ECJ says innovation can help companies beat competition rap

Rejecting appeals by pharmaceutical giant GlaxoSmithKline (GSK) and the European Commission against earlier rulings, the ECJ has confirmed the possibility of allowing otherwise anti-competitive activities to pass unpunished if it can be proved that they are so innovative that their inventiveness benefits consumers more than their anti-competitiveness harms them.

The ECJ confirmed the approach of the lower court, the Court of First Instance (CFI), when it said that anti-competitive behaviour could be offset by innovation.

"The Court of First Instance rightly observed that, in order to be capable of being exempted under Article 81(3) [of the EU Treaty], an agreement must contribute to improving the production or distribution of goods or to promoting technical or economic progress," said the ECJ's ruling. "That contribution is not identified with all the advantages which the undertakings participating in the agreement derive from it as regards their activities, but with appreciable objective advantages of such a kind as to compensate for the resulting disadvantages for competition."

GSK operated a dual pricing strategy in Spain, whereby it charged one price to wholesalers for drugs for the Spanish market and a higher price for those that were for sale on to other EU markets.

The EU was founded on the principle of free trade between member states, so the European Commission refused to give GSK assurance that its actions were not illegal, and ruled that it had broken competition law.

GSK appealed that decision through the courts, and the CFI said that its actions did break laws on the prohibition of agreements in restriction of competition. But it also found that the Commission had not closely enough examined GSK's claim that it deserved an exemption on the grounds of its innovation.

Article 81 of the EC Treaty, which is the European Union's legal basis, says that activity is illegal which has as its "object or effect" the distortion of competition in the market. It says, though that there can be exemptions for cases in which the activity "contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit".

Earlier cases had said that where activity had as its "object" the restriction of trade that could be deemed illegal without any actual proof of consumer harm. The ECJ said that the CFI had made an error because it said that there had to be proof of consumer harm before a finding of restriction by object could be made.

"By requiring proof that the agreement entails disadvantages for final consumers as a prerequisite for a finding of anti-competitive object and by not finding that that agreement had such an object, the Court of First Instance committed an error of law," said its ruling.

Adrian Wood, a competition law expert at Pinsent Masons, the law firm behind OUT-LAW.COM, said that the ECJ had underlined that idea.

"It confirms earlier judgments by the Luxembourg courts in 2009 that in restriction by object cases there is no need to prove that consumer welfare has been harmed," he said. "The ECJ's approach today to the relevance of consumer detriment came as no real surprise and will end any arguments that in certain circumstances the effects of alleged anti-competitive behaviour must be examined before a restriction by object infringement can be found."

"Of greater interest, however, is the fact that the ECJ has confirmed the possibility of arguing successfully an Article 81(3) [based on technical or economic progress] defence in a restriction by object case such as the one brought by GSK," said Wood. "Furthermore, the ECJ has stated that arguments based on innovation in the sector could in principle override any negative effects on competition arising from a dual pricing strategy."

Wood said that the result of the ruling could be an increase in cases where companies whose behaviour seems to be anti-competitive argue for an exemption based on their inventiveness, as detailed in Article 81, section 3 of the EC Treaty.

"[The ruling says that] the infringer must demonstrate that its behaviour will more likely than not produce efficiencies that outweigh any detrimental effects on competition," he said. "The existence going forward of a clearer yardstick for evaluating the standard of proof under Article 81(3) is likely to lead to more Art 81(3) arguments being ventilated in the Luxembourg courts."

The ECJ said that GSK's appeal against the ruling that it should not operate dual pricing should fail. It also said that the Commission's appeal against the CFI's ruling that it did not take enough account of GSK's arguments for an exemption should fail.