Increased Leeway for Cooperation between Pharma and Medical Equipment Companies during the Covid-19 Crisis

Competition rules are aimed at safeguarding healthy competition between companies. For more than half a century the EU and its Member States have vigorously defended effective competition by pursuing and sanctioning anti-competitive agreements and abuses of dominant positions. The pharma sector has always been a focus area and increasingly so over the last decade. Prohibited are for example exchange of commercially sensitive information (sale figures, stock levels, production capacity, etc.), agreeing on production quotas, charging excessive prices for certain medical products, etc.

Application of the competition rules are in most EU Member States entirely based on self-assessment where companies have to carry out their own analysis of the legality and risks involved when considering cooperation with competitors or business practices.

None of these basic principles of law have changed. However, what has changed are the factual circumstances. The dramatic changes to supply and demand brought on by the exponential growth in demand for certain medicines and medical equipment needed to treat patients has led to life-threatening shortages that we read about in the newspapers on a daily basis. Other factors exacerbating shortages include massive precautionary stockpiling throughout the distribution chain, the lockdown in factories due to quarantine or confinement measures, logistical issues caused by border closures, export bans, lockdowns in third countries supplying the EU.

A Temporary Framework

Luckily, the existing rules are broad enough to also cater for extraordinary times such as the COVID-19 crisis and both the European Commission as well as the network of European competition authorities (the European Competition Network – ECN) are now explicitly acknowledging that extraordinary times may require the types of cooperation normally caught and sanctioned by the competition rules for the duration of the crisis.

Specifically, the European Commission has issued a Temporary Framework of assessing competition law issues aimed at providing legal certainty for cooperation between, in particular, pharma and medical equipment companies. The focus of the Temporal Framework is to facilitate the supply and adequate distribution of essential scarce products and services during the COVID-19 crisis.

First of all, the European Commission has set out criteria for cooperation aimed at overcoming critical supply shortages, including for cooperation such as

• Increased use of specialization agreements (i.e. company A does only masks, whilst company B does only protective clothing to increase and optimize output), including:
  • reduction of production of non-essential products,
  • coordinated switches in production lines
  • Re-allocation of stocks
• Exchanges of commercially sensitive information to allow for coordination of production, stock management and, potentially, even joint distribution.

Such measures would, however, need to be:

1. designed to increase output in the most efficient way to address or avoid a shortage of supply of essential products or services;
2. temporary in nature (i.e. to be applied only as long there is a risk of shortage or in any event during the COVID-19 outbreak); and
3. not exceeding what is strictly necessary to achieve the objective of addressing or avoiding the shortage of supply.

If cooperation is encouraged and/or coordinated by a public authority it would be looked upon favourably.

Very importantly, cooperating companies must document all exchanges, and agreements between them and be prepared to make them available to the European Commission on request.

Second, the European Commission has allocated significant resources to informally answer questions relating to cooperation between pharma and medical equipment companies. This includes a dedicated email address for queries and setting up a dedicated website where information on the treatment of different schemes can be accessed easily.

Please note that such informal guidance will not give formal legal certainty but the European Commission will be unlikely to investigate or pursue cooperation that has been the subject of such discussions. This is of course subject to the facts provided remaining unchanged and the informal guidance having been followed.

Third, the European Commission will in certain important cases even be prepared to issue ad hoc “comfort letters” providing formal legal certainty to important cooperation schemes.

Which authority will deal with cases

Whilst the European Commission has not explicitly mentioned this, it is likely that it will give priority to cases which have an impact on three or more Member States (the 3+ rule) . Cases where the impact is more local will likely have to be dealt with by individual members of the ECN. This said, it is likely that the ECN Members will seek inspiration from this guidance in dealing with local cases.

Revisiting the old notification system to increase legal certainty during the crises

To assist businesses, the EU and the ECN members have recently made it clear that they are prepared to, in practice, revert to the old clearance scheme for cooperation or practices abandoned 16 years ago to give companies legal certainty that they are not infringing competition rules when working together. This will allow companies worried about grey zones to get speedy assessment of a contemplated cooperation or business practice.

In order to facilitate a swift follow-up by the competition authorities, companies are asked to provide upfront as much detail as possible on the initiative, including:

1. the firm(s), product(s) or service(s) concerned;
2. the scope and set-up of the cooperation;
3. the aspects that may raise concerns under EU antitrust law; and
4. the benefits that the cooperation seeks to achieve, and an explanation of why the cooperation is necessary and proportionate to achieve those benefits in the current circumstances.

In short, what the competition authorities are asking for is reminiscent of the notification system and it will be important that companies put together a solid dossier with sufficient information and analysis of possible competition issues, including an analysis of why the cooperation is either not caught by the competition rules or merits an exemption.

Increased focus on infringements

Should companies forge ahead and infringe the rules, the competition authorities have also made it clear that they will be particularly vigilant towards collaborations that exploit the current serious situation. For example, the European Commission has stated that it “…will not tolerate conduct by undertakings that opportunistically seek to exploit the crisis as a cover for anti-competitive collusion or abuses of their dominant position (including dominant positions conferred by the particular circumstances of this crisis) by, for example, exploiting customers and consumers (e.g. by charging prices above normal competitive levels) or limiting production to the ultimate prejudice of consumers (e.g. by obstructing attempts to scale up production to face shortages of supply).”

Such cases will be given investigative priority and it must be expected that sanctions will be very severe as exploitation of the crisis will likely be deemed an aggravating factor.

Tips and practical advice

If you have a need to cooperate with competitors or organize your distributors differently to, for example, avoid shortages or switch production to goods in high demand, and feel that certain of the terms are in a grey zone, you can contact either your local competition authority or, if an EU-wide issue covering a number of EU Member States, the European Commission to obtain more legal certainty.

To speed up the process, the following will be essential

• You need to prepare the request carefully, providing full facts and competition law analysis
• Time spent in preparation will lead to speedier responses and more favorable outcomes
• The case handlers will be under significant pressure to act quickly so well-crafted applications will be looked at favorably
• Keep cooperation limited in time and scope to what’s necessary to solve the challenges

And please remember: price gouging will be monitored so (i) seek to avoid unjustified price increases on scarce essential products, for example by agreeing on maximum prices with distributors and (ii) create internal documentation explaining why a price increase is necessary.

In the spirit of solidarity with clients and contacts in these extraordinary times, Bird & Bird’s competition law experts will, at no cost, guide you with your preliminary competition law queries by phone/email. You will find their contact details at this link here.