Importance of the Draft Model Requirements to Vertical Concerted Actions For the Pharm

Andrii Gorbatenko, associated partner at Legal Alliance Company

On June 30th, 2017, draft Order of the Antimonopoly Committee of Ukraine (the AMCU) “On Approving Model Requirements for Vertical Concerted Actions of Economic Entities on the Supply and Use of Goods” (hereinafter – the Model Requirements) was published for public discussion scheduled for July 7th, 2017.

The Model Requirements is one of the most anticipated documents, since its task is to resolve disputable issues related to violations of competition law in the framework of vertical concerted actions in more detail.

The Model Requirements is of a particular interest for the pharmaceutical market, since both completed AMCU cases and ongoing investigations concern vertical concerted actions in the form of concluding distribution contracts.

Below we provide some information on this issue for readers who are not familiar with it (our remark – due to the efforts of the AMCU, there are fewer such people).

Thus, the Law of Ukraine “On the Protection of Economic Competition” defines different types of activities of market participants that may harm economic competition and, therefore, may lead to the imposition of a fine.

Among other things, such violations include anticompetitive concerted actions. As a general rule, anticompetitive concerted actions are concerted actions that led or may lead to the prevention, elimination or restriction of competition.

In order to give more exact ideas about anticompetitive concerted actions, the legislator provided their approximate list in Article 6 of the Law, as follows:

1. setting of prices or other conditions for the acquisition or sale of goods;
2. restriction on the rate of production, commodity markets, technical and technological development, investment or establishment of control over these;
3. distribution of markets or sources of supply as per the territorial principle, assortment of goods, the volume of their sale or acquisition, as per the group of sellers, buyers or consumers or based on other features;
4. distortion of results of auctions, competitions, tenders;
5. removal from the market of or restriction of access to the market (exit from the market) to other business entities, buyers, sellers;
6. application of different conditions to equivalent agreements with other business entities puts the latter at a disadvantageous position in competition;
7. conclusion of agreements, provided that other business entities undertake additional obligations which by their content or according to commercial and other honest customs in business do not concern the subject matter of these agreements;
8. substantial restriction of competitiveness of other economic entities in the market without objectively justified reasons.

However, realizing that not always the above listed actions can adversely affect the competition in the market, the legislator made exceptions to this rule.

First of all, the legislator has established that this rule does not work in the case of concerted actions by small and medium-sized enterprises with regard to joint purchase of goods if this contributes to the competitiveness of such enterprises.

In addition, the legislator has established exceptions for concerted actions related to the supply of goods, namely the above rule does not apply to cases where the supplier sets the following restrictions on its buyer:

• to use the goods supplied by it or goods supplied by other suppliers;
• to purchase from other business entities or sell other goods to other business entities or consumers;
• to purchase goods that, by their nature or according to trade and other honest customs in business, do not relate to the subject matter of the agreement;
• regarding the formation of prices or other terms of the contract for the sale of the delivered goods to other business entities or consumers.

However, unlike the exception related to small and medium-sized enterprises, this situation is a little more complicated. The legislator had to make an important reservation regarding the application of this exemption. This exemption does not apply if the concerted actions:

• lead to a significant restriction on competition in the whole market or in a large part of it, including monopolization of the relevant markets;
• restrict access to the market for other business entities;
• lead to economically unjustified increases in prices or shortages of goods.

As we can see, the formulation of this clause is very vague, which impairs unambiguous assessment of risks.

The main task of the Model Requirements is to eliminate this vagueness.

Model Requirements establish criteria for vertical concerted actions which are accurately covered by an exception, even if they contain vertical constraints, and therefore can be considered safe.

The following vertical concerted actions related to the limitations listed above are allowed:

1. Concerted actions in which the supplier’s share in the market where he sells the contract goods does not exceed 30%, and the buyer’s share in the market where he buys the contract goods also does not exceed 30%.
2. Concerted actions between the association of economic entities and its participants, or between such an association and its suppliers and if all participants in such an association are retail sellers of goods, provided that the association does not include at least one business entity whose sales volume in Ukraine, taking into account the relations of control, for the last financial year has exceeded the amount equivalent to EUR 25 million determined at the official exchange rate established by the National Bank of Ukraine on the last day of the fiscal year.
3. Concerted actions which include granting or use by the buyer of intellectual property rights, provided that such provisions are not the main subject of such transactions and are directly related to the use, sale or resale of goods by the buyer or its customers.
4. Concerted actions between the contractor and the subcontractor when the subcontractor ensures the production of certain goods exclusively for the contractor in the event that the latter supplies the subcontractor with the technology or equipment that is required for the subcontractor’s production of such goods, with the exception of the obligations for the subcontractor not to do or use his own research and development or in general not to produce goods for third parties.

Also, the AMCU has identified a list of vertical concerted actions, which will always be classified as anticompetitive. In other words, the following is not allowed:

1.  Vertical concerted actions of competing economic entities, except for the case when competing economic entities participate in vertical concerted actions that are not reciprocal (when the supplier simultaneously acts as the purchaser of its buyer, and the buyer as the supplier of its supplier), and at the same time one of the following conditions is met:
2.   The supplier is at the same time a producer and distributor of goods, and the buyer is a distributor who does not compete at the level of the goods production, or
3.   The supplier provides services at various levels of trade, and the buyer operates only in the retail trade market, not competing in the wholesale market where he buys the contract service.

Here the importance of the condition “a” for the pharmaceutical market should be noted, as it removes from the “black list” concerted actions with restrictions between classical distributors and subsidiaries of producers which perform distribution functions. In the course of applying this clause in practice, a controversial situation may arise about whether a pharmaceutical company’s subsidiary in the territory of Ukraine should be considered as a supplier that is also a producer, since, of course, such subsidiaries perform exclusively supply functions. However, if we take into consideration that in accordance with the Model Requirements, the supplier is a business entity, which, taking into account the control relationships, within the vertical concerted actions delivers the contract goods to the buyers for subsequent resale; and if the subsidiary company belongs to the group of companies whose participants are manufacturers, such a subsidiary that exclusively performs supply functions should consider it as a supplier that is also a producer.

2.  Vertical concerted actions with rigid vertical restrictions, namely, the purposes of which directly or indirectly are the following:
3.   Restrictions on the ability of the buyer to set the price of the sale of the contract goods, except for the supplier’s actions to set the maximum or recommended selling price, provided this does not lead to the setting of fixed or minimum selling prices due to pressure by one of the participants of the concerted actions or benefits (incentives) offered by such a participant.
4.   Restrictions on the territory or customers, respectively, within which or to which the buyer can sell the contract goods, without hindering the establishment of restrictions on its location.

The AMCU has provided for several exceptions from this rule. Thus, restrictions on the territory or customers will not be considered a rigid (forbidden) restriction, if the restriction applies to the following:

1.            Active sales by the buyer of the contracted goods to an exceptional group of customers, or within an exclusive territory for which the supplier reserved the right to exclusive sale of the goods or granted this right to another business entity if such restriction does not lead to a reduction in the rate of sales of this product to customers of that buyer;
2.            Sales of the goods to end-users by the buyer engaged in wholesale activities;

III.            Sales of goods by members of the selective system of supply to business entities to which the supplier did not grant the right to resell the goods within the territory fixed by the supplier for the functioning of this supply system;

1.            The ability of the buyer to sell the components of the product supplied to assemble this product to customers who will use them to produce products similar to those manufactured by the supplier;
2.       Active and passive sales of the goods to end-users of the selective system of supply that operate in the retail market, with the exception of the possibility to prohibit a member of the selective system of supply from carrying out activities from a specific place not agreed for this purpose;
3.      Cross-supply between buyers participating in the selective supply system, including between buyers who operate at different levels of trade;
4.       Restrictions in the agreement between the supplier of the components of the product and the buyer which assembles it, the ability of the buyer to sell the components of the product as spare parts to end-users or business entities that provide repair services or other services for the maintenance of the products concerned and that the buyer did not commission the provision of such services concerning its goods.

–          Any direct or indirect obligation not to compete, whose validity is not determined or exceeds five years, unless the obligation not to compete concerns the sale by the buyer of contract goods at the premises and / or within territory owned by the supplier or leased by the supplier from third persons not related to the buyer, provided that the duration of the obligation not to compete does not exceed the period during which the buyer occupies these premises and / or territory.

–          Any direct or indirect obligation of the buyer not to produce, purchase, sell or resell the goods after the termination of the agreement, except for a few exceptions, which we will not mention in order to save space.

–          Any direct or indirect obligation of the participant in the selective system of supply not to sell goods sold under the trademarks of specific economic entities are competitors of the supplier.

Also, the Model Requirements contain the grounds and mechanism for introducing additional cases when the envisaged exceptions do not work, and the concerted actions will be classified as anticompetitive. In such cases, the AMCU undertakes to make separate orders and publish them within 3 days upon the adoption.

In addition to the above, the Model Requirements have made a significant contribution to the conceptual apparatus. Thus, such important terms as “active sales”, “passive sales”, “reciprocal vertical concerted actions”, “selective supply system”, “exclusive supply”, “obligation not to compete”, “competing entity” were defined.

In general, the Model Requirements in many respects repeat COMMISSION REGULATION No. 330/2010 dated April 20th, 2010.

Despite obvious progress in this matter, unfortunately the entire positive effect of the Model Requirements for the pharmaceutical market is significantly counter balanced by the fact that the distribution market for medicines is characterized by a high level of concentration. In Ukraine there are two distributors that have shares of more than 30% each. Almost all suppliers distribute through distributors. Consequently, the safe zone, which is formed based on the Model Requirements, will not cover most drug distribution contracts. Moreover, based on the wording of para 1 of the Model Requirements, such agreements will be very desirable to be approved with the AMCU. In particular, this paragraph establishes that in the event that the concerted actions of business entities comply with the provisions of these Model Requirements, such actions are deemed to be in conformity with the provisions of Section 8, Paragraph 1 of the Law, and the conditions provided for in Section 8, Paragraph 2 of the Law do not apply in this case. Therefore such actions are allowed and do not require the AMCU’s permission. Therefore, it can be concluded that if the concerted actions do not correspond to the provisions of the Model Requirements, such actions are not allowed and require agreement with the AMCU. Thus, distribution contracts with large distributors that contain any restrictions (for example, on the territory) must be agreed with the AMCU.

Legal Alliance Company, founded in 1995, is today one of the leading Ukrainian law firms specializing in legal support to pharmaceutical companies doing business in Ukraine and CIS countries. The Firm advises leading companies working in the industries of pharmaceuticals, medical devices, consumer goods, healthcare, veterinary, cosmetics, parapharmaceuticals, chemistry, biotechnology, agriculture, food & beverages.

For additional information please contact Nataliia Duginova, [email protected], +380 44 425 40 50.

Source: Фармацевт Практик