A bundle of trouble: an analysis of how the lower courts have handled bundled discounts since LePage's Inc. v. 3M.

• Author: Kilper, John H.

1. INTRODUCTION

   A bundled discount, also known as a "loyalty discount" or "bundled rebate," is created when a seller offers a buyer a reduction in price that is contingent upon the buyer purchasing a minimum percentage of the buyer's needs from the seller. (1) Since the Third Circuit's decision in LePage's Inc. v. 3M in 2003, (2) a decision that directly dealt with bundled discounts, district courts facing antitrust lawsuits involving bundled discounts have been left with little guidance as to how they should approach the procompetitive and anticompetitive aspects of such a discounting scheme. Consequently, the decisions made and the analysis used by these district courts since LePage's has varied greatly. Some courts have chosen to reject LePage's reasoning outright, (3) while others have followed LePage's initially, only to then subsequently reject the reasoning in later decisions. (4)

   This Summary will analyze the reasoning utilized in the various district court decisions since LePage's and will seek to illustrate how those courts have dealt with a lack of clear foundation as to how to handle bundling claims under the antitrust laws. Furthermore, this summary will attempt to determine specific reasons why the LePage's decision has failed to provide a proper approach to determining the legality of bundled discounts. Finally, the Summary will conclude that the Supreme Court should grant certiorari in order to provide both the district and circuit courts with guidance as to how they should balance between both the procompetitive and anticompetitive effects of bundled discounts.

2. LEGAL BACKGROUND

   1. What is a Bundled Discount?

      A bundled discount, also known as a "loyalty discount" or "bundled rebate," is created when a seller offers a buyer a reduction in price that is contingent upon the buyer purchasing a minimum percentage of the buyer's needs from the seller. (5) One of the most basic forms of a bundled discount is the package discount, which occurs when "a seller charges a lower price for a group of disparate goods sold together than for the same collection of goods purchased separately." (6) However, bundled discounts can be more complex, such as when a seller offers to pay a rebate on all of a buyer's purchases from the seller so long as the buyer meets certain purchasing targets pertaining to each of the seller's product lines. (7) Thus, one of the distinguishing characteristics of a bundled discount is that they are "multi-product, purchase target discounts--they are conditioned upon purchasing some quantum of goods from multiple product markets" from a single seller. (8)

   2. Monopolization under the Sherman Act

      Section 2 of the Sherman Act provides: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony," and subject to significant fines and imprisonment. (9) Additionally, a private party who successfully sues for an antitrust violation may recover threefold the damages and counsel fees if successful. (10)

      In U.S. v. Grinnell Corp., the Supreme Court held that in order to show monopolization under section 2 of the Sherman Act, a plaintiff must prove, inter alia, that the defendant has demonstrated a "willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." (11) Although there are no bright line rules available to determine exactly what types of conduct fall under this element, (12) actions such as unlawful acquisitions, (13) predatory pricing, (14) refusals to deal, (15) and leveraging (16) have been found illegal under section 2. Traditionally, courts have analyzed claims involving bundled discounts under either an exclusionary conduct or predatory pricing claim. (17) As a result, it is necessary to provide a more in-depth background of exclusionary conduct and predatory pricing.

      1. Exclusionary Conduct

         Exclusionary conduct has been defined as "[c]onduct that intentionally, significantly, and without business justification excludes a potential competitor from outlets ..., where access to those outlets is a necessary ... condition to waging a challenge to a monopolist and fear of the challenge prompts the conduct." (18) More specifically, exclusionary conduct occurs when a firm's actions are designed "to prevent one or more new or potential competitors from gaining a foothold in the market by exclusionary ... conduct." (19) When this behavior is used by a firm, it injures not only that specific competitor, but competition in general. (20)

         In determining whether a certain type of conduct should be classified as exclusionary, the Supreme Court noted in Aspen Skiing Co. v. Aspen Highlands Skiing Corp. that "it is relevant to consider [the conduct's] impact on consumers and whether [that conduct] has impaired competition in an unnecessarily restrictive way." (21) The Court went on to conclude that whenever a firm acts in such a way that excludes its competitors on some basis other than efficiency, it is fair to characterize that behavior as predatory. (22) Although a plaintiff wishing to bring an exclusionary conduct claim must still meet the test described in Grinnell, (23) federal courts have been inconsistent in determining what will or will not constitute exclusionary conduct. (24) However, courts have found illegal exclusionary conduct in cases involving behavior such as monopoly leveraging, (25) tying arrangements, (26) and predatory pricing. (27)

      2. Predatory Pricing

         Predatory pricing occurs when a firm "drives out, excludes, or disciplines rivals by selling at non-remunerative prices." (28) Specifically, predatory pricing takes place when a firm sets its prices at such a level that the prices will cause an immediate loss of profits in the hopes of driving the firm's rivals out of the market. (29) Once the competition is driven out of the market, a "recoupment" period follows in which the predatory firm "enjoys monopoly prices and profits." (30)

         The most recent Supreme Court decision analyzing predatory pricing was Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. (31) In that case, the plaintiff, a manufacturer of generic cigarettes, alleged that the defendant injured competition "by furthering a predatory pricing scheme de signed to purge competition from the economy segment of the cigarette market." (32) The plaintiff argued that the volume discounts given by Brown & Williamson (Brown) to its wholesale customers reduced Brown's net prices below its average variable cost, and that those discounts were intended to drive out competition. (33)

         The Supreme Court found that in order for a plaintiff to succeed on a predatory pricing claim, it must prove that (1) the prices being challenged "are below an appropriate measure of its rival's costs," (34) and (2) that there is a "dangerous probability of recouping its investment in below-cost prices." (35) In formulating the predatory pricing test, the Court noted that it had previously rejected the idea that "above-cost prices that are below general market levels or the costs of a firm's competitors inflict injury to competition." (36) As a result, the Court recognized a general rule that "the exclusionary effect of prices above a relevant measure of cost either reflects the lower cost structure of the alleged predator, and so represents competition on the merits, or is beyond the practical ability of a judicial tribunal to control without courting intolerable risks of chilling legitimate price-cutting." (37)

   3. History of Bundled Discount Cases Before LePage's

      1. SmithKline Corp. v. Eli Lilly & Co. (38)

         One of the earliest cases dealing with bundled discounts prior to LePage's was SmithKline Corp. v. Eli Lilly & Co., which was also a Third Circuit decision. (39) In that case, SmithKline Corp. (SmithKline) brought a section 2 claim arguing that a rebate program created by Eli Lilly (Lilly) was an attempt to monopolize the cephalosporin market. (40) More specifically, SmithKline alleged that Lilly's rebate program worked to discourage its customers from purchasing SmithKline's cephalosporin product, Ancef, by requiring those customers to purchase specified quantities of at least three of Lilly's cephalosporin products. (41)

         The Third Circuit found that in order for a competitor to meet the bonus discounts Lilly offered, it would be forced not only to meet the competition on a single product, but also to "match the bonus rebate awarded to the hospital purchaser based on [the] total purchases of three [different] cephalosporins." (42) Ultimately, the Third Circuit concluded, inter alia, that "[w]ere it not for [Lilly's rebate plan], the price, supply, and demand of [drugs that were also produced by SmithKline] would have been determined by the economic laws of a competitive market." (43)

      2. Ortho Diagnostic Systems, Inc. v. Abbott Laboratories, Inc. (44)

         Nearly eighteen years passed after the SmithKline decision before another federal court was given an opportunity to hear a case involving bundled discounting. In 1996, the U.S. District Court for the Southern District of New York was given such an opportunity in Ortho Diagnostic Systems, Inc. v. Abbott Laboratories, Inc. (45) In that case, Ortho Diagnostic Systems, Inc. (Ortho) brought a section 2 claim against Abbott Laboratories, Inc. (Abbott) alleging that Abbott violated the antitrust laws "by entering into a contract with the Council of Community Blood Centers (CCBC) pursuant to which CCBC members were entitled to advantageous pricing if they purchased a package of four or five tests from Abbott." (46)

         In the fall of 1992, after a period of negotiation, CCBC and Abbott executed a three year contract for the supply of blood tests and equipment. (47) As part of the contract, Abbott...