European Union: NAPP Pharmaceutical: OFT Decision Confirmed but Fine Reduced

Last Updated: 5 February 2002
Article by Martin R Smith

In a landmark judgment delivered on 15 January 2002, the Competition Commission Appeal Tribunal ("the Tribunal") upheld a decision by the Director General of Fair Trading (DGFT) that Napp Pharmaceutical Holdings Ltd, a Cambridge-based company, had abused its dominant position, in breach of Chapter II of the Competition Act 1998.

The case is important as it is the first appeal made under the Act against a DGFT infringement and fining decision. In March 2001, the DGFT found that Napp had abused its dominant position in the UK market for the supply of sustained release morphine tablets and capsules (MST), an analgesic commonly used in the treatment of cancer-related pain, and imposed a penalty of £3.21m. Napp’s abusive conduct was twofold: charging excessive prices to customers in the community segment of the market whilst supplying hospitals at discount levels designed to drive out competitors. The DGFT directed Napp to reduce the price of MST tablets in the community and limit the extent to which discounts are offered to hospitals.

The Judgement

In its judgment, the Tribunal confirms in substance the essential features of the DGFT's reasoning on the findings of infringement, whilst making extensive reference to the case law of the European Court of Justice (ECJ).

Discounts to hospitals

The DGFT had found that Napp (the first company to launch a sustained release morphine product in the UK, in 1980) charged excessively low prices in the hospital segment of the market. Although hospital sales represent only a fraction (around 10-14%) of all sales of MST, such sales nevertheless play a central role in facilitating entry into the much larger community segment of the market, by establishing the reputation of a new product brand. By matching the prices offered by competitors with discounts of over 90% off NHS list prices in some instances, Napp effectively foreclosed the hospital segment of the market. It was also found to have selectively targeted these discounts at those hospitals and strengths of MST where it faced competition.

Napp argued that its hospital sales have always been profitable when one takes account of the ‘net revenue’ resulting from both the hospital sales and the ‘follow-on’ sales in the community to which the hospital sales give rise; and that this linkage is equally available to its competitors, so that overall Napp’s conduct had been reasonable and proportionate, and within the bounds of normal competition.

The Tribunal could have disposed of the issue quite simply by stating that, since on the (uncontested) facts of the case Napp, a virtual monopolist, had been selling at prices below direct cost, and did so selectively on those tablet strengths where it faced competition, applying the principles laid down by the ECJ (presumption of abuse) in AKZO and Tetra Pak II, Napp had abused its dominant position contrary to the Chapter II prohibition, without it being necessary to find that Napp had a specific intention to eliminate competition.

However, ‘as a precaution’, the Tribunal went on to consider whether Napp had an intention to eliminate competition. It ruled that Napp’s ‘net revenue’ argument, on its own, was not a legitimate defence to a charge of abuse "unless it is accompanied by clear evidence that there was no intention or effect of foreclosing the market and impairing competition".

The Tribunal found that Napp’s intention to eliminate competition was shown by the fact that Napp’s discounts were targeted on those tablet strengths where it faced competition; the highest discounts were given on sole contracts (which by their nature were intended to exclude competitors); and Napp must have been aware that its conduct was of such a nature as to prevent or hinder entry in the market. In reaching this conclusion, the Tribunal admitted new evidence, which had not been relied on in the original Decision. It also emphasised that Napp had a ‘special responsibility’, by virtue of its virtual monopoly, which constrained its freedom of action: there was a certain limit beyond which it could not go when reducing its prices, ostensibly to meet competition.

Excessive Prices

The second abuse found by the DGFT was that Napp charged high prices in the community segment of the market, in some cases more than ten times its hospital prices. This premium pricing combined with Napp’s virtual monopoly led the DGFT to conclude that Napp was abusing its position by charging excessive prices in the community.

Napp argued that its pricing of MST could not be regarded as excessive since it is set in accordance with the Pharmaceutical Price Regulation Scheme (PPRS), which sets a limit on the rate of return that a company can earn on its sales of branded prescription medicines to the NHS.

Adopting the DGFT’s approach to deciding when, as a matter of principle, a price is excessive for the purposes of the Chapter II prohibition, and after reviewing the factual circumstances before it, the Tribunal concluded that these established that Napp’s prices in the community were well above what would have been expected in a competitive market and that those prices had not been subject to competitive pressure to bring them down to competitive levels.

Rejecting Napp’s argument, the Tribunal found that the PPRS was irrelevant to the determination of the issue, although it later took it into account as a mitigating factor when considering the amount of the penalty

The Penalty

The Tribunal agreed with the DGFT that predatory pricing, even of short duration (here a year, as the Act only came into force on 1 March 2000), is one of the most serious infringements of the Act. On the other hand, whilst taking the view that excessive pricing was also a serious abuse, it was prepared to accept some mitigating factors in Napp’s favour: the existence of the PPRS; the absence of any ECJ case law upholding an abuse of excessive pricing in comparable circumstances; and the fact that this was the first case of excessive pricing under the Act. Taking all of these factors into account, the Tribunal reduced the fine to £2.2 million. Given the complex nature of the issues, it rejected the DGFT’s decision that Napp’s failure to alter its pricing practices when proceedings were first brought was an aggravating factor. It ordered interest to be payable on the fine from the date of the application to the date of payment.

Comments

The judgment is important in several respects. It addresses the issue of the burden and standard of proof in proceedings where penalties are imposed. Whilst conceding that such proceedings may be treated as ‘criminal’ for the purposes of the ECHR (Article 6), with the consequence that the burden of proof rests on the DGFT to prove the infringements alleged, the Tribunal ruled that it does not follow that Article 6 imposes the criminal standard of proof. In its view, the structure of the Competition Act points to the conclusion that the standard of proof in proceedings involving penalties is the civil standard (ie. the balance of probabilities), but that standard is to be applied having regard to the fact that infringements of the Act are serious matters attracting severe penalties. The Tribunal accepted that there was force in the argument that the administrative procedure before the DGFT does not comply with Article 6(1), notably because the DGFT himself combines the roles of investigator, prosecutor and decision maker. However, it found that that in itself is not a breach of Article 6 because his decision-making is subject to full judicial control on the merits by the Tribunal.

It also clarifies the question of admissibility before the Tribunal of new evidence adduced by the DGFT and, indirectly, the function of the Tribunal. In essence, whilst the discretion to take account of such new evidence should be exercised sparingly, it held that it should be allowed in some instances in the interests of fairness. By contrast, the DGFT should not be allowed to make a wholly new case at the judicial stage.

The judgment – as well as the proceedings which preceded it – gives some useful insight into the procedure to be followed in future appeals. One ‘tip’ for future applicants is to follow the Guide to Appeals under the Competition Act closely. Another would be to abide by the strict timetable for the proceedings agreed with the Tribunal.

The Tribunal’s approach to the question of assessment of the penalty is also worthy of mention: it makes it clear that it has full jurisdiction to assess the penalty to be imposed and that it is not bound by (and does not even have to have regard to) the DGFT’s published Guidance on penalties. The only constraint on the amount of the penalty binding on the Tribunal is that which flows from the Maximum Penalties Order.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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