This article was written by Matt Sherman, Peta Stevenson and Caroline Coops.
The Federal Court has again found against the ACCC in a misuse of market power case, this time involving allegations that Pfizer abused its incumbent position as a patent holder to deter competition from generics when its cholesterol drug Lipitor came off patent.
The decision adds to a list of failed proceedings brought by the ACCC under section 46, and will attract particular scrutiny in light of the Harper Review’s recommendation to amend the section. However, the case differs from many of these previous decisions in that the ACCC succeeded in proving the normally problematic element of ‘taking advantage’ of market power, but failed to prove that Pfizer was acting for the purpose of deterring or preventing other suppliers from engaging in competitive conduct. Similarly, the ACCC’s exclusive dealing case against Pfizer fell over due to a failure to prove that Pfizer was acting for the purpose of substantially lessening competition.
Interestingly, even if the Harper Review's recommended changes to section 46 were in place, the ACCC’s case would not have succeeded. The ACCC has advocated for:
- the removal of the 'take advantage' limb, and
- replacing the current purpose test with a requirement that the relevant conduct have the purpose, effect or likely effect of substantially lessening competition in a market.
The draft Harper Report has made a similar recommendation, but with the addition of a defence. However, as in this case the ACCC failed to establish that Pfizer was acting with the purpose of substantially lessening competition (and did not allege that Pfizer's conduct had this effect), the same outcome would have resulted even under a revised section 46.
We believe the case highlights the difficulties in successfully establishing that conduct amounts to a misuse of market power, and that the amendments proposed by the Harper Review will not make it any easier to do so. However, we also consider it appropriate for section 46 to set a high bar, as any lowering of that bar risks inhibiting vigorous competition and innovative responses to evolving market conditions.
The ACCC commenced proceedings against Pfizer in early 2014, alleging that it had misused its market power and engaged in exclusive dealing as a result of steps taken to minimise loss of market share to generics following the expiry of its atorvastatin patent. Pfizer had the exclusive right to market atorvastatin until the patent’s expiry on 18 May 2012. Its atorvastatin drug Lipitor enjoyed PBS sales valued at $700 million per annum, making it the highest selling prescription pharmaceutical prior to expiry of the patent. In anticipation of intense competition from generics, Pfizer took a number of steps to minimise what it expected to be a dramatic decline in revenues:
- Direct-to-Pharmacy restructure — in January 2011, it restructured marketing and distribution arrangements across its whole business so that it could sell directly to pharmacies rather than through wholesalers. This allowed it to assume greater control over the terms and packages offered to pharmacies on its branded products (which pharmacies were required to stock) and the new generic products which it proposed to introduce as products came off patent.
- Rebate funds — as part of the marketing restructure, it established “accrual funds” for each pharmacy, crediting these funds with notional rebates in relation to each of its drugs (5% of the price in the case of Lipitor). The Lipitor rebates could not be accessed until it came off patent but funds started accruing in the accounts over the 14 month period between January 2011 and May 2012.
- Discount and rebate package — in January 2012, it commenced selling its own generic version of atorvastatin (Atorvastatin Pfizer) and offered a discount and rebate package to pharmacies. Under the offer, pharmacies could access some or all of the rebates which had been accumulating if they purchased 75% of their anticipated generic requirements from Pfizer over a 6, 9 or 12 month period. They were also offered ongoing discounts on both Atorvastatin Pfizer and Lipitor based on:
The discounts were tied to a minimum requirement that pharmacies purchase 75% of their anticipated generic supply from Pfizer over a 6, 9 or 12 month period. If pharmacies did not accept the offer before August 2012 they would not receive any accrued rebates, and payments would be delayed if they accepted after 24 February 2012 (which was 5 days after Pfizer’s first competitor was lawfully able to advertise).
- the length of their supply contract; and
- the percentage of their atorvastatin sales constituted by Atorvastatin Pfizer.
- Bulk sell-in — for pharmacies participating in the offer, Pfizer shipped the entirety of the relevant 6, 9 or 12 month supply of its drugs in advance, before Lipitor came off patent. It was alleged that this was designed to reduce the shelf space available for other generic versions of the drug.
The ACCC’s case
The ACCC contended that Pfizer had substantial market power in the Australia-wide market for the supply of atorvastatin to, and acquisition of atorvastatin by, pharmacies because no other person could lawfully promote or supply within that market until 1 April 2012 (when the first generic manufacturer was permitted to sell atorvastatin as a result of a separate court settlement). It alleged that, by implementing the measures outlined above, Pfizer took advantage of its market power with the substantial purpose of deterring or preventing other suppliers from engaging in competitive conduct. It also alleged that the discounts and rebates offered on Atorvastatin Pfizer and Lipitor constituted exclusive dealing, with the purpose of substantially lessening competition in the national atorvastatin market.
The Court’s decision
As we previously reported in brief, although the ACCC established that Pfizer had a substantial degree of market power until late 2011, and took advantage of that power to implement some of the disputed initiatives, it failed to persuade the Court that Pfizer did so with the purpose of deterring or preventing competitive conduct. A similar conclusion was reached in relation to the alleged purpose of substantially lessening competition in the exclusive dealing case.
In general terms, Flick J was persuaded that Pfizer took the disputed steps to defend its market position from vigorous competition from other generic manufacturers, which had strong existing relationships with pharmacies. This reasoning depended heavily on an evaluative assessment of the evidence of the various witnesses, with his Honour observing that the Pfizer executives were ‘persons of commercial integrity who sought to do no more than give an honest account of the “purposes” or “reasons” behind the decisions being taken.’
A “legally incoherent” case
One striking aspect of the Court’s decision was its conclusion that the ACCC’s case was fatally undermined by a pleading issue. Justice Flick accepted Pfizer’s submission that critical parts of the ACCC’s statement of claim were “legally incoherent” because it had put its case on the basis of the cumulative effect of all of the initiatives described above from 16 January 2012 onwards, rather by reference to the individual steps taken throughout 2011 and 2012. This rendered evidence about the purposes of the direct-to-pharmacy and rebate fund initiatives irrelevant — because each of the elements of s 46 had to co-exist at the time of contravention, a contravention could not be made out by reference to conduct which took place in 2011. Notwithstanding this conclusion, Flick J proceeded to consider the merits of the case on the basis that factual findings might be of assistance in an appeal.
Misuse of market power
On the central issue of misuse of market power, Flick J accepted the ACCC’s submission that the relevant market was the Australia-wide wholesale market for atorvastatin (rather than Pfizer’s preferred wholesale market for pharmaceutical products and over-the-counter products). His Honour held that Pfizer had a substantial degree of market power in that market from December 2010 through to 2012 but that it no longer possessed substantial market power during the period from January 2012 through to May 2012 — as the expiration of the patent drew closer Pfizer’s market power was ever-declining as a result of emerging competition from generics.
During the period in which Pfizer had market power, the Court held it had taken advantage of its power by restructuring its marketing arrangements and by establishing the accrual fund scheme — it could not have implemented either of those changes in the absence of the substantial market power which it possessed. On the other hand, his Honour held that Pfizer had not taken advantage of its market power by offering the discount and rebate package to pharmacies from January 2012.
Importantly, the Court found that Pfizer did not take advantage of its market power for the proscribed purpose of deterring or preventing a person from engaging in competitive conduct. His Honour held that Pfizer’s conduct was pursued for the purposes of ensuring it remained a supplier of pharmaceutical products and that it remained a competitive supplier in the atorvastatin market following the expiry of the patent. This conclusion was dependent on a fact-intensive evaluation of the various witnesses’ evidence, which could provide difficult to displace on appeal. In arriving at this conclusion on purpose, Flick J considered each of the steps taken by Pfizer in detail, before concluding that each was undertaken for a legitimate reason, rather than for the proscribed purpose of deterring or preventing competitive conduct.
His Honour noted that documents relied upon by the ACCC may have inferred the existence of an anti-competitive purpose, but that each inference did not survive the evidence given by the witnesses in Court. His Honour also noted that in some cases the documents were not prepared by the key decision makers, and that it was their purposes in acting as they did that informed his view of Pfizer's purposes.
The explanation provided by Mr Latham … provides, only by way of further example, reason for caution in too readily drawing inferences from documents drafted in some cases by unknown persons and divorced from the input of those responsible within Pfizer for making decisions. On many occasions the author of the documents upon which cross-examination proceeded was unknown – the author may have been an officer of Pfizer or (indeed) Sinapse. But it was not the subjective purpose of any individual author which mattered; it was the purpose of those who were responsible for making the ultimate decision that mattered. The views being expressed by those various authors may be a source upon which the views of those responsible may be questioned. Ultimately, however, it was the purpose of the decision-maker that remains of primary importance for the purposes of s 46(1).
Flick J held that:
- The Direct-to-Pharmacy restructure was explained by a desire to establish close relationships with pharmacies and create greater opportunities for Pfizer to sell its own generic products to them.
- The bulk sell-in strategy was directed at protecting Pfizer’s own commercial position rather than deterring or “blocking” competitors — Pfizer implemented the changes to secure an advantage in an adjustment of PBS pricing of atorvastatin (which depended on stock levels) and to secure the long-term support of pharmacies.
- The discount and rebate strategy was implemented by Pfizer so as to permit supply from another supplier, following a decision to lower minimum purchases from 100% of generic supply to 75% of supply. Justice Flick also rejected a submission that the early acceptance deadline was designed to lock down supply arrangements prior before pharmacies could adequately assess offers from supplies, in light of the fact that the deadline was moved back until 5 days after the first generic competitor could legally advertise.
Taken together, the various measures disclosed no proscribed purpose. Instead, they were adopted as a defence to what Pfizer anticipated would be intense competition from generics.
Pfizer had conceded that it offered and gave discounts on Lipitor on the condition that pharmacies would not, except to a limited extent, re-supply atorvastatin acquired from another supplier (“a “condition” within the scope of section 47).
As a result, the live issues were:
- whether the rebates and Atorvastatin Pfizer discounts were imposed on a relevant condition of non-acquisition or re-supply; and
- whether Pfizer had the purpose of substantially lessening competition.
On the issue of conditionality, Flick J held that although the rebates and Atorvastatin Pfizer discounts might have had the practical consequence that pharmacies might be less inclined to purchase generic atorvastatin from another supplier, no condition was imposed on the pharmacies which inhibited their freedom to acquire from those suppliers.
On the issue of purpose, Flick J held that Pfizer’s purpose in allowing the conditional Lipitor discounts and rebates was to maximise its sales and ensure its own corporate survival in light of the strong relationships between generics and pharmacies, and that the ACCC had failed to establish a purpose of substantially lessening competition. His Honour observed that the Commission’s failure to direct attention to the state of competition in the market “with or without” Pfizer’s impugned conduct contributed to this finding.
The future of section 46
The Court’s decision in ACCC v Pfizer is of particular interest in light of the ongoing debate over the future of section 46, both in the context of the Harper Review and Senator Xenophon’s Competition and Consumer Amendment (Misuse of Market Power) Bill 2014, which seeks to empower courts to order divestiture for contraventions of s 46.
The Harper Review
The difficulties experienced by the ACCC in establishing breaches of section 46 have led it to repeatedly call for changes to the section. Most recently, in its submission to the Harper Review it argued that the ‘taking advantage’ limb of the provision — which it succeeded in making out in Pfizer — was being applied in a way which stripped the provision of its effectiveness and noted that it had ‘not lost a section 46 case in the courts on the basis that it [had] failed to establish an anti-competitive purpose’. While the ACCC observed that there had been occasions where difficulty in establishing anti-competitive purpose resulted in investigations being abandoned, in calling for an effects test in section 46 it placed particular emphasis on previous decisions such as ACCC v Cement Australia and Rural Press Limited v ACCC, which it said exemplified the ‘narrow interpretation’ of the ‘taking advantage’ requirement.
The Harper Review’s draft report has embraced the ACCC’s recommendation that the “taking advantage” element be removed and an effects test be introduced into section 46, in large part due to the perceived difficulties associated with the ‘taking advantage’ requirement. Under the Harper Review’s draft proposal, the current test would be abandoned in favour of a test prohibiting corporations with a substantial degree of market power from engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition. The breadth of the proposed provision would be somewhat reduced by a defence which would carve out conduct that would represent a rational business decision or strategy by a corporation which did not have a substantial degree of market power, and that is in the long term interests of consumers.
The Harper Review’s proposal — which to a large extent rests on the perceived deficiencies of the ‘take advantage’ requirement — may be revisited in light of the decision in Pfizer, particularly given the findings of the court in relation to the alleged purpose of substantially lessening competition (seen by some as an easier test to make out than the ‘effects’ element). A fuller discussion of the proposal is contained in the submission of the Law Council of Australia’s Competition and Consumer Law Section to the Harper Review.
Senator Xenophon’s private members bill
The decision is also of interest in the context of debate over Senator Xenophon’s Competition and Consumer Amendment (Misuse of Market Power) Bill 2014, which was introduced on 6 March 2014, and was the subject of an adverse report by the Senate Economics Legislation Committee released on 26 February 2015. The Bill seeks to introduce a provision which would allow the Court to order that a corporation which contravenes section 46 reduce its power in, or share of, the relevant market. A similar proposal was considered by the Harper Report and rejected in its draft report on the basis that existing remedies were sufficient.
Litigating section 46
As well as his comments about the nature of the ACCC’s pleaded case, Flick J stated at a number of points in his judgment that the ACCC had in its reliance on documentary evidence failed to satisfactorily displace the evidence called by Pfizer on purpose.
These comments highlight the difficulty in locating the purpose of a corporation for engaging in conduct. However, they also serve as a reminder that litigation under the CCA – while complex and involving a degree of abstraction in concept – is subject to the same fundamental requirements as any other type of litigation:
- the case must be properly pleaded, with judges regularly urging for intelligible, concise pleadings; and
- relevant and cogent evidence must be tendered to prove all of the necessary facts.
The ACCC has stated that it is considering the judgment, with any appeal to be filed within 21 days. The hearing of a further prosecution under section 46, against VISA in relation to dynamic currency conversion services, is due to commence on 31 August 2015.