Bayer wins vital parallel importing case

Almost four years ago the European Commission fined Bayer Euro 3m on the basis that Bayer's distribution policy for its anti-hypertension product Adalat infringed EC competition rules. In accepting Bayer's appeal on 26th October 2000 the European Court of First Instance (CFI) has confirmed that a non-dominant company has considerable freedom of action to determine its commercial activities even if the aim is to impede parallel imports. The decision is particularly important for the pharmaceutical sector from which this case arose, but the principle established is of far wider application.

The key to the CFI's position is that:

".... provided he does so without abusing a dominant position, and there is no concurrence of wills between him and his wholesalers, a manufacturer may adopt the supply policy which he considers necessary, even if, by the very nature of its aim, for example, to hinder parallel imports, the implementation of that policy may entail restrictions of competition and affect trade between Member States".

Background

The price of pharmaceutical products is closely regulated in most EU Member States. For Adalat, prices were lower in France and Spain than in the UK. The disparity in prices led to a sudden tripling in demand for the product from French and Spanish wholesalers and in turn led to considerable parallel trade in Adalat from France and Spain to the UK

In response Bayer introduced a policy of supplying French and Spanish wholesalers only in line with their historical level of orders and allowing for a 10 percent annual increase against that level. The Commission claimed that Bayer's policy was not a purely unilateral action but was a tacit agreement between Bayer and each wholesaler whereby the wholesaler was not to export Adalat from Spain or France.

Bayer did not enjoy a dominant position in relation to anti-hypertensive pharmaceuticals. It was therefore not open to the Commission to allege that Bayer's distribution policy was an abuse of a dominant position prohibited under Article 82 EC Treaty. Because the Commission nonetheless wanted to attack the policy it adopted a creative interpretation of Article 81 EC Treaty (which prohibits restrictive agreements) by claiming that this was an agreement between Bayer and each wholesaler not to export Adalat.

Bayer and the pharmaceutical sector generally saw this approach as an attempt by the Commission to extend the reach of the competition rules by artificially treating unilateral conduct by a non-dominant company as agreement. Bayer appealed against the Commission's findings and secured the suspension of key parts of the decision pending the appeal.

CFI judgment

The focus of the judgment is on whether there was indeed an export ban agreement between Bayer and its wholesalers. The CFI found no support for the Commission's contention that such an agreement existed. There was no evidence of Bayer's intention to impose an export ban or of any intention of wholesalers to adhere to Bayer's policy to reduce parallel imports. The CFI saw that parallel imports continued on a smaller scale after the introduction of the policy and Bayer did not intend to monitor quantities actually exported by each wholesaler. The CFI also observed that the Commission's proposed extension of the competition rules would lead to a "paradoxical situation" in which refusal to sell would be penalised more heavily in the context of Article 81 (restrictive agreements) than in the context of Article 82 (abuse of a dominant position). This is because the prohibition on restrictive agreements under Article 81 would hit a manufacturer deciding to refuse or restrict future supplies to a customer despite continuing commercial relations. In contrast a refusal to supply, even where it is total, is prohibited if under Article 82 only if it is an abuse.

Conclusion

The judgment is of great significance for companies whose products are susceptible to parallel trade and who distribute through third parties.

A rationing of supplies to wholesalers in order to prevent parallel trade does not infringe EC competition law provided:

• the company does not hold a dominant position in the product concerned, and
• there is no "concurrence of wills" between the company and wholesalers.

The mere fact that the company and the wholesalers continue to have commercial dealings does not mean that there is such a "concurrence of wills". A unilaterally adopted policy will not easily be converted into a bilateral agreement.

It remains to be seen whether the Commission wishes to appeal against this CFI judgment to the full European Court. Given the unequivocal nature of the CFI's judgment this seems unlikely.

For further information please contact David Marks by e-mail at [email protected] or by telephone on +44 (0)20 7367 2136.