Acting legally, even within the specific framework of regulatory procedures, is not necessarily a defense to antitrust allegations of abuse of dominance. That’s the clear–and perhaps startling– message from the European General Court’s July 2010 judgment in AstraZeneca v. European Commission.

The decision confirmed the European Commission’s (EC) 2005 ruling that AstraZeneca, a pharmaceutical company, had abused its dominant position in the market for proton pump inhibitors (PPIs), drugs used to combat conditions such as ulcers and acid reflux. The court also upheld a EUR52.5 million fine imposed on AstraZeneca (AZ).

“The court ruled that a dominant undertaking cannot use regulatory procedures to prevent or hinder market entry for competitors,” says Richard Eccles, a partner at Bird & Bird. “Any such use of regulatory procedures must be related to competition on the merits by the dominant undertaking or otherwise be supported by objective justification in order not to be an abuse.”

Perhaps as significantly, the court also ruled that dominant companies that make misrepresentations to regulators may face antitrust penalties if the misrepresentations have the effect of restricting competition. The liabilities attach even if the regulatory scheme contains its own sanctions for such conduct.

“The court’s reasoning here is a good victory for the commission. It amounts to a statement that abuse of dominance is not a closed category,” says David Marks, a partner at CMS Cameron McKenna.

Questionable Strategy

AZ pioneered the development of PPIs with its introduction of Losec, on which it held a patent, in the late 1980s.

“It was the biggest drug in the world at the time,” Marks says.

Taking advantage of its first-to-market position in PPIs, AZ held a dominant position in Belgium, The Netherlands, Sweden, Denmark, the U.K. and Germany, where it had a market share of 55 percent to 100 percent through most of
the 1990s.

Naturally, the generic drug manufacturers had their eyes on the market, eagerly looking forward to the expiration of the Losec patent. Under European rules, new entrants seeking approval to market their drugs could rely on the pharmacological and toxicological tests and clinical trials filed by AZ to show that their products were essentially similar to the original and therefore eligible for marketing authorization.

Realizing this, AZ ceased marketing Losec capsules in Denmark, Norway and Sweden and began selling Losec tablets instead. Simultaneously, the company deregistered the marketing authorizations for the capsules.

“Because the generics could rely on the clinical trials for the capsules only while the authorizations existed, the deregistrations prevented AZ’s competitors from using its original tests as benchmarks for their own authorizations,” Eccles says.

European rules also allow patent holders to apply for a supplementary protection certificate (SPC) extending the validity of their patents for five years. The term is limited to the lesser of five years from patent expiration and 15 years from the first European marketing authorization.

In its SPC application for Losec, AZ claimed March 1988 as the first marketing authorization date, but the EC proved that France had issued an authorization in 1987.

“This resulted in AZ gaining an additional period of protection for Losec in some countries and excluding the possibility of generic competition for a period of several months longer than was justified under the SPC system,” Eccles says.

Following complaints from two generic manufacturers in 1999, the EC began investigating AZ’s patent management strategies between 1993 and 2000. In 2005, the EC decided that both the deregistration of the marketing authorization and the misrepresentation of the first authorization date constituted abuse of dominance and imposed fines of EUR60 million. AZ appealed to the European General Court.

Competitive Conduct

On appeal, AZ argued that abuse of dominance rules should not force the company to perpetuate its marketing authorizations in aid of its competitors.

But the court reasoned that the deregistrations were “not based on the legitimate protection of an investment designed to contribute to competition on the merits, since AZ no longer had the exclusive right to make use of the results of the pharmacological and toxicological tests and clinical trials.”

AZ also hadn’t established the deregistrations were either necessary or useful to market the Losec tablets and promote consumer conversion to tablets.

“The upshot is that there was no objective justification for the conduct,” Eccles says.

However that may be, the practical implications are significant.

“The ruling suggests that pharmacuetical patent holders may be under a duty to maintain their marketing authorizations, and that goes quite far in terms of requiring you to help your competitors,” says Joanna Goyder, a barrister at Freshfields Burckhaus Deringer.

To be sure, AstraZeneca doesn’t stand for the proposition that dominant companies are prohibited from using regulatory processes to protect their market position.

“But the judgment makes it clear that dominant companies must be careful in their approach to the regulatory process,” says Matthew Hall, a partner at McGuire Woods.

For example, the mere fact that AZ applied for the SPCs did not make its conduct abusive. But misleading regulators regarding the date of the “first marketing authorization” took the company’s conduct outside the realm of legitimate competition on the merits.

“The submission to the public authorities of misleading information liable to lead them into error and therefore to make possible the grant of an exclusive right to which an undertaking is not entitled, or to which it is entitled for a shorter period, constitutes a practice falling outside the scope of competition on the merits which may be particularly restrictive of competition,” the court stated.

Neither the misrepresentation nor the withdrawal of the marketing authorizations, then, was in keeping with “the special responsibility of dominant companies not to impair, by methods falling outside the scope of competition on the merits, genuine undistorted competition.”

Widespread Effect

While AstraZeneca directly concerns the pharmaceutical market, it could well affect conduct in other regulated industries, particularly where innovation and patents are significant competitive factors.

“The technology sector, for example, is one area where regulatory procedures and intellectual property rights play an important role,” Goyder says.

What is clear is that the commission regards the abuses revealed in AstraZeneca seriously. The commission’s press release when it imposed the EUR60 million fine emphasized that it had taken the novel features of the case into account as a mitigating factor.

“Firms should be aware that considerably higher fines can be expected in similar cases in the future,” Goyder says.

AZ has appealed to the European Court of Justice.