Earlier this year, the CAT issued its first judgment on the raft of cases initiated by the CMA into the UK generics sector in late 2017. While a number of those cases have been closed by the CMA, either following settlement or on a no grounds for action basis, this is the first merits appeal arising out of those cases.
The decision under appeal is addressed to Lexon, King Pharmaceuticals, and Alissa, and concerns information sharing in relation to the supply of 10mg and 25mg nortriptyline tablets. (A second decision relating to market sharing of the same products addressed to Auden McKenzie and King was not appealed.) The decision imposed fines of £1.47 million on all three participants – of which £1.22 million was payable by Lexon.
Of the three addressees, only Lexon lodged an appeal of the CMA’s information sharing decision, the CMA having reached settlements with King and Alissa prior to the issue of its decision.
This post looks at the CAT’s judgment as a whole; a second post on our sister On the Pulse blog focuses on the top 10 information sharing risks that companies active in distribution of pharmaceuticals should be aware of.
Content and Scope of the infringement
In the UK, the NHS is the main purchaser of nortriptyline, a generic prescription-only drug used to treat depression. Since 2010, following de-branding by King, prices had significantly increased, and until mid-2015, there were only two competitors on the market (King and Auden McKenzie). The CMA’s market sharing decision in relation to King and Auden McKenzie concerned the latter part of this period, from September 2014 to May 2015. However, prices increased across the whole period, with NHS spend increasing from £6.3 million in 2011, to £38 million in 2015.
The factual background is somewhat complex, but in brief the key points are:
- Prior to 2015, Lexon purchased nortriptyline from King for its wholesale business. The facts of this case follow on from Lexon’s development of its own nortriptyline product pursuant to a joint venture agreement with Indian manufacturer Medreich.
- Following the grant of Medreich’s MA in March 2015, Lexon entered the market in July 2015. Lexon was contractually required to purchase its UK requirements from Medreich; Medreich remained free to supply to the UK market on its own account.
- Medreich also negotiated an agreement to supply Teva with nortriptyline for sale under Teva’s own label. Up to 40% of the total profit from Teva nortriptyline sales flowed through to Lexon pursuant to the JV agreement.
- A further independent manufacturer, Alissa, entered the market with a nortriptyline product in 2016.
UK wholesale prices did start to fall following the grant of Medreich’s MA and Lexon’s entry into the UK market, but, according to the CMA, this occurred at a lower rate than should have been expected given the decrease in concentration in this period.
The CMA found that in this period the parties had engaged in a succession of exchanges of information (focussed in two distinct sub-periods), all with a “Price Maintenance Objective”. As the CAT noted, the communications could be more precisely characterised as having the the objective of slowing the decline in the price of generic nortriptyline.
Lexon raised three grounds of appeal:
- The CMA failed to prove Lexon exchanged information with the objective of maintaining prices (ground dismissed).
- There was not a single and continuous infringement (ground dropped in oral argument as the decision was clear that Lexon was not implicated in the second period).
- The CMA erred in its penalty calculation by incorrectly including Lexon’s share of profits from Medreich (based on income from Teva), by setting the starting point at 20%, and by applying an uplift of 75% (ground dismissed).
In relation to the first, main, ground of appeal, the CAT spent some time considering the economic context, highlighting the following in the judgment:
- Prices in the period 2010-2015 were “substantially in excess of costs of supply” (possibly attributable in part to a 2014 to 2015 market-sharing agreement between the two MA holders, King and Auden McKenzie). While this was not in itself due to the infringement under consideration, “there was a very large potential to fall if effective competition was restored to the market”.
- It was reasonable to expect a “downward correction in market price levels” following Medreich obtaining an MA. Medreich’s MA effectively increased the number of independent suppliers of nortriptyline from two to five, although there were price and volume constraints on Teva’s freedom to compete in the market.
- Lexon accepted that its profit share from Teva was a more important part of its total commercial returns on nortriptyline than it’s the sales made on its own account, giving Lexon an interest in the size and profit margins of Teva’s sales. Teva would submit quarterly reports to Lexon and Medreich, which although historic, would provide an element of transparency that isn’t normally present between independently competing firms.
- Nortriptyline was a commodity product, and there was evidence that customers switched suppliers on the basis of price.
The judgment then proceeds to walk through and analyse 17 different information exchanges in emails, phone calls and one meeting. A significant proportion of the information provided by Lexon concerned Teva, and Lexon was considered a reliable source for such information – even though some of the information Lexon gave was actually false, the other parties had no reason to suspect it was misleading and acted on reliance of it. Information about Teva’s pricing and supply to reassure King about Teva’s ability to compete was considered to be of strategic importance, considering that Lexon shared in Teva’s profits and so had a commercial interest in keeping prices high.
We review the types of strategic information exchanged in more detail in our post on our On the Pulse blog, but examples include:
- Teva’s stock position (providing knowledge, or supporting a belief that Teva would be unable to win certain sales);
- information on Teva’s input costs, and reassurances about Teva’s pricing to its customers (this indicated the feasibility of buyer claims of low price offers that King was competing with, reducing the intensity of the rivalry between King and Teva);
- Alissa’s market entry plans (in which it stated its intention was not to disrupt the market);
- Lexon’s pricing and market strategy (which removed uncertainty about Lexon acting as a disruptive ‘maverick’);
- discussion of market intelligence and beliefs on parallel import volumes and price (although the intelligence itself was public, it was provided reassurance that the competitive threat wasn’t coming from UK rivals); and
- the sharing of market intelligence on which customers Actavis, another competitor, was supplying (establishes a willingness to pool intelligence with the object of reducing market uncertainty).
In isolation, some of the information exchanges were considered to be innocuous (such as a proposal to call Actavis that was not acted on). However, the CAT found that these exchanges confirmed the CMA’s view that there “existed a culture of coordination and communication in this market, rather than one of competition”. Taken together, the 17 exchanges showed that Lexon, King, and Alissa engaged in the exchange of sensitive commercial information in a manner that was inconsistent with the behaviour of independent competitors, thereby enabling them to adjust and improve their commercial positions. There was no obvious, legitimate, commercial purpose for the exchanges.
The CAT found that there was a clear anticompetitive object to the exchanges that were by their nature liable to cause serious harm to competition. Lexon argued that the CMA had not correctly considered the economic context of the exchanges, and had been wrong in its conclusion that they could have an anticompetitive effect in the ‘real world’ situation on the market. However, the CAT found the CMA’s examination sufficient – a ‘basic reality check’ as described in Budapest Bank confirmed that the harmful nature of the conduct was not negated by the economic and legal context.
Lexon also argued that the CMA had only established an anticompetitive object by inference, rather than following a “content, object, context approach”. Whilst the CAT agreed that the CMA “must find the factual elements of an object infringement within the behaviour of the parties to the alleged infringement: it is not entitled to find an effect in an market and then use that to infer an anticompetitive objective to a given course of conduct and proceed solely on an object infringement basis”, that was not the basis for this decision. The CAT also rejected arguments that this could not be an infringement by object because the case was novel, as the exchanges fall within already sufficiently established categories – it would be an excessive constraint to require falling within the precise terms of a prior legal authority.
The first ground of the appeal was therefore dismissed, with the CAT finding that the CMA correctly applied the law on infringement by object, and the information exchanged supported a finding of a concerted practice.
Lexon’s appeal on the penalty was also dismissed, with the CAT finding a penalty of £1.2 million on a company of Lexon’s size, where it “realised very substantial profits over a significant period in clear breach of the law”, to be justified.
Implications of the judgment
Overall, a key takeaway from the judgment is that although certain pieces of information may not seem obviously sensitive, it’s important to consider that information in context. For example, public information itself is not sensitive, but discussing it with competitors may be problematic if the discussion is liable to reduce competitive pressures.
The judgment is also very significant for the director of Lexon facing disqualification proceedings in the High Court. The CMA issued disqualification proceedings in August 2020, but these had been put on hold pending the appeal of the decision. Two conditions must be satisfied for the Court to make a competition disqualification order: 1) the company for which the person is a director must have committed a breach of competition law; and 2) the court must consider that their conduct as a director makes them unfit to be concerned in the management of a company (more information on the requirements can be found here). With the CMA’s decision upheld, the first limb has been satisfied (subject to any further appeals), so the High Court can move on to consider the second limb.