Excessive Pricing: Impact of the Le Patourel and Phenytoin rulings

The Competition Appeal Tribunal (CAT) has recently provided useful analysis on the rarely tried excessive pricing abuse of dominance in the Phenytoin and Le Patourel judgments. In this update, we delve into the key updates and consider next steps for the law on excessive pricing.

What you need to know

• The Phenytoin and Le Patourel judgments confirm that United Brands remains the correct test for assessing excessive pricing cases.
• The judgments also set out a clear framework for assessing the first limb of the United Brands test and outlines a threshold for excessiveness (although this is likely to be challenged in future cases).
• Whilst the judgments also provide guidance in relation to the second limb of the United Brands test, the application of this test in practice remains highly fact specific and the issue of distinctive value is likely to be hotly debated in future cases.

Background

The CAT recently handed down two significant judgments concerning excessive and unfair pricing abuse of dominance under Chapter II of the Competition Act 1998:

• On 20 November 2024, the CAT rejected the Competition and Markets Authority's (CMA) revised decision to fine Pfizer and Flynn Pharma for engaging in excessive and unfair pricing in relation to various dosages of phenytoin sodium capsules. The CAT took the unusual step to remake the decision, issuing comparable fines for the same infringements of £62.3 million and £6.7 million respectively (see our March 2025 update).
• On 19 December 2024, the CAT handed down its long-awaited judgment in Justin Le Patourel's collective action against BT, alleging that BT charged excessive and unfair prices to approximately 2.3 million landline customers in the UK (see our May 2022 update). The CAT found that BT had not abused its dominant position and that while prices were excessive they were not unfair when considering the economic value of BT's landline services (see our December 2024 update).

The United Brands legal test and judicial treatment

The seminal authority on excessive pricing is a 1978 judgment from the European Court of Justice (Case 27/76 United Brands) concerning the supply of bananas. The United Brands case established a two limb test for determining whether pricing practices constitute an abuse of a dominant position: 

• Limb 1: the price charged for the relevant product must be excessive; and
• Limb 2: the price must also be "unfair", either: (a) in itself; or (b) when compared to competing products.

The vast majority of the subsequent cases have endorsed United Brands as containing the fundamental benchmark to assess excessive and unfair pricing.

The Le Patourel judgment also references some of the most noteworthy English law cases on excessive and unfair pricing since the United Brands judgment, including judgments from the CAT in Albion Water II, Liothyronine and Hydrocortisone and the Court of Appeal's judgment in an earlier ruling in the Pfizer and Flynn Phenytoin litigation. The latter provides a helpful précis of the state of the law following United Brands: 

• To constitute an abuse, both limbs of the United Brands test must be met – i.e., the test is cumulative. The presence of an abuse will often hinge on whether a price is unfair: generally a price will be unfair "when the dominant undertaking has reaped trading benefits which it could not have obtained in conditions of “normal and sufficiently effective competition”, i.e. “workable” competition.
• Competition authorities, claimants and courts are not bound to a specific methodology to establish that either limb of the United Brands test has been met.

Three of the four significant cases mentioned above concern pharmaceuticals, each with very significant producer profit margins and a unique market dynamic characterised by a single significant purchaser (known as a monopsonist) via the NHS' purchasing regime. The recent judgment in Le Patourel therefore provides welcome guidance on the application of the United Brands test outside of pharmaceutical markets. 

A framework for assessing limb 1

It has long been accepted that the test under limb 1 of United Brands is to determine whether prices are significantly and persistently above costs plus a reasonable rate of return. This approach was confirmed in Le Patourel and Phenytoin. Le Patourel sets out a simple three-step framework for assessing limb 1:

• Step 1: determine the relevant competitive benchmark (i.e. costs plus a reasonable rate of return).
• Step 2: calculate the excess of the price (if any) over that benchmark.
• Step 3: establish whether such excess is significant and persistent.

Whilst the limb 1 test involves detailed analysis (the assessment of limb 1 is well over 100 pages in the Phenytoin judgment on limb 1 and just under 100 pages in Le Patourel), both judgments make clear that it involves a more mechanical assessment than limb 2. Questions of economic value or justifications for why prices are above costs should largely be left to limb 2.

What is a significant excess? 

One of the challenges in evaluating excessive pricing cases has been determining what will be considered a significant excess above the competitive benchmark. This is one of the reasons that excessive pricing cases have generally been confined to instances where prices have clearly been significantly above cost or have increased significantly. For example, in the CMA's investigation into Hydrocortisone tablets it found that prices had increased by over 10,000%.

The Le Patourel judgment establishes a clear threshold for what might be considered significant, with the CAT concluding that: "we consider that any excess would have been significant if it was 20% or more above the competitive benchmark". There is no explanation as to how the CAT arrived at this figure and it is possible that an alternative threshold may be appropriate in other cases. 

Is the extent of the excess relevant to limb 2 (unfair pricing)?

In previous cases, if prices are significantly above the competitive benchmark then this has often been viewed as evidence of unfairness as well as excessiveness. 

However, in Phenytoin the CAT strongly criticised the CMA for focusing on the extent of excess in its assessment of limb 2, noting that "a cost plus approach to the Unfair Limb is the wrong approach… Focus on CMA Cost Plus – critical for the Excessive Limb – is at best an irrelevance and more like an immaterial factor to take into account in the case of the Unfair Limb". 

The CAT took a more nuanced view in Le Patourel explaining that: "[o]f course, the very size of the excess can be a factor pointing strongly towards unfairness. On the other hand, it would, in our view, be wrong to approach the Limb 2 exercise as if there were a presumption of unfairness established already by the mere fact that the price was excessive under Limb 1". Ultimately, the size of the excess found by the CAT in Le Patourel was significantly less than the amount claimed by the Class Representative, and therefore the CAT gave this factor limited consideration.

While this issue is likely to be considered again in future cases, it is clear that the extent of excess as part of the limb 2 assessment needs to be considered alongside other factors. 

Distinctive value and its role in assessing limb 2 

In relation to limb 2, the CAT has repeatedly noted that the economic value analysis is highly fact specific and should not be prescribed fixed rules for identification. 

In Le Patourel, the CAT endorsed the assessment in United Brands that the traditional understanding of "economic value" (the price consumers are willing to pay for a product) is an unsatisfactory starting position to assess whether a price is unfair. This approach would allow an abusive dominant company to price a product at any price and state that the price they can "get away with" consumers paying represents the product's economic value. To address this, United Brands and later judgments have set out rules according to which a product's economic value can be used to assess a price's unfairness. 

For example, the CAT's Hydrocortisone judgment sets out three hypothetical scenarios that explain why prices above costs may arise: 

• Case 1: where costs are higher due to relative inefficiencies among different sellers.
• Case 2: where a particular supplier may be able to generate additional value through the provision of "distinctive value", resulting in consumers' willingness to pay a premium for the product.
• Case 3: where producer surplus is generated without any added economic value to buyers caused by the exercise of market power.

The CAT used this framework to assess the economic value of landline phone services in Le Patourel and phenytoin sodium capsules in Phenytoin, but arrived at different conclusions. 

In Le Patourel, BT argued that various factors (in addition to the general utility of landline services) command a higher economic value than was claimed by the Class Representative. The CAT agreed with BT's argument that certain "gives" (defined as additional services that BT customers benefit from when using its landline services) should be considered in the product's aggregate economic value. Further, BT successfully argued that its strong brand played a material factor in demonstrating the added economic value of its products. Overall, BT successfully contended that high prices were in this case justified as a result of a Hydrocortisone Case 2 scenario. On that basis, although the price may have been excessive in absolute and relative terms, the CAT concluded that the price bore a reasonable relation to the economic value.

In Phenytoin, the CAT analysed economic value through the lens of consumer and producer surpluses as a potential means of justifying higher prices. The CAT held that some producer surplus for Pfizer was justified (as the branded producer of phenytoin) but a surplus of 96% was clearly unfair. In relation to Flynn (which acted as the reseller of a generic version of phenytoin), the CAT concluded that there was no material additional value to warrant any producer surplus, i.e. comparable to Case 3 as identified in Hydrocortisone.