The Competition and Markets Authority (CMA), the UK competition regulator, has had a busy few years since being created in 2014. It has imposed record fines for competition law infringements across a wide range of sectors, and secured its first director disqualifications and criminal conviction.
Anti-competitive behaviour can cause significant damage to reputation and brand, as it comes at the expense of customers. The regulatory consequences are also severe, with the CMA and European Commission able to impose fines up to 10% of global group turnover. In the UK, breaches can also be punished by director disqualification and up to five years in prison. Customers can now bring ‘class action’ claims to recover any excess prices paid, and competition breaches will exclude a business from bidding for public contracts.
Only a fraction of the sectors that have recently come under scrutiny from competition regulators can be covered here, so we will focus on some of the most high-profile investigations and penalties. However, competition law compliance is an essential part of good corporate governance whatever the sector and size of business, and the CMA’s recent increase in enforcement activity means it has never been more important.
Retail: online sales restrictions
Online retail has been a consistent focus for competition regulators, with manufacturers and distributors fined for limiting their buyers’ ability to resell products or set their own prices online.
The European Court of Justice’s December judgment in Coty confirmed that sellers of ‘luxury goods’ can prohibit their resale on third party platforms such as eBay and Amazon Marketplace. At first glance this seemed at odds with the well-established principle that suppliers cannot prevent their buyers selling products online, which significantly decreases consumers’ options. However, on closer inspection the decision is specific to third party platforms. Suppliers can keep their products off such spaces as long as buyers remain free to sell via their own websites. This principle should also apply to non-‘luxury’ goods, as long as neither the supplier nor the buyer has a market share over 30%.
Beyond that narrow application, Coty is by no means a licence to restrict online sales. A recent UK case involving golf equipment manufacturer Ping illustrates the perils of doing so. The CMA fined Ping £1.45m and ordered it to discontinue its ban on the sale of Ping clubs online, having concluded that the ban reduced Ping’s buyers’ ability to sell to customers outside their ‘bricks-and-mortar’ catchment areas, and restricted customers’ options and ability to compare deals. Ping argued that an online ban was necessary to promote the custom fitting of clubs, which optimised performance for the customer. While the CMA accepted that was a legitimate commercial aim, Ping could have pursued less restrictive options.
Ping has appealed, with the case to be heard by the Competition Appeal Tribunal (CAT) in May.
Manufacturing: cartels, prosecutions and information sharing
In December 2016 the CMA imposed fines totalling over £2.5m on three suppliers of galvanised steel water tanks, who had conspired to fix prices, share markets and rig bids; a ‘hat trick’ of the most serious breaches. The former managing director of one company had been given a suspended six-month prison sentence in September 2015, reduced from a likely two-year term after he pled guilty to agreeing these ‘cartel’ arrangements with the other firms and provided evidence against directors of the two other companies. Although those directors were acquitted, changes to the criminal offence mean it should now be easier to prove in respect of conduct taking place after April 2014. Anyone involved in anti-competitive conduct after that date can therefore expect the CMA to remain aggressive in pursuing criminal sanctions.
A fourth tank supplier, Balmoral Tanks Ltd, was fined £130,000 for sharing information about their pricing intentions in a meeting secretly recorded by the CMA, despite declining an invite to join the cartel. Balmoral appealed to the CAT, which last December confirmed that simply sharing information on pricing and other commercially sensitive matters is itself a breach of competition law. It is essential that businesses be aware of this issue to avoid unintentionally infringing competition law.
Estate agency and online retail: director disqualification
The CMA can ask the court to disqualify directors for up to 15 years if their company has broken competition law. They have only recently started to use this power, but it should become a more common tool in future.
In April 2018 the CMA secured the disqualification, for three-and-a-half and three years respectively, of two directors of a Burnham-on-Sea estate agency that had broken competition law by forming a price-fixing cartel with five competitors. This followed the CMA’s first disqualification in December 2016, when the former managing director of online poster supplier Trod Limited was subject to a five year disqualification after the company agreed with rival sellers not to undercut each other on Amazon. These disqualifications came on top of fines of £30,099 for the estate agents and £163,000 for Trod.
Not only do these cases show that directors need to be aware of the individual consequences of competition law breaches, but also that it is not just big businesses who need to comply with competition law.
Pharmaceuticals: abuse of dominance and anti-competitive agreements
Pharmaceutical companies have been in the crosshairs of competition regulators world-wide. In October last year the CMA opened four new investigations of alleged anti-competitive behaviour by as-yet-unnamed pharma businesses, adding to a number of other ongoing cases.
Competition law places significant limitations on the commercial freedom of businesses with a dominant market position (ie a position sufficiently strong that the business can act independently of competitive constraints), who are prohibited from abusing their status. Abuse can include restricting supply, forcing other firms out of the market or charging excessive prices.
While dominance can arise in many sectors, especially concentrated markets, it is particularly relevant to the pharmaceutical sector. Patents are of course essential to the production of new products, by incentivising risk-taking, innovation and huge investment in R&D, but their monopoly nature will often produce a dominant market position. Even once patents expire dominant positions can survive, for example where it is not advisable for existing patients to switch medication.
In May 2017 the European Commission alleged that Aspen Pharma had abused a dominant position by imposing ‘very significant and unjustified price increases of up to several hundred per cent, so-called “price gouging”’ for cancer drugs to which it had acquired the rights. It is also alleged that Aspen ceased or restricted the supply of drugs to health authorities in Europe, or threatened to do so, unless price increases were agreed.
The Commission’s investigation is ongoing, but Aspen has already been fined €5.2m by the Italian competition authority and is also being investigated in Spain and South Africa.
Pfizer and Flynn Pharma
Closer to home, the CMA has set its sights on price increases for generic drugs. Pfizer and distributor Flynn Pharma were fined in December 2016 for charging ‘excessive and unfair’ prices for the epilepsy medication phenytoin sodium. Pfizer had sold the distribution rights for the branded drug Epanutin to Flynn, which had then re-launched it as an unbranded generic. Because the UK’s price control legislation covered only branded products, Flynn was able to increase the price charged to wholesalers and pharmacies by up to 2,600%. Pfizer had increased its manufacturer price by up to 1,600%. This increased the cost to the NHS from £2m in 2012 to more than £50m in 2013. The NHS had to pay the increased price because many epilepsy sufferers use the drug, and switching medication can risk loss of seizure control.
The CMA’s (500-page) decision concluded that both Pfizer and Flynn had abused dominant market positions by charging excessive prices. Pfizer was fined a record £84.2m (representing 0.2% of the group’s worldwide turnover) while Flynn was hit with the maximum possible fine of 10% of its worldwide group turnover (£5.2m).
Pfizer and Flynn have both appealed to the CAT. Their cases were heard in October and November 2017 but judgment was awaited at the time of writing.
In November 2017 the CMA alleged that Concordia had abused a dominant market position by over-charging for liothyronine tablets, used to treat thyroid problems. The CMA found that the pack price charged to the NHS rose from £4.46, before the drug was de-branded in 2007, to £258.19 by July 2017. This was despite the CMA’s view that ‘production costs remained broadly stable’. Concordia has an opportunity to respond to the allegations before the CMA decides its next steps.
Also in December 2016 (a busy month!), the CMA accused Actavis UK of raising prices by 9,500% to 12,000% for unbranded hydrocortisone tablets over several years. Before April 2008, when another company sold the tablets as a branded product, the NHS spent approximately 70p per 10mg pack. After de-branding this increased, hitting £88 by March 2016, while 20mg packs went from £1.07 to £102.74. From 2008 to 2015 the NHS’s annual spend on hydrocortisone tablets rose from around £522,000 to £70m.
The investigation is ongoing, with the CMA currently considering representations from the parties involved. Those parties include Allergan plc as the ultimate parent company of Actavis UK, which the CMA proposes to hold jointly and severally liable. This is common practice in competition law, which generally does not respect corporate legal personality. Similarly, the CMA proposes to hold Actavis directly responsible for the period from 2008 to 2015, when the product was marketed by Auden McKenzie. Because Actavis acquired Auden McKenzie in 2015, the CMA considers Actavis UK the ‘economic successor’ to that business despite them being separate companies.
This shows the need to identify any competition law issues before taking over a business, as liability for breaches can transfer to a new parent or successor company. Unlike most liabilities, this will be the case even if the takeover is an asset purchase rather than (as with Actavis) a share purchase.
‘Pay for delay’
Related to that case, the CMA alleged in March 2017 that Actavis UK and Concordia entered into anti-competitive agreements in relation to generic hydrocortisone tablets, with Actavis prolonging its market position by incentivising Concordia to delay introduction of competing drugs. This investigation also remains live.
Fines totalling £45m were imposed on various pharmaceutical companies in February 2016 in respect of similar allegations of ‘pay for delay’ and abuse of dominance relating to the anti-depressant paroxetine. This decision was appealed, with the CAT deciding in March 2018 to dismiss some grounds and refer others to the European Court of Justice.
The pricing of de-branded medicines has now been controlled by the Health Service Medical Supplies (Costs) Act 2017, but the CMA’s focus on the issue means there may yet be further investigations into past price increases as well as any other ‘pay for delay’ agreements. Given the additional costs these practices imposed on the NHS, and with drug budgets under constant pressure, it would not be surprising to see NHS bodies seeking damages from the companies involved.
While the details of these cases are specific to the pharma sector, any business that may have a dominant market position should heed the lessons they contain on the limitations competition law places on their commercial freedom. They also show the care that needs to be taken by businesses that rely heavily on exclusive IP rights.
In February the CMA announced a new ‘Be safe, not sorry’ campaign encouraging more people to get in touch with information about cartels, which will particularly target higher-risk sectors including construction, manufacturing and business support services. This follows a 30% increase in cartel tip-offs in 2017. Participants who blow the whistle on a cartel can receive immunity from all fines and prosecutions, while uninvolved third parties can receive significant rewards. It is therefore vital that businesses who may have breached competition law take legal advice as soon as possible.
Competition regulators expect businesses and individuals to know the rules and ensure they are followed. With the incentives to comply with competition law as strong as they have ever been, proactive compliance measures such as written policies, risk mitigation procedures and training for key staff should be a high priority for all businesses.