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Decision by the Danish Competition Appeals Tribunal The insolvency scheme of the pharmaceutical sector

08. juni 2007

On June 8, 2007, the Danish Competition Appeals Tribunal overruled a decision made by the Danish Competition Council on November 30, 2005.

The decision concerned a so-called insolvency scheme made by the Danish Pharmaceutical Association in agreement with the three and only pharmaceutical wholesalers on the Danish market. The purpose of the scheme (which was in force from 1998 to 2004) was to help insolvent pharmacies to consolidate and settle their debts. The arrangement implied that the wholesalers accepted to supply to insolvent pharmacies on their usual credit terms. In return, the pharmacies were not allowed to switch between suppliers during the period, in which they were covered by the scheme. If, for instance, a pharmacy had dispersed its purchases between two wholesalers on a 40/60 % basis, the pharmacy was not allowed to deviate from this dispersion.

In a written statement the Ministry of Justice had declared that imposition of an obligation on insolvent undertakings not to switch supplier during the insolvency period is not a direct or necessary consequence of the rules on suspension of payments in the Bankruptcy Act.

As this meant that the Competition Act was fully applicable, the Competition Council assessed the case and found the mandatory freeze of the pharmacies’ purchase patterns to be an anticompetitive horizontal market sharing agreement and consequently a serious infringement of Section 6 of the Competition Act as well as Article 81 of the Treaty.

The Competition Appeals Tribunal agreed with the Competition Council that the insolvency scheme included an unnecessary agreement on market or customer sharing – as far as insolvent pharmacies were concerned (covering 6,1 % of the market in 1998, 4,2 % in 2003, and 2,8 % in 2004) – and that the agreement as such must be regarded as anticompetitive.

However, the Competition Appeals Tribunal also found that great importance should be attached to the distinctive competitive constraints on this particular market when assessing the effect and legitimacy of the restriction concerned. The pharmaceutical market is highly regulated, and due to regulation the pharmaceutical wholesalers are not in a position to compete on normal parameters, such as price and quality/diversity of products. The wholesalers can only compete on service and on cost-based discounts.

In the light of these characteristics, the Competition Appeals Tribunal found that there was not sufficient evidence to support the fact that the market sharing agreement had actually had a negative impact on the market. Furthermore, the Competition Appeals Tribunal found that the wholesalers had more or less been forced by the Pharmaceutical Association to participate in the insolvency scheme, and therefore the scheme did not have an anticompetitive purpose.

On this basis the Competition Appeals Tribunal decided: “... In the opinion of the Appeals Tribunal, the very fact that the arrangement includes an agreement on market sharing is sufficient grounds for the competition authority to seek termination of the agreement, but there are not sufficient grounds to characterize the matter as a serious infringement of Section 6 of the Competition Act. Moreover, the appealed decision does not contain evidence of an appreciable restriction, in violation of Section 6 of the Competition Act, during the period 1998 to2004. Since that is the core of the [Competition Council’s] decision, the Appeals Tribunal annuls the decision”.