pharmaceutical

Illumina vs European Commission: the EU General Court endorses the Commission’s new approach to Article 22 EUMR allowing the capture of mergers below the thresholds

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In a judgment dated 13 July 2022 (T-227/21), the General Court of the European Union (the “General Court” or the “Court”) upheld the decision of the European Commission (the “Commission”) whereby the latter accepted to assert its (merger control) jurisdiction over the “below-the-thresholds” acquisition of Grail by Illumina (the “Transaction”), following referrals from EU and EFTA member states based on Article 22 of the EU Merger Regulation (“EUMR”)[1].

In addition to its direct and almost immediate implications for Illumina and Grail (see below), this judgment paves the way for new cases that capture concentrations below the thresholds (i.e., not triggering merger control requirements based on the numerical thresholds) while leaving a few questions open.

It was indeed the first time, since the announcement by Margrethe Vestager of the Commission’s willingness to use Article 22 EUMR to tackle potentially problematic “below the thresholds” mergers, that the General Court was given the opportunity to have its say on this new approach.

Background

Pursuant to Article 22 EUMR, national competition authorities (“NCAs”) may refer to the Commission any concentration that does not have a European dimension, but (i) which affects trade between Member States and (ii) threatens to significantly affect competition in the territory of the Member State concerned (see our previous Blog post on the Commission’s guidance published on 26 March 2021).

This provision was long conceived as a tool designed for EU Member States lacking national merger control regimes. Over recent years, however, there had been increasingly clear messages that the Commission wanted to use it for other purposes, namely to extend its jurisdiction to catch the so-called killer acquisitions, or more generally potentially problematic concentrations below the thresholds. But, before the issuance of the Commission’s guidance regarding the application of Article 22 EUMR on 26 March 2021, the rules of the game were not clear at all.

Made public in September 2020, before the release of the aforementioned guidance, the Illumina/Grail Transaction was not notified to any NCAs within the EU or to the Commission, as it did not cross any relevant thresholds. However, a complainant, as well as the Commission, has considered it a textbook case of a “killer acquisition.”

In this case, Grail is a start-up, not yet generating any turnover, developing innovative blood-based cancer tests based on genomic sequencing and data science tools. Reportedly, the alleged concern would be that the purchaser, Illumina, a U.S. major biotechnology company supplying sequencing and array-based solutions for genetic and genomic analysis, could post-transaction restrict access to or increase prices of next generation sequencers and reagents to the detriment of Grail’s rivals active in genomic cancer tests.

Likely informed of the Transaction by the complaint, the Commission reached the preliminary conclusion that the Transaction satisfied the necessary conditions for a referral. In accordance with Article 22(5) EUMR, the Commission informed the EU and EFTA Member States of the Transaction and invited them to request a referral (through a so-called “Invitation Letter”), and on 9 March 2021, the French competition authority sent a request (joined by the Dutch, Belgian, Norwegian, and Icelandic competition authorities). By decisions of 19 April 2021, the Commission accepted the referral request and associated requests to join (the “Decisions”).

Subsequently, Illumina, supported by Grail, initiated an action for annulment against both the Invitation Letter and the Decisions before the General Court of the EU, competent to rule on such annulments for acts of the institutions of the European Union that are contrary to European Union law.

The judgment at hand was much awaited as, by contrast with traditional guidelines which build upon a long decisional practice, the Commission’s guidance develops a new untested approach to Article 22 EUMR and has generated much debate amongst academics and practitioners about its legality.

Findings of the General Court

First ruling on the admissibility of the case, the General Court confirmed that the Commission’s Decisions constituted challengeable acts within the meaning of Article 263 of the Treaty on the Functioning of the European Union (“TFEU”), notably as each were considered to produce binding legal effects vis-à-vis Illumina and were thus capable of affecting its interests by bringing about a distinct change in its legal situation.

The Court thus rejected the European Commission’s position that its Decisions were merely preparatory acts, the illegalities of which could be raised in an action brought against the final decision on the concentration at issue. On the contrary, the Invitation Letter was considered to constitute only an intermediate step in the context of the referral procedure so that the Court held Illumina’s action against such letter to be inadmissible.

On the substance of the case, Illumina challenged the Commission’s Decisions on three points, essentially alleging: 1) a lack of competence on the part of the Commission, 2) that the referral request of France was late and 3) that the Decisions violated the principle of protection of legitimate expectations.

1° Article 22 EUMR is an adequate legal basis for the Commission to exercise its jurisdiction over the Transaction

Illumina argued that the Commission did not have a valid legal basis to review the transaction at issue, since the referral request was made by a competition authority which was not itself competent, under its own national legislation, to review the transaction. For Illumina, the residual purpose of Article 22 EUMR only enables a Member State that does not have a merger control legislation to submit a referral request in order to prevent a concentration affecting its territory from not being subject to any scrutiny.

Following a holistic review, through a literal, contextual, teleological and historical interpretation of the provision at issue, the Court concluded that the Commission was right to accept the referral request and the requests to join under Article 22 EUMR, thus confirming with a particular strength, the validity of this recent and major change in the Commission’s merger control policy.

Relying on the wording of Article 22(1) EUMR, and in particular the use of the expression “any concentration,” the Court took the view that a concentration could be the subject of a referral, regardless of the existence or scope of national merger control rule. Interpreting Article 22(1) EUMR otherwise, as Illumina and Grail advocated, would in fact add a condition for a referral that is not apparent from its wording, the Court added.

It also considered that although the referral mechanism was originally conceived, under the previous merger regulation 4064/89, primarily for Member States which did not have their own merger control system (in practice, the Kingdom of the Netherlands), it did not, however, preclude other Member States from also having recourse to that mechanism. For the Court, nothing in that regulation indicates that the EU legislature intended at the time to reserve that mechanism for those aforementioned States.

For the Court, while the scope of the EUMR depends primarily on the exceeding of the turnover thresholds defining the European dimension, it also depends, alternatively, on the referral mechanisms provided for in Article 4(5) and Article 22 of that regulation, which supplement those thresholds by authorising the examination, by the Commission, of certain concentrations that do not have such a European dimension. It further emphasized the distinction that was operated between the referral mechanism set forth under Article 4(5) EUMR, the “one-stop shop” threshold, which specifically requires 3 Member States having competence to review a transaction for it to be referred to the Commission, and the referral mechanism of Article 22, which does not provide such a condition.

Eventually, the Court found that referral mechanisms are an instrument necessary to remedy the control gaps inherent to a rigid system solely based on turnover thresholds. It considered that the use of the expression “effective corrective mechanism” in recital 11 of the EUMR, to describe referrals, shows that such mechanisms create a subsidiary power of the Commission which confers on it the flexibility necessary to achieve the objective of the regulation, namely, to allow for the control of concentrations that are likely to significantly impede effective competition in the internal market.

Accordingly, the General Court concluded that the Commission was right to accept the referral request at issue and that neither a legislative amendment nor a revision of the EU thresholds were necessary, contrary to what Illumina claimed.

2° The Transaction was lawfully referred to the Commission as the referral request was not late

Beyond the much-anticipated conclusion on the overall lawfulness of the referral request made by a non-competent NCA, the General Court’s judgment also provides clarifications as regards the deadline to be complied with by Member States to submit such a referral request, which, if helpful, still leaves open a number of questions.

As a reminder, the second subparagraph of Article 22(1) EUMR provides that a referral request “shall be made at most within 15 working days of the date on which the concentration was notified, or if no notification is required, otherwise made known to the Member State concerned.”

Illumina, supported by Grail, argued that the referral request was submitted after the expiry of the time limit, since the Transaction was announced publicly through a press release and the CMA and the FTC had already started investigating the deal, which therefore was necessarily known to the French NCA.

The General Court rejected the argument and held that the concept of a concentration being “made known” within the meaning of the second subparagraph of Article 22(1) EUMR must, as regards its form, consist of the active transmission of relevant information to the Member State concerned and, as regards its content, contain sufficient information to enable that Member State to carry out a preliminary assessment.

According to that interpretation, the Court followed, the period of 15 working days laid down in that provision starts to run from the time when that information was transmitted, and in the present case, the information was transmitted through the Invitation Letter sent by the Commission, which eventually enabled the NCAs concerned to carry out a preliminary assessment of the required conditions. In consequence, the Court found that the referral request at issue was made on time since it was rightly made within 15 working days from receipt of the Invitation Letter.

The Court did note, however, that the Invitation Letter itself was sent within an unreasonable period of time as a period of 47 working days elapsed between receipt of the original complaint by the Commission and the sending of the Invitation Letter to the NCAs, a delay which the Court found to be unjustified. Nevertheless, the Court ruled that such an infringement of the reasonable time principle could not in the present situation justify the annulment of the Commission’s Decisions as it did not adversely affect the ability of Illumina or Grail to defend themselves effectively, such adverse effect being the legal standard to call into question the validity of an administrative procedure.

3° The recent shift in the Commission’s approach towards Article 22 EUMR does not violate the principle of protection of legitimate expectation

Finally, Illumina argued that the recent shift in the commission’s guidance on Article 22 violated its legitimate expectations since, at the time it agreed on the concentration with Grail, the Commission did not accept referral requests for concentrations that did not fall within the scope of national merger control rules. To that end, it pointed out to a specific speech made by Margrethe Vestager in September 2020 in which she confirmed that, at the time, the Commission was discouraging Member States to make use of such referral requests and that a change of approach would take place in the future. Illumina and Grail emphasized the clear and unconditional nature of that speech, as regards the process and timing of the implementation of the new referral policy. They also reminded that the Commission’s guidance on the application of the referral mechanism of Article 22 was adopted after the Invitation Letter was sent, without public consultation.

However, the Court dismissed such argumentation, reminding that a party’s right to rely on the principle of the protection of legitimate expectations presupposes the fulfilment of certain conditions set by the case law, notably that “precise, unconditional and consistent assurances originating from authorised, reliable sources have been given to the person concerned by the competent authorities of the European Union” and “has led him or her to entertain well-founded expectations.” In the present case, the Court held that Illumina failed to demonstrate the existence of such assurances. In particular, with regard to Margrethe Vestager’s speech that Illumina relied upon, the Court found that the Vice-President of the Commission simply stated in her general policy speech that it was time to change that past practice but did not make any commentary on the transaction. And since the speech occurred months before the transaction was even publicly announced, that speech could not contain precise, unconditional and consistent assurances in relation to the treatment of that specific concentration.

Furthermore, the Court noted that the fact that the Commission has a practice of discouraging NCAs from referring cases to it that they do not have the power to review themselves does not, in itself, precluded such referrals.

The Court added that because the contested Decisions were based on a correct interpretation of the scope of Article 22 EUMR (as developed supra in section 1°), Illumina could not rely on the reorientation of the Commission’s decision-making practice to claim any violation of the principle of legitimate expectation.

The General Court thus concluded by dismissing Illumina’s action in its entirety.

Conclusion

Given the novelty of the Article 22 doctrine and the absence of guidance thereof at the time of the contemplated Transaction, this is arguably a particularly harsh ruling against Illumina, with serious consequences. The Commission, which had temporarily halted its in-depth probe into the Transaction last February while waiting for the General Court’s ruling, may now resume its work. As for now, Illumina and Grail remain subject to the interim measures imposed by the Commission in October 2021 requiring, in particular, that Grail be kept separate, be run by independent managers and that the parties implement Chinese walls in order to avoid sharing confidential and strategic information. In parallel of the in-depth review and the interim measures, the Commission, just six days after the judgment, sent a statement of objections to Illumina alleging unlawful gun-jumping (i.e., violation of the standstill obligation). The latter had indeed publicly announced that it had completed its acquisition of Grail while the Commission’s in-depth investigation was still ongoing. What’s next? Illumina made public its intention to appeal the judgment almost immediately after its issuance. It may hence not be the end of the story.

About the impact of the ruling beyond the Illumina/Grail transaction, it vigorously reinforces the Commission’s expansion of jurisdiction over mergers below the thresholds and confirms the need, for companies, whatever the activities concerned, to adapt to this new legal framework and take into account the clear uncertainty that derives from a potential Article 22 referral.

This is even truer as Margrethe Vestager, commenting upon the judgment, declared “We have a few acquisitions within our sights that might be relevant candidates.” So, there are clearly more cases to come.

In this context, our recommendations made a few months back (see here) remain all the more relevant after this confirmation’s judgment.

Finally, one can only hope that in the future the Commission and the NCAs will use this new Article 22 approach sparingly, focusing on the highest risks’ cases.

[1] Article 22 EUMR provides that « one or more Member States may request the Commission to examine any concentration as defined in Article 3 that does not have a Community dimension within the meaning of Article 1 but affects trade between Member States and threatens to significantly affect competition within the territory of the Member State or States making the request. »

No more ‘flying under the radar’: capturing transactions below the jurisdictional thresholds of national and EU merger control regimes

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The European Commission (“Commission”) is expanding its jurisdiction over transactions by encouraging national competition authorities (“NCAs”) of the EU Member States to ‘refer’ certain transactions to it that fall below the thresholds for mandatory notification at the EU and the national level. On 26 March 2021, the Commission published guidance (“Guidance”) setting out referrals that are ‘encouraged’ and how and when it will accept such referrals. This development has not required legislative changes (which would have taken some time and also required unanimity among EU Member States) but rather the Commission is resuscitating an existing provision, the so-called “Dutch clause”, namely Article 22 of the EU Merger Regulation (“EUMR”).

The Commission hopes to remedy what it perceives as an enforcement gap under the turnover-based thresholds for notification. In particular, this change in policy aims to catch transactions that would otherwise fall outside its jurisdiction as the turnover thresholds would not be met, but the parties otherwise have an important competitive position that is not reflected in their turnover, including so-called “killer acquisitions”. The Commission considers this to be a particular issue in the digital economy, pharmaceutical sector and other ‘innovation-driven’ sectors.

Only a couple of Member States (Austria and Germany) have implemented transaction value-based thresholds to catch acquisitions of companies with low turnover and high valuation. The Guidance allows the Commission to enable a more systematic EU-wide response.

The substantive test remains unchanged: the Commission will continue to assess whether there is a risk of significant impediment to effective competition (the “SIEC test”).

Transactions falling within the new policy

According to the Guidance, Article 22 referrals will be encouraged for transactions where the turnover of at least one party does not reflect its actual or future “competitive potential.” A non-exhaustive list of examples includes acquisitions of: (i) promising start-ups, (ii) “important innovators,” (iii) an “actual or potential important competitive force,” (iv) companies having access to key raw materials, infrastructure, data or IP rights, and (v) companies providing key inputs for other industries.

Whether a transaction is eligible for an Article 22 referral depends on two legal requirements: the transaction must (i) affect trade between Member States, and (ii) threaten to significantly affect competition within the territory of the Member State(s) making the request. The Commission provides examples of the relevant factors for the assessment of these criteria:

  • Trade between Member States could be considered affected, for example, based on the location of potential customers, data collection, or likely future commercialisation of IP rights.
  • The requirement of a threat to “significantly affect competition” within the relevant territory will be met if a preliminary assessment reveals a real risk that the transaction could result in the creation or strengthening of a dominant position, the elimination of an important competitive force (in particular, a new important innovator), the foreclosure from a market or supplies, and leveraging a strong market position from one market to another through exclusionary practices. The preliminary assessment conducted to verify this second criterion is without prejudice to the subsequent formal assessment of the transaction if the Commission accepts the referral.

Procedure/timing

The Commission intends to play an active role in the enforcement of the new policy. It is willing to “cooperate closely” with NCAs to identify transactions that would fall within the scope of this new policy, or even invite NCAs to invoke Article 22 in certain cases. Third parties are encouraged to contact the Commission or NCAs, if they consider a transaction appropriate for referral, provided they have sufficient evidence to enable a preliminary assessment.

The timing for referral is as follows:

  • In cases where there is no mandatory filing at a national level, NCAs have 15 working days to request referral, starting from the date on which the transaction is made known to them (according to the Guidance, this is when sufficient information is available to make a preliminary assessment);
  • The Commission will inform the other NCAs of the referral request “without delay”;
  • Other NCAs then have 15 working days to join the initial request (direct communication between NCAs is also encouraged by the Commission); and
  • After 10 additional working days, the Commission will be deemed to have adopted a decision to examine the transaction, if it has not already done so.

While the referral is subject to the deadlines set out above, the Commission is willing to accept Article 22 referrals up to six months after completion of the transaction or the transaction having become known in the EU (whichever is the later), or even later in “exceptional situations”.

Implications for parties to corporate transactions

Standstill effect and risk of gun jumping: The obligation not to close a transaction applies to transactions that have not completed at the date on which the Commission informs the parties that an Article 22 referral request has been made, after which the parties risk substantial gun jumping fines if they decide to close. The standstill obligation ceases if the Commission subsequently decides not to examine the concentration. The standstill obligation does not apply to transactions that have already completed before the Article 22 referral process is initiated such that no gun jumping fines can be incurred. The Commission will inform the parties as soon as possible if a referral is being considered to allow the parties to refrain from completing the transaction.

Duty to notify: Once the Commission has accepted Article 22 jurisdiction, the acquirer will be under a duty to notify the transaction under the standard notification procedure under the EUMR.

Potential effects on the transaction and risk of sanctions: Once the Commission has accepted jurisdiction, the transaction will be reviewed based on the standard substantive and procedural EUMR rules, which for transactions that raise concerns include the risk of remedies and in the worst-case scenario, a prohibition decision. If the transaction has not yet completed, there will be no real difference with the standard rules for notifiable transactions, although a decision to apply Article 22 adds to the timetable and may delay closing. However, effective remedies could prove difficult to implement for transactions that have already closed depending on the degree to which the acquired business has been integrated, particularly remedies requiring structural changes (e.g. full or partial divestment) to restore the situation pre-transaction.

The end of the “one stop shop” within the EU?: While under Article 22, the territorial jurisdiction is in theory limited to the EU Member States that have either referred the concentration to the Commission or joined the initial referral(s), the Commission takes into account the effects of a transaction in the rest of the EU whenever a relevant market has a geographic dimension larger than the referring Member State(s). This is likely to be the case in many digital and innovation markets potentially covered by the new policy and tech companies with global ambitions should assume that the Commission will investigate the effect of the transaction on an EU-wide basis.

The Guidance states that if a transaction has already been notified in one or more EU Member States that did not request a referral or join such referral request, this could be a factor against accepting a referral. However, for the purposes of legal certainty and considering potential for inconsistencies, in particular in relation to any remedies, we encourage the NCAs and the Commission to maintain a high level of cooperation to avoid overlapping investigations.

Our recommendations in light of the new policy

This is a major change to the Commission’s merger control policy. With this new policy, which is not limited to “Big Tech” or the digital economy (which has driven recent policy shifts or discourse relating to such shifts), EU merger control no longer provides for the legal certainty resulting from turnover-based notification thresholds. Several months of delay could be added between signing and closing, remedies could be imposed after the implementation of a transaction, and completed acquisitions might have to be unwound, all for transactions which prior to this policy change would not have faced any merger control review in the EU.

In light of this, transaction parties should consider:

Assessing the risk of falling within the scope of the new policy: Transaction parties should consider if a transaction falls within the categories of potential Article 22 referrals set out above. They should also consider if the transaction is likely to raise competition concerns – including through the strengthening of dominance/market power, access to advanced/innovative technology, R&D or data, or if the transaction involves a highly concentrated market, a target with a substantial user base or high projected growth, or meets merger control thresholds outside the EU. The rationale of the transaction and projected market developments will also be relevant factors in assessing if an Article 22 referral is likely.

Allocating risk and adapting transaction documents: Transaction agreements should be revised to take into account the risk of an Article 22 referral. In particular, agreements should allocate the risk of an Article 22 referral between buyers and sellers and include, or not include, as a condition precedent the absence of an Article 22 referral in the time period between signing and closing. If a transaction is likely to be referred, the acquirer may insist on having received from the Commission or NCAs confirmation that the transaction will not get referred under Article 22.

Strategically informing NCAs: At a national level, it might be beneficial to provide NCAs with enough information to allow a preliminary assessment of whether Article 22 referral is appropriate. Providing a sufficient level of detail should trigger the 15 working day deadline vis-à-vis the NCAs that have been provided with such information. It remains to be seen what level of cooperation will be achieved among NCAs; at this stage, it is not certain that informing one NCA would be regarded as informing all NCAs.

Reaching out to the Commission: While it is not yet clear what type of “comfort letter” the Commission is willing to provide, early communication with the Commission should help clarify whether a transaction is outside the scope of Article 22 referral, provided that sufficient information is made available to the Commission to make such assessment. This option should be particularly attractive in a competing bid scenario, or where competitors or other third parties otherwise may use the new Article 22 policy to scupper or delay a transaction.

Dusting the Regulatory Framework – French Competition Authority Seeks to Liberalize Distribution of Drugs and Private Medical Biology

On April 4, 2019, just three months after the publication of the European Commission (EC) report on “Competition enforcement in the pharmaceutical sector,” the French Competition Authority (FrCA) issued its report n°19-A-08 on “Distribution of drugs and private medical biology.” While the reports do not have much in common, except maybe the shared concern of excessive prices in the pharmaceutical sector, they both illustrate the keen interest of the European competition authorities in this sector. The focus of the EC report is the market players’ conducts and how they may impede competition. The FrCA report rather focuses on the obstacles to effective competition that may derive from the current legislative and regulatory framework and may translate in a competitiveness gap to the detriment of French-based operators and in higher prices for patients. It deals inter alia with a French “exception”: the monopoly of pharmacies and pharmacists over drug distribution. The report also covers a wide range of French-centric topics from online sales of drugs to capital ownership of private biology medical laboratories and pharmacies, and drug advertisement, as well as the situation of wholesalers-distributors.

Softening the pharmacies and pharmacists’ monopoly over drug distribution

16 of 28 EU Member States have softened the pharmacies’ and/or pharmacists’ monopoly over drug distribution. Among France’s neighboring countries, only Belgium, Luxembourg and Spain have a legislation as restrictive as France, where drugs, whether prescription-only or over-the-counter (OTC), may only be sold in pharmacies by qualified pharmacists.

After noticing the positive effects on prices of the enlargement of the distribution channels for certain medical devices, the FrCA advocates for a liberalization of pharmacies’ monopoly over the sale of OTC drugs, to allow drugstores and supermarkets to sell them as well. For the sake of public health, it is suggested to preserve the pharmacists’ monopoly over their sale, meaning that OTC drugs could be sold in drugstores or supermarkets but only by qualified pharmacists on whom no sales targets may be applied, and in delineated spaces with their own cash point.

Softening the regime applicable to advertising issued by pharmacists

The current regulations provide for a strict framework for advertising issued by pharmacies, be it done in favor of the pharmacies themselves or of any product, drug or other, marketed by them.

According to the FrCA, the way those regulations are currently being construed translates into excessive restrictions and prevents pharmacists from using any form of advertising, including when it does not pertain to medicinal products and therefore does not present any risk to public health.

One of the detrimental consequences thereof is the absence of any real competitive pressure between pharmacies and significant price disparities. For instance, the FrCA has found price disparities between pharmacies ranging from 103.4% to 431% for certain drugs.

The FrCA considers that softening the framework for advertising issued by pharmacists and increasing price transparency would contribute to boost competition between them, and between pharmacists and supermarkets and drugstores commercializing the same personal care products.

One of the recommendations issued by the FrCA in that respect would be to better distinguish between advertisement for drugs and for personal care products: by, for instance, allowing pharmacists to put in place rebates and loyalty programs for the latter.

Softening the rules applicable to online drug distribution

Directive 2011/62/EU obliges EU Member States to allow online sales of OTC drugs and permits online sales of prescription drugs. Implementation of the Directive has noticeably differed between countries. For instance, the UK and the Netherlands have allowed online sales for both OTC and prescription drugs by pure-players. Germany, Portugal, Sweden and Denmark have allowed the sale of any drug (OTC or prescription), but only by websites leaning on a physical pharmacy. Finally, France, Belgium, Spain, Italy and Ireland have limited online sales to OTC drugs and impose a physical pharmacy.

Questioning the effectiveness of the legal framework in France, the report points out that online sales of drugs are not very well developed in France. Most French patients still think the practice is illegal or non-existent. As a result, online sales of OTC represent only 1% of total sales in France vs 14.3% of total sales in Germany. Besides, the French offer of online sales is very limited compared to that of other European countries.

According to the FrCA, the development of online sales is impeded by the numerous legal constraints facing France-based players. In particular, the prohibition of joint websites between pharmacies is being challenged because it prevents them from pooling their resources. Furthermore, the FrCA points out the difficulty for pharmacies to get visibility since the law prohibits advertising of online sales websites, comparison price websites and paid referencing.

Here again, the FrCA considers that the solution would be to soften the applicable legal framework to provide patients with better information on the online sale of medicines, as well as on the actors authorized to do so. This enhanced information would promote the emergence of an economic model better suited to the development of competitive national operators capable of competing effectively with foreign players.

Other issues addressed

The report also points out several improvable aspects that could help balance the market. The FrCA points out the rules of capital ownership of pharmacies and private medical biology laboratories that could be softened to allow better access to financing and, regarding private biology medical laboratories, to put an end to an asymmetry existing as a result of a softening in the rules of capital ownership followed by a step backward, which has created an unjustified difference between laboratories that could benefit from the softening and the ones that were created after the step backward. Finally, the FrCA advocates for a revision of the method of remuneration of wholesalers-distributors, allowing for a fairer compensation of the heavy public service mission weighing on them.

Conclusion

This report is another illustration of what could start to become an interesting trend at the FrCA: using its power to deliver opinion to invite the legislator to tackle the inefficiencies and barriers to competition created by old and sometimes overly rigid rules in regulated sectors. In the same vein, one may mention its report of February 21, 2019, n° 19-A-04, on the broadcasting sector, where the FrCA advocates for a softened regulation of the sector to consider the development of new technologies and market entry of new players.

While this trend is welcome for France-based players and also for consumers in general, it remains to be seen how these recommendations will be used (or not) by the legislator.

 

More Affordable and Innovative Medicines and Treatments in Europe – Has the Competition Enforcement Met the 2009 Objective?

A decade ago, the European Commission conducted a thorough sectoral inquiry into the European pharmaceutical sector that identified antitrust shortcomings impeding access to more affordable and innovative medicines and treatments. Concluding this inquiry by setting priority actions for the years to come, former Competition Commissioner Kroes called for “… more competition and less red tape …” (sic).

Since this statement, there has been intense enforcement activity in the sector not only by the European Commission itself, but also by the European Union Member States’ antitrust authorities.

In its report on “Competition enforcement in the pharmaceutical sector,”  issued on January 28, 2019, the European Commission takes stock of their actions in this space.

The past enforcement record (2009-2017): intense activity, hard stance towards pharmaceutical companies with the use of novel or less known theories of harm

Between 2009 and 2017, no less than 29 infringement decisions were issued by European antitrust authorities, leading to fines totaling over €1 billion, while the European Commission asked for structural remedies for 25% of the reportable mergers in the sector.

Antitrust enforcement

In total, European antitrust authorities investigated over a hundred cases during the 2009-2017 period. Their investigations related to a wide range of medicines and many of the actors involved in the pharmaceutical sector: manufacturers, wholesalers and retail distributors.

Applying Article 101 of the Treaty on the Functioning of the European Union (TFEU) (or its national equivalent), which prohibits anticompetitive agreements and cartels, European antitrust authorities condemned, for the first time, certain pay-for-delay agreements, whereby a generic company agrees to restrict or delay its independent entry onto the market in exchange for benefits transferred from the originator. They also condemned practices of collusion in tenders, price fixing, conduct aimed at excluding competitors or limiting their ability to compete, and other types of coordination between competitors.

Besides, European antitrust authorities found that the misuse of the regulatory framework, whereby a dominant company misleads public authorities and misuses the regulatory procedures, can infringe Article 102 TFEU (or its national equivalent). Similarly, disparagement and other practices curbing demand for generics were found to infringe Article 102 TFEU. Reviving the neglected notion of exploitative abuse, European antitrust authorities found that under certain circumstances, a dominant pharmaceutical firm may infringe Article 102 TFEU if it imposes unfair terms and conditions or excessive pricing. In these cases, the reward for innovation seemed to have weighed little in the balance against the alleged harm caused to patients.

Merger control

19 of the 80 mergers reviewed by the Commission over the 2009-2017 period were subject to structural remedies, namely divestitures, offered by the merging firms. Antitrust concerns in those cases related to the risks of (i) price increases for some medicines in one or several Member States, (ii) depriving patients and national healthcare systems of some medicinal products, and (iii) diminishing innovation in relation to certain treatments developed at the EU or even global level.

All in all, the Commission takes a positive view: it considers that active competition enforcement throughout the European Union has fostered innovation, choice and affordability by intervening where companies, unilaterally or jointly, relax competitive pressures that force them to innovate further or prevent others from innovating or illegitimately exploiting their market power.

What’s next?

After this positive assessment, the question that finally arises is whether pharmaceutical companies remain in the spotlight in Europe and should expect the same level of attention from the European antitrust authorities.

The response is, fortunately or unfortunately (depending on the standpoint), yes, definitely.

The now numerous precedents and case law have undoubtedly helped the sector to put some order into the practices implemented in the past. However, the critical challenges facing pharmaceutical companies for years (succession of blockbusters, very high cost and remuneration of innovation, very lengthy development process, etc.) weaken them and may still lead them to adopt either defensive or aggressive strategies at risk from an antitrust perspective. The European Commission remains fully aware of such risk and ultimately recommends that: “Authorities … remain vigilant and pro-active in investigating potentially anti-competitive situations, including where new practices used by companies or new trends in the industry are concerned, such as the growing relevance of biosimilars.”

So, it is most likely not the end of the story …

Third Circuit Rules that Antitrust Standing Is Properly Challenged Under Rule 12(b)(6) for Failure to State a Claim, Not Under Rule 12(b)(1) for Lack of Subject Matter Jurisdiction

On September 7, 2016, the Third Circuit ruled that a district court erred in granting a Fed. R. Civ. P. 12(b)(1) motion to dismiss federal antitrust claims for lack of subject matter jurisdiction, because the court conflated the analyses for Article III standing and antitrust standing. Hartig Drug Co. Inc. v. Senju Pharmaceutical Co. Ltd., No. 15-3289 (3d Cir. Sept. 7, 2016).

Hartig Drug Company Inc. (“Hartig”), an Iowa-based drug store chain, sued pharmaceutical manufacturers alleging that they suppressed competition for medicated eyedrops through a variety of means, which resulted in higher prices for the eyedrops. Hartig purchased the eyedrops from a distributor, AmerisourceBergen Drug Corporation (“Amerisource”), which purchased the eyedrops from the manufacturers. Hartig’s claim as an indirect purchaser from the defendant manufacturers was barred by Illinois Brick v. Illinois, 431 U.S. 720 (1977), so it alleged that Amerisource had assigned its claim to Hartwig, which enable Hartwig to sue as a direct purchaser.

The manufacturers filed a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction, and also a Rule 12(b)(6) motion to dismiss for failure to state a claim. For the Rule 12(b)(1) motion, defendants submitted Amerisource’s Distribution Services Agreement (“DSA”) with one of the manufacturers—which was not mentioned in Hartwig’s complaint—to argue that an anti-assignment clause in the DSA prohibited Amerisource from assigning its claim without the defendant’s consent. The District Court accepted that argument and granted the Rule 12(b)(1) motion on the ground that Hartig was actually suing as an indirect purchaser and not as a direct purchaser because the assignment was invalid.

On appeal, several retailers filed an amicus brief arguing that defendant’s anti-assignment argument reached only the issue of antitrust standing, which is different from Article III standing, and the district court erred in ruling that it did not have subject matter jurisdiction. The Third Circuit agreed.

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Third Circuit Rejects Drug Manufacturer’s Single-Product Bundling Claim – But Prescription for the Future Is Unclear

You know what they say: one man’s price is another man’s bundle.  No?  Well maybe they should, after this recent decision out of the Third Circuit in Eisai, Inc. v. Sanofi Aventis U.S., LLC involving allegedly exclusionary discounting.  The court ultimately found Sanofi’s conduct was not unlawful.  But the decision raises questions about how such conduct – a hybrid of price discounts and single-product bundling – will be treated going forward, at least in the Third Circuit.

At issue was Sanofi’s marketing of its anticoagulant drug Lovenox to hospitals through its Lovenox Acute Contract Value Program.  Under the Program, hospitals received price discounts based on the total volume of Lovenox they purchased and the proportion of Lovenox in their overall purchase of anticoagulant drugs.  A hospital that chose Lovenox for less than 75% of its total purchase of anticoagulants received a flat 1% discount regardless of the volume purchased.  But when a hospital’s purchase of Lovenox exceeded that percentage, it would receive an increasingly higher discount based on total volume and percentage share, up to a total of 30% off the wholesale price.  A hospital that did not participate in the Program at all was free to purchase Lovenox “off contract” at the wholesale price.

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“Product Hopping”: New Second Circuit Decision Addresses Antitrust Limits on Innovation and Related Marketing Activity

In late May, the U.S. Court of Appeals for the Second Circuit issued the first appellate decision addressing the pharmaceutical industry practice called by some “product hopping”—a two-step process in which a drug approaching the end of its patent term is withdrawn or made less desirable to customers so that patients will switch to a successor product with more exclusivity remaining.  In this way, drug manufacturers may seek to protect sales from generic competition.  “Product hopping” cases are often analyzed under the antitrust rules developed to assess claims of “predatory innovation” or related conduct, as exemplified by well-known cases involving Microsoft and Kodak.  In this article, just published in Law360, lawyers from Orrick’s Intellectual Property and Antitrust groups weigh in on the Second Circuit’s decision, focusing on aspects of the analysis that may not be applicable in different cases and contexts.