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On 7 June, the UK’s Competition Appeal Tribunal (CAT) annulled in part a decision by the UK’s Competition and Markets Authority (CMA) imposing fines of nearly £90 million on two pharma companies, Pfizer and Flynn, for charging excessive prices for the anti-epileptic drug, phenytoin sodium capsules. The case is notable as it marks the first time that the CAT has ruled on a pure excessive pricing case in the pharma sector.

In its decision, the CMA had found that both Pfizer and Flynn held a dominant position in their respective markets and that each company had abused that position by significantly raising the prices of phenytoin sodium capsules from £2.83 to £67.50 – corresponding to a price increase of 2,600%. The price increase followed from Flynn’s decision in 2012 to genericise the drug with a view to effectively removing it from the sectoral pricing regulation that applies to branded medicines.

Pfizer and Flynn appealed the CMA’s decision before the CAT. Although the Tribunal upheld the CMA’s findings on market definition and dominance, it found that the CMA misapplied the two-limb test for excessive pricing established by the European Court of Justice in its seminal judgment in United Brands. That test involves assessing (i) whether the price is excessive by comparison to the cost of production (the ‘excessive’ limb); and if so, (ii) whether a price is unfair either in itself or when compared to competing products (the ‘unfair’ limb).

As regards the ‘excessive’ limb, the Tribunal held that the CMA was wrong to restrict its assessment to a cost plus¹ approach, to the exclusion of other methodologies and the evidence more widely available. In doing so, the CMA focused its analysis on “a theoretical concept of idealised or near perfect competition, than to the real world”. The correct approach, according to the Tribunal, was to identify a benchmark price or price range, which would have applied in conditions of “normal and sufficiently effective competition”.

In respect of the ‘unfair’ limb, the CAT found that the CMA wrongly examined only if the Pfizer/Flynn price was unfair in itself, thereby failing to adequately assess the possible impact of phenytoin tablets (the price of which was 25% higher than that of capsules), as meaningful comparators.

In light of the misapplication of the test on excessive pricing, the CAT concluded that the CMA’s findings on abuse of dominance were defective and set aside that part of the decision. In terms of remedy, the Tribunal has indicated that its provisional view is to remit the case back to the CMA for further consideration, noting that the correct application of the test on excessive pricing will require detailed examination of the facts, which the CMA is better placed to carry out.

Cases of pure excessive pricing are very rare in competition law and notoriously difficult to establish. The Tribunal’s judgment illustrates the practical issues that competition authorities face when intervening in such cases, notably the lack of a single methodology to determine that a price/profit margin is excessive and the inherent complexity of establishing an appropriate benchmark price. The structure and specificities of the pharmaceutical market, in particular national pricing regulations, compound the complexity of the legal analysis and increase the likelihood of errors.

Despite these difficulties, competition authorities across the EU, including the European Commission, have been in recent years actively pursuing excessive pricing cases in the pharma sector, in particular cases involving significant prices increases.

Shortly after the Pfizer/Flynn decision, the CMA issued a Statement of Objections to Actavis UK in the context of its investigation into excessive pricing of hydrocortisone tablets – involving price increases up to 12,000%. The authority is also currently investigating alleged excessive pricing with respect to liothyronine tablets, a drug used to treat hypothyroidism.

In 2016, the Italian competition authority imposed a €5 million fine on Aspen for charging excessive prices (through increases up to 1,500%) for a suite of off-patent cancer drugs; the fine has been recently upheld by the Italian Administration Court. The company is currently under investigation by the European Commission for having allegedly implemented excessive prices in several EU Member States on five cancer drugs and for having threatened to withdraw those drugs in some other EU Member States.

Earlier this year, the Danish competition authority found that CD Pharma abused its dominant position by charging excessive prices for the drug Syntocinon, an off-patent drug used by public hospitals in Denmark in connection with childbirth. The authority found that in 2014 CD Pharma increased the price on Syntocinon from €6 to €127, corresponding to a price increase of 2,000%. The case has been submitted to the Danish State Prosecutor for Serious Economic and International Crime, who will be deciding on prosecution and financial penalties.

In addition, the French competition authority has recently launched a sector-wide investigation into healthcare, targeting specifically the distribution of pharmaceuticals and their price regulation mechanism, while the president of the Dutch competition authority has published a working paper regarding enforcement of competition law in the pharma sector, where it is noted that “excessive pricing cases addressing patented products are bound to follow”.

These developments highlight that cases of excessive pricing will continue to remain high on the agenda of competition authorities across the EU in the coming years and suggest that the EU could be moving towards establishing a comprehensive framework for pursuing excessive pricing cases – the CAT’s judgment was the first step in that direction.

_{[1] In assessing the ‘plus’ element, the CMA considered that an ROS (return on sales) of 6% was a reasonable rate of return, as the maximum permissible ROS for a portfolio of branded medicines under UK pharma pricing regulation. This was one of the most controversial elements of the CMA’s decision, raising doubts about the appropriateness and probative value of a regulatory price cap for a portfolio of products as an indicator of a reasonable rate of return for a single generic product.}

This article was written by Tatiana Siakka of Squire Patton Boggs (US) LLP

If an agreement qualifies as a “subcontract” under a government contract, then it may be subject to certain flow-down, compliance, and reporting requirements.  These requirements are intended to protect the government’s interests, and have significant ramifications for contractors, e.g., increasing transaction costs, expanding potential areas of exposure.  These compliance obligations and risks can even deter some companies from performing under government contracts, especially those companies offering commercial items.

Currently, there is no uniform definition of “subcontract” in the applicable procurement regulations or in the procurement chapters under Titles 10 and 41 of the U.S. Code.  Indeed, there are more than twenty varying definitions of “subcontract” in the FAR and DFARS, with many clauses failing to specify which definition applies.  Now Congress is looking to address this lack of uniformity through the FY 2019 National Defense Authorization Act (NDAA).

The House’s Proposed Definition of “Subcontract”

The House’s version of the FY 2019 NDAA (H.R.5515), which passed on May 24, 2018, offers a single definition of “subcontract” that would be added to Chapter 1 of Title 41 and Chapters 137 and 140 of Title 10.  Section 832 of H.R.5515 generally defines a “subcontract” to mean “a contract entered into by a prime contractor or subcontractor for the purpose of obtaining supplies, materials, equipment, or services of any kind under a prime contract. The term includes a transfer of a commercial product or commercial service between divisions, subsidiaries, or affiliates of a contractor or subcontractor.”

More importantly, section 832 excludes the following categories of agreements from the definition of subcontract: “(1) a contract the costs of which are applied to general and administrative expenses or indirect costs; or (2) an agreement entered into by a contractor or subcontractor for the supply of a commodity, a commercial product, or a commercial service that is intended for use in the performance of multiple contracts.”  (See Section 831 for the definitions of a “commercial product” and a “commercial service,” which would replace the term “commercial item” for procurement purposes.)

The Significance of This New Definition

The HASC Committee Report explains that a single definition of “subcontract” would provide “clarification, simplicity, and consistency for defense procurement actions.”  The Section 809 Panel – an independent advisory panel on streamlining DoD acquisition regulations – likely would agree with the HASC’s assessment as the House’s definition of “subcontract” appears to have been taken directly from the Section 809 Panel’s January 2018 Report.

The House’s proposed definition of “subcontract” is significant because it would exclude a broad range of agreements from that definition.  As a result, fewer agreements would be subject to the mandatory flow-down, compliance, and reporting requirements imposed on procurement contracts.

This approach is consistent with the intent of the Section 809 Panel, which noted in its January 2018 Report that excluding commodities, commercial products and commercial services from the definition of subcontract “makes clear to both government and industry that Congress is serious about simplifying the procurement process, especially for items that are clearly available on the commercial market, for which the burden would be the greatest.”

Remaining Hurdles and Open Questions

There still remain a number of hurdles and open questions before contractors can rely on this narrowing of obligations.

• First, this new definition of “subcontract” must make its way into the final version of the FY 2019 NDAA. (The definition is missing from the SASC mark-up, S.2987, issued on June 5, 2018, and has not been included in any of the proposed Senate amendments.)

• Second, even if this new definition becomes part of the FY 2019 NDAA that ultimately is signed into law by President Trump, it still must be implemented through the FAR and DFARS.

• Third, key questions surrounding the implementation of this new definition and its potential impact would need to be addressed. For example, would this new definition apply to every mention of the word “subcontract” in the FAR and DFARS?  Or, would exceptions to the general definition be needed, e.g., to avoid potential ambiguity in a clause or subpart, to ensure that particular requirements flow-down to certain categories of agreements?  Would this new definition apply retroactively?  What is the definition of a “commodity”?  How will this new definition reconcile with requirements that exist, at least in part, outside the FAR and DFARS, e.g., requirements pertaining to Department of Labor regulations and related Executive Orders?  And, finally, how would the new definition impact the underlying regulatory requirements that higher-tier contractors currently must flow-down to certain of their suppliers, and which serve to protect the government’s interests?

• Fourth, the timing of potential implementation remains unclear. To draw a parallel, Section 874 of the FY 2017 NDAA (Dec. 23, 2016) and Section 820 of the FY 2018 NDAA (Dec. 12, 2017) both included a definition of “subcontract” with less expansive exclusions that would apply only to commercial item subcontracting under 10 U.S.C. § 2375 and 41 U.S.C. § 1906, respectively.  Years later, regulations still have not been promulgated, though the government has signaled that they are likely to be issued soon.

Accordingly, government contractors at all tiers should closely monitor developments related to this potential new definition of “subcontract,” as it will have significant ramifications downstream.

This article was written by Justin M. Ganderson and Susan B. Cassidy of Covington & Burling LLP

The Southern District of Ohio recently denied class certification because the defendant’s unrebutted testimony—which established that its procedures ensured that faxes were only sent to those who had given their prior express permission—created individualized issues that predominated over any common ones. See Sawyer v. KRS Biotechnology, 2018 U.S. Dist. LEXIS 8595 (S.D. Oh. May 30, 2018).

The plaintiff moved for class certification based in large part on a transmission log purportedly showing that over 34,000 faxes had been sent. The defendant opposed that motion and explained that only 1,000-10,000 of those faxes had been the advertisements that the plaintiff had received. As for the recipients of those advertisements, the defendant insisted that the plaintiff was the only recipient who had not provided prior express permission. Specifically, it offered unrebutted testimony that its practice—although it was not memorialized in a written policy—was to obtain express permission prior to sending any fax. The defendant also testified that it did not fax blast advertisements to its entire list of contacts, but rather it reached out to its contacts to confirm that the contact wished to receive materials about the specific product the defendant was marketing.

The court denied the motion for class certification. It explained that the defendant’s testimony was “sufficient, non-speculative evidence that a bona fide issue of consent exists to all other faxes” and that the plaintiff was therefore required “to come up with something . . . to persuade this Court that those individualized consent issues would not drive this litigation[.]” The court rejected the plaintiff’s argument that the defendant could not rely on testimonial evidence alone, finding that both forms of evidence were probative. Because the defendant’s testimony supported the theory that the plaintiff’s receipt of an unsolicited fax was an “aberration” of the defendant’s normal business practices, and because that testimony was wholly unrebutted, individual inquires of consent predominated and prohibited class certification.

The court’s reasoning demonstrates that defendants can defeat class certification even if they have no documentary evidence regarding their past practices. While it remains a best practice to document prior express permission, business that have not done so—perhaps because, like the defendant here, they were unaware of the TCPA’s requirements—are not foreclosed from putting plaintiffs to their proofs.

This article was written by Michael P. Daly and Andrew L. Van Houter of Drinker Biddle & Reath LLP

A recent California case may force companies doing business with foreign entities to reconsider—and maybe rewrite—their contracts. In Rockefeller Tech. Invs. (Asia) VII v. Changzhou Sinotype Tech. Co., No. B272170, 2018 WL 2455092 (Cal. App. June 1, 2018), the California Court of Appeal held that parties may not contract around the formal service requirements of the Convention on the Service Abroad of Judicial and Extrajudicial Documents, commonly referred to as the Hague Service Convention. The decision could have profound implications for international business.

When a U.S. company conducts business with foreign companies, it typically requires the foreign company to resolve its dispute in U.S. courts or in some arbitral forum. The Rockefeller decision arguably makes it impossible to require foreign companies from some of the largest economies including China, Japan, Germany, U.K., India, Korea, Russia and Mexico, to show up in a California court based on notice provided by mail, courier (FedEx), or email even if the parties agreed to such forms of notice in their contract. This will have profound consequences for companies with global supply chains such as Apple and GM, for investment funds with foreign investors, for engineering and construction companies that procure materials and handle projects around the world, such as AECOM, and potentially for any company that imports or exports goods to or from the United States. Contract drafters beware!

The court in Rockefeller held that parties cannot enter into a private agreement to circumvent the official service requirements set forth in the Hague Service Convention. The Convention was created to allow and regulate service of process in a foreign country, ensuring that service is in compliance with the Convention would be valid, and that service was reasonably calculated to provide actual notice. Service under the Convention requires transmission of court documents through the “Central Authority” of the requesting and receiving countries, with the latter to arrange actual service on the foreign party. Not surprisingly, Hague service is expensive and cumbersome; it often takes many months to complete.

Article 10 of the Convention allows contracting states to permit service by mail; and it allows them to object to service by mail. Many commercially important countries, including the eight big economies listed above, submitted objections to Article 10 when they joined the Convention, meaning service in those countries generally cannot be accomplished by mail. In the U.S., parties often agreed to allow notification in accordance with contractual notice provisions. After Rockefeller, such contract language is no longer enforceable, at least in California.

In Rockefeller, Rockefeller Technology Investments (Asia) VII (a U.S. company) wanted to enforce its $414M arbitration award in California state court. SinoType (a Chinese company), although aware of the proceedings, did not participate in the arbitration or the court case, and the California trial court granted recognition of the award. Fifteen months later, SinoType moved to set aside the recognition judgment on the basis of improper service. The trial court denied the motion, acknowledging that service had not complied with the Convention, but concluding that the parties had privately agreed to accept service by mail.

The Court of Appeal reversed, explaining that the Hague Service Convention does not permit service by mail in countries that have objected to Article 10, and China, where SinoType was served, has filed an Article 10 objection. The court rejected Rockefeller’s argument that private parties may establish terms of service by contract, finding that the language of the Convention refers explicitly to the rights of each State, not its citizens, and as such, private parties cannot contract around the treaty.

The Court also rejected Rockefeller’s argument that the judgment remained valid due to SinoType’s actual notice of the proceedings and failure to timely move to set aside the judgment. The court held that personal jurisdiction requires valid service of process, and any judgment rendered without proper service is “void as violating fundamental due process,” and void judgments can be challenged at any time. (The Court did not address the validity of service for the underlying arbitration or potential defenses to enforcement of the award.)

For existing contracts with foreign companies, the Rockefeller decision means parties should review them carefully to identify and evaluate provisions that purport to bypass Hague service requirements, including assessment of whether the foreign contracting party might have to be served in a country that objected to Article 10 of the Convention.

For future contracts, the decision puts companies doing business with foreign parties on notice that attempts to contract around Hague Service Convention are likely to be ineffective. At the least, U.S. parties should provide in their contracts that the foreign party will pay for the costs of service if the foreign party does not appear voluntarily. (The Convention does not prohibit a foreign party from appearing in litigation voluntarily.)

Finally, the full import of the Rockefeller decision remains to be seen. Although purporting to interpret an international treaty as a matter of federal law (under the Supremacy Clause), a decision of the California Court of Appeal does not bind federal courts or courts in other states—and it may be subject to review by the Supreme Court of California. But for now, the Rockefeller decision makes it harder to get foreign parties into a court in the U.S. by providing notice by mail, courier or email.

This article was written by Hwan Kim and Neil A.F. Popović of Sheppard, Mullin, Richter & Hampton LLP

The constitutionality of the Philadelphia ordinance aimed at regulating employers’ requests for and reliance on salary histories has been appealed to the U.S. Court of Appeals for the Third Circuit.

Both the City of Philadelphia and the Chamber of Commerce for Greater Philadelphia appealed U.S. District Judge Mitchell Goldberg’s decision to grant in part and deny in part entry of a preliminary injunction, issued at the end of April. In the 54-page opinion, Judge Goldberg held that the ordinance’s provision banning an employer’s inquiry about an employee’s prior salary violated the First Amendment, but he upheld the ordinance’s prohibition against the use of that information to set rates of pay.

While Judge Goldberg applauded the intent behind the ordinance, he found the City had failed to present sufficient evidence to support its argument that discriminatory pay is perpetuated by an employee’s disclosure of his or her prior wages to a subsequent employer.

The parties each filed their notices of appeal on May 25, 2018. For details of Judge Goldberg’s Opinion and Order, see our article, Philadelphia’s Salary History Inquiry Ban Violates the First Amendment, Federal Court Rules.

This case potentially implicates the state and local salary history bans that have recently passed around the country.

This article was written by Amanda E. Steinke of Jackson Lewis P.C.

If there is a holy book for finance lawyers, at least on this side of the Atlantic Ocean, it would be the Loan Market Association (LMA) standard form.

Aimed to improve liquidity and efficiency in the syndicated loan markets in EMEA, the recommended standard forms developed by the LMA are here to stay. Although intended as a non-binding recommended form to be used as a starting point for negotiation only, boilerplates and other provisions proposed by the LMA have become widely accepted market standards.

English law governs the LMA standard documentation. In fact, it is not a single form but a selection of different forms for various types of transactions, including investment grade, real estate or leveraged transactions. While Germany, France and Spain enjoy their own LMA-based primary documents governed by their respective local laws, CEE jurisdictions are still in the basket of the developing markets for which the LMA produced its developing markets standard documentation. Standard forms for developing markets are governed by English law, based on the assumption that international lenders are likely to opt for legal documentation governed by a globally recognized legal framework instead of the law of the borrower’s jurisdiction.

So, what is the practice of using LMA standard forms like in Poland, the Czech Republic, Slovakia and Hungary?

Poland

For many years, the use of facility agreements based on the LMA standard has been widespread in the Polish market. The LMA standard has been followed in transactions documented under English law and Polish law. In large-cap deals and where the primary syndicate includes foreign lenders, especially international financial institutions such as the EBRD and EIB, the parties are more likely to use facility agreements governed by English law. In medium-cap deals and transactions where only Polish banks are involved, especially to avoid additional legal costs, frequently the facilities agreements, although based on the LMA standard, are governed by Polish law. Banks and law firms have developed their own templates, to greater or lesser degree, based on the LMA form. When it comes to specific LMA provisions that have to be modified to conform to mandatory Polish law provisions, various solutions are proposed.

The above approach has been taken a step further with the development by the Polish Bank Association (Związek Banków Polskich, ZBP) of a Polish law-governed standard form of a facility agreement based on the LMA standard documentation. The ZBP standard form is not an official LMA document, but it has been developed with the LMA’s consent. It is not only a transposition of the LMA form to Polish law, but also a translation of the LMA standard form to the Polish language. The objective, similar to the Western European LMA standard forms, was to adapt the LMA documentation specifically to the requirements of local law while also, to the extent possible, retaining the form and substance of the LMA English law documents.

The Polish standard form was initially announced in November 2016. It will certainly help to unify the various approaches on how the specific LMA provisions can be transposed to Polish law. Some banks specifically require that credit loan documentation is based on the ‘Polish LMA’ standard form. Whether such standard form will completely replace the numerous forms used by financial institutions and law firms so far, time will tell.

Czech Republic

LMA standard forms modified with respect to Czech law are frequently used in the Czech Republic, especially for large-scale and complex transactions. Czech lawyers started to draft facility agreements based on the LMA standard some 15 years ago.

Small- and medium-scale transactions are usually carried out based on the respective bank’s forms. Banks’ internal forms are substantially simpler and shorter than the LMA standard forms and usually include reference to the bank’s business terms and conditions.

In 2011 and 2012, the Czech Banking Association (CBA), in cooperation with major Czech banks and law firms with extensive finance experience, developed its own standard based on the LMA standard. The CBA standard was further amended in 2013 and 2014 to adopt the new Civil Code in the Czech Republic. Based on the CBA effort, a facility agreement form and an enforcement agreement form (regulation of the enforcement procedure among the finance parties) were introduced, in both the Czech and English languages.

Although these CBA standard forms are now available, banks and law firms prefer to use their own agreements, which they have developed over the years based on the LMA standard, which nevertheless reflect the Czech law specifics.

 Slovakia

LMA standard forms modified with respect to Slovak law are frequently used in the Slovak Republic, especially for large-scale and complex transactions (clubs and syndications). Depending on the type of financing, investment grade, leveraged or real estate forms are used. Slovak modifications relate mostly to the position of the security agent, repayment and transfer certificate, and there are specific provisions that deal with insolvency proceedings. Slovak facility agreements based on the LMA standard have been used for some 15 years, mostly by Slovak offices of international law firms that are usually seen as banks’ counsels (which also helped to standardize the forms used on the local market).

In the beginning, borrowers and bankers struggled to understand the clauses of the LMA standard forms. A negotiation strategy based on an argument that the wording of a clause is “LMA standard” was not well received. Today, borrowers, although still unhappy to see that they have to negotiate over a 100-page document, are becoming more familiar with the LMA standards. One of the reasons for this is that Slovak language versions of the forms are also standardized to some extent, which makes negotiation for borrowers easier.

Hungary

 In Hungary, loan documentation based on the LMA standard form started to be used around 10-15 years ago, especially for syndicated loans. Today, such LMA standard forms are used in nearly all significant international and Hungarian domestic financing transactions, despite the fact that the legal thinking and legal concepts that underlie the LMA standards do not always match the Hungarian legal terminology and regulatory tradition.

According to market players, the importance of the LMA standard forms in Hungary will increase in the coming years, since growth of project financing is expected in Hungary following the long-lasting downturn after the financial crisis.

What’s next?

Although the use of the LMA standard forms is widespread in CEE jurisdictions, in many cases, the governing law of the LMA-based facility agreement is adapted to the local law and LMA forms are modified accordingly to conform to the local mandatory provisions. As such, transposition of a common law-based document to the laws of civil law jurisdictions can be tricky. In some countries, initiatives were undertaken to further standardize loan documentation on a local level.

This is the first part of a series of posts devoted to the LMA standard provisions sensitive to jurisdiction-specific concerns in CEE, so stay tuned!

This article was written by Silvia Belovičová, Hana Čekalová, Malgorzata P. Grzelak, and Ákos Mester of Squire Patton Boggs (US) LLP