Antitrust Restrictions in Russian Pharma & Medical Device Markets

 

March 3, 2024

BRACE Law Firm ©

 

The largest participants in any trade market set trends and significantly influence the market situation through their actions. However, uncontrolled actions in the market can lead to serious negative consequences. Persons occupying a dominant position or those who have entered into cartel agreements can dictate prices and supply terms, restricting market access for other participants. The pharmaceutical market and the medical device market are no exception.

With the aim of reducing the risks of abuse, antitrust legislation establishes prohibitions and restrictions on monopolistic activities and unfair competition.

In this article, we will examine in detail which prohibitions and restrictions must be observed by participants in the market of pharmaceutical products and medical devices.

Antitrust Prohibitions and Restrictions in the Drug and Medical Device Markets

The basic law regulating the organizational and legal foundations for the protection of competition, and the prevention and suppression of monopolistic activity and unfair competition in the Russian Federation, is Federal Law No. 135-FZ dated July 26, 2006, On Protection of Competition (the "Competition Law", "FZ No. 135-FZ", "Law").

The Competition Law establishes the following prohibitions and restrictions for market participants:

• Prohibition on the abuse of a dominant position;
• Prohibition on agreements and concerted actions that restrict competition;
• Prohibition on unfair competition.

Below, we will consider the essence of these prohibitions and restrictions in detail, as well as the extent to which they concern participants in the market of medicinal products and medical devices.

Prohibition on Abuse of Dominant Position in the Drug and Medical Device Markets

According to Article 10 of the Competition Law, actions (inaction) of an economic entity occupying a dominant position are prohibited if they result in or may result in the prevention, restriction, or elimination of competition and/or infringement of the interests of other persons in the sphere of entrepreneurial activity or of an indefinite circle of consumers.

The concept and signs of a dominant position are contained in Article 5 of the Law. A dominant position is recognized as the position of an economic entity or several economic entities (groups of persons) in the market of a specific product, giving it the ability to:

• Exert a decisive influence on the general conditions of circulation of the product on the relevant product market;
• Eliminate other economic entities from this product market;
• Impede access to this product market for other economic entities.

As a general rule, a position is recognized as dominant if the share of the economic entity in the market of a specific product exceeds 50%. If the share is smaller, the antimonopoly authority must prove the existence of a dominant position using criteria such as:

• The presence of administrative barriers to market entry for potential competitors (for example, the requirement to obtain the consent of the copyright holder to use the results of intellectual activity);
• The presence of significant economic advantages of the economic entity (for example, access to production technologies, capital markets);
• The significance (extraordinary nature) of the costs that the economic entity's counterparties would have to incur in the event of switching to purchasing goods from other suppliers [1].

A position cannot be recognized as dominant if the share of the economic entity in the market of a certain product does not exceed 35%, except for collective dominance or other cases expressly provided for by law.

It should be noted that companies often mistakenly calculate their share based on the volume of the entire range of goods sold or the volume of all revenue received in monetary terms. When assessing the presence of a dominant position, the antimonopoly authority analyzes a specific product on the market of interchangeable goods. Let us explain with an example from the practice of the antimonopoly authority. As established by the FAS Russia (Federal Antimonopoly Service) [2], the product market of dialyzers (medical devices used in the hemodialysis procedure) consists of dialyzers produced by various manufacturers (Gambro, Fresenius, B. Braun, Baxter, Bellco, Nipro, Asahi, and others), and despite differences in consumer properties, they are interchangeable and form a single product market. conversely, certain artificial kidney machines are "closed systems": their use is possible only with bloodlines of a specific manufacturer. Such bloodlines, having no interchangeable goods, form a separate product market. In the latter case, the market share will be calculated based on the sales of the specific product.

Thus, when assessing dominance, one should evaluate both quantitative and qualitative criteria, as well as take into account the specifics of calculating market share applied by antimonopoly authorities.

Dominance in itself is not a violation of antitrust legislation; however, it obliges the economic entity not to abuse its position. The list of actions (inaction) violating the ban on abuse of a dominant position is provided in Article 10 of 135-FZ and includes:

• Establishing or maintaining a monopolistically high or monopolistically low price for a product;
• Withdrawing a product from circulation if the result of such withdrawal is an increase in the price of the product;
• Imposing contractual terms on a counterparty that are unfavorable to them or do not relate to the subject of the contract (economically or technologically unjustified and/or not expressly provided for by federal laws, regulatory legal acts, or judicial acts);
• Economically or technologically unjustified reduction or cessation of production of a product, if there is demand for the product or orders for its supply have been placed, provided there is a possibility for its profitable production;
• Economically or technologically unjustified refusal or evasion to conclude a contract with individual buyers given the possibility of production or supply;
• Economically, technologically, and otherwise unjustified establishment of different prices (tariffs) for the same product, unless otherwise established by federal law;
• Creation of discriminatory conditions;
• Creating obstacles to access to the product market or exit from the product market for other economic entities.

The list of actions is not exhaustive. However, according to representatives of the FAS Russia, the most common violations of antitrust legislation by dominant economic entities in the market of pharmaceutical and medical goods are:

• Imposing unfavorable contract terms on a counterparty;
• Unjustified refusal or evasion to conclude a contract with individual buyers (customers);
• Creation of discriminatory conditions [3].

Let us illustrate with examples from judicial practice:

• Case No. AK/33869. As a result of an analysis of the markets for insulin drugs and drugs, FAS Russia established that a business entity, being a subsidiary of a major Danish manufacturer of these drugs, held a share equal to 100% in the Russian market for these medicinal products. The antimonopoly authority established that the business entity, when selecting distributors, imposed requirements not usually practiced by other manufacturers of similar goods and worked only with five permanent partners. The refusal to conclude a contract with other distributors was motivated by requirements related to reputational risks not provided for by Russian legislation. FAS recognized the actions of the business entity as violations of Article 10 of the Competition Law, expressed in economically unjustified evasion from concluding drug supply contracts and the creation of discriminatory conditions for potential counterparties compared to its permanent distributors. An order was issued to eliminate the violations [4]. Subsequently, FAS Russia identified similar violations in the actions of other large pharmaceutical companies.
• Case No. A40-42997/2014. The antimonopoly authority recognized a violation of Article 10 of the Competition Law in the Company's actions, expressed in an unjustified refusal to conclude a contract with a counterparty for the supply of the medicinal product "Copaxone". FAS Russia issued an order to eliminate the violation and also held the company administratively liable under Part 1 of Article 14.31 of the Code of Administrative Offenses of the Russian Federation (CAO RF) "Abuse of a dominant position in the product market", imposing a fine of 650,000 rubles. Attempts to challenge this decision in judicial bodies, including the Supreme Court of the Russian Federation, were unsuccessful [5].
• Case No. A40-72433/14. A resolution was issued against a Joint Stock Company bringing it to administrative liability for a similar violation in the product market of the drug "Extraneal". The fine amounted to 1,324,272 rubles. Challenging it in court was also unsuccessful [6].

In all the cases considered above, pharmaceutical companies attempted to justify their refusal to conclude a contract by stating that the counterparty did not meet the requirements of American or European anti-corruption legislation (FCPA and UKBA), to which foreign companies are subject. It should be noted that both FAS Russia and researchers of this topic acknowledge that the requirements of foreign and domestic anti-corruption legislation are not identical [7]. However, in the opinion of the antimonopoly authority, pharmaceutical companies use this merely as a pretext for the illegal selection of distributors, during which they violate Russian legislation on the protection of competition [8].

Prohibition on Agreements Restricting Competition

In accordance with Part 1 of Article 11 of the Competition Law, agreements between competing economic entities (i.e., between economic entities selling goods or purchasing goods on the same product market) are recognized as a cartel and are prohibited if such agreements lead to or may lead to:

• Establishing or maintaining prices (tariffs), discounts, allowances (surcharges), and/or markups;
• Increasing, reducing, or maintaining prices at auctions;
• Division of the product market based on territory, volume of sales or purchases of goods, assortment of goods sold, or composition of sellers or buyers;
• Reduction or cessation of the production of goods;
• Refusal to conclude contracts with certain sellers or buyers.

Such agreements are also called "horizontal agreements". At the same time, an agreement is understood as an arrangement in written form contained in a document or several documents, as well as an arrangement in oral form (Clause 18 of Article 4 of Law No. 135-FZ).

One of the most frequently encountered violations of this rule in the market of medicines and medical devices is bid rigging. Let us illustrate with an example from judicial practice.

In Case No. A55-30553/2017 [9], FAS Russia recognized the existence of a cartel collusion between LLC "F" and OJSC "N" at state tenders for the supply of medicinal products and medical devices aiming to maintain prices for them during more than 400 auctions totaling over 400 million rubles. The fact of collusion was established based on the aggregate of the following evidence:

• Coincidence of the user account strictly used to prepare applications on behalf of both firms;
• Use of identical IP addresses for submitting applications, price offers, and signing contracts;
• Offering goods with identical trade names in applications;
• Use of each other's funds to pay for security;
• Purchasing goods from each other for supply to customers within the framework of contract execution.

LLC "N" was held administratively liable under Part 1 of Article 14.32 of the CAO RF "Conclusion of an agreement restricting competition, implementation of concerted actions restricting competition, coordination of economic activity", and a fine of more than 85 million rubles was imposed. The court reduced the fine to 4,208,045.25 rubles, but the rest of the antimonopoly authority's decision could not be successfully challenged. Furthermore, the case materials were transferred to the Ministry of Internal Affairs of Russia to consider initiating a criminal case under Article 178 of the Criminal Code of the Russian Federation "Restriction of Competition".

In Case No. A67-4316/2019, the antimonopoly authority concluded that a cartel existed in the actions of several pharmaceutical companies based on the following signs:

• Formal participation in auctions: the price reduction in 140 auctions ranged from 0.5 to 2.9%, while in auctions where other economic entities participated, the reduction reached significant values;
• Use of a single set of IP addresses, phone numbers, and email addresses for submitting applications to participate in auctions;
• Existence of stable economic ties: a unified accounting department and tender department, location at the same address.

Without disputing the factual circumstances, the companies cited actual control by the same persons. However, they failed to prove in court that they belonged to the same group of persons [10].

Another type of prohibited agreement is vertical agreements. A "vertical" agreement is an agreement between economic entities, one of which acquires the product and the other sells the product (Clause 19 of Article 4 of Law No. 135-FZ). In fact, vertical agreements represent agreements between economic entities at different levels of the technological cycle. Agreements between a manufacturer and a distributor of medicines and medical devices can be classified as such.

In accordance with Part 2 of Article 11 of the Competition Law, "vertical" agreements between economic entities are prohibited if:

• They lead to or may lead to the establishment of the resale price of the product, except for the case when the seller establishes a maximum resale price for the buyer;
• Such agreements provide for the buyer's obligation not to sell the product of an economic entity that is a competitor of the seller.

Let us illustrate with an example from judicial practice. In Case No. A40-27528/2019, a business entity applied to the antimonopoly authority with a statement regarding the conclusion of an anti-competitive agreement between the manufacturer and packers of the medicinal product "Sprycel", aimed at selling the drug through a limited circle of persons at knowingly higher prices. FAS Russia did not see signs of a violation of antitrust legislation and refused to initiate a case [11].

The business entity appealed to the court with a demand to recognize the refusal as invalid. The appellate court indicated that the concluded agreement granting rights to package and subsequently sell the specified medicinal product in Russia creates obstacles to the free purchase of the specified product by a wide range of entities and, as a consequence, leads to maintaining prices for the product. It obliged FAS Russia to reconsider the decision.

Vertical agreements may be recognized as admissible if the share of each of the economic entities in the product market of the given product does not exceed 20 percent (Part 2 of Article 12 of Law No. 135-FZ). In addition, as a general rule, other agreements, with the exception of vertical ones, are prohibited if it is established that such agreements lead to or may lead to a restriction of competition. In particular, agreements:

• On imposing contractual terms on a counterparty that are unfavorable to them or do not relate to the subject of the contract (unjustified demands for the transfer of financial funds, other property, as well as consent to conclude a contract conditional upon including provisions regarding goods in which the counterparty is not interested, and other demands);
• On economically, technologically, and otherwise unjustified establishment of different prices (tariffs) for the same product;
• On creating obstacles for other economic entities to access the product market or exit from the product market.

Prohibition on Unfair Competition in the Medical Goods Markets

Regardless of position and market share, unfair competition is prohibited for all economic entities.

Unfair competition is understood as any actions of economic entities (groups of persons) that are aimed at obtaining advantages in carrying out entrepreneurial activity, contradict the legislation of the Russian Federation, customs of business turnover, requirements of integrity, reasonableness, and fairness, and have caused or may cause losses to other economic entities (competitors) or have inflicted or may inflict harm on their business reputation (Clause 9 of Article 4 of Law No. 135-FZ).

The law establishes several types of prohibitions on unfair competition:

• Prohibition on discrediting (dissemination of false, inaccurate, or distorted information that may harm the business reputation of a competitor or cause them losses);
• Prohibition on misleading;
• Prohibition on incorrect comparison;
• Prohibition on the acquisition and use of exclusive rights to means of individualization for the purposes of unfair competition;
• Prohibition on the illegal use of results of intellectual activity;
• Prohibition on creating confusion (by copying, imitation, etc.);
• Prohibition on the illegal receipt, use, or disclosure of commercial or other legally protected secrets.

More details about the essence of these prohibitions can be found in our article on this topic [12].

As judicial practice shows, the following manifestations of unfair competition are most frequently encountered in the market of medicines and medical devices:

• Illegal use of an invention, the copyright holder of which is another company, in the production of a medicinal product [13];
• Registration of a trademark solely for the purpose of ousting a competitor from the market of the corresponding product and/or using the already established reputation of their product [14];
• Use of packaging in production and sales that is similar to the packaging of a medical device produced by a third party [15].

Let us give an example from judicial practice. In Case No. A40-2379/2021 [16], a business entity was found guilty of violating Article 14.5 of the Competition Law, expressed in introducing into civil circulation the medicinal product for medical use "Drastop", produced using an invention patented by another person. The patent holder did not give permission for its use. An order was issued to eliminate the violations, and an administrative case was initiated under Article 14.33 of the CAO RF "Unfair Competition". The fine under this rule can reach 500,000 rubles, and in cases of illegal use of the results of intellectual activity — a revenue-based fine of up to 0.15 of the amount of revenue from the sale of the product, but not less than 100,000 rubles.

It should be noted that the law prohibits any other forms of unfair competition. Thus, in Case No. A40-263871/2022, the distribution of letters about the impossibility of joint operation of medical equipment with consumables not approved by the manufacturer of this equipment was recognized as unfair competition [17].

Competition in the Pharma and Medical Device Markets

To prevent violations, market participants need to develop and implement antitrust compliance. This is a set of legal and organizational measures aimed at complying with the requirements of antitrust legislation and preventing its violation.

It should be noted that this term is not used in the Competition Law. According to Article 9.1 of 135-FZ, in order to comply with antitrust legislation and prevent its violation, an economic entity has the right to organize a "system of internal compliance with the requirements of antitrust legislation". This system, in essence, represents antitrust compliance (hereinafter we will use this term). Its organization is a right of the economic entity; however, its presence will allow reducing the risks of violations and ensuring competition.

To organize antitrust compliance, the economic entity adopts an internal act (internal acts). The specified internal acts, in aggregate, must contain:

• Requirements for the procedure for conducting an assessment of risks of violating antitrust legislation;
• Measures aimed at reducing the risks of violating antitrust legislation;
• Measures aimed at monitoring the functioning of the antitrust compliance system;
• The procedure for familiarizing employees with internal acts;
• Information about the official responsible for the functioning of the antitrust compliance system.

FAS Russia has developed recommendations regarding the content of these acts [18]. Moreover, the company has the right to send these acts to FAS Russia for verification. Within 30 days from the date of their receipt, the antimonopoly authority gives a conclusion on their compliance or non-compliance with the requirements of antitrust legislation.

Information on the application of antitrust compliance is posted by the company on its website on the Internet in Russian.

However, the implementation of antitrust compliance is insufficient to ensure fair competition and prevent violations when interacting with other market participants. For companies occupying a dominant position in the market of medicines or medical devices, FAS Russia recommends additionally developing and applying commercial policies [19].

A similar requirement is contained in the Code of Good Practice in the Pharmaceutical Industry (hereinafter referred to as the "Code"), developed by the Working Group under the auspices of the Health and Pharmaceuticals Committee of the Association of European Businesses [20]. According to clause 4.2.1 of the Code, commercial policy must include:

• Criteria for selecting distributors;
• Procedure and deadlines for the submission of documents by a distributor for making a decision on concluding a contract or refusing to conclude a contract;
• Procedure and deadlines for making a decision on concluding a contract or refusing to conclude a contract with a potential distributor;
• A standard contract including the main terms of supply of products in relation to which the participant occupies a dominant position in the product market;
• Procedure and mechanism for granting discounts/bonuses;
• General conditions for payment of products;
• Procedure for informing existing distributors about commercial conditions and their changes.

It is also recommended to publish the provisions of the commercial policy on the company's official website and, upon request, inform potential buyers about the current commercial conditions for interaction with buyers.

Summarizing the results, we note that antimonopoly authorities have been actively working in recent years to identify violations in the pharmaceutical market and the market of medical devices. At the same time, sanctions for violating antitrust prohibitions and restrictions are large.

In connection with the above, assessing the company's risks and developing measures aimed at minimizing them is extremely important. In our opinion, such actions should be carried out with the involvement of specialists of financial and legal profiles through a comprehensive assessment of the specifics of doing business, partners, and competitors of the company.

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[1] Clause 8 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated 04.03.2021 No. 2 "On some issues arising in connection with the application of antimonopoly legislation by courts".

[2] Recommendations of the FAS Russia on the development and application of commercial policies by economic entities occupying a dominant position in the markets of medicinal products and markets of medical devices, approved by the Presidium of the FAS Russia on 17.06.2015.

[3] FAS Russia Website.

[4] Decision and order on the case regarding LLC "Novo Nordisk" under case No. AK/33869 dated 06.10.2010.

[5] Resolution of the Supreme Court of the Russian Federation dated 09.11.2015 No. 305-KG15-7123 in case No. A40-42997/2014.

[6] Resolution of the Arbitration Court of the Moscow District dated 23.06.2015 No. F05-6781/2015 in case No. A40-72433/14.

[7] Sokolovskaya E., Glubokaya Yu.: Anti-corruption regulation and antitrust compliance: RF, USA and UK // Competition and Law, 2016, No. 2.

[8] Recommendations on the development and application of commercial policies by economic entities occupying a dominant position in the market of medicinal products and markets of medical devices, approved by the Presidium of the FAS Russia on June 17, 2015.

[9] Determination of the Supreme Court of the Russian Federation dated 14.02.2019 No. 306-AD18-25765 in case No. A55-30553/2017.

[10] Determination of the Supreme Court of the Russian Federation dated 16.11.2020 No. 304-ES20-18368 in case No. A67-4316/2019.

[11] Determination of the Supreme Court of the Russian Federation dated 27.03.2020 No. 305-ES20-4302 in case No. A40-27528/2019.

[12] Unfair competition: methods of legal protection. March 5, 2022. BRACE Law Firm. Source: https://brace-lf.com/informaciya/konkurentnoe/1582-nedobrosovestnaya-konkurentsiya-sposoby-yuridicheskoj-zashchity

[13] Resolution of the Court for Intellectual Rights dated 28.09.2022 No. S01-1616/2022.

[14] Determination of the Supreme Court of the Russian Federation dated 31.07.2023 No. 300-ES23-12603.

[15] Resolution of the Arbitration Court of the Moscow District dated 02.06.2021 No. F05-11931/2021 in case No. A40-71661/20-17-521.

[16] Resolution of the Court for Intellectual Rights dated 07.09.2021 No. S01-1389/2021 in case No. A40-2379/2021.

[17] Resolution of the Arbitration Court of the Moscow District dated 13.11.2023 No. F05-24666/2023 in case No. A40-263871/2022.

[18] Clarification of the FAS Russia dated 02.07.2021 No. 20 "On the system of internal compliance with the requirements of antimonopoly legislation".

[19] Recommendations of the FAS Russia on the development and application of commercial policies by economic entities occupying a dominant position. FAS Russia Website.

[20] Adopted on April 19, 2016.