Is That a Carrot or a Stick in Your Hand? The Third Circuit Examines the Line Between Competition and Coercion in De Facto Exclusive Dealing Agreements

by BakerHostetler
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We recently wrote about attempts to force exclusivity onto customers. But firms with large or dominant market shares often must walk a fine line between properly offering customers percentage-based discounts and improperly coercing customers into de facto exclusivity. For example, if a dominant firm offers a 25 percent price reduction to a customer that purchases all of its needs for a particular product from the dominant firm, does that offer constitute a competitive 25 percent volume discount, or an anticompetitive 25 percent penalty for purchasing any product from the dominant firm’s competitor? Not surprisingly, it usually depends on whom you ask: the dominant firm or the competitor.

The Third Circuit provided some guidance on the line between price competition and coercion with its recent opinion in Eisai, Inc. v. Sanofi Aventis U.S., LLC, No. 14-2017 (3d Cir. May 4, 2016).[1] In Eisai, the Sanofi defendants, manufacturers of the anticoagulant Lovenox, offered customers the “Lovenox Acute Contract Value Program,” which provided percentage-based discounts. Customers who joined the program received a 1 percent discount from Sanofi’s wholesale price, and increasingly higher discounts if Lovenox exceeded 75 percent of the customer’s total purchases of low-molecular-weight heparin, with the discounts potentially reaching 30 percent. If a customer left the program, the customer lost its discount but could still purchase Lovenox at regular wholesale prices. During the relevant time period, Lovenox’s market share ranged from 81.5 percent to 92.3 percent.

Eisai alleged that Sanofi’s market share discounts violated Sherman Act Sections 1 and 2, as well as Clayton Act Section 3, by imposing anticompetitive de facto exclusive-dealing arrangements. The district court granted Sanofi’s motion for summary judgment.

On appeal, the Third Circuit noted that exclusive dealing agreements, including alleged de facto exclusive dealing agreements, can provide competitive benefits and therefore are subject to rule of reason analysis. De facto exclusive dealing is anticompetitive, the court stated, only if it results in substantial foreclosure of the market, meaning “the ‘probable effect’ of the arrangement is to substantially lessen competition, rather than merely disadvantage rivals.”[2] The court acknowledged there is no set formula for making this determination, or any fixed percentage at which foreclosure of a market becomes substantial.[3] Indeed, “courts have varied widely in the degree of foreclosure they consider unlawful.”[4]

Rather than being subject to specific percentages or tests, the Third Circuit explained, de facto exclusive dealing arrangements generally constitute anticompetitive agreements when a monopolist uses “its power to breach the competitive mechanism and deprive customers of the ability to make a meaningful choice.”[5] The court found Sanofi’s discounting program did not deprive customers of meaningful choice. Eisai pointed to record evidence that some hospitals – the Third Circuit characterized the number as a “few dozen” out of 6,000 – wanted to purchase Eisai’s product, but could not due to Sanofi’s discounting program. The court found Eisai’s evidence insufficient to show substantial foreclosure in the market.[6]

The Third Circuit also rejected Eisai’s novel theory that analogized Sanofi’s discount program to tying or bundled discounts by arguing that Sanofi improperly bundled different “types of demand” for Lovenox. Lovenox is FDA-approved to treat certain severe heart attacks, whereas Eisai’s product, Fragmin, is not. Eisai’s expert characterized customer demand for Lovenox to treat those severe heart attacks as an “incontestable demand” by Eisai, whereas customer demand for Lovenox for other uses for which Fragmin is approved, such as to treat deep vein thrombosis, was “contestable demand.” In other words, Eisai could compete with Sanofi for only a portion of Lovenox’s sales, not all sales, so Sanofi improperly bundled the “incontestable demand” with the “contestable demand” for Lovenox, thereby foreclosing Eisai from the market.

The Third Circuit refused to extend its previous holdings on bundled discounts across multiple products to apply to single-product discounts. Further, it found nothing else in Sanofi’s discount program akin to those discount programs previously found to deprive customers of meaningful choice. For example, in LePage’s Inc. v. 3M, a monopolist foreclosed one product market by tying its discounts in that market to discounts on other products that the plaintiff did not offer.[7] Similarly, in both Dentsply and ZF Meritor, a monopolist structured its agreement such that the customer could lose access to the monopolist’s product altogether if it did not accept exclusivity or near-exclusivity.[8] By contrast, any of Sanofi’s customers could leave Sanofi’s discount program and still purchase Sanofi products at the wholesale price.

Although finding for Sanofi, the Third Circuit rejected Sanofi’s argument, and the district court’s holding, that Sanofi’s discount program was valid, as a matter of law, because it sold Lovenox at above-cost prices. The Third Circuit acknowledged that in evaluating a predatory pricing claim – a monopolist excluding rivals by pricing below cost with a dangerous probability of recouping its investment from later price hikes – courts are loath to find above-cost pricing anticompetitive because any exclusionary effect of those prices arises from the alleged predator’s efficiency, which reflects competition on the merits.[9] But the Third Circuit found that the “price-cost” test was unavailable to Sanofi because Eisai alleged that Sanofi’s primary exclusionary tool was bundling of different types of demand, not price alone.[10] The court declined to speculate on whether the price-cost test could apply to a de facto exclusive dealing claim under other facts: “Because we have concluded that Eisai’s claims are not substantiated and that they fail a rule of reason analysis, we will not opine on when, if ever, the price-cost test applies to this type of claim.”[11]

A takeaway from Eisai is that although there is still no bright-line rule regarding de facto exclusive dealing agreements, the Third Circuit will generally tolerate percentage-based discounts so long as not meeting those percentage targets does not threaten the customer’s access to the product. Further, Eisai suggests that a dominant firm may cite its above-cost pricing as evidence that its discounts are reasonable and not anticompetitive de facto exclusive dealing agreements.

[1] The Third Circuit’s opinion is reprinted at http://www2.ca3.uscourts.gov/opinarch/142017p.pdf.

[2] Op., at 13 (citing ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 271 (3d Cir. 2012)).

[3] Op., at 13-14.

[4] Id.

[5] Op., at 14-15 (citing ZF Meritor, 696 F.3d at 285).

[6] Op., at 15-16.

[7] Op., at 15 (citing LePage’s Inc. v. 3M, 324 F.3d 141, 154-58 (3d Cir. 2003) (en banc)).

[8] Op., at 15 (citing ZF Meritor, 696 F.3d at 285 and United States v. Dentsply Int’l, Inc., 399 F.3d 181, 185 (3d Cir. 2005)).

[9] Op., at 24.

[10] Op., at 27.

[11] Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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