Bayer fine sets an alarming precedent for manufacturers

Date: 21/03/1996

By Ian S. Forrester QC

THE competition rules of the EC Treaty are unique in that they are enforced directly by the European Commission, which has the duty of interpreting the rules, receiving complaints and notifications, condemning infringements and imposing fines, which have reached as high as 30 million ecu.

Since the Commission's powers are so great, lawyers and companies are naturally anxious about the risk of transgressing the law.

The Commission has just taken a decision which may significantly increase the challenge of deciding whether conduct is safe or unsafe.

The basic prohibition of the competition rules of the EC Treaty is contained in Article 85(1). It applies when three conditions are satisfied: the case involves an agreement or concerted practice between two or more businesses, a restriction of competition and an effect on trade between member states.

The clearest infringement occurs when a firm forbids a trader who buys goods in one member state from exporting them to another member state. Why should this be so condemnable? Because the competition rules in Europe have two purposes: first, to prevent cartels, to protect the weak against the economically brutal and to pursue the same 'anti-trust' goals as American law; and second, to create a common market by deterring contractual obstacles to trade between member states, which should have disappeared at the same time as governmental hurdles to trade between member states.

Lawyers and economists have frequently criticised the Commission's preoccupation with hindrances to trade between member states, but almost every year there is at least one such case in which a fine is imposed.

Until now, the conventional wisdom has been that truly unilateral behaviour cannot infringe Article 85(1). Increasing your price to make more profit, cutting your price to make competitors suffer, launching an advertising campaign to recruit more customers: none of these actions involves an agreement between two companies. (Dominant companies must be wary of Article 86, which condemns abuses of dominant position, but only a few enterprises are in that fortunate situation.)

Any well-trained lawyer would therefore advise a client that there is no infringement of EC competition law rules in merely declining to supply an unwelcome customer. In other words, a refusal to supply does not constitute a breach of Article 85(1).

But why should an order be unwelcome? Because for many products, the price in one member state, such as Portugal, is cheaper than the price in another, such as Germany. Suppliers hate to see middlemen buying large quantities in a member state where prices are low and making a big profit by reselling in a member state where costs, profits or prices are higher.

Firms may not welcome this 'parallel trade', but ferocious fines await those who forbid it. The company must not enter any agreement whose terms are “we will supply you only if you promise not to export”.

When a parallel trader asks for supplies, the salesman may be pleased to accept his order, since the salesman's commission reflects the quantity he sells, not where the goods are consumed. More likely, however, the salesman will refuse the order or agree to supply only a small amount. The trader may know why his request is being refused, but as long as the refusal is unilateral, Article 85(1) is not infringed, because there is no agreement.

The remarkable thing about the recent decision to fine Bayer is that, for the first time, the Commission has taken a bold step towards making it easier to find an agreement, even where the company has not clearly imposed an illegal condition on its would-be customers.

Pharmaceutical prices are effectively determined by governments through price control or health service reimbursement levels. Pharmaceutical firms can therefore readily find that orders for a medicine in Greece may be five times the consumption of all the patients in Greece. If they accept the orders, German or Danish patients will still pay the same price, but pharmacists, wholesalers or the parallel traders will make more profit.

Bayer strongly disliked parallel trade. That is not illegal. It held internal meetings to discuss how to prevent parallel trade. That is not illegal either. Bayer's employees knew they could not put in writing that the company refused to supply firms which exported its products. They believed that if they tersely reduced or refused export orders, they would be safe.

But wholesalers believed that Bayer considered they should not export. The Commission investigated - probably acting upon a wholesaler's complaint - and found a large number of embarrassing internal documents which revealed Bayer's desire to prevent parallel trade, and boldly contended that the actions of Bayer's representatives constituted the agreement necessary to find a breach of Article 85(1). The customers implicitly 'agreed' to Bayer's behaviour by continuing to place orders, said the Commission. This was enough. Bayer was fined 2,000,000 ecu.

The case will be of enormous importance for those who buy or sell goods at different prices in different member states.

The article reflects the personal views of the author.