GlaxoSmithKline, a very large producer of pharmaceuticals, won a fairly significant but incomplete victory over grey markets or parallel trade in the Court of First Instance in Case T-168/01 GlaxoSmithKline Services Unlimited v. Commission
The judgment is of serious theoretical as well as practical interest because it shows clearly that a restriction of competition is a restriction of output to the detriment of consumer welfare, not some notional restriction of the freedom of action of a party to a contract. Thus, the judgment puts to rest a long standing doctrinal argument that had raged between old fashioned, formalistic antitrust lawyers (mostly in the Commission's DG Competition) and more modern ones who read economic literature.
But here's the story. Spain is a low cost country for drugs. As a result there was quite a substantial trade in drugs between Spain and other member States. Glaxo Wellcome, the Spanish subsidiary of the GlaxoSmithKline group, adopted new General Sales Conditions in 1998, which stipulated that its medicines will be sold to Spanish wholesalers at prices differentiated according to the national sickness insurance scheme which will reimburse them. That meant in reality that drugs intended to be reimbursed in other member States would be sold at a higher price than those intended to be reimbursed in Spain. That system was introduced to limit parallel trade in drugs between Spain, where the administration sets maximum prices, and other member States, in particular the United Kingdom, where prices are fixed at a higher level.
The Commission decided on May 8th, 2001 that the General Sales Conditions were prohibited by EC antitrust law because they constituted an agreement in restriction of competition. It also decided that the General Sales Conditions could not benefit from an exemption.
GlaxoSmithKline brought an action before the Court of First Instance to have the Commission's decision annulled.
The Court of First Instance agreed in part with GlaxoSmithKline and disagreed in part. Consequently, the decision was annulled in part and upheld in part.
First, the Court of First Instance agreed with the Commission that the General Sales Conditions constituted an agreement. The Court recalled that for there to be an agreement, it is sufficient that at least two undertakings express their joint intention to conduct themselves on the market in a specific way (see Case T-41/96 Bayer v. Commission, paragraphs 67 and 173).
The Court of First Instance also upheld the Commission's finding that the General Sales Conditions have the effect of restricting competition. The Court puts an end to a long standing doctrinal discussion by holding that it is not enough for the freedom of action of the parties to the General Sales Conditions to be limited: That was inherent in contractual agreements. What mattered was the result of an examination of the effects of the agreement on the market. It held that parallel trade permits a limited but real reduction in the price and the cost of medicines. As they prevent that advantage from being produced, the General Sales Conditions diminish the welfare of final consumers. And so it is the reduction in consumer welfare that constitutes the effective restriction of competition, not some formalistic, doctrinal, Germanic analysis relating to the liberty of a party to a contract.
But the Court of First Instance strikes down the Commission's conclusion that the General Sales Conditions had as their object the restriction of competition. The Court found that the Commission's analysis was defective and too formalistic, failing to take proper account of the legal and economic context of the highly regulated pharmaceutical market.
As a consequence, the Court of First Instance also found that the Commission had failed to examine properly whether the General Sales Conditions could be exempted under Article 81(3) EC.