Distribution, Competition, and Antitrust / IP Law

Third Circuit Rejects Single-Product Bundling Claim – But Holds Its Fire on What Test to Apply

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Red Blood Cell (Photo credit: Wikipedia)

In Eisai, Inc. v. Sanofi Aventis U.S., LLC, No. 14-2017 (3d Cir. May 4, 2016), the Third Circuit addressed a mix of allegedly exclusionary conduct, including the defendant’s discounting of its anti-coagulant drug Lovenox, and held that the discounting was not unlawful.

The defendant offered discounts, including up to 30% of a customer’s total Lovenox purchases if the customer bought some 90% of its anti-coagulant drugs from Sanofi.  Eisai argued that Sanofi was effectively foreclosing competition by “bundling” the different types of demand for Lovenox – the “uncontestable” demand for the product (i.e., the inelastic and always-present demand) with the “contestable” portion for which Eisai would like to compete.

The Third Circuit declined to extend its Rule of Reason bundled-product discounting analysis in LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc), cert. denied, 542 U.S. 953 (2004), to a single-product market.  And “[e]ven if bundling of different types of demand for the same product could, in the abstract, foreclose competition, nothing in the record indicates that an equally efficient competitor was unable to compete with Sanofi,” the Court held.

While rejecting application of LePage’s, in analyzing the evidence of competitive harm, the Third Circuit nevertheless engaged in an exclusive dealing-type analysis, focusing on the relatively mild consequences of not obtaining the defendant’s discounts.  In the Court’s view, Eisai failed to demonstrate that hospitals were foreclosed from purchasing competing drugs as a result of Sanofi’s discounting.

However, the Court also refused to apply a price-cost screen to Sanofi’s conduct.  When pricing “predominates over other means of exclusivity, the price-cost test applies.  This is usually the case when a firm uses a single-product loyalty discount or rebate to compete with similar products.”  In that situation, “an equally efficient competitor can match the loyalty price and the firms can compete on the merits.  More in-depth factual analysis is unnecessary because we know that ‘the balance always tips in favor of allowing above-cost pricing practices to stand.’”  However, Eisai alleged that Sanofi, having obtained a unique FDA indication, offered a discount that bundled incontestable and contestable demand.  “On Eisai’s telling, the bundling – not the price – served as the primary exclusionary tool.”  The Third Circuit therefore did not apply a price-cost screen, and declined to opine “on when, if ever, the price-cost test applies to this type of claim.”

Whether the distinction between bundling and discounting the Third Circuit sought to draw makes sense is less than clear – the only real effect of the bundling was to enable a discount, and the discount was offered in connection with the bundling.  They are two sides of the same coin.  Eisai continues the tension between the Third Circuit and others on the treatment of bundled discounts.  See, e.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (applying price-cost screen to bundled discounts).

Price Erosion and Restricting Online Distribution Rights

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An early vegetables reseller. (Photo credit: Wikipedia)

A reader who works with clients who sell online asked me to address online distribution restrictions.  This is more-or-less the reverse of the question I addressed in “Can My Supplier Refuse to Sell Products to Me?”  As always, I offer general thoughts here, not specific legal advice.

First, to frame the issue a bit further – if you sell products online, particularly through third-party sites such as Amazon, eBay, etc., then you very well may have concerns about controlling not only product quality and service but also price.  Many online sellers are seeing price erosion caused by multiple distributors or resellers, and they want to know what they can do about it.

Before getting to the several possibilities below, keep in mind that if you – or anyone in your distribution chain – is a monopolist or near-monopolist, many of these possibilities may be problematic.  It’s often more difficult than you might think to figure out if a firm is a monopolist, but you can use market share as a sort of rough proxy.  A share above 40% starts putting you in the potential yellow zone.  A share above 60%-70% is often (though not always) evidence of monopoly power.

But let’s assume that neither you, nor your supplier (to the extent you have one), has a market share close to these levels.  In that case, what can you do to control product distribution – and particularly product pricing – on third-party Internet sites?

Exclusive distribution

First, you can be appointed (or appoint yourself) as the exclusive distributor of the product.  You can define the rights as they best work for your business.  You could have the exclusive rights to:

  • Distribute product anywhere;
  • Distribute product online; or
  • Distribute product on certain third-party sites (like Amazon).

By having exclusive distribution rights, you can of course maintain better control over product pricing.  (Note – I’m not talking here about actual price agreements – only the natural result of having a limited distribution network.)

Online distribution “territories”

You can appoint distributors, sub-distributors, or resellers for limited purposes – for example, you can have a single authorized sub-distributor for Amazon, another for eBay, etc.  Again, by limiting your distributors, you should see less intra-brand price competition.  Because the antitrust laws are designed to encourage inter-brand competition, a loss of intra-brand competition is not usually a matter of significant (or indeed any) concern.

Minimum advertised price programs

If you use a number of sub-distributors, or if you are one of many sub-distributors, you can use minimum advertised price (“MAP”) programs.  These do not limit actual consumer pricing (e.g., the pricing in an online checkout cart), but they impose limits on what prices can be advertised.  Sometimes advertising coop dollars are awarded for compliance with the program and withheld for non-compliance.  It is important to properly structure any MAP program.  If structured properly, they are lawful throughout the country.

Resale price agreements

This one is a little tricky.  Under federal law, agreements on resale prices are no longer per se unlawful.  They can still be condemned if they are anti-competitive, but it is usually quite difficult to establish that they are.

The problem is that at least several states still consider agreements on minimum resale prices to be per se unlawful.  So before entering into such agreements, you need to consider whether you are going to be selling or distributing products in those states.  If you’re selling on a national platform like Amazon, you may have to assume that you will be selling in all 50 states.

Price discrimination

Can you offer (or be offered) different (e.g., better) pricing than other distributors or sub-distributors?  Maybe, maybe not — there is a complex law called the Robinson-Patman Act that governs such price “discrimination.”  The law makes discrimination unlawful, but there are many exceptions, and I don’t have space to get into all of them here.

Terminations for price

If your sub-distributor is pricing product in a way you don’t like, you can always terminate him/her (putting aside any contract rights he may have).  However, it is very important that you make a clean termination – promises, commitments, and suggestions followed by a reinstatement can amount to an agreement, which again may still be per se unlawful in several states.

Conclusion

There are a number of options for limiting online distribution to maintain better control over product placement and pricing.  Keep in mind, however, that you should never agree on such options with your competitors – or else you may have a horizontal agreement on pricing, which can be extremely problematic.

Northern District of California Raises the Bar on Exclusive Dealing Claims

In PNY Technologies, Inc. v. SanDisk Corp., Case No. C-11-04689 (N.D. Cal. Apr. 25, 2014) (Orrick, J.), the court dismissed PNY’s exclusive dealing and attempted monopolization claims. I previously covered the case here.

The case is significant because it found – on a motion to dismiss – that allegations of foreclosure from a substantial percentage of retail outlets were insufficient as a matter of law. The court took judicial notice of SanDisk’s contracts with retailers under the “incorporation by reference” doctrine, and proceeded to conclude that because they were terminable on short notice, they did not plausibly foreclose competition. Unfortunately, due to protective order issues, the court redacted information on the term(s) of SanDisk’s exclusives, so we don’t know precisely how long would be too long.

The court also determined that PNY had failed to adequately plead a lack of alternative channels of distribution. Although PNY alleged that non-retail channels were insufficient, the court held that PNY’s allegations were wholly conclusory and therefore insufficient. The court gave PNY leave to amend.

The case is a (relatively) uncommon exclusive dealing victory at the motion to dismiss stage for defendants. It shows that courts will scrutinize and look at exclusive dealing contracts (even if not attached to the complaint). It also demonstrates that in the case of short-term exclusives, and where the plaintiff does not allege in substantial detail why other distribution channels are insufficient to compete, plaintiffs’ claims may be dismissed.

Allegations of Harm to Competition Caused by Multiple Defendants Can’t be Aggregated

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(Photo credit: Wikipedia)

Earlier this year, I covered the case of Orchard Supply Hardware LLC v. Home Depot USA, Inc. See this post.

On September 19, 2013, the court (the Northern District of California) issued its decision on defendants’ motion to dismiss the plaintiff’s second amended complaint. The court dismissed plaintiff’s antitrust claims against the tool manufacturers (Makita and Milwaukee Electric Tool Corp. (“METCo”)), this time with prejudice.

On its second go-round, the court found that Orchard had alleged harm to competition, because it alleged a distinct product submarket: the market for certain specific professional power tools, as purchased by professional customers. “The market Orchard alleges . . . is defined by a distinct set of products, and within that market Orchard alleges that there is a distinct submarket as indicated by a distinct set of purchasers, sensitive to a distinct price point. Within this submarket, Orchard alleges that the challenged agreements have the effective of totally foreclosing competition. These allegations suffice to outline a defined submarket in which Orchard has pled harm to competition.”

The court rejected defendants’ argument that Orchard had failed to allege harm to competition because it had alleged neither a reduction in the output or quality of goods, and had not demonstrated an increase in price caused by Orchard’s foreclosure from the market. “An antitrust plaintiff need not demonstrate that prices have actually been raised to plead a rule-of-reason claim.”

Nevertheless, the court dismissed the claims against Makita and METCo. Plaintiff alleged that each tool manufacturer had entered into a separate vertical, exclusive agreement with Home Depot. “[I]t is inappropriate to aggregate the two vertical agreements in evaluating whether METCo and Makita’s conduct was anti-competitive. METCo and Makita each separately made an agreement with Home Depot. Orchard does not contend that, taken individually, these contracts have an anticompetitive effect . . . . If an individual supplier could be held liable for the cumulative impact of all suppliers’ conduct, a company would have to investigate what other businesses were doing before it acted in order to make sure its own conduct wasn’t anticompetitive, a burden the antitrust law does not impose.”

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It Is Becoming Tougher for Plaintiffs to Allege Harm to Competition

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(Photo credit: Wikipedia)

It has long been the case that Sherman Act Section 1 Rule of Reason claims as well as Section 2 claims require proof of harm to competition. But the courts, particularly in the Ninth Circuit, have been tightening up on the requirement to plead such harm, as evidenced by the recent case of Orchard Supply Hardware LLC v. Home Depot USA, Inc., 2013 U.S. Dist LEXIS 53214 (Apr. 11, 2013) (Tigar, J).

In Orchard Supply, the plaintiff, a retailer, challenged Home Depot’s alleged agreements with several tool manufacturers to be the exclusive carrier of the manufacturers’ lines of power tools and accessories. The court dismissed the plaintiff’s Rule of Reason claim, although it granted leave to amend.

The complaint’s defect was its failure to allege harm to competition itself. Although the complaint alleged that the exclusives would enable Home Depot to charge higher prices and deprive consumers of choice, this is not enough. As the court held, “[a]llegations that an agreement has the effect of reducing consumers’ choices or increasing prices to consumers does not sufficiently allege an injury to competition.” Id. at *16, quoting Brantley v. NBC Universal, Inc., 675 F.3d 1192, 1202 (9th Cir.), cert. denied, 133 S. Ct. 573 (2012).

In the case of exclusives, if they actually or potentially cause substantial market foreclosure or the exit of competitors, harm to competition may exist. But higher consumer prices do not themselves amount to an actionable antitrust injury.

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