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March 2010
Contents
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Cartel Update
UK: NHS buries hatchet with last
of (alleged) generics cartelists
The Department of Health has settled its cartel damages case against Kent Pharmaceuticals Ltd for an undisclosed sum. Kent, along with a number of other generic drug suppliers, was sued by the Department of Health on allegation of anti-competitive fixing of prices in the supply of Warfarin and several penicillin-based drugs to the NHS in 1996-2000. The settlement with Kent, the last defendant standing in this litigation, marks the end of Department of Health's nearly decade-long pursuit of the cartel.
The Serious Fraud Office began investigating the cartel in 2002, leading to criminal prosecutions being brought against the companies and nine implicated individuals for conspiracy to defraud. The prosecution collapsed in 2008 following a judgment in the long-running Norris case (for the latest on Norris, see the "UK" section below) where the House of Lords held that price-fixing could not, in itself, amount to conspiracy to defraud. As the alleged conduct had taken place before the Enterprise Act 2002 came into force, the companies and individuals could not be convicted under the criminal cartel offence. This was covered in our March 2008 and July 2008 e-updates.
In parallel with the SFO proceedings, the Department of Health pursued the companies in the civil courts for damages resulting from the price-fixing against the NHS. Regent-GM Laboratories has been put into liquidation and the other groups involved (Generics UK Limited, Goldshield Group plc, Norton Healthcare Limited, DDSA Pharmaceuticals Ltd and Ranbaxy (UK) Limited) settled the claims with the Department of Health in 2006-2009. Parallel claims by the Scottish Government also settled in 2008 and 2009.
As illustrated by the Reckitt-Benckiser story below, not only generic drug makers but also patent holders are vulnerable to scrutiny by the competition authorities. Similarly, the US Federal Trade Commission and the European Union have both taken action against so-called "reverse settlements" of patent infringement claims, whereby patent holders pay out money to alleged infringers of the patent, in exchange for a commitment not to introduce generic versions of medicines even after their patents expire. These cases show that competitive prices of drugs and healthcare are of great concern to governments, who are very keen to ensure a completely level playingfield.
EU: Have car wiring harness
makers short-circuited competition?
The European Commission has carried out dawn raids at several companies in the automotive electrical distribution systems sector. These systems are sometimes referred to as "wiring harnesses", forming the "central nervous system" of a car. The inspections are the first step in an investigation which the Commission has commenced on suspicion that the raided companies may have breached Article 101 of the Treaty of the Functioning of the European Union (TFEU) (ex-Article 81 EC). The inspections took place in various Member States, with German company Leoni AG being the first to admit publicly to being investigated. Competition authorities in Japan and the US are also investigating companies active in this sector, including Yazaki North American Denso International and Tokai Rita. The European Commission has not made any further announcements on the likely progress of its investigation.
World: Air freight forwarding companies
charged over coordinated surcharges
On 10 February the European Commission issued a Statement of Objections against companies accused of having operated an air freight forwarding cartel. The alleged cartelists include Panalpina, a French subsidiary of DSV, UPS, DHL and Kuehne + Nagel. Air freight forwarding involves organising the transport of goods and other related activities including customs clearance, warehousing and ground services.
The Statement of Objections is a charge sheet in which the Commission sets out its provisional findings as to the infringements. The investigated parties will now be given a chance to defend those charges and the Commission's factual findings before the Commission decides on any fines.
The investigation relates to freight forwarding by air only, and follows dawn raids that took place at the companies' premises in October 2007. The Commission is investigating allegations that the companies agreed on the level, timing, imposition and application of various surcharges, in breach of Article 101 TFEU (ex-Article 81 EC). There are four alleged infringements under investigation: services from the UK to outside the EEA, from the EEA to the USA, from China to the EEA and from Southern China/ Hong Kong to the EEA. Investigations into the sector are underway in cooperation with the US Department of Justice and competition authorities in Switzerland, Canada and Australia.
Spain: The road to a cartel fine
is paved with false pretensions
The Spanish competition authority, CNC, has announced the opening of a formal investigation into 53 companies concerning alleged anti-competitive practices in relation to roadway maintenance and paving works. The investigated companies are suspected of market sharing and price-fixing agreements in relation to government tenders. Inspections at the premises of the companies were carried out in October 2009. The CNC now has a maximum period of 18 months to investigate and make a decision on this case.
The road paving industry has been put under the competition law spotlight before. For instance, in 2009, a Swedish court ordered roadbuilding companies to pay fines totalling some €50m for rigging bids when tendering for contracts with the public sector. Bid-rigging against the public sector has also received attention in the UK, where the Office of Fair Trading found 103 construction companies guilty of bid-rigging in September 2009, fining them £129.5m.
Click here to read our coverage of the construction cartel in our Winter 2009/2010 e-update.
UK
Supreme Court dismisses human
rights appeal in Norris extradition case
The extradition to the US of former Morgan Crucible chief executive Ian Norris seems more and more likely after the UK's Supreme Court dismissed his final appeal, which was based on human rights grounds. Mr Norris is wanted by the US Department of Justice on a charge of obstruction of justice in relation to an investigation of a cartel in carbon products.
The background to the Norris case has been covered in previous editions of this e-update; most recently in our March 2008 and February/March 2009 e-updates.
In his appeal to the Supreme Court, Mr Norris argued that Article 8 of the European Convention on Human Rights prevented the UK from meeting the US Department of Justice's request for his extradition. Article 8 provides that everyone has the right to respect for his private and family life, his home and his correspondence. Interference by the public with the exercise of this right is however justified "such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others".
Mr Norris argued that the deteriorating health of both himself and his wife meant that the level of interference with his private and family life would be disproportionate to carrying out the extradition. Mr Norris was diagnosed with prostate cancer in 2000, and both he and his wife have been diagnosed as suffering from depression. There was evidence that Mrs Norris' "severe psychological suffering and mental deterioration" would be worsened if Mr Norris were to be extradited. Because of her ill health, Mrs Norris no longer intends to accompany her husband to the US. Therefore, their family life would be completely interrupted if Mr Norris were extradited and convicted.
The Supreme Court, however, held that the public interest in the prevention of crime would be seriously damaged if any defendant with family ties and dependencies such as those which bind Mr Norris and his wife was thereby rendered immune from being extradited to be tried for "serious wrongdoing". Therefore, "only the gravest effects" of interference with family life will be capable of rendering extradition disproportionate to the public interest that it serves. The Court concluded that this was not such a case.
The only route still available to Mr Norris is to take his case before the European Court of Human Rights.
Norris v Government of United States of America ([2010] UKSC 9), judgment of 24 February 2010
OFT cannot stomach Reckitt Benckiser's
practices in rare abuse of dominance case
The Office of Fair Trading (OFT) has sent a Statement of Objections to pharmaceutical company Reckitt Benckiser. The Statement sets out the OFT's charges against the company following its investigation into an alleged abuse of Reckitt Benckiser's dominant position in the market for the supply of alginate and antacid heartburn medicines to the NHS.
The alleged abuse stems from Reckitt Benckiser's withdrawal of its product Gaviscon Original Liquid from the NHS prescription list.
The OFT notes that the withdrawal came just as Reckitt Benckiser's patent for Gaviscon Original Liquid was about to expire. If the product had remained on the NHS prescription list after its patent expired, GPs would have been able to search for the brand name "Gaviscon" on the NHS's prescribing software but prescribe an "open" prescription. An "open" prescription allows pharmacies to choose whether to dispense the relevant brand or equivalent but cheaper generic medicines. The OFT notes that the price competition that this brings about can result in considerable cost savings for the NHS.
However, a drug can only be included on the "open" prescription list if the patent for it has expired. As a result of Reckitt Benckiser's withdrawal of Gaviscon Original Liquid from the NHS list, when GPs search for "Gaviscon", only Gaviscon Advance Liquid would be identified as the appropriate prescription. Gaviscon Advance Liquid is patented until 2016 and therefore protected from "open" prescription.
The OFT argues that Reckitt Benckiser's behaviour is an improper use of the patent system and, given the company's strong position in the market, an abuse of dominance in breach of Chapter II of the Competition Act and/or Article 102 TFEU (ex-Article 82 EC). If Reckitt is found guilty, it can be fined up to 10 per cent of its worldwide turnover, which was £7.75 billion last year.
The OFT has found abuse of dominance cases hard to come by: in the past 7 years it has only issued one infringement decision (in the Cardiff Bus case in 2008).
Click here to read the OFT press release, 23 February 2010.
The importance of being earnest - or at least insist
on an appropriately caveated Competition Warranty...
A case currently going through the Scottish Court of Session illustrates the intricacies of claiming damages for breach of a competition warranty following a business transfer. It also highlights the importance of making the wording of the competition warranty completely watertight - if you're the purchaser, that is.
In 2004, BSA International SA (the Purchaser) acquired the shares of A McLelland & Son Limited (the Company) from its previous shareholders (the Vendors). Under the terms of the Share Purchase Agreement the Vendors provided the following warranty:
"No Group Company has received any process, notice or communication, formal or informal, by or on behalf of the Office of Fair Trading or the European Commission or any other authority of any country ... having jurisdiction in anti-competitive matters in relation to any aspect of the business of that Group Company or any agreement of arrangement to which that Group Company is, or is alleged to be, a party, and so far as the Warrantors are aware, there are no subsisting circumstances that may give rise to any such process, notice or communication being received by any Group Company."
In 2005, the Purchaser received notice from the OFT of an investigation into the so-called "dairy retail pricing initiative" in which the Company had been involved. The OFT subsequently sent a Statement of Objections to the Purchaser in 2007. The Purchaser reached a settlement agreement with the OFT under which the Purchaser admitted infringement of the competition rules by the Company and agreed to pay a reduced penalty. The Purchaser subsequently brought a damages claim against the Vendors for breach of warranty.
In their defence, the Vendors argued two preliminary issues:
- that the action was time-barred
- that the Purchaser had not specified how the warranty had been breached.
In an interim opinion of 28 January 2010, the Court ruled on the preliminary issue raised by the Vendors. On the time bar issue, the Court held that, on the facts of the case, the action had not been brought out of time.
On the issue of specification of the breach of warranty, the Court noted that the wording of the competition warranty focussed on the Vendors' awareness, not only of the facts giving rise to the investigation, but also of their likely consequences. The Court held that, in order to establish a breach of the competition warranty, the Purchaser must establish that the Vendors were aware of the actual behaviour which resulted in the investigation by the OFT and that they also ought to have reasonably been aware that the behaviour may be investigated by competition authorities.
The Purchaser will now have an opportunity to amend its claim to address this issue, before the case can be finally determined. Of course, it may prove difficult to find evidence on what the Vendors were aware of at the time when the competition warranty was given.
BSA International SA v Irvine & Ors, Opinion of the Court of Session of 28 January 2010
EU
Commission searches for Google infringements
In a brief statement on 24 February, the European Commission confirmed that it has opened an informal investigation into Google's search engine and search-advertising services following complaints by competitors on the vertical search engine market. Vertical search engines - as opposed to general web search engines -focus searches on specific types of internet content; for instance flights, hotels or car insurance.
The complaints allege that Google has abused its dominant position on the search engine market by demoting websites in Google search results where the website provides a vertical search engine in direct competition with Google.
Google has responded to the complaints acknowledging that the Google search is not always perfect, but denying that the company has acted in a way that removes competition or creates artificial barriers to entry.
The alleged behaviour seems to be similar to that investigated by the Commission in relation to Microsoft, most recently for using its strength on the operating system market to enter the Internet browser market. Also in the Google case, the issues appear to surround the leveraging of a dominant position on one market to gain an advantage on another market.
The European Commission has not yet launched a formal investigation against Google, and has not yet reached a view on whether Google's conduct is unlawful.
International
It takes two... but not in New Zealand
A recent decision by the New Zealand Commerce Commission serves as a reminder that it can intervene in cases where there is a unilateral attempt by one party to enter into price-fixing agreement with a competitor, even if it does not result in any agreement or concerted practice. This sets New Zealand competition law apart from its UK and EU counterparts.
The Commerce Commission issued a formal warning to Ernie Travers of Massey, Auckland, a Trade Me seller, for an attempt to fix prices for LED bicycle lights with an online competitor. Mr Travers had emailed a competitor, saying:
"Hey, how about instead of continually discounting these lights we agree to one price. $189 and stick to it. Post a question as a reply on one of my auctions if you like then no buyers will know about this. I am sure we will both get a share of the market if we are both consistent on the price."
Travers' competitor did not respond to the approach; therefore, no price-fixing agreement was entered into. Nevertheless, a provision in New Zealand's Commerce Act 1986 allows a court to award a penalty against a person who has attempted to breach the Act even if it has not succeeded. In this case however, the Commerce Commission was content to issue a formal warning, since Travers' behaviour was not considered to be either deliberate or significant.
The position in New Zealand is different from European Union and United Kingdom competition laws, as both require the existence of an agreement or concerted practice for the prohibition against anti-competitive agreements to be breached. Purely unilateral conduct can only be punished if the company in question holds a dominant market position.
Click here to read The Commerce Commission's press release 3 February 2010.
India: CCI introduces pre-merger consultation process
The Competition Commission of India (CCI) is currently consulting on changes to India's merger control rules, with the aim of rationalising the process.
The CCI is considering introducing a scheme of pre-merger consultations that would allow companies to get the CCI's opinion on whether a proposed merger is in compliance with the Competition Act 2002. In contrast to the EU merger control regime, Indian competition law does not provide for prior notification of proposed concentrations, but takes an exclusively ex-post approach to merger control. The UK regime does not have mandatory prior notification, but a voluntary system.
However, the CCI's merger clearance process currently takes up to 210 days. Therefore, the main aim of the proposed pre-merger scheme is to speed up the process and make the control of merger transactions less time-consuming and more efficient. The CCI hopes that the scheme will reduce handling times to around 40 days. The consultation invites all stakeholders to comment on the proposals.
Contact Us
If you think your business may be affected by any of the above, or if you have any other questions, please contact:
Michael Dean
Partner
0141 303 2415
michael.dean@mms.co.uk
Catriona Munro
Partner
0141 303 2385
catriona.munro@mms.co.uk
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