Competition fines are unfair on smaller companies
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The Competition and Markets Authority’s recent decision to fine the drugs company Pfizer £84.2 million and the smaller Flynn Pharma £5.2 million for charging excessive and unfair prices for phenytoin sodium capsules – a decision that both companies are appealing – illustrates the systemic disparity in treatment in regulator rulings (Stephen Hornsby writes).
Considering that the authority found both companies to be equally culpable, how is it possible that Flynn Pharma – with a worldwide turnover of £52 million – had to pay a fine pegged at 10 per cent of revenue, while Pfizer, with a turnover of more than £50 billion, only had to pay a fine of £84.2 million, representing a mere 0.27 per cent of its total turnover?
The reason is that following the EU example, fines for intentional or negligent breaches are calculated according to a complicated formula in which the starting point for determining the seriousness of an offence – and thence the eventual penalty – is a percentage (up to 30 per cent) of turnover in the product or service market where the infringement occurs.
That figure is then multiplied by the duration of the infringement, and this starting point is tweaked to arrive at a final number, which must never exceed 10 per cent of a worldwide turnover.
Following a European Court (ECJ) of Justice ruling, the authority should not confer an advantage on the least diversified undertakings on the basis of criteria that are irrelevant in the light of the gravity and duration of the infringement.
But what has happened in Pfizer-Flynn is that the most diversified company is given an advantage as a result of the fining formula being followed. So we end up with that result despite other ECJ cases that refer to the need for equal treatment. This will strike the layman as bizarre; if this is the consequence of equality of treatment then it is only equal in the most formal of sense that was rightly ridiculed in Animal Farm.
The authority would doubtlessly say that it should follow the EU model; however, in practice not all member states do so. Indeed the formula applied in the UK was ignored studiously by the French authority in a recent investigation into modelling agencies, where Italian and British businesses were fined up to the statutory maximum while French agencies received much lower fines based on no discernible rationale.
It is to be hoped that when the UK leaves the EU it will be adopt a more pragmatic and just system. Reform is vitally necessary because smaller businesses that often offer a much smaller range of goods and services have recently been the focus of the British authority’s “low hanging fruit” enforcement initiative.
Such companies who are attracting fines of 10 per cent of their total turnover will be less willing to challenge controversial regulatory decisions than their more diversified counterparts as a result of the slavish implementation of the EU’s fining formula.
Stephen Hornsby is a competition law partner at Goodman Derrick, a City of London law firm