Some considerations on the Glaxo case. A radical change in the approach to parallel imports?

Fabio Bortolotti | EU | 2007-04-18

Fabio Bortolotti

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In fact, in the first case dealing with this matter, the Grundig case, decided by the Court of justice on 13 July 1966, the principle was stated that clauses which grant an absolute territorial protection to an exclusive distributor, by preventing parallel imports to his territory:

  • amount to a ‘per se’ violation of article 81 of the EC Treaty (in the sense that such clauses are to be considered as prohibited on the basis of their mere object, without need to establish if they are actually capable of producing restrictive effects on the market) and
  • can in no case be exempted under Article 81(3).

This has brought the EC Commission to establish the principle (which has become almost a dogma) that any attempt to prevent parallel imports amounts to a violation of article 81 which cannot be exempted under § 3 of the same provision.
Such rigid approach has been maintained even in cases where the decision of producers to limit parallel imports was justified by the fact that they reacted to a situation for which they were not responsible, like for example a national law freezing the prices of certain products or the devaluation of the currency in one member state which forced foreign manufacturers to reduce their prices in such country in order to remain competitive with the local producers.
Now, in the Glaxo case, the Court of First instance takes for the first time a more flexible approach, in the sense that it admits that, when market conditions within different EU countries differ due to external reasons, it may be justified for the producers to put some limitations on the freedom of parallel imports.
The case at issue concerns the Spanish subsidiary of the GlaxoSmithKline group (hereafter GSK) which notified to the EU Commission its general conditions of sale to Spanish wholesalers with a view to obtaining negative clearance or an exemption under article 81(3). The main issue in this context was a clause whereby the wholesalers were charged different prices for reimbursable drugs sold to pharmacies and hospitals in Spain (where the producer was obliged to respect a maximum price fixed by law) and drugs to be exported to other member States.



Export prohibition do not necessarily restrict competition ‘by object’


According to the EU Commission such clause amounted to ad export prohibition which restricted competition ‘by object’ and which moreover had the effect of restricting competition by excluding or impeding parallel trade.
According to GSK the clause was not to be considered as anti-competitive, since its purpose was to neutralise a distortion of competition attributable to the Kingdom of Spain (which fixed the maximum price of drugs reimbursable by social security). Moreover GSK objected that the clause in question could not be considered as having as its object a restriction of competition and that, consequently, the Commission should have proved that it actually had the effect of restricting competition to the detriment of the final consumer.
The CFI accepted on this first issue the point of view of GSK, affirming in particular (§ 121) that
«while it is accepted that an agreement intended to limit parallel trade must in principle be considered to have as its object the restriction of competition, that applies in so far as the agreement may be presumed to deprive final consumers of those advantages».
Although trying not to contradict the well-established rule that export prohibitions have as their object the restriction of competition (and that there is no need to examine the actual effects on the market), the CFI finally comes to the conclusion that in the specific case,
« … it cannot be taken for granted at the outset that parallel trade tends to reduce prices and thus to increase the welfare of final consumers.»
In fact by requiring a market analysis in the specific case the Court admits that clauses intended to limit parallel trade have «in principle» a restrictive object, but that this need not always be the case, which constitutes a substantial change with respect to previous case law.



The export prohibitions did actually have a restrictive effect


After having made this rather «revolutionary» statement, the CFI concludes, with respect to the application of Article 81(1) that the agreement in question had actually produced an anti-competitive effect.
In particular, after a detailed analysis of the arguments put forward by the parties the CFI concludes that,
« … although the Commission’s principal conclusion that clause 4 of the General Sales Conditions has as its object the restriction of competition is incorrect, GSK has not succeeded in calling in question its subsidiary conclusion that that provision had the effect of depriving final consumers of the advantage which they would have derived, in terms of price and costs, from the participation of the Spanish wholesalers in intrabrand competition on the national markets of destination of the parallel trade originating in Spain.»



The Commission should not have rejected the request for exemption under Article 81(3)


The CFI decided that the Commission did not apply correctly Article 81(3) by refusing to exempt the General Sales Conditions of GSK, arguing that the conditions of such provision were not met.
In particular, with respect to the first condition of Article 81(3), GSK argued that the agreement actually contributed to improving production or distribution of goods because parallel trade leads to a loss of efficiency insofar as it reduces the producer’s capacity for innovation and that consequently the fact of preventing parallel trade will lead to a gain in efficiency as it will enable GSK to make the benefit necessary for financing innovation, by charging market prices in countries where this is possible. This argument was substantially accepted by the CFI, which concluded that the Commission carried out no serious examination of the arguments and evidence put forward by GSK on this issue.





The Glaxo judgment represents a major change in the approach towards the evaluation of export prohibitions under the EC rules of competition.
In fact the CFI states some rather innovative principles:

  1. Export prohibitions are not necessarily anti-competitive by their object, and it is consequently necessary to examine their possible impact on the market before deciding that they infringe Article 81(1). This may particularly be the case where they intend to neutralise a distortion of competition created by diverging State legislations.
  2. Export prohibitions which do not deprive the final consumers of the advantages which they would have derived from parallel imports do not infringe Article 81.
  3. Export prohibitions which restrict competition may be exempted when they improve production and distribution, which may be the case when they are necessary to warrant earnings which the producer needs for financing research and development.

It is very difficult to foresee the future impact of these principles, which have been worded with the utmost caution, with the intent of showing that they do not contradict previous case law.
Nevertheless, it is reasonable to assume that – if confirmed by the Court of justice – the Glaxo judgment may be the first step towards a less rigid protection of the freedom of parallel trade, particularly in cases where limitations to parallel imports are justified by the need to neutralise distortions of competition for which the parties in question are not responsible.



Fabio Bortolotti, IDI Country Expert for Italy.



The text of this judgment, together with the other most important decisions on this subject-matter, can be found in the database of the European decisions, in the EU section of the IDI website. An analysis of the European case-law on antitrust rules applicable to agency and distribution contracts is contained in the IDI Antitrust report, that can be downloaded from the Reports section of the website.



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