Ian Forrester Discusses Landmark EU Parallel Trade Judgment

Ramifications for Dominant Companies Following Landmark EU Parallel Trade Judgment
November 2008

On 16 September 2008, the European Court of Justice (ECJ) issued a landmark judgment in favour of our client GlaxoSmithKline (GSK) in Lelos and Others v. GSK, confirming the legitimacy of pharmaceutical companies taking steps to protect their commercial interests, even if this involves limiting parallel trade. White & Case partner Ian Forrester, in Brussels, who led the White & Case team representing GSK, discusses the background of the case, the arguments made on GSK’s behalf and the importance of the judgment, not only for the pharmaceutical industry, but for all dominant companies in the EU.

Q: What is "parallel trade"?

A: US antitrust law does not pursue, as a goal, market integration between Arizona and California but European competition law, for policy reasons, emphasises it. From the earliest days of the European Communities, traders realised that there were profits to be made from parallel trade in the European common market. Their business model was simple: buy products in European Member States where the price is low, transport them to European Member States where prices are higher, and resell them. For many products, there was a chance of some consumer benefit as price discrepancies diminished through market forces. 

The European Commission (EC) and the ECJ encouraged such activities as good for market integration.  The ECJ held that IP rightholders could not rely on their patent or trademark rights to prevent the importation of product from one Member State to another as this would hinder the establishment of a European common market for prescription medicines. The importers also won the right to repackage prescription medicines they had bought so as to conform to that of the country of resale, and to change the trademark when repackaging.

However, what was not appreciated until recently is that theories of market integration through parallel trade do not work in the case of prescription medicines. In a normal market, parallel trade may have the effect of eliminating price disparities. However, parallel trade in the prescription medicines sector is different, as each European government effectively sets the prices of prescription medicines at the level it deems appropriate for its budget and its citizens.  Parallel trade in prescription medicines does not therefore actually reduce the price paid by patients for medicines. In fact, it harms patients by creating shortages in exporting Member States and in facilitating the entry of counterfeit medicines into the legitimate supply chain.

Q: What was the background of the Lelos case? 

A: The present case concerned events during 2000 in Greece. Prescription medicine prices in Greece were set at the lowest level within the EU. Greek wholesalers were placing exorbitant orders for GSK’s products with its Greek subsidiary. GSK had reached the point of supplying seven times Greek demand for three of its products (one treating epilepsy, one treating migraines and one treating asthma), yet almost all of these supplies were being exported. Greek pharmacies faced shortages and could not meet Greek patients’ needs.

Q: How did GSK respond?

A: GSK made the decision to suspend supplies of these three products to all wholesalers in Greece and supplied pharmacies directly to ensure they were restocked. After nine weeks, it resumed supplies in quantities corresponding to Greek annual consumption, plus a safety margin.

Q: What happened next?

A: In 2001, many Greek wholesalers lodged complaints before the Hellenic Competition Commission (HCC), alleging that GSK held a dominant position on the market for each of the three medicines and that by limiting supplies of the three medicines, GSK was abusing that dominant position. They also brought parallel proceedings before the Greek civil courts seeking the supply of additional quantities of products from GSK as well as damages.

On 3 August 2001, the HCC ordered GSK to supply the three medicines to Greek wholesalers in unlimited quantities. The order came as a surprise, as never before had a competition authority ordered the supply of unlimited quantities, not even from a public utility company.

On 6 August 2001, GSK closed for the summer holidays. When it re-opened on August 27, it found vast orders for the three products awaiting it. Wholesalers who had been in the habit of ordering 300 units were now asking for 40,000 units. Total orders booked on that one day amounted to several times the total amount of the products supplied by GSK to all Greek purchasers in the previous year. GSK began to execute the orders, dispatching the earliest first.  Its entire stock was cleaned out in 24 hours.

GSK immediately notified the Greek health authority of its inability to supply such excessive quantities. On 27 November 2001, the authority, having established that there were shortages in the Greek market, issued a circular requiring GSK to "only" supply national Greek prescription needs plus 25%.

Q: How did the case end up before the ECJ?

A: Following these remarkable events, the HCC received written submissions and held extensive oral hearings on the substance in Athens between January and May 2002. I was specially authorised by the HCC to plead in English (with Greek interpretation) at its hearings. After reflection, in 2003, the HCC referred the case to the ECJ (Case C-53/03 Syfait), asking whether the refusal by GSK to supply, in unlimited quantities, all the orders placed by wholesalers, could constitute an abuse of a dominant position.
 
In light of the EC's and the ECJ's long-held belief that parallel trade contributes to the creation of a European common market, the reference presented enormously important questions of principle. Should the traditional approach to parallel trade in any product prevail? Or should EC competition law be adapted to reflect the particularities of GSK and the realities of the European pharmaceutical industry? 

In October 2004, Advocate General (AG) Jacobs of the ECJ delivered an Opinion, endorsing most of the arguments made by GSK. He agreed that because of the specific characteristics of the European prescription medicines market (notably that prices were set by the state), GSK could not be said to have abused its dominant position and that the parallel trade of medicines does not necessarily result in either any substantial benefits for the ultimate consumers of pharmaceutical products, or contribute to the creation of a European common market in prescription medicines. 

However, the ECJ never proceeded to issue a final judgment on the merits of that case, since the reference was found to be inadmissible for procedural reasons, namely that the HCC was not a court (and only courts can make such references to the ECJ).

The matter subsequently returned to the ECJ in 2006 pursuant to a reference from the Greek civil courts hearing the same questions.  The background to the two cases was therefore identical.

Q: What arguments were made for GSK before the ECJ to support its protective actions?

A: The Oral Hearing before 13 judges from different EU member states was held in Greek, the language of the proceedings, and GSK’s case was pleaded by White & Case lawyer Assimakis Komninos (and was translated into the native languages of all the 13 judges). He argued that GSK’s refusal to supply products to wholesalers did not constitute an abuse. GSK never refused to supply its products to those who needed them as, apart from during the nine-week period between November 2000 and February 2001, GSK always supplied sufficient quantities to meet Greek demand.

Moreover, since price regulation distorts normal conditions of competition in the European prescription medicines sector, GSK argued that it should be entitled to adopt measures limiting – but not prohibiting or eliminating – parallel trade, and that such measures should not be considered contrary to the EC competition rules.

Q: What was the position of the Greek wholesalers?

A: The Greek wholesalers, supported by the European Commission and two intervening governments, Italy and Poland, responded that parallel trade was beneficial for Member States and that producers are free to decide whether or not to supply at a low price in a certain market or to place on the market their products in higher priced countries and delay bringing them on the market in lower priced countries. Advocate General Colomer, who delivered his Opinion in April 2008, broadly supported their position, holding that none of the grounds relied on by GSK were adequate to justify not delivering supplies.

Q: How did the ECJ rule?

A: First, the ECJ pointed out that parallel exports of prescription medicines from a Member State where the prices are low as compared to other Member States in which the prices are higher open up an alternative source of supply to buyers of the medicines in those latter States. GSK could not therefore argue that the parallel exports are of only minimal benefit to the final consumers.

The ECJ then analysed the possible effect of State regulation of the prices of prescription medicines on the assessment of whether GSK’s alleged refusal to supply constituted an abuse. The ECJ observed that the control exercised by Member States over the prices and the reimbursement levels of prescription medicines does not entirely remove those products from the law of supply and demand. The degree of price regulation in the prescription medicines sector could therefore not preclude the Community rules on competition from applying. However, the ECJ acknowledged that, in the case of Member States with a system of price regulation, governmental price regulation is one of the factors liable to create opportunities for parallel trade.

Moreover, the ECJ disagreed with the Commission which had argued that although every company is free to place its products on a lower-price market or not, once the product is sold in such a market, the company has to accept parallel exports.  The ECJ found that in order to defend its own commercial interests, it cannot be the case that the only choice left for a pharmaceuticals company in a dominant position is not to sell its products at all in a Member State where the prices of prescription medicines are set at a low level.

The ECJ went on to consider that a pharmaceuticals company in a dominant position must be in a position to take steps that are reasonable and proportionate to protect its own commercial interests. Such a company is therefore not required to supply unlimited quantities (as initially ordered by the HCC).  Instead, supplies can be limited to such quantities that are ordinary in light of both the previous business relations between the pharmaceuticals company and its wholesalers and the demand in the country concerned.

Q: How is the judgment significant for pharmaceutical companies?

A: The ECJ's judgment represents welcome news for the research-based pharmaceutical industry, which has for years been faced with the uncertainty created by massive volumes of parallel trade in the EU from Member States which for budgetary reasons set prices at a very low level.  Now it is clear that sales can be limited to what is required in each EU Member State to satisfy national patient demand.

Q: Is the judgment significant for non-pharmaceutical companies?

A: Yes, potentially. The judgment is not expressly limited to the pharmaceuticals sector. It is therefore good news for all dominant companies, because it allows them to maintain certain reasonable and proportionate limits on wholesalers wishing to order quantities for parallel exports that are out of proportion to the needs of the market in the exporting Member State. It is an important victory for any manufacturer of goods which are sold in different countries at very different prices.

"Talking" features White & Case lawyers answering questions about emerging legal and business issues. For more information or to schedule an interview with Ian Forrester, contact Francine Minadeo at fminadeo@whitecase.com.

Any information contained in this interview is for educational purposes only. It should not be construed as legal advice.