Enforcing Competition in the Pharmaceutical Sector: - A Multi-Perspective Analysis of Restrictions on Parallel Trade with Pharmaceutical Products

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Department of Law Spring Term 2019

Master’s Thesis in European Competition Law 30 ECTS

Enforcing Competition in the Pharmaceutical Sector

- A Multi-Perspective Analysis of Restrictions on Parallel Trade with Pharmaceutical Products

Author: Robin Fazel

Supervisor: Senior Lecturer Vladimir Bastidas

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Abstract

The following thesis analyses restrictions on parallel trade with pharmaceutical products from an EU competition law perspective. It is firstly submitted that the constitutional architecture and the regulatory framework for pharmaceuticals are constructed so as to inherently promote parallel trade. Moreover, it is also asserted that competition in the pharmaceutical sector is distorted. This is because of the fact that supply, demand and prices in this sector are primarily governed by public regulation as a result of Member State intervention on the market. Furthermore, from a competition law perspective, it is submitted that the CJEU has consistently held restrictions on parallel trade with pharmaceutical products as contrary to Articles 101 – 102 TFEU since such restrictions have been deemed as being contrary to the internal market objective of the EU. The market integration of the EU has consequently produced such normative effect under the CJEU’s jurisprudence so as to hold restrictions on parallel trade with medicinal products as impermissible. Furthermore, the specific economic and legal characteristics of the pharmaceutical sector have not sufficient so as to justify a departure from the CJEU’s long-standing jurisprudence that restrictions on parallel trade in general are contrary to Articles 101 – 102 TFEU. However, it is also submitted that the jurisprudence of the CJEU with regards to restrictions on parallel trade is not in line with the consumer welfare and economic efficiency objectives of competition law.

Therefore, it is submitted that the objectives of consumer welfare and economic efficiency should be given priority in relation to market integration. It is also argued that a change in policy should be adopted concerning pharmaceutical parallel trade in order to align Articles 101 – 102 TFEU with the objectives of consumer welfare and economic efficiency. Moreover, it is also argued inter alia that a change in policy is motivated by the fact that when pharmaceutical originator undertakings attempt to restrict parallel trade, they are not exercising market power and consequently distort completion. On the contrary, restrictions on parallel trade can rather be regarded as attempts by pharmaceutical undertakings to mitigate the adverse consequences of the fact that competition in the pharmaceutical sector is already distorted due to the prevalence of government intervention. Lastly, the means for attaining a change in policy are discussed. It is submitted that a change in policy can be attained on an enforcement level, on the level of the judiciary and on a regulatory level.

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1 INTRODUCTION ... 8

1.1 BACKGROUND TO THE PROBLEM ... 8

1.2 PURPOSE OF THE STUDY ... 9

1.3 RESEARCH QUESTIONS ... 9

1.4 METHODOLOGY AND THE EUROPEAN LEGAL METHOD ... 9

1.5 DEMARCATIONS ... 12

1.6 DISPOSITION ... 13

2 THE OBJECTIVES OF EUROPEAN COMPETITION LAW ... 14

2.1 MARKET INTEGRATION AS AN OBJECTIVE OF EUROPEAN COMPETITION LAW ... 15

2.2 THE CONSUMER WELFARE AND ECONOMIC EFFICIENCY APPROACH ... 17

2.2.1 Competition and Economic Efficiency ... 17

2.2.2 Consumer Welfare and Economic Efficiency ... 20

2.3 CONCLUDING REMARKS TO THE CHAPTER ... 21

3 THE LEGAL FRAMEWORK OF EUROPEAN COMPETITION LAW ... 21

3.1 ARTICLE 101TFEU ... 22

3.2 ARTICLE 102TFEU ... 24

4 THE MARKET STRUCTURE AND ECONOMIC CONTEXT OF THE PHARMACEUTICAL SECTOR ... 26

4.1 MARKET ACTORS WHO PRODUCE AND SUPPLY PHARMACEUTICALS ... 26

4.1.1 The activity of originator companies ... 26

4.1.2 Parallel traders in the pharmaceutical sector ... 27

4.2 THE DEMAND FOR PHARMACEUTICALS:WHO ARE THE BUYERS AND CONSUMERS? ... 27

4.2.1 Prescribing drugs for patients: Physicians as the decision makers ... 28

4.2.2 National health systems organised by the state ... 28

4.2.3 Patients ... 28

4.3 THE IMPORTANCE OF R&D AND INNOVATIONS ... 29

4.3.1 The importance of facilitating innovation in the pharmaceutical market ... 29

4.3.2 The high degree of R&D investments that pervade the sector ... 29

4.4 INTERIM CONCLUSIONS REGARDING THE MARKET CONTEXT ... 33

5 TRACING THE CAUSES: THE REGULATORY- AND CONSTITUTIONAL FRAMEWORK ... 34

5.1 THE CONSTITUTIONAL FRAMEWORK CONCERNING THE PROTECTION OF PUBLIC HEALTH ... 35

5.2 MARKETING AUTHORISATIONS AND THE OBLIGATION OF CONTINUOUS SUPPLY ... 36

5.3 PRICE CONTROLS AND REIMBURSEMENT OF PHARMACEUTICALS ... 39

5.4 INTERIM CONCLUSIONS ... 41

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5.4.1 The pharmaceutical sector – an imperfect market? ... 41

5.4.2 A bipartite and fragmented regulatory framework that favours government intervention? 42 5.4.3 A shift in policy - forcing a convergence of pharmaceutical prices? ... 43

6 RESTRICTIONS ON PARALLEL TRADE WITH MEDICINAL PROPRIETARY PRODUCTS UNDER EU COMPETITION LAW... 45

6.1 INTRODUCTION ... 45

6.2 THE POSITION ADOPTED BY THE CJEU WITH REGARDS TO RESTRICTIONS ON PARALLEL TRADE IN GENERAL ... 45

6.3 THE JURISPRUDENCE OF THE CJEU CONCERNING RESTRICTIONS ON PARALLEL TRADE IN THE PHARMACEUTICAL SECTOR ... 47

6.3.1 Joined Cases C-2/01 P and 3/01 P – BAI and Commission v. Bayer ... 47

6.3.1.1 Background ... 47

6.3.1.2 The judgment by the General Court ... 48

6.3.1.3 The judgment by the CJEU ... 49

6.3.1.4 Comment... 49

6.3.2 Joined Cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P – GlaxoSmithKline v. Commission ... 51

6.3.2.2 The judgment by the General Court ... 52

6.3.2.4 Comment... 60

6.3.3 Case C-53/03 Syfait et al., v. GlaxoSmithKline ... 63

6.3.3.2 The opinion of Advocate General Jacobs ... 64

6.3.3.3 The judgment of the CJEU ... 69

6.3.3.4 Comment... 69

6.3.4 Joined Cases C-468/06 to C-478/06 Sot. Lelos kai Sia EE et al., v. GlaxoSmithKline ... 74

6.3.4.2 The opinion of Advocate General Ruiz-Jarabo Colomer ... 75

6.3.4.4 Comment... 83

6.4 CONCLUSIONS ON THE FOLLOWING CHAPTER ... 87

7 THE MARKET INTEGRATION IMPACT AND WELFARE EFFECTS OF PARALLEL TRADE IN THE PHARMACEUTICAL SECTOR ... 89

7.2 PROMOTING PARALLEL TRADE AS A TOOL FOR ACHIEVING MARKET INTEGRATION? ... 90

7.3 STATIC EFFICIENCIES AND WELFARE GAINS FROM PARALLEL TRADE? ... 93

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7.3.1 Parallel trade in light of Article 168 TFEU: Limiting access to medicines and disrupting the

EU’s constitutional social aims? ... 93

7.3.2 Consumer benefits through reduced prices: Ambiguous results? ... 95

7.3.3 Static efficiency gains in the production resulting from parallel trade ... 98

7.4 THE IMPACT OF PARALLEL TRADE ON DYNAMIC EFFICIENCY AND THE INNOVATIVE NATURE OF THE PHARMACEUTICALS SECTOR ... 101

7.5 INTERIM CONCLUSIONS ... 102

8 THE JURISPRUDENCE OF THE CJEU IN LIGHT OF THE OBJECTIVES OF COMPETITION LAW ... 103

8.2 IS THE CASE-LAW OF THE CJEU IN LINE WITH THE OBJECTIVES OF COMPETITION LAW? ... 103

8.3 TWO OBJECTIVES IN CONFLICT WITH EACH OTHER:PRIORITIZING CONSUMER WELFARE AND ECONOMIC EFFICIENCY OVER MARKET INTEGRATION?... 104

8.4 POLICY PROPOSALS CONCERNING THE APPLICATION OF COMPETITION LAW ON PHARMACEUTICAL PARALLEL TRADE 107 8.4.1 What type of policy should be adopted under Articles 101 – 102 TFEU? ... 107

8.4.2 A change in policy on the enforcement level ... 109

8.4.3 A change in policy on the level of the EU’s judiciary ... 109

8.4.4 A change in policy on a regulatory level ... 110

8.5 CONCLUDING REMARKS ... 111

9 CONCLUSIONS ... 112

BIBLIOGRAPHY ... 116

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1 Introduction

1.1 Background to the problem

There are several distinguishing features appertaining to the pharmaceutical market in Europe. This is true both from an economic and a legal point of view. As such, within the field of EU competition law, parallel trade of pharmaceutical products has since long been a battlefield of conflicting interests that has sparked an intensive legal and economic debate.

The European Union has taken several measures of harmonization with regards to pharmaceuticals. However, substantive regulatory measures relating to price setting and reimbursement schemes still fall within the competences of the Member States. This regulatory landscape has ultimately resulted in that prices for medicines can vary significantly between member states. This is because most, if not presumably all Member States, consider access to affordable medicines an important social objective in aimed at protecting human health. Thus, price differentials among Member States has led to the phenomenon referred to as ”parallel trading” where wholesalers and other market actors buy medicines from markets in Member States where prices are low and sell them in Member States where prices are higher. However, it should come as no surprise that the interests of parallel traders are antagonistic to that of pharmaceutical companies who are often the intellectual property rights holders of the very same products and thus view parallel traders as free riders and who have spent considerable resources in developing the aforementioned medicines. Furthermore, the legal and economic features of the pharmaceutical market are distinct as well. An example hereof lies in the fact that it is a R&D intensive and high risk industry with very few initial guarantees of returns on investments.

As such, it should be considered natural that pharmaceutical companies have adopted various strategies aimed at restricting parallel imports and trade of medicines. However, these strategies are not exempt from the scrutiny of competition law and policy as it has been applied on various strategies that pharmaceutical companies may adopt in order to restrict parallel trade. However, the question what competition policy should be adopted with regards to parallel trade of pharmaceuticals in order to generate optimal results is far from given. On the one hand, proponents of parallel trade argue that such practice is

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beneficial to competition and promotes consumer welfare by lowering prices. On the other hand, critics usually submit that parallel trade hinders innovation as it decreases incentives for manufacturers of medicines to develop new products as parallel trade diminishes pharmaceutical companies’ return on investments.

1.2 Purpose of the study

There are several purposes behind the following thesis. Firstly, the following paper aims at analysing and tracing the causes of parallel trade in the pharmaceutical sector.

Secondly, the objective is to analyse to how the EU’s competition law regime has applied to restrictions on parallel with medicinal products. Thirdly, the aim is to analyse whether the current state of the law is satisfactory and compatible with the objectives and policies underpinning the rules on competition in the TFEU. Lastly, the purpose is to discuss, from a normative de lege ferenda perspective, which policy EU competition law should adopt in relation to restrictions of parallel trade of pharmaceuticals.

1.3 Research questions

In light of the macro-legal nature of the aims described in section 1.2, the following research questions are presented in order to break down the aims above into concrete questions:

- What impact has the constitutional architecture of the Treaties and the pharmaceutical regulatory context had on parallel trade in the pharmaceutical sector?

- How has EU competition law been applied on restrictions of parallel trade with pharmaceutical products?

- Is the jurisprudence of the CJEU concerning restrictions of parallel trade in line with economic considerations? Moreover, concerning the issue of parallel trade with pharmaceuticals, which position should be adopted under EU competition law?

1.4 Methodology and the European legal method

The subject matter for this thesis is EU law and EU competition law. Therefore the method that has been chosen for this paper is that which can be referred to as the European legal method. The following section aims to describe the method used since the term ”EU legal method” is somewhat imprecise and vague. As was mentioned in the

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preceding paragraph, the concept of a European legal method is difficult to describe due to the fact that it is not entirely clear what such a method entails. It has been submitted that the European legal method is not a single method. On the contrary, there can be several different forms of the EU legal method. However, in its most elementary form, the EU legal method can be viewed as an approach to handling the various legal sources of EU law.¹

Concerning the legal sources of EU law, there are firstly the provisions set out in the founding treaties of the European Union. These are the Treaty on the European Union² and the Treaty on the Functioning of the European Union.³ In addition to this, there is also the Charter of Fundamental Rights of the European Union.⁴ It is in the treaties and the Charter where many central provisions of EU law can be found. An example of this are the provisions on free movement in the EU’s internal market regime⁵, the provisions on competition in the internal market as laid down in the TFEU⁶ or the right to effective judicial protection in the Charter.⁷

Secondly, there is the case law of the Court of Justice of the European Union.⁸ According to Article 19 TEU, the CJEU shall ensure that in the interpretation of and application of the Treaties, the law is observed. In EU law, the CJEU’s case law presents itself as perhaps the most important source of law in the EU’s hierarchy of legal sources. A reason behind this is of course the open ended nature of the provisions in the Treaties which in my view has given the Court a considerable margin. However, the role that can be attributed to the CJEU extends in my opinion to more than interpreting EU law. As has been submitted by Reichel, the CJEU has contributed to, and been a major driving factor, in the development and advancement of EU law. Thus, the importance of the CJEU’s case law should not be understated as the CJEU has fulfilled a central role in the establishment of the internal market.⁹ For the purpose of

1 Jane Reichel, ’EU-rättslig metod’ in Frederic Korling & Mauro Zamboni (eds), Juridisk metodlära, 1 uppl., (Studentlitteratur 2013) at 109.

2 Abbrevieated as the ”TEU”.

3 Referred to as the ”TFEU”.

4 The Charter of Fundamental Rights of the European Union is usually referred to as the ”CHFR” or simply ”the Charter”.

5 Articles 34, 49, 56 & 63 TFEU.

6 Articles 101 – 109 TFEU.

7 Article 47 CHFR.

8 Referred to as the ”CJEU” or the ”ECJ”.

9 Reichel, J, Juridisk metodlära, at 119.

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this thesis, the CJEU’s case law has naturally been used thoroughly and a great deal of weight has been attributed to it.

Thirdly, other important sources of law in the legal order of the EU are of the legal acts enacted by the EU’s institutions. These include regulations, directives, decisions, recommendation and opinions.¹⁰ Among the legal acts, regulations and directives are perhaps the most common ones. Regulations have general application. Furthermore, they are also binding in their entirety and are directly applicable in all Member States.¹¹ Similarly, decisions are binding in their entirety. However, if they are address to specific addressees, they are only binding upon them.¹² Thus, with regards to regulations and decisions there is no need for Member States to undertake implementing measures and transpose them into national law. However, the contrary applies in the case of directives which are binding upon Member States as to the result that they aim to achieve. As a main rule, directives have to be transposed into national legal systems but leave to national authorities the choice of form and method for their implementation.¹³ Concerning recommendations and opinions, it should be highlighted that they have no binding force as is established in Article 288(5) TFEU.

Furthermore, doctrine and legal literature has a place amongst the legal sources of EU law as well. Consequently, whenever the need should arise, this paper will consult the literature in this area of law. However, certain issues arise with regards to legal literature in EU law that should be addressed. Firstly, since the EU is a relatively young legal order, it has been submitted that this has affected the nature of the legal literature that exists. For example, Reichel have stressed that doctrine in the field of EU law generally has a low degree of theoretical self-awareness.¹⁴ Thusly, it has been submitted that the academic treatment of EU law is at times relatively underdeveloped which should correlate to the fact that the EU as a legal order is relatively young.¹⁵ Secondly, it has been highlighted by Reichel that since the EU is a legal order that operates not only on a common European level but also amongst the 28 Member States, it could be questioned whether there is one single European legal doctrine or whether there exists

10 Article 288 TFEU.

11 Article 288(2) TFEU.

12 Article 288(4) TFEU.

13 See Article 288(3) TFEU.

14 See Reichel, J, Juridisk metodlära, at 110.

15 Reichel J, Juridisk metodlära, at 128.

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pluralism of several national doctrines on EU law.¹⁶ Establishing a common doctrine has been difficult and the situation has been characterized by several academics discourses that run parallel to each other with limited interaction.¹⁷ The question is then how this will affect the approach that this thesis takes to legal doctrine. Legal literature is not excluded in this paper. On the contrary, it is viewed as a fruitful legal source that can be utilized in the analysis to come. However, since the EU is a legal order that operators in 28 Member States, all of whom have varying and unique legal traditions, it is in my view important to keep in mind that each legal commentator may be affect by the legal traditions of his or her native country. Lastly, another important source that has had a major impact is the so called general principles of EU law.¹⁸ These principles often have an open and teleological character.¹⁹ Aside from the primary and legally binding sources of law in the legal order of the European Union, there is also a category of legal sources which are usually referred to as ”soft law”. The term ”soft law” usually refers to non-legally binding documents which are adopted by the administrative organs of the EU, often in cooperation with national administrative bodies, in order to facilitate an effective and uniform application of EU law.²⁰ However, they can still produce a normative effect in the sense that they serve as interpretative data for the interpretation and application of EU law.

The question is then how the legal sources of EU law should be interpreted. In CILFIT, the CJEU laid down that in the interpretation of EU law, each provision must be placed in its context. Moreover, it must be interpreted in the light of EU law as a whole, taking into consideration of the objectives thereof and to the state of its evolution at the date of application.²¹

1.5 Demarcations

Concerning the overall scope of the study, the following delineations have been made.

The thesis will first and foremost solely focus on EU law and EU competition law with Articles 101 – 102 TFEU being the centre of analysis. Substantive national competition law is therefore excluded from the thesis. However, due to the ambition in

17 Reichel, J, Juridisk metodlära, at 128 – 129.

18 See for example Article 6(3) TEU which makes an explicit referrence to the term ”general principles of EU law”.

21 C-283/81, CILFIT v. Ministero della Sanità, ECLI:EU:C:1982:335, para. 20.

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contemporary competition law of attaining substantive legal equivalence between national and European competition law, this demarcation should in practice not have any major impacts on the analysis. Furthermore, it should also be pointed out that since it is necessary to discuss the regulatory context of pharmaceuticals in order to gain a full understanding of the field, pharmaceutical regulation will be addressed. The reason behind this is that Member States have a certain degree of regulatory competence in the field of pricing and reimbursement of medicines. Likewise, the constitutional context surrounding this topic will also be discussed.

Apart from the discussion on the constitutional- and regulatory context, this thesis will only focus on competition law as such. The issue of parallel trade can be analysed from an intellectual property rights perspective. Furthermore, parallel trade can also be analysed from the point of view of the internal market and in particular the free movement of goods. However, the discussion on intellectual property rights and the free movement of goods is outside the scope of this thesis since it is competition law specific. Moreover, the thesis will only focus on restrictions on parallel trade. Strategies aimed at for example delaying or hindering generic entry on the market will therefore not be analysed. Therefore, cases such as the AstraZeneca-case²² which concerned inter alia withdrawal of marketing authorisations, has been left out.

1.6 Disposition

The thesis is structure in accordance with the following structure. Apart from the introduction in chapter 1, chapter 2 aims at providing a discussion on competition law specific objectives in order to set a normative and theoretical framework. Chapter 3 aims at providing the reader with the legal framework of competition law. However, the purpose behind chapter 3 is only to give the reader a brief overview and a general background to the relevant substantive provisions. Its aim is not to in depth analyse all of the criteria contained these provisions. Chapter 4 aims at examining the market structure and the economic context of the pharmaceutical sector in order to provide the reader with some general background. Under chapter 5, the constitutional architecture and regulatory context surrounding the pharmaceuticals sector, and its impact on the sector and parallel trade, will be analysed. After that, chapter 6 will analyse how European competition law has applied with regards to restrictions on parallel trade in

22 See C-457/10 P, AstraZeneca v. Commisson, ECLI:EU:C:2012:770.

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the pharmaceutical sector. Chapter 7 will in turn analyse the effects of parallel trade with medicinal products on market integration as well as economic efficiency and consumer welfare. After this has been accomplished, chapter 8 will discuss from a de lege ferenda and normative point of view, whether the state of competition law in this policy context is in line with the objectives underpinning the legal regime. Moreover, chapter 9 will also discuss what policy competition law should adopted with regards to restrictions on parallel trade in the pharmaceutical sector and also discuss some of the means for accomplishing any eventual change in policy. Lastly, chapter 9 will conclude the thesis.

2 The objectives of European Competition Law

In order to facilitate a satisfactory analysis of the research questions presented in the following thesis, it must first be examined what the objectives of European competition law are to begin with. Accordingly, as a sub step to the general analysis, the following chapter seeks to examine market integration and consumer welfare as normative foundations of competition law, the chapter is divided into two sections. Section 2.2 will submit that market integration is a major objective of EU competition law. In turn, section 2.3 will analyse the consumer welfare and economic efficiency approach that has been pursued by the commission and seemingly accepted by the CJEU.

By way of introduction, it can be questioned why there is a need for the following chapter in the first place. In my view, examining the objectives of competition law is of importance since it is ultimately the goals which the rules pursue that serve as the guidance for how the rules are to be applied and interpreted. Furthermore, it is not excluded that knowing what the goals of the rules are can also give a deeper understanding of the field in question as it then becomes possible to discuss which policies and goals that have been pursued on an EU level and can therefore aid in a critical discussion of the issues that arises. However, the question concerning what the goals of competition law are and what goals can be accommodated within the legal framework of competition law is a broad question under which many different aspects can be analysed. An example of this is the discussion in the legal literature on whether

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public policy goals can be accommodated under EU competition law.²³ However, only the market integration as well as consumer welfare and economic efficiency objectives will be examined.

In general, competition law is capable of pursuing a wide variety of goals. Additionally, as has been pointed out above, there is no established consensus on what these goals are.²⁴ However, stipulating the goals of competition law is coupled with a certain degree of difficulty. This is because firstly, Articles 101 – 102 do not expressly declare their intended goals. Moreover, it is not entirely easy to ascertain what objectives the Member States of the EU did assign to the provision on competition when they concluded the Treaty on the Functioning of the European Union and its predecessors.²⁵ The question then becomes how the objectives of the EU’s provisions on competition can be established. Taking into consideration the silence of Article 101 – 102 on the matter as well as the difficulty of ascertaining the contracting parties’ intentions behind the Treaties, the starting point of the analysis should be, aside from the TEU and TFEU as such, the European Commission’s view on the issue as well as the jurisprudence of the CJEU. This is motivated by the fact that the Commission is one of the main enforcers of competition law on an European level²⁶ and also the CJEU is responsible for correct application and interpretation of the Treaties.²⁷

2.1 Market integration as an Objective of European Competition Law

Establishing a single market has long been one of the core objectives of the EU. This raises the question of the internal market objective of the EU interplays with competition law. In light of this, the question at play under the following section is whether market integration can be considered an objective of competition law in the EU. It is submitted that the answer to this question is an affirmative and that market integration is one of the goals of competition law. Article 101 – 102 TFEU do not exist in a vacuum. On the contrary, they are one of many components of the TFEU as a whole. Therefore, as a reading of a provision of EU law must take the context in which

23 See Alison Jones & Brenda Sufrin, EU Competition law: Text, cases, and materials, (5^th. Ed., Oxford University Press, 2014) at 48 note 237.

24 Alison Jones & Brenda Sufrin, EU Competition law: Text, cases, and materials, at 34.

25 Alison Jones & Brenda Sufrin, EU Competition law: Text, cases, and materials, at 35.

26 See for example Article 17 TEU concerning the role of the European Commission and Article 4 of Regulation 1/2003 which states that for the purpose of applying Articles 81 and 82 of the Treaty, the Commission shall have the powers provided for by this Regulation.

27 Article 19 TEU.

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that provision exists into consideration, the context in which Article 101 – 102 TFEU take place must be considered as well.²⁸ Thus, Articles 101 – 102 must be read in light of the objectives of the EU as a whole.

The objectives of the European Union can be found in inter alia Title I of the TEU.

Article 3(3) TEU states that the Union shall establish an internal market. Article 3(1)(b) TFEU states that the Union shall have exclusive competence in the area of establishing the competition rules necessary for the functioning of the internal market. In turn, according to Article 26(2) TFEU, the internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties. Consequently, it follows from Article 3(3) TEU read in junction with Article 26(2) TFEU that establishing an internal market for the European Union is one of the fundamental objectives of the EU.

The aforementioned shows that establishing an internal market is a fundamental objective of the EU. The fact that the objective of establishing an internal market is embedded in the Treaties and thereby the EU’s constitutional structures indicates the fundamental nature of this particular objective and the weight that the Treaties attribute to it. However, having established that creating an internal market is a fundamental aim of the EU, the question then becomes what connection this has with the provisions on competition set out in the Treaties. Protocol (No 27) on the Internal Market and Competition which is annexed to the Treaties²⁹ states that the High Contracting Parties considers that the internal market as set out in Article 3 of the Treaty on the European Union includes a system ensuring that competition is not distorted, and that the High Contracting Parties have agreed that to this end, the EU shall, if necessary, take action under the provisions of the Treaties, including Article 352 of the Treaty of the Functioning of the European Union.³⁰ Consequently, Protocol (No 27) establishes a link between the Internal Market and competition policy by stating that a system ensuring that competition is not distorted can be accommodated within the internal market. Furthermore, according to Article 51 TEU, the Protocols and Annexes to the Treaties shall form an integral part thereof.

28 Concerning the modes of interpreting EU law, see section 1.4.3.

29 Protocol (No 27) on the internal market and competition, (OJ C 115, 9.5.2008, p. 309–309 ), paragraph 3.

30 Protocol (No 27) on the Internal Market and Competition.

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As a conclusion for section 2.1, it can therefore be established that market integration in the sense of achieving an internal market for the EU is in fact one of the goals which competition law seeks to pursue.

2.2 The Consumer Welfare and Economic Efficiency Approach

In 1999, the European Commission issued the White Paper on the Modernisation of the Rules Implementing Article 85 and 86 of the EC Treaty.³¹ On the 1st of May 2004 Regulation 1/2003³² entered into force. This marks the reformation of the enforcement regime of Articles 101 – 102 TFEU and is usually referred to as the modernisation of EU competition law.³³ However, according to Jones & Sufrin, the modernisation process can be regarded as an earlier phenomenon which started already in the 1990’s when the Commission sought to realign competition law with economic considerations such as economic efficiency and consumer welfare.³⁴ Indeed, in the White Paper on Modernisation, the commission discusses changing the interpretation of Article 85(1) EC (now Article 101 TFEU) so as to include an analysis on the harmful and beneficial effects of an agreement falling under its scrutiny.³⁵

2.2.1 Competition and Economic Efficiency

In order to facilitate an understanding of economic efficiency and consumer welfare, an introduction to the concept of perfect competition will be presented. Intervention on the market by means of applying competition law should serve the goal of improving consumer welfare.³⁶ In a market under which there is perfect competition, consumer welfare is at its maximum and cannot be improved any further.³⁷ Therefore, consumer welfare is maximised under a market in which there is perfect competition.³⁸ Consequently, in a perfectly competitive market, welfare would increase as prices would be lower, products would be better, there would be wider range of products and

31 European Commission, The White Paper on the Modernisation of the Rules Implementing Article 85 and 86 of the EC Treaty, Brussels 28.04.1999.

32 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, article 45.

33 Paul Craig & Grainne De Burca, EU Law: Text, cases and materials (6^th ed., Oxford University Press, 2015) at 1048; Alison Jones & Brenda Sufrin, EU Competition law: Text, cases and materials, at 41.

34 See Alison Jones & Brenda Sufrin, EU Competition law: Text, cases, and materials, at 41.

35 The White Paper on the Modernisation of the Rules Implementing Article 85 and 86 of the EC Treaty, at 23.

36 Simon Bishop & Mike Walker, The Economics of Competition Law, (3^rd ed., Sweet & Maxwell, 2010), at 21

37 Simon Bishop & Mike Walker, The Economics of Competition Law, at 21.

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greater general efficiency.³⁹ In reality, most markets bear little resemblance to the type of market that is described according to the theory of perfect competition.⁴⁰ However, the theory provides a standard according to which it is possible to assess whether the intervention of competition law will increase welfare.⁴¹

There are several market features present in a perfectly competitive market according to the aforementioned model. Firstly, there exists a large amount of buyers and sellers.⁴² Secondly, the quantities of products that are being either sold or bought are so small in relation to the total quantity of goods in circulation that any change in these quantities leave prices unaltered.⁴³ Moreover, the product being traded is homogeneous, all undertakings on the market are identical, there exists no information asymmetries between buyers and sellers, and there are no barriers to exit or entry on the market.⁴⁴ Moreover, there are no transaction costs and lastly, no negative externalities exist in the sense that each market actor bears its own costs of production.⁴⁵ Moreover, in economic theory it is also submitted that powerlessness over price is a characteristic feature of a market under which there is perfect competition.⁴⁶ This means that under a state of perfect competition, individual firms are unable to assert control over the prices of their product.⁴⁷ Likewise, it is impossible for actors on the demand side to control prices as well.⁴⁸ Under a state of perfect competition, prices are instead determined by the market forces of supply and demand.⁴⁹ Consequently, in theory, under market in which there is perfect competition, individual market actors are unable to assert control over pricing levels. Instead, in a perfectly competitive market, the free play of supply and demand decides the level of prices on products in circulation.

Three types of efficiency gains are thought to be achieved under perfect competition.

These are allocative efficiency, productive efficiency and dynamic efficiency.

39 Richard Whish & Robert Bailey, Competition Law (7^th ed., Oxford University Press, 2012), at 4.

41 Simon Bishop & Mike Walker, The Economics of Competition Law, at. 21 – 22.

43 Simon Bishop & Mike Walker, The Economics of Competition Law at 22

44 Simon Bishop & Mike Walker, The Economics of Competition Law at 22.

45 Alison Sufrin & Brenda Jones, EU Competition Law: Text, cases and materials, at 7.

46 M. Northrup Buechner, ‘A comment on the law of supply and demand’, 2018, volume XI, The Journal of Philosophical Economics: Reflections on Economic and Social Issues, 67, at 68.

47 M. Northrup Buechner, ‘A comment on the law of supply and demand’, at 68.

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Allocative efficiency exists when the price of a product equals its marginal costs.⁵⁰ Marginal cost refers to the cost of producing one extra unit of a product.⁵¹ If the marginal cost is below what consumers are prepared to pay for, then it would benefit both the consumers and the producer if the producer produced one extra unit as he the price that he would be able to receive would be above the production costs but below the price consumers are willing to pay.⁵² If the marginal cost would be above what consumers would be willing to pay, allocative inefficiencies would occur and welfare could only be increased by a decrease in output.⁵³

Productive efficiencies are thought to arise from perfectly competitive markets as well.

Productive efficiency means that products are produced at the lowest cost possible at the time of production.⁵⁴ In theory, under a market in which there is perfect competition, if an undertaking does not strive for productive efficiency by producing goods at the lowest possible cost, that undertaking will be forced to leave the market as a result of losing income.⁵⁵ Furthermore, due to the accessibility of information, any cost cutting techniques will be copied and thus prices in general will be lowered.⁵⁶

Lastly, the concept of dynamic efficiency focuses on the question of how well the market promotes innovation.⁵⁷ In dynamic markets, undertakings compete not only on prices but also on innovation.⁵⁸ Moreover, undertakings usually compete to be the first to launch a new innovation on the market and thus are able to earn a monopoly profit through the granting of intellectual property rights.⁵⁹ In such markets, expenditure in R&D is substantial, the costs related to R&D are often fixed costs and there are low marginal costs of production.⁶⁰ Therefore, it has been submitted by Bishop and Walker that using marginal costs as a standard of efficiency may not be appropriate in such markets.⁶¹

50 Simon Bishop & Mike Walker, The Economics of Competition Law, at 25

51 Alison Jones & Brenda Sufrin, EU Competition Law: Text, cases, and materials, at 7

52 Simon Bishop and Mike Walker, The Economics of Competition Law, at 25

53 Simon Bishop and Mike Walker, The Economics of Competition Law, at 25.

56 Alison Jones & Brenda Sufrin, EU Competition Law: Text, cases, and materials, at 8.

57 Alison Jones & Brenda Sufrin, EU Competition Law: Text, cases, and materials, at 8 – 9.

59 Simon Bishop and Mike Walker, The Economics of Competition Law at 46

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2.2.2 Consumer Welfare and Economic Efficiency

In the literature, it has been stressed that competition law should promote consumer welfare. According to Bishop and Walker, one of the reasons why competition authorities intervene on the market is because they believe that as a result of such an intervention, consumer welfare will increase.⁶² Thus, they assert that the goal of competition law is to maximise consumer welfare.⁶³ Today, the view of the Commission seems to be that Articles 101 – 102 TFEU shall promote consumer welfare and efficiency gains. This is for example highlighted in the Commission’s Report on Competition Policy from 2016. Here the Commission seems to confirm the view that competition law shall promote consumer welfare. According to the Commission, ”the aim of competition policy is to ensure that consumers are treated fairly and that powerful businesses are prevented from striking deals that raise prices, or suppress innovation or deny people the freedom to choose the products they want”.⁶⁴

This position is also reflected in the Commission’s soft law. In for example the Commission’s Communication Guidelines on the Application of 81(3) of the Treaty, it laid down that the objective of Article. 81 (Article 101 TFEU) is to protect market competition as a means for enhancing consumer welfare and attaining an efficient allocation of resources.⁶⁵ Accordingly, it becomes apparent that in the view of the Commission, consumer welfare and an efficient allocation of resources are explicit objectives of competition law. From the perspective of the Commission, promoting consumer welfare and economic efficiency is therefore a goal of competition law. The question then becomes how this standard has been received by the CJEU since it is ultimately the CJEU that shall ensure the correct interpretation application of EU law.⁶⁶ In Roquette Fréres, the CJEU stated that the function of the provisions on competition in the Treaties is to prevent competition from being distorted to the detriment of the public interest, individual undertakings and consumers.⁶⁷ In the case Österreichische Postsparkasse v. Commission, the General Court laid down that the ultimate purpose of

64 European Commission, Report from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions – Report on Competition Policy 2016, (Brussels 31.5.2017 COM(2017) 285 final), at 5.

65 Communication from the Commission - Notice - Guidelines on the application of Article 81(3) of the Treaty (2004/C 101/08), Official Journal, C 101, 27/04/2004 P. 0097 – 0118, para. 13.

66 Article 19 TEU.

67 C-94/00, Roquette Frères, ECLI:EU:C:2002:603, para 42.

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the competition rules is to increase the well-being of consumers.⁶⁸ Consequently, the consumer welfare standard has been accepted by the courts.

2.3 Concluding remarks to the chapter

The following chapter has sought to examine the objectives of competition law in the EU. In light of the foregoing, it is submitted that two primary objectives can be identified. The first one is the objective of market integration. This objective is not exclusive to competition law as such. On the contrary, market integration in the sense of establishing an internal market for the EU can be regarded as an overarching goal of EU law in general. Furthermore, market integration as an objective has a firm basis in the Treaties and can therefore be attributed somewhat of a constitutional status. Thus, looking at market integration in competition law from a constitutional perspective, this objective should have a high hierarchy. The second goal of competition law that can be identified is the objective of consumer welfare and efficiency gains. This objective is not embedded in the competition provisions or the Treaties as such. Instead the emergence of consumer welfare has developed over a long period of time alongside the modernisation of competition law and its main proponent has been the Commission which has pushed consumer welfare as an objective gradually through its enforcement of competition law in general. However, this push has not been entirely unilateral.

Among the Courts of the Union, consumer welfare as a competition law standard has gained acceptance as well. It can therefore be inferred that market integration and consumer welfare are two main objectives of competition law. Moreover, the premise of this thesis is that market integration and consumer welfare are the two goals which competition law should strive for.

3 The legal framework of European competition law

The EU’s competition law regime consists of primarily two provisions. These are Articles 101 – 102 TFEU. The following chapter aims briefly examining the substantive conditions of application of these articles. The purpose behind this is to give the reader a brief overview of the legal framework.

68 Joined cases T-213/01 & T-214/01, Österreichische Postsparkasse v. Commission,, ECLI:EU:T:2006:151, para. 115.

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3.1 Article 101 TFEU

From Article 101 TFEU, it follows inter alia that ”all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market” shall be prohibited as incompatible with the internal market. As the purpose of this section is only to give the reader an overview of the legal framework, all of the conditions of application of the criteria set out in Article 101 TFEU shall not be delved into in greater depth as such an analysis is outside the scope of this thesis. However, three of the criteria contained in Article 101 TFEU will be briefly described under this section. These are a) the definition of an undertaking, b) the definition of an agreement and b) the object or effect of distorting or restricting competition.

Within the meaning of Article 101 TFEU, ”undertaking” is defined as encompassing

”every entity engaged in an economic activity regardless of the legal status of the entity and the way in which it is financed”.⁶⁹ The determining criterion under this definition is therefore whether the undertaking – or the entity – is engaged in an economic activity.

Concerning the latter criteria, it can be noted that the CJEU has consistently defined the concept of an ”economic activity” as entailing ”any activity consisting in offering goods or services on a given market”.⁷⁰

Concerning the definition of an agreement within the meaning of Article 101 TFEU, this criteria is defined as ”the existence of a concurrence of wills between at least two parties, the form in which it is manifested being unimportant so long as it constitutes the faithful expression of the parties’ intentions.”⁷¹ Lastly, concerning the condition that the agreement must either by its object or effect restrict or distort competition, it can be noted that ”object” and ”effect” are alternative criteria.⁷² Moreover when an agreement restricts competition “by object”, the actual consequences of that agreement on competition need not be assessed. In order to determine whether an agreement restricts

69 C-41/90, Höfner and Elser v Macrotron, ECLI:EU:C:1991:161, para 21. See also Richard Whish &

Robert Bailey, Competition Law, at 84.

70 See Joined cases C-180/98 to C-184/98, Pavlov and others, ECLI:EU:C:2000:428. p. 75. See also Richard Whish & Robert Bailey, Competition Law, at 84.

71 T-41/96, Bayer v Commission, ECLI:EU:T:2000:242, para. 69. See also Richard Whish & Robert Bailey, Competition Law, at 99.

72 C-56/65, Société Technique Minière v Maschinenbau Ulm, ECLI:EU:C:1966:38, p 249. See also Richard Whish & Robert Bailey, Competition Law, at 118.

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competition by object, the content of the agreements provision, the objectives it seeks to attaint and the economic and legal context of the agreement must by looked at.⁷³

The prohibition contained in Article 101 TFEU is however not absolute. Given that the conditions for application in Article 101(3) TFEU are met, an agreement can escape the prohibition contained in Article 101(1) TFEU. According to Article 101(3) TFEU, Article 101(1) TFEU may be declared inapplicable given that four cumulative⁷⁴ conditions are fulfilled. Firstly, the agreement must contribute to improving the production or distribution of goods or promote technical or economic progress. The purpose behind the first criteria is to ascertain what the benefits behind an agreement are.⁷⁵ Furthermore, the link between the agreement and the claimed efficiencies, and the value of these efficiencies must be verified.⁷⁶ According to the Commission’s Guidelines on the application of Article 101(3) TFEU, only objective benefits can be taken into account.⁷⁷ Concerning the nature of the efficiencies that can fall within the scope of the exemption, it can be stated that all objective efficiencies are included such as cost efficiencies but also qualitative efficiencies such as new and improved products.⁷⁸ Secondly, consumers must be allows a fair share of the resulting benefit.

Within the meaning of Article 101(3) TFEU, ”consumers” include all direct and indirect users of a product.⁷⁹ The concept of a ”fair share” means that the pass-on benefits of the agreement in question must at least compensate consumers for any negative impact caused to the by the existence of the agreement.⁸⁰ Thirdly, the agreement must not impose on the undertakings concerned restrictions which are not indispensable to the attainment of this objective. This means that the restriction of competition that flows from the agreement must be reasonably necessary in order to achieve the claimed efficiencies.⁸¹ There must furthermore not exist any economically more practicable and less restrictive means for achieving the efficiency.⁸² Moreover, any individual

73 C-501/06 P, GlaxoSmithKline Services and Others v Commission and Others, ECLI:EU:C:2009:610, para 58. See also Richard Whish & Robert Bailey, Competition Law, at 118.

74 Guidelines on the application of Article 81(3) of the Treaty, para 42.

76 Guidelines on the application of Article 81(3) of the Treaty, para 50

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restrictions from the agreement must be reasonably necessary for the attainment of the claimed efficiencies as well.⁸³

Lastly, the agreement may not afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. According to the Commission, ”the protection of rivalry and the competitive process is given priority over potentially pro-competitive efficiency gains which would result from restrictive agreements”.⁸⁴ Therefore, competition as such is acknowledged as an interest which must be promoted alongside economic efficiency which is why the agreement may not eliminate competition in such a way as is described in Article 101(3)(b) TFEU.

3.2 Article 102 TFEU

If Article 101 TFEU is aimed towards agreements between undertakings that in some way or other restrict competition, Article 102 TFEU prohibits unilateral actions that distort competition. Article 102(1) TFEU states that ”any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.”

In United Brands, the CJEU stated that ”the dominant position referred to in this article relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customer and ultimately of its consumers.⁸⁵ There are several factors that must be considered when establishing a dominant position. Out of these factors, a highly important factor is the existence of large market shares.⁸⁶ Moreover, in order to define whether a company enjoys a dominant position on the market, the relevant market must be defined. Market definition is thus a tool to identify and define the boundaries of competition by firms so that the market shares of held by the undertaking can be calculated.⁸⁷ An analysis of the concept of the relevant market definition is however outside the scope. It should

85 C-27/76, United Brands v Commission, ECLI:EU:C:1978:22, para 65. See also Van Bael & Bellis, Competition Law of the European Communities (5^th ed., Kluwer Law International 2010), at 101.

86 See C-85/76, Hoffmann-La Roche v Commission, ECLI:EU:C:1979:36, para 39. See also Van Bael &

Bellis, Competition Law of the European Communities, at 108.

87 Commission Notice on the definition of relevant market for the purposes of Community competition law, (97/C 372/03), OJ C 372, 9.12.1997, p. 5–13, para 2.

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however be mentioned that the relevant market is defined both in terms of the relevant product market and the relevant geographic market.⁸⁸

Furthermore, in order for Article 102 TFEU to apply, there must also exist an abuse.

The CJEU has defined the concept of abuse as being an objective concept that relates to the behaviour of an undertaking in a dominant position and ”which is such as to influence the structure of a market where as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to method different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition”.⁸⁹

Furthermore, conduct found abusive under Article 102 TFEU can still be justified under the doctrine of ”objective justifications”. According to the Commission, there are three types of defences according to which an abusive behaviour can be objectively justified.

These are the “objective necessities defence”, the “meeting competition defence” and

“the efficiencies defence”.⁹⁰ Under the objective necessities defence, an abusive conduct can be justified if the undertaking concerned can show that the conduct is necessary because of objective factors that apply to all undertakings in the market. This can include safety or health reasons.⁹¹ The “meeting competition defence” means that undertakings are allowed to take measures aimed at defending their own commercial or economic interests in the face of competitors.⁹² This can for example be the case if the undertaking is attempting to reduce its short term losses due to the activity of another undertaking.⁹³ The meeting competition defence has been confirmed by the CJEU in United Brands in which it stated that dominant undertakings are allowed to defend their commercial interests if they are attacked.⁹⁴ Lastly, concerning the “efficiencies

88 Commission Notice on the definition of relevant market for the purposes of Community competition law, para 4.

89 C-85/76, Hoffman-La Roche, para 91(2).

90 European Commission DG Competition, DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, Brussels December 2005, at 24 - 28

91 See European Commission DG Competition, DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, at 24.

92 European Commission DG Competition, DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, at 25.

93 European Commission DG Competition, Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, at 25.

94 C-27/76, United Brands, para 189.