Clifford Chance

As well as clarifying the law on unfair pricing, this judgment has important implications for the duty of competition authorities to investigate and the evidential burden placed on defendants.

Pfizer's phenytoin capsules had been loss-making for some time. An identical tablet product was marketed at a price at least 30 times higher than the capsule price. Pfizer entered into a deal with a third party (Flynn) and in 2012 the price of the capsules increased by up to 2,600%, although the price was still lower than the tablet price. The CMA began an investigation in May 2013 and in December 2016 issued a judgment finding that Pfizer (and another company Flynn) had abused a dominant position in the manufacture and supply of "Pfizer-manufacturered capsules" by charging excessive and unfair prices. The CMA imposed a record £84.2m fine on Pfizer and a £5.2m fine on Flynn (the statutory maximum) and directed both companies to lower their prices.

Following an appeal by Pfizer and Flynn, in June 2018, the Competition Appeal Tribunal set aside the CMA's decision. It found that the CMA did not correctly apply the legal test for finding that the prices were unfair; it did not appropriately consider what was the right economic value for the product at issue; and it did not take sufficient account of the situation of other, comparable, products, in particular the phenytoin sodium tablet. The Tribunal also set aside the penalties imposed, including the £84.2m fine against Pfizer. The CMA appealed the Tribunal's judgment and Flynn appealed on a narrow issue.

The Court's judgment on unfair pricing

The CMA's key ground before the Court of Appeal, that it had an unfettered discretion to choose between analysing whether a product was unfair "in itself" or "compared to competing products" was rejected. The Court found that these were not true alternatives and, importantly, if a defendant raises other methods or types of evidence then the authority must fairly evaluate them. Two further CMA grounds were rejected, in effect, on the basis that the CMA had attempted to appeal factual findings. While the CMA did succeed on one ground, that there was no requirement in every case to create a hypothetical benchmark price, the Court of Appeal upheld the Tribunal's judgment overall. The CMA has decided not to appeal and the matter will now be remitted to the CMA to reconsider the questions of abuse and penalties in light of both judgments.

A duty to consider prima facie relevant comparators

Before the Court of Appeal, the CMA sought to argue that it did not have to consider prima facie relevant comparables (like the phenytoin tablet) if it had decided that a price was unfair in itself (e.g. on a cost plus basis). The Court of Appeal dismissed that ground of appeal. If an authority chooses one method (e.g. cost plus) and one body of evidence and the defendant does not adduce other methods or evidence, the authority may proceed to a conclusion on the basis of that method/evidence alone. However, if a defendant relies on other methods or types of evidence then the authority must fairly evaluate it. The extent of the duty will be affected by the nature, extent and quality of the evidence adduced by the defendant which has an evidential burden. The authority will always need, at least as part of its duty of good administration, to give some consideration to prima facie valid comparators advanced evidentially by defendants.

A margin of manoeuvre

In cases of excessive pricing there is no single method to establish an abuse and authorities have a margin of manoeuvre in deciding which methodology to use and which evidence to rely upon. The Court also found that the Tribunal was wrong in law to have found that the CMA had in every case to investigate comparators. However, if the CMA rejects the comparators wrongly or without giving appropriate reasons, its infringement decision will be more vulnerable, if and when the matter comes before the CAT on appeal. If the CMA wrongly ignores evidence of comparators, and those comparators turn out to be relevant or important, their analysis will fail at the CAT.

A competition authority is not an ordinary litigant

In making submissions about its burden of investigation the CMA emphasised that it should be governed by the same principles as any other claimant. The Court of Appeal rejected that submission and made clear that the CMA has a duty of sound administration in carrying out its functions in investigating and reaching a decision.

The existence of an appeal tribunal does not affect the CMA's duties

The Court of Appeal found, contrary to the CMA's submissions, that the fact that an appeal tribunal might review the CMA's evaluation is not a factor which affects the nature and extent of the prior duty imposed upon the competition authority.

Implications for the CMA's attempt to narrow the standard of review by the Tribunal

At present, appeals before the Tribunal relating to Competition Act 1998 cases are on a "full merits" basis. In February 2019 Lord Tyrie (the CMA Chair) wrote to the Secretary of State for Business, Energy and Industrial Strategy (here). One of the proposals was to change the full merits standard either to a judicial review standard or a new (implicitly lower) standard of review.

This judgment by the Court of Appeal is likely to further contribute to the debate about what the relevant standard of review should be before the Tribunal. Having considered the key authorities, Green LJ found the following: (1) for a (non-judicial) administrative body lawfully to be able to impose quasi-criminal sanctions there must be a right of challenge; (2) that right must offer guarantees of a type required by Article 6 ECHR; (3) the subsequent review must be by a judicial body with "full jurisdiction"; (4) the judicial body must have the power to quash the decision "in all respects on questions of fact and law"; (5) the judicial body must have the power to substitute its own appraisal for that of the decision maker; (6) the judicial body must conduct its evaluation of the legality of the decision on the basis of the evidence adduced by the appellant; and (7) the existence of a margin of discretion accorded to an authority does not dispense with the requirement for an in depth review of the law and of the facts by the supervising judicial body.

Clifford Chance acted for Pfizer during the investigation; in its successful appeal to the Tribunal; and in its success before the Court of Appeal.