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EU – Parallel trade in the life sciences sector – Q&A

On Tuesday, 26 January 2021, Allen&Overy (Belgium) LLP hosted a webinar on the key developments in parallel trade of pharmaceuticals in 2020. In this blog post, we discuss a few key topics and questions raised by the webinar’s participants

How will the competition law framework apply post-Brexit?­

Post-Brexit, companies active in the UK and the EU are now subject to parallel regimes, with the UK Competition and Markets Authority having the ability to review (potentially identical) transactions and behaviour alongside the European Commission.

Focusing on parallel trade, the topic of our webinar, the question arises as to whether a ban on exports to the UK would still be problematic from an EU competition law perspective given the UK’s exit from the EU. Art 101 TFEU applies to the territory of the EU – it catches only conduct that may have an effect on trade between Member States and that has the object of effect of distorting competition in the EU. We know from caselaw that Article 101 TFEU catches also agreements that may have an impact on competition in the EU, so a potential effect in the EU of the export ban would be sufficient. However, a limitation on exports to the UK arguably would not produce any even potential restriction on competition in the EU. Hence, it would seem reasonable to take the view that such a restriction would not not fall within the scope of Article 101 TFEU and, therefore, would not be prohibited under EU competition law rules. However, one would still need to consider whether there may be an issue under UK competition law. At first glance, it would seem unlikely to be the case that the UK CMA would be able to challenge such an export ban as Chapter I of the UK Competition Act applies to agreements that are implemented in the UK, or at least are intended to be implemented in the UK. However, one would need to consider further whether the CMA could establish jurisdiction based on qualified effects in the UK. For completeness, it is noted that, as discussed during the webinar, under the EU antitrust rules, there are a set of regulations which exempt certain types of conduct, if criteria are satisfied, from the prohibition on anti-competitive agreements (the so-called Block Exemption Regulations). These Block Exemption Regulations, including the regulation applying to vertical agreements, have been adopted into UK law and will, therefore, continue to apply in the UK.

From an EU competition law perspective, the analysis is likely to be different in the reverse situation, i.e. a ban on exports from the UK to the EU. Such a ban arguably would have at least a potential effect on competition in the EU and on trade between Member States. Such a restriction is likely to be problematic, unless it could be block exempted (for example, certain restrictions on active sales may be permitted in the context of an exclusive distribution system) or otherwise justified on the basis that its potential restrictive effects are counterbalanced by its procompetitive effects. Furthermore, as discussed during the webinar, the principle of exhaustion still applies in the UK, so there could not be any trademark-based justification for restricting such sales.

For a broader discussion of how the competition law framework applies post-Brexit, we invite you to read our article Antitrust and Brexit – where do we stand?, which explores what Brexit means for merger control, antitrust investigations and enforcement and State aid/subsidies, and how this is likely to impact business.

How can the existing BMS criteria, which require traders to demonstrate the objective necessity of re-boxing, be reconciled with the Falsified Medicines Directive (FMD), and the objective to strengthen the legitimate supply chain against the entry of falsified or substandard medicines?

The FMD requires pharmaceutical companies to affix a so-called 'anti-tampering device' on all prescription medicinal products to allow verification of whether their packaging has been tampered with. Parallel importers have already claimed in the past that anti-tampering devices provide an overarching objective necessity (as the original box cannot be reused due to the mark the anti-tampering device will leave) to re-box parallel import medicinal products. This is effectively a circumvention of the objective necessity requirement imposed by the BMS criteria, and cannot, further to Recital 29 of the FMD, be accepted.

As overstickering is indeed not the best way to achieve the objective to strengthen the legitimate supply chain, re-boxing should be analysed on a case-by-case basis, thereby reconciling the BMS criteria with the FMD, taking also into account the public health protection principles enshrined in the FMD.

This position also seems to have been confirmed by the European Commission in its "Safety Features for medicinal products for human use. Questions and Answers", in which Question 1.20 states as follows: “If a pack bearing the safety features is lawfully opened (e.g. by parallel traders/manufacturers replacing the leaflet under the supervision of national competent authorities), can it be resealed (e.g. by applying a new ATD on top of the old, broken ATD)? The European Commission has answered this question affirmatively in principle, provided that the old anti-tampering device can be replaced with an equivalent.

Finally, INTA too has confirmed this view in the Joint cases C-147/20, Novartis Pharma GmbH v. Abacus Medicine A/S and C-224/20, Merck Sharp & Dohme B.V. et al. v. Abacus Medicine A/S et al.: “INTA submits that repackaging is not the only possibility under the new requirements of the FMD and the Delegated Regulation. It is not a legal obligation stemming from those provisions. It is therefore not “objectively necessary” within the meaning of the five conditions for exhaustion in respect of the repackaging (see the judgments of 11 July 1996, Bristol-Myers Squibb and Others, C-427/93, C-429/93 and C-436/93).” […] “Under the FMD and the Delegated Regulation, repackaging is not an obligation. This follows from the wording of the said provisions. The FMD specifically refers to both repackaging and relabeling of goods; it anticipates that both means of presentation of the goods will continue to be possible under the FMD. The FMD makes specific reference to parallel importation. It specifically provides that the provisions are without prejudice to intellectual property rights. Nothing in the legislation itself suggests that the FMD is intended to restrict the scope of the principles established under the Bristol-Meyers Squibb (“BMS”) jurisprudence referred to above. This follows from the wording of the FMD and the Delegated Regulation which specifically provide for repackaging (article 16 para. 1 of Delegated Regulation).”

If a firm systematically monitors the destination of its products, does that render the supply quotas unlawful per se? Or does it depend on the presence of additional factors?

The application of a system of supply quotas or refusals to supply as a means of restricting parallel trade may be scrutinised under Article 101 and/or Article 102 TFEU, depending on the circumstances.

A landmark case in this respect remains Bayer/Adalat, which confirms that Bayer's policy of applying supply quotas for deliveries of Adalat to its French and Spanish wholesalers, in order to limit exports and resale to the UK, was not to be qualified as a tacit 'agreement' but, rather, as a truly unilateral measure – to which the cartel prohibition of Article 101 TFEU does not apply. There must be a ‘concurrence of wills’ between the parties for there to be an 'agreement' (i.e. an invitation and some form of acceptance to adopt a common line of conduct on the market), and that this is all the more so where an agreement is not at first sight in the interests of the wholesaler. Potential indicators of an 'agreement' are the establishment of a monitoring system for the final destination of the products, or the imposition of penalties for non-compliance with an export restriction. Importantly, these are mere indicators of an agreement not to allow parallel trade, but they are not conclusive on their own.

The main take-away from Bayer/Adalat is that a commercial policy of applying supply quotas can be permissible under EU competition law, even if it has the objective or the effect of hindering parallel trade, as long as it is truly unilateral (i.e., it is not the result of an agreement or joint intent with the relevant reseller(s)) and the supplier is not dominant. The fact that the supplier systematically monitors the destination of its products does not, in such a case, render the system unlawful under Article 101 TFEU. However, systematic monitoring may be seen as an indication that an (illicit) agreement exists between the supplier and its wholesalers to restrict parallel exports. A case-by-case assessment, including of the parties' actual conduct, will be required.

In contrast, where a supplier reduces deliveries to resellers based on an agreement or joint intent with the relevant resellers to limit exports, this will almost inevitably infringe Article 101 TFEU. In addition, the use of monitoring mechanisms in contracts with a view to preventing or controlling parallel trade, whereby a producer requires information from its wholesalers or distributors as to the destination of its products, is likely to be contrary to Article 101 TFEU.

Where a supplier is dominant, it follows from Sot. Lélos kai Sia that, whilst it is not obliged to meet (exporting) wholesalers' orders in full, it will, in principle, be required to meet 'ordinary' orders. Otherwise, it risks abusing its dominant position under Article 102 TFEU. Whether an order is 'ordinary' or not, is ultimately for the national courts to establish, taking into account the size of the order compared to the requirements of the national market and the previous business relations between the supplier and the wholesalers.

This article was co-authored by Geert Glas, Tine Carmeliet, Nieke Van Avermaete, Francesca Di Miotto and Nele De Backer.