Swiss Federal Supreme Court: Tightened Competition Law Practice on Recommended Resale Prices – Everything Unclear?

In its decision dated 4 February 2021, the Swiss Federal Supreme Court qualified Pfizer’s non-binding resale price recommendations for Viagra, a medication used to treat erectile dysfunction, as inadmissible resale price maintenance in the form of a concerted practice that is subject to direct fines, contrary to the Swiss Federal Administrative Court. The judgement already attracted a lot of attention and raises the question of whether and, if so, how resale price recommendations may still be admissible under Swiss competition law. This article provides a summary and critical assessment of the decision. Companies with distribution activities or independent distributors in Switzerland should in any case review their practice regarding their resale price recommendations.

Background

The pharmaceutical companies Pfizer, Eli Lilly and Bayer issued resale price recommendations for the drugs Viagra, Cialis and Levitra electronically to the points of sale via an external database operator. The database contained bar codes of the respective products. When the corresponding articles were scanned, the recommended resale price automatically appeared in the cash register system of the respective retailer on a daily basis. A deviation from the public resale price recommendations delivered directly to the point of sale (POS) was possible in principle, but would have meant an additional effort from the distributors through their own calculations and an adjustment of the software. According to the calculations of the Swiss Competition Commission (COMCO), which were confirmed by the Swiss Federal Supreme Court, almost 90% of pharmacies (89.3%) and more than 80% of self-dispensing doctors (81.7%) followed the resale price recommendations for several years.

The present case has a long procedural history and is still not closed even after more than eleven years:

• By decision of 2 November 2009, the COMCO fined the three companies Pfizer, Eli Lilly and Bayer. It found that the publication of and the adherence with public resale price recommendations for their erectile dysfunction drugs in the previous form and to the previous extent constituted an unlawful agreement to compete within the meaning of Art. 5 para. 1 in conjunction with Art. 5 para. 4 of the Swiss Cartel Act (Cartel Act). Furthermore, it prohibited the continued publication of the public resale price recommendations.

• The Swiss Federal Administrative Court upheld the appeals filed by the pharmaceutical companies against the COMCO’s decision. Referring to Art. 3 para. 1 Cartel Act, it found that the act was not applicable in this case. However, the Swiss Federal Supreme Court overturned this ruling and referred the matter back to the lower court. In its new ruling B-846/2015 of 19 December 2017, the Swiss Federal Administrative Court again upheld the appeals. It did not consider the resale price recommendations issued by Pfizer to be anti-competitive agreements within the meaning of Art. 4 para. 1 Cartel Act, but as admissible price ceilings with a neutral effect on competition (see consideration 10 of its ruling).

• In its decision 2C_149/2018 of 4 February 2021, published on 21 April 2021, the Swiss Federal Supreme Court once again upheld the COMCO’s decision against Pfizer and found unlawful vertical price fixing in the form of a concerted practice subject to direct fines within the meaning of the Cartel Act. For the concrete assessment of the fine against Pfizer, it referred the matter back to the lower court.

Non-binding resale price recommendation as unlawful concerted practice

Since a competition agreement in the sense of an agreement could be ruled out from the outset, the Swiss Federal Supreme Court mainly dealt in its decision with the question of whether the resale price recommendation issued by Pfizer qualified as anti-competitive agreements within the meaning of Art. 4 para. 1 Cartel Act in the form of a concerted practice. In the view of the Swiss Federal Supreme Court, this requires cumulatively (i) a concertation, (ii) a corresponding effect of such concertation (market conduct/degree of adherence), (iii) a causal connection between the concertation and the concertation’s effect and (iv) a restriction of competition by object or effect. It considered these elements to be given in the case at hand despite the fact that Pfizer explicitly stated that the resale price recommendations were non-binding.

• With regard to the concertation, the Swiss Federal Supreme Court generally stated that this does not require a concurrence of wills. A bilateral or multilateral exchange of information was also not required. What was necessary was minimal communication in the sense of mutual contact. Unilateral information exchange can be sufficient if «competitors» adapt their market conduct in accordance therewith. A joint plan was not necessary (see consideration 3.4.2 of the decision).

  In the present case, the Swiss Federal Supreme Court considered the required minimum communication to be given due to the design of the electronic system, with which the recommended resale prices automatically appeared in the retailers› cash register system on a daily basis. Also relevant was the fact that the conduct took place on a daily basis over months and years and that some dealers – reinforcing the concertation – asked Pfizer to communicate non-binding resale price recommendations (see consideration 5.2 of the ruling).

• With regard to the effect of the concertation, the Swiss Federal Supreme Court generally held that adherence to the recommended resale prices alone can suffice for the assumption of a concerted practice, but was not sufficient in every case. Conversely, it was not necessary that pressure or other elements were exerted in addition to price adherence in order for this requirement to be met. An overall assessment was necessary (see consideration 4.5.1 of the ruling).

  In the present case, according to the Swiss Federal Supreme Court, the degree of price adherence of the distributors based on the calculations of the COMCO was around 90% and over 80%, respectively, and thus above the threshold of 50% that shall be decisive in the Swiss Federal Supreme Court’s view. This level of price adherence includes distributors that did not strictly follow the resale price recommendation but only selectively granted rebates on the recommended resale price, i.e. in less than half of the individual sales, rather than general or systematic discounts (see consideration 5.3 of the ruling).

• The Swiss Federal Supreme Court considered the causal connection between the concertation and the success of such concertation to be directly proven on the basis of the price communication that had lasted for several years (consideration 5.4.1 of the decision). In addition, it referred to the following two facilitations of proof (consideration 5.4.2 of the ruling): In the case of proven concertation, it is presumed that the companies involved also took the exchanged information into account when determining their market conduct. In addition, uniform behaviour serves as an indication for a concerted practice that shall be considered proven if it results in market behaviour that does not correspond to «normal market conditions«. In the present case, the non-normal market conditions shall have been given by a high number of distributors selling the drugs at the same, comparatively high price.

• With regard to the test of harm to competition by object and effect, the Swiss Federal Supreme Court stated apodictically that the concerted practice in question had the object and effect of harming competition. Price agreements were objectively capable of causing a restriction to effective competition and in the case at hand the uniform pricing made competition impossible or more difficult (see consideration 5.5 of the ruling).

Simulated recommended resale price as illegal vertical price maintenance subject to direct fines | No justification

In the opinion of the Swiss Federal Supreme Court, vertical resale price recommendations aim at influencing the retailers in their price setting. In the present case, it was irrelevant to the Swiss Federal Supreme Court that the price recommendations were explicitly labelled as «non-binding» because it found a concerted practice that was also objectively capable of restricting competition. Due to the high degree of price adherence, the Swiss Federal Supreme Court concluded that there was a price fixing agreement within the meaning of Art. 5 para. 4 Cartel Act, which it subsequently qualified as per se significant in view of its case law in the Gaba toothpaste case (see also here). In the view of the Swiss Federal Supreme Court, the economic efficiency reasons put forward by the respondent (prevention of double marginalisation and reduction of transaction costs) could not justify the restriction of competition. It upheld the decision of the COMCO and referred the matter back to the lower court for the assessment of the fine to be imposed on Pfizer.

Critical appraisal

The decision creates legal uncertainty and, if interpreted broadly, would lead to a de facto ban on price recommendations

With its decision, the Swiss Federal Supreme Court creates considerable uncertainty regarding the question of whether and under which circumstances resale price recommendations are still allowed in a vertical distribution context in Switzerland.

If the decision was interpreted broadly, it led to a de facto ban of (non-binding) resale price recommendations in a distribution context since once such recommendations have been announced, it is no longer in the hands of the manufacturers to what extent the dealers follow them. In this respect, the Swiss Federal Supreme Court has clarified that it does not matter whether the resale price recommendations are declared as non-binding or whether they have the effect of resale price maintenance (RPM) because of exerting pressure or the setting of incentives. In the light of the Swiss Federal Supreme Court’s ruling, there is now an increased competition law risk for manufacturers when they communicate resale price recommendations (and also for the distributors when they voluntarily adhere to such recommendations).

The decision is to be interpreted narrowly | Certain non-binding price recommendations are still permissible despite the Swiss Federal Supreme Court’s tightened practice

In our view, the Swiss Federal Supreme Court did not intend to ban resale price recommendations in a vertical distribution context in general. There are good reasons to interpret the decision narrowly. For example, the Swiss Federal Supreme Court differentiated the relevant conduct in this case from a «real» resale price recommendation (consideration 6.4.6 of the decision) and repeatedly pointed out that the conduct in question in this case involves the automated and daily updated communication of resale price recommendations at the POS of the distributors, which were directly applied as resale prices in the POS system without additional effort by the respective distributor. According to the Swiss Federal Supreme Court, the case cannot be compared to non-binding resale price recommendations in catalogues, for example, because there it is not the case that the manufacturer repeatedly communicates the price recommendations to the retailer via the POS system (see consideration 5.6. of the ruling). Depending on their design, resale price recommendations are therefore, in our opinion, still possible and permissible also in the light of the Swiss Federal Supreme Court’s ruling.

The decision leads to practical challenges for manufacturers and distributors

The further practice of the COMCO and the courts will hopefully soon lead to a reduction of the legal uncertainty created by the Swiss Federal Supreme Court and show the exact limits of permissible conduct. In this regard, a quick publication of specific guidance is required. Otherwise, there is a risk that companies will abandon this useful and, from the consumer’s point of view, beneficial instrument due to risk considerations.

In many industries, the prohibition of an automated adoption of resale price recommendations without a suitable substitute would also be problematic from a practical point of view, inefficient, price-increasing and technology-hostile. While large distributors are better positioned to cope with the administrative burden associated therewith due to economies of scale, smaller distributors may reach their limits and risk dropping out of the market. The Swiss Federal Supreme Court hardly intended to initiate market concentration as a result of its decision.

The decision also raises questions from a dogmatic point of view

In addition to the more practical issues mentioned above, the decision also raises questions from a dogmatic standpoint. For example, the question arises to what extent the concept of a concerted practice is justified in a vertical distribution context because unlike competitors in a horizontal relationship manufacturers and distributors must necessarily enter into more or less intense contact with each other in connection with their distribution relationship. It is telling that the Swiss Federal Supreme Court refers in its judgement regarding the concerted practice exclusively to European decisions that were issued in the context of horizontal cartels. Furthermore, the criterion of the mere degree of price adherence is highly unsatisfactory from the point of view of the manufacturers, as they lose influence on this and are not allowed to influence the retailers› price setting. According to European regulation, distributors can avoid antitrust liability by neither exerting pressure nor setting incentives with regard to price adherence to resale price recommendations. So what should a manufacturers in Switzerland do if they notice that distributors are increasingly adhering to their recommended resale prices? Intervene? Distance themselves from their own resale price recommendations? Is price monitoring and thus the consistent and regular monitoring of the distributor’s setting of resale prices permissible or even required for reasons of competition law compliance? Unfortunately, there are no considerations on this in the decision.

Finally, it also seems questionable that the Swiss Federal Supreme Court itself summarily dismissed the question of the justification for economic efficiency reasons pursuant to Art. 5 para. 2 Cartel Act. As far as can be seen, it did so without the necessary factual basis. In its decision of 19 December 2017, the Swiss Federal Administrative Court expressly stated that the questionnaires sent by the competition authorities to the self-dispensing doctors and pharmacies did not contain any questions on possible economic efficiency reasons. This is despite the fact that it would have been the responsibility of the competition authorities to assess such reasons ex officio on the basis of the investigation principle (see consideration 10.1 of this ruling). It is not apparent from the decision of the Swiss Federal Supreme Court that this serious procedural deficiency has been remedied in the meantime.

Need for action for manufacturers and resellers

The Swiss Federal Supreme Court’s decision creates a need for action for manufacturers and distributers alike. The following points should be taken into account:

• Companies with distribution activities or independent distributors in Switzerland should in any case review their practice on recommended resale prices.

• Even recommended resale prices that are explicitly labelled as non-binding can lead to heavy fines, also in cases where the manufacturer does not exert any pressure or does not grant any incentives.

• Contact from distributors requesting a resale price recommendation may be considered as an indication for an anti-competitive agreement.

• According to the Swiss Federal Supreme Court, the automated, regularly updated distribution of resale price recommendations at the POS of the distributors (e.g. in their cash register system) are inadmissible if a majority of the distributors adheres to such resale price recommendations. In the case of the latter, there is thus a high competition law risk, which the manufacturer cannot control once it has communicated the resale price recommendations to the distributors.

• Static price recommendations, which are only updated sporadically and are generally accessible (by consumers and distributors alike, e.g. on the website of the respective manufacturer), should be assessed differently. In our view, such non-binding resale recommendations are still permissible. However, due to the legal uncertainty created by the decision of the Swiss Federal Supreme Court, a residual antitrust risk remains also in this case.