On 3 September 2020, to the Turkish Competition Authority (the “TCA”) rejected Johnson and Johnson Sıhhi Malzeme Sanayi ve Ticaret Limited Şirketi's (“JJ”) exemption application relating to the “Pharmaceutical Warehouse Sales Agreement” (the “Agreement”) to be concluded between JJ and nine pharmaceutical warehouses for the distribution of four specific drugs used for the treatment of serious illnesses. The Agreement envisages a quantitative selective distribution system for these drugs, limits the number of authorized warehouses to nine and prohibits the authorized warehouses to sell, provide or trade these four drugs to parties other than authorized warehouses. JJ asked the TCA to determine that the Agreement benefits from block exemption and if not to grant an individual exemption. The TCA decided that the selective distribution system envisaged by JJ neither benefit from the block exemption nor meet the criteria for granting an individual exemption.
The TCA's decision was outstanding since it stated that selective distribution system is usually established for products in the automotive, cosmetics and durable consumer goods sector to protect the brand value and pharmaceutical products are not suitable for selective distribution. The decision challenged the legality of quantitative selective distribution systems in the pharmaceutical sector. However, the Ankara 13th Administrative Court's (the “Court”) decision of 27 April 20221 annuls the TCA's decision and gives green light to the establishment of selective distribution systems in the pharmaceutical sector.
- The TCA's Grounds for Rejecting the Exemption Request
According to the Block Exemption Communiqué No. 2002/2 on Vertical Agreements (“the Communiqué”) and Guidelines on Vertical Agreements (the “Guidelines”), selective distribution systems benefit from the safe harbor of block exemption, regardless of the products' qualities, if the supplier's market share is below 30%2. However, although JJ's market share in the relevant markets were below the threshold, the TCA decided that JJ could not benefit from block exemption because the relevant drugs' qualities did not necessitate the establishment of a selective distribution system.
JJ argued that a selective distribution system was necessary for the relevant drugs because they are high-priced biotechnological products, they should be transported and stored under specific conditions, and they require high level of specialization. Another important argument for selective distribution was preventing parallel exports of these drugs and ensuring supply security. The relevant drugs' prices are lower in Turkey compared to neighbouring countries and this incentivize parallel exports. The selective distribution system would allow JJ to prevent parallel exports and thus increase product availability in Turkey.
The TCA considered that all products provided in the pharmaceutical sector require high technology and special transportation and storage conditions and some pharmaceutical products' prices are higher than others. The TCA also considered that there are less restrictive alternatives to prevent parallel exports. Accordingly, the TCA concluded that there are many products having the same qualities and these are not sufficient grounds to establish a selective distribution system for these medicines. The TCA stated that wholesale level of pharmaceutical products did not require a selective distribution system.
The TCA also assessed whether the Agreement could benefit from an individual exemption. According to the applicable law, an agreement should meet four criteria to benefit from individual exemption:
- New developments and economic or technical improvements in the production or distribution of the products and the provision of services must be provided.
- Consumers must benefit from such developments and improvements.
- Competition should not be eliminated in a significant part of the relevant market.
- Competition should not be restricted more than necessary to achieve the goals set out in the first two conditions above.
Even though the TCA acknowledged that the selective distribution system aims to prevent parallel exports and consequently ensure supply security, the product availability and public health, it concluded that the Agreement restricts competition more than necessary by preventing passive sales to other pharmaceutical warehouses. The TCA considered that such restriction was not essential as the Agreement contains another provision prohibiting parallel exports. Moreover, the TCA concluded that limiting the number of warehouses can complicate and/or delay access of consumers to the products.
The TCA stated that restricting the access of certain warehouses to these products would not eliminate competition in a significant part of the market. However, according to the TCA limiting the number of authorized distributors and restricting active and passive sales of authorized distributors to third parties are unnecessary competition restrictions. Consequently, the TCA decided that the Agreement could not benefit from individual exemption since it does not meet all the four criteria
- The Court's Annulment Decision
The Court's decision directly quotes the Guidelines and states that JJ's market shares in the relevant markets are lower than the market share threshold determined in the Communiqué and the products' qualities is not relevant to benefit from block exemption. Moreover, the Court stated that the envisioned selective distribution system's sale restrictions only apply to the wholesale level and the Agreement does not contain a sale restriction to final consumers. In addition, the Court considered parallel exports' prevention as a valid argument to establish a quantitative selective distribution system.
Finally, the Court stressed that the TCA has the right to withdraw the exemption if the Agreement is no longer capable of meeting the conditions which allow it to get an exemption. Therefore, the Court found that there are no legal grounds for not granting an exemption at this stage and annulled the TCA's prohibition decision.
The TCA's decision was particularly interesting as it includes an assessment regarding the necessity to establish a selective distribution system based on the characteristics of the products distributed, even though such assessment is not required in the Guidelines. Although the TCA's approach raised questions on the legality of selective distribution systems in pharmaceuticals sector, the Court's annulment decision provides legal certainty and predictability. Therefore, the Court re-established that quantitative selective distribution systems are block exempted if the market share of the supplier is below the statutory threshold.
1 Decision dated 27 April 2022 and numbered 2021/778
2 The applicable market share threshold was 40% by the time of the decision.
© Kolcuoğlu Demirkan Koçaklı Attorneys at Law 2020
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