Sharing information and markets
The first case concerned King Pharmaceuticals and Auden Mckenzie (Pharma division), both suppliers of a tricyclic antidepressant, nortriptyline, to a large pharmaceutical wholesaler. The UK Competition and Markets Authority, the CMA, decided that, rather than competing, King and Mckenzie agreed that King would supply only 25mg and Mckenzie only 10mg tablets, and that the businesses colluded to fix quantities and prices. Accord-UK became involved as the current owner of Mckenzie’s nortriptyline business.
King and Accord were fined over £75k and £1.8m respectively, and the companies agreed to make a £1m payment to the NHS. The £1m payment is an unusual remedy. It does not preclude the NHS from seeking further damages, although the payment would be offset against any claim of this kind.
In addition, King, Lexon (UK) and Alissa Healthcare Research were fined by the CMA for sharing commercially sensitive information about prices, supply volumes and Alissa’s plans to enter the market, as they attempted to keep nortriptyline prices up when the cost of the drug was falling. These activities could have led to the NHS paying over the odds for nortriptyline.
King and Alissa were handed reduced fines of over £75k and £174k respectively because they admitted to their involvement in the infringement. King’s fines were also reduced to ensure that they did not exceed the statutory maximum for CMA fines of 10% of worldwide turnover. Lexon, who did not admit to breaking the law, was fined over £1.2m. One of King’s directors was disqualified for his role in the illegal activity, and the CMA is considering possible further director disqualifications.
The second case involved an investigation by the CMA against Flynn Pharma and Pfizer. This case reached the Court of Appeal, where the legal test for excessive and unfair pricing came under review.
In 2016 the CMA found that Pfizer and Flynn had abused their dominant positions in the UK market for phenytoin sodium capsules (an important anti-epilepsy drug) by intentionally and negligently charging unfair and excessive prices. The CMA concluded that the companies had abused their dominant market position by charging unfair prices which bore no reasonable relation to the economic value of the capsules. In coming to this conclusion the CMA relied on a ‘Cost Plus’ approach, identifying a return on sales of 6% as a reasonable return, which Pfizer and Flynn had significantly overstepped. The CMA said that each of the prices had been “unfair in itself”, and imposed fines of over £84m and £5m respectively.
Pfizer and Flynn successfully appealed to the Competition Appeal Tribunal (CAT). The CAT agreed with the CMA that the companies held dominant positions in their respective markets, but quashed the fines. In the CAT’s view, the finding of abuse was based on errors by the CMA - the Cost Plus approach alone did not establish a sufficient benchmark; the CMA did not appropriately consider what was the right economic value for the capsules; and it did not take sufficient account of comparable products.
The case did not end there, but eventually reached the Court of Appeal. Unusually, the European Commission intervened in the appeal, in support of the CMA.
In its March judgment, the Court of Appeal agreed with the CAT that comparable products had not been sufficiently considered, and that the CMA had erred in its economic valuation of the capsules. Accordingly, the court rejected the CMA’s appeal that the fines should be reinstated.
The Court of Appeal provided valuable insights into the legal test for abuse of a dominant position:
- The basic test for abuse is whether the price is “unfair”, meaning when a dominant undertaking has reaped trading benefits that it could not have obtained in conditions of “normal and sufficiently effective competition”. An example of an unfair price would be a price that is “excessive” because it bears no reasonable relation to the economic value of the good or service.
- The Cost Plus approach of the CMA was sufficient (agreeing with the CMA on this point), as a competition authority may use one or more alternative economic tests and that a range of relevant factors may be considered. However, the authority must also fairly evaluate other methods relied on by a defendant.
- There needs to be a benchmark to determine if a price is excessive, but the choice of benchmark is for the authority to choose.
The case will now go back to the CMA to reconsider the issue of abuse in light of the Court of Appeal’s judgment.
Take away points
These cases highlight the very serious penalties and extensive litigation that can result from competition investigations. It is worth taking compliance in this area seriously. Sharing information and dividing up markets is clearly outside the law. Questions about pricing, however, especially in a market dominated by a small number of players, can be more difficult. Where prices are very high though, compared to the cost of manufacture, businesses can expect to attract the attention of regulators.
Another point worth noting is the sharply reduced penalties imposed on businesses that co-operated with the authorities, as compared to those that did not.
Impact of COVID-19/coronavirus
What about compliance under the difficult circumstances of the current coronavirus crisis? Businesses are currently having to take unusual steps to assist in national and local efforts to tackle the consequences of the COVID-19 pandemic. In guidance published on 25 March 2020, the CMA recognises this, and acknowledges that there may be coordination between competing businesses. The guidance provides reassurance that the CMA will not take action against this, as long as that any such coordination is necessary in order to avoid shortage, is clearly in the public interest, is undertaken solely to address concerns arising from the current crisis and does not go further or last longer than what is necessary.
However, the CMA has made it clear that this lenient approach is strictly limited to immediate response to the current crisis. It does not give cover to actions such as abusing a dominant market position to keep prices above normal competition level, or the exchange by competitors of commercially sensitive information on future pricing or business strategies, where this is not necessary to meet the needs of the current situation.