The Competition and Markets Authority v Flynn Pharma Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Green |
| Judgment Date | 04 October 2019 |
| Neutral Citation | [2019] EWCA Civ 1631 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: C3/2018/1874(B) |
| Date | 04 October 2019 |
[2019] EWCA Civ 1631
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM Competition Appeal Tribunal
HHJ Peter Freeman CBE QC
1275-1276/1/12/17
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Green
Case No: C3/2018/1874(B)
and
and
Mr Mark Hoskins QC & Ms Jennifer MacLeod (instructed by Competition and Markets Authority) for the Appellant
Mr Mark Brealey QC, Mr Robert O'Donoghue QC and Mr Tim Johnston (instructed by Clifford Chance LLP) for the 3rd & 4th Respondents
Hearing date: Thursday 26th September 2019
Approved Judgment
A. Application
There is before the court an application made on behalf of the Competition and Markets Authority (“CMA”) to amend its Grounds of Appeal pursuant to CPR 52.17 and PD 52C paragraph 30. There will, at the full appeal, be four parties. The appellant is the CMA. The first and second respondents are Flynn Pharma Limited and Flynn Pharma (Holdings) Limited (together “ Flynn”). The third and fourth respondents are Pfizer Inc. and Pfizer Limited (together “ Pfizer”). The intervener is the European Commission (“ the Commission”).
The application to amend the Grounds of Appeal is opposed only by Pfizer.
B. Background
On 7 th December 2016 the CMA issued a decision entitled “ Unfair Pricing in Respect of the Supply of Phenytoin Sodium Capsules in the UK” (“ the Decision”) addressed to Pfizer (the manufacturer) and Flynn (the distributor). The CMA found, inter alia, that (i) Pfizer's supply prices to Flynn; and (ii) Flynn's onward selling prices for the capsule form of the drug phenytoin sodium, which is used to treat epilepsy, were unfairly high. In consequence both Pfizer and Flynn were found to have infringed the Chapter II prohibition set out in the Competition Act 1998 (“CA 1998”) and Article 102 TFEU. Both provisions prohibit the abuse of a dominant position. A financial penalty of £84.2m was imposed by the CMA upon Pfizer and a fine of £5.2m was imposed upon Flynn. Both companies were ordered to reduce their prices.
Pfizer and Flynn appealed against the Decision to the Competition Appeal Tribunal (“ the Tribunal”). The appeal was heard during October and November 2017. Judgment was handed down on 7 th June 2018 and is reported at: [2018] CAT 11 (“ the Judgment”). The Tribunal upheld the conclusion of the CMA that the relevant markets in which to assess the alleged dominance of Pfizer and Flynn were (i) with regard to Pfizer, manufacture of Pfizer-manufactured phenytoin sodium capsules that were distributed in the UK and (ii) with regard to Flynn, the distribution of Pfizer manufactured phenytoin sodium capsules in the UK, and that both Pfizer and Flynn each held dominant positions in their respective relevant markets.
However, in respect of the finding in the Decision that both Pfizer and Flynn had abused a dominant position in the relevant markets the Tribunal set aside the CMA's findings on several bases. These may be summarised as follows. First, that the CMA had erred in its reliance in the Decision upon the cost-plus approach to excessive pricing by which it found that the prices charged by Pfizer and Flynn were excessive because they materially exceeded their respective costs plus a reasonable rate of return. Second, that the CMA had failed properly to assess the possible impact of meaningful comparators for the purpose of assessing whether Pfizer and Flynn's prices were unfair. Third, that the CMA had erred in finding that there were no cost related factors which would increase the economic value of the capsule product beyond Pfizer's and Flynn's prices.
In view of the conclusion in relation to abuse, which resulted in the Decision (which therefore included the penalty) being set aside, it was unnecessary to arrive at a separate decision upon the legality of the fines imposed by the CMA.
The CMA sought permission to appeal the Judgment. By an order of 12 th December 2018, Newey LJ granted permission to appeal on the papers having regard to the arguments set out in the skeleton argument of the CMA. The judge stated as follows:
“The arguments advanced in the appellant's skeleton argument have sufficient substance for the appeal to have a real prospect of success. The appeal raises, moreover, important points of principle, in particular as to the significance of the opinion of Advocate General Wahl in the Latvian Copyright case.”
A central issue arising upon this appeal is the test to be applied under EU and domestic law for the determination of when a price is abusive and the extent, if at all, to which a decision maker (here the CMA, but it could also include a court) is bound to have regard to evidence of relevant comparators.
The seminal authority on abusive pricing is Case 27/76 United Brands v Commission EU: C: 1978:22. (“ United Brands”). At paragraphs [248]–[253] the Court of Justice stated:
“248 The imposition by an undertaking in a dominant position directly or indirectly of unfair purchase or selling prices is an abuse to which exception can be taken under Article 86 of the Treaty.
249 It is advisable therefore to ascertain whether the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition.
250 In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be such an abuse.
251 This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin; however the Commission has not done this since it has not analysed UBC's costs structure.
252 The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, it the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products.
253 Other ways may be devised — and economic theorists have not failed to think up several — of selecting the rules for determining whether the price of a product is unfair.”
Paragraph [252] identifies a test with three components. The first component is to determine whether the difference between the costs actually incurred and the price actually charged must be determined to see if it is “excessive”. If it is, then the second and third components are to decide (a) whether a price has been imposed which is either unfair “in itself” or (b) whether a price has been imposed which is unfair “when compared to competing products”. The scope and effect of this formulation has been the subject of much debate ever since it was first articulated. Save to set out the competing positions of the parties, it is unnecessary to explore the wider debate here.
Pfizer relied upon evidence before the CMA of comparators which it was argued demonstrated that the prices for the products in question were fair. The CMA explains that its Decision was adopted upon the basis that to establish that the impugned prices were abusive, the law required it to be shown that a price was either unfair “in itself”, or, when compared to competing products. In other words, the second and third components of the test were alternatives: See for example paragraphs 5.476 – 5.477 of the Decision. For this reason (and I summarise) once the CMA had found that the prices were unfair in themselves there was no requirement in law to go on and compare those (ex hypothesi) unfair prices with relevant comparators to see whether that conclusion held good.
In the Judgment, the Tribunal acknowledged that a “key issue” between the parties was whether this analysis of the test was correct. The Tribunal held that it was not. At paragraphs [367] – [368] the Tribunal held that an authority could not simply ignore a prima facie valid argument that a price was fair under one alternative (because for instance it bore a reasonable relation to a competing product — the comparator — which itself was fair) but then proceed to find an infringement upon the basis that the price was unfair in itself ie without reference to comparators. The Tribunal stated:
“That is not to say the authority cannot find that there is an infringement where one Alternative demonstrates unfairness and the other does not since it does not need to succeed on both heads. However, the authority must consider whether a prima facie case of fairness under one Alternative undermines the basis for the finding of unfairness under the other Alternative and produced a reasoned basis for determining that the Unfair Limb is satisfied.”
The Tribunal observed that this conclusion flowed not only as a matter of logic but that it also accorded with the burden of proof and the principle of respect for the presumption of innocence. Moreover, it accorded with the approach adopted by Advocate General Wahl in his opinion in Case C-177/16 Autortiesibu un komunicešanas konsultaciju agentura / Latvijas Autoru apvieniba EU:C:2017:286 (“Latvian Copyright”) at paragraphs [124] – [128].
C. The application to amend the Grounds of Appeal
I turn now to the issue arising. In its application for permission to appeal dated 8 th August 2018, Ground 1(b) was in the following terms:
“As to the unfairness limb of the United Brands test, the Tribunal misapplied its own test in finding...
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