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Friday, 11 April 2008

No link between parallel trade and reduction in R&D, says AG

It's only available in ten official EU languages (naturally excluding English), but the IPKat thinks that the Opinion of Advocate General Dámaso Ruiz-Jarabo Colomer in Joined Cases C-468/06 to C-478/06 Sot. Lélos Kai Sia EE (and Others) v GlaxoSmithKline AEVE is worth paying close attention to. So, presumably does the European Court of Justice itself since it went to the effort of pinning a press release on the Opinion on to its website.

Right: it may provide relief from migraine, but Imigran is giving GSK a real headache in these proceedings before the ECJ

At the heart of this case, a reference for a preliminary ruling from Greece, lies the question whether GlaxoSmithKline can refuse to supply orders from wholesalers for pharma products that, it believes, will be pushed into the IP owners' favourite bugbear, parallel trade. The Advocate General has recommended the Court to rule that any attempt to use one's market dominance (and having patent and trade mark rights can create that dominance) in order to stop lawful parallel trade is an abuse of dominant position under Article 82 of the EC Treaty.

According to the press release, which gives a fuller picture:

"Through its subsidiary, GSK ... distributes in Greece certain pharmaceutical products for which it holds the patent (Imigran for migraine, Lamictal for epilepsy and Serevent for asthma). For a number of years, the applicants (intermediary wholesalers) have been buying those medicinal products in order to supply the market not only in Greece but also in other countries (Germany and the United Kingdom) where the amount reimbursed per medicinal product is higher than that obtained in Greece. In 2000, GSK changed its system of distribution in Greece, no longer meeting orders from wholesalers. It supplied hospitals and pharmacies through a company called Farmacenter AE. The dispute which then arose gave rise to a first reference to the Court of Justice of the European Communities for a preliminary ruling [Case C-53/03 Syfait and Others [2005] ECR 4609 ..., in which the Court declared that it had no jurisdiction to reply to the body which had referred the question to it (the Epitropi Antagonismou), since the latter was not a court or tribunal].

Before the Greek civil courts, Sot. Lélos and the other wholesalers maintained that GSK’s interruption of supplies, as well as its practice of trading through Farmacenter, amounted to anti-competitive conduct and abuse of dominant position.

The Trimeles Efeteio Athinon (Appeal Court of Athens) therefore sought a preliminary ruling on a number of questions concerning Community competition law and the abuse of dominant position, as well as parallel exports of medicinal products from Greece to other Member States.

Advocate General Dámaso Ruiz-Jarabo points out that the Treaty provision which prohibits abuse of dominant position does not admit of any exception. Moreover, he maintains that the Treaty does not provide a basis for attributing to undertakings in a dominant position conduct which is in itself abusive, even when the circumstances of the case leave no room for doubt as to its anti-competitive purpose or effect. On the contrary, such conduct may be objectively justified.

First, in the view of the Advocate General, the European pharmaceuticals market is an imperfect market, with a low level of harmonisation, characterised by State intervention in respect of pricing and public reimbursement systems and by the duty to supply and where, because of the industrial patents of pharmaceutical products, the holders of those industrial property rights can easily assume positions of dominance.

Nevertheless, the Advocate General believes that the price regulation system is not completely free from the influence of the manufacturers, who negotiate prices with the health authorities of the Member States. By the same token, the duty to supply does not justify cutting off supplies to rival wholesalers, because the needs of patients in a Member State are not subject to sudden changes, and the statistics for the various illnesses are reliable, offering companies a degree of predictability which enables them to adapt to the market.

Second, protection of legitimate business interests may justify conduct such as that of GSK, in accordance with certain case-law of the Court of Justice. However, in the present case, the Advocate General rejects the idea of a causal link between the loss of income because of parallel trading and the producer’s reduction of investment in research and development. In fact, the European Union offers undertakings a favourable environment in that respect, encouraging them to minimise the costs entailed by research and development by means of block exemptions for horizontal agreements of that nature.

Lastly, the Advocate General suggests that undertakings in a dominant position may be entitled to demonstrate the efficiency in economic terms of their potentially abusive conduct. As regards the circumstances of the present case, however, the Advocate General takes the view that – apart from the description of the negative consequences of parallel trade – GSK has not indicated any positive aspect resulting from its cutting down on medicinal supplies to wholesalers.

In consequence, the Advocate General proposes that the Court of Justice state in reply to the questions referred for a preliminary ruling that an undertaking in a dominant position which refuses to meet in full the orders of wholesalers of pharmaceutical products, with a view to reducing the harm caused by parallel trade, thereby engages in abusive conduct. However, it is possible that the undertaking can provide an objective justification for its conduct by showing that the regulation of the market compels it to behave in that manner in order to protect its legitimate business interests (it not being possible in the present case to rely on the pricing system for medicinal products, the duty to supply or the impact on innovation incentives)".
Says the IPKat, it would be good to see the basis upon which the Advocate General was able to conclude that there was no "causal link between the loss of income because of parallel trading and the producer’s reduction of investment in research and development". What is the nature of his evidence? And how, in the course of a reference to the ECJ on a preliminary legal issue, is it possible for a party to the proceedings to challenge such a conclusion?

Some cures for headaches here and here

3 comments:

Anonymous said...

What bizarre (non) logic this seems to be. It appears highly questionable for two reasons (in addition to the IPKat’s comments):
1. The “favourable environment” is unchanged by the presence or absence of parallel imports. Accordingly, since it is clearly “on both sides of the equation”, as a matter of basic logic it can not tip the scales either way; and
2. Any person who has ever worked in any commercial organisation is aware of a direct causal link between what the organisation earns and what it spends. So it is demonstrably false to claim that there CAN NOT be a causal link. Whether, in each case, there IS a causal link is a matter of evidence (back to the IPKat’s comment).

Matthew said...

This is a general (quite long) comment on the specific comment of Friday 11 April.

The point about ‘what a company earns and what it spends’ and the correlation there is misleading unless elaborated upon. Large companies especially are not very good at spending what they earn on later R&D. In fact, SMEs generally do much better in this respect (assuming we see R&D as a positive thing). Large drug companies are though very good at spending a much higher proportion of earned income on advertising, promotion (and admin.) related to the drugs (with IP attached). I believe this is particularly the case for 'reinvestment' in the process of making and selling 'lifestyle' and 'me-too' type drugs.
I think that is the point here - even if not clarified enough in the Opinion. It counters the general argument that consumers will benefit if EU originator drug manufacturers earn more income through inter alia, prohibitions on parallel trade (which is effectively what all this boils down to isn't it? i.e. how much more money these companies should earn...).
Perhaps what the learned AG is trying to indicate is that higher levels of income do not necessarily equate with higher levels of R&D. Of course, there is an element of causation here. Earning is a major cause of spending (another is speculation). But it is where the spending occurs that is the issue, not that it occurs. At least, this basic 'direct causal' proposition creates certain difficulties in relation to parallel trade.
Thus, I think the comment about it being 'demonstrably false' is a rather heavy-handed reply, though I understand the premise. If we agree that higher income does not have a direct and reliable correlation with R&D (or that this is an arguable case), it becomes logical to say that there is no "causal link between the loss of income because of parallel trading and the producer’s reduction of investment in research and development". As a starting position, this is a good place. It is then a matter of causation - but of proof, positive proof. The AG is asking correctly for a positive proof in the case. This seems perfectly acceptable to me for the mighty GSK (or the like). The onus is on the claimant, even the defendant, to discharge this burden of proof (beyond a balance of some level of a probability), rather than the court to not show it.

twr57 said...

Reading this stuff makes me feel incredibly stupid - I can't follow the logic.

Obviously there is no necessary fixed direct proportionality between what companies earn and what they invest in research. Equally obviously, what one earns powerfully influences what one invests (for example, if one earns nothing, it will be difficult to raise funds for further investment). Parallel importing from low-priced to high-priced markets inevitably reduces the patentee's profits and the attractions of the high-priced market, and hence the propensity to invest in inherently chancy propositions. The Court should take judicial notice that rain falls from time to time.

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