Carmen Peli; Carmen Korsinszki
On 28 October 2011, the Romanian Competition Council (the “Council”) published Decisions n° 51 and 52/28.10.2011 sanctioning two suppliers of prescription-only medicines – Belupo Iijekovi & kozmetica d.d. Croatia (“Belupo”) and Baxter AG Switzerland (“Baxter”) – and their distributors on the Romanian market for restricting parallel exports outside the Romanian market.
These are the first two decisions issued by the Council dealing with agreements between undertakings for restricting parallel trade caught under both article 5 (1) from the Competition Law n° 21/1996 (the “Competition Law”) and article 101 (1) of the Treaty on the Functioning of the European Union (“TFUE”).
The Council also made public that fines for similar infringements have been applied to other suppliers and its local distributors and are soon to be made public.
In 2008 the Council commenced a sector inquiry on the Romanian market for the wholesale of pharmaceutical products for identifying potential market sensitiveness triggering competition concerns.
In the context of the sector inquiry, in September 2009, the Council opened ex officio infringement investigations against several suppliers of pharmaceutical products – both over- the-counter and prescription-only medicines suppliers – and their distributors acting on the Romanian market. On 7 September 2009, the Council undertook unexpected inspections to the headquarters of these suppliers.
Dawn-raids were also carried out at Baxter and Belupo’s headquarters where the Council managed to find incriminating agreements restricting distributors’ resale outside the Romanian market.
2. The Council assessment of parallel export restrictions
The application of the extraterritoriality principle
Baxter oncology products are resold on the Romanian market via three distributors: Actavis, Farmaceutica Remedia, Softmedica, while Belupo entrusted the resale of its cardiovascular, nervous and on skin medicines to a sole distributor, A&A MED TRADING.
Even though a local corporate presence could be attributed to neither Baxter nor Belupo – they are merely present on the Romanian market through marketing local representatives – the fact that they are active on the local market via their distributors was sufficient for the Council to consider them to be capable of restricting competition on the Romanian market. Therefore, both suppliers’ conducts were found to fall in the application scope of the Competition Law and also of the TFUE, despite their establishment outside the EU territory.
Restriction by object of both Romanian and EU competition rules
The Council found that both Baxter and Belupo have concluded agreements with their local distributors containing clauses restricting distributors’ resale outside the Romanian market. For amounting to this conclusion the Council based its approach on the well established EU case-law.
The existence of the infringement mostly resulted from the wording of the distribution agreements signed with distributors. The Council also relied on distributors’ abstinence from exporting Baxter and Belupo’s products – while exporting other competing medicines – as a proof of implementation of the parallel trade restriction.
Both suppliers restricted their distributors from performing active sales outside the territory, i.e., Romania, while distributors could also not passively respond to orders coming from dealers known or suspected to directly export or to ease the redirection of their products for export purposes. Eventual exports could have only been performed in exceptional cases and in limited quantities, upon suppliers’ express approval.
Monitoring as a means to observe deviations
Local pharmaceutical suppliers usually set quite detailed reporting mechanisms requiring distributors to systematically provide territorial data about sales and stocks, as well as forecasts. The Council identified such provisions in all investigated distribution agreements and assessed them as a well-settled instrument for monitoring and controlling the export ban.
The Council recognized that such clauses are not to be automatically construed as amounting to an infringement and they become illegal only if a supplier uses them for preventing or controlling cross border trades. The Council however refused to accept any of the parties’ arguments related to the legitimate need and use of the reporting mechanism, such as compliance with regulatory requirements, prepare realistic forecasts, internal business performance observance, etc. Also, the decisions do not detail whether an assessment of the actual implementation of such contractual clauses had been performed, such as to find that in practice the monitoring mechanism went beyond what was legitimately necessary.
It seems therefore that so far, the border between legitimate and illegal distribution monitoring remains in a blur.
Exhaustion of IP rights in Romania
Baxter claimed that before Romania’s accession to the EU, a prohibition of exports could not have amounted to a breach of the Romanian competition law, on the basis of its intellectual property rights. The Council rejected such claim, arguing, on the basis of an express legal provision, that IP (trademark) rights are exhausted and the holder of a trademark cannot prohibit the trade of the products that have been placed on the market in Romania by itself or with its consent.
Applying the national provisions on the exhaustion of IP rights to “exports” may raise concerns of extra-territorial application of the local exhaustion rules. However, Baxter also prevented its distributors from selling the products to other local buyers that may have intended the export without Baxter’s consent (i.e., domestic trade restrictions). Council’s interpretation regarding the application of the rules on the exhaustion of IP rights seems to be correct in this last case.
The appreciable restriction of competition
In both cases, the appreciability of the restriction of competition results in particular from the gross price differences for Baxter and Belupo’s medicines across the European Union, triggering incentives for parallel trade and going beyond any regulatory barrier or additional particular costs incurred. Almost all the data supporting this conclusion is redacted from the public decisions, while information on the actual price differences making parallel exports attractive to higher-price territories is not available. The assessment on the price differences rather remains theoretical as no discussions on actual parallel trade costs, regulatory constraints or the eventual import markets’ absorption degree are developed.
In the Baxter case, The Council also relied on the parties’ important market power to find proof of market affection. The export was even more attractive in a context where on the local pharmaceutical market payment deadlines are extremely long, i.e., above 180 days, while resale at export would most frequently allow distributors to enjoy cash liquidity.
The export bans were caught to restrict intra-brand competition as otherwise EU distributors could have accessibly reached products sold on the Romania market at smaller prices.
The Council firmly dismissed the availability of the individual exemption on the ground that negative market impact caused by restrictions of passive sales would not respond to any indispensability rationale, while no benefit to the wholesale market structure or the consumer could be reached.
Export bans doubled by non-compete restrictions
Both distribution systems contained non-competition provisions – some of them even exceeding the 5 years safe-harbor term – preventing distributors from selling or marketing competing medicines containing same active substance. The Council did not assess these restrictions in conjunction with the export restrictions notably from the overall negative market impact. It generally looked for individual exemption arguments on several grounds, such as: the poor market power of one distributor bound by a non-compete restriction beyond 5 years, while some distributors have breached the ban and started selling competing medicines.
Fines applied to Baxter and its distributors amounted to EUR 1,389,157, while Belupo and its distributor were together fined with EUR 435,264. As neither Belupo nor Baxter act on the Romanian market through well-established subsidiaries, the Council decided to apply the fine to the aggregated value of each supplier’s sales on the Romanian market.
The administrative offence was of medium gravity so the proposed basic level of the fine ranged between 2% – 4% of the turnover.
The export restriction imposed by Baxter to its distributor lasted for more than 7 years, i.e., long term infringement, while the agreement restricting parallel exports between Belupo and its distributors lasted almost 4 years, i.e., medium term infringement. Consequently additional increases of the basic level of the fine were applied.
In both cases, mitigating circumstances for stopping the infringement immediately after the dawn-raid were granted to Baxter and Belupo.
The Council reduced Baxter, Belupo and one of their distributor’s fines for partial admission of guilt. This has become an increasingly popular procedure for investigated undertakings which was set by the law in July 2011, allowing firms investigated for unlawful agreements or unilateral abusive practices to make a partial or total admission of guilt during the investigation procedure until – including – the oral hearings. This particular form of cooperation during the investigation may bring a legal reduction of the fine ranging from 10% to 30%. Although no transparent guidelines ruling this procedure are in place, the Council seemed rather willing to apply the maximum 30% reduction for total and unconditional admissions of guilt which can sometimes be accompanied by sufficient remedies offered by the undertakings.
Even though the Council acknowledged in each case that the supplier had initiated the infringing conduct, no aggravating circumstance has been retained for such reason.
The decision against Baxter was challenged by the supplier and is currently under the scrutiny of the Bucharest Court of Appeal.