Acting legally, even within the specific framework of regulatory procedures, is not necessarily a defence to antitrust allegations of abuse of dominance. That’s the clear and perhaps startling message from the European General Court’s July 2010 judgment in AstraZeneca v. Commission.
The decision confirmed the European Commission’s 2005 ruling that AstraZeneca, a pharmaceutical company, had abused its dominant position in the market for proton pump inhibitors used to combat gastrointestinal diseases and conditions such as ulcers and acid reflux.
The court also upheld 52.5 million euros of the 60-million-euro fine imposed on AstraZeneca. It reduced the fine slightly because the commission had erred in its assessment of the impact of the company’s misconduct.
“The court ruled that a dominant undertaking cannot use regulatory procedures to prevent or hinder market entry for competitors,” says Richard Eccles, a partner at Bird & Bird LLP in London, England. “Any such use of regulatory procedures must be related to competition on the merits by the dominant undertaking or otherwise be supported by objective justification in order not to be an abuse.”
Perhaps as significantly, the court also ruled that dominant companies that make misrepresentations to regulators may be liable to antitrust penalties if the misrepresentations have the effect of restricting competition. The liabilities attach even if the regulatory scheme contains its own sanctions for such conduct.
“The court’s reasoning here is a good victory for the commission because it amounts to a statement that abuse of dominance is not a closed category,” says David Marks, a partner at CMS Cameron McKenna LLP.
AstraZeneca pioneered the development of proton pump inhibitors with its introduction of Losec, for which it held a patent, in the late 1980s.
“Losec was the biggest drug in the world at the time, the Lipitor of its day,” Marks says.
Taking advantage of its first-to-market status, AstraZeneca held a dominant position in Belgium, the Netherlands, Sweden, Denmark, Britain, and Germany.
Naturally, the generic drug manufacturers had their eyes on the market. Under European rules, new entrants seeking market authorization for their drugs could rely on the pharmacological and toxicological tests and clinical trials filed by AstraZeneca to show that their products were essentially similar to the original and therefore eligible for marketing authorization.
Realizing this, AstraZeneca ceased marketing Losec capsules in Denmark, Norway, and Sweden and began selling Losec tablets instead. Simultaneously, the company deregistered the marketing authorizations for the capsules.
“Because the generics could only rely on the clinical trials for the capsules only while the authorizations existed, the deregistrations had the effect of preventing [AstraZeneca’s] competitors from using its original tests as benchmarks for their own authorizations,” Eccles says.
European rules also allowed patent holders to apply for a supplementary protection certificate extending the validity of their patents for five years. The term is limited to the lesser of five years from patent expiration and 15 years from the first European marketing authorization.
In its application for Losec, AstraZeneca claimed March 1988 as the first marketing authorization date, but the commission proved that France had issued an authorization in 1987.
“This resulted in [AstraZeneca] gaining an additional period of protection for Losec in some countries and excluded the possibility of generic competition for a period of several months longer than was justified under the [supplementary] system,” Eccles says.
Following complaints from two generic manufacturers in 1999, the commission began investigating AstraZeneca’s patent management strategies between 1993 and 2000. In 2005, it decided that both the deregistration of the marketing authorizations and the misrepresentation of the first authorization date constituted abuse of dominance and imposed fines totalling 60 million euros.
AstraZeneca appealed to the European General Court.
The company argued that abuse-of-dominance rules shouldn’t force it to perpetuate its marketing authorizations in aid of its competitors.
But the court reasoned that the deregistrations were “not based on the legitimate protection of an investment designed to contribute to competition on the merits since [AstraZeneca] no longer had the exclusive right to make use of the results of the pharmacological and toxicological tests and clinical trials.”
As well, the company hadn’t established that the deregistrations were either necessary or useful to market the Losec tablets and promote consumer conversion from capsules.
“The upshot is that there was no objective justification for the conduct,” Eccles says.
However that may be, the practical implications are significant.
“The ruling suggests that pharmaceutical patent holders may be under a duty to maintain their marketing authorizations, and that goes quite far in terms of requiring you to help your competitors,” says Joanna Goyder, a barrister at Freshfields Bruckhaus Deringer LLP.
To be sure, the case doesn’t stand for the proposition that dominant companies are prohibited from using regulatory processes to protect their market position. “But the judgment does make it clear that dominant companies must be very careful in their approach to the regulatory process,” says Matthew Hall, a partner at McGuireWoods LLP in Brussels.
For example, the mere fact that AstraZeneca applied for the supplementary certificates didn’t make its conduct abusive. But misleading regulators regarding the date of the “first marketing authorization” took the company’s conduct outside the realm of legitimate competition on the merits.
“The submission to the public authorities of misleading information liable to lead them into error and therefore to make possible the grant of an exclusive right to which an undertaking is not entitled, or to which it is entitled for a shorter period, constitutes a practice falling outside the scope of competition on the merits which may be particularly restrictive of competition,” the court stated.
Neither the misrepresentation nor the withdrawal of the marketing authorizations, then, was in keeping with “the special responsibility of dominant companies not to impair, by methods falling outside the scope of competition on the merits, genuine undistorted competition.”
While the case arises in the context of the pharmaceutical market, it could well affect conduct in other regulated industries, particularly those in which innovation and patents are significant competitive factors.
“The technology sector, for example, is one area where regulatory procedures and intellectual property rights play an important role,” Goyder says.
What’s clear is that the commission regards the abuses revealed in the case seriously. Its press release when it imposed the 60-million-euro fine emphasized that it had taken the novel features of the case into account as a mitigating factor.
“Firms should therefore be aware that considerably higher fines can be expected in similar cases in the future,” Goyder says.
AstraZeneca has appealed the matter to the European Court of Justice.