European Union: Pfizer's Trivial £84.2 Million Competition Law Fine Highlights The Advantages Enjoyed By Conglomerates

Last Updated: 29 June 2017
Article by Stephen Hornsby

If George Orwell were alive today, the author of Animal Farm (where all animals are equal but some are more equal than others) would certainly be struck by how fines imposed for breaches of competition law committed by equally culpable companies bear down least heavily on multinational conglomerates and most heavily on companies that sell few or even just one product or service. The recently published non-confidential text of the Competition and Markets(CMA) decision fining Pfizer the (apparently) severe amount of  £84.2 million and the relatively tiny company Flynn Pharma £5.2 million for charging excessive and unfair prices for phenytoin sodium capsules ( a decision which both companies are appealing) is an acute illustration of this systemic disparity in treatment.

Assuming both companies are equally culpable (as the CMA found to be the case here) how is such a counter-intuitive outcome possible? The reason is that following the EU example, fines for intentional or negligent breaches are calculated according to a highly complex formula in which the starting point for determining the seriousness of an offence (and thence the eventual penalty) is a percentage (up to 30%) of the turnover obtained in the product or service market where the infringement occurs. This figure is then multiplied by the duration of the infringement and this starting point  is then subjected to a number of 'tweaks' ( the need to account for the size of the company and deter breaches etc etc) to arrive at a final number .This final figure must never exceed 10 per cent of a worldwide turnover of the company in question.

Following an ECJ judgement ( Pilkington v Commission C – 101/15, EU:C:2016:631 paragraphs 64-66) the CMA should not confer an advantage on the least diversified undertakings on the basis of criteria that are irrelevant in the light of the gravity of and the duration of the infringement".  But what has happened here is that the most diversified company is given an advantage as a result of the fining formula being followed.  So, despite other ECJ cases that refer to the need for equal treatment,  Flynn Pharma with worldwide turnover of £52 million, had to pay a fine scaled down to £5.2 million so as not to exceed the statutory maximum whereas Pfizer, with a turnover of over £50 billion had only had to pay a fine of £84.2 million that represents  a mere 0.27 per cent of its total turnover. This would have been even smaller had the CMA not quadrupled the amount because of Pfizers size. Looked at another way, the fines imposed represent 59% of Flynn's average annual profit (against Pfizer's 1.45%) and 82% of Flynns' dividends (as against 1.96% of Pfizers): This will strike the layman as bizarre; if this is the consequence of equality of treatment it is only equal  in the most formal of sense that was rightly ridiculed in Animal Farm.

The CMA would doubtlessly say that it (like other member states) should follow the EU model; however in practice not all member states do so. Indeed the formula the CMA applies was ignored studiously by its  French counterpart in the recent high profile model agencies investigation where  Italian and UK model agencies were fined up to the statutory maximum whereas the French model agencies received much lower fines based on no discernible rationale at all. Hopefully when the UK leaves the EU (if not before) it will be adopt a more pragmatic and just system. Reform is vitally necessary because SME's, who very often offer a much smaller range of goods and services have recently been the focus of the CMA's "low hanging fruit" enforcement initiative which is (incidentally) entirely inconsistent with its publicised prioritisation principles. Such companies, who are attracting fines of 10 % of their total turnover will be less willing to challenge controversial regulatory decisions than their more diversified and well heeled counterparts as a result of the slavish implementation of the EU's fining formula which the Pfizer case illustrates in such a stark form.

This article has also appeared in The Times.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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