Crackdown on Cartels

Pharmaceutical companies doing business in Europe had better heed EU antitrust laws. It does not take a genius to devise a cartel. When competitors divide the market or fix prices, profits escalate and life is easier for managers and directors under pressure to maintain market share or achieve "orderly markets."

But there is a huge downside. In the European Union, fines of up to 10 percent of a company's global sales for the group/division can be imposed when cartels breach competition or antitrust laws under Articles 81 and 82 of the Treaty of Rome. Lawsuits for damages may follow. In late 2001, the European Commission imposed fines of more than 800 million euros on a vitamins cartel. And the English government is poised to copy the US system and introduce criminal penalties this year. Clearly, the risks are not worth the rewards.

This article looks at recent antitrust cases in Europe that involve the abuse of market power, resale price maintenance, export bans, and cartels and describes the fines and other adverse consequences that can result from an infringement of the law in those areas. It also analyzes the risks pharma companies run if they infringe competition rules and describes how they can recover losses if they are a victim of such arrangements.

Cartels have been illegal in the European Union since at least 1957, yet they remain prevalent across a wide range of industries. Last year, millionaire businessman Alfred Taubman, a former chairman of Sotheby's, was found guilty in the United States of fixing prices with Christie's. Other cartels that have been investigated and fined involve industries such as airlines, banking, brewing, and automobiles and products such as zinc phosphate, sodium gluconate, graphite electrodes, and carbonless paper.

Margaret Bloom, the chief enforcer at the Office of Fair Trading (OFT) in the United Kingdom says, "We find about one cartel a month. They are getting more serious, and some involve household names. There are local and national cartels. They include the sale of services to local councils, services to domestic consumers, bulk food products, construction materials, and fabricated metals." Pharmaceutical companies have been involved as well.

The Napp Rap

Companies operating in Europe must comply with both EU antitrust law and member states' national competition laws. In the United Kingdom, the national law is virtually the same as the EU rules and is contained in the Competition Act of 1998. In January 2002, the English Competition Commission Appeals Tribunal in Napp Pharmaceutical Holdings v Director General of Fair Trading held that Napp, based in Cambridge, UK, had abused a dominant position in the supply of sustained release morphine tablets and capsules in the United Kingdom. The product, MST, launched in 1980, was the first sustained release morphine to appear on the market and now has about 95 percent of total UK sales for that therapeutic formulation. The court found two abuses of a dominant position:

Napp charged excessively low prices to hospitals. By matching the prices offered by competitors with discounts of 90 percent or more off its list price, Napp effectively monopolized the hospital segment of the market. Napp's prices in that segment were below the average direct cost and were intended to exclude competitors from that "key strategic gateway" to the larger, and more profitable, community segment of the market.

Napp charged the community excessively high prices. The court held that "the prices Napp was able to charge to the much larger community segment were on average over ten times higher than its price in the hospital segment and, at its highest level of discount, on some tablets even higher still. Napp's prices and margins were significantly higher than for its other products and significantly above those of its competitors. They were not subject to competitive pressure, and Napp was a virtual monopolist."

The court imposed a ??2.2 million fine and ordered Napp to reduce its National Health System (NHS) List Price by 15 percent and to maintain its hospital prices at a minimum level. During an earlier stage of the case, Napp implied that if it lost its appeal, which it now has, the company would renegotiate the prices in its hospital supply contracts as quickly as possible. Napp also said it would reimburse the UK Department of Health for any excess costs that the department incurred in reimbursing community pharmacists for MST based on the NHS list price of 29 May 2001. At press time, the company had not yet issued another appeal or fulfilled its promises.

The decision caused many dominant suppliers in all industries to reassess whether their pricing policies are in compliance with UK and EU competition law.

Resale Price Maintenance

The antitrust authorities also look closely for evidence of resale price maintenance-suppliers putting pressure on dealers to resell at, or above, recommended minimum prices. The practice is strictly illegal in the European Union. In May 2001, a UK court found that resale price maintenance for over-the-counter pharmaceuticals breached antitrust rules. The goods included a wide range of products from paracetamol to multivitamins and garlic supplements.

In particular, they included UK over-the-counter name brands like Lemsip, Nurofen, TCP, and Rennies. The UK Office of Fair Trading filed the case, which was defended by the Proprietary Association of Great Britain and the Proprietary Articles Trade Association and involved a market worth about ??1.6 billion a year. Local pharmacies were concerned that they could no longer compete with large chains if the offending Medicaments Order 1970-which had permitted the price fixing in the first place-were held illegal, because their resale prices would no longer be guaranteed. The court failed to uphold their objections, and the suppliers were left free to set resale prices as they wished.

The last few months of 2001 saw the greatest number of fines ever imposed by the European Commission in such a short time. Mario Monti, the European Competition Commissioner, took action against seven price-fixing arrangements. In 2001, the commission fined 56 companies a total of 1.8 billion euros, including one fine of 855 million euros against companies involved in a vitamins cartel. But that money goes to EU coffers, not to customers who have paid more than they should have. Customers and competitors suffering at the hands of a cartel must bring their own claims if they want financial recompense.

Vitamins Cartel

On 21 November 2001, the European Commission announced the largest penalty in its history for the breach of EU competition rules when it fined Hoffman??La Roche 463 million euros for operating a cartel that fixed the price for vitamins in the European Union for more than ten years. In all, eight pharma companies were fined a total of 855 million euros. (See "Pharma Fines." )

The cartel involved bulk synthetic substances such as vitamins A, E, B1, B2, B5, B6, C, and D3 and biotin, folic acid, beta carotene, and carotinoids. It fixed prices, allocated sales quotas, agreed on and implemented price increases, and issued

price announcements in accordance with their agreements. The participating companies also set up a means to monitor and enforce their agreements and participated in regular meetings to implement their plans.

Several cartels, which were somewhat linked, operated at the same time for different types of vitamins. The commission said that the modus operandi of the cartels was essentially the same, if not identical, each having "target" and "minimum" prices and maintaining the status quo in market shares and compensation arrangements. In particular, it included:

• the establishment of a formal hierarchy of management, often with overlapping membership at the most senior levels to ensure the cartel's function

• the exchange of sales values, sales volumes, and pricing information during quarterly or monthly meetings.

• in the case of the largest cartels, the preparation, agreement, implementation, and monitoring of an annual "budget," followed by the adjustment of actual sales to comply with the quotas allocated.

Other Hot Spots

EU and English competition law does not just prohibit cartels. It also has implications in a wide range of areas, including the export of patented products around the single European market and restrictive clauses in patent and know-how licenses. In addition to fines, plaintiffs can also bring claims for damages.

Parallel trade. In 2001, the European Commission decided under EU antitrust rules to prohibit the dual pricing system GlaxoSmithKline had introduced for its pharma products in Spain and had submitted to the commission for clearance in 1998. Under the dual pricing system, GSK requires its Spanish wholesalers to pay a higher price for products they intend to export to other member states than they pay for the same products to be sold on the domestic market. The aim is to reduce parallel trade.

In its decision, the commission said, "Pharmaceutical companies or other companies cannot put in place distribution arrangements that perpetuate the partitioning of the 'single market' into national markets. In principle, market partitioning arrangements do not qualify for an exemption, but we have carefully examined GSK's economic arguments. But, none of these arguments were convincing upon closer scrutiny." Few other geographic territories have the goal of market integration; thus, they do not have prohibitions against measures intended to prevent parallel imports. Therefore, companies seeking to export to Europe need to seek legal advice about that aspect of the antitrust regime.

Some EU states control the resale price of pharmaceuticals, yet manufacturers still must ensure free movement of goods around the union and must not take measures, direct or indirect, that prevent a distributor from purchasing products in one of the 15 European Economic Area states and selling them in another. In 1996, the European Court of Justice held in Merck Primecrown that the antitrust rules apply even though there is state price control.

The European Commission stressed that pharma R&D budgets represent only around 15 percent of companies' total spend. It claimed, "Losses stemming from parallel trade could just as well be deducted from companies' other budget items such as marketing costs." No fine was imposed in the case because the company had asked for clearance, but GSK had to immediately end its dual pricing system.

Patent and know-how licensing. The EU antitrust rules permit certain forms of exclusive patent and technology know-how licenses but only if they comply with the detailed requirements of a regulation known as the technology transfer regulation 240/96. In December 2001, the European Union issued a detailed evaluation of the regulation. The pharma industry is one of the biggest licensors of patented technology, so the information should be of particular interest. It is likely that when the regulation expires, it will be replaced with a more liberal policy covering a wider range of intellectual property licenses.

Third-party losses. If a commercial contract contains restrictions that breach EU competition rules, the clause will be void and unenforceable. Moreover, third parties can bring action for damages in the national courts. The English High Court heard such a case in February. Those who have been victimized by a cartel can either act alone or collaborate with others in a joint action. In cases of clear infringement and provable financial loss, a few legal letters from in-house counsel may be all that is necessary to retrieve damages.

When such action fails to result in an acceptable offer, legal proceedings are required. In the United Kingdom, contingency fees, common in the United States, are illegal. Since July 1998, however, lawyers have been allowed to charge nothing if they lose and to double their normal fees if they win-a structure known as conditional fees. They are still, however, forbidden to charge a percentage of what they recover. The following questions will assist companies in assessing whether to file a damages lawsuit:

• Is there good evidence of the cartel, such as an EU or OFT decision against it or written documents?

• Did the company pay higher prices than necessary because of the cartel, and can it be proved?

• Is the loss, either individually or in conjunction with other claimants, great enough to bear the financial and time-consuming burden of litigation?

• Is the case suitable for a conditional fee (no win/no fee) arrangement with lawyers?

Long Arm of the Law

Companies that discover a member of their staff is involved in a cartel should seek legal advice. Most of the cartels mentioned in this article were investigated because one member told the authorities, often benefiting from the leniency clause that gives immunity to the whistleblower. In the vitamins case, Aventis avoided fines entirely by cooperating.

The EU and UK competition rules seek to protect consumers and companies against cartels, restrictive agreements, and abuses of market power. Such abuses remain a major risk for pharma companies both within and outside the European Union. It is important to note that whenever an abusive arrangement has effects within the European Union, fines can be imposed even on businesses located elsewhere, as occurred in the case of the wood-pulp cartel in which all parties were located in wooded areas outside the European Union at that time.