The Full Court of the Federal Court of Australia has dismissed an appeal by the ACCC against an earlier judgment in relation to pharmaceutical company Pfizer. While the Full Court upheld the single judge decision that Pfizer had not misused its market power or engaged in prohibited anti-competitive exclusive dealing, the Full Court found that Pfizer did have market power in all relevant periods and that it used its market power. These findings when coupled with changes to the law in November 2017, mean that pharmaceutical companies cannot assume that steps taken in the period leading up to the expiry of a patent will not give rise to potential competition law issues and ACCC interest.
Update: On 25 June 2018, the ACCC announced that it has sought special leave from the High Court to appeal the Full Court‘s judgment. In deciding whether or not to grant special leave for the appeal, the High Court will consider whether the appeal raises questions of law that are of public importance. The ACCC stated that it is seeking clarity from the High Court on how to assess anti-competitive purpose, and when a “requirements contract” will amount to exclusive dealing. We will update this webpage with any developments.
In dismissing the appeal on 25 May 2018, the Full Federal Court agreed with the primary judge that the actions taken by Pfizer leading up to the expiry of its atorvastatin patent were not done for an anti-competitive purpose, but rather in recognition of the commercial challenges that Pfizer would face as it moved beyond the expiry of its patent and sought to remain competitive in the market.
While the ACCC lost overall, the Full Court did find in its favour on two points:
- holding that Pfizer continued to hold market power in January and February 2012 in the lead up to and expiry of its patent; and
- that the actions it took in January and February 2012 involved taking advantage of that power.
The finding of continued market power has implications for pharmaceutical companies in considering their strategies in the lead up to and on the expiry of a patent. This is particularly the case given the recent ‘Harper’ amendments to the prohibition on misuse of market power remove the need for the ACCC to establish a proscribed anti-competitive purpose. Also, the ACCC’s exclusive dealing case was only concerned with ‘purpose’ – it did not allege an ‘effect’ (or likely effect) of substantially lessening competition. Going forward, pharmaceutical companies will need to carefully consider both the purpose of any patent expiration strategy and also its effect. Finally, while the Full Court did not overturn the primary judge’s decision with regards to purpose, the history of this matter highlights the danger of documents which do not properly describe the true objectives of the corporation being of interest to the ACCC and, potentially, the basis on which proceedings are commenced.
Pfizer and the drug atorvastatin
From 2000 until 18 May 2012, Pfizer owned a patent (through acquisition of the patentee, Warner-Lambert) giving it rights to exclusively supply the ‘blockbuster’ cholesterol-lowering drug atorvastatin in Australia. In January 2012 atorvastatin was the highest-selling medicine, in terms of volume and value, under the Pharmaceutical Benefits Scheme in Australia. Pfizer’s patent for atorvastatin expired on 18 May 2012.
Pfizer’s commercial strategy to deal with patent expiry
In 2011 and 2012 Pfizer took a number of steps, including a strategy called ‘Project LEAP’, in anticipation of the expiry of the patent. That strategy included:
- the establishment of a direct to pharmacy model in 2011, focusing on the distribution of products directly to community pharmacies;
- the establishment of an accrual fund scheme (AFS) in 2011, whereby a percentage of the price of purchases of Pfizer’s pharmaceuticals (including Lipitor) was credited to an account created for each pharmacy to be rebated on terms which would be announced at a later date; and
- bundling the supply of Lipitor and its own generic Atorvastatin Pfizer to almost all community pharmacies in 2012. The offer tied the rebates that were available from the AFS to the quantity of Atorvastatin Pfizer that the pharmacies purchased.
First instance decision and points of appeal
In 2015, the Federal Court dismissed proceedings by the ACCC alleging that Pfizer had misused its market power and engaged in anti-competitive exclusive dealing for the actions taken by Pfizer in the lead up to the expiry of its atorvastatin patent. The Court’s findings included that Pfizer did not hold market power for the whole of the period in question (from 2012) and that for the period when it did hold market power (2011), the ACCC had not established that Pfizer’s actions had an anti-competitive purpose. The ACCC appealed these market power and purpose findings and also raised an additional 24 grounds of appeal.
Key implications for pharmaceutical companies
The expiry of a patent may not immediately diminish market power
The Full Court decision makes it clear that the impending or recent expiry of a patent will not necessarily result in the company no longer holding substantial market power.
The Court found that while Pfizer may have faced the prospect of significant potential competition in the lead up to the patent’s expiry, this was not enough to diminish Pfizer’s substantial market power to any significant degree as at January and February 2012 (when it was still the only supplier of atorvastatin and first competitor entry would not occur until April 2012). In concluding that Pfizer still held substantial market power in January and February 2012 in the lead up to and expiry of its patent, the Court pointed to Pfizer’s ability to introduce its own atorvastatin generic into the market:
- by means of bundled offers in a manner which gave it a significant commercial advantage over its potential future competitors; and
- without affecting the price of its branded product.
One potential reading of the initial decision was that pharmaceutical companies need not be concerned about sales and distribution strategies in the period leading up to the expiry of a patent, as they would not have substantial market power. The Full Court makes clear that there can still be market power in this period, at least while a pharmaceutical company remains the only supplier of a particular product. While the Full Court said that Pfizer’s market power “probably” subsisted for some time after February 2012 it did not determine whether the power subsisted in the period between March and May 2012 (when the patent expired). In this period, the anticipated launch of atorvastatin by major competitors in June 2012 was becoming more imminent. While not addressed by the Full Court, depending upon the particular product at issue, and potentially also the supplier in question, it is possible that substantial market power could continue to exist in the period just prior to and at the expiration of the patent. In this respect, pharmaceutical companies should not assume that the impending or recent end of a patent is a carte blanche to implement any pricing or tying distribution strategies. They will still need to consider the purpose and/or effect of that strategy in the relevant market.
Commercial strategies for patent expiry – the post-Harper difference
Both the first instance and appeal decisions support the fact that aggressive commercial strategies in the lead up to patent expiry, should not be assumed to have any anti-competitive purpose. The Full Court agreed with the primary judge’s view that Pfizer’s aim in making the bundled offers was not to make it difficult for its competitors to compete, but rather to give Pfizer the opportunity to minimise the erosion of its market share as a result of the loss of its monopoly position.
However, it is important to recognise that the Pfizer case related to conduct that occurred under the old prohibition against misuse of market power, which required there to be a proscribed anti-competitive purpose. Likewise, the ACCC’s exclusive dealing case only pleaded an anti-competitive purpose, not an anti-competitive effect.
Under the new misuse of market power prohibition, the ACCC can bring actions where it believes the conduct had the purpose, effect or likely effect of substantially lessening competition. Also, if the ACCC were commencing proceedings afresh, it might reconsider its decision not to plead an anti-competitive effect. Where there may continue to be market power associated with a patent, it will not be enough for companies to simply ensure that the intentions behind their strategies are legitimate – the likely anti-competitive effects of those strategies must also be considered.
A lucky escape on internal documents?
The ACCC relied on the existence of Pfizer strategy documents which referred to “blocking generics”. These documents no doubt influenced the ACCC in its investigation and decision to ultimately bring proceedings against Pfizer.
Pfizer was fortunate that the evidence of senior executives was able to persuade the Court that these were merely draft documents that were not prepared under instruction by senior management or ultimately provided in any final package to key decision makers. In short, they were able to demonstrate that the documents did not, in fact, reflect the purposes and objectives of Pfizer in implementing its strategy.
However, this case is a reminder of why companies should be careful when creating strategy documents. Companies can proactively deal with the prospect of ACCC scrutiny by ensuring that they carefully articulate their legitimate pro-competitive purpose at the time of adopting major competitive strategies.
The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2018