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Refusal to Supply and Abuse of Dominant Position in European Antitrust Law: an Analysis of the Case Law of the Court of Justice. von Dr. Irene Grassi, Avvocato, Kanzlei Derra, Meyer & Partner, Bologna The principle of free competition lies at the heart of the Community's economic order 1. The institution of a system of undistorted competition has been one of the main aims of the Treaties since the foundation of the Community and, in the following decades, has developed into a very sophisticated system. The single market, following the integration of national markets, is intended to be not only free, but also fair and equitable for all participants. For this reason it must be governed by rules that prevent market forces dominating and that preserve effective freedom 2. In the past few years, the attention of antitrust authorities and academics was mainly focused on Article 81 EC, concerning the agreements between undertakings, and on merger control. However, in more recent times the attention of the commentators and the Commission itself has returned to Article 82 EC and to anti-competitive abuses of dominant positions 3. Between the business practises which are considered as abusive, some of the most interesting developments concern refusal to deal, that is refusal by a dominant subject to meet, in full or in part, orders placed with it by its customers. Refusal to deal is generally considered abusive, as it limits the customers’ activity and prevents access of other competitors to the market of a certain product or service. In this field the boundry between an illegal restriction and a practice which is the legitimate expression of the commercial policy by the dominant competitor is however particularly difficult to define. 1 GREEN, HARTLEY, USHER, The legal foundations of the Single European Market, Oxford, 2 On EC Competition Law in general see BELLAMY, CHILD, European Community Law of Competition, London 2001; WHISH, Competition Law, London 2003. 3 EILMANSBERGER, How to Distinguish Good from Bad Competition Under Article 82 EC: In Search of Clearer and More Coherent Standards for Anti-Competitive Abuses, [2005] CMLR, 129; SHER, The Last of the Steam-Powered Trains: Modernizing Article 82, [2004] ECLR, 243. In a case recently argued before the European Court of Justice 4, a pharmaceutical industry refused to supply products in order to prevent parallel trade on the part of the wholesalers 5. Unfortunately for the present discussion, the Court concluded it had no jurisdiction in the case and therefore did not rule on the merits. The questions posed by the referring authority remain therefore open. This paper reviews the case law of the Court concerning refusal to deal, as well as the specific conditions of competition applicable in the highly regulated pharmaceutical market. It subsequently examines the opinion of the Advocate General Jacobs in the Syfait case, exploring possible alternative solutions to the question. 2. Refusal to Supply as an Abuse of a Dominant Position The Court of Justice first outlined an obligation of undertakings that are in a dominant position in the sense of Article 82 to meet in full the orders of their customers in the case ICI and Commercial Solvents 6. The case originated from a refusal of a dominant producer to supply one of its customers with a raw material for the manufacture of ethambutol, the producer having decided to develop its own specialities based on that substance and therefore to enter in competition with its former customers. The refusal to supply had therefore the aim to facilitate its own access to the market for the derivatives. The Court ruled that ‘an undertaking which has a dominant position in the market of raw materials and which, with the object of reserving such raw material for manufacturing its own derivates, refuses to supply a customer, which is itself a manufacturer of these derivatives, and therefore risks eliminating all competition on the part of this customer, is abusing its dominant position’. The above principle was confirmed and developed some years later, in United Brands 7, a case concerning the refusal of the Chiquita banana producer to supply a customer that had participated in an advertising campaign for one of Chiquita’s competitors. The Court declared that ‘an undertaking in a dominant position for the purpose of marketing a product – which cashes in on the reputation of a brand name known to and valued by the consumers – cannot stop supplying a long standing customer who 4 Judgment of 31 May 2005, case C-53/03, Syfait and Others v. GSK. 5 The case generated considerable expectations, as in a previous judgment on 6 January 2004, case C-2/01, Bayer, [2004] ECR I-23, the Court had considered export bans intended to prevent parallel trade not to constitute an agreement under Article 81. See BROWN, Bayer v. Commission: the ECJ Agrees, [2004] ECLR 386. 6 Judgment of 6 March 1974, joined cases 6/73 and 7/73 [1974] ECR 223. A wide selection of EC antitrust cases can be found in Italian in MANZINI, Antitrust applicato – Raccolta sistematica della giurisprudenza comunitaria, Torino, Giappichelli 2004. 7 Judgement of 14 February 1978, Case 27/76 [1978] ECR 207. abides by regular commercial practice, if the orders placed by that customer are in no way out of the ordinary’. However, the prohibition is not absolute: a refusal to supply may be justified by the right of the dominant undertaking ‘to take such reasonable steps as it deems appropriate to protect its [commercial] interests’, although ‘such behaviour cannot be countenanced if its actual purpose is to strengthen this dominant position and abuse it’. In other words, the refusal to supply may be legitimate as a commercial response to competitors' attacks, but it must be proportionate to the threat, taking into account the economic strength of the undertakings confronting each other. On the fact of United Brands, the Court found that the decision to refuse to supply was disproportionate, being in excess of what might reasonably be contemplated as a sanction for the conduct of the customer and, further, that the conduct adopted by United Brands was intended to have a serious effect on competition by discouraging small and medium sized firms from giving preference to competitors' goods. Application of the proportionality test yielded a different result in the BP case 8, where the Court judged as justified the decision of BP, in a period of fuel shortage, not to supply a customer (or to apply to him greater rates of reduction than to other customers), due to the fact that it was only an occasional customer when the crisis began, having ceased to have a long-term contract with BP in the year prior to the oil crisis. It was therefore considered as justified to apply different rates of reduction to occasional customers than to regular ones. It is interesting to note that the Commission 9 had considered the conduct of BP abusive, evaluating habitual customers under different criteria. The same principle does not apply however if the dominant undertaking discriminates among the customers, preferring "loyal" customers to those who buy also from other suppliers. The Court of First Instance 10 judged that whilst it is open to an undertaking in a dominant position, in times of shortage, to lay down criteria for according priority in meeting orders, those criteria must be objective, must not be discriminatory in any way and must be objectively justified, in accordance with the rules governing fair competition, between economic operators. That requirement is not met by a criterion based on a distinction between customers who obtain their supplies only from the undertaking holding the dominant position and those who also market products bought from certain of its competitors. The behaviour was deemed as anti-competitive by reason of the discriminatory purpose that it pursues and the exclusionary effect that may result from it. 8 Judgement of 29 June 1978, Benzine en Petroleum and others v. Commission, Case 77/77 9 Decision 77/327/EEC (OJ 1977, L 1/17). 10 Judgment of the Court of First Instance of 1 April 1993, case T-65/89, BPB Industries and Bitish Gypsum v. Commission, [1993] ECR II-389. A further confirmation of the above principles comes from the Telemarketing case 11, concerning a Belgian television broadcaster also carrying out an ancillary activity of telephone marketing. In order to protect its position in the latter market, the dominant undertaking refused to sell television time to competitors in the telephone marketing and refused to sell time to advertisers for advertisements which involved an invitation to make a telephone call unless the telephone number used was that of its own telephone marketing operation. Consistent with the former case-law, the Court ruled that an abuse of a dominant ‘where, without any objective necessity, an undertaking holding a dominant position on a particular market reserves to itself an ancillary activity which might be carried out by another undertaking as part of its activities on a neighbouring but separate market, with the possibility of eliminating all competition from such undertaking’. An interesting development of the case law on refusal to supply concerns the exercise of intellectual property rights. In its judgment in the Volvo case 12, the Court examined a refusal, on the part of the Volvo car manufacturer, to grant licences to produce replacement body panels. The Court ruling was that the right of a proprietor of a protected design to prevent third parties from manufacturing and selling or importing, without its consent, products incorporating the design constitutes the very subject-matter of his exclusive right and therefore a refusal to grant a licence cannot in itself constitute an abuse of a dominant position. However, the exercise of an exclusive right by the proprietor of a registered design in respect of car body panels ‘may be prohibited under Article 86 if it involves, on the part of an undertaking holding a dominant position, certain abusive conduct such as the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation’. The same approach was followed in Magill, a case concerning the marketing of weekly television guides in Ireland. At the material time, no comprehensive television guide was available on the market in Ireland and each television station published a guide covering exclusively its own programmes, claiming copyright protection for its own weekly programme listings in order to prevent their reproduction by third parties. Main television broadcasters provided their programme schedules with a licence free of charge to newspapers, only allowing daily publication and setting conditions relating to the format. When Magill TV Guide Ltd attempted to publish a comprehensive weekly television guide, the television broadcasters obtained an injunction prohibiting to do 11 Judgement 3 October 1985, CBEM v. CLT and IPB, case 311/4, [1985] ECR 3261. 12 Judgement of 5 October 1988, AB Volvo v. Erik Veng (UK) Ltd., case 238/87, [1988] ECR so. Following to a complaint of Magill, the Commission 13 found that there had been a breach of Article 86 and ordered the TV broadcasters to supply third parties on request and on a non-discriminatory basis with their individual programme listings and to permit reproduction of those listings by such parties, asking "reasonable loyalties" for granting reproduction licenses. Following Volvo, the Court14 ruled that ‘refusal to grant a licence, even if it is the act of an undertaking holding a dominant position, cannot in itself constitute abuse of a dominant position’ but at the same time ‘the exercise of an exclusive right by a proprietor may, in exceptional circumstances, involve abusive conduct’. Moreover, upholding the judgment of the Court of First Instance 15, the Court found that the conduct of Irish TV broadcasters was abusive taking into account the following three issues: 1) the conduct of the broadcasters prevented the development of a new product, a comprehensive weekly guide to television programmes, which the companies concerned did not offer and for which there is a potential consumer demand; 2) there was no justification for the refusal; 3) the broadcasters reserved to themselves the secondary market of weekly television guides by their conduct, namely excluding all competition from the market by denying access to the basic information necessary for the compilation of such a guide. It is possible therefore to extrapolate some principles that the Court followed when dealing with the above cases of refusal to supply. The starting point is that undertakings which have a dominant position in the market are not, for this reason alone, obliged to supply all customers and to meet in full the orders which are submitted to them. In other words, refusal to supply is not per se an abuse of a dominant position. A refusal to supply may be the legitimate expression of the commercial policy of the dominant undertaking: however this is only the case when the refusal is a necessary and proportionate measure to protect a legitimate interest and has therefore an objective justification. Finally, refusal to supply will not be tolerated and is not justified when its purpose and effect is to eliminate competition in a secondary market, to prevent or make impossible the development of a new product or otherwise to strengthen the dominant position of the undertaking concerned. 13 Decision 89/205/EEC of 21 December 1988, OJ 1989 L 78/43. 14 Judgment of 6 April 1995, RTE and ITP v. Commission, joined cases C-241/91 P and C-242/91 15 Judgments of 10 July 1991, cases T-69/89, [1991] ECR II-485 and T-76/89, [1991] ECR II- 3. The Essential Facilities Doctrine and the Bronner and IMS cases. When discussing of refusal to supply, the ‘essential facilities’ doctrine is often referred to. The essential facilities doctrine originated in United States antitrust law 16 and has been construed in many different ways. In broad terms, it specifies when the owner of an ‘essential’ or ‘bottleneck’ facility is required to provide access to that facility at a ‘reasonable’ price. Four elements are considered necessary 17 to establish liability under the essential Control of the essential facility by a monopolist; A competitor's inability practically or reasonably to duplicate the essential The denial to use of the facility of a competitor; The feasibility of providing the facility. Examples of essential facilities in US antitrust law have historically included: railway bridges into the city of St. Louis, a nationwide communications network, a local electricity transmission network, a sports stadium. Although essential facilities may arise in purely private contexts, they are more common in contexts where the owner/controller of the essential facility is subject to the economic regulation or is an emanation of the State. This often generates a conflict between economic regulation and competition laws. In European antitrust law, the first published Commission decision openly to refer to the doctrine is Sea Containers v. Stena Sealink 18. The Commission ruled that an undertaking that occupies a dominant position in the provision of an essential facility and that itself uses that facility (i.e. a facility of infrastructure, without access to which competitor cannot provide services to their customers), and which refuses other companies access to that facility without objective justification or grants access to competitors only on terms less favourable than those which it gives to its own services, infringes Article 86 if the other conditions of that Article are met. In the Magill case, examined above, the Commission maintained that RTE and ITP owned, through their exclusive right to use their copyright material, an essential 16 VAN SICLEN, The Essential Faicilities Concept, OECD/GD(96)113, Paris 1996; WERDEN, The law and economics of the essential facility doctrine, Saint Louis University Law Journal, 1987, Vol. 32, 433. 17 The leading US essential facilities case is MCI Communication Corp. v. AT&T (708 F.2d 1081, 1132 (7th Cir.), cert. denied, 464 U.S. 891 (1983)). 18 Case IV/34.689 OJ 1994 L15/8 - Markets for port services and passenger ferry services; see also case IV/34.801 FAG Flughafen Frankfurt/Main AG, OJ 1998 L 72/30 - Separate markets for airport facilities for the landing/take-off of aircraft and the provision of ramp-handling services. See EILMANSBERGER, How to Distiguish Good from Bad Competition, cit. supra note 3, 139 note 49. facility, being the only sources of the basic information on programme scheduling indispensable for compiling weekly television guides 19. It was however in Bronner v. Mediaprint 20 that the doctrine was directly Oscar Bronner, an Austrian minor daily newspaper publisher, invoked the essential facilities doctrine in order to have access to the network of home delivery set up by Mediaprint, a competitor holding 46.8% of the Austrian daily newspaper market 21. Bronner argued that, in view of its small number of subscribers, it would be entirely unprofitable for them to organise their own home-delivery service and that postal delivery does not represent an equivalent alternative to home-delivery. On the other hand, Mediaprint contended that the establishment of its home-delivery service required a great administrative and financial investment, and that holding a dominant position does not oblige to subsidise competition by assisting competing companies. According to the Court, the refusal of Mediaprint to allow Bronner to have access to its home-delivery scheme did not constitute an abuse of a dominant position. The Court referred to Commercial Solvents, Telemarketing and Magill but put particular emphasis on the fact that the refusal should concern a service the supply of which is indispensable for carrying on the business in question. The Court ruled that, in order to rely successfully on the existence of an abuse, it would be necessary to show not only that the refusal of the service comprised in home delivery was likely to eliminate all competition in the daily newspaper market on the part of the person requesting the service and that such refusal was incapable of being objectively justified, but also that the service in itself was indispensable for the conduct of Bronner's business, for lack of any actual or potential substitute in existence for that home-delivery scheme. On the facts of that case, the Court found that a) other methods of distributing daily newspapers, such as by post and through sale in shops and at kiosks, while potentially less advantageous for the distribution of certain newspapers, existed and were used by some publishers and b) there were no technical, legal or even economic obstacles capable of making it impossible, or even unreasonably difficult, for any other publisher of daily newspapers to establish, alone or in cooperation with other publishers, its own nationwide home-delivery scheme and use it to distribute its own daily newspapers. 19 TEMPLE LANG, Anticompetitive Non-Prising Abuses Under European and National Antitrust Law, in International Antitrust Law & Polices, Fordham Corp. L. Inst., 2004, 235; AITMAN, JONES, Competition Law and copyright: Has the copyright owner lost the ability to control his copyright? [2004] EIPR 137. 20 Judgment of 26 November 1998, case C-7/97, [1998] ECR I-7791. 21 The reference for a preliminary ruling come from the Oberlandesgericht Wien, in its capacity as Kartellgericht. This is interesting to note in the light of the Syfait case (see para. 7), where the Court refused to rule on a preliminary ruling coming from the Greek Competition Authority, which was considered not fulfilling the requirements of independence necessary to be considered a 'court or tribunal' within the meaning of Article 234. The approach of the Court to the essential facilities doctrine is therefore particularly strict: according to Bronner, it requires impossibility, or an unreasonable difficulty, of the competitor to duplicate the essential facility.22 In the more recent IMS case 23 the Court was again faced with a refusal to licence. IMS, the world's leading company providing market research and information solutions to the pharmaceutical industry, provided in Germany a regional sales-data service based on a brick structure, entitled the "1860 brick structure". This structure was developed by IMS considering geographical areas, administrative units, population and other similar criteria and constituted the core feature of the regional sales-data service provided by IMS in Germany. It was then launched on the market and became, according to the Commission, a 'de facto' industry standard 24. When a competitor, Pharma Intranet Information (PII) tried to sell in Germany services based on copies of the 1860 brick structure, IMS brought copyright infringement proceedings before the German Courts. On a preliminary ruling, the Court referred to Magill and Bronner and ruled that the refusal of IMS was abusive if the following three conditions were fulfilled: a) the undertaking requesting the licence intends to offer a new products, and not only a duplicate of the goods or services already offered by IMS; b) the refusal is not objectively justified; c) the refusal is such as to eliminate competition on the market for the supply of data on sales of pharmaceutical products. In the Syfait case 25 the Court was faced with an alleged abuse of dominant position deriving from a refusal to supply aimed at preventing parallel imports. Syfait was and is an association of pharmacists established in Greece, whose main activity is the operation of a joint wholesale repository for pharmaceutical products. They purchase the products from various pharmaceutical companies and supply their members on the Greek territory. Syfait, as well as other associations and organizations of wholesalers of pharmaceutical products operating in Greece purchased among others from the Greek subsidiary of the pharmaceutical manufacturing company GlaxoSmithKline plc (GSK) and then distributed them on the Greek market but also abroad. 22 BERGMAN, The Bronner case: A turning point for the essential facilities doctrine? [2000] ECLR 59; see also DOHERTY, Just what are essential facilities? [2001] CMLR 397; SOTHERS, Refusal to supply as abuse of a dominant position: Essential facilities in the European Union, [2001] ECLR 256. 23 Judgment of 29 April 2004, IMS v. NDC, case C-418/01, [2004] ECR I-5039. See SOTHERS, IMS Health and its implications for compulsory licensing in Europe, [2004] EIPR 467. 24 Commission decision of 3 July 2001, case COMP D3/38.044 – NDC Health/IMS Health: Interim Measures, OJ 2002 L59/18, paragraph 180. 25 Judgment of 31 May 2005, case C-53/03, Syfait and Others v. GSK. GSK found out however that a large proportion of the supplies corresponding to the orders of Syfait and the other Greek wholesalers was re-exported to other Member States, especially to the United Kingdom, because of the much higher price of the same medicines in that country. Therefore, invoking shortages on the Greek market, which it attributed to re-exports by third parties, GSK stopped meeting the orders of the Greek wholesalers, stating that it would supply hospitals and pharmacies directly. It subsequently reinstated supplies to wholesalers, but still refused to meet their orders in full. Syfait and the other organizations involved introduced a complaint against GSK before the Greek Antitrust Authority (Epitropi Antagonismou), alleging that the pharmaceutical company had committed an abuse of a dominant position by refusing to meet their orders in full. This concerned in particular three medicines, Imigran, Lamictal and Serevent, which are classified as prescription medicines. Some time later, the GSK asked the Greek Antitrust Authority for a negative clearance in respect of its refusal to cover more than 125% of Greek demand. The Greek Antitrust Authority, with an interim measure, temporarily required GSK AEVE, the Greek distributor fully owned by the British manufacturer GSK plc, to meet in full the orders received from the wholesalers. GSK AEVE maintained, however, that it fulfilled the orders to the extent that it was supplied by GSK plc. The Greek Antitrust Authority concluded that GSK enjoyed a dominant position on the relevant market in Greece in respect of at least one of the three medicines at issue, Lamictal. Therefore, it decided to refer to the Court for a preliminary ruling concerning the existence of an abuse within the meaning of Article 82 EC. The questions posed by the Greek Authority may be summarized as follows: Whether or not a refusal of an undertaking holding a dominant position to supply the wholesalers in order to limit their export activity (and hereby parallel trade) constitutes per se an abuse according to Article 82 and whether the answer to that question is affected by the fact that the market of pharmaceutical products is governed to a large extent by State intervention; If the refusal to supply is not per se an abuse, what criteria should be considered to assess an abuse. The Greek Authority suggested in particular: - The percentage by which normal domestic consumption is exceeded; - The loss suffered by the dominant undertaking compared with its total - A balancing of interests, including the financial advantages to the ultimate consumers from the parallel trade and the interests of social insurance bodies in cheaper medicinal products. 5. The Peculiarities of Pharmaceutical Market In the questions referred by the Greek Authority a clear reference was made to the specifics of the market of pharmaceuticals, as governed to a large extent by State intervention and therefore where conditions of competition are distorted. The pharmaceuticals market is in fact subject to a high regulatory presence of the Member States, only partially harmonized at Community level 26. No medicinal product may be placed on the market of a Member State unless an authorisation has been issued by the competent authorities of that Member State or by the European Agency for the Evaluation of Medicinal Products, whereas all national authorizations are mutually recognized. All aspects of marketing: manufacture, labelling, packaging, import, distribution and advertising of pharmaceuticals is subject to authorization, according to harmonization measures contained in Directive 2001/83/EC of 6 November 2001 on the Community code relating to medicinal products for human use 27. The directive was recently amended to include a new Article 81, which now obliges holders of a marketing authorization to 'ensure appropriate and continued supplies' to pharmacies 'so that the needs of patients in the Member States in question are covered'. However, the State measures implementing such obligation should be justified on grounds of public health protection and be proportionate in relation to the objective of such protection, in compliance with Treaty rules particularly those concerning free movement of goods and competition 28. State intervention also involves price fixing. As the national health insurance organizations support a major part of the cost for medicines, both in the form of direct purchase and in the form of reimbursement to the patients, the Member States either unilaterally fix or negotiate with the manufactures the prices at which each medicinal products can be sold within a territory. Alternatively, the health authorities set the amount which is reimbursed to the patients 29. The result is, on the one hand, the total absence of intra-brand competition within each national territory and, on the other hand, different price levels for the same 26 HANCHER, The European Pharmaceutical Market: Problems of Partial Harmonisation, 27 OJ L 311 of 28 November 2001. 28 Article 81 was amended by Directive 2004/27/EC of 31 March 2004, OJ L 136/34 of 30 April 2004. The original text was based on a different approach: the decision whether or not to impose public service obligations was left to Member States, providing however that the said obligations shoud be justified, in keeping with the Treaty, on grounds of public health protection and be proportionate in relation to the objective of such protection. 29 NAZZINI, Parallel Trade in the Pharmaceutical market – Current Trends and Future Solution, World Competition [2003] 53, 58. medicine in different Member States. As price differentials between Member States may be significant, the opportunities for parallel trade are evident 30. When negotiating with the States the price of pharmaceuticals, the manufacturers claim the necessity to take into account the high costs implied by research of new specialities. On the other hand, the interest of public health imposes a central control on prices that cannot go beyond what is affordable to certain categories of patients and to the public health structures. The above two conflicting interests (to repay R&D costs and to offer medicines at affordable prices) are the main factors which have so far restricted competition in the market of pharmaceuticals. Unlike the authorization system, which is harmonized at Community level, the pricing system is almost entirely national. Already in its 1998 Communication on the Single Market in pharmaceuticals 31, referred to by Advocate General Jacobs in his opinion in the Syfait case, the adoption of a central European pricing system for medicines was considered 'undesirable and currently impracticable' by the Commission, which found that 'establishing an appropriate level of price across the Community would prove extremely difficult'. More recently, in its 2003 Communication on strengthening the European pharmaceutical industry for the benefit of the patient 32 the Commission suggested steps to take in order to facilitate market integration. The Commission suggested in particular giving manufacturers the option of setting the prices of medicinal products and leaving to negotiation with Member States safeguard mechanisms to contain pharmaceutical expenditure. Moreover, the Commission asked the Member States to remove price controls on medicines that are not reimbursed by the State and for those which are not to be sold to the public sector and suggests favouring reclassification of products from prescription to non-prescription status, in order to strengthen the competitive non-prescription market. 6. The Opinion of Advocate General Jacobs In his opinion, Advocate General Jacobs thoroughly examined the case-law on refusal to supply, coming first of all to the conclusion that a refusal to supply by which a dominant pharmaceutical undertaking aims at limiting parallel trade does not in itself constitute an abuse of a dominant position within the meaning of Article 82. 30 NAZZINI, Parallel Trade in the Pharmaceutical Market, cit. supra note 29. With a particular reference to the enlargement of the Community see FEDDERSEN, Parallel Trade in Pharma-ceuticals in a Europe of 25: What the "Specific Mechanism" Achieves and What it Does Not, [2003] EIPR, 545; LEMAIRE, Parallel Trade of Pharmaceutical Produts within the Enlarged European Union, [2005] EIPR, 43. 31 COM (1998) 588 final. 32 COM (2003) 383 final. According to him, although generally the intention of partitioning the market is a circumstance rendering abusive a refusal of supply, this is not so in the present case, where, due to the characteristics of the market, GSK is attempting to protect what it sees as its legitimate commercial interests. It becomes crucial, therefore, to find out whether it is possible to demonstrate an objective justification for the refusal. The first question of the Greek referring authority should therefore receive a The issue of objective justification was then examined by the Advocate General in the light of the pervasive regulation present in the pharmaceutical market. According to Jacobs, the partitioning of the markets and the restrictions of supply are more a result of the measures of the national authorities in the State of export than of the commercial policy of pharmaceutical industries. Such measures include not only price fixing, but also additional duties imposed to distributors of medicines, such as the obligation to maintain a full stock appropriate for covering the requirements of a defined geographical area. Due to the obligation to meet domestic demand, wholesalers were prevented from exporting all of their stock even in the absence of any limiting measures from manufactures. In the opinion of the Advocate General, the effects of State regulation shed light on the reasonableness and proportionality of the restriction of supply, in the sense that restrictions do not protect price disparities, nor do them directly impede trade, which is rather blocked by public service obligations imposed by the Member States and are therefore capable of justification as a reasonable and proportionate measure in defence of the undertaking's commercial interests. Two additional lines of reasoning led Advocate General to the same conclusion. The first is based on the economics of the pharmaceutical industry and considers that substantial investments are typically required in the research and development of new pharmaceutical products: of course, the decision whether to invest in new products depends in part upon the expectations that prices will repay investments. If parallel trade were generalised across the Community, the incentives for a pharmaceutical undertaking to invest in research would be reduced, given the lower returns that such an undertaking could expect to enjoy. In alternative, there would be a pressure for prices to rise in low-price Member States and in the end this would result in a redistribution of resources from consumers in the low-price Member States to those in the high-price Member States. A second line of reasoning focuses on the possible effects of parallel trade in pharmaceuticals. Due to the specific structure of the market, it is possible that the price differential which gave rise to the parallel trade is completely absorbed as profit by those involved in the distribution chain and that no benefit is enjoyed by the health care systems or the patients. The conclusion of the Advocate General was therefore that a restriction to supply by a dominant pharmaceutical undertaking in order to limit parallel trade is capable of justification as a reasonable and proportionate measure in defence of that undertaking's commercial interests. Finally, Jacobs particularly emphasised that such a conclusion is 'highly specific to the pharmaceutical industry in its current condition and to the particular type of conduct at issue in the present proceedings' and that 'it is highly unlikely that any other sector would exhibit the characteristics' which led him to that conclusion. 7. Refusal to Supply and Pharmaceuticals: Considerations on the Syfait case In its judgment of 31 May 2005 the Court did not rule on the case, having found it had no jurisdiction to answer the questions referred by the Epitropi Antagonismou. The Greek Antitrust Commission was found not to be a 'court or tribunal' within the meaning of Article 234 EC 33. The case is now left to the decision of the Greek authority 34, but the questions If one examines the Syfait case in the light of previous case law on refusal to supply, it is uncertain whether the conduct of GSK constituted an abuse 36. The opinion of the Advocate General is mainly focused on the regulatory features of the pharmaceutical market, which in his view appear to deprive the undertakings of any freedom to act in the market. In the Community system, however, the existence of different national regulations should not prevent the application of competition rules. For so long as the diverging national regulations remain unharmonized, the implementation of the 33 The issue is extremely interesting, although going beyond the scope of this article. Advocate General Jacobs had concluded that the Greek Antitrust Authority is “situated very close to the border line between a judicial authority and an administrative authority having certain judicial characteristics” and considered in the end that “it is sufficiently judicial in character to qualify as a court or tribunal for the purposes of Article 234 EC”. For a similar case see the Judgement of 21 March 2000, Joined Cases C-110/98 to C-147/98, Gabalfrisa and others, [2000] ECR I-1577. 34 The Greek Competition Commission has already found in an interim decision in 2002 that GSK, as a dominant undertaking, was abusing its leading position by restricting supplies to wholesalers; moreover, the Court of First Instance of Athens granted compensation to wholesalers for the losses suffered from the refusals to supply by GSK: see KOBELT, Perpetual Scenario – Europe’s highest court has failed to rule for or against the practice of parallel trade, in Pharmaceutical Marketing Europe, Summer 2005, 18. 35 HEIDE, PEREZ, Parallel imports, Competition Law Insight, 14 June 2005, 3: according to the authors, although the opinion of the AG does not formally constitute binding authority, it will have significant influence on the developement of subsequent cases before the national and Community courts. 36 The opinion of the Advocate General is fully supported by HULL, Parallel trade in Pharmaceutical Products in Europe: The Advocate General’s opinion in SYFAIT v. GlaxoSmithKline, in Competition Law Insight, 9 November 2004, 3; A critical view is taken by KOBELT, Perpetual Scenario, cit. supra note 34 and KOENIG, ENGELMANN Parallel Trade Restrictions in the Pharmaceuticals Sector on the Test Stand of Article 82 EC. Commentary on the Opinion of Advocate General Jacobs in the Case Syfait/GlaxoSmithKline, [2005] ECLR 338. single market requires that trade is not restricted through state measures or competition distortions, without a substantive justification. The case law of the Court of Justice as reviewed above makes clear that no objective justification may be invoked when the purpose and the effect of the conduct is to eliminate competition or to strengthen the dominant position of the undertaking concerned. One cannot deny that in the Syfait case the restriction on the part of GSK was aimed at causing the foreclosure and the partitioning of the national markets 37, therefore eliminating competition within the markets concerned. In the case law of the Court concerning the free movement of goods, national measures intended to restrict parallel trade are carefully scrutinised and repeatedly condemned 38. It appears contradictory, therefore, to allow a dominant company to obtain, through its unilateral conduct, the results which would be forbidden as an outcome of state measures or agreements 39. The above considerations do not intend to ignore the special features of the In particular, the third point raised by Advocate General Jacobs as a justification for restrictions, namely that parallel trade in medicines would not necessarily benefit consumers, is certainly substantive 40. It is a fact that profits from parallel imports invariably benefit the distributors themselves. At least to some extent, however, parallel trade in pharmaceuticals has the effect of increasing competition in national markets where prices have a higher level, thus generating direct savings for health insurance systems and also for patients 41. Moreover, there is evidence in the economic analysis that parallel trade in drugs in the EU market has in practice contributed to a reduction in the extent of price discrimination between different national markets 42. 37 KOENIG, ENGELMANN, Parallel Trade Restrictions, cit. supra note 36. 38 In the pharmaceutical sector see the Judgement of 5 December 1996, Merck and Beecham, joint cases C-267/95 and C-268/95, [1996] ECR I-6285; Judgement of 12 October 1999, C-379/97, Upjohn [1999] ECR I-6927; Judgments of 23 April 2002, case C-143/00, Boehringer Ingelheim, [2002] ECR I-3759; case C-443/99, Merck, Sharp & Dome [2002] ECR I-3703. 39 A case is now pending before the European Court of First Instance (Case T-168/01) concerning the appeal of Glaxo Wellcome against a Commission decision of 8 May 2001 concerning dual pricing system in Spain. The Commission (OJ 29.9.2001 C275/17) found the terms and conditions of sale of Glaxo to be contrary to Article 81 (1) since they restricted parallel imports. 40 On the contrary, and in spite of the popularity of the argument, there is appearently no evidence of a connection between R&D investments and parallel trade: In the Syfait case, GSK failed to prove that R&D funding was reduced as a result of parallel exports from Greece: see KOENIG, ENGELMANN, Parallel Trade Restrictions, cit. supra note 36, 345. 41 This is particularly true in the States where the healthcare system reimburse the costs of drugs to the level of the actual pharmacy retail prices. The savings for the health system deriving from parallel trade are explained in detail in KOENIG, ENGELMANN, Parallel Trade Restrictions, cit. supra note 36, 346. If one considers the aims of market integration and the Community system as a whole, the conclusion should be that a refusal to supply aimed at preventing parallel trade, even in a highly specific market like those of pharmaceuticals, does indeed constitute an abuse of a dominant position within the meaning of Article 82. 42 GLYNN, Article 82 and Price Discrimination in Patented Pharmaceuticals: the Economics, [2005] ECLR 135: the author argues however that price discrimination in pharmaceuticals should not be regarded as an abuse; see also LORENZ, LUEBBIG, RUSSELL, Price Discrimination, a Tender Story, [2005] ECLR 355.

Source: http://www.derra.eu/dateien/public/publikationen/publikation160.pdf

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