The Complexity Behind the Implementation of a Single Market Policy in the EU - Case Study Example

Complexity behind the Implementation of a Single Market Policy in EU _______________________________________________________ Introduction: Intellectual property rights (IPRs) such as patents and trademarks are known to foster technological innovation necessary in maintaining economic growth. By protecting the rights of inventors over their individual creation, businesses are encouraged to invest more in research and development (R&D) which aims to innovate and develop new product designs as well as technology invention.1 Since a patent provides a temporary protection that lasts for 20 years (from the filing date) over something created by an inventor against businesses or individuals who would copy, imitate, or reproduce the invention of other people2 and trademarks grant businesses with an exclusive right to over a company’s product name, words, signs and symbols, logos, the labelling and packaging as well as the exact product configuration or the appearance of the product itself3; IPRs are said to promote a monopolistic competition within the domestic and international markets.4 On the other hand, competition law promotes free trade and healthy competition among the local and international businesses.5 Considering that competition law is very much focused on eliminating and reducing the cases of monopolistic competition, it has been strongly argued that the concept behind the IPR contradicts with the fundamental principles that are being promoted under competition law. To enable the readers to have a better understanding of the subject matter, brief information with regards to patents and trademarks vs. competition law will be provided. Eventually, the rules of competition that were applied in the context of pharmaceutical industry will be thoroughly examined, including analysis of reasons why competition rules may be inapplicable to the pharmaceutical industry. Upon analysing of the conflicting purpose between the use of IPRs and the competition law, the factors that strongly support the idea that IP law significantly impedes the promotion of a free market movement of pharmaceutical products within and outside the domestic market will be discussed prior to the conclusion. At the end of the study, whether or not it is possible to implement EU’s goal of being able to integrate the entire market of pharmaceutical sector into a ‘one size fits all’ attitude with the use of a single market policy will be answered. Patents and Trademarks on Pharmaceutical Firms vs. Competition Law: Patents and trademarks are used to protect the interests of inventors as well as the business. Since hundreds of millions of dollars are needed to develop a new drug6, patents are usually given to pharmaceutical firms in order to protect them when investing a large sum of money spent on research studies.7 On top of the pharmaceutical firms’ application for patent, these multi-national companies are also applying for trademark protection over the company’s brand name and logo. Through the use of intellectual property rights, pharmaceutical companies can be legally protected from the risk of being imitated. In line with this matter, one of the benefits of being protected by the IP law is that large-scale pharmaceutical companies are given the right to file a fraud case against any person or business entity that will be caught imitating a particular drug or uses any signs that have already been registered under the patent and trademark laws.8 Parallel trading can result to a huge business opportunity loss on the part of the pharmaceutical companies given that wholesalers of pharmaceutical drugs are able to purchase these drugs at a much cheaper price when purchased directly from pharmaceutical companies and sell these items at a higher price to the consumers. Since majority of the pharmaceutical companies today are able to take advantage of intellectual property rights to protect their businesses from the negative consequences of parallel trade9, it becomes arguable that the application of the IP law gives the large pharmaceutical companies the competitive advantage of being able to monopolize the market of each specific drugs. Considering this point-of-view, IP law really contradicts the main concept of competition law which is to promote free market competition at all times. As an end result of limiting the parallel trade on pharmaceutical products, large-scale pharmaceutical companies are able enjoy the benefit of maintaining a high market price of drugs within the United Kingdom while the public consumers suffer from the need to pay a premium price on newly invented medicines. Rules of Competition Applied in the Context of Pharmaceutical Industry: In Europe, the phrase ‘protecting competition’ refers to the need to protect the economic freedom of players in the market.10 Protecting the welfare of large pharmaceutical companies is exactly what the IP law is all about. Since the IP law promotes monopolistic market competition11, the conflict between IPRs and competition law arises. This can be easily noted from the European Union (EU) law.12 Article 81 and 82 (ex Art. 85 & 86) of Treaty of Rome The main objective of the EC Treaty is to create a single European market by promoting open competition in the market.13 Under article 81 of Treaty of Rome, any acts or decisions that could distort or prevent competition in the market are strictly prohibited. On the other hand, article 82 (ex Art. 86) of Treaty of Rome states that imposing a high selling price over a particular goods and services by controlling the availability of supply in the market can be considered an abusive act. Article 82 also prohibits any pharmaceutical companies who are in a dominant position from abusing the common market including its Member States.14 Upon analyzing the Article 81 and 82 of the Treaty of Rome, it is clear that any form of activities that could prevent free market competition is not legally allowed in UK. Based on this context, UK should not legally allow IP law since the entire concept of this IPR strongly violates the concept of a free market competition. The existence of IP law violate the article 81 of Treaty of Rome in the sense that other pharmaceutical companies are not legally allowed to imitate drugs that are protected by the IP law. Likewise, the IP law also violates the article 82 of Treaty of Rome such that the IP protected companies are able to legally manipulate the market prices of newly invented drugs. Taking into consideration that the idea that IP protected pharmaceutical companies are able to monopolize the market, the general public has no other option but to patronize these patented drugs despite the high market prices of these drugs. Even though these large pharmaceutical companies would contest that they are selling the drugs at a reasonable price, it would still be difficult on the part of the jury to justify whether or not the IP protected pharmaceutical company is really selling the patented drugs at a reasonable market price because of the lack of sufficient evidences that can be used as a close comparison with the market price set by these large pharmaceutical companies. One of the common legal problems associated with granting a patent right over a newly invented drug is the fact that it violates the article 81 Treaty of Rome which states that “any acts or decisions that could distort or prevent competition in the market are strictly prohibited”. By legally prohibiting any pharmaceutical companies from copying the formula of a patented drug, the pharmaceutical company of a patented drug is able to dominate the entire market for the particular drug. Since pharmaceutical companies are given the benefit of being able to monopolize the entire market for a maximum period of 20 years15, a free competition which is necessary in keeping the market prices of new drugs low becomes close to impossible. Even though drug regulators protect the general public from unsafe and ineffective drugs16, it does not literally protect the general public from the high costs of new drug. Previous Court Cases Related to the Violation of Free Market Competition within the Pharmaceutical Companies: Over the years, there have been several well-known court cases wherein pharmaceutical companies were accused of violating competition law. These cases include: (1) Hoffmann-La Roche v Commission; (2) Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. GlaxoSmithKline plc; (3) Centrafarm BV and Adriaan de Peijper v. Sterling Drug Inc.; and (4) Centrafarm BV and Adriaan de Peijper v. Wintrhop BV. Intentionally Dominating the Market Hoffmann-La Roche also known as ‘Roche’ is a pharmaceutical company that manufacture vitamins among others.17 Back in August 1976, the Swiss company was forced to pay a fine for violating Article 86 of the EEC Treaty and thereby dominating the market supply of Vitamins A, B2, B3, B6, C, E, and H.18 According to the European Court of Justice (ECJ), Roche abused its market position by “entering into exclusive purchasing agreement with its customers in exchange with loyalty rebates to customers that orders in bulk”.19 Even though the use of loyalty rebates can be considered as a marketing strategy, it remained a fact that Roche was able to manipulate the available supply of vitamins within and outside the domestic market. Since millions of people had to face the consequences of paying a higher price for vitamin supplements, the ECJ made the final decision to oblige Roche to pay a penalty for violating the competition law.20 The case of Hoffmann-La Roche is a very good example that provides us a better understanding between the intentional abuse of power with the purpose of dominating and manipulating the market of vitamins. The Use of Intellectual Property Rights to Prevent Parallel Trading of Drugs GlaxoSmithKline (GSK) is a pharmaceutical company that manufactures drugs for migraine, anti-epileptic drugs, HIV/AIDS, and treatment for asthma among others.21 Upon learning that GSK’s Greek pharmaceutical wholesalers were exporting a large volume of its drugs to other countries at much higher prices, GSK started to refuse selling its products causing a significant shortage of GSK manufactured drugs throughout the Greek market.22 Through the Greek Competition Commission – also known as the Epitropi Antagonismou, Greek pharmaceutical wholesalers and distributors as well as the associations of pharmacists filed a legal complaint against GSK for refusing to deliver their full orders.23 Sterling Drugs is known as a leading American brand for aspirin24 whereas Sanofi Winthrop Pharmaceuticals is the sole U.S. manufacturer of primaquine phosphate – an anti-malarial drug25. On the other hand, Centrafarm Nederland B.V. engages not only in the development and manufacturing of drugs but also the sale of pharmaceutical products produced by other drug manufacturers.26 The case of Centrafarm v. Sterling Drugs Inc. as well as Centrafarm v. Winthrop is very much similar to the case of GSK. Back in 1974, Centrafarm purchased a large volume of pharmaceutical products from European countries at a relatively low price and sold the drugs in the Netherlands at a higher price. Since Sterling Drugs Inc. and Winthrop are two large companies protected under the patent27 and trademark law28 respectively; both companies filed an infringement case against Centrafarm for violating the intellectual property rights of both companies.29 Some people consider the idea that pharmaceutical companies should be allowed to legally enter into a business transaction with pharmaceutical wholesalers since prohibiting the wholesalers to sell the patented drugs would mean removing the wholesalers’ right to sell which totally restrict competition in the market. On the contrary, large pharmaceutical companies would commonly argue that there is really no competition that occurs in the market since wholesalers of pharmaceutical drugs are actually buying these drugs straight from the pharmaceutical companies. It only means that wholesalers are actively supporting the business activities of the large pharmaceutical companies by taking initiative to sell these drugs directly to the consumers. Even though pharmaceutical wholesalers and traders do not violate the IP law by imitating the patented drugs, large pharmaceutical companies should not be legally allowed to use the IP law as a strategic way of preventing parallel trading since pharmaceutical wholesalers and traders are the ones that make these drugs available to the general public. Upon analyzing the article 82 of Treaty of Rome, pharmaceutical companies are not allowed to increase the selling price of pharmaceutical drugs as a strategic way of controlling the supply of drugs available in the market even though large pharmaceutical companies are losing large sum of money to parallel traders. It is also illegal for large pharmaceutical companies to control the supply of drugs given to pharmaceutical wholesalers and traders since it would mean abusing their power from having a dominant position within the pharmaceutical industry. Valid Reasons that makes the Rule of Competition Inapplicable in Some Previous Pharmaceutical Cases: There is a big difference between limiting the production supply for the purpose of preventing fair market competition and holding on the production supply with the purpose of preventing a parallel trade. Holding back the supply of drugs with the purpose of controlling the market price is a clear violation of competition law. However, some people consider the case wherein a company decided to control the market distribution of drugs given that a company tries to avoid the negative consequences associated with parallel trading to be different from intentionally controlling or manipulating the market.30 In relation to IP law, most pharmaceutical companies do not support the parallel trading of pharmaceutical products because wholesaler of drugs are able to purchase a relatively lower price for each item and eventually sell it to distributors and the consumers at a higher market price.31 Utilising this type of business strategy, large-scale wholesalers of pharmaceutical products are able to earn large profits from low investment capital. For this reason, the ECJ developed initiatives which aim to avoid parallel trade within the pharmaceutical industry.32 Article 82 EC does not consider the intentional limitation of pharmaceutical supply as a violation of competition law since parallel trading does not literally promote competition in the market.33 At the expense of the pharmaceutical companies who had invested a large sum of money on research and development program, strong support on parallel trading could only benefit the wholesaler since consumers are still required to pay the same price or a little more than the market price of a patented drug. Aside from having a lot of business opportunity loss on the part of pharmaceutical companies, there is a possibility for insufficient supply of drugs to occur in the market since parallel trading could suddenly increase the demand for a particular drug over a short period of notice.34 Indirectly, a parallel trading violates the IP law in the sense that patent is normally awarded to pharmaceutical companies in exchange with the effort they had exerted on developing new drugs. Most of the pharmaceutical products wholesalers are taking advantage of the business opportunity to sell these drugs within their preferred target market. The fact that some of these pharmaceutical wholesalers were given the permit to sell the drugs directly to consumers somehow violates the pharmaceutical company’s monopolistic right to sell the specific drug.35 For this reason, large pharmaceutical companies insist that there is a strong need to control the parallel trading of pharmaceutical products in the market. The following cases are good examples of parallel trading the has occurred within the pharmaceutical industry: (1) Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. GlaxoSmithKline plc; (2) Centrafarm BV and Adriaan de Peijper v. Sterling Drug Inc.; and (3) Centrafarm BV and Adriaan de Peijper v. Wintrhop BV. Few years ago, GlaxoSmithKline was legally sued under the case Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. GlaxoSmithKline plc [2005] when the company decided to cut down its supply with the Greek wholesalers.36 Even though GSK decided not to deliver supply of drugs to Greek wholesalers for the ground of trying to avoid parallel trading of drugs within the European Union37, ECJ dismissed the case since the court considered GSK’s reason to cut down its supply to Greek market was objective. In line with the case of GSK, article 82 EC stated that any company that refuses to supply their products and services for the purpose of trying to avoid parallel trading is not considered as an abuse of the company’s dominant position in the market especially when a huge price discrepancy was proven to exist in the process of parallel trading.38 Just like the case of GSK, Centrafarm v. Sterling Drugs Inc. was also dismissed by the court because of the fact that Sterling Drugs Inc. is protected under a patent. The IPR ownership of Sterling empowered the company with the right not only to exclude others from manufacturing a patented drug but also the use and the legal right to import or sell a pharmaceutical drug.39 Since Sterling Drugs is protected under patent law40, the company was able to legally file a case on Centrafarm due to the fact that the company was taking advantage over the consumers’ right for cheaper medicines through parallel trading. The same situation has been observed in the case of Centrafarm v. Winthrop. The only difference is that Winthrop took advantage of its trademark protection upon filing a case against Centrafarm.41 Discussion: There is a thin line that enables ECJ to identify the limitations of patent rights as compared with the competition law in UK. Having gone through the previous case examples that were presented in this study enables us to have a better idea and understanding on how the court justifies a case and punishes those companies that will be been proven guilty of violating the competition law. In the case of Hoffmann–La Roche v. Commission [1979], the intentional manipulation of domestic and international markets clearly violated Article 81 – formerly known as Article 85 of the EC treaty - which stated that it is illegal to manipulate or control of markets.42 Through the use of marketing strategies like loyalty rebates, the ECJ pointed out that Roche’s decision to enter into a one-on-one unwritten trading agreement with its qualified domestic and international wholesalers and distributors is a sign of forming a cartel with the purpose of dominating the market.43 In the case of Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v. GlaxoSmithKline plc [2005], the ECJ decided to dismiss the case since the company’s decision to cut down drug supply to Greek wholesalers was purposely done only to prevent parallel trading of drugs within the European Union. Since pharmaceutical products are considered an important part in terms of improving the health condition of the millions of people, there is a strong need for UK government to keep the market prices of these drugs affordable.44 The fact that parallel trading is not a form of market competition which could bring down the market prices of pharmaceutical drugs, the ECJ decided not to legally support parallel trading. IPRs legally protect the profitability and market shares of large pharmaceutical companies that are willing to spend billions of dollars on research and development. As soon as pharmaceutical companies are able to develop an effective drug designed to cure a particular illness or a disease, the company would immediately register the new drug under patent law in order to have a competitive advantage over its competitors.45 On the other hand, competition law is designed to protect the welfare of the consumers. By promoting a fair competition in the market, it is possible to keep the market price of pharmaceutical products as low as possible. In relation to the differences between IPR and competition law, Individuals who are pro-IPR would normally agree that pharmaceutical companies should be protected under the IP law in order to encourage them to continuously search for new drugs. On the contrary, the ability of large-scale pharmaceutical companies to dominate the market of specific drugs make the anti-IPR group considers IP law as a tool that encourages the giants to take advantage of its target consumers. This violates the main purpose of competition law. Since IPR contradicts the concept of competition law under the EC Treaty Art. 8246, there is an on-going debate as to whether or not there is really a need to protect large-scale pharmaceutical companies from being protected under the IP law since empirical evidences show that the use of the IP system could enable pharmaceutical companies to exploit their ability to innovate new drugs.47 Since the law behind IPR and competition are both legally accepted in EU, it becomes very difficult on the part of the ECJ not to make some cases of IPR protection prevail over the existing competition law that aggressively promotes a free movement of pharmaceutical products since the intellectual property law is also legally accepted in the country. Despite the aggressive promotion of competition law, companies with IPR ownership will continue to enjoy the fundamental rights stipulated under the intellectual property law. To avoid making a biased judgment in pharmaceutical cases among others, the ECJ carefully considers the background of each case prior to making a final conclusion as to whether or not the defending company has been using its IP rights in the promotion of anti-competitive practices. Conclusion: The rules and regulation stipulated under IP law strongly contradict the business concept suggested under competition law. For this reason, it becomes unwise and illogical on the part of the ECJ including its subordinate – the Court of First Instance (CFI) to consider only pure competition law when judging a pharmaceutical case.48 Since IP law is equally recognized in EU, both the IP law and EU competition law should be acknowledged when solving a pharmaceutical case.49 EU’s goal of being able to integrate the entire market of pharmaceutical sector into a ‘one size fits all’ attitude through the use of a single market policy is a very complex situation in the sense that it is not possible to simply based everything on EU competition law without taking into consideration the IP law. Since IP law is legally allowed in the country, large-scale pharmaceutical companies are expected to continuously grab the opportunity of being able to monopolize a specific drug in the market to enable the company to enjoy the financial gain out of the large sum of money they have invested on research and development of new drugs. Due to the existence of IP law, the possibility of effectively implementing a free market competition rule within the pharmaceutical industry will remain very slim. Aiming to avoid being charged with a lawsuit on the grounds of violating the EU competition law, IPR owners should at all times exercise their IPRs in a way that respects the business objectives being promoted under the competition law. In line with this matter, IPR owners should exert extra effort in trying to avoid distorting the free market competition of pharmaceutical products among its member states. Read More