Distribution, Competition, and Antitrust / IP Law

Marginal Evidence of Customer Diversion Won’t Support a Price Discrimination Claim

In Cash & Henderson Drugs, Inc v. Johnson & Johnson, Case No. 12-4689 (2nd Cir. Aug. 27, 2015), the Second Circuit upheld a summary judgment in favor of defendant pharmaceutical manufacturers accused of price discrimination.

Retail pharmacies alleged – and the defendant manufacturers conceded – that the drug companies had offered lower drug pricing to staff-model HMOs and pharmacy benefit managers. The retail pharmacies alleged that the price discounts amounted to unlawful price discrimination under the Robinson-Patman Act.

Through court-supervised discovery, the plaintiffs attempted to assemble “matching” evidence showing that customers they lost ended up purchasing from the favored purchasers. However, the evidence showed that only 1%-3% of potential lost customers in plaintiffs’ records could be identified as customers who later filled prescriptions with a favored purchaser.

The Second Circuit held that this de minimis loss of customers was insufficient to establish a competitive injury. The court held that although FTC v. Morton Salt Co., 334 U.S. 37, 50-51 (1948), also permits a discrimination claim to be predicated upon a substantial discount to a competitor over a significant period of time, after Volvo Trucks North America v. Reeder-Simco GMC, Inc., 546 U.S. 164, 180 (2006) (holding that price discrimination must affect “substantially” competition between the favored purchaser and the plaintiff), “if the loss attributable to impaired competition is de minimis, then the challenged practice cannot be said to have had a ‘substantial’ affect [sic] on competition.”

Cash & Henderson is yet further evidence of the courts’ repeated attempts to limit the reach of the Robinson-Patman Act and harmonize it with the intent to protect competition (not competitors) that animates the Sherman Act.

Return of Robinson-Patman Act and Resale Price Maintenance Litigation?

A quick note on a few recent developments suggesting that RP and RPM litigation is not yet dead.

First, on February 2, 2015, a court refused to dismiss claims against Clorox arising from its refusal to sell a small regional grocery chain the same large packs of products as Clorox sells to big box retailers. Clorox didn’t refuse to sell the smaller retailer products – it simply didn’t sell it the same large packs, which have a lower per unit cost. The court held that the practice might violate Section 2(e) of the Robinson-Patman Act, which prohibits discrimination in the furnishing of services or facilities in connection with the processing, handling, sale or offering for sale of a commodity purchased for resale. See Woodman’s Food Market, Inc. v. The Clorox Co., No. 14-cv-734-slc (W.D. Wis. Feb. 2, 2015).

Second, a slew of recently-filed suits have accused contact lens manufacturers of conspiring to set minimum resale prices for contact lenses sold at certain outlets. The manufacturers have been sued both by putative indirect purchaser classes as well as by Costco. The lawsuits generally allege that the manufacturers started to implement so-called “unilateral pricing policies” because they were concerned about deep discounts being offered by Wal-Mart, Costco, and others.

These cases do remind us to be careful about the design and implementation of pricing policies.

Northern District of California Addresses Functional Discounts, Price Discrimination Claims

Chrysler 1959

Chrysler 1959 (Photo credit: Wikipedia)

In Mathew Enterprise, Inc. v. Chrysler Group, LLC, 2014 U.S. Dist. LEXIS 95522 (N.D. Cal. July 11, 2014) (Freeman, J.), the court dismissed certain Robinson-Patman Act price discrimination claims and allowed others to proceed, and in so doing addressed the contours of the functional availability defense.

The plaintiff is a car dealership. It alleged that Chrysler grants “volume growth” incentives which function as a subsidy and amount to roughly $700 per vehicle sold by a qualifying dealer. The plaintiff alleged that Chrysler allowed competing dealerships to be established in plaintiff’s area but did not adjust the formula by which plaintiff could qualify for volume growth incentives. That is, plaintiff’s sales objectives continued to be based on its past year’s sales without consideration of the reduction of sales expected due to the addition of new dealerships in the market.

In addition to its allegations about volume growth incentives, the plaintiff further alleged that Chrysler provided disguised reductions in the net prices of vehicles to a competing dealership in the form of below-market rent subsidies which were not also provided to plaintiff.

On Chrysler’s motion to dismiss, the court held that plaintiff had adequately alleged that the volume growth incentives were not functionally available to it. “Defendant’s incentive program could not be applied in an even-handed manner, Plaintiff alleges, because its formula as applied to Plaintiff took into account Plaintiff’s prior year sales, while the formulas put in place for the [competing] dealerships did not, because neither new dealer had prior-year sales.” The court also held that plaintiff had plausibly alleged an effect on competition in the form of sales diversions. “Although Plaintiff acknowledges that other factors contributed to its declining sales, such as increased competition and geographic convenience to customers, those others factors are not more plausible than Plaintiff’s allegations of diverted sales.”

As to the rental subsidies, however, the court held that a rental agreement itself is not a commodity within the reach of the Robinson-Patman Act, and that the plaintiff had not plead facts that would permit the court to infer that the rental agreement in some way was tied to the volume of cars sold. Therefore, the court rejected plaintiff’s argument that the rental agreement was a “disguised discount.”

Is Razor and Blade Pricing a Myth?

A heavy duty style safety razor. This is a fun...

(Photo credit: Wikipedia)

Speaking of razor and blade pricing, I just recently found this 2010 paper by Randal C. Picker entitled “The Razors-and-Blades Myth(s).”  From the abstract:

Gillette’s 1904 patents gave it the power to block entry into the installed base of handles that it would create. While other firms could and did enter the multi-blade market with their own handles and blades, no one could produce Gillette handles or blades during the life of the patents.

From 1904-1921, Gillette could have played razors-and-blades – low-price or free handles and expensive blades – but it did not do so. Gillette set a high price for its handle – high as measured by the price of competing razors and the prices of other contemporaneous goods – and fought to maintain those high prices during the life of the patents. For whatever it is worth, the firm understood to have invented razors-and-blades as a business strategy did not play that strategy at the point that it was best situated to do so.

It was at the point of the expiration of the 1904 patents that Gillette started to play something like razors-and-blades, though the actual facts are much more interesting than that. Before the expiration of the 1904 patents, the multi-blade market was segmented, with Gillette occupying the high end with razor sets listing at $5.00 and other brands such as Ever-Ready and Gem Junior occupying the low-end with sets listing at $1.00.

Given Gillette’s high handle prices, it had to fear entry in handles, but it had a solution to that entry: it dropped its handle prices to match those of its multi-blade competitors. And Gillette simultaneously introduced a new patented razor handle sold at its traditional high price point. Gillette was now selling a product line, with the old-style Gillette priced to compete at the low-end and the new Gillette occupying the high end. Gillette foreclosed low-end entry by doing it itself and yet it also offered an upgrade path with the new handle.

But what of the blades? Gillette’s pricing strategy for blades showed a remarkable stickiness, indeed, sticky doesn’t begin to capture it. By 1909, the Gillette list price for a dozen blades was $1 and Gillette maintained that price until 1924, though there clearly was discounting off of list as Sears sold for around 80 cents during most of that time. In 1924, Gillette reduced the number of blades from 12 to 10 and maintained the $1.00 list price, so a real price jump if not a nominal one. That was Gillette’s blade pricing strategy.

In sum: “Gillette hadn’t played razors-and-blades when it could have during the life of the 1904 patents and didn’t seem well situated to do so after their expiration, but it was exactly at that point that Gillette played something like razors-and-blades and that was when it made the most money. Razors-and-blades seems to have worked at the point where the theory suggests that it shouldn’t have.”

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Drug Makers Win Summary Judgment on De Minimis Price Discrimination Claim

A recent case reminds us that price discrimination under the Robinson-Patman Act may be so de minimis that it is not actionable.

In Drug Mart Pharmacy Corp. v. American Home Products Corp. (No. 1:93-cv-05148-ILG-SMG) (August 16, 2012) (a so-called secondary line discrimination case involving disfavored retailers), retail pharmacies brought a Robinson-Patman Act price discrimination claim against various drug manufacturers, alleging that the manufacturers had effectively given price breaks to hospitals, HMOs, and mail order pharmacies but not to the smaller retailers. Plaintiffs argued that they could identify specific customers lost to competitors as a result of the price discrimination, and selected a test sample of plaintiffs to evaluate.

Upon evaluation, the 28 sample plaintiffs were only able to match 5,147 potential lost customers (about 3% of their customer base) and 15,043 potential lost transactions.

On these facts, the court concluded that the plaintiffs had failed to demonstrate an anti-competitive effect or antitrust injury. Although FTC v. Morton Salt Co., 334 U.S. 37 (1948), allows an inference of anti-competitive effect where there is a significant price difference over a substantial period of time, this presumption is subject to rebuttal, and here the plaintiffs themselves undertook an extensive, costly, and time-consuming effort to trace the customers they claim to have lost to favored purchasers because of price discrimination, but “essentially c[a]me up empty.”

Additionally, plaintiffs could not show antitrust injury, because they could not match up any alleged losses with gains to favored customers — at least not beyond a de minimis amount.

Price discrimination is not per se unlawful, and winning a price discrimination case, while not impossible, is in fact very difficult.

Sixth Circuit Rules that Competing End Users Can Bring Price Discrimination Claims

English: Lightning over Las Cruces, New Mexico...

(Photo credit: Wikipedia)

In Williams v. Duke Energy International, Inc., No. 10-3604 (6th Cir. June 4, 2012), plaintiffs alleged that Duke paid unlawful and substantial electricity rebates to certain large customers, including General Motors, in exchange for the withdrawal by those customers of objections to a rate-stabilization plan that Duke was attempting to have approved by Ohio regulators.

The Sixth Circuit held that electricity is a commodity within the meaning of the Robinson-Patman Act.  It also found that plaintiffs had stated a price discrimination claim, because one subclass of plaintiffs, sellers of goods and services, competed in the same market as the favored customers and alleged that they lost profits as a result of the discriminatory rebates and the competitive advantage provided to favored customers.  “Defendants’ contention that the [Robinson-Patman Act] applies only to the resale of a purchased product is not consistent with case law.”

Usually price discrimination between and among end users is not problematic.  Williams is a reminder that such discrimination is usually not problematic because the end users aren’t in competition with each other.  Sometimes, however, they are.

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Patent Tying: Does Price Discrimination Promote Innovation? (Part 3)

Returning to the subject of patent tying, price discrimination, and the promotion of innovation, Christopher Leslie’s recent article comes to the following conclusions:

1. Tying law should apply equally to patent tie-ins as to other tie-ins.

2. Tying law generally should be “fixed” by requiring proof of anticompetitive effects.  In other words, per se treatment should be jettisoned.  (In reality, although many courts still speak of “per se” illegal tying offenses, they often analyze competitive effects.  But there is language in some relatively recent cases suggesting that the offense of per se illegal tying may still exist.)

3. So long as the elements of a tying claim (including anticompetitive effects) are proven, then the fact that the patentee was using the tie-in as a metering device should be irrelevant.

I personally suggest that point no. 2 above makes eminent sense.  Point no. 3 at least has the advantage of simplicity of administration.  But I find, perhaps surprisingly, that point no. 1 is the most interesting one.  For one thing, it may be overbroad.  Patent law, after all, distinguishes between staple products (those that have uses unrelated to the patented product) and non-staple products (which are specially designed for use with the patented product).  Sale of a non-staple product can, at least under certain circumstances, amount to contributory patent infringement.  So if non-staple products are in some sense within the scope of the patent grant, why shouldn’t a patentee be able to engage in metered tying without worrying about tying law?

Additionally, the existence of a patent is probably some evidence of at least some sort of innovation in the patented product.  In the ordinary tying case involving unpatented products, there may be no such presumption.  And although some patentees can directly meter usage instead of using a tie in, as Leslie suggests, in some cases that may not be possible.  For example, suppose a company has a patent on a razor design, which utilizes unpatented blades.  Each consumer may buy only one razor, which lasts many years (or decades).  As a practical matter, it may not be possible to meter the razor usage — but it is relatively easy to meter the blade usage.

So perhaps the rule should be: as to staple products, or as to tied products where metering of the tying, patented product is a practical alternative, the tying rules should be the same.


Patent Tying: Does Price Discrimination Promote Innovation? (Part 2)

In the last post on this topic, I summarized arguments in favor of metered patent tying, as developed in a recent article by Christopher Leslie. There are, of course, arguments against the practice. Leslie summarizes them as follows:

1. The patentee is already rewarded for innovation. The patentee already has the power to charge higher prices for the patented product.

2. Metered tying isn’t calibrated to produce the optimal reward. For most of the 20th century, metered tying constituted (per se) patent misuse, yet firms innovated. The evidence that metered tying is necessary to promote innovation is lacking.

3. Overinvestment. Patent grants produce a “winner-takes-all” reward, which may cause an R&D race by a number of firms. This excessive research activity may be inefficient. Metered tying may exacerbate the problem.

4. Metered tying may not foster innovation. There is an absence of empirical evidence on this point. Additionally, the innovation argument, even if true, has no limiting principle. Why couldn’t companies defend a price-fixing charge on the basis that their activity fostered innovation?

5. Metered tying may reduce innovation in the tied product market. Fewer firms may mean less innovation. A smaller available tied product market provides less incentive for competitors to innovate in that market. The patentee may not have robust incentives to innovate in the tied product market, either. Finally, the tie could force rivals to enter two markets concurrently, impeding competition and innovation.

I’ll finish some thoughts on this in a final post.

Patent Tying: Does Price Discrimination Promote Innovation?

Christopher Leslie has a thoughtful article in this month’s issue of the Antitrust Law Journal entitled “Patent Tying, Price Discrimination, and Innovation.”  I thought I would take a post or two to riff on a few of the ideas presented.

Patents, of course, give their owners certain exclusive rights.  These are thought to foster innovation by allowing firms to recoup their R&D costs.  Absent patents, other firms would free ride on innovators’ efforts, which would reduce the incentive to innovate in the first place.

But patents also create inefficiencies.  Patent owners will likely price their patented products at higher price points.  Some consumers, who would have purchased a product at the competitive price (because they value the product more than it costs at the competitive price), will not buy the higher-priced patented product.  Rivals cannot meet this demand because of the patent.  And so the overall economic system suffers a deadweight loss or inefficiency.

Some commentators have proposed that price discrimination in a tied, metered product is appropriate, efficiency-enhancing, and an antitrust defense to a patented product tie.  Here’s the argument: suppose a manufacturer receives a patent on a sophisticated new type of color copier – one that performs functions no other copiers can perform.  The manufacturer could price its product at a premium, but then some customers who would otherwise buy it will be priced out of the market.  So the manufacturer engages in “metered tying” – it will sell the copier at a lower price point, but only to those customers who buy special, non-patented paper from the manufacturer.  The manufacturer charges for the paper by the page, so that customers who use more paper pay more.  This type of metered tying accomplishes price discrimination – those customers who want the patented product more will pay more for it through the metering.  If the metering is perfectly calibrated, the manufacturer may be able to capture – and thereby eliminate – the entire deadweight loss.

This sort of patent tying may (and often does) violate the patent laws and constitute patent misuse.  But the question is, should there be a special rule for antitrust purposes – should price discrimination through metered tying be allowable under the Sherman and Clayton Acts?

Leslie outlines the arguments that have been advanced in favor of such a defense.  Metered tying rewards past innovation and promotes future innovation.  Also, in the view of some, patentees can price discriminate as to patented products themselves, and so should be able to discriminate as to tied products.  In other words, price discrimination as to tied products is an exercise of the power inherent in the patent grant, not an extension of that power.

There are, of course, responses to these arguments.  I’ll summarize those in the next post.

Refusal to Deal Is Not a Robinson-Patman Act Violation

In Fresh N’ Pure Distributors, Inc. v. Foremost Farms USA (E.D. Wis. No. 2:11-cv-00470-AEG) (Nov. 28, 2011), a distributor’s supplier was purchased by a competitor of the distributor. Later, the new owner refused to sell its products to the distributor. The distributor sued. The district court dismissed the distributor’s Robinson-Patman Act claim. A refusal to deal, the court held, “generally does not violate the Robison-Patman Act because one who unsuccessfully seeks to purchase a commodity cannot be a ‘purchaser’ within the meaning of the Act.” The plaintiff managed to save its breach of contract claims by their whiskers.

Moral of the story: claims under the Robinson-Patman Act require two or more actual sales, and a discrimination in price. Refusals to deal don’t count.

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