The UK Competition and Markets Authority on June 19 announced that it had opened investigations against four pharmacies and convenience stores in relation to suspected breaches of antitrust rules by charging excessive and unfair prices for hand sanitiser products during the coronavirus (COVID-19) pandemic, and on June 29 published an open letter warning pharmacists against price gouging, raising the possibility of additional investigations.
The UK’s Competition and Markets Authority (CMA) on June 19 announced that it had launched investigations into suspected breaches of competition law by four pharmacies and convenience stores. The investigations relate to suspected charging of excessive and unfair prices for hand sanitiser products during the coronavirus (COVID-19) pandemic. The charging of excessive and unfair pricing by a business with significant market power may give rise to a breach of UK and EU competition rules.
This was followed on June 29 by the publication of an open joint letter from the CMA and the General Pharmaceutical Council to UK pharmacists (Open Letter), warning pharmacies against price gouging of essential products in response to the COVID-19 pandemic. This is a warning by the CMA to the pharmaceutical sector that it is tracking prices during the pandemic, and it raises the possibility of more investigations by the CMA into alleged excessive and unfair pricing by undertakings the CMA perceives to be seeking to profiteer from the COVID-19 pandemic.
The investigations are the first to be announced by the CMA in connection with excessive pricing related to the COVID-19 crisis and are a clear indication of the CMA’s focus on essential products that have been in short supply during the pandemic. These investigations confirm again that companies must be vigilant to ensure that both their unilateral pricing strategies as well as any supply or other arrangements they may enter into with other companies arising out of the pandemic comply with competition law.
Chapter II of the UK Competition Act 1998 (CA98) prohibits certain types of unilateral conduct by a business with significant market power that may affect trade within the United Kingdom, or part of the United Kingdom. In general terms, a business may be considered to have so-called market dominance if it has a market share of around 40% or more in a relevant market. Chapter II does not prohibit a firm from having a dominant position, but it is an infringement to abuse its dominance. Abusive conduct by a dominant firm may include so-called unfair and excessive pricing.
Companies found to have infringed Chapter II are liable to fines of up to 10% of their worldwide group turnover. Undertakings that have suffered loss as a result of a breach of Chapter II may initiate litigation proceedings in the UK courts to recover their loss.
In March 2020, the CMA issued guidance (Guidance) on its approach to business during the COVID-19 pandemic (see our LawFlash, “UK Antitrust Authority Issues Guidance on Business Cooperation During Pandemic”). While in its Guidance the CMA focused on potentially permissible cooperation between businesses during the pandemic, the CMA was keen to note that it would not tolerate businesses "exploiting" the crisis as a "cover" for potentially anticompetitive conduct, including abuse of dominance.
To date, as is usual in these types of investigation, the CMA has not provided any additional information with regard to the alleged infringements under investigation. For example, it is not clear from the CMA’s announcement which pharmacies and convenience stores are under investigation, how big they are (e.g., whether they are national or local suppliers, although the latter is more likely), what the geographical scope of the investigation is, or whether the investigation relates to four separate alleged infringements by different companies that have abused their dominant position in different parts of the United Kingdom or whether they are interrelated (although the former is more likely).
In its Guidance, the CMA had stressed that it is of the "utmost importance" to ensure that the price of products considered essential to protect the health of consumers during the pandemic (for example, face masks and sanitising gel) are not artificially inflated by businesses abusing a dominant position in a market, including a dominant position that has been conferred by the particular circumstances of the COVID-19 pandemic.
In other words, even though a business may not have been considered dominant on a market prior to the COVID-19 situation, the specific circumstances of the pandemic may have made it dominant during this period either in the whole or in parts of the United Kingdom. Dominance, for example, may arise because other competing companies may be unable to receive supplies of the relevant product (or sufficient quantities of the product given increased demand), or they may be unable to trade during this period as a result of financial constraints, or because, taking into account the lockdown and the travel restrictions in place within the United Kingdom, consumers may have been unable to shop around and as a result they may have been confined to making purchases within a very small radius of their homes, giving rise to very localised geographical markets. Accordingly, it is possible, that the CMA has taken a narrow approach on geographic markets, with the result that companies that would not ordinarily have been considered dominant may be considered as such during the pandemic.
As we described in our previous LawFlash, the CMA’s guidance is also precarious in nature, since the CMA had accompanied it by issuing an open letter on March 20 to the pharmaceutical and food and drink industries in which it invited businesses to inform on each other if they think that firms in their sector are seeking to capitalize on the COVID-19 situation by “charging unjustifiably high prices for essential goods or making misleading claims around their efficacy.”[1] The CMA also provided an email hotline by which such “tip-offs” can be given to the CMA by businesses as well as by consumers. In its letter of March 20, the CMA did not describe what an unjustifiably high price is, what an essential good is, or what would constitute a misleading claim.
The CMA’s invitation to businesses (in addition to consumers) to inform on each other clearly puts businesses at risk of their competitors exploiting this for their own commercial gains.
In March 2020, the CMA also launched a taskforce to identify, monitor, and respond to competition and consumer problems arising during the pandemic. Reports published by the CMA taskforce in April and May noted that the coronavirus outbreak, and the necessary restrictions on businesses and people, presented "significant risks that prices are raised above justifiable levels in a number of sectors."
The CMA’s reports also described that a large proportion of complaints received by the antitrust authority related to price rises, particularly for personal hygiene goods such as hand sanitiser and basic food products such as meat, and that the largest price increases concerned hand sanitisers, with a reported median rise of just under 400%.
The Open Letter makes reference to the receipt of such complaints by the CMA. The Open Letter describes that the CMA has received reports alleging that “a small minority of pharmacies are seeking to benefit from the coronavirus pandemic by charging unjustifiably high prices for essential products – including hand sanitiser, face masks and paracetamol”.
Similar to the CMA’s open letter of March 20 to the pharmaceutical and food and drink industries, this Open Letter does not define what an essential products is, but says that pharmacies should ensure that their prices for such essential products do not include “higher than usual mark-ups, when compared to their pre-coronavirus markups for those products and their mark-ups more generally.”
Once again, the CMA provides little guidance to pharmacies as to what it means by “higher than usual mark-ups”, simply stating that the fact that pharmacies may be paying higher prices to wholesalers for high-demand products “do not justify the pharmacy increasing its own percentage mark-up on the wholesale price” and that additional operational costs faced by pharmacies, such as for additional cleaning and PPE, might only “justify a limited increase in general mark-ups.” Despite the lack of clear guidance, the CMA stresses in its Open Letter that the consequences of the CMA concluding that competition law has been infringed are potentially significant and include the possibility of material financial penalties.[2]
Furthermore, in its Open Letter, the CMA encouraged pharmacies “experiencing large price rises or other unfair practices from their suppliers” to report them to the CMA. This suggests that, in addition to investigating suspected price gouging by pharmacists, the CMA is also investigating any suspected price gouging by pharmaceutical manufacturers and/or distributors.[3]
The CMA and the European Commission hadn’t investigated allegations of excessive and unfair pricing under Chapter I and/or the equivalent Article 102 of the Treaty on the Functioning of the European Union[4] for many years. In recent years, however, the CMA (as well as the European Commission) has launched a number of high profile investigations under Chapter II/Article 102 in relation to suspected excessive and unfair prices in the pharmaceutical sector, specifically in relation to phenytoin sodium capsules, hydrocortisone tablets, and liothyronine tablets.
The methodology used by the CMA to reach a finding that prices are excessive and unfair has been the subject of recent judicial consideration. In March 2020, in Phenytoin[5] the UK Court of Appeal in large part dismissed an appeal by the CMA against a judgment of the Competition Appeal Tribunal, in which the Tribunal had ruled against the CMA’s methodology for a finding of unfair and excessive pricing in respect of phenytoin sodium capsules. Among its findings, the Court of Appeal dismissed the CMA’s argument that, in applying the legal test for finding that prices are excessive and unfair, it has an unfettered discretion to choose between analysing whether the pricing of a product is unfair "in itself" or "compared to competing products". The Court of Appeal also held that, if an undertaking relies in its defence on other methods or types of evidence to that relied on by the competition authority, the authority has an obligation to fairly evaluate them. Prior to the judgment of the Court of Appeal in Phenytoin, the law in England on excessive and unfair pricing had not been settled.
It is possible that the CMA will open additional investigations as a result of companies’ conduct during the COVID-19 pandemic. In these uncertain times, it is very important that businesses ensure that their arrangements intended to address the COVID-19 situation comply with competition law and that they are documented appropriately so that they can be properly defended to the CMA and/or in private litigation if need be. If in doubt, businesses are advised to seek specialist legal advice.
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Frances Murphy
Omar Shah
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Eric Sitarchuk
Rebecca Hillyer
[1] On July 3, 2020 the CMA (together with a number of trade bodies) published a further open letter, warning both retailers and wholesalers generally against price gouging, and urging retailers to report to the CMA examples of resale prices being raised as a result of increases in supplier costs.
[2] As described above, companies found to have infringed Chapter II are liable to fines of up to 10% of their worldwide group turnover.
[3] This approach is also reflected in the CMA’s open letter of July 3, 2020 (referred to at Footnote 1 above), in which the CMA, in addition to warning retailers and wholesalers against price gouging, also urged retailers to report to it examples of resale prices being raised as a result of increases in supplier costs.
[4] The United Kingdom exited the European Union on 1 January 2020. However, EU law continues to apply in the United Kingdom as if it continues to be an EU member state during the transition period until December 31, 2020 (unless extended).
[5] Judgment of the Court of Appeal of 10 March 2020, Competition and Markets Authority v. Flynn Pharma Ltd and others [2020] EWCA Civ 339.