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Napp (OFT, CAT & EWCA)

Napp Pharmaceutical Holdings Limited v Director General of Fair Trading
CAT judgment (155 pages, PDF) of 15 January 2002
Court of Appeal judgment (12 pages, HTML) of 8 May 2002 (refusing permission to appeal)
List of case documents from CAT website

Administrative stage
OFT decision (72 pages, PDF) of 5 April 2001

Napp is an early case of abuse of dominant position under the UK Competition Act 1998. The appeals to the Competition Appeal Tribunal and the Court of Appeal left the OFT's original findings largely undisturbed.

The abuses were committed by Napp in its marketing of sustained release morphine, which is used as a painkiller for cancer and other severe pain conditions. Napp was the incumbent in the supply of such products, and had held a patent on its drug MST. The patent had expired in 1992.

There were two separate abuses:

Market definition and dominance

The hospital and community sectors were considered to be distinct markets. A link exists between the two in that, because of referrals and reputation effects, sales in the community sector were largely driven by the availability of the drug in the hospital sector.

Napp was found to have a dominant position in the relevant markets in both sectors.

Exclusionary abuse (predatory pricing)

Napp was found to have adopted a commercial policy in relation to MST which excluded competition in the hospital sector (predatory pricing).

This practice in the hospital sector was found to have effectively denied rivals access to the community sector by virtue of the fact that sales in this sector were driven largely by availability in the hospital sector, because of referrals and reputation effects.

Exploitative abuse (excessive pricing)

In addition, Napp's prices of MST in the community sector were found to be excessive: Napp had engaged in an exploitative abuse.

The OFT decision had put the charge as follows:

203. The prices charged by Napp in the community are excessive. The Director considers that a price is excessive and an abuse if it is above that which would exist in a competitive market and where it is clear that high profits will not stimulate successful new entry within a reasonable period. Therefore, to show that prices are excessive, it must be demonstrated that (i) prices are higher than would be expected in a competitive market, and (ii) there is no effective competitor pressure to bring them down to competitive levels, nor is there likely to be.

The following evidence was brought forward by the OFT to support its conclusion that Napp's prices were excessive:

The CAT judgment comments favourably on the OFT's approach:

391 ... the Director's starting point, as stated in paragraph 203 of the Decision, seems to us to be soundly based in the circumstances of the present case.

392. Measuring whether a price is above the level that would exist in a competitive market is rarely an easy task. The fact that the exercise may be difficult is not, however, a reason for not attempting it. In the present case, the methods used by the Director are various comparisons of (i) Napp's prices with Napp's costs, (ii) Napp's prices with the costs of its next most profitable competitor, (iii) Napp's prices with those of its competitors and (iv) Napp's prices with prices charged by Napp in other markets. Those methods seem to us to be among the approaches that may reasonably be used to establish excessive prices, although there are, no doubt, other methods.

After a review of Napp's arguments, the CAT judgment states:

396. We therefore conclude that no serious criticism can be made of the detail of the price comparisons relied on by the Director.

397. In our view those comparisons, taken together, amply support the Director's conclusions that Napp's prices in the community segment were, during the period of the infringement, well above what would have been expected in competitive conditions. ...

The CAT summarises its findings as follows:

400. It is therefore established, on the facts of this case, that during the period of infringement Napp charged significantly higher prices in the community segment than in other markets or segments where it faced competition, and has significantly higher margins in the community segment than its most profitable competitor. In addition, Napp faced no competitive pressure on its prices in the community segment, had no patent protection, and enjoyed a market share of 96 per cent throughout.

401. The fact that the Director has not chosen to rely on other comparators such as international price comparisons or returns on capital does not in our view lessen the force of the comparators upon which he does rely. Napp itself has not, in the notice of appeal, put forward any other comparators.

402. We are satisfied that Napp "has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition", so as to satisfy the test of abuse as laid down by the Court of Justice in United Brands at paragraph 249 of its judgment.

403. To put the matter in terms of the principle set out at paragraph 203 of the Decision, in our view the above facts demonstrate (i) that, during the period of the infringement, Napp's prices in the community segment were significantly higher than would be expected in a competitive market; and (ii) that, during the period of the infringement, there was no significant competitive pressure to bring them down to competitive levels, nor was there likely to be over any reasonable time scale.

405. The fact that the Director has not ... precisely quantified by how much he considers Napp's prices in the community segment to be excessive ... does not in our view alter the fact that, measured by a number of different yardsticks which all yield the same result, Napp's prices in the community segment were well above the levels to be expected in conditions of normal competition, during the period of the infringement.

The CAT judgment also clarifies the interactions between price regulation, anti-competitive abuse and exploitative abuse:

421. ... we do not think that arguments based on the PPRS have any application where the lack of competitive pressure on the prices concerned is due, to an appreciable extent, to anticompetitive practices by the dominant undertaking concerned. A key feature of the present case is that Napp's high prices in the community segment do not represent a competitive market outcome but, on the contrary, occur in circumstances where, throughout the period of infringement, Napp's discounts to hospitals substantially hindered competitive entry ...

434. What in our view the Director was really saying to us was that the hospital pricing abuse created the conditions in which the community pricing abuse could take place, which is not significantly different from what is said in the Decision. If, in the defence, the Director intended to go further and say that the excessive pricing in the community segment was abusive only because of Napp's exclusionary conduct in the hospital segment, any such view would have been erroneous in law. Nothing in United Brands suggests that the existence of exclusionary conduct is a prerequisite to a finding that prices are excessive contrary to the Chapter II prohibition.

The Court of Appeal rejected Napp's complaints about the OFT's and CAT's approach to exploitative abuse as follows:

54. The Tribunal held, at paragraph 402, that Napp had made use of its dominant position to reap trading benefits that would not have been available to it in conditions of normal competition, thus fulfilling the test for abuse of market power. We did not understand Napp to disagree with that as a test, but to argue that: 1. No value had been placed on Napp's legitimate brand premium; 2. A pharmaceutical company's prices should be judged according to its profits on its portfolio, in order to encourage R&D; 3. Prices could not be abusive if they complied with the PPRS.

55. The first of these points is obscure. It is far from clear that the Tribunal did acknowledge the legitimacy of any price-increase for brand premium, not least when it was the strength of the brand that was found to be one of the serious barriers to entry into the market.

56. As to the two other points, the Tribunal convincingly demonstrated that the PPRS outcome, precisely because of its "portfolio" base, is irrelevant in the case of over-pricing of any particular product. The need to support R&D is, as far as I understand it, not denied by the Tribunal, but is not accepted by it as a reason for justifying pricing above the competitive level. No authority was put before us that suggested that that view was wrong in law. The Tribunal in its judgement put forward a series of bases and comparisons to demonstrate that prices were seriously above those that would obtain in a properly competitive market. That was a matter for them. No error of law in their process has been demonstrated.

The Court of Appeal judgment was a refusal of permission to appeal, but paragraph 60 of the judgment indicates that it purports to establish a new principle or to extend the present law for the purposes of the practice direction on the citation of authorities: this means that this judgment can be cited on the same basis as a full Court of Appeal judgment.

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Last changed by Franck at 10:50 AM on Wednesday 4 June 2008.

Reference for this page:
Reckon Open "Napp" 2008-06-04T10:50:50
Link within Reckon Open: [[Napp]]