If George Orwell were alive today, he would be struck by how fines imposed for breaches of competition law, committed by equally culpable companies, bear down least heavily on multinational conglomerates and most heavily on companies that sell few or even just one product or service.
The recently published Competition and Markets (CMA) decision fining Pfizer the (apparently) severe amount of £84.2 million and the relatively tiny company Flynn Pharma £5.2 million for charging excessive and unfair prices for phenytoin sodium capsules is an acute illustration of this systemic disparity in treatment.
Assuming both companies are equally culpable (as the CMA found to be the case here) how is such a counter-intuitive outcome possible? The reason is that, following the EU example, fines for intentional or negligent breaches are calculated according to a highly complex formula in which the starting point for determining the seriousness of an offence (and the eventual penalty) is a percentage (up to 30%) of the turnover obtained in the product or service market where the infringement occurs.
This figure is then multiplied by the duration of the infringement and this starting point is subjected to a number of ‘tweaks’ that account for the size of the company and deter breaches, amongst other things, to arrive at a final number. This final figure must never exceed 10% of a worldwide turnover of the company in question.
Following an ECJ judgement (Pilkington v Commission C) the CMA “should not confer an advantage on the least diversified undertakings, on the basis of criteria that are irrelevant in light of the gravity of, and the duration of, the infringement”. What has happened here, however, is that the most diversified company is given an advantage as a result of the fining formula being followed.
So, despite other ECJ cases that refer to the need for equal treatment, Flynn Pharma, with a turnover of £52 million, had to pay a fine scaled down to £5.2 million so as not to exceed the statutory maximum, whereas Pfizer, with a turnover of over £50 billion, only had to pay a fine of £84.2 million which represents a mere 0.27% of its total turnover.
This would have been even smaller had the CMA not quadrupled the amount because of Pfizers size. Looked at another way, the fines imposed represent 59% of Flynn’s average annual profit, against Pfizer’s 1.45% and 82% of Flynns’ dividends, compared to 1.96% of Pfizers. If this is the consequence of equality of treatment, it is only equal in the most formal of sense that was rightly ridiculed in Animal Farm.
The CMA would doubtlessly say that it, like other member states, should follow the EU model; however in practice not all member states do so. Indeed the formula the CMA applies was ignored studiously by its French counterpart in the recent high profile model agencies investigation, where Italian and UK model agencies were fined up to the statutory maximum, whereas the French model agencies received much lower fines based on no discernible rationale at all.
Hopefully, when the UK leaves the EU, it will adopt a more pragmatic and just system. Reform is vitally necessary because SME’s, who very often offer a much smaller range of goods and services, have recently been the focus of the CMA’s “low hanging fruit” enforcement initiative which is, incidentally, entirely inconsistent with its publicised prioritisation principles.
Such companies, who are attracting fines of 10% of their total turnover, will be less willing to challenge controversial regulatory decisions than their more diversified and well heeled counterparts, as a result of the slavish implementation of the EU’s fining formula, which the Pfizer case illustrates in such stark form.
Stephen Hornsby is a partner specialising in Competition Law at Goodman Derrick LLP, the City law firm.