CHAPTER § 4.05 Antitrust Issues in Sales, Marketing, and Pricing

• Jurisdiction: United States

§ 4.05 Antitrust Issues in Sales, Marketing, and Pricing

Pharmaceutical manufacturers' distribution practices have proven to be a fertile ground for antitrust issues. Problems may arise (i) between manufacturers of competing products due to exclusionary conduct such as tying, exclusive dealing, or certain discounting practices (interbrand competition) and (ii) within a manufacturer's own distribution chain through practices such as territorial restrictions and resale price maintenance programs (intrabrand competition). In addition, buyers who believe that they have been the subject of illegal price discrimination from sellers may bring claims under the Robinson-Patman Act.³¹⁴

All of these distribution practices involve vertical, rather than horizontal, conduct of some kind, and it is useful to articulate several broad themes from court decisions in recent decades. First, courts generally view vertical restraints and agreements with less suspicion than horizontal restraints due to their potentially procompetitive effects. Second, manufacturers have more leeway to impose restraints on their own distribution than to utilize exclusionary practices that exclude or foreclose their competitors. Third, even with respect to exclusionary conduct impacting competitors, plaintiffs, whether private plaintiffs or the Antitrust Agencies, may face challenges in demonstrating the required harm to competition.

[1] Vertical Restraints on Distribution

Pharmaceutical manufacturers and distributors may at times impose certain vertical restraints on distribution at the risk of running afoul of the antitrust laws. These can be primarily categorized as non-price restraints, such as exclusive territories, or as price restraints, most notably resale price maintenance.

[a] Non-Price Vertical Restraints

Absent market power, pharmaceutical and medical-device manufacturers have wide discretion to impose non-price restraints upon the distribution of their products. One category of non-price restraint involves territorial restrictions, which require distributors to sell within an assigned territory.

Courts evaluate territorial restrictions under the rule of reason and require plaintiffs to show evidence of the competitive harm of the territorial restraints to succeed on an antitrust claim.³¹⁵ Other factors that courts consider include the purpose of the territorial restriction, the market share within the relevant market held by the supplier imposing the restraint,³¹⁶ and the overall net impact of the restriction on competition. After consideration of these factors, courts still uphold most territorial restrictions under the rule of reason.³¹⁷

Manufacturers may also seek to limit distribution to certain categories of customers or through certain sales channels. As long as the manufacturer can provide valid business justifications for the restrictions under the rule of reason, courts have generally upheld such restrictions.³¹⁸

[b] Minimum-Resale-Price Maintenance

Resale-price maintenance ("RPM") involves an agreement between participants at different levels of the distribution chain to set parameters around the resale price of products or services. Minimum-RPM agreements are vertical restraints on trade that enable a manufacturer to set a price floor below which a distributor cannot sell its products or services.³¹⁹ For over 100 years, the United States Supreme Court had held that vertical minimum-RPM agreements were per se illegal.

This changed in 2007 when the Supreme Court in Leegin Creative Leather Products v. PSKS, Inc. held that vertical price restraints should be analyzed under the rule of reason,³²⁰ thereby bringing federal law on minimum-RPM agreements in line with earlier decisions on other types of vertical agreements. The Court noted a number of procompetitive justifications for a manufacturer's use of RPM including: (1) "giv[ing] consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between," (2) allowing manufacturers to protect high-service retailers from discounting "free riders" who then "capture some of the increased demand those services generate," and (3) providing "new firms and brands" with a way to ensure the margins necessary "to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer."³²¹

Leegin does not render all minimum-resale-price agreements legal. Rather, the decision allows courts and juries to consider whether, on balance, a specific agreement advances or retards product competition. Factors that lower courts should consider include: (1) "the number of manufacturers that make use of RPM in a given industry"; (2) the source of the minimum-resale-price restraint; and (3) whether the "dominant manufacturer or retailer can abuse resale price maintenance for anticompetitive purposes."³²²

Although RPM antitrust claims have all but disappeared at the federal level, manufacturers still must consider state laws as well. A number of states still maintain that minimum-RPM agreements are per se illegal in that state.³²³ Maryland's statute, passed in response to the Leegin decision expressly prohibits all minimum-RPM agreements, and in 2016, the Maryland Attorney General brought an enforcement action against Johnson & Johnson Vision Care for implementing a minimum-RPM policy for all retail sellers of J&J contact lenses.³²⁴ J&J later settled the suit with conduct remedies and a civil penalty fine.³²⁵

[2] Exclusionary Conduct

Exclusionary conduct, including tying and exclusive-dealing agreements, may violate Section 1 of the Sherman Act prohibiting agreements "in restraint of trade," Section 3 of the Clayton Act prohibiting exclusive arrangements involving tangible goods that may "substantially lessen competition," and Section 5 of the FTC Act, which broadly prohibits "unfair methods of competition." In addition, exclusionary conduct by a dominant firm may violate Section 2 of the Sherman Act prohibiting monopolization or attempts at monopolization.

[a] Tying

A tying arrangement is "an agreement by a party to sell one product (the tying product) but only on the condition that the buyer also purchase a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier."³²⁶ Over the years, the Supreme Court's strong disapproval of tying arrangements has substantially diminished,³²⁷ and the strength of the per se rule as applied to tying arrangements has decreased as courts have recognized that such arrangements may actually be procompetitive.³²⁸

The four elements of an unlawful tying arrangement are (i) two separate products, (ii) conditioning sale of one product (tying product) on the purchase of the other, (iii) sufficient economic power in the tying product to restrain trade in the tied product, and (iv) a "not insubstantial" amount of interstate commerce in the tied product is affected.³²⁹ As the Supreme Court has made clear, plaintiffs must show market power in the tying product.³³⁰ It is this required demonstration of market power that has caused some courts to refer to tying arrangements as "quasi"-illegal per se, as normal per se analysis would not require proof of market power.³³¹

Although courts have eroded the strict per se illegality of tying conduct, a plaintiff may also establish a tying violation under the rule of reason.³³² Of course, accompanying a rule of reason analysis is the burden-shifting framework where the defendant has the opportunity to provide a procompetitive justification once the plaintiff makes a prima facie showing of an adverse effect on competition.³³³

[i] Tying in the Pharmaceutical Industry

In the pharmaceutical context, pure tying claims are rare, although the related sales arrangements involving bundling and loyalty discounts are more common. In one case, Sandoz Pharmaceuticals was alleged to have tied blood monitoring services to the sale of Clozaril. In October 1989, the FDA approved Clozaril to treat severely ill schizophrenic patients who did not respond to standard therapy.³³⁴ After being granted marketing rights for Clozaril, Sandoz Pharmaceuticals distributed the drug exclusively through Caremark Pharmacies.³³⁵ Clozaril's original price accounted for a system of compulsory weekly blood tests called the Clozaril Patient Management System ("CPMS").³³⁶ Blood monitoring of patients taking Clozaril was required to detect a serious blood disorder and each week patients were allegedly required to go to a Caremark pharmacy and have blood drawn for testing.³³⁷ CPMS was "designed to ensure that the drug was available only to those patients who complied with weekly monitoring requirements: hence the operating principle of the CPMS was 'no blood, no drug.'"³³⁸

Clozaril and CPMS proved prohibitively expensive; as a result, public agencies could not afford to provide care to a majority of the mentally ill.³³⁹ As a result, 29 states filed antitrust actions against Sandoz claiming that it had illegally tied the sale of a drug to a medical service.³⁴⁰ The FTC also filed a complaint which alleged that the tying of Clozaril to the medical-monitoring services raised the price of treatment and "prevent[ed] federal, state, and local government agencies and private health care providers from providing their own pharmacy, distribution and delivery, blood drawing, patient tracking, and clinical laboratory services in connection with the use of clozapine."³⁴¹ The FTC issued a consent order prohibiting Sandoz from requiring any purchaser of Clozaril or any patient taking Clozaril to buy other services from Sandoz.³⁴² As result of the civil cases and FTC's order, Sandoz announced that it would unbundle its system and permit health care providers to devise their own blood-monitoring systems.³⁴³

Another more recent tying case from 2017 involved the distribution of medical and surgical supplies; in that case the...