September 27, 2006
On 27 September 2006, the European Court of First Instance (CFI) delivered an important judgment in the GlaxoSmithKline (“Glaxo”) Case on Glaxo’s dual pricing practice to prevent parallel trade of pharmaceuticals in the EU. This practice was declared illegal by the European Commission in 2001. Glaxo challenged the Commission’s Decision in front of the CFI (Case T-168/01).
By way of introducing new General Sales Conditions for its Spanish wholesalers in 1998, Glaxo installed two price levels for sales of its pharmaceutical products in Spain: a lower price for pharmaceuticals intended to be marketed in Spain and financed by the Spanish national social security schemes, and a higher price for other sales. These other sales mainly relate to products that are later exported by the Spanish wholesalers to other Member States of the EU, where the price level for pharmaceuticals is higher than in Spain (such as in the United Kingdom) — a practice known as ‘parallel trade’. The reasoning for applying this higher price was to discourage parallel trade and to secure the profits gained by Glaxo in countries with a higher price level.
The Commission found that this practice violated Art. 81 of the EC Treaty as it had as its object and effect the distortion of competition and free trade between the Member States of the EU.
In its judgment, the CFI found that
The Commission’s Decision had not properly taken into account the specific nature of the pharmaceutical sector. In most EU Member States, prices are not determined by supply and demand as a result of a competitive process, but are directly fixed by the competent authorities. Therefore, the parallel trade of pharmaceuticals would not, of itself, directly contribute to lower consumer prices but would rather shift profits from producers to intermediate wholesalers. As a result, the CFI stated that Glaxo’s dual pricing approach does not have the object of restricting competition to the detriment of consumers.
However, due to certain measures taken by some Member States, parallel trade may nevertheless permit a limited but notable reduction of pharmaceutical costs for consumers and for social security schemes. Glaxo could therefore not disprove that its pricing did have a restrictive effect on competition. For this reason, the dual pricing system constitutes a violation of Art. 81(1) of the EC Treaty, which would be legal only if exempted under Art. 81(3) of the EC Treaty.
When assessing the availability of such exemption, the Commission had not thoroughly taken into account the possible economic advantage of Glaxo’s dual pricing system. The CFI acknowledged that Glaxo’s pricing mechanism may contribute in a considerable way to innovation, as research and development play a crucial role in today’s pharmaceutical sector. These considerations and the benefit of such pharmaceutical innovations to consumers may justify and exempt Glaxo’s pricing system.
As stated by counsel at the oral hearing, this case is a “landmark case the whole industry has been waiting for”. The Advocate General’s Opinion in the Syfait case has already demonstrated a much greater willingness to take into account the specific characteristics of the pharmaceutical industry, but the CFI has now clearly acknowledged that competition in the pharmaceutical sector is distorted due to different national regulations within the EU and that the pharmaceutical industry may validly take steps to protect and secure its investment in R&D as well as to prevent profit shifts to intermediate wholesalers in which final consumers would not participate. Nevertheless, as parallel trade may contribute to a limited reduction of medical costs for consumers, pharmaceutical companies will have to adhere to such effects and ensure that any measures it takes do not affect possible reductions in the cost of pharmaceutical products for consumers.
It must be noted, that the CFI’s judgment may be appealed in front of the European Court of Justice. Further, the Commission may after thorough consideration of the CFI’s judgment, find that the benefits to consumers and the contribution to innovation brought about by Glaxo’s pricing system do not justify an exemption under Art. 81(3) of the EC Treaty.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or Michael Walther (+49 89 18933-180; [email protected]) in the firm’s Munich office.
© 2006 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.