Reaffirming Cost-Plus as the Principal Benchmark for Excessive Pricing under Section 18 CA 1998

Introduction

This commentary examines the Court of Appeal’s judgment in Cinven Capital Management (V) General Partner Ltd & Ors v Competition and Markets Authority ([2025] EWCA Civ 578). The dispute arose from the CMA’s finding that Advanz Pharma Corp, a single “undertaking” supplying generic liothyronine tablets to the NHS, had abused its dominant position between January 2009 and July 2017 by charging excessive and unfair prices. The price per box of tablets rose from £20.48 to £247.87 over that period. The CMA imposed penalties totalling over £100 million. The Competition Appeal Tribunal (CAT) dismissed all appeals on the merits but reduced the Cinven group’s penalty by removing a specific-deterrence uplift. Cinven and Advanz seek leave to appeal the CAT’s conclusions on pricing benchmarks and the CMA seeks leave to appeal the CAT’s penalty adjustment in relation to Cinven.

Summary of the Judgment

Dominance and Abuse – The Court of Appeal upheld the CAT’s finding that Advanz held a dominant position in the market for liothyronine tablets and abused that position by charging prices far above a reasonable “Cost Plus” benchmark.
Cost Plus Benchmark – The CMA’s computation of average Cost Plus at £4.94 per pack was endorsed as a valid measure of a fair price in a competitive generics market.
Rejection of Alternative Benchmarks – Price benchmarks based on market structure (“workable competition”), entry-incentivising prices (EIP), post-entry prices (PEP), multi-firm hypothetical costs (MFP), or portfolio-pricing theories were held to be non-mandatory and, on the facts, unpersuasive.
Penalties – The CAT correctly calculated the minimum financial benefit (MFB) to Advanz under Cinven’s ownership, but erred in refusing to apply a specific-deterrence uplift under Step 4 of the CMA’s penalty guidelines. The Court of Appeal reinstated the full penalty for Cinven.

Analysis

Precedents Cited

United Brands v Commission (C-27/76) – The foundational EU case on unfair pricing, defining abuse as prices bearing no reasonable relation to economic value.
Phenytoin (Flynn Pharma) [2020] EWCA Civ 339 – Synthesised 50 years of abuse jurisprudence; confirmed Cost Plus as a permissible test and that no single methodology is mandatory.
Napp v OFT [2002] CAT 1 – An example of combinatorial benchmarking but did not mandate any one test.
Latvian Copyright (AG Opinion) – Discussed hypothetical models; not adopted as mandatory by UK courts.
Generics (UK) Ltd v CMA (C-307/18) – Confirmed burden on dominant firms to adduce objective justifications (e.g., efficiencies) if challenged.

Legal Reasoning

The Court of Appeal identified two core legal principles:

Broad Brush Test of Fairness
Fairness under section 18 CA 1998 is assessed by reference to whether the dominant firm reaped trading benefits not obtainable under “normal and sufficiently effective” (workable) competition. Neither “workable competition” nor any other structural test is a hard‐and‐fast legal benchmark.
Methodological Discretion
The CMA and CAT enjoy a margin of appreciation in choosing among permissible methodologies—Cost Plus, comparables, profitability tests, or economic models—but are not obliged to deploy every theoretical benchmark. They must, however, fairly evaluate any alternative evidence adduced by a defendant.

Rejection of Alternative Pricing Tests

Workable Competition Structure – No bright-line rule that absence of dominance, collusion, and insurmountable entry barriers automatically makes any price lawful.
Entry-Incentivising Prices (EIP) – Entry prices are subjective, variable, and often above competitive levels where barriers are high. They cannot displace Cost Plus as the legal benchmark.
Post-Entry Prices (PEP) – Market contamination from prior abuse can persist long after new entry. Prices in decline or convergence do not prove a return to competitive norms unless uncontaminated.
Multi-Firm Pricing (MFP) – A hypothetical multi-competitor Cost Plus lacks legal certainty and bears no necessary relation to actual costs or product value in a monopoly period.
Portfolio Pricing – The notion that excess profits on one product may subsidise another is not a recognized legal justification absent clear evidence of consumer benefit and causation.
Acquiescence – Passive acceptance by the NHS (or DOH/DHSC) cannot immunize unilateral abuse. No general principle of acquiescence overrides statutory duties or CMA enforcement.

Impact

This decision has significant consequences:

It reaffirms the centrality of Cost Plus (and related comparables) as a sufficient, stand-alone test for unfair pricing in abuse cases.
It curtails efforts to import broad structural or hypothetical economic tests as mandatory legal benchmarks.
It clarifies the weight to be given to post-infringement pricing evidence—contamination must be addressed, not ignored.
It underscores the CMA’s discretion under its penalty guidelines and confirms judicial review of specific-deterrence uplifts where the CAT misapplies the guidance.

Complex Concepts Simplified

Cost Plus Test: Calculation of production and overhead costs plus a reasonable return on capital—used to gauge a competitive price ceiling.
Workable vs. Perfect Competition: “Perfect” competition is theoretical; “workable” competition means sufficiently effective market pressures so that prices reflect cost plus a normal margin.
Market Contamination: Lingering distortions to prices caused by prior abuse, delaying a return to competitive norms even after new entry.
EIP and PEP: Entry-Incentivising Price (EIP): the price level that triggers a new competitor’s market-entry decision.
Post-Entry Price (PEP): the price level after new entry, purportedly reflecting competitive equilibrium.
Specific vs. General Deterrence: General deterrence aims to discourage others in the market. Specific deterrence seeks to prevent the same undertaking from re-offending by imposing an uplift if a base penalty is not sufficiently impactful.

Conclusion

The Court of Appeal’s judgment firmly anchors UK abuse of dominance law in pragmatic, evidence-based benchmarking, with Cost Plus and contemporaneous comparables as valid pillars. Alternative structural and economic tests remain tools of persuasion, not mandatory gateways. On penalties, the Court reinforces the CMA’s duty to apply its detailed guidance—particularly the specific-deterrence step—by ensuring uplifts reflect an undertaking’s global size and the inadequacy of a mere token overrun of financial benefit. The decision brings clarity and predictability to future excessive-pricing cases and penalty assessments under the Competition Act 1998.