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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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).

Third Circuit Rules That Long-Term Agreements Featuring Market Share Rebates, Coupled With Other Exclusionary Behavior, Are Not Subject to a Price-Cost Screen

In ZF Meritor, LLC v. Eaton Corp., 2012 U.S. App. LEXIS 20342 (3d Cir. Sept. 28, 2012) (opinion available here), the Third Circuit ruled that long-term supply agreements predicated upon market share rebates or discounts should be evaluated under the Rule of Reason, rather than under the Brooke Group above-cost pricing test. As such, they can be exclusionary even if all of a defendant’s prices are above cost.

The defendant Eaton, a monopolist in the heavy-duty truck transmissions market, had entered into long-term supply agreements with all of the customers (OEMs) in the market. The agreements conditioned rebates on the purchase of a specified percentage of the OEMs’ requirements from Eaton.

The rebates did not reduce Eaton’s prices below cost, and Eaton argued that under a price-cost screen it therefore did not violate the antitrust laws. The Third Circuit conceded that predatory pricing principles, including the price-cost test, would control in cases solely presenting a challenge to pricing practices. “Moreover, a plaintiff’s characterization of its claim as an exclusive dealing claim does not take the price-cost test off the table . . . . [W]hen price is the clearly predominant mechanism of exclusion, the price-cost test tells us that, so long as the price is above-cost, the procompetitive justifications for, and the benefits of, lowering prices far outweigh any potential anticompetitive effects.”

However, the court declined to adopt Eaton’s “unduly narrow” characterization of the case as a “pricing practices” case, i.e., a case in which price is the “clearly predominant mechanism of exclusion.” The court noted other forms of exclusionary behavior, including (i) Eaton’s efforts to make itself the standard offering in the OEMs’ “data books” (which provided product information to end users); (ii) the removal of competitors’ products from two data books; (iii) preferential prices for Eaton products required by the long-term agreements; and (iv) evidence that Eaton’s continued compliance with the long-term agreements was also conditioned on the market penetration targets.

“Accordingly,” the Third Circuit concluded, “this is not a case in which the defendant’s low price was the clear driving force behind the customer’s compliance with purchase targets, and the customers were free to walk away if a competitor offered a better price . . . . Rather, Plaintiffs introduced evidence that compliance with the market penetration targets was mandatory because failing to meet such targets would jeopardize the OEMs’ relationships with the dominant manufacturer of transmissions in the market.”

In a long footnote, the Third Circuit distinguished its decision in LePage’s, while reaffirming its vitality. According to the ZF Meritor Court, LePage’s involved bundled product tying claims. “LePage’s is inapplicable where, as here, only one product is at issue and the plaintiffs have not made any allegations of bundling or tying. The reasoning of LePage’s is limited to cases in which a single-product producer is excluded through a bundled rebate program offered by a producer of multiple products, which conditions the rebates on purchases across multiple different product lines.”

The court went on to find that Eaton’s long-term contracts were, in fact, exclusionary and supported a finding of antitrust injury.

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You Can’t Be a Price Predator When The Market Has Only One Buyer

This predator is looking for something other than low prices.

Under federal (U.S.) law, predatory pricing can be illegal — but establishing a predatory pricing violation can be quite difficult.  To do so requires proof of below cost pricing and a dangerous probability that the predator will recoup its losses following the predation period.

What happens when there is only one buyer in the marketplace?

That was the unusual fact pattern in GMA Cover Corp. v. Saab Barracuda LLC, No. 4:10-cv-12060-MAG-PJK (E.D. Mich. February 28, 2012).  There, both the plaintiff and the defendant sold stealth technology products to the military.  The plaintiff claimed that the defendant engaged in monopolization and attempted monopolization through predatory pricing.  In rejecting the claim, the court found that the plaintiff could not establish a dangerous probability of success.  The court noted that it could not find any cases addressing predatory pricing claims in which the market for the predatorily priced product contains a single (“monopsony”) buyer.  Nor, the court stated, had commentators addressed the unique situation.  Writing on a somewhat blank slate, the court wrote:

“[B]ecause the market for [stealth products] consists of a single purchaser — the United States Army — there is not a dangerous probability that [defendant] will be able to charge a supracompetitive price.  Even assuming that [defendant] achieved monopoly power, it would result in the market for [products] being a bilateral monopoly – a monopoly supplier dealing with a monopsony purchaser.  In such a situation, neither the monopoly supplier nor the monopsony purchaser can exercise monopoly power to set prices, because the other party can simply walk away from the transaction.”

Other features of the unusual market confirmed, in the court’s mind, the conclusion that there was no dangerous probability of supracompetitive price recoupment.

The case illustrates just how hard it is to prove anticompetitive price predation.  It is possible to do so — it is just very challenging.

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