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Antitrust Alert

A Global Resource for Compliance Officers & Legal Advisors

FTC Promotes Competition Among Professionals Through Advocacy, Enforcement

Posted in FTC Developments

On July 16, 2014, Andrew Gavil, Director of the Office of Policy Planning at the Federal Trade Commission (FTC), testified on the subject of “Competition and the Potential Costs and Benefits of Professional Licensure” before the House Committee on Small Business.  Gavil explained the FTC’s rationale for evaluating the competitive effects of different licensing regimes and described its strategy of promoting competition among professionals through a combination of advocacy and enforcement.

The FTC’s approach in this area is to evaluate the pros and cons of specific licensure regulations on a case-by-case basis.  In a nutshell, the agency recognizes that, “although licensure may be designed to provide consumers with minimum quality assurances, licensure provisions do not always increase service quality,” and indeed “may . . . discourage innovation and entrepreneurship” and “impede the flow of labor or services.”  Advocacy is an important component of the FTC’s strategy because state and local licensing regimes are often not actionable under the federal antitrust laws.  Instead, the agency utilizes tools such as comments, testimony, workshops, reports and amicus briefs to encourage policymakers to consider the likely competitive effects of proposed regulations.  Gavil noted a recent example in which, at the request of Chicago Alderman Brendan Reilly, FTC staff provided a comment assessing the potential competitive effects of a proposed Chicago ordinance creating a licensing scheme to regulate mobile ride-sharing apps.  The comment, available here, details how certain provisions of the ordinance might “unnecessarily impede competition in these services without providing any apparent consumer protection benefits,” for example, by placing licensees at a competitive disadvantage to traditional transportation services or by restricting innovative pricing models.

The FTC also keeps an eye out for opportunities to flex its enforcement muscle and discourage anticompetitive conduct by independent regulatory boards that are not protected by the state action doctrine.  For example, the Fourth Circuit last year sided with the FTC in a suit challenging the North Carolina Board of Dental Examiners’ practice of issuing cease-and-desist letters to non-dentist providers of teeth-whitening services.  See N.C. State Bd. of Dental Examiners v. FTC, 717 F.3d 359 (4th Cir. 2013), cert. granted, No. 13-564, 5014 WL 801099 (U.S. Mar. 3, 2014).  In particular, state agencies comprised mostly of industry participants who are chosen by other industry participants must take special precautions to avoid violating the antitrust laws.  Many of the examples of enforcement actions Gavil provided in his testimony concerned the healthcare arena, which is consistent with the FTC’s ongoing commitment to promote competition in that sector.

The text of the Commission’s prepared statement is available here.

 

District Court Pares Down Price Discrimination Suit Against Chrysler

Posted in Distribution/Franchising, Private Litigation

On July 11, 2014, the Northern District of California dismissed one of two federal antitrust claims brought against Chrysler Group LLC under the Robinson-Patman Act, 15 U.S. C. § 13, as well as several state statutory and common law claims.  Matthew Enterprise, Inc. v. Chrysler Group LLC, No. 13-cv-04236-BLF (N.D. Cal. July 11, 2014).  The plaintiff, a franchise car dealer and direct customer of the defendant, alleged that Chrysler committed anticompetitive price discrimination by offering volume discounts to new dealers on more favorable terms than those offered to established dealers like the plaintiff and by selectively offering the plaintiff’s competitors disguised price discounts in the form of below-market rent.  The court allowed the former claim to go forward but dismissed the latter for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).

The court began by recounting the purposes behind the Robinson-Patman Act, as described by the Supreme Court in FTC v. Sun Oil Co., 371 U.S. 505, 520 (1963): “to curb the use by financially powerful corporations of localized price-cutting tactics which had gravely impaired the competitive position of other sellers . . . and to ensure that businessmen at the same functional level . . . start out on equal competitive footing so far as price is concerned.”  Matthew Enterprise, slip op. at 6 (internal quotation marks omitted).  It explained that in order to state a “secondary-line case” involving competition among customers of a common seller, a plaintiff must plead facts showing that “(1) the relevant sales were made in interstate commerce; (2) the products were of like grade and quality; (3) the seller discriminated in price between the Plaintiff and another purchaser of the same products; and (4) that the effect of that price discrimination was to injure, destroy, or prevent competition to the advantage of a favored purchaser.”  Id., slip op. at 7.

The plaintiff in Matthew Enterprise alleged that Chrysler offered volume discounts to established car dealers based on a formula that took into account the dealer’s prior year sales.  Because new dealers, by definition, did not have prior  year sales, Chrysler used different criteria to determine the volume at which new dealers would receive a discount, which the plaintiff alleged was substantially lower than the volume the plaintiff needed to sell in order to qualify for the discount.  For example, the plaintiff alleged that “this inequality of treatment led to [one new competitor] receiving vehicle subsidies during July 2012, despite selling only sixty vehicles, while Plaintiff failed to receive incentives, despite selling 130 vehicles.”  Id., slip op. at 8.  These allegations, taken as true for purposes of the motion to dismiss, allowed the court ultimately to conclude “that Chrysler ha[d] set up its newly opened dealers as a class of ‘favored purchasers’” in violation of the Robinson-Patman Act.  Id., slip op. at 9.

Regarding the second price discrimination claim, the court noted that it was not aware of any Ninth Circuit case law holding that the Robinson-Patman Act applies to real estate transactions.  The plaintiff tried to salvage its claim by arguing that the rental agreement was actually a disguised price discount.  But “in order for the Court to find sufficient its ‘disguised discount’ claims,” the court stated that the “Plaintiff would need to plead facts that permit the Court to infer that the rental agreement is in some way tied to the volume of cars sold,” which it failed to do.  Id., slip op. at 13-14.  The court therefore dismissed the plaintiff’s Robinson-Patman Act claim under this theory of liability.

Aerospace & Defense Series: DOD Study Touts Competition Benefits in Military Purchases—Creates Implications for Future Antitrust Reviews

Posted in Joint Ventures/Competitor Collaboration, Mergers & Acquisitions

It is a general tenet that competition serves customers well, enabling them to acquire better products at lower prices.  Of course, this premise underlies the antitrust laws.  In the aerospace and defense industry, the customers are often government agencies that are monopsonists with significant purchasing leverage.  Government customers often have contracting mechanisms that are not generally available in the commercial marketplace, such as the ability to receive certified cost and pricing data from contractors.  From time to time, contractors have attempted to rely on arguments that the government’s buyer power and contracting rights ensure that contractors cannot impose unreasonable pricing on the government, even if there is no or limited competition.  The antitrust regulators and the U.S. Department of Defense (DoD) have long rejected that notion, stressing that regulation is not a substitute for competition.  A recent DoD study supports that general proposition, and provides data the DoD interprets as showing that the presence of competition improves contracting outcomes for the government.  See DoD 2014 Annual Report on the Performance of the Defense Acquisition System.  This report provides some interesting thoughts and data that may impact future antitrust agency reviews.

Read the full article.

Commission Publishes White Paper on Minority Shareholdings

Posted in Mergers & Acquisitions

On 9 July 2014, the EU Commission (Commission) published a White Paper (White Paper) entitled Towards more effective EU merger control. The White Paper sets out the Commission’s current thinking on the application of merger control rules to the acquisition of non-controlling minority shareholdings. The Commission’s proposals concerning the application of merger controls to the acquisition of non-controlling minority shareholdings are, however, problematic and may lead to a dampening of investments in Europe. Interested parties, which include companies, industry associations and national competition authorities, have until 3 October 2014 to comment on the White Paper.

Under the current Council Regulation (EC) No 139/2004 (the Merger Regulation), the Commission is only able to review transactions that lead to a change of control. The Commission also has the power to review existing minority shareholdings held by the parties to a notifiable transaction, i.e., one resulting in a change of control. Acquisitions of non-controlling minority shareholdings (also referred to as structural links) by themselves, however, can only be carried out retrospectively under Articles 101 or 102 of the Treaty on the Functioning of the European Union (TFEU). In other words, under the Merger Regulation, acquisitions of non-controlling minority shareholdings are not subject to prior review by the Commission unless they result in a change of control, and are only subject to after-the-fact enforcement under Articles 101 and/or 102 TFEU. This leads to what the Commission perceives as an “enforcement gap” at EU level, which results in the Merger Regulation not being applied to non-controlling minority shareholdings that have the potential to harm competition, as exemplified by the recent Ryanair/Aer Lingus case.

In contrast, some EU Member States, such as Germany, and some major non-European jurisdictions (including the United States and Japan) are empowered to review some non-controlling minority shareholdings under their national merger control rules. In these jurisdictions, the Commission would contend that no enforcement gap exists, since non-controlling minority shareholdings can be subjected to prior review.

In view of concerns about the enforcement gap, in 2011, the Commission organised studies on the importance of minority shareholdings in the European Union. Subsequently, in June 2013, the Commission launched a public consultation (the consultation paper) on possible modifications to the Merger Regulation, including the expansion of merger controls to capture certain non-controlling minority shareholdings. The consultation paper also considered different models for reviewing non-controlling minority shareholdings. The responses to the consultation paper generally revealed a lack of consensus about the existence and extent of an enforcement gap. Equally, the responses demonstrated that the need to change the Merger Regulation to address a perceived enforcement gap remained a hotly disputed topic.

The 9 July White Paper contains the Commission’s proposed actions in response to the consultation paper. It covers the issue of minority shareholdings and also looks at other areas where the Commission sees the need for a revision of merger control rules, including mechanisms for referring cases between the Commission and the EU Member States. The White Paper was published together with the Commission Staff Working Document and the impact assessment conducted by the Commission on the contemplated reform.

Proposed Review of Acquisitions of Non-Controlling Minority Shareholdings With a “Competitively Significant Link”

In the 2011 consultation paper, the Commission envisaged three systems for the control of the acquisitions of non-controlling minority shareholdings: a notification system, a transparency system and a self-assessment system.

In the White Paper, the Commission proposes a “targeted” transparency system, which combines the self-assessment and transparency systems. According to the Commission, this would be the most suitable solution to address the three concerns it identified:

  • Capturing most of the anti-competitive acquisitions
  • Avoiding unnecessary and disproportionate administrative burdens on companies and competition authorities (including the Commission)
  • Staying in line with the current merger control regime.

This targeted transparency system would apply to transactions that create a “competitively significant link”. According to the White Paper, such a link is created by acquisitions of a minority shareholding in a competitor or a vertically related company, where the acquired stake is

  •  Approximately 20 per cent or
  • Between 5 per cent and approximately 20 per cent, if it is combined with “additional factors”, which include “rights that give the acquirer a de-facto blocking minority, a seat on the board of directors, or access to commercially sensitive information of the target”.

Proposed Control Procedure

Under the targeted transparency system, an undertaking that plans to acquire a non-controlling minority shareholding that meets the cumulative criteria of having a competitively significant link would have to submit an “information notice” to the Commission. This information notice should contain only “basic information”, i.e., information relating to the parties and their turnovers, a description of the transaction, the level of shareholding before and after the transaction, any rights attached to the minority shareholding and some limited market share information.

Based on the information provided in this notice, the Commission would then decide whether or not to investigate the case further and Member States will consider whether or not to request that the case be referred. The parties would only be required to submit a full notification if the Commission decided to initiate an investigation, at the end of which the Commission would have to issue a formal decision ruling on the compatibility of the transaction. On this basis, any parties wanting greater legal certainty could voluntarily submit a full notification.

The Commission also proposes introducing a waiting period of, e.g., 15 working days, during which the parties would not be able to close the transaction and the Member States could request a referral. Should the Commission not initiate an investigation during this waiting period, the parties could then close the transaction. The Commission would, however remain free to investigate a transaction, whether or not it had already been implemented, within a limited period of up to six months (prescription period) following the information notice and, if necessary, impose interim measures on transactions that were already implemented.

Case Referrals

The Commission observed that the pre-notification referral laid out in Article 4(5) of the Merger Regulation is of little practical use. It therefore proposes to abolish this procedure so the parties would notify their transaction directly to the Commission, which will forward the notification to the Member States.

The Commission also proposes to amend the post-notification referral set out in Article 22 of the Merger Regulation. Once the Commission notifies the Member States, one or more Member State(s), that are competent under their national law to review a merger, may request that the case be referred to the Commission. Any other competent Member State can oppose the referral but, if none does so, the Commission has the discretion to accept or decline the request for referral. Its acceptance of the referral would give jurisdiction for the entire European Economic Area (EEA) to the Commission, without other Member States needing to join the request for a referral. This process would simplify requests for referrals to the Commission and extend its jurisdiction where there is no opposition to the referral.

Non-Problematic Transactions Currently Notifiable

The White Paper proposes to exclude from the scope of the Merger Regulation certain non-problematic transactions. These include the creation of joint ventures that will only operate outside the EEA and have no impact on the EU market.

It also envisages further reducing the notification requirements for other non-problematic cases currently reviewed under the “simplified” procedure, in order to diminish the administrative burden and cost where it is not strictly necessary. This could allow transactions that have no overlaps to be exempted from any notification requirement.

Comments

The Commission’s proposals concerning the application of merger controls to the acquisition of non-controlling minority shareholdings are problematic and may lead to a dampening of investments in Europe.

The absence of a clear and closed list of “additional factors”, and the potential application of merger control rules to non-controlling minority shareholdings of as little as 5 per cent would lead to legal uncertainty. This is because a large number of transactions could potentially fall under merger control rules, and past experience in Germany and the United Kingdom shows that is unclear whether or not “plus factors” are sufficient to lead to the application of merger control rules. The White Paper’s proposed limitation of the extension of merger control rules to transactions between competitors or vertically related companies does not provide for more legal certainty, in particular where market definitions are unclear. At the very least, a strict threshold, such as the acquisition of 25 per cent, would leave no question mark concerning whether or not merger control rules apply.

While the Commission anticipates that the proposed reforms would lead to the review of only a limited number of cases—between 20 and 30 per year—this does not take into account the number of cases that would require self-assessment by the parties and would lead to legal uncertainty with respect to i) the obligation to submit an information notice, ii) the obligation to respect a waiting period and iii) the possibility for the Commission to open a procedure even after the expiry of the waiting period. The problem is not the number of deals that will have to be reviewed under the proposed changes, but the number of deals where the parties have to waste time and effort in order to self-assess the applicability of merger control rules.

It is also questionable whether or not the limited market share information in the required information notice and the simplified procedure may still be very burdensome, particularly if the parties are required to provide (alternative) market definitions and market data.

The proposed waiting period, together with the possibility for the Commission to open an investigation after the expiry of that period, actually combines the worst of two worlds. Not only do the companies have to submit an information notice and make the expiration of the waiting period a condition for the closure of the deal, but they also do not even get legal certainty as a reward for their efforts. In addition, the parties would need to file a full notification if the Commission decides to investigate the case, which would significantly further delay the transaction or at least further delay the attainment of legal certainty.

It is also unclear how the Commission envisages the case referral request from Member States in those cases, which are currently the vast majority, where national law does not give national regulators the power to review the acquisition of minority shareholdings.

It is unlikely that the extra regulatory burden that would result from the implementation of the proposed reform with respect to non-controlling minority shareholdings would be as insignificant as the Commission expects it to be. It is likely that the burden will be disproportionate, given the very low number of non-controlling minority shareholdings able to raise significant concerns.

In contrast, the proposed steps for reviewing the referral system and alleviating the burden for the parties (and the Commission) in unproblematic cases are very much welcomed.

Next steps

By outlining the Commission’s proposals for the reform of the Merger Regulation, the White Paper is testing the reaction of the Council to gauge whether or not it is timely and politically acceptable to make changes.

More generally, the Commission now seeks views from all interested parties by 3 October 2014. Once the consultation is closed, the Commission will review the comments and, probably, finalise its legislative proposal. The timing of this proposal is not, however, predictable. For example, in relation to antitrust damages actions, which also sparked significant debate, the Commission adopted a White Paper in 2008 and a proposal for a directive five years later. This was only adopted by the Parliament in April 2014 and is now waiting for the final approval of the Council of Ministers. Whatever the final changes to merger controls for minority shareholdings may be, they are unlikely to come into effect very soon.

Getting the Deal Through: Pharmaceutical Antitrust 2014

Posted in Healthcare Antitrust, Italian Developments

McDermott has contributed to the Italian chapter of the 2014 edition of “Pharmaceutical Antitrust” published by Getting the Deal Through, a valuable work tool for legal practitioners dealing with antitrust rules in the pharmaceutical sector.  The chapter addresses the most significant regulatory and antitrust issues affecting the marketing, authorization and pricing of pharmaceutical products in Italy.

Click here to read the full chapter.

New Italian Competition Authority’s Regulation on Legality Rating Certification

Posted in Italian Developments

On 4 July 2014, the new regulation on legality rating certification by the Italian Competition Authority entered into force. The legality rating is designed to facilitate companies’ access to credit from banks and public financial support.

Certification is expressed in a score of between one and three stars and is issued by the Italian Competition Authority at the request of companies that have

  • An operating office in the Italian territory
  • A minimum turnover of €2 million in the year preceding the request
  • Been registered in the Italian Business Register for at least two years.

As part of the procedure for the awarding of public finance, companies that have been granted the legality rating certification will benefit from either a preferential ranking, a higher score or a specifically reserved share of the financing available.

Banks and financial institutions are obliged to take the legality rating certification into account in their loan granting procedures. The Bank of Italy will monitor and enforce this obligation.

In order to obtain legality rating certification, the applicant company (and its management) must demonstrate that they have not been found to have committed certain specific violations including tax and criminal offences and serious breaches of antitrust and unfair commercial practice rules.

Certification is confirmed within 60 days of application and is valid for two years, subject to renewals.

Limitation Periods for Antitrust Damages Actions in The European Union

Posted in Cartel Enforcement, EC Developments

The last decade or so has seen a marked increase in antitrust damages actions brought before the national courts of the EU Member States. As things currently stand, such actions are governed by the various national laws of the 28 Member States. This patchwork of differing national rules further complicates the already complex underpinning of antitrust damages actions. In order to facilitate the initiation of such actions, the European institutions have recently agreed upon a new directive that provides for a minimum degree of harmonisation of certain rules governing actions for damages under national laws (the Damages Directive). Its promulgation is now just a formality.

One of the key, yet often overlooked, legal considerations in antitrust damages actions is the issue of limitation periods. For a defendant, a careful assessment of this issue is core to any cartel defence strategy and must be considered at the time of administrative proceedings, as it can have huge implications on the decision of whether or not an appeal should be considered (see the Morgan Crucible proceedings before the English courts, discussed below).

For a claimant, it is equally crucial in order to ensure that a claim is not time-barred and, as a result, left with no legal remedy. An action brought out of time will fail, no matter how robust the claim is perceived to be. A complication arises in this context, however, given the often cross-border nature of antitrust infringements, which means a claim may be brought in a number of Member States, each of which have different rules in place with respect to the length and calculation of limitation periods.

Calculating a given limitation period will often be a relatively straightforward exercise but complexities do sometimes arise. This is illustrated by the Morgan Crucible cases in the United Kingdom, which only recently resolved key questions relating to the calculation of limitation periods for the purposes of bringing an action before the English courts.

Against this backdrop, this special report looks at the limitation periods in those EU Member States that are arguably at the forefront of developments in antitrust damages actions: France, Germany, Italy, the Netherlands and the United Kingdom. In particular, this report analyses the complexities relating to limitation periods, as illustrated by the UK courts’ attempts to grapple with the matter in a complex line of cases, ending up before the UK Supreme Court. This special report also highlights potential problem areas with respect to the limitation periods that are not addressed by the Damages Directive and may adversely affect the interplay between the public and private enforcement system in the European Union.

Read the full Special Report here.

2014 Cartel Penalties On Pace to Set Record

Posted in Cartel Enforcement

Global antitrust regulators are on pace to levy record-breaking cartel penalties in 2014.  If global regulators keep pace, cartel penalties will surpass 2013’s record total.  Through June, U.S. antitrust regulators issued fines totaling $709 million (USD), while European regulators imposed fines of $1.95 billion.

The record-breaking fines are the result of global regulators more actively enforcing antitrust and competition laws.  While the U.S. and Europe have been rigorously investigating cartel activity, Russia and many Asian countries have also seen a noticeable uptick in activity.  To date, China has levied $36.3 million in fines, and Japan and South Korea are considerably ahead of the pace needed to exceed 2013 totals.  If the current rate continues through the second half of 2014, global regulators are likely to hit all-time highs by the end of the year, especially considering that many large fines are frequently handed out near year’s end.

In addition to increased fines and enforcement activity, many jurisdictions are also more proactively taking a role in multinational cartel investigations.  Particularly, Asian countries have been more vocal about the extraterritorial reach of U.S. and European antitrust laws.  For example, in Motorola Mobility LLC v. AU Optronics Corp., et al., Taiwan, Japan and South Korea submitted letters to the Seventh Circuit expressing concerns about allowing recoverable damages for the purchase of end-products made with price-fixed products sold abroad.

Federal Judge Puts Narcolepsy Drug Horizontal Conspiracy Claims to Bed

Posted in Healthcare Antitrust, IP Antitrust

On Monday, June 23, 2014, a Federal Judge in the Eastern District of Pennsylvania granted summary judgment for five pharmaceutical companies on horizontal conspiracy claims brought by Apotex Inc. and direct purchaser and end payor plaintiffs regarding the popular narcolepsy drug Provigil.  Provigil’s key ingredient is modafinil, “a wakefulness-promoting agent” used to treat sleep disorders like narcolepsy.  Apotex and the Provigil buyers claimed that Cephalon, Inc. unlawfully restrained trade and maintained a monopoly on modafinil sales by facilitating a horizontal conspiracy through reverse payment settlements with generic-drug manufacturers.

Cephalon, which manufacturers Provigil, entered into reverse payment settlements (also known as “pay-for-delay”) between 2005-2008 to settle patent infringement litigation with Teva Pharmaceutical Industries Ltd., Ranbaxy Laboratories Ltd, Mylan Inc., and Barr Laboratories, Inc.  Although Judge Mitchell Goldberg previously held the plaintiffs’ claims were sufficient to withstand a motion to dismiss, on summary he judgment he found insufficient evidence of a conspiracy.

Judge Goldberg held that the plaintiffs lacked sufficient evidence to demonstrate the existence of the alleged hub-and-spoke conspiracy.  He reasoned that evidence of “conscious parallelism” among the defendants’ behavior was not enough to levy an antitrust claim when equally plausible independent explanations for their behavior exist.  For example, the generic-drug manufacturers were separately compensated and some would receive favored treatment regarding royalty rates.  The “pay-for-delay” settlement agreements also created contingent launch provisions, reassuring generic companies that they would not lose the opportunity to launch if another generic-drug manufacturer obtained an earlier date.  Had the agreements been contrary to the generic-drug manufacturers’ self-interest, the claims would have more closely resembled noteworthy hub-and-spoke conspiracy cases.

Judge Goldberg cautioned, however, that the court’s opinion does not address the legality of each individual “pay-for-delay” settlement agreements between Cephalon and the generic-drug manufacturers.  The Federal Trade Commission is separately challenging the settlements under antitrust law.

FTC and DOJ Host Conditional Pricing Programs Workshop

Posted in DOJ Developments, FTC Developments

The Federal Trade Commission (FTC) and United States Department of Justice (DOJ) hosted a workshop on June 23, 2014 discussing the law and economics of “conditional pricing” programs.  Most panelists were academics, including economists and law school professors.  The bulk of the presenters advocated a more aggressive posture towards these arrangements than the courts have recently adopted.

Conditional pricing programs.  Conditional pricing generally encompasses pricing, discounting and contracting practices in which a company’s prices charged will vary depending upon the level of purchases the customer makes from the company’s competitors.   Examples include:

  • Bundled discounts: Supplier X, which sells dominant product A and competitive product B, grants a discount on product A (which the customers have to buy) so long as customers buy a certain percentage of their needs of product B from Supplier X, rather than from its competitors.
  • Loyalty / market share discounts: Supplier X, which has a dominant position in product A, grants discounts from its baseline pricing if customers purchase a high percentage (e.g., 90 percent) of Product A from Supplier X, rather than from its competitors.

Theories of harm.  The panelists discussed two basic categories of theories of competitive harm.

  • Exclusion of rival manufacturer.  When a smaller rival, perhaps a new entrant, tries to break in to a market, the dominant incumbent may impose a conditional pricing program that makes it hard for the new entrant to get a significant share of sales, which may deprive it of critical scale efficiencies and render it a marginal supplier, or perhaps even force an exit.
  • Coordination / collusion of customers / distributors.  A retailer can be viewed as providing retailing services in the sale of the manufacturer’s products.  The purchases and contracts different retailers receive from manufacturers can be thought of as inputs in the retailer’s provision of its services.  Some of the economists stated their view that customers who may desire to coordinate their behavior as sellers can use conditional pricing programs from their suppliers to ensure that the input costs are comparable, which can reduce competition among retailers.  For example, the conditional pricing program may ensure that no retailer switches over from the dominant supplier to the new entrant with a lower cost product.  Keeping the customers from switching to the new entrant may make it easier to achieve or maintain coordination.

Relevance of cost based tests.  The panel addressed cost-based safe harbors in great detail, with most of the economists opining that they were simply not helpful.  The issue is whether conditional pricing programs that result in a product being sold “above cost” should fit within a safe harbor. 

  • Legal background.  This discussion starts with the Supreme Court’s Brook Group case, which found that above cost pricing cannot create liability under a predatory pricing theory.  In cases involving bundled /multiproduct discounts, there has been a circuit split with the Third Circuit (LePage’s) allowing liability even if prices are above costs, and the Ninth Circuit (Peace Health) holding that above cost pricing is within a safe harbor.  The courts, including the Third Circuit, have generally held that in the case of a single product loyalty discount, above cost pricing is lawful.
  • Economists generally viewed the cost-based tests as not relevant.  The vast majority of the economists argued that the cost-based tests were simply not helpful in analyzing conditional pricing programs.  There are difficulties in measuring costs that make them difficult to implement.  There are also concerns about measuring what the “price” is.  In some cases, a dominant supplier could have a monopoly price of $100 for a product, but then raise it to an above monopoly price of $110 as a new entrant enters, and then offer a discount for loyalty that takes the price back down to $100.  In that case, several of the economists were of the view that there was no discount at all, but rather a “disloyalty tax.”
    More importantly, the economists were of the view that even an above-cost pricing program could exclude or marginalize a new entrant trying to compete against a conditional pricing program from a dominant incumbent, which could have anticompetitive effects.  They found no economic basis for applying a safe harbor based on a test that would allow for what they viewed to be anticompetitive conduct.  In addition, the economists indicated that while the cost-based tests have some potential relevance to looking at the potential harms based on the exclusion of a smaller rival, they shed no light at all on the theory that the manufacturer’s conditional pricing program is used by buyers to facilitate coordination among themselves.  There were some proponents of cost-based tests to allow for some degree of certainty for suppliers who want to discount, and who want to be sure their conduct cannot be challenged.  In essence, they argued that you need certainty to enable discounting, which is generally procompetitive.
  • Economists generally rejected any standard based on whether an “equally efficient rival” could compete above cost.  Another factor with cost-based tests is if in applying the test, courts should measure whether the seller engaging in conditional pricing is selling above its own cost, or whether the smaller competitor could meet the discount and sell above its costs.  In general, the economists were strongly of the view that even a less efficient competitor could have significant procompetitive effects on a market that has been dominated by an incumbent supplier, and therefore rejected the relevance of an “equally efficient competitor” standard focused on the seller’s own costs and whether its prices were above cost.

Conclusion.  The academic community, which is likely to be influential to the antitrust agencies, generally indicated that conditional pricing programs had significant potential to be anticompetitive.  This applied equally to single product loyalty discounting programs and to multi-product “bundled discount” arrangements.  The panelists generally advocated case-by-case analyses of these programs, focused on the potential anticompetitive effects, rather than on broad safe harbors such as price / cost tests.  There seem to be some similarities between the analysis of these conditional pricing programs and the reverse payment cases that have been so predominant in the pharmaceutical industry.  In the Actavis case, the Supreme Court rejected what was essentially a safe harbor for settlements that did not extend beyond the scope of the patent, instead subjecting reverse payment cases to rule of reason analysis.  It seems that the academic community is similarly pushing for the FTC and DOJ to evaluate conditional pricing programs under the rule of reason, rather than allowing for safe harbors where price is above cost.  It appears the law in this area continues to evolve.

The agencies will be accepting comments for the next 60 days, through August 22, 2014.  In some prior situations, similar workshops have led to agency enforcement guidelines.  Companies engaged in, or potentially impacted by, conditional pricing programs may wish to comment.