Saturday, September 15, 2012

The Supreme Court of Chile Upholds Record Fines for Pharmaceutical Industry Cartel (Article)

By Benjamin Gomez, Attorney at Law, UC Berkeley LL.M. candidate 

On Friday September 7th, 2012, the Supreme Court of Chile released a final decision on one of the most important cases in the recent history of Chilean competition law.

The unanimous decision affirmed the ruling of the Antitrust Tribunal (Tribunal de Defensa de la Libre Competencia – TDLC) on January 31st of this year, which found two of the three major pharmaceutical companies in Chile, Salcobrand and Cruz Verde, guilty of collusion, in what can be considered the biggest cartel case assessed by modern antitrust authorities in Chile since their creation. The third company involved – Farmacias Ahumada – was deemed free from all liability by participating in a groundbreaking agreement of what would become the current leniency program (Chile’s version of a whistle-blower program) implemented by the National Antitrust Prosecutor (Fiscalia Nacional Economica – FNE).

The initial investigation conducted by the FNE in 2008 aimed to investigate potential collusive agreements between Salcobrand, Cruz Verde and Farmacias Ahumada to increase the price of 222 pharmaceutical products between 2007 and 2008. At the time, the three firms collectively held nearly 92% of the national market share.

For a better understanding of this particular case and the general procedure, it is important to establish the factual and legal context of the case. The colluded price increase was motivated by an even earlier “price war” which occurred between the three companies, where they constantly lowered the prices on these same 222 products in order to increase their market share. After the products reached their lowest, the three companies involved entered into an agreement to coordinate systematic prices increases of the products in question in order to recover from the losses suffered by their prior aggressive price strategy.

Briefly stated, the Chilean Antitrust system undergoes an administrative review process before the TDLC, which can be initiated either by the FNE after completion of the requisite investigation, or by a private party that files a claim directly before the TDLC. The FNE in its part, can initiate an investigation sua sponte, or by means of a report made by a private party. In the present case, it was a private attorney who brought the case to the FNE, which then determined there were sufficient grounds to prosecute all three companies, leading to a subsequent complaint filed before the TDLC on December, 2008. The TDLC is an independent court composed of lawyers and economists (5 members), with its own regulation and particularities in its process, and its decisions can only be reversed by means of a Claim Recourse (Recurso de Reclamacion) before the Supreme Court.

Antitrust litigation is probably one of the worst scenarios for a company in Chile. The process is long, and it requires reports from experts, and the constant assistance from a team of both lawyers and economists, making it very expensive to undergo. The battle becomes even more uneven when it is the FNE who is prosecuting, especially with their invasive processes and large financial resources. Needless to say the reputation of the involved companies is also seriously affected, although it is important to point out an interesting fact: while the public condemned this collusion (there were several cases of protests, looting, and vandalism), the sales from all three pharmaceutical companies have not decreased still to this day. After all, they do own most of the Chilean market.

The impact of the case in the public sphere was so powerful that Congress discussed and approved an amendment to Decree Law 211 – the Antitrust statute in Chile – while the judicial process before the TDLC was already underway. Such amendments would significantly affect the outcome of this case.

The amendments applied specifically to cartel cases in the following manner: (i) a significant increase in the fines; (ii) the establishment of more invasive investigation tools for the FNE; and (iii) statute of limitation was raised from 3 to 5 years; and (iv) the creation of a “leniency program”, also known as a whistle-blower program, which would allows cartel participants to “come clean”, and be eligible for lower economic sanctions.

The last of these legal innovations is particularly interesting in this case. In March, 2009, four months before the amendment entered into force, Farmacias Ahumada became in a way the first business actor to benefit from this newly created leniency, while the litigation had already begun before the TDLC. Farmacias Ahumada admitted its participation in the cartel, and provided further details and supporting evidence to the FNE regarding the implication of the other two parties. Instead of getting drawn into the litigation before the TDLC, a unique sanction consisting of a USD 1 million fine was agreed to, thus reaching an extra-judicial settlement with the FNE excluding the company from thecostly, time-consuming, and embarrassing judicial process.

This event was controversial, as the FNE called it an extra-judicial settlement, but it is clear that this was a disguised leniency. As this was a very unusual scenario, there were doubts among legal experts as to whether the TDLC would finally accept this settlement, as there was no clear rule on the matter, only those regarding leniency which were still not in force. The TDLC finally accepted the motion.

Regarding the new increased fines – almost doubled from its preceding statute – the amendment specified that they would be applicable in actum to all new and pending procedures. This means that the legislature had a clear intention of seizing this opportunity of strong public opinion, to make the pharmacies pay for their anticompetitive acts like no other corporation has ever done before. The TDLC aligned with the relevance of this case, and making the most of its new punitive faculties, applied record fines as high as USD 20 million for each of the two prosecuted pharmaceutical companies.

Analyzing the timing of the statute’s amendment, the increase of the fines and the leniency program appeared to be “tailor made” for this case. Given the history of the case and the actors involved, the outcome proved the amendments to the regulation to be effective. Although such amendments were discussed in Congress years before the “pharmacy case” even began, it was this event which finally triggered their passage.

In short, the “pharmacies case” provides not only a landmark in Chile’s public conscience and media regarding the role of Antitrust as a means to control company overgrowth and abuse to consumers, but also a clear and interesting example of how flexible and evolving this body of law really is in Chile: the statute for Antitrust procedure and fines was modified during the judicial process, giving place to an extraordinary situation regarding Farmacias Ahumada, and the application of more severe fines in an ongoing procedure to the other two pharmacies, something unseen in ordinary procedure statutes such as those applying to criminal matters.In fact, the general rule is the non-retroactivity of a law (ex post facto), especially regarding sanctions in a judicial process, while new statutes that affect procedural rules are usually applied retroactively to cases pending resolution. This flexibility can perhaps be explained by the fact that Antitrust is the only legal field governed by the common law system, in a country such as Chile with strong and long standing civil law traditions.

For more information on the case, a Spanish version of the referenced decisions can be found here (TDLC) and here (Supreme Court of Chile) here:

For further inquiries about this case or general regulation in Chile, you can contact me at :


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