Excessive? Unfair? Court of Appeal reaffirms United Brands excessive pricing test

11.03.2020

Introduction

In December 2016, the UK’s Competition and Markets Authority (CMA) found that Pfizer and Flynn had charged unfairly high prices for phenytoin sodium capsules, an important anti-epilepsy drug, in breach of competition law.  The CMA imposed fines totalling £90 million.  Pfizer and Flynn appealed the decision to the Competition Appeal Tribunal (CAT) which overturned the CMA’s decision in June 2018 on the grounds that the CMA had misapplied the legal test for unfair pricing.  The CMA (and Flynn in respect of another aspect of the decision) appealed, and on 10 March 2020 the Court of Appeal handed down its judgment.[1]

Background

Phenytoin sodium is used to help control the frequency of epileptic seizures.  It is available in tablet and capsule form.  In 2012, Flynn acquired the marketing authorisations for phenytoin sodium capsules (sold under the Epanutin brand) from Pfizer for £1.  The price of Epanutin was regulated under the Pharmaceutical Price Regulation Scheme (PPRS).  Following the acquisition, Flynn applied to ‘de-brand’ Epanutin and instead sell generic phenytoin sodium capsules.  Pfizer would manufacture the capsules and then sell them to Flynn for onward sale.  However, as a result of the de-branding, the generic capsules were no longer price regulated under PPRS.  Pfizer and Flynn therefore increased the prices for the capsules as follows by over 2,000%.  For example the average selling price of a 100mg pack of capsules (the most commonly used strength) before September 2012 was £2.21.  After September 2012 the average price went up to £54.87.

What was the appeal about?

To show that these prices were excessive, the CMA had relied upon a ‘Cost Plus’ approach.  It identified a return on sales (ROS) of 6% as a reasonable return bearing in mind Pfizer and Flynn’s costs and the fact that they would have obtained that rate of return under the PPRS.  As Pfizer and Flynn both had a significantly higher ROS over the relevant period, the CMA considered that that the prices imposed had been excessive and unfair under the ‘unfair in itself’ part of the test set out by the CJEU in United Brands.  This imposed a two limb requirement for proving an abuse:

  1. The price must be “excessive” (in United Brands, it was said that this could be calculated as the difference between the cost of production of the product and the selling price); and
  2. The price must be “unfair” either in itself OR when compared to competing products.

A number of issues were considered in the appeal.  The most important ones, which will be important in all future excessive pricing cases, are:

  1. Does the CMA have to establish benchmark rates (beyond a Cost Plus approach) to determine whether prices are excessive?
  2. Does the CMA have to consider both alternatives on the second limb of the United Brands test? That is, is it enough for the CMA to demonstrate that the price is unfair in itself?  Or does it also have to show that the price is unfair when compared to competing products?
  3. Does the CMA have to consider any comparators raised by the alleged infringer?

 The judgment

The appeal was heard by three judges.  Lord Justice Green and Sir Geoffrey Vos both gave reasoned judgments (agreeing on all major points).  Sir Geoffrey Vos was careful to set the scene at the beginning of his judgment, noting that it was important to keep in mind that “literally overnight, Pfizer and Flynn increased their prices for phenytoin sodium capsules by factors of between approximately 7 and 27” and that the “CMA has to be able to do its job depending on the economic circumstances of the case”.

Both Green LJ and Sir Vos agreed that the CMA’s Cost Plus approach was sufficient to show that the prices charged by Pfizer and Flynn were excessive (under the first limb of the United Brands test).  They said the CAT had fallen into error when requiring the CMA to go beyond the Cost Plus approach to establish a benchmark price or range of prices (in this respect, the CMA was successful in its appeal).

However, the Court of Appeal was keen to emphasise that the United Brands test should not be construed as a deed.  It concluded, as the CAT had accepted, that the CMA can establish a breach of competition law if the regulator shows that a price is unfair in itself or when compared to competing products; it does not have to show both.

However, the CMA cannot simply ignore arguments made by the alleged infringer(s).  If they raise prima facie valid comparators as evidence as to why the prices they charge are in fact fair, the CMA is obliged to give these comparators due attention.  So while the CAT was wrong to hold in law that the CMA has to investigate all comparators raised by the alleged infringers as a matter of course, it nevertheless must consider all the factors put forward by undertakings in the course of an investigation with “an open mind, carefully and impartially”.  The CMA then has a margin of discretion in deciding whether competing evidence on one aspect (for example the ‘when compared to competing products’ aspect) would outweigh conclusions reached in the alternative (i.e. the ‘unfair in itself’ test).

The result of this is that the CAT’s remittal of the case back to the CMA to reconsider the issue of abuse still stands.  As the comparators (phenytoin sodium tablets) raised by Pfizer and Flynn did give rise to prima facie valid arguments on whether their prices were fair, the CMA will have to assess whether the prices charged by Pfizer and Flynn are still unfair in the light of these comparators.  (The CMA will also be required to revisit whether it allocated sufficient weight to ‘patient benefit’ when assessing the economic value of the phenytoin sodium capsules).

Finally, it is worth mentioning that Flynn had also appealed the CAT’s decision.  Flynn was concerned that upon remittal, the CMA would treat findings by the CAT as definitive and binding, preventing Flynn from re-arguing these points, even with new evidence.  However, the Court of Appeal decided that this ground of appeal was based upon an inaccurate interpretation of the CAT’s judgment.  As the CAT had remitted the entire issue of abuse to be reconsidered by the CMA, none of the CAT’s (potential) findings on abuse would be binding.

[1] The Competition and Markets Authority v (1) Flynn Pharma Limited; (2) Flynn Pharma (Holdings) Limited; (3) Pfizer Inc. (4) Pfizer Limited [2020] EWCA Civ 339.  The European Commission intervened in support of the CMA.

Stephen Smith

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Matthew Hunt

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