Aaron Chen & Sally Yang[1]
With respect to the case involving the concerted action of three pharmaceutical companies, namely, TTY Biopharm Co., Ltd. (hereinafter, “Company A”), Lotus Pharmaceutical Co., Ltd. (hereinafter, “Company B”), and Otsuka Pharmaceutical Co., Ltd. (hereinafter, “Company C”) over colon cancer drugs, the Fair Trade Commission (hereinafter, the “FTC”) concluded during its Commissioners’ Meeting on May 11, 2021 that Company A and Company B violated the prohibition against concerted action under Article 15, Paragraph 1 of the Fair Trade Law and rendered the Gong-Chu-110032 Disposition of May 14, 2021 (hereinafter, the “Disposition at Issue”) concerning the illegal acts.
Reasons of the FTC’s findings
According to the FTC’s findings, since the colon cancer drugs of Companies A, B and C mentioned above have the same ingredients, dosage and dosage form and are substitutable to one another, Companies A, B and C are competitors for colon cancer drugs in Taiwan. However, Company A separately entered into an exclusive distribution agreement with both Company B and Company C for Company A to exclusively distribute the colon cancer drugs of Company B and Company C. (The “drugs” mentioned below all refer to colon cancer drugs.)
The FTC concluded as a result of its investigation that the exclusive distribution agreement executed between Company A and Company C is an ordinary vertical distribution and agency act and does not violate the provision concerning concerted action under the Fair Trade Law. According to the information in the Disposition at Issue, the FTC seems to believe that since Company A still had commission income from selling Company C’s drugs, it was a genuine vertical distribution agreement, which is different from the exclusive distribution agreement between Company A and Company B, which was actually reached to achieve the no competition arrangements.
The exclusive distribution agreement between Company A and Company B stipulated that Company A shall obtain the exclusive distribution right in Taiwan for Company B’s drugs, and that Company B shall not sell the drugs on its own in Taiwan or via others, while Company A was required to pay a periodical licensing fee to Company B. Although Company B’s drug prices were lower than those supplied by Company A and should be more competitive, still Company A never issued any purchase order to Company B or sold Company B’s drugs to hospitals after the exclusive distribution agreement was executed. As a result, Company B’s products have never been sold in the market in recent years. Therefore, the FTC held that Company A engaged in an illegal concerted action by achieving the effect of excluding the sales of such drugs in the relevant market via exclusive distribution clauses and high licensing fees.
Points to note for this case
1. If there is no actual distribution of goods when an exclusive distribution agreement is reached between competitors, the goods under distribution conversely do not enter the market for competition. The FTC believes that this constitutes a concerted action between such competitors (i.e., the circumstance involving Company A and Company B mentioned above). This shows that operators should be careful since the vertical distribution arrangements for competitive products between competitors may potentially violate the provisions concerning concerted action under the Fair Trade Law.
2. However, the FTC seemed to believe that with respect to the exclusive distribution agreement between Company A and C, the two companies did have actual distribution operation between them, and thus such relationship was viewed as “an ordinary vertical distribution relationship” and did not constitute a concerted action. However, exclusive distribution between competitors will result in the circumstance where all competitive products in the market are sold by a certain competitor. Therefore, the selling prices, sales areas, and customers for the sales are definitely decided based on the intention of the distributor. To wit, this may potentially lead to a concerted action where price restriction, area restriction or customer distribution are achieved via exclusive distribution. Therefore, if the FTC believes that the conclusion of an exclusive distribution agreement between competitors will not constitute a concerted action, such view may be questionable. However, the FTC does not issue a disposition that does not impose any penalty for its decision not to impose a penalty. Therefore, we have no way of knowing the FTC’s grounds for not finding the illegality of the exclusive distribution agreement between Company A and Company C, whether it was the FTC’s view that Company A and Company C did not have “an agreement on concerted action” or could not “sufficiently affect the supply and demand function of the market?” In case of the former, why did it not constitute an agreement? Was it because the subjective criteria were considered? Or was it based on the purposes and effect analysis under academic theories? Since the FTC did not release the minutes of the Commissioners’ Meeting or the grounds in the disposition not to impose a penalty, it is very difficult for the public to know the answer. Anyway, it is not appropriate for operators to readily conclude that competitors can freely enter into an exclusive distribution agreement simply because the FTC did not penalize Company A and Company C.
3. The FTC made a intriguing statement in its newsletter released on May 11. The FTC pointed out: “Under the National Health Insurance system, drugs are included for reimbursement under the National Health Insurance system pursuant to health insurance laws and regulations. The reimbursement standards and price adjustment operations are regulated by health insurance laws and regulations, and the Fair Trade Law basically does not apply.” It is not clear if the FTC meant that although the “price agreement” for health insurance drugs is not governed by the Fair Trade Law, other arrangements still are. However, if it is viewed the drugs reimbursed under the National Health Insurance system are not governed by the Fair Trade Law, such position is not entirely consistent with the Disposition at Issue. Whether this will become one of the issues in future administrative litigation remains to be seen.
[1] The authors are lawyers at Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.