Parallel trade and free movement

The issue of parallel trade has long been controversial. This is not surprising in view of the astonishing figures in the UK; a recent study revealed that the shipment of bona fide pharmaceutical drugs into Britain from Europe may cost the UK pharmaceutical industry more than £770 million a year and lead to some products selling for as much as 15% below the price of nonparallel traded goods.¹

In essence, a parallel trader exploits price differentials between markets. It buys goods in a low price country outside the official supply chain, then resells these goods in a higher price country — at a profit. This occurs to goods traded across the European borders to the rest of the world, and also within the EU where significant variations in pricing and regulation persist between member states.

In Zino Davidoff SA C414/99, the trading took place between the UK and Singapore. A UK manufacturer had entered into an exclusive distribution arrangement whereby it sold its products to a distributor in Singapore. A third party attempted to import those stocks back into the UK. If Davidoff had given its positive consent for this to occur, the court said that it would have renounced its right to rely on its trademark in the UK to prevent the goods coming in. No consent had been given so Davidoff was able to stop the parallel trade.

The business of parallel traders is, on one level, protected inside the European Economic Area (EEA) of the EU. The principle of free movement of goods entrenched in the European Treaty makes it difficult for anyone to stop trading of a product between member states. Once placed on the market, the proprietor has exhausted his rights and cannot prevent resales of his branded goods.

Glaxo Group's rights were found to have been exhausted in Glaxo Group v Dowelhurst [2004] EWCA Civ 290. The English Court of Appeal decided that goods sold to France and destined for Africa had been legitimately resold in Spain. Glaxo Group had exhausted its rights in its patent and could not prevent any further trade in its products. To be able to do so would enable it to partition national markets and thereby restrict trade between member states.

Inside Europe, a balance must be struck between fostering competition and enabling businesses to protect their product and their goodwill. The case above strikes the right balance by only allowing a company to restrict movement of its goods when they are first placed on the market. Other treaty articles in place to protect competition are Articles 81 and 82. However, they are not applied strictly and the courts have recently shown great leniency towards the practices of pharmaceutical companies.

In Bayer (Adalat)C2/01 P (2004), the drug in question was on sale at a considerably lower price in Spain and France, and parallel traders were reaping the benefits by exploiting the product in the EEA in parallel to Bayer. To counteract this effect, Bayer restricted the stock it made available to meet only the domestic needs of those countries, thus reducing the scope for parallel imports. The European Commission found that Bayer's conduct amounted to an agreement to restrict competition. However, the European Court of Justice (ECJ) disagreed. The genuinely unilateral act by Bayer to restrict supply was not caught by the competition provisions.

In Syfait v GlaxoSmithKIine C53/03 (AG) (2005) GSK stopped supplying products to wholesalers in Greece to prevent parallel trade. The Advocate General held that a refusal to supply would not be an abuse of a dominant position (as prohibited by Article 82) even if it did prevent parallel trade, if the decision could be justified. He viewed pharmaceuticals as being in a distinct position because of (a) the intervention by member states in price setting; (b) the fact pricing of products must reflect the investment in R&D and (c) the end beneficiary of parallel trade is unlikely to be the ultimate consumer but the purchaser (e.g., the public sector) who will often have had a say in the pricing.

Surely any measure aimed at preventing competition in a 'single market' must be unlawful? It is true that variations of pricing are accentuated in the pharmaceutical sector by the high level of government involvement in price-fixing and profit capping. But there is no legal basis for the justification of conduct which would otherwise amount to abuse, simply by reason of a distortion of the market particular to an industry. As part of the bigger picture, these decisions should be analysed in the context of another strand of ECJ rulings that have decided public bodies (e.g., national health services) and government ministries should be immune to competition law.² This means that public bodies can act in such a way which could amount to an abuse of their dominant position, regardless of the effect on competition. This is unlikely to have a direct impact on parallel trade: what is more likely is that those decisions in combination with Bayer and Syfait will result generally in a more restrictive market place for the individual trader.

1. Funded by ESRC and led by Dr Stefan Szymanski of Imperial College, London 'Parallel trade, price discrimination, investment and price caps', May 2005.

2. See, for example, FENIN Case T-319/99 (awaiting final decision from ECJ) and AOK Bundesverband Case -264/01.

Rachel Witt is a solicitor in the corporate team of Mills & Reeve, UK.