On 10 March 2020, the Court of Appeal ("CA") allowed one of the four grounds of appeal of the Competition and Markets Authority ("CMA") in its challenge to the judgment of the Competition Appeal Tribunal ("CAT") allowing the appeal of Pfizer and Flynn Pharma ("Flynn") against the CMA's infringement decision of 2016 finding that Pfizer and Flynn abused a dominant position by charging excessive and unfair prices in the UK for phenytoin sodium capsules (an anti-epilepsy drug). However, the CA upheld the overall judgment of CAT that the case be remitted back to the CMA for reconsideration of whether Pfizer and Flynn had abused their dominant positions by charging excessive prices for phenytoin sodium capsules and, if so, what fine should be imposed.
| what you need to know - key takeaways |
- As evidenced by the European Commission's intervention in this case, this judgement provides important clarifications on the legal test for excessive/unfair pricing – cases involving this exploitative type of abuse are rare both on an EU and on a UK level.
- The CMA is now required to reconsider its abuse of dominance findings and calculation of fines.
- The Court of Appeal's decision may influence the CMA's ongoing investigations under Chapter II/Article 102 TFEU into liothyronine and hydrocortisone (regarding the latter the CMA recently issued a supplementary Statement of Objections in three ongoing investigations).
- Any decision by the CMA may be susceptible to a further appeal.
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Background
Phenytoin sodium capsules are an important anti-epilepsy drug for an estimated 48,000 patients in the UK, which was previously sold under the brand name "Epanutin" by US company Pfizer. In 2012, Pfizer assigned the rights to market phenytoin capsules to Flynn, a UK distributor, whilst Pfizer continued to manufacture and supply the product to Flynn.
Flynn de-branded Epanutin and continued to sell it as a generic, unbranded, drug in the UK, meaning it was no longer subject to the Pharmaceutical Pricing Regulation Scheme ("PPRS").
After de-branding Epanutin, Flynn significantly increased the price of phenytoin virtually overnight. In May 2013, the Office of Fair Trading, the CMA's predecessor, launched an investigation into potential abuse of dominance under Chapter II of the Competition Act 1998 and Article 102 TFEU.
The CMA's 2016 decision
In 2016, the CMA found that both Pfizer and Flynn were dominant in the relevant markets and had infringed competition law by charging excessive and unfair prices in the UK for phenytoin sodium capsules. Pfizer had abused its position in relation to the manufacture of the drug whilst Flynn had abused its dominance in relation to its distribution.
After the drug was de-branded, significant price increases were applied to both the manufacture (by Pfizer) and distribution (by Flynn) of the drug with the NHS expenditure on the drug rising from GBP 2 million in 2012 to GBP 50 million in 2013.
A record fine of GBP 89.4 million was imposed on the two pharmaceutical companies (GBP 84.2 million on Pfizer and GBP 5.2 million on Flynn respectively). The CMA also issued directions ordering both companies to reduce their prices.
The CAT's 2018 decision
Following an appeal against the CMA's decision, the CAT upheld the CMA's finding that Pfizer and Flynn were dominant, but rejected the CMA's findings on abuse (see our summary here).
The CAT appeal focussed on whether the CMA correctly applied the two-step legal test originally set out in United Brands for determining excessive/unfair prices:
- Step 1 – "excessiveness": first whether the difference between the costs incurred and the selling price charged by a dominant company is excessive.
- Step 2 – "unfairness": second, whether the price charged is unfair either (a) in and of itself, or (b) in comparison with competing products.
In applying that two-step test, the CAT indicated that the CMA made the following errors:
- The CMA's "cost plus analysis": in considering whether prices were excessive (Step 1), the CMA adopted a "cost plus analysis" under which a return on sales of no more than 6% would be considered reasonable, on the basis that this is the permissible return under the PPRS. The CAT held that the CMA was wrong in law to confine its methodology for determining whether the drug prices were excessive by reference only to its "cost plus" test.
- Benchmark price: under Step 2, the CMA failed to ascertain a hypothetical benchmark price in conditions of "normal and sufficiently effective competition".
- Comparator products: in determining that benchmark price, the CMA failed to give proper consideration to whether, amongst other things, phenytoin sodium tablets – the prices of which were higher than the prices for capsules – served as a meaningful price comparator. Instead, the CMA found that Pfizer's and Flynn's prices were unfair in themselves, as they bore no reasonable relation to the economic value of the capsules.
- Economic value of phenytoin: the CMA also failed to consider patient benefits under Step 2.
- Fining methodology: the CAT also expressed concerns about the CMA's decision to impose a 400% uplift on Pfizer's fine for the purposes of deterrence.
Grounds of appeal
The CMA appealed the CAT's judgement on four grounds:
- Ground 1 - United Brands: the CMA challenged the CAT's interpretation of the United Brands test, in particular arguing that the two limbs under Step 2 are true alternatives (such that if the CMA found one was satisfied, it did not need to address the other) and not, as the CAT found, simply two examples of individual tests that might be used in a particular case. This ground also challenged the findings of the CAT that the CMA is obliged to consider evidence adduced by the parties (i.e. where that evidence related to a limb not relied on by the CMA).
- Ground 2 - Benchmark price: this ground challenged the finding of the CAT that the CMA should have ascertained a hypothetical benchmark price in conditions of "normal and sufficiently effective competition" against which to assess whether the actual price charged is excessive.
- Ground 3 – Relevance of comparator products: this ground challenges the CAT's finding that the CMA should have carried out a more intense evaluation of comparable products. This ground focused upon the existence of discretion for competition authorities and whether it serves to limit the jurisdiction of the Tribunal to reject findings or conclusions which amount to judgment calls of the authority.
- Ground 4 - Economic value of phenytoin: this ground challenged the CAT's findings on the meaning of “economic value” in the United Brands test.
Flynn also appealed certain findings of the CAT due, it appears, to concerns about whether those findings would be binding on any remittal of the case to the CMA ("Ground 5").
The European Commission intervened in support of the CMA on the basis that the CAT erred in law in its articulation of the test for abuse of dominance. According to the Commission, if the law is as laid down by the CAT, it would be impracticable and unworkable.
The CA's 2020 decision
The CA largely upheld the CAT's findings, with three of the CMA's four Grounds (1,3 and 4) being dismissed.
- United Brands: the CMA's approach was unduly rigid and literal by interpreting the two limbs under Step 2 (the unfairness test) as strict alternatives. The CA clarified that whilst Step 2 cannot be construed as conferring an obligation on competition authorities to use multiple tests (the CA noted that the CAT's decision was unclear on this point), if evidence is presented by a party under one of the alternative limbs under Step 2, then that evidence must be considered by a competition authority.
- Benchmark price: the CA allowed this Ground of Appeal, concluding that whilst "a" benchmark is required, a competition authority can choose a benchmark based upon costs and it is not necessary to establish a hypothetical benchmark price.
- Relevance of comparator products: the CAT's finding that the CMA failed to carry out a sufficient deep or intense investigation (i.e. a failure adequately to consider comparator products) is a finding of fact which the CAT is entitled to make and against which there is no appeal.
- Economic value of phenytoin: the CA dismissed the CMA's challenge to the CAT's findings on 'economic value' on the basis that (a) the CAT judgment relied on a finding a fact which it was entitled to reach (and is not subject to appeal) and (b) the CMA's approach erred in law and adopted an artificially limited approach to the evidence.
- Flynn appeal: the CA dismissed Flynn's appeal observing that nothing in the CAT's judgment is intended to be binding on remittal and the judgment does not fetter the right of any party to adduce new evidence or argument on the issues remitted.
Conclusion
The judgment of the CA provides some clarity on the obligations on a competition authority to evaluate relevant evidence when applying the United Brands test for excessive pricing. However, a competition authority retains considerable discretion and is entitled to conclude that prices are excessive by reference to a cost based benchmark (so long as other relevant benchmarks that may have been put forward by the parties have been considered).
There is no requirement for the authority to ascertain a hypothetical benchmark price that would exist in conditions of "normal and sufficiently effective competition" by reference to which it can be determined whether prices are excessive.
Although the CA sided with only one of the CMA's appeal grounds, and upheld the judgment of the CAT that the case be remitted back to the CMA, the CMA's chief executive Andrea Coscelli welcomed the ruling as a whole. He did, however, again emphasise the CMA's "serious concerns about the very big price increases imposed by certain drugs companies for several other generic drugs, which have cost the NHS hundreds of millions of pounds".
With thanks to Nadja Waksman of Ashurst for her contribution.
