Australia: ACCC’s Focus on Conduct Could Have Far-Reaching Implications

The Australian Competition and Consumer Commission (ACCC) is a highly trusted regulator in Australia and its role continues to expand. Unlike digital platforms to which the ACCC has dedicated significant resources, the life sciences sector is not currently identified as a priority area for ACCC enforcement. However, there have been some important regulatory developments affecting the life sciences sector and the ACCC has also taken some significant cases against companies in this sector in recent years.

Relevant regulatory developments

Repeal of safe harbour exemption for IP licences

With effect from 13 September 2019, the Australian parliament repealed a safe harbour exemption for certain conditions in intellectual property (IP) licences in Section 51(3) of the Competition and Consumer Act 2010 (Cth) (CCA). As a result, all IP assignments or licensing arrangements are now subject to the entire CCA, including cartel prohibitions. The repealed provision provided a limited exemption for conditional licences or assignments of patents, registered designs, copyright and protected circuit layouts. However, it did not exempt conduct that contravened the prohibitions on misuse of market power or resale price maintenance.

Since the repeal of the IP exemption, there have been reports of the ACCC’s Cartels Branch initiating investigations into restrictions in distribution agreements, IP licences or patent settlements for pharmaceuticals, but no proceedings have been commenced at this stage. Following the IP exemption’s repeal, if parties to an assignment or licence of IP rights could be competitors, it is important to assess whether there are any conditions that could be viewed as cartel provisions, such as setting prices, restricting output or sales, or allocating markets (including disease areas, customers and territories). In addition to exposing the parties to cartel prosecution, conditions that contravene the CCA would also be void and unenforceable.

Ongoing covid-19 authorisations for the wholesale pharmaceutical sector

During September and October 2020, in the context of the covid-19 pandemic, the ACCC granted a number of final authorisations to allow members of various pharmaceutical industry associations, pharmaceutical wholesalers, medical oxygen suppliers and suppliers of medical equipment, respectively, to cooperate to ensure security of supply of essential medicines and related devices, pharmacy products, medical oxygen, medical equipment and related supplies in the event of shortages resulting from the pandemic. These authorisations are subject to conditions that allow the ACCC to monitor the authorised conduct. Under the CCA, the ACCC may grant authorisations to provide businesses with legal protection for conduct that might otherwise contravene the CCA but is not harmful to competition or likely to result in overall public benefits, or both. The ACCC also granted a number of interim authorisations in early 2020, at the beginning of the pandemic, in some cases in extremely short time frames.

On 6 September 2021, pharmaceutical wholesalers applied for reauthorisation to continue to cooperate in providing access to essential medicines and pharmacy products during the continuing covid-19 pandemic. After granting an interim authorisation on 13 September 2021 to allow the cooperation to continue while the ACCC considered the application, on 17 February 2022 the ACCC reauthorised the cooperation until 28 February 2023.

Indications of ACCC approach to patent settlements

On 23 March 2022, the ACCC published for comment a draft determination in which it proposed to deny an application for authorisation of a patent settlement and licence agreement between Celgene and two generic companies (Juno and Natco).^[2] The authorisation application related to a proposed patent settlement and licence agreement between Celgene, Juno and Natco for Revlimid and Pomalyst, which are used in the treatment of multiple myeloma and other forms of cancer.

While there are numerous ACCC authorisations relating to agreements to supply or distribute pharmaceutical products that contain restrictions that could give rise to exclusive dealing, this is the first draft determination by the ACCC regarding an application for authorisation relating to a patent settlement. This authorisation application follows the repeal of the IP exemption in Section 51(3) (discussed above), which may have previously been relied upon by parties assessing such agreements.

When considering whether to grant an authorisation, the ACCC exercises its discretion as to whether the relevant public benefit test is satisfied (outweighing the detriment arising from a lessening of competition), and here the ACCC proposes to deny the application as it considers that the agreement is likely to result in anticompetitive effects but is not satisfied it will give rise to the claimed public benefits that would outweigh the detriment.^[3] The entry date provisions appear to be the focus of the ACCC’s views that the agreement is likely to result in public detriment.

In describing the likely public detriment in the draft determination, the ACCC set out factors that might foreshadow how it could apply the CCA to patent settlements in the future, outside of the context of an authorisation determination. The ACCC indicates that an entry date might reduce the competitive constraint posed by the threat of generic entry by providing an originator with greater control and certainty of the timing of generic entry and might deter other generic entrants by conferring a first mover advantage on one generic entrant.

Patent settlements that provide for an entry date within the exclusionary scope of a valid and in-force patent and without any value transfer from the originator to the generic have typically not been the focus of enforcement action in Europe and the US. If enforcement risk arises solely from an agreed entry date in patent settlements, this makes settlements that involve any term with a potential for early entry problematic and could mean that parties might be forced to litigate their patent disputes to the end as settlements may be unable to be reached on commercially acceptable terms.

On 27 May 2022, the ACCC extended the statutory deadline for its final determination, with the agreement of the applicants, until 29 July 2022. On 29 July 2022, Celgene, Juno and Natco withdrew their application for authorisation without explanation.

Main merger control developments

In August 2021, the outgoing ACCC chair Rod Sims announced proposals for substantial reform to Australia’s merger rules. The proposed reforms included introducing a mandatory, suspensory merger regime. Mr Sims also proposed updates to the merger test, such as including new merger factors addressing whether acquisitions will result in a loss of potential competition. The reform proposals are not finalised and would require legislative change. The previous Australian government had not supported a merger reform process. While the incoming ACCC chair appears to be generally supportive of a review of the merger rules, no view has been expressed on the prior chair’s proposals.

In the context of the proposed merger reform, the ACCC has been more assertive in requiring that parties meet its expectations in relation to the time and information provided for the ACCC to make its independent assessment. This more assertive approach was demonstrated by the ACCC’s application for an interim injunction restraining the acquisition of Adora Fertility by Virtus Health, which was granted by the Federal Court in October 2021.^[4]

In the ACCC’s recent reviews of two significant mergers in life sciences – Elanco’s acquisition of Bayer Animal Health and Mylan’s merger with Upjohn to create Viatris^[5] – brands have played an important role. The ACCC considered generics and private labels as unlikely to exercise a sufficient constraint in light of customer loyalty to the brands of the merged entities, arising from: trust in the safety and efficacy of products; supply on a portfolio basis; and internal documents supporting the strength of the brand and reinforcing concerns that the brand might hinder successful new entry. These factors also influenced the ACCC’s review of divestiture purchasers with preference given to purchasers with customer relationships and experience in supplying branded products in Australia, in addition to an ability to transfer the manufacturing process.

Main infringement proceedings

Cartels are an enduring priority for the ACCC’s enforcement activity and one of the three ACCC criminal cartel prosecutions currently being pursued before Australian courts involves the pharmaceutical sector.

ACCC v. Alkaloids of Australia – criminal cartel prosecution

On 1 December 2020, the Commonwealth Director of Public Prosecutions filed criminal charges against Alkaloids of Australia Pty Ltd and its former export manager, Christopher Kenneth Joyce, for cartel conduct relating to the supply of active pharmaceutical ingredient scopolamine N-butylbromide (SNBB) in contravention of the CCA, following a criminal investigation by the ACCC.^[6]

Alkaloids of Australia and Mr Joyce were both originally charged with 33 criminal cartel offences spanning a period of almost 10 years from 24 July 2009, relating to allegations that Alkaloids of Australia and other overseas suppliers of SNBB made and gave effect to arrangements to fix prices, restrict supply, allocate customers or geographical markets, or both, or rig bids for the supply of SNBB to manufacturers of generic antispasmodic medications.

On 26 October 2021, Mr Joyce pleaded guilty to three charges and admitted guilt in respect of a further seven offences involving criminal cartel conduct. Three weeks later, on 16 November 2021, Alkaloids of Australia also pleaded guilty to three charges and admitted a further seven offences. Mr Joyce and Alkaloids of Australia have been committed to the Federal Court of Australia for sentencing. While all 66 sequences on the initial charge sheets were withdrawn, the remaining charges involved:

• for Alkaloids of Australia, intentionally making and attempting to enter into contracts, arrangements or understandings containing cartel provisions, and giving effect to cartel provisions, involving fixing the sale price of SNBB, fixing bid prices for the supply of SNBB and restricting the supply of SNBB; and
• for Mr Joyce, aiding, abetting or procuring Alkaloids of Australia’s contraventions of the cartel provisions, intentionally attempting to make contracts or arrive at understandings containing cartel provisions or inducing others to do so and being knowingly concerned in giving effect to cartel provisions.

The Alkaloids of Australia case is the fourth criminal cartel case brought by the ACCC that has been resolved by guilty pleas, and the first in which a guilty plea has been entered by an individual in addition to a corporate defendant.

ACCC v. Cryosite Limited – gun-jumping as cartel conduct

In 2019, the first penalty for gun-jumping conduct in Australia was imposed in a case involving two companies supplying services for the collection and storage of cord blood and tissue (CBT), Cryosite Limited and Cell Care Australia Pty Ltd. On 13 February 2019, the Federal Court of Australia ordered Cryosite to pay A$1.05 million in civil penalties for entering into an asset sale agreement that contained a cartel provision and giving effect to that cartel provision in violation of the CCA.^[7]

Cryosite had agreed to sell assets used in its CBT banking services to Cell Care, and the ACCC raised concerns about cartel conduct during its public merger review of the deal. The sale agreement contained a clause that required Cryosite to refer all customer sales enquiries regarding its CBT banking business to Cell Care in the period between signing and completion. Cryosite admitted that this clause was designed to restrict or limit the supply of CBT banking services by Cryosite and to allocate potential customers to Cell Care. Cryosite also admitted that it gave effect to the cartel provision by ceasing to supply CBT banking services to new customers from the time of the signing of the deal and that it had set up and implemented a system to refer enquiries from potential customers to Cell Care following the signing of the deal. This resulted in Cryosite ceasing to compete with Cell Care even though the proposed sale had not been completed.

This case illustrates how important it is for parties involved in a proposed merger to ensure that the planning of the integration of their business ahead of completion and prior to obtaining clearance from the ACCC does not give rise to gun-jumping in violation of the prohibitions against cartel conduct in Part IV of the CCA.

ACCC v. Pfizer Australia Pty Ltd – life-cycle management strategies

An older matter concerning the Australian pharmaceutical sector that retains importance is the ACCC’s case against Pfizer Australia Pty Ltd, alleging exclusive dealing and misuse of market power in relation to the supply of atorvastatin to pharmacies in violation of the CCA.^[8] The case focused on life-cycle management (LCM) strategies employed by Pfizer to address the patent expiry for its blockbuster cholesterol-lowering medicine, Lipitor (atorvastatin). The strategies involved the introduction of a direct-to-pharmacy distribution model, establishing an accrual funds scheme with pharmacies, making bundled product offers to pharmacies and offering discounts on the condition pharmacies would not supply generic atorvastatin. The ACCC’s case focused on the language used to express the objective of the LCM strategies within Pfizer’s internal documents.

On 25 February 2015, the Federal Court of Australia dismissed the ACCC’s case.^[9] Although the Court determined that Pfizer had substantial market power prior to patent expiry and that it took advantage of that market power by implementing the LCM strategies, the Court did not find that Pfizer had a substantial purpose of deterring or preventing competitors from competing. Instead, the Court found that the substantial purpose of Pfizer’s LCM strategies was to ensure that it remained competitive and that the language in Pfizer’s documents needed to be understood in this context. It also found that Pfizer had not engaged in exclusive dealing conduct. The ACCC appealed.

On 25 May 2018, the Full Court of the Federal Court of Australia rejected the ACCC’s appeal, finding that Pfizer had not misused its substantial market power for an anticompetitive purpose and had not engaged in exclusive dealing conduct when it devised and implemented a strategy with the purpose of protecting its business by reducing the financial impact of patent expiry for Lipitor.^[10] The High Court of Australia refused the ACCC’s application for special leave to appeal this decision on 19 October 2018.

After the ACCC had initiated its case against Pfizer, changes to strengthen the misuse of market power prohibition were introduced, which: removed the requirement that a firm had taken advantage of its market power; added an effects test; and focused the prohibition on conduct that is likely to substantially lessen competition and on conduct that has that purpose.^[11] Given that the Court had previously found that the substantial purpose of Pfizer’s LCM strategy was to ensure it remained competitive, even if the ACCC could have taken its case under the new market power prohibition, it would have still faced difficulties in proving that the substantial purpose of Pfizer’s conduct was to substantially lessen competition instead of ensuring it remained competitive. The ACCC might have also encountered difficulties in proving that the likely effect of Pfizer’s conduct was to substantially lessen competition considering the evidence Pfizer had presented that generics did compete and respond to Pfizer’s strategy by offering increased discounts.^[12]

Growing private litigation for misuse of market power

Since the changes to the misuse of market power prohibition, the ACCC has only brought one case to trial under the amended provision. However, a series of private actions have been brought before the competent courts, including one in the life sciences sector.

On 16 July 2021, Merck Sharpe & Dohme (Australia) Pty Ltd launched private litigation against Bristol-Myers Squibb Australia Pty Limited (BMS), claiming that BMS had misused its substantial market power in relation to the supply of immunotherapy to patients with Stage III and Stage IV melanoma.^[13] Merck alleged that BMS’s Opdivo melanoma continuation programme (Opdivo MCP), which offered Opdivo free of charge when used in combination with Yervoy only to those patients who had received Opdivo at an earlier stage in their treatment, had the effect of eliminating or substantially lessening competition from Merck’s competing immunotherapy, Keytruda. It was also alleged that doctors would be reluctant to prescribe Keytruda, rather than Opdivo, if it restricted their patients’ access to the Opdivo MCP. While the proceedings have since been dismissed by consent (on 8 February 2022) on account of BMS agreeing to open up its subsidised treatment programme to patients who have been treated with drugs manufactured by its competitors, Merck’s application provides an indication of the types of claims that parties might bring under the new test, such as alleging a competitor has leveraged power in one market for the purpose or effect of substantially lessening competition in another market.

Outlook

In March 2022, Gina Cass-Gottlieb was appointed as chair of the ACCC, following the 11-year tenure of Rod Sims. The new chair has indicated a strong focus on conduct that impacts Australian consumers, so with the IP exemption now repealed, we would expect that the ACCC will look closely at any conduct that could result in limiting Australian consumers’ access to cost-effective treatments.

Notes