The government reviews competition
By Curtis Rooney
Well-known trustbuster, Columbia law school dropout, and 26th President of the United States Teddy Roosevelt would have looked on with great interest recently, as the Federal Trade Commission (FTC) and Department of Justice (DOJ) Antitrust Division convened a workshop on “conditional pricing practices.” Not since Flo from the Progressive Insurance commercials have bundled discounts been discussed with such enthusiasm.
FTC and DOJ brought together leading economists, law professors and medical practitioners to discuss the rationale for, and potential effects of, such marketing practices, as well as the current and appropriate legal standards for judging conditional pricing practices under antitrust law.
Since the Affordable Care Act largely postponed antitrust questions, the importance of the existing standards cannot be exaggerated. Government representatives solicited guidance from the various panelists about the current regulatory approach. Panelists were asked:
- Was there a consensus that the “price-cost” safe harbor should be abandoned? (Answer: No.)
- Should federal agencies worry about conditional pricing facilitating collusion, given that these practices are more commonly thought to have exclusionary effects? (Answer: Sometimes.)
- Should federal agencies credit cost-saving efficiencies in their analysis, and if so, in what way? (Answer: In many cases.)
While the group did not reach a clear consensus, the program did provide clues as to how law enforcers might view conditional pricing practices in the future.
Discounts and the courts
Two common forms of “conditional pricing practices” are loyalty and bundled discounts. Sellers offering loyalty discounts typically extend a discount to buyers who purchase all or nearly all of their needs from that seller. Plaintiffs in cases that challenge loyalty discounts often allege that the discount is so aggressive that competitors cannot compete, and that the lack of competition leads to higher prices.
Sellers offering multiple products sometimes offer a discount to buyers who purchase two different products in what are often called “bundled products.” Plaintiffs challenging bundled discounts typically allege that competitive sellers of the product cannot compete effectively. They contend that these discounts create a lack of competition that leads to higher prices for the competitive product.
Most panelists recognized that loyalty and bundled discounts are consistent with sellers’ efforts to reduce costs and improve their products. Lower costs and better products are regarded generally as good for consumers. For example, bundled discounts can lead to lower shipping and restocking costs. Likewise, manufacturers’ loyalty discounts can encourage distributors to invest in promoting a product and providing a higher level of service to consumers. Some panelists emphasized that these sorts of pro-competitive justifications are evident because the same discounting methods are commonly used by non-dominant firms when there is no risk of an exclusionary effect.
Why the questions?
One of the reasons the DOJ and FTC are looking for greater clarity on conditional pricing is that the courts have applied different tests when considering potential anticompetitive effects. For example, in the Southeast Missouri Hospital v. C.R. Bard, Inc. case, the majority court in the 8th U.S. Circuit of Appeals granted summary judgment (i.e., dismissed the case before it went to trial) in favor of the defendant (Bard). The Court of Appeals affirmed the lower court’s finding that, because buyers of hospital products were not required to buy 100 percent of their needs from their group purchasing organization contract to obtain discounts and could choose to buy from a variety of competitors at any time, there was no legal reason the case should be allowed to proceed.
In March 2014, the U.S. District Court for the District of New Jersey, in Eisai Inc. v. Sanofi-Aventis U.S., rejected an antitrust plaintiff’s challenge to “loyalty-discount” contracts. The court said that such contracts are not anticompetitive, as a matter of law, as long as the prices offered are above-cost. The Eisai decision used a “price-cost test” for antitrust claims involving price discounts conditioned on a customer’s agreement to purchase a certain volume or market-share of a single product from a supplier off a GPO-negotiated contract. The plaintiff had argued that the discounts offered by the defendant were so attractive to customers that they as competitors could not survive and competition was, therefore, harmed. The court said that unless the plaintiff could show that such discounts resulted in prices that are below the defendant’s cost, there was no right to recovery under the antitrust laws.
Competition should be protected
Determining the proper standard for balancing competitive interests in these cases has challenged courts and regulatory agencies for some time. The FTC and DOJ are asking for additional comments on these matters to be submitted to them by August 22. While we can’t know for sure what the Rough Rider himself would say about conditional pricing today, it is safe to assume that he would agree that the basic tenets of antitrust law should protect competition, not competitors.
Curtis Rooney is president of the Healthcare Supply Chain Association, www.supplychainassociation.org.