ECJ Rules on GlaxoSmithKline's Parallel Trade Restriction

Today, the European Court of Justice (“ECJ”) handed down its long-awaited judgment in the dispute between GlaxoSmithKline (“GSK”) and a number of independent Greek wholesalers of prescription medicines.

In October 2000, GSK had refused to meet the orders of these wholesalers citing shortages. It later resumed the supply of the medicines but restricted the quantities, effectively limiting the wholesalers’ ability to export to high-price Member States since they were also under an obligation to supply the domestic market.

In Syfait, the ECJ was asked to decide whether GSK's refusal to meet fully the orders of the wholesalers constitutes an abuse of dominance under Article 82 EC. At the time, the ECJ dismissed the case on procedural grounds. However, the opinion of Advocate General (“AG”) Jacobs was widely read and commented upon. AG Jacobs had concluded that in a highly regulated market, such as that for pharmaceuticals, parallel import restrictions by a dominant company are not abusive.

In the case decided today, AG Ruiz-Jarabo Colomer completely diverged from AG Jacobs’ opinion, arguing instead that the prevention of parallel imports does constitute an abuse and, moreover, cannot be justified by reference to specific market conditions that characterise the pharmaceutical sector, or otherwise. In particular, AG Ruiz-Jarabo Colomer concluded that no “efficiency defense” is available in this case.

Today, the ECJ relied on the United Brands and Commercial Solvents line of cases, striking a balance between the two conflicting AG opinions. It held that a refusal to supply medicines to wholesalers in order to prevent parallel exports constitutes an abuse unless the practice is considered reasonable and proportionate to protect that company’s legitimate commercial interests. Specifically, the ECJ held that “it is permissible for that company to counter in a reasonable and proportionate way the threat to its own commercial interests potentially posed by the activities of an undertaking which wishes to be supplied […] with significant quantities of products that are essentially destined for parallel imports.” In practice, added the ECJ, it must be ascertained whether the undertaking’s refusal to supply relates to orders of wholesalers that “are out of the ordinary”. This requires an appraisal of both the “previous business relations” between the pharmaceutical company and the wholesalers and the “size of the orders in relation to the requirements of the market” concerned.

GSK argued that State intervention in the pharmaceutical sector is such that pharmaceutical companies do not control the prices of their products. Therefore, the general logic behind protecting competition within a brand does not function in this sector. GSK also pointed out that parallel trade reduces profits that are needed for R&D. The ECJ dismissed these arguments. Irrespective of price control and State supervision, the laws of supply and demand continue to apply to pharmaceutical products. This is because pharmaceutical companies are actively involved in price setting at the national level. The ECJ also pointed out that intra-brand competition is the only form of competition for drugs under patent protection. Parallel trade is liable to exert pressure on prices in the importing country. GSK cannot justify its practice by saying that the benefit of lower prices to consumers is negligible.

The ECJ confirmed previous case-law that a dominant company cannot refuse to meet its wholesalers’ “ordinary” orders. The ruling does not however provide clear guidance as to how “ordinary” ought to be interpreted. Pharmaceutical companies are now faced with a reversal of AG Jacobs’ opinion and deciding on how to deal with parallel trade will prove very difficult in practice.

Furthermore, while the Commission is promoting a more “effects-based” analysis in the application of Article 82 EC, it appears that the ECJ has refused to embark on such an exercise. Likewise, the ECJ has not shed light on the extent to which dominant undertakings may put forward overriding efficiency arguments in support of a refusal to supply. Clarifications on this aspect would have been welcome.

The full text of the ECJ's decision is available here.

If you have any questions regarding this matter, please contact:  Kees J. Kuilwijk, Yves Botteman or Zoi Sazaklidou.