU Competition Law’ (2020) 65 (2) The Antitrust Bulletin 256 <https://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=143194142&site=eds-live&scope=site> Accessed on 7 February 2021
S, Joseph, ‘Patent Application: Obstacle for Innovation and Abuse of Dominant Position under Article 102 TFEU?’ (2010) 1(3) Journal of European Competition Law & Practice 189 <https://search.ebscohost.com/login.aspx?direct=true&db=edo&AN=ejs21524100&site=eds-live&scope=site> Accessed on 7 February 2021
V, Tjarda van der, ‘Article 102 TFEU: How to Claim the Application of Objective Justifications in the Case of prima facie Dominance Abuses’ (2013) 4 (2) Journal of European Competition Law & Practice 121 <https://search.ebscohost.com/login.aspx?direct=true&db=edb&AN=86692488&site=eds-live&scope=site> Accessed on 7 February 2021
Regulations and Laws
Guidance on the Commission's Enforcement Priorities in Applying Article 82 of the EC Treaty To Abusive Exclusionary Conduct By Dominant Undertakings (2009) OJ C45/7
European Commission (2011), Communication from the Commission, Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, 2011/C 11/01, 14 January, 2011.
European Commission (2014) Communication from the Commission — Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) of the Treaty on the Functioning of the European Union (De Minimis Notice), 2014/C 291/01, 18 August, 2014.
European Commission (1999), White Paper on modernisation of the rules implementing Articles
81 and 82 of the EC Treaty (formerly Articles 85 and 86 of the EC Treaty) 28 April, 1999
Internet sources
Investopedia, What Are Barriers to Entry for Pharma Companies?, Updated Feb 5, 2020, (Accessed on: 2020- 02-08) <https://www.investopedia.com/ask/answers/052215/what-are-major-barriers-entry-new-companies-drugs-sector.asp>
Cases
The Intel Corporation Inc. v. Commission, C-413/14 P, ECLI:EU:C:2017
Oscar Bronner GmbH & Co. KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG,Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG, Case C-7/97 EU: C:1998:569
Opinion of Advocate General Jacobs on Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. Glaxosmithkline AEVE Case C-53/03 ECLI:EU:C:2004:67
Generics and others v. UK Competition and Markets authority, Case C-307/18 EU:C:2020:52
United Brands v Commission, Case C- 27/76, ECLI:EU:C:1978:22
Hoffmann-La Roche & Co. AG v Commission, Case 85/76 ECLI:EU:C:1979:36
British Airways plc v Commission, Case T-219/99 ECLI:EU:T:2003:343
Firma Ambulanz Glöckner v Landkreis Südwestpfalz, Case C-475/99 ECLI:EU:C:2001:577
AstraZeneca v Commission, Case C-457/10 P ECLI:EU:C:2012:770
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