Michael Jürgen Werner and Gabrielle Somers, Competition Law Insight - Drug sales in Germany

7 December 2010

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How are the courts dealing with promotions for prescription medicines?

Germany’s Supreme Court for civil matters has recently handed down a number of judgments which should go some way to clarifying the country’s rules on the lawfulness of rebates offered on the sale of prescription medicines by pharmacies.  However, uncertainties remain, in particular with regard to the legality of discounts offered on internet sales channels by companies based outside Germany.  This article considers the legality of promotions for prescription products and in particular the position of foreign companies making online sales into Germany.

Background

The German market for the sale of prescription pharmaceuticals to end-users is highly regulated.  Pharmacists are subject to a number of specific rules at both the German national and federal state levels.  Of these, the Arzneimittelgesetz (AMG) regulates the price at which such drugs can be sold at the retail level.  One of the purposes of the AMG is to control price competition and other market behaviour of pharmacies in Germany.  Any infringement of its provisions can therefore constitute unfair commercial practices, meaning in turn that any breach of the AMG can lead to a violation of the Unfair Competition Act (UWG).  The Medicinal Products Advertising Act (HWG) imposes a general prohibition on the advertising of prescription medicines to the public.  In addition, the types of promotional activities that can be undertaken by pharmacists are tightly controlled, including the level of discounts which may be offered.  While there is no legal definition of what constitutes advertising in the HWG, the term has been broadly interpreted to cover any kind of inducement designed to promote the prescription, sale, supply or consumption of a pharmaceutical product.

These constraints mean that competition among pharmacies for prescription products is limited.  However, in recent years, the market has been opened up thanks to the advent of distance selling following the judgment of the European Court of Justice in the DocMorris case.  This has exposed traditional pharmacies to a certain degree of price competition from on-line sellers.  As a result, pharmacists have been forced to explore different types of marketing and promotional activities to attract customers.  Up until now, the legality of such practices has not been clear.

Legal challenge

The German courts had developed a large body of jurisprudence on the legality of rebates connected with sale of prescription medicines.  However, much of it was contradictory, resulting in significant uncertainty for pharmacists.  A series of appeals by the German Centre for Protection against Unfair Competition and pharmacists against a number of lower court judgments on discounting practices gave the Supreme Court for Civil Matters (Supreme Court) the opportunity to settle the matter.  Importantly, one of the cases asked the court to rule on whether the country’s strict regulations on the pricing of medicines applied to online sales into Germany by foreign pharmacies.

The cases before the Supreme Court concerned the provision of discount vouchers (of differing value) to customers by pharmacists.  These were given away when customers purchased prescription medicines.  In one case, the pharmacists also offered discount vouchers to customers as a goodwill gesture to make amends for poor service.  According to the various schemes, the vouchers could then be redeemed in the pharmacy where the original purchase had been made or against goods purchased from other participating retailers, depending on the particular scheme in operation.

The defendants argued that, as customers had paid the full price for the prescription goods as regulated by the AMG, there had been no breach of the relevant law.  In addition, as the vouchers could only be used to purchase non-prescription products, there was no question that prescription medicines were being sold at below the required price.

Findings of the Supreme Court

The judgments of the Supreme Court began by analysing what type of practices breached the German laws on pharmaceutical product pricing.  In each case, the Court confirmed that a breach of the AMG occurred not only where prescription goods were not sold at the official price, but also where the receipt of a discount voucher following the purchase of prescription goods in fact entailed other advantages.  Significantly, the Court found that the AMG was also violated in circumstances when goods were sold at the correct price but where, in addition, customers received an advantage that made the prescription product appear cheaper - e.g. where the sale entitled customers to money off future purchases.  On a first analysis therefore, the offering of discount vouchers which could be used towards the acquisition of other products violated the AMG.

However, the Supreme Court found that a second stage of analysis was necessary to determine whether or not there had been a breach of the UWG.  This required the Court to analyse in each case whether there had been a tangible impairment of the interests of competitors, consumers or other market participants.

Here, the findings of the Court turned on the value of the vouchers offered by the pharmacists in the individual cases.  In those instances where vouchers under EUR 0.50 were offered, it found that these had no appreciable effect on the interests of competitors or others active in the market, due to their low value.  This was because, the Court found, the vouchers had no influence on the decisions of customers as to where they chose to purchase their prescription medicines.  Moreover, the Court ruled that the intention of the pharmacists in running such promotional activities was not to restrict competition.  As such, while promotions offering discounts or similar schemes of minimal value in principle broke the strict rules on medicine pricing, the de minimis effect of the incentive meant that there was no negative effect on competition.

In contrast, in those cases where the value of the discount offered was more substantial, the Court took a different view.  In one such case, customers of an on-line pharmacy were offered a EUR 5 voucher by way of an introductory offer the first time they purchased at least two prescription products. The voucher could be used the next time the customer made an internet purchase, but not against a prescribed medicine.  The Court found that this level of inducement was capable of having an adverse effect on competition and in particular on the interests of the pharmacists’ competitors and others on market.  Only where the voucher was for a minimal sum and represented a gesture of good customer relations were such promotions acceptable.

The Supreme Court also considered the role of the HWG, which is intended to ensure that advertising, including promotions, give-aways and discounts, should not influence the customers’ choice of medicinal products.  It found that even where there was an infringement of the price fixing regulations in the AMG, minimal rebates which do not conflict with the HWG are not capable of negatively influencing competition.  In its general consideration of the type of promotions that are permissible, the Supreme Court found that the distribution of small free-samples to customers were allowed, provided these were of a minimal value.  It ruled that with this type of advertising there was no link between the HWG and the AMG.  In contrast, it found that product-specific advertising would always be contrary to the HWG.

Are internet sales by foreign companies also caught?

One of the cases before the Supreme Court concerned internet sales by a Dutch pharmaceutical chain to customers in Germany.  Under the discount scheme, customers purchasing prescription medicines on-line were eligible for a premium worth 3% of the value of the products, amounting to at least EUR 2.50 and with a maximum value of EUR 15 per product ordered.  This premium could be redeemed immediately against the value of the goods ordered or used against future purchases.

While the facts should have allowed the Supreme Court to make a straightforward ruling in line with its other judgments, this case was complicated by the fact that the Supreme Social Court had already examined a similar issue in 2008.  In that case, the Supreme Social Court had held that the restrictions enshrined in German law regarding the pricing of prescription goods were not applicable to goods sold from abroad.  This meant that producers in other EU Member States and importers of their products into Germany were able to determine freely the prices at which they sold prescription medicines.

The Supreme Social Court reasoned that even though the rules on distance selling stipulate that prescription goods may only be sold on-line to customers in Germany if they are sent from a pharmacy registered elsewhere in the EU or EEA, the German law does not prescribe any specific rules on pricing.  As such, the Supreme Social Court took the view that there was no intention on the part of the legislator to adopt special pricing rules for the import of medicines by online pharmacies.

In contrast, the Supreme Court explicitly held that the rules on pricing were applicable to a number of situations where medicines were imported into Germany, for example when they were intended for personal use or brought into the country in very small quantities.  It was therefore only logical to assume that, by extension, the pricing rules should also apply to imports by on-line sellers.

Importantly, the Supreme Court found that for the AMG’s pricing rules to apply, the place of business of the producer or the wholesaler was irrelevant.  In the case before it, the Supreme Court found that there was a sufficient connection to Germany for the AMG to apply.  Significantly, the company was registered in Germany, the medicines had been packaged with German labels and the goods had been imported into Germany under contracts concluded with individuals living there or with German insurance funds.  This weight of evidence thus showed that even in the absence of explicit legal provisions, the facts justified the application of the German rules on pricing and discounts.

The Supreme Court expressed concerns that it would be contradictory were there to be a difference in the treatment of prescription goods sold to German customers based solely on the origin of the goods.  In its opinion, the imposition of the German pricing regime on pharmacists operating in other EU Member States did not entail a restriction of the free movement of goods under the Treaty on the Functioning of the European Union as such measures were justified as a legitimate means of health protection under Article 36 of the Treaty.

In view of the conflicting opinion of the Supreme Social Court, the Supreme Court was unable to make a final ruling on whether the German law applied to online sales into the country by foreign pharmacists.  Instead, the question has now been referred to the Senate Court for a final ruling.

Conclusions

While the recent judgments of the Supreme Court have gone some way to clarifying the types of promotional activities that pharmacists may engage in when selling prescription medicines, there remain a number of grey areas.  In particular, it will not always be clear at what level vouchers or money-off schemes begin to act as an incentive for customers and in turn produce negative effects on the market.  Arguably, the intention of all promotions is to influence the behaviour of purchasers and it may not always be easy for individual pharmacists to determine at what point their practices begin to have a detrimental effect on competition.

The decision of the Senate Court is not expected until late 2011.  Until then, pharmacists based in Germany may be at a competitive disadvantage compared to online pharmacies based elsewhere in the EU.  Whatever the outcome of the ruling, the matter is likely to end up with the European Court of Justice, to decide on the compatibility of the German laws and the EU principles of the free movement of goods.

This article first appeared www.informaprofessional.com/publications/newsletter/competition_law_insight

Michael Jürgen Werner is Managing Partner - and Gabrielle Somers is associate - with Norton Rose LLP’s Brussels Office