CAT overturns CMA excessive pricing decision

Clio Angeli: Today we are going to talk about the judgement issued by the Competition Appeal Tribunal last week, which sets aside in part the Pfizer Flynn decision adopted by the CMA in 2016. In this decision the CMA found that Pfizer and Flynn had been overcharging the National Health Service for epilepsy drug.  The CAT overturned the decision and found that the CMA failed to actually show that either company charged excessive and unfair prices. Interestingly this was the first excessive pricing case brought by the UK Competition Authority in a few years and my first question to you Ian is why are there are so few excessive pricing cases?

Ian Giles: That’s a very interesting question Clio.  This is an area of case law which the competition authorities have shied away from for a long time, because I think in part of the challenge in establishing what’s exactly an excessive price is.  So when a price is high and a company that has market power will be able to impose higher prices, at what point does that become excessive?  What is the legal test for establishing excessive pricing? 

So this case is high profile because it involves the National Health Service as a victim and because it has started a trend which has seen a number of other cases taken up by the CMA, which are still in process and now need to be reflected on in the context of this judgement, and because it’s a trend which has been picked up by authorities in other countries.  So we’ve seen excessive pricing cases now started in South Africa, the Australians have shown an interest, in the US as well as a number of other European countries.  So this is an area which is a hot topic in competition law and where this judgement will be looked at very closely.

Clio Angeli: Now that the CAT has actually decided to set aside the findings of the CMA as far as the CMA found that there was an abuse – do you think that confirms the fact that competition authorities should stay clear from acting as pricing regulators?

Ian Giles: Again I think that’s a very interesting question.  So in this case, the price, what you had under the UK regime was a drug phenytoin capsules which came out of price regulation and then were subject to market forces and so Pfizer had to decide the price to set for these capsules in the market and they looked at available other comparators and they decided to set the price about 25 per cent lower than the phenytoin tablets which were already available in the market.

Now the CMA said – well this involved a very significant price increase, 2,000 per cent over the regulated price and therefore this is a competition concern and they looked at the test for excessive pricing which involves establishing first of all that the price is excessive and second of all, that its either unfair or that it is unfair when compared to competing products. And where this CAT decision is interesting is that they accept that the CMA established dominance, so they accept that there was a market for phenytoin capsules in which Pfizer was dominant.  They accept that there was the possibility of excessive pricing. But they criticise the approach that the CMA took in establishing excessive pricing.  So they say – it’s not enough for you to follow what they’ve called the cost plus methodology.  So the CMA sought to establish the costs of producing these drugs and to establish what a reasonable return would be above those costs and then compare that with the price that was charged and in this case they said – well it’s so far above cost plus that it’s excessive.  The CAT has said, no CMA.  If evidence is put forward showing that there are benchmarks in the market, although you’re trying to just look at the unfair in itself element of the test, if benchmarks are put forward you need to deal with those.  So actually there’s an interesting parallel with some other case law that we’ve seen come out of the European Court of Justice for example in Intel, where they said you have to look at evidence that had been given to you. 

So in this case the benchmark of the tablets which were 25 per cent more expensive than the capsules were seem to be something the CMA did not address in sufficient detail.  So the suggestion is it will go back to the CMA to look at again and the question then is whether they are still able to make out the case, bearing in mind these benchmarks.

Clio Angeli: The CAT is actually grounding its judgement in the presumption of innocence of the parties saying to the CMA – if you want to show there is an infringement you need to do a lot more work, otherwise you are infringing the presumption of innocence of Pfizer and Flynn in that case.  Do you think that signalling the CMA that they need to put much more resources and thought in those cases will have an impact on their enforcement priorities going ahead?

Ian Giles: It’s going to be something that the CMA and other authorities around the world will now reflect on because it’s become clear that if companies are able to put forward arguments that there are benchmarks that need to be considered then there’s also the Latvian Collecting Society’s case which is new law in this area, then it’s more of a burden on the authority to establish excessive pricing, there isn’t an easy way through and so in that context the CMA and other agencies will have to reflect on whether these cases are the priority that they perhaps thought they might be.

Clio Angeli: Thank you very much Ian, that was very interesting and we will discuss this in even more detail with Richard Wish in our next let’s talk antitrust video series.