What You See Isn't What You Get: How the Colgate Doctrine May Apply to the Disposable Contact Lens Antitrust Litigation

• Jurisdiction: United States,Federal,California
• Author: By James M. Mulcahy & Filemon Carrillo
• Publication year: 2015
• Citation: Vol. 24 No. 2

WHAT YOU SEE ISN'T WHAT YOU GET: HOW THE COLGATE DOCTRINE MAY APPLY TO THE DISPOSABLE CONTACT LENS ANTITRUST LITIGATION

By James M. Mulcahy & Filemon Carrillo¹

I. INTRODUCTION

The four largest disposable contact lens manufacturers² have, within months of each other, implemented minimum resale pricing policies that govern the sales of specific contact lens models. Given the unique prescription method and downstream distribution characteristics of the disposable contact lens industry, many contact lens retailers and consumers maintain that: (a) these policies are anticompetitive and have no legitimate procompetitive justification; and (b) both intrabrand and interbrand³ competition in the disposable contact lens relevant product market are severely limited as a direct result of these pricing policies.

The disposable contact lens manufacturers now are facing claims that have been brought by retailers and disposable contact lens consumers under Section 1 of the federal Sherman Act and Section 16720 the California Cartwright Act.⁴ These actions allege that the policies implemented by the contact lens manufacturers are anticompetitive and unlawful. The manufacturers, on the other hand, argue that because the policies were implemented unilaterally, they are immune from antitrust liability.

At bottom, each of the defendants contends that it unilaterally adopted a pricing policy imposing a minimum resale price and thereafter each defendant will deal only with those retailers who adhere to that policy.⁵ The defendants implicitly also argue that the fact that each of them simultaneously implemented similar retail price maintenance (RPM) programs represents nothing more than "conscious parallel conduct" which, as a matter of law, does not allow an inference of a conspiracy—i.e., their "conscious parallel conduct" is entirely consistent with unilateral action.⁶ Given that the defendants' conduct is unilateral, according to the defendants, it matters not that the combined effect of their RPM policies may represent an anticompetitive and unreasonable restraint on interbrand competition.⁷

[Page 60]

In 1911, the United States Supreme Court in Dr. Miles Med. Co. v. John D. Parker & Sons Co. held that an agreement between a manufacturer and its distributor establishing an RPM program was per se unlawful under Section 1 of the Sherman Act (15 U.S.C. § 1).⁸

In 1919, the United States Supreme Court in United States v. Colgate qualified Dr. Miles, and held that when a firm unilaterally announces its minimum retail pricing policy, and thereafter simply refuses to sell to distributors who do not comply, it is not subject to antitrust scrutiny under Section 1 of the Sherman Act.⁹ This has become known as the Colgate doctrine.

In 2007, ninety six years after the Dr. Miles decision, the Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc.,¹⁰ reversed Dr. Miles, and announced that RPM agreements are no longer per se unlawful under the Sherman Act. Now, they are subject to the rule of reason analysis.¹¹ Some now argue that because the Colgate doctrine merely offered a way to escape the per se condemnation of RPM agreements set forth in Dr. Miles, the Leegin holding may have limited the availability and application of the Colgate doctrine.

This article suggests that Colgate is still good law and that the Leegin decision did not affect the ongoing viability of the Colgate doctrine. Thus, even if it is assumed that the contact lens manufacturers' collective RPM policies are manifestly anticompetitive and lack any pro-competitive justification or redeeming value—e.g., there is no legitimate basis for arguing that the RPM policies promote the deterrence of free riding on reseller investments in presale promotional services—the Colgate doctrine still insulates the disposable contact lens manufacturers from antitrust liability as long as each manufacturer's RPM policy was implemented unilaterally. Nevertheless, the Disposable Contact Lens Antitrust Litigation well may test that conclusion.

[Page 61]

II. BACKGROUND

A. The disposable contact lens industry inherently is susceptible to anticompetitive conduct

The disposable contact lens industry is unique. By its very nature, the industry is highly susceptible to anticompetitive behavior. It is distinguished by five principal competitive characteristics.

First, consumers must obtain written prescriptions from optometrists and ophthalmologists (eye care providers or "ECPs") before they can purchase their contact lenses.¹²

Second, the ECPs perform eye exams and contact lens fittings and receive payment for both services. Because ECPs are paid separately for their eye exam and contact lens fitting services, they are not subject to free riding by discount rivals in connection with their sales of disposable contact lenses to their patients.

Third, based upon their eye examinations, ECPs prescribe a specific contact lens brand—e.g., Bausch & Lomb—for the patient. The law does not permit the consumer to substitute another brand for the prescribed brand, and generic equivalents cannot be obtained for branded contact lenses.¹³ This practice is in stark contrast to the general pharmaceutical industry, where primary care physicians write prescriptions for various drugs, but the consumer-patients can freely substitute equivalent generic or competing brands when they go to a pharmacy to fill the prescription.¹⁴

Fourth, the industry is highly concentrated and dominated by four manufacturers— Cooper Vision, Inc.; Alcon Laboratories, Inc.; Bausch + Lomb; and Johnson & Johnson Vision Care, Inc. (J&J) (collectively the "Manufacturers"). Together, the Manufacturers comprise 97% of the relevant contact lens product market.

Fifth, ECPs communicate with each other and the Manufacturers through their largest supplier of contact lenses—ABB Optical Group ("ABB"). ABB is the "nation's largest distributor of soft contact lenses. [It] [purportedly] suppl[ies] more than two-thirds of [ECPs] in America with brand name contact lenses."¹⁵ ABB allegedly also "surveys its ECP customers to find out how much they are charging their patients for each different type and brand of contact lenses [and thereafter] publishes the results of the surveys in its periodic Retail Price Matrix"¹⁶

Theoretically, when patients visit their ECPs and obtain prescriptions for their contact lenses, they can purchase their contact lenses from any retailer that sells the prescribed product and brand. These retailers include 1-800 CONTACTS and Costco. In practice, however, the ECPs apparently historically have declined to give their patients a copy of their contact lens prescriptions unless the patients purchase their disposable contact lenses directly from the prescribing ECP.¹⁷

[Page 62]

This practice foreclosed any ability on the part of the patients to effectively participate in competitive price discovery for the prescribed brand of contact lenses, and effectively eliminated entirely all intrabrand price competition. This changed, however, when in 2003 Congress enacted the Fairness to Contact Lens Consumer Act ("FCLCA").¹⁸ Under the FCLCA, ECPs now must provide a copy of their contact lens prescriptions to the patient. This, then, provides patients with the opportunity to engage in certain competitive price discovery—e.g., they can go to retailers such as 1-800 CONTACTS and Costco—but only as it relates to intrabrand competition. This, of course, does not necessarily suggest that these intrabrand restrictions are unlawful under the antitrust laws. This is so because the purpose of the antitrust laws is "the protection of competition, not competitors,"¹⁹ and because "the antitrust laws are designed primarily to protect interbrand [—not intrabrand—] competition."²⁰

B. The Manufacturers implement minimum resale price maintenance policies

Beginning in June 2013, each of the Manufacturers more or less simultaneously implemented so-called "unilateral pricing policies" (UPPs) on specific contact lens models. In general, the pricing policies identify the minimum retail price that retailers, including the ECPs, must charge consumers for specific models—e.g., ACUVUE® OASYS® Brand Contact Lenses (6 lenses per box) must have a minimum retail price of $34.00.²¹ The net price of any advertisement or bundled sale cannot be lower than the UPP set price.²² And, although the pricing policy is a UPP, it clearly is RPM. Because the four dominant disposable contact lens manufacturers each implemented so-called UPP policies in tandem, the collective effect of those policies very well may be nothing other than a purely anticompetitive effect on interbrand competition.

C. The Senate holds hearings regarding Manufacturers' RPMs

On July 30, 2014, the Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights of the United States Senate held hearings on: "Pricing Policies and Competition in the Contact Lens Industry: Is What You See What You Get?"²³ The Committee was concerned by the fact that all of the large contact lens manufacturers have adopted parallel so-called UPPs, and the effect on competition may well be manifestly anticompetitive without any procompetitive or other redeeming virtue.

[Page 63]

At the hearing before the Senate Judiciary Committee, representatives from J&J and Alcon Laboratories, Inc. appeared and testified. J&J's representative testified that it had "made the decision to implement a UPP after a thorough consideration of a number of options and independent of pricing decisions of other contact lens manufacturers"²⁴ J&J further testified that by establishing its UPP, J&J is "creating lower prices for the most widely prescribed" contact lens.²⁵ Part of J&J's reasoning was that "[s]ubstantial time spent reviewing costs during a patient examination takes away valuable time from the clinical discussion."²⁶

Alcon Laboratories, Inc. ("Alcon") testified that the idea of implementing its UPP came from an Alcon employee. ²⁷...