Napp Pharmaceutical Holdings Limited v Director General of Fair Trading

An appeal from a specialist competition tribunal lies on a point of law, not merely against its assessment of market facts or commercial judgment. Abuse of dominance is assessed objectively against competition in a normal market. Conduct does not escape scrutiny merely because it is prevalent in a market already distorted by the dominant undertaking.

Below-cost pricing which forecloses competitors may constitute predatory pricing. Intention to eliminate competition is unnecessary where the pricing and its likely effects establish abuse, although proven exclusionary intention provides an additional basis. Compliance with a portfolio-based pharmaceutical price-control scheme does not prevent an individual product price from being excessive under competition law.

Napp supplied sustained-release morphine products in linked hospital and community markets and held market shares exceeding 90 per cent. It charged high community prices while supplying hospitals at discounts exceeding 90 per cent, in some instances below direct costs. Hospital presence acted as a gateway to community sales.

The Director General of Fair Trading found that Napp had abused its dominant position under section 18 of the Competition Act 1998 through exclusionary hospital pricing and excessive community pricing. He imposed regulatory measures and a £3.21 million penalty. The Tribunal substantially upheld the findings, omitted one aspect of the hospital-pricing decision and reduced the penalty to £2.2 million.

Napp sought permission to appeal against the abuse findings and the penalty. The central question was whether its complaints disclosed points of law capable of appellate review.

1. Permission to appeal was refused. Buxton LJ delivered the judgment, with which Brooke LJ agreed. Except in relation to the amount of a penalty, an appeal from the Tribunal lay only on a point of law. The Tribunal’s specialist assessments of market operation, barriers to entry, foreclosure, intention and the appropriate penalty could not be reopened merely by characterising disagreement with them as legal error.

2. Abuse of dominance is an objective concept. Conduct must be examined against methods of competition operating in a normal market, rather than practices prevalent in a market already distorted by the dominant undertaking. Napp’s matching of entrants’ hospital discounts was capable of foreclosing their only effective means of competition. The Tribunal was entitled to find that prolonged below-cost pricing, selective discounting and the exceptional disparity between hospital and community prices were not normal commercial conduct.

3. The Tribunal had found that pricing below direct costs hindered competition and raised barriers to entry. Because hospital presence was the gateway to profitable community sales, exclusion from the hospital segment also protected Napp’s community position. This was a specialist market analysis involving no demonstrated error of law.

4. Predatory prices below average variable costs are abusive where used to eliminate a competitor. On the approach in Tetrapak II, proof of intention is unnecessary where exclusion is a likely consequence. In any event, the Tribunal separately found from Napp’s documents and oral evidence that its pricing policy was intended to eliminate competition. That finding was neither irrational nor unsupported.

5. The Tribunal was entitled to find excessive community pricing. The portfolio basis of the Pharmaceutical Price Regulation Scheme did not determine whether the price of an individual product exceeded the competitive level. Neither research and development expenditure nor compliance with that scheme supplied a legal answer to the finding of abuse.

6. The finding of deliberate exclusionary conduct justified a penalty. The Tribunal’s detailed calculation and treatment of mitigating factors disclosed no point of law. Future applicants should identify the precise legal rule allegedly infringed, its source in European jurisprudence and the place where the Tribunal committed the asserted error.

1. Court of Appeal (Civil Division): Refused Napp permission to appeal against the findings of abuse and the penalty: [2002] EWCA Civ 796.
2. Tribunal: Substantially upheld the Director’s abuse decision, omitted one element concerning selective hospital pricing and reduced the penalty from £3.21 million to £2.2 million. No citation is stated in the judgment.
3. Director General of Fair Trading: Found abuse of a dominant position under section 18 of the Competition Act 1998, imposed regulatory measures and fixed a £3.21 million penalty.