Excessive pricing enforcement in Europe has been infrequent owing to the lack of guidance from EU courts on when prices might be deemed excessive, coupled with the fact that such cases are extremely difficult to substantiate. A judgment in relation to a request for a preliminary ruling by the Court of Justice of European Union (the “CJEU”) in the case of AKKA/LAA was eagerly anticipated, as there had been no jurisprudence from EU courts on excessive pricing for a number of years. Although the judgment AKKA/LAA judgement is helpful in some respects, it does little to provide real practical guidance, leaving much of the decision-making to the regulators.
This article will address the substantive elements of excessive pricing and the challenges which come with it. The article will also provide a summary and analysis of the September AKKA/LAA judgment by the CJEU , as well as discuss the recent interface between excessive pricing and the pharmaceutical industry.
Excessive pricing falls within the scope of Article 102(a) of the Treaty, which stipulates that an abuse of a dominant position can consist of “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions”. United Brands is the leading case challenging excessive pricing. The test for excessive pricing set in that case had two limbs:
- whether the difference between the cost actually incurred and the price actually charged is excessive (otherwise known as the “cost-price analysis”); and, if so
- whether the price that has been charged is either unfair in itself or unfair when compared to the prices for competing products.
Application of the United Brands test is far from straightforward – as highlighted in the opinion of Advocate General Wahl in the AKKA/LAA case. Some key challenges include:
- There is no one single method or test to determine whether a price is excessive. Instead, there are many recognized methods: cost-price analysis, comparisons of prices across different geographic markets, and comparisons over time. EU and national regulators enjoy a certain degree of autonomy when determining whether a price is excessive; however, with limited practical guidance, coupled with the fact that each method has its shortcomings, this can result in a substantial amount of work and resource.
- Although EU and national regulators are concerned with defending and stamping out anti-competitive behavior, they want to avoid taking on the role of price regulators in excessive pricing cases. However, this line is not always clear. For example, when determining the benchmark, regulators may have to consider an undertaking’s profit margins and sector-specific issues, as well as any regulations/accounting standards.
- The investigating authority will not always have the relevant information and/or data at its disposal, and so inferences must be drawn or a mixture of methods applied to ensure a defendable methodology.
In addition to satisfying the United Brands test, the usual criteria in Article 102 cases must also be established. In particular, the Commission or court must establish whether an undertaking is dominant or not. In doing so, it must define the relevant market (or markets), with reference to the undertaking’s market share. For these purposes, it is necessary to define the relevant product market as well as the relevant geographic market. Generally, when an undertaking has 50% or more of the market, there is a presumption of dominance. Where an undertaking has less than 40% of the market share, it’s unlikely to be considered dominant.
The Commission also takes other factors into account when assessing dominance, including whether there are any barriers to entry, how easy it is for other competitors to enter the market, the existence of countervailing buyer power, as well as the overall size and strength of the undertaking and its resources. A dominant position is not unlawful per se, but such undertakings have a special responsibility to ensure that their conduct does not hinder or distort marketplace competition.
AKKA/LAA – a much welcomed judgment or merely toeing the line?
1. Background to case.
AKKA/LAA is the Latvian collective management organization that handles the copyright for musical works—as the only entity in Latvia authorised to issue licences for public performance of musical work, there was no question as to its dominance. On 1 December 2008, the Latvian Competition Council (the “LCC”) fined AKKA/LAA for abuse of a dominant position for application of excessively high rates. Accordingly, AKKA/LAA adopted new rates applicable from 2011. However, the LCC thereafter opened a new investigation to examine the new rates
In order to assess compliance with the United Brands test, the LCC compared the rates applied in Latvia for the use of musical works in shops and service centres with those applied in neighbouring Member States and markets, Lithuania and Estonia. The LCC found that the rates applied in Latvia were higher than those applied in Estonia and, in most cases, higher than those applied in Lithuania. In addition, the LCC conducted a broader geographic comparison by deploying the use of the purchasing power parities index (the “PPP index”). The PPP index, as explained by the OECD, consists of price relatives that show the ratio of prices in national currencies of the same good or service across different countries. As a result, the LCC was able to carry out a wider geographic comparison, which compared fees in force in approximately 20 other Member States. It found that the rates payable in Latvia exceeded the average level of those other Member States by 50% to 100%.
In its 2013 decision, the LCC concluded that the fees in Latvia were significantly higher than fees in Estonia and Lithuania and that, therefore, the fees charged by AKKA/LAA were unfair. Consequently, the LCC fined AKKA/LAA for abuse of a dominant position. AKKA/LAA brought an action before the Regional Administrative Court (the “RAC”) in Latvia seeking annulment of the contested decision. Of most significance, AKKA/LAA contended that the LCC limited its comparison of rates applicable in Latvia to those applicable in Estonia and Lithuania, whereas in respect of other indicators, such as gross domestic product (“GDP”) and price levels, the situation in Latvia was also comparable to those in Bulgaria, Romania, Poland, and Hungary.
In a 2015 judgment, the RAC partially annulled the contested decision but upheld the LCC’s finding that there had been an abuse of a dominant position by AKKA/LAA. Both parties appealed the decision.
The Latvia Supreme Court stayed the proceedings and triggered the Article 267 TFEU procedure, whereby certain questions can be referred to the CJEU.
2. Analysis of AKKA/LAA judgment.
The CJEU acknowledged that, although the test established in United Brands advocates a cost-price analysis, there are other methods which can help determine whether a price is excessive, including the geographic comparison adopted by the LCC. Moreover, he fact that the LCC only looked at a limited number of states for its comparison did not mean that the comparison was insufficient or unrepresentative. The CJEU indicated that if the reference Member States were selected ‘…with objective, appropriate and verifiable criteria…’, any concerns about the limited number of markets for comparison might not arise; it would depend on the facts of each case.
Interestingly, the CJEU said that the criteria for selection could include consumption habits and other economic and sociocultural factors, including GDP and cultural and historical heritage. This suggests that the selection criteria available to regulators is quite wide. However, the CJEU did not give any examples of the types of factors regulators might take into consideration when considering “cultural and historical heritage”. The application of this criteria has the potential to lead regulators down a slippery slope, and one may speculate that it should be used in combination with other factors.
The CJEU reiterated the principle that a comparison between the prices applied in the Member State concerned and those applied in other Member States must be made on a consistent basis. The CJEU also left regulators to decide the framework of the comparison, i.e., whether the comparison of prices should be within specific user segments or across all segments. The CJEU did conclude, however, that the burden of showing that prices are fair by reference to objective factors is on the undertaking holding a dominant position.
The CJEU did rule that the PPP index must be considered in determining whether a comparison of prices applied across several Member States for the same goods or services is made on a consistent basis, because differences in price levels among Member States are closely linked to differences in citizens’ purchasing power.
Strikingly, the CJEU judgment highlights the degree of autonomy afforded to regulators when substantiating excessive pricing abuses. This degree of autonomy may lead to more appeals by dominant undertakings in national and EU courts, as is the case currently in the UK. Given the upward trend in the public enforcement against excessive pricing practices, there may therefore be opportunities for more practical guidance in the near future.
Excessive pricing and the pharmaceutical industry.
The pharmaceutical industry is facing a string of investigations alleged excessive pricing practices both at a national and EU level. In fact, on 15 May 2017, the Commission announced that it was opening a formal investigation against Aspen Pharma to ascertain whether it has imposed significant and unjustified price increases in relation to its cancer medicines. The investigation will be EU-wide save for Italy, as the AGCM, the Italian Competition Authority, already has imposed a fine of €5million on Aspen Pharma for imposing increases in prices from 300% to 1500% on cancer drugs. Indeed, the Commission’s investigation was opened following the AGCM’s decision.
National competition authorities have also taken a stand against alleged excessive pricing in the pharmaceutical industry. On 7 December 2016, the UK’s Competition and Markets Authority (the “CMA”) fined Pfizer and Flynn £90 million for charging excessive prices in relation to an anti-epilepsy drug, which left the UK’s National Health System (the “NHS”) exposed to significant price increases. The CMA’s decision is more than 500 pages long, and contains a comprehensive analysis of its findings, many of which have been both ground-breaking and controversial. The CMA’s decision is being appealed in the Competition Appeal Tribunal, a specialist court for competition clams in the UK. The month-long appeal commenced on 30 October 2017, with Pfizer’s legal representatives already accusing the CMA of erring in its economic analysis of drug pricing, failing to appreciate market realities, and its lack of comparison against other anti-epilepsy drugs when looking at prices. Interestingly, this case was referred to the CMA by the Department of Health for investigation – similar or equivalent authorities elsewhere in the EU may do the same.
Despite previous reluctance on the part of the Commission to pursue excessive pricing cases, it now recognises that ‘…there can be times when prices get so high that they just can’t be justified. In the case of Pfizer and Flynn, the NHS’ expenditure on the relevant anti-epilepsy drug increased from around £2million a year in 2012 to around £50million in 2013. Where victims are faced with such colossal price increases, one needs to question what competition means, and the extent to which we protect and defend it. This moves away from the logic that in free and competitive markets, high prices should normally attract new entrants and more innovation, thereby increasing competition in the long run. While the recent AKKA/LAA judgment provides some guidance about the law in this area, with more potential investigations and decisions in the pipeline, and if recent trends are anything to go by, we are likely to see a surge in excessive pricing cases at both a national and EU level, an exciting change in direction for what previously has been a dormant area of competition law enforcement. Will the U.S. courts or legislative bodies follow in kind?
 Case C-177/16: Autortiesību un komunicēšanās konsultāciju aģentūra/Latvijas Autoru apvienība v Konkurences padome, Judgment of the Court (Second Chamber) dated 14 September 2017, referred to as AKKA/LAA. Please click here for the judgment.
 Same as above.
 United Brands and United Brands Continentaal v Commission, judgment of 14 February 1978.
 AKZO v Commission 
 Michelin v Commission, paragraph 57
 Paragraph 9 of judgment.
 Paragraph 13 of judgment.
 Paragraph 41 of judgment
 Paragraph 42 of judgment
 Paragraph 46 of Judgment
*Wessen Jazrawi is a senior associate and Gurpreet Chhokar is an associate in the London office.