The Competition Appeal Tribunal (CAT) recently gave its judgment in Pfizer and Flynn’s appeal of the ground-breaking excessive pricing Decision by the Competition and Markets Authority (CMA). While the findings of dominance (based on an ultra-narrow market) have been upheld, the controversial finding of abuse has been set aside (for now).

This post guides readers through the key points in the CAT’s judgment and looks at the prognosis for future UK excessive pricing investigations; for more detail on the judgment please see our post on the CLIP Board.

How should Article 102 be applied to cases of excessive and unfair prices?

In its 500 page Decision, the CMA had sought to apply the Court of Justice’s United Brands ‘two-limb’ test for excessive and unfair pricing; but the CAT concluded that the CMA should have gone further in its analysis. The CAT acknowledged the opinion of Advocate General Wahl (in another recent excessive pricing case) that authorities should have flexibility to determine their own framework for assessing prices. However, it indicated that an authority seeking to apply the United Brands test should do so in the following way.

1. Set the benchmark price by considering a range of possible analyses that reflect market conditions to establish what the price would be under normal and sufficiently efficient competition. The CMA had set a benchmark price at a level of ‘cost plus’, together with a return on sales linked to the PPRS, which the CAT found was incorrectly based on conditions of “idealised competition”, rather than on “real world” pricing. According to the CAT, the CMA had placed far too great a reliance on the PPRS as an indicator, given that it applies in different circumstances, and there was evidence from the DoH expressing doubts as to its relevance.
2. Compare the benchmark price with what was charged in practice and determine whether that is excessive, by assessing whether the difference is “significant and persistent”. An authority should look at the reasons for the difference, previous decisions, and the wider market conditions. The CAT made clear that it was not concluding that price increases at issue could not give rise to a finding of excessiveness, but simply that the benchmarking approach adopted by the CMA did not give a sufficient basis for doing so.
3. If the price is excessive, consider whether the price is either unfair in itself, or unfair when compared to competing products. Either option can satisfy the test, but there needs to be consideration of whether the alternative can show that the price is actually fair. The CAT found that despite the narrow market definition, there were still comparators from outside the defined market which could be used in this assessment.
4. If the price is unfair, assess whether the price bears a reasonable relation to the economic value. The CAT highlighted the importance of including non-cost factors, such as the benefit to patients reliant on the product, when determining the economic value.
5. Consider any objective justifications advanced by the dominant undertaking.
6. Find an infringement of Article 102 if all conditions above are fulfilled (without any objective justification), and the dominant undertaking is reaping trade benefits that it would not reap under conditions of normal and sufficiently effective competition.

The future for excessive and unfair pricing cases?

The CAT reminded the CMA of the presumption of innocence that must favour an undertaking under investigation. A headline-grabbing price increase is not presumptively unlawful, and is not even unlawful when compared to theoretical figures; the full market and commercial context must be considered. At each stage of the analysis, there must be some form of check to ensure that interim conclusions cannot be undermined.

The CAT did not rule specifically on the level of the fine which had been imposed. However, it did note that the 400% upwards adjustment which had been applied to Pfizer’s fine for deterrence (making it the largest penalty issued by the CMA) appeared difficult to justify, particularly in the light of the new powers of the DoH.

The CAT has said that it is minded to remit the Decision to the CMA, in order for it to consider the case with the benefit of additional guidance coming from both the CAT’s judgment, and the recent AKKA/LAA case before the EU Court of Justice. Our expectation is that the CMA will seek to prepare a revised infringement decision in relation to Pfizer/Flynn which follows the CAT’s guidance, and that it will also try to fit other substantially progressed investigations (such as that into hydrocortisone) into the new framework, in parallel to a possible appeal of the CAT’s judgment. The CMA has already indicated that other active investigations it has in the area may now be severely delayed (noting the risk of continued high costs to the DoH).

In our view, the likelihood of new investigations – which was already reduced given the DoH’s new powers – is now even lower.

Nevertheless, competition authority interest in this area continues: the Commission has an excessive pricing investigation (into Aspen Pharma) open, and other authorities (such as the Danish, with its infringement decision against CD Pharma – discussed here) and the Dutch (with its new focus on price containment even for branded pharmaceuticals – see here) are likely to remain active in this area.