ECJ confirms that GSK distribution arrangements must be reassessed by Commission, but overturns CFI on purpose of EU competition rules

On 6 October 2009 the European Court of Justice ('ECJ') confirmed the judgment of the European Court of First Instance ('CFI') that the Commission must reassess the impact of GSK's distribution arrangements in Spain, but overturned the CFI's finding that the fundamental purpose of EU competition rules is the protection of final consumers.

The case relates to GSK's agreements with wholesalers in Spain. Under these agreements, the prices paid by Spanish wholesalers varied depending on whether GSK products were resold within Spain or exported, with higher prices being paid for products exported outside Spain. In March 1998, prior to the move to compulsory self-assessment under Regulation 1/2003, GSK notified these agreements to the Commission. On 8 May 2001, the Commission found that they infringed EU rules on anti-competitive agreements because they restricted wholesalers' ability to sell products outside Spain and did not offer sufficient pro-competitive benefits to merit exemption.

GSK appealed the Commission's decision to the CFI and, on 27 September 2006, the CFI sent the case back to the Commission for further assessment. Both GSK and the Commission appealed the CFI decision, which the ECJ has now upheld on the facts.

Although the ECJ ultimately upheld the CFI, the differences in the reasoning of the two courts may have far reaching implications and is worth examining further. Among others, the CFI found:

• the purpose of EU competition rules is to protect the interests of final consumers;
• although GSK's terms constituted a restriction on sales between EEA Member States, which would normally constitute an object restriction (in effect a per se infringement), Government controls on prices and supply in the pharma sector had already distorted the market to such an extent that consumer harm could not be assumed, and in these circumstances the Commission had not sufficiently investigated whether consumer harm had in fact arisen;
• the Commission had also failed to sufficiently investigate whether, in the particular context of the pharmaceutical sector with its high levels of investment in innovation and Government intervention, GSK's terms offered benefits that could justify an exemption from the EU prohibition on restrictive agreements, particularly by increasing incentives to invest in the development of new and innovative drugs.

While agreeing with the CFI that the Commission's assessment of the facts was inadequate, the ECJ overturned the CFI's judgment on the purpose of EU competition rules and the assessment of restrictions on inter-State trade. Specifically, the ECJ found:

• the purpose of EU competition rules is to protect "not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such"; and
• restrictions on export sales between EEA Member States should be treated as object (effectively per se) infringements, regardless of their impact on final consumers; but
• given the structure of the pharmaceuticals sector, the Commission had not sufficiently assessed whether the positive impact of GSK's distribution agreement on investment in innovation might justify exemption.

Comments:

By shifting the focus of competition enforcement away from consumer harm and focusing on market structure, including apparently harm to competitors, the ECJ potentially opens the door to less economically rigorous enforcement of EU competition rules going forward. In particular, the explicit recognition of a broader purpose of EU competition law casts some doubt on the Commission's enforcement priorities, which have focused on consumer harm.

As regards the pharmaceutical sector specifically, the ECJ's acknowledgment of the specific features of the sector and the referral of GSK's distribution arrangements back to the Commission - notwithstanding their restrictive effect on inter-State trade within the EEA - will raise hopes that some easing of the tensions between the EU rules on cross-border trade and the realities of the pharma industry is possible. Whether or not this actually happens will depend on the Commission's handling of the case from here.

Click for the full text of the ECJ decision.

Click for the full text of the CFI decision.