Unfair and excessive pricing: the latest from the UK Courts
The Court of Appeal recently considered the law of unfair and excessive pricing, in its judgment of Flynn Pharma and Pfizer v CMA.[1] The case concerns the pricing of drugs and, while a coincidence, the subject is of particular relevance in the current COVID-19 climate. That said, its application is much broader, as it sets out the test for assessing whether a price is excessive and unfair.
The appeal
The case involves an appeal by the CMA against a decision of the Competition Appeal Tribunal (the CAT). The defendants are Flynn Pharma, a small drug company specializing in ‘end-of-life’ medicines, and Pfizer, one of the world’s leading pharmaceutical companies. In 2016, the CMA found that Flynn Pharma and Pfizer had breached competition law by charging an excessive price for the capsule form of epilepsy drug Epanutin, resulting in an increase between 780% and 1600% in a year.
In 2018, the CAT upheld the Defendants’ appeal, overturned the CMA’s ruling and so the matter was sent back to the CMA for reconsideration. The basis for upholding the appeal was that the CMA had erred in its application of the law in its finding that it was unfair (rather than a finding that the price was fair per se).
The CMA had looked at unfairness ‘in itself’, by reference to a comparison between the cost of the drug and its price (a “Cost Plus” analysis), and had not assessed the fairness of the price by reference to appropriate comparators – in particular the tablet form of the drug, sold by Teva, that was similarly priced.
The test
In its judgment, the court drew together the following guidance:
(i) First, a price will be unfair when the dominant undertaking has reaped trading benefits which it could not have obtained in conditions of workable competition.
(ii) A price which is “excessive” because it bears no “reasonable” relation to the economic value of the good or service is an example of such an unfair price.
(iii) There is no single method for establishing abuse and, crucially, competition authorities have a discretion in deciding which methodology to use and which evidence to rely upon
(iv) There is no rule of law requiring competition authorities to use more than one test or method in all cases.
(v) If a Cost-Plus test is applied, then the authority should determine whether the margin is “excessive”. The authority should then compare the price charged against any other factors which might otherwise serve to justify the price charged as fair and not abusive.
Relevant factors include, but are not limited to, evidence and data relating to the defendant undertaking itself and/or evidence of comparable competing products and/or any other relevant comparable.
If an undertaking relies, in its defence, upon other methods or types of evidence to that relied upon by the competition authority, then the authority must fairly evaluate it.
The outcome
The judgment, broadly, upheld the CAT’s decision, but important points were decided in the CMA’s favour. The court found that the CMA did not have to construct a “hypothetical benchmark price” in all circumstances. The CMA is also entitled to use its discretion in determining what economic analysis is sufficient.
In response to the judgment, the CMA struck a positive tone - saying that it was an important step forward in clarifying the legal test for excessive and unfair pricing. That assessment is a fair one, and indeed the case is not lost, as the CMA has the opportunity to review the elements that the Court of Appeal has referred back to it as it moves forward (notwithstanding that it has lost nearly 4 years in the process of the appeals).
The impact on the market
The Court of Appeal guidance means that parties can pursue excessive pricing cases in all sectors on a surer footing. Undoubtedly helpful to the CMA and the FCA in their role as competition regulators, but also to private parties seeking to enforce the competition rules independently. We anticipate increased application of the law in the area, in the pharmaceutical sector and beyond.
Footnotes
[1] Judgment of the Court of Appeal [2020] EWCA Civ 339
