User Name:     Password:        Join Us
  • 1
  • 2
  • 3
  • 4
▪ China is to award whistleblowers heavily – foreign companies are more vulnerable t
▪ 130 Chinese headhunters arrested, involving breach of 200 million pieces of person
▪ Corporate Compliance Programs Evaluation Issued by US DOJ (Chinese Translation)
▪ The prospect is promising to commercialize Level-3 autonomous driving in China
▪ Intelligent and digital infrastructures are scheduled to accompany automatic vehic
▪ Will China illegalize VIEs?
▪ You cannot miss the gold rush under China's new Foreign Investment Law
▪ Data must stay in China to get classified protection under Cyber Security Law
▪ China is to fast-track law-making in autonomous driving
▪ What compliance obligations to meet to transfer data from within China?
▪ Chinese government uses digital forensics technology to dig bribery evidence
▪ A Chinese medical device distributor fined CNY 50,000 for bribing with Moutai
▪ How would Chinese E-commerce Law affect you (1)?
▪ Conflict between the culture and the Party’s rules: $70 gift money got a director
▪ "Excessive Pricing" from perspective of Competition Law
▪ Does China prohibit cross-border transfer of scientific data?
▪ Hypermarket Caesar jailed for ten years for giving “reward for go-between”
▪ How is environmental protection tax collected in China?
▪ China Redefined Bribery Anticompetitive in Nature
▪ China is to amend its Constitution
▪ Chinese government vowed to crack down on bribe givers more harshly
▪ China has its own Dodd-Frank; the award for whistleblower could be US$ 80K
▪ Chinese government may LIUZHI a suspect of wrongdoing
▪ Cooking clinical trial data is rampant and now criminally punishable in China
▪ 5th Viadrina Compliance Congress
▪ Does a compliance bird eat nothing?
▪ How Are Drugs Being Sold in China Despite the Anti-Corruption Crusading
▪ Chinese whistle-blower lauded while French boss fled out of China
▪ Life Sentence for Deputy Chief Justice of China
▪ Why Is Chinese Anti-bribery Law a Very Important Compliance Obligation?
▪ The Report on Corporate Compliance Management in China (2016)
▪ Use of "predictive coding" in eDiscovery document review…best friend or job replac
▪ Civil Fraud v. Criminal Fraud: Criminal Proceedings Not a Silver Bullet to Resolve
▪ Corrupt Chinese drug administrators jailed or executed, whose family members ended
▪ Tone from the middle cannot be ignored
▪ Is bribing a Chinese doctor bribing an FCPA governmental official?
▪ Criminal and Administrative Liability under China's Competition Laws
▪ Model Standards for Trade Association Compliance with China's AML
▪ Double Exposure to Legal Risk Under China's Competition Laws: Comments Upon the Ex
▪ New Privacy Standards for New Data
▪ Chinese Police Are Foxhunting Corrupt Officials
▪ Transfer of Personal Data Overseas from Singapore: Recent Enhanced Provisions
▪ New Guidance on Antitrust Notifications in China
▪ China Issued the Standards on the Quality Management of Using Medical Devices (Dra
▪ China Imposes Harsher Liabilities for Environmental Non-Compliance
▪ GSK Faces Two Corruption Fights in East and West
▪ European Court of Justice Abrogates Data Retention and Allows Data Detention
▪ China Is to Adopt Risk-based Supervisory Rules on Medical Devices
▪ China to Set Food & Drug Police
▪ Don't Put All Medical Eggs into One Blacklisted Basket
 
Home > Competition
"Excessive Pricing" from perspective of Competition Law

Recently a domestic move titled Dying to Survive(《我不是药神》) has attracted a lot of attention in China, including that of our Premier Li Keqiang.  Premier Li instructed that relevant measures should be adopted for purposes of reducing the prices of and keeping the supplying of the anti-cancer drugs as soon as practicable[1].


It is said that the movie indirectly targets the dominant pharmaceutical companies, which seem to enjoy the intellectual property rights of the concerned anti-cancer drugs, sell these drugs at “excessive price” which the patients cannot afford financially. 


From the movie, we understand that the prices of these so-called life-saving drugs are too high for the patients to bear.  Therefore, the movie hints that due to the excessive prices charged by the dominant pharmaceutical companies, people’s (especially the patients’) dignity and life cannot be duly and fully respected.  This is therefore de-factoa very serious and complicated topic. 


Undoubtedly the move could be regarded as a big success given its record box income since its release on and from 6 July 2018.  And also it has caused a lot of public discussions/debates throughout China from different angles.  We will in this article though purely from competition law’s perspective discuss about one of the concerned legal issues in the movie, i.e. the “excessive price” of the life-saving anti-cancer drugs charged by the dominant pharmaceutical companies. 


1     Excessive Pricing


For legal comparison purposes, we will also make reference to the legal provisions and decisional practices regarding “excessive pricing” mainly under EU competition regime. 


1.1  EU Competition Law


Article 102 (ex Article 82) of the Treaty on the Functioning of the European Union (“the Treaty”) is an important companion of Article 101 (ex Article 81).  Article 102 is directed towards the unilateral conduct of dominant companies which use their market power in an exploitative or in an exclusionary manner, although there is not necessarily a rigid demarcation:  a dominant company which charges discriminatory prices may be both exploiting its position by earning the maximum profit at the expense of customers and harming competition by making it harder for other companies to enter the market.


Article 102 has been much more regularly applied to behavior which the Commission, the General Court and the Court of Justice consider to be exclusionary; and the Guidance on the Commission’s Enforcement Priorities in Applying Article 102 TFEU to Abusive Exclusionary Conduct by Dominant Undertakings (the "Priority Guidance") explains its enforcement priorities in relation to exclusionary, as opposed to exploitative abuses.


1.2  China’s Competition Regime


Article 17 of China’s Anti-Monopoly Law provides that dominant undertakings are prohibited to sell products at unfairly high prices or to buy products at unfairly low prices.  Article 11 of Provisions against Price Fixing stipulates that dominant undertakings shall not sell commodities at an unfairly high price or buy commodities at an unfairly low price; in the meanwhile, it lists the factors to be considered for purposes of determining the "unfairly high price" and/or the "unfairly low price".


Article 8 of the Price Guidance for Undertakings in respect of Shortage Medicine and Raw Material Medicine ("the Medicine Price Guidance") also lists the factors to be considered for the purposes of determining the "unfairly high price" and/or the "unfairly low price" in respect of shortage medicine and raw material medicine.


2     Decisional Pricing Practices


It should be noted that, on the one hand, in any competition, whether economic, sporting or of some other kind, the most efficient or the fittest person will win; this is an inevitable part of the competition process, so that, if a company ends up as a monopolist simply by virtue of its efficiency, this should be applauded, or at the very least not be condemned.


On the other hand, even if a competition authority wishes to intervene to control prices, it is not that easy to decide when a price is excessive for these purposes. 


For these reasons there has been but relatively little examination of high prices or other exploitative behavior on the part of the Commission and the case-law of the Court of Justice; and the General Court is not particularly helpful in establishing what is exactly meant by an excessive price.


We below list some of the methodologies adopted by the Commission, the General Court, the Court of Justice, as well as China’s National Development and Reform Commission ("NDRC"), which use them separately and/or jointly, in order to assess whether the selling price of the product in question is excessive or not. 


2.1 Comparison between the selling price of the product in question and its cost of production


2.1.1      EU 


There is a growing consensus that, in determining whether a dominant undertaking’s behavior should be condemned, it is appropriate to look at the relationship between the dominant undertaking’s costs of production and its sales prices[2].


In the United Brands case[3], the Commission is of the opinion that the UBC has a dominant position on the relevant market and that the UBC has also abused its dominant position by charging its customers in Germany (other than in Scipio Group), Denmark, the Netherlands and the BLEU unfair prices, which in the circumstances it considers are "excessive in relation to the economic value of the product supplied".[4]


The applicant (i.e. UBC), which does not accept the Commission’s argument, lays stress on the very low price of bananas at all stages of the banana chain and illustrate this by the example of a metric ton of bananas which could be imported into Germany in 1956 for DM 697, the price whereof fell in 1973 to DM 458, the difference corresponding to a 50% reduction in real terms.


It is advisable therefore to ascertain whether the dominant company (i.e. UBC) has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it could not have reaped if there had been normal and sufficiently effective competition.


The Court of Justice considers that "in this case charging a price which is excessive because it has no reasonable relation to the economic value of the products supplied would be such an abuse." [5]


The Court of Justice did not specifically set out how the "economic value" of a product should be determined, it said however that "this excess could, inter alia, be determined objectively, if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin; however, the Commission has not done this since it has not analyzed UBC’s costs structure."[6]


In these circumstances it appears that the Commission has not adduced adequate legal proof of the facts and evaluations which formed the foundation of its finding that UBC had infringed Article 102 of the Treaty by directly and indirectly imposing unfair prices for bananas.  The Court of Justice therefore annulled Article 1(c) (i.e. the “unfair prices”) of the Commission’s decision.


2.1.2      China


Neither the Provisions against Price Fixing nor the Medicine Price Guidance provides the definition of the “normal range” in order to ascertain whether the selling price of the product in question is "excessive" or "unfair". Therefore, as far as the methodology referred to in Item 2.1 is concerned, it is likely that China’s competition law enforcement authorities might make a discretionary decision on a case-by-case basis.


As a price regulator, China’s NDRC has already investigated several cases involving "excessive pricing" by using the methodology in Item 2.1. However it seems that NDRC focused more on whether the selling price was beyond the "normal range".  Please see Item 2.5.2 below for more information.


2.2  Comparison between the selling price of the product in question and the cost of its other products 


2.2.1      EU


In General Motors v Commission[7], the Belgian government had given General Motor the exclusive power to grant test certificates  to second-hand imports of Opel cars, this function was held  to constitute a separate market, and General Motor’s exclusive right meant that it was in a dominant position. 


From 1 August 1973 General Motor implemented new scale of charges, which distinguishes between General Motor vehicles of American manufacture and those of European Manufacture.


The Commission decision was finally quashed by the Court of Justice on the excessive pricing issues because the Court of Justice considers the fact that very soon afterwards General Motors brought its rates into line with the real economic cost of the operation, that it bore the consequences of doing so by reimbursing those persons who have made complaints to it and it did so before any intervention on the part of the Commission.


The Decision in British Leyland v Commission[8]was similar: British Leyland (“BL”) was held to have a dominant position in the provision of national type approval certificates for its vehicles.  BL initially charged a single fee of UKL 25 for both right-hand-drive and left-hand-drive Metros for the issue of certificates of conformity.  It left that amount unchanged for right-hand-drive vehicles, but on 1 July 1981 it increased the fee for left-hand-drive vehicles to UKL 150 for deals and UKL 100 for private individuals.  


BL’s pricing policy in respect of type approval certificate had the effect of reducing imports of BL cars from the continent into the UK.  The Commission’s condemnation of this conduct (i.e. the fee was fixed at a level which was clearly disproportionate to the economic value of the service provided) was upheld on appeal by the Court of Justice.


It is understood from the above two cases that if a dominant company charges different prices for its different products with the same/similar cost structure, it is likely that the higher price charged by the dominant companies could possibly be considered as "excessive" (provided other conditions for abuse are also met).


2.2.2      China


There are no similar provisions under China’s competition regime.  Note however that both Provisions against Price Fixing and the Medicine Price Guidance had a catch-all clause when listing the factors to be considered for the purposes of determining the "unfairly high price" and/or the "unfairly low price".


2.3 Comparison between the selling price of the product in question and that of its competitors’


2.3.1      EU


In addition to the "economic value of the product supplied", the Court of Justice in the United Brands also states that "the questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and if the answer to this question is affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products".[9]


The Court of Justice finally considers that although it is true that the price of Chiquita Bananas and those of its principal competitors is different, the difference is about 7%, a percentage which has not been challenged and which cannot automatically be regarded as excessive and consequently unfair.[10]


In Scandlines Sverige AB v Port of Helsingborg[11], the Commission is of the opinion that  while a comparison of prices and costs, which reveals the profit margin, of a particular company may serve as a first step in the analysis (if at all possible to calculate), this in itself cannot be conclusive ….  Therefore the Commission assesses the costs actually incurred in providing the products/services in question (the costs of production) and make a comparison with the prices actually charged, it also assesses whether the prices are unfair when compared to prices to other users by other ports, or whether the prices are unfair in themselves.


The Commission is of opinion that "the economic value of the of the product/service cannot simply be determined by adding to the approximate costs incurred in the provision of this product/service as assessed by the Commission, a profit margin which would be a pre-determined percentage of the production costs.  The economic value must be determined with regards to the particular circumstances of the case and take into account also non-cost related factors such as the demand for the product/service."


"As a consequence, finding a positive difference between the price and the approximate production costs exceeding what Scandlines claims as being a reasonable margin, would not necessarily lead to the conclusion that the price is unfair, provided that this price has a reasonable relation to the economic value of the product/service supplied."


In conclusion, "the Commission considers that there is insufficient evidence to conclude that the prices charged by HHAB are unfair/excessive and thus constitute an abuse within the meaning of Article [102] of the Treaty…"


2.3.2      China


It is advisable that the above non-cost related factors such as the demand for the product/service should also be on the list in order to assess whether the selling price of the product in question is within the "normal range".  Especially in the pharmaceutical industry, it should not be regarded as excessive pricing if the patients would like to pay higher prices for some specific drugs which they think are more effective from medical perspective.


2.4  Comparison between the selling price of the product in question in different areas


2.4.1      EU


In AKK/LAA V[12]case, the Latvia Competition Council found that the rates applied by AKK/LAA V (a collective management organization handling copyright for musical works) in Latvia were higher than those applied in Estonia and, in most cases, higher than those charged in Lithuania.  The Latvia Competition Council, having recourse to the purchasing power parity index ("PPP index"), also found that the rates payable in Latvia exceeded the average level of those charged in those other Member States by 50% to 100%.


By decision of 1 December 2008, the Latvia Competition Council imposed a fine on the AKKA/LAA for abuse of a dominant position as a result of the application of excessively high rates.


Per the request for a preliminary ruling from the Augstākā tiesa, Administratīvo lietu departaments (Supreme Court, Administrative Cases Division, Latvia), the Court of Justice rules that:


"… it is appropriate to compare its rates with those applicable in neighboring Member States as well as with those applicable in other Member States adjusted in accordance with the PPP index provided that the reference Member States have been selected in accordance with objective, appropriate and verifiable criteria and that the comparisons are made on a consistent basis.  It is permissible to compare the rates charged in one or several specific user segments if there are indications that the excessive nature of the fees affects those segments."


The Court of Justice also rules that "the difference between the rates compared must be regarded as appreciable if that difference is significant and persistent.  Such a difference is indicative of abuse of a dominant...".


2.4.2       China


The Medicine Price Guidance also provides that selling prices of the product in question in different areas should also be considered as one of the factors in order to assess whether the prices are fair.


2.5  Comparison between the selling price of the product in question now and in the past


2.5.1      A relatively new case in the UK


A recent case regarding "unfair pricing" in the UK is Pfizer v Competition and Markets Authority[13].  In accordance with the Decision by the Competition and Markets Authority ("CMA") on 7 December 2016, the CMA found inter aliathat (i) Pfizer’s supply prices to Flynn; and (ii) Flynn’s selling prices, for the capsule form of the drug phenytoin sodium, which is used to treat epilepsy, were excessive and unfair. 


In an appeal, the Competition Appeal Tribunal on 6 June 2018 upheld the CMA’s findings that the relevant markets were (i) as regards Pfizer, the manufacture of Pfizer-manufactured phenytoin sodium capsules that are distributed in the UK; and (ii) as regards Flynn, the distribution of Pfizer-manufactured phenytoin sodium capsules in the UK; and that Pfizer and Flynn each held dominant positions in their respective relevant markets. 


However, the Competition Appeal Tribunal set aside the CMA’s findings on abuse (and any consequential findings, including penalties), on the basis inter aliathat the CMA had erred in its reliance on the Cost Plusapproach by which it found that Pfizer’s and Flynn’s prices were excessive because they materially exceeded their respective costs plus a reasonable rate of return.


2.5.2      China


In accordance with its administrative decisions [2017] No. 1[14]and No. 2[15], China’s NDRC is of the opinion that the concerned companies have abused their dominant positions and sold raw material medicines at unfairly price - the selling prices were 19 times higher than in the previous year - under the circumstances where the costs and demand of the downstream companies were basically stable, the prices charged by the dominant concerned companies were obviously beyond "the normal range". 


3     Conclusion


It should be noted that a dominant undertaking which defeats a competitor because of its superior economic efficiency should not be condemned.  Therefore an undertaking that wins business on the merits, whether dominant or not, must be allowed to do so.


The conduct of a dominant company must however be prohibited where effective access of actual or potential competitors to supplies or markets is prevented or eliminated as a result of such conduct whereby the dominant company is likely to be in a position to profitably increase prices to the detriment of consumers.  The identification of likely consumer harm can rely on qualitative and, where possible and appropriate, quantitative evidence. 


As far as the pharmaceutical industry is concerned, like other industries, there are so many reasons which could result in the high prices and/or "excessive prices": huge amount of R&D expenses, relatively long R&D period, etc. 


In order to assess whether the prices charged by the dominant undertakings are "excessive/unfair", one and/or more of the above methodologies in Item 2inter alia, could be used considering the specific circumstances on a case-by-case basis.  It could be, however, from the previous decisional practices, that competition authorities from time to time adopt rather a formalistic (as opposed to an economic-based) approach to the application of competition laws. 


Without doubt if the intellectual property rights are not fully protected legally, it would be less likely for the pharmaceutical companies to have and maintain the motivation to develop and produce more new drugs.  If it were the case, at the extremes, there would be no new drugs in the future, not to mention life-saving drugs at excessive prices.  This is apparently a different issue which is not discussed here in this article. 


In reality it is said that an arrangement has been made with respect to the concerned issue in the movie.  In other words, it is said that the compromise regarding the issue, which is between the protection of the intellectual property rights enjoyed by the dominant pharmaceutical companies which charge "excessive prices" and the unaffordability of the patients who are dying to survive or just want to live a dignified life, is kind of obtained in the interests of both sides.


Against the backdrop of China’s medical reform, on the one hand, China’s pharmaceutical companies are granted discretional rights to decide the prices of the pharmaceutical products manufactured by themselves in accordance with Advice on Promoting Drug Price Reform; on the other hand, China’s competition law enforcement authorities have investigated a few pricing cases regarding abuse of dominant position, including in the pharmaceutical industry (please see also Item 2.5.2), therefore, it is advisable that pharmaceutical companies in China, especially those with dominant positions, should step by step establish, develop and improve their internal compliance scheme, including but without limitation to the sales pattern, pricing policy, etc. from China’s competition law’s perspective by considering the factors listed under Provisions against Price Fixing and the Medicine Price Guidance, etc. in order for the selling prices of the products not to be beyond "the normal range".


In the meanwhile, for overall compliance purposes of the undertakings with or without dominant positions, in addition to the competition legal provisions, such other laws and regulations as the Price Law, anti-commercial bribery laws and regulations, etc. should also be abided by.




[1]The relevant news is accessible at http://www.gov.cn/xinwen/2018-07/18/content_5307223.htmas of 20 July 2018.

[2] This is also acknowledged in paragraph 25 of the Priority Guidance.

[3]Case 27/76 United Brands v Commission ([1978] ECR 207).

[4]The price charged by UBC to its customers in Germany (other than in Scipio Group), Denmark,  the Netherlands and the BLEU are considerably higher, sometimes by as much as 100%, than the prices charged to customers in Ireland and produce for it a substantial and excessive profit in relation to the economic value of the product supplied. The significance of it is accentuated by the fact that there is a 20 to 40% difference between the price of Chiquita and unbranded bananas, even though the quality of the latter is only slightly lower than that of labeled banana and by the fact that the price of unbranded bananas of similar quality sold by its principle competitors is lower even though their undertakings are running at a profit.

[5]Paragraph 250, Case 27/76 United Brands v Commission ([1978] ECR 207).

[6]Paragraph 251, Case 27/76 United Brands v Commission ([1978] ECR 207).

[7]Case 26/75 General Motors Continental NV v Commission ([1975] ECR 1367).

[8]Case 226/84 British Leyland v Commission ([1986] ECR 3623).

[9]Paragraph 252, Case 27/76 United Brands v Commission ([1978] ECR 207).

[10]Paragraph266, Case 27/76 United Brands v Commission ([1978] ECR 207).

[11]COMP/A.36.568/D3 – Scandlines Sverige AB v Port of Helsingborg.

[12]Case C- 177/16, Autortiesību un komunicēšanās konsultāciju aģentūra/Latvijas Autoru apvienība v Konkurences padome.

[13]Case 1276/1/12/17 Pfizer Inc. and Pfizer Limited v Competition and Markets Authority. The judgment is accessible at http://www.catribunal.org.uk/files/1275-1276_Flynn_Judgment_CAT_11_070618.pdfas of 19 July 2018.


[15]The content is accessible at http://www.ndrc.gov.cn/xzcf/201708/t20170815_861782.htmlas of 19 July 2018.




* The author, Ai Ping BAO, is counsel at CMS, Shanghai Office.  Ai Ping has been providing advice for both Chinese companies and international companies on corporate and commercial transactions as well as on competition and compliance issues for more than twenty years.  


Tweet Like Email LinkedIn
There are no comments for this journal entry. To create a new comment, use the form below.
    Enter your information below to add a new comment.
Author:   
Email:    (optional)
URL:    (optional)
Content:  
Code: *
    
  Comment Moderation Enabled
Your comment will not appear until it has been cleared by a website editor.
The Compliance Reviews COPYRIGHT © 2013-19 All Rights Reserved. Supported by International Risk and Compliance Association and International Risk and Compliance Institute Limited. 沪ICP备10034943号-8

31010502002477