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European Union

ECJ rules on Primecrown parallel import case

On December 6 1996, the ECJ issued one of the most important rulings in recent years in the continuing battle between pharmaceutical companies and 'parallel importers', ie independent traders who are able to undercut prices in expensive markets by importing bulk quantities of medicines from low-price EU countries. The Primecrown case upholds the right of parallel importers under the Single Market rules to buy and sell wherever they choose in the EU and fails to answer the claim of patent holders that parallel imports threaten research.

The ECJ's judgment ends the legal proceedings brought by two drug manufacturers, Merck & Co and SmithKline Beecham, against Primecrown, a drugs wholesaler. The maufacturers had marketed drugs in Spain and Portugal after their accession to the European Community but before the product could be protected by a patent in those states, and claimed Primecrown had carried out parallel imports of products from Spain and Portugal into the UK. The most important question for the ECJ was whether or not the principle of exhaustion of patent rights as laid down by the ECJ in the 1981 case of Merck v Stephar should be reconsidered in the light of these particular circumstances.

In Merck v Stephar, the ECJ stated that it was for the holder of the patent to decide under what conditions to market the product. A patent held in one member state could not therefore be invoked to prevent the import of a product from a member state where that product was freely marketed but not patentable.

The ECJ upheld the ruling in Merck v Stephar, rejecting the advocate general's suggestion that the rule be abandoned in this kind of situation. It outlined only limited circumstances where patent holders could use national laws to prevent import of products from another member state, namely where it can prove that it is under an existing legal obligation to market the product in that member state.

Import of products from Spain and Portugal has been a problem for patent holders since 1995, when the EU's three year ban on parallel imports from these countries expired. The problem is expected to worsen as a result of this judgment.

UK secretary of state's decision on the BA/AA alliance

On December 6 1996, Ian Lang, the president of the UK Board of Trade and secretary of state for trade and industry, announced he would be prepared to clear the the proposed alliance between British Airways (BA)and American Airlines (AA) under the merger control provisions of the UK Fair Trading Act and grant an Article 85(3) exemption using the powers under Article 88 of the EC Treaty, if appropriate undertakings could be negotiated by the Office of Fair Trading.

The principal undertakings proposed would involve the release by the parties of up to 168 take off and landing slots per week at Heathrow, London's main airport, during 1997 and 1998. The secretary of state was concerned as to the competitive effect of the alliance on the London-Dallas Fort Worth and London-Boston routes, and proposed that one pair of slots per day for each of these routes be reserved for use by other airlines and that, in addition, the alliance should reduce its services on the London-Dallas Fort Worth route. He also proposed undertakings by which the alliance would allow access to its joint frequent flyer programme, and which would remove existing restrictions preventing USAir from competing with BA on certain routes.

Rival airlines have criticized the proposed undertakings for failing to go far enough in addressing the competition concerns presented by the alliance, pointing out that a much more far-reaching solution is required. This could entail, for example, divestment of a greater number of slots by the alliance, outright disposal rather than leasing (which was envisaged by certain of the secretary of state's proposals), and a restriction on the ability of the alliance partners to buy slots in the future. The secretary of state's announcement has also been criticized for not dealing with other important aspects of the alliance, such as access to ground facilities for the alliance's competitors at Heathrow and at US airports, without which a slot may have little value.

One other issue which is raised by the proposed undertakings concerns the terms on which BA and AA should relinquish any slots of which disposal is required. If they were able to sell such slots, this could entail a 'windfall' of, potentially, many millions of pounds for BA and AA. At present airlines receive slots twice a year free of charge and are not entitled, under Community law, to sell them. The Commission has been considering introducing legislation which would permit the trading of slots, but opposition by competition commissioner Karel van Miert means that any such legislation is unlikely to be adopted in the near future.

After a period of consultation between the Office of Fair Trading and interested parties, which ended on January 10 1997, the final decision of the secretary of state is now awaited. In the meantime, the European Commission's investigation into the BA/AA alliance continues, and Van Miert has written to the secretary of state threatening legal action in the European Court of Justice if he proceeds to grant a decision under Article 85(3) pending resolution of the Commission's concerns about the alliance.

Commission studies Anglo-American's shareholding in Lonrho

The Commission announced in December 1996 that it would investigate the acquisition by the Anglo American Corporation of South Africa Limited (AAC) and its related companies of a total of 28.4% of shares in Lonrho plc, an amount which the Commission considered sufficient to give AAC control over Lonrho within the meaning of the Merger Regulation.

An initial 10% shareholding was acquired in March and April 1996 and in November 1996 a further 18.4% interest was acquired from Dieter Bock through the exercise of an option. Both companies are active in the production of platinum group metals and the Commission is concerned that the operation would lead to the creation of a dominant position in the platinum and rhodium markets.

In April 1996 the Commission prohibited the proposed merger between Impala Platinum, controlled by the South African company Gencor, and Lonrho's platinum division on the grounds that this would have led to a duopoly on the platinum market consisting of Gencor-Lonrho and AAC.

Michael Reynolds
Allen & Overy

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