ECJ advisor calls for certainty in law of anti-competitive practices

Advocate General Verica Trstenjak also said that the Court of First Instance (CFI) took a "legally erroneous" interpretation of competition law when it ruled on the case in 2006, though she recommended upholding part of that judgment.

The European Commission and GlaxoSmithKline appealed the CFI's judgment, for different reasons, to the European Court of Justice (ECJ). Advocates General issue Opinions to give advice to the ECJ, Europe's highest court, and their Opinions are followed in around 80% of cases.

Drugs that GSK sold in Spain were being traded back into the UK at less than the wholesale price that GSK charged for the UK market, a practice known as parallel importing. In an effort to stop that trade, GSK implemented a dual-pricing strategy for some drugs sold into Spain. Under that policy, drugs sold to Spanish wholesalers that were destined for export were priced higher than equivalent drugs being sold to the Spanish Health Service.

GSK sought to justify its discriminatory pricing policy. It argued that it needed to recover a certain level of profit in order to undertake research and development into new drugs. The European Commission objected to GSK's argument and found that GSK had breached Article 81 of the EC Treaty, a cornerstone of competition law in the EU.

Article 81(1) prohibits agreements and practices between companies that may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market.

According to the case law, the alternatives of having the object or the effect of restricting competition imply a two‑stage examination. But if the restrictive object of an agreement is proven, i.e. if its aim can be said to restrict competition, there is no need to produce evidence of its restrictive effects.

The Commission said that GSK's pricing structure was a 'restriction by object' infringement. Therefore it was not necessary to examine whether the pricing policy created any adverse anticompetitive effects, it argued.

The CFI ruled in 2006 that the dual-pricing agreement could in principle fall within Article 81 but considered on the facts that a restriction of parallel trade could not be viewed automatically as being a restriction of competition by object.

Before an object restriction could be found, the CFI said it would be necessary for the Commission to analyse whether there were any actual adverse effects on consumers.

For example, might it be possible that consumers did not gain any benefit from the parallel trade because the parallel traders kept all the profits for themselves? Did consumers actually benefit from increased access to drugs that would not have come to the market but for the dual-pricing regime?

The CFI criticised the Commission for not having properly evaluated GSK's arguments that its dual-pricing policy could in any event be justified under Article 81(3).

Article 81(3) offers a qualified exception to the general prohibition. Subject to certain limitations, it allows agreements and practices that would otherwise breach Article 81(1) if they contribute to "improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit".

Both GSK and the Commission appealed the CFI's ruling to the ECJ.

GSK continued to contest the Commission's infringement finding. The Commission objected not only to the CFI's statement that it would be necessary to examine the effects on the market of the pricing arrangement before a restriction by object infringement could be found, but also complained that the CFI placed too high a burden on the Commission when the latter faced arguments from businesses that their practices could be justified on efficiency grounds under Article 81(3).

In an Opinion published last Tuesday, Advocate General (AG) Trstenjak said GSK’s appeal should be dismissed, since the relevant part of the contested Commission decision must be upheld, albeit with reasoning different from that chosen by the CFI.

The CFI gave a "legally erroneous" interpretation to the notion of restriction of competition by object, according to AG Trstenjak. The existence of a restriction of competition by object cannot be made dependent on proof of a restriction of competition to the detriment of the final consumer, she said. The Commission correctly found that agreements which seek to restrict parallel trade have as their object a restriction of competition.

AG Trstenjak has also recommended that the ECJ uphold the annulment by the CFI of the Commission’s refusal to exempt the dual-pricing arrangement from the prohibition of agreements which restrict competition. In the view of the Advocate General, the Commission’s finding that there was no appreciable objective advantage was not based on adequate reasoning.

"The Commission cannot ... disregard the submissions of an undertaking which relies on an economic argument and cites economic and econometric data which are relevant to it solely because no direct link is thereby demonstrated," she wrote. "It can certainly refute in general terms submissions by an undertaking which are couched in general terms. However, where an undertaking backs up its arguments in a detailed and relevant manner, the Commission must also deal with those arguments in a detailed manner."

"A reference to the possibility that extra resources may also simply be added to the company’s profits, since it is a matter of discretion for undertakings to decide how much they will invest in research and development, is not sufficient in that case," wrote AG Trstenjak. "Such a general reference fails to have regard to the fact that the market conduct of undertakings may be influenced to a considerable extent by competition with other undertakings and that an undertaking’s discretion may be restricted by that."

Adrian Wood, a competition law specialist with Pinsent Masons, the law firm behind OUT-LAW.COM said that the Opinion brings clarity to the restriction by object infringement rule.

"The CFI's ruling on the need to take account of certain effects on the market before a restriction by object infringement could be found had been viewed by many as either being inconsistent with existing case law on the definition of restrictions by object infringements or as creating a special rule for drug sales," he said. "AG Trstenjak has now taken the opportunity to bring some consistency into the analysis of a restriction by object infringement."

Wood said that AG Trstenjak has sought to achieve three things.

"Firstly, she had to ensure certainty and predictability in the law without sacrificing any flexibility that may be required in the future to deal with unexpected situations," he said. "She did this by relying very pointedly on recent ECJ case law on restriction by object, but then emphasised the importance in each and every case of taking account of the legal and economic context in which the activity occurs."

"Secondly, she saw the need to reinforce a clear demarcation between a restriction by object and a restriction by effect," said Wood.

"She achieved this by observing carefully that most arguments about the existence or otherwise of consumer detriment should properly be discussed as part of an Art 81(3) analysis, although she carefully left a small window of opportunity for businesses to argue that an absence of consumer detriment might mean that no anti-competitive restriction exists in any event," he said. "For the most part though, she considered that consumer-related arguments would be dealt with under Art 81(3)."

"Thirdly, she needed to ensure that a successful reliance on Article 81(3) should not be considered beyond the reach of a business facing a potential restriction by object infringement," said Wood.

He said that she achieved this indirectly by sending out the message that advisers, courts and regulators should play by the proper rules of evidence.

"Simply put, if an alleged infringing party makes out a sound, evidentially-supported case for satisfying the criteria under Art 81(3), then an opposing party should as a minimum be able to point to sound contrary arguments and not simply dismiss the infringing party's arguments out of hand on the basis of skimpy assumptions," said Wood.

"In evidential terms, the Advocate General was emphasising that parties should be aware that the operation of the tactical burden requires the introduction of relevant material to counter existing admissible evidence. The Advocate General's comments do not undermine the legal burden of proof placed on a party that seeks to rely on an Article 81(3) defence, but the comments provide some refreshing encouragement that Article 81(3) arguments might receive a fairer hearing in the future." 

If the ECJ follows the Opinion, both GSK and the Commission will lose their appeals on the core issues. The CFI is also implicitly criticised in the Opinion for taking a liberal approach to object infringements.

"Following the CFI's ruling, the Commission feared that businesses would discover a new route for escaping an Article 81 object infringement by advancing more 'special case' scenarios based on how a particular sector operated," said Wood. "The Advocate General has clearly sought to block that path by limiting the scope for businesses to argue their way out of an Article 81 infringement in situations where the facts support a true object restriction case."

"At the same time, the AG has sought cleverly to encourage more attention on the scope for developing realistic Article 81(3) arguments, without interfering with the burden of proof placed on a business to make out its case on efficiencies," he said. "The Advocate General's approach is likely to be attractive to the ECJ when it finally rules in the case. If the ECJ agrees with the AG, the Commission will have to further analyse whether GSK's policy satisfies Article 81(3)."