Sot. Lelos kai Sia EE v GSK Update on Anti-Competition Legislation

This article is an expanded version of a previous post on this case, which was published in the Business Strategy Special Report of Pharma Technology China Autumn 2009

In the field of Anti-Competition legislation, one of the most important European statutory provisions is Article 82 EC which states:

"Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States. Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

(b) limiting production, markets or technical development to the prejudice of consumers;

(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. "

This provision was recently examined and re-interpreted in the recent decision in Sot. Lélos kai Sia EE and Others v GlaxoSmithKline AEVE Farmakeftikon Proionton

The facts:

GSK AEVE- the Greek subsidiary of GlaxoSmithKline plc which imported, warehoused and distributed GSK’s products in Greece- including the prescription brands, Lamictal and Serevent - Migraine, Epilepsy and Asthma therapies respectively.

· The appellants in the main proceedings were customers of GSK AEVE i.e wholesalers/distributors and had been for a number of years. However on 6 November 2000, GSK AEVE stopped supply of products to the appellants (citing shortage in product supply, for which it denied responsibility) and then proceeded to distribute the said products directly to Greek hospitals and pharmacies through a company Farmacenter AE.

· In December 2000, February and December 2001 GSK AEVE applied to the Greek Competition Commission for a declaration that its direct sales to Greek consumers did not infringe Greek anti-competition legislation. Following discussions with the said Commission, GSK AEVE agreed to deliver quantities of medicines equivalent to national consumption plus 25%.

· The appellants i.e a number of Greek pharmaceutical wholesalers and Pharmaceutical Trade associations, applied for and obtained an Interim order- pending a final determination- from the Competition Commission requiring GSK AEVE to meet orders to the appellants.

· Also between 30 April 2001 and 11 November 2002, each of the appellants filed proceedings before the Greek Court of First Instance, claiming that the conduct of GSK AEVE in failing to supply products ordered by them and by distributing through Farmacenter- constituted unfair and anticompetitive acts and an abuse of GSK’s dominant position The Greek Court of first Instance however dismissed these actions- deciding substantively that GSK AEVE had not abused its dominant position.

· Prior to this the Greek Competition Commission- as a result of the plurality of actions- referred the matter to the ECJ for determination, of which the ECJ declined Jurisdiction in (Syfait and Others [2005] ECR I‑4609), since the Commission was not a Court or Tribunal as per Article 234 EC. The appellants in the main action proceeded to appeal the decision of the Court of first instance at the Greek Court of Appeal in Athens which stayed the action- and this time- successfully referred the matters to the ECJ. The Italian and Polish Governments as well as Commission of the European Communities also joined with the Appellants in the action against GSK.

The preliminary questions referred to the ECJ being the following:

a. Whether there is an abuse of a dominant position contrary to Article 82 EC if a pharmaceuticals company occupying such a position on the national market for certain medicinal products refuses to meet orders sent to it by wholesalers on account of those wholesalers involvement in parallel exports of those products to other Member States.

b. Guidance as to the relevance of a series of factors, such as:

I. The degree of regulation to which the pharmaceuticals sector is subject in Member States;

II. The impact of parallel trade on the pharmaceuticals companies’ revenues, and;

III. Whether parallel trade is capable of generating financial benefits for the ultimate consumers of the medicinal products.

The Proceedings:

The Grand Chamber in its consideration of the issues delineated two issues for examination based on the respective arguments of the parties:

a. The existence of a refusal to supply liable to eliminate competition;

It examined the general proposition of Art.82 EC as applied in the Joined Cases 6 Istituto Chemioterapico Italiano and Commercial Solvents v Commission [1974] ECR 223, paragraph 25, and Case 27/76 United Brands and United Brands Continentaal v Commission [1978] ECR 207, paragraph 183). It was common ground with the parties that GSK AEVE aimed to limit parallel exports by those wholesalers to the markets of other Member States, which in itself was contrary to Art.82 EC, the next consideration thus being whether the same amounted to abusive conduct. Leading to the next item of consideration:


b. The abusive nature of the refusal to supply;

GSK AVEVE in this regard argued- citing (United Brands Continentaal v Commission), that a dominant undertaking is not under an obligation to honour orders that are out of the ordinary and that it may take reasonable steps in order to protect its legitimate commercial interests. Further arguing with regard to the Pharmaceutical sector, that the general logic behind protecting competition within a brand does not function, because of the attendant intervention of the public authorities of Member States- preventing the manufacturers of medicines from developing their activities in normal competitive conditions (being the largest customer base). GSK AEVE also argued that as a consequence of the slim margins referred to, the parallel trade, which it sought to limit, brought financial advantage only to the intermediaries (who exported the goods to other member states) and who did not make any contribution to the R+D process which ultimately would not benefit the consumer.

The Appellants on the other hand advanced two contrary arguments: a. That Art.82 EC cannot be applied differently to the Pharmaceutical sector; b. That the repercussions of parallel trade do not impact on the R+D investment of Pharma companies and that parallel trade in products bring advantages to consumers. Furthermore they argued that to accept GSK AEVE’s arguments would amount to accepting a restriction on free trade.

The Grand Chamber:

1. Rejected GSK AEVE’s argument that parallel trade did not bring comparative advantage to consumers, deciding that on the contrary where a lower price impact results, it is in fact of advantage to the consumer;

2. Accepted that whilst price regulation within national territories may have an impact on profit margins within a particular territory, a party had a choice to trade within a territory where such price restrictions exist and if it exercises that choice, it cannot claim that there has been a restraint on competition- especially where in many instances it is involved in negotiating the said prices- importantly stating that price regulation does not remove the said prices from the law of supply and demand;

3. Accepted that a refusal to supply distributors would amount abuse, if the orders were ordinary orders, but not so if the same were extra-ordinary orders, however it determined that the nature of what amounted to an ordinary or extra-ordinary order would be a matter for the referring courts in the member states to determine, based on lack of uniformity of circumstances from state to state. The Grand Chamber acknowledged that in Greece, pharmaceuticals wholesalers were obliged by Law to supply the needs of a defined geographical area with a range of pharmaceutical products, it also accepted that in cases where parallel trade would lead to a shortage of medicines on a given national market, it would be for the national authorities to resolve the situation, by taking steps consistent with national legislation as well as with the obligations flowing from Article 81 of Directive 2001/83.

Consequent to all the arguments and its determinations of Law and fact above, the Grand Chamber then made a final determination in the following terms:

“Article 82 EC must be interpreted as meaning that an undertaking occupying a dominant position on the relevant market for medicinal products which, in order to put a stop to parallel exports carried out by certain wholesalers from one Member State to other Member States, refuses to meet ordinary orders from those wholesalers, is abusing its dominant position. It is for the national court to ascertain whether the orders are ordinary in the light of both the size of those orders in relation to the requirements of the market in the first Member State and the previous business relations between that undertaking and the wholesalers concerned.”

The Implications:

Whilst patently clear that the Cases in issue here are far from resolved, being that the Greek Courts would now have to determine whether the orders were indeed Ordinary or Extraordinary, the fact does remain that that this case is extremely important for having at least clearly defined some very important areas of controversy in Anti-Competition Law, namely:

1. That Pharmaceutical Industry inspite of attendant regulation of pricing in many national markets is not immune from anti-competition legislation at both EU and National levels, since as the Grand Chamber stated- a company has the free will to either participate in a market or not and where it does so cannot claim an exemption from anti-competition laws.

2. Parallel trade by wholesalers or distributors of Pharmaceutical trade cannot justify abuse of manufacturers dominant position i.e by refusal to meet ordinary order, since such parallel trade is within the spirit of free trade engendered by the community in general and specifically enshrined in ART 81 EC (formerly Art 85 of the EC Treaty) and applied in the joined cases of IAZ International Belgium and Others v Commission [1983] ECR 3369, paragraphs 23 to 27; Javico [1998] ECR I‑1983, paragraphs 13 and 14; and P General Motors v Commission [2006] ECR I‑3173, paragraphs 67 to 69;

3. A dominant party inspite of its overriding obligation to comply with Anti-competition statute, otherwise have a duty to protect their commercial interest where parallel trade by wholesalers/distributors is based on extra-ordinary orders;

4. Member states are the sole determinant of whether the conduct of a dominant party amounts to abuse- based on the exercise of its discretion to determine whether the orders in question are ordinary or indeed extra-ordinary.

Whilst one school of thought may be that the Grand Chamber merely passed the responsibility for finally resolving this thorny issue to the member state courts, its is undeniable that this is a most important decision with far-reaching implications for the Pharmaceutical industry and which shall certainly give rise to a plethora of litigation in Courts in member states and which may indeed influence the emerging markets in due course and it is the view of this writer that new questions may soon arise- especially from a determination of the broad parameters of Ordinary and Extra-ordinary orders- which will necessarily have to go back to the ECJ for an authoritative pronouncement. This and much more remains to be seen.


© Edward Keazor