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16 July 2020
On 16 April 2020 the Maritime and Commercial High Court found that a pharmaceutical distributor, CD Pharma AB, had abused its dominant position in Denmark by charging excessive prices (a price increase of 2,000%). The case largely concerned the question of dominance.
CD Pharma is a pharmaceutical company that distributes Syntocinon, a labour-inducing drug. Amgros I/S is the purchaser of medicine for Danish public hospitals. A parallel importer, Orifarm A/S, had a contract to supply Syntocinon to Amgros from 1 April 2014 to 31 March 2015. However, before the contract was due to start, Orifarm announced that it would be unable to fulfil its terms. Therefore, Amgros had been forced to buy from CD Pharma, which was the only alternative supplier in Denmark.
CD Pharma had an exclusive distribution agreement with the only producer of Syntocinon with an authorisation in Denmark and therefore had a steady and secure supply line. Around the same time, CD Pharma had raised its price for Syntocinon from Dkr45 to Dkr945 per package (a rise of approximately 2,000%). The price was later lowered to Dkr225 per package. Orifarm's contract had the price of Dkr43 per package, but it was able to deliver only 30% to 40% of the contract. CD Pharma delivered the rest.
In January 2018 the Danish Competition Council (DCC) found that CD Pharma had violated the prohibition against the abuse of dominant position in the Competition Act and the Treaty on the Functioning of the European Union. The DCC concluded that the company had charged an excessive price and that the price increase was not substantiated by an increase in costs. In November 2018 the Competition Appeals Tribunal (CAT) upheld the decision, which was subsequently brought before the High Court.
On 2 March 2020 the High Court upheld the rulings of the DCC and CAT, and found CD Pharma had abused its dominant position by charging excessive prices. The parties largely debated whether CD Pharma had a dominant position on the Danish market for Syntocinon, as the competition authorities had found CD Pharma to have had a dominant position from the day that CD Pharma entered the market.
The case discussed two periods. The first period (2014) related to CD Pharma's behaviour when Orifarm could not supply the drugs. The second period (2015) related to CD Pharma's behaviour when agreeing on a new framework agreement with Amgros going forward.
In relation to the first period, it was examined whether it was sufficiently proven that Orifarm could have imported Syntocinon from Spain, where a large supply of Syntocinon existed. Orifarm was the sole competitor of CD Pharma, and Orifarm had stated it could not supply Syntocinon.
The High Court's (4 of 5) majority found there to be a presumption for a commercial and professional company such as Orifarm having done everything in its power to supply the drug in accordance with Orifarm's agreement with Amgros.
One dissenting judge found that the DCC had failed to establish that Orifarm was unable to import the drug from Spain. The dissenting judge found there to be reasonable doubt on this substantial fact and therefore found doubt as to whether CD Pharma had had a dominant position in the market.
In relation to the second period, it was examined whether CD Pharma had had the ability to act independently of its competitors and costumers when bidding on a tender for the supply of Syntocinon going forward.
The High Court's (3 of 5) majority found that there was insufficient grounds for setting aside the competition authorities assessment that CD Pharma could have acted independently of competitors and costumers. According to the majority, such assessment should take into account the recent failure to supply from Orifarm and CD Pharma's knowledge of this failure. The majority found CD Pharma could bid for the tender with an excessive price with little to no risk.
The High Court's (2 of 5) minority found it unproven that CD Pharma had had a dominant position in 2015 and emphasised that certainty is required to establish dominance in public offerings, which increase uncertainty for the bidders and the possibility of import or trade based on existing or future product licences.
The High Court's (3 of 5) majority ultimately found that CD Pharma had been dominant in the relevant period and upheld the decision.
The court unanimously found the price increase of more than 2,000% to be excessive, as it was disproportionate with the economic value of the product and the actual costs associated with the sales.
Abuse of dominance cases, in particular excessive pricing, are rarely seen in Denmark. Several elements in the decision are of interest and could give rise to discussion.
First, the excessive pricing was considered not only exploitative, but also potentially exclusionary. If a supplier fails to deliver goods (in this case Syntocinon), it may be met with a claim from their customers for replacement purchases. Therefore, it was found that CD Pharma's behaviour could lead to less incentive for other suppliers to bid on similar contracts, as they could be met with a high claim for replacement purchases in case of failed delivery.
Second, CD Pharma was considered dominant from the day that it entered the market and over the course of just one year. Normally, the establishment of dominance requires an assessment of a company's position over several years, depending on the market. However, due to specific circumstances, CD Pharma was considered dominant for the year in question.
Third, CD Pharma was a small and new player compared with Orifarm (Orifarm had a turnover of Dkr5.6 billion in 2014, whereas CD Pharma had a turnover of Dkr16.5 million in the same year). Arguably, CD Pharma had not established a position that made it independent of its competitors.
Finally, the case shows the increased level of scrutiny that competition authorities experience when decisions relate to excessive pricing. The High Court established the need to keep the assessment of dominance and abuse separate. Although the price increase was at an unprecedented level, the High Court's minority still found that the competition authorities had failed to establish dominance and therefore had failed to establish a violation.
The High Court emphasised that a company occupies a dominant position when it can act independent of competitors and customers in a significant period and to a considerable extent. The High Court's majority found that:
The pharmaceutical sector has received increased scrutiny from the competition authorities in recent years. The case is particularly relevant to the application of competition law during the COVID-19 crisis, as even short periods of dominance are sufficient to establish abuse of a dominant position.
For further information on this topic please contact Martin André Dittmer or Thomas Skou at Gorrissen Federspiel by telephone (+45 33 41 41 41) or email (firstname.lastname@example.org or email@example.com). The Gorrissen Federspiel website can be accessed at www.gorrissenfederspiel.com.
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