Third Circuit Upholds Pharmaceutical Loyalty Discount Program

Practical Law Legal Update w-002-2280 (Approx. 5 pages)

Third Circuit Upholds Pharmaceutical Loyalty Discount Program

by Practical Law Antitrust

Background

The plaintiff, Eisai, Inc., competes with Sanofi in the market for a category of anticoagulant drugs used in the treatment of deep vein thrombosis. Eisai challenged Sanofi's marketing program for the drug Lovenox, which has a market share of 81% to 92%. Sanofi's program included:

Price discounts based on the volume and market share of Lovenox that hospitals purchased.
A clause that limited a hospital's ability to give competing anticoagulants priority status on its formulary.

Under Sanofi's program, the discounts available to a hospital increased when its purchases of Lovenox exceeded 75% of total purchases for the relevant anticoagulant drugs, with increasing discounts based on additional volume and market share criteria. A hospital that purchased less than 75% of its requirements from Sanofi could obtain a 1% discount under the contract. Without any contract, the hospital could still purchase Lovenox at the wholesale price.

The plaintiff alleged that the program constituted illegal de facto exclusive dealing in violation of Sections 1 and 2 of the Sherman Act, Section 3 of the Clayton Act, and the New Jersey Antitrust Act. On a motion for summary judgment, the plaintiff relied primarily on its expert report to argue that Sanofi's marketing program:

Harmed competition by bundling each hospital's contestable demand for Lovenox (the purchases that the hospital is willing to make from rivals) with its incontestable demand (the purchases that the hospital is less willing to make from rivals). In other words, the plaintiff alleged that Sanofi leveraged the hospital's need to have at least some Lovenox available, because of a unique FDA indication that no other drug on the market possessed, to exclude rivals from the market.
Ensured that it would cost hospitals more to switch from Lovenox to the plaintiff's drug, Fragmin, despite Fragmin's lower price.
Led to foreclosure of 68% to 84% of the relevant market.

The US District Court for the District of New Jersey granted Sanofi's motion for summary judgment and the plaintiff appealed.

Outcome

The Third Circuit panel analyzed the plaintiff's claims as a de facto exclusive dealing claim subject to the rule of reason. The court found that the same substantive analysis applied to the claims under Sections 1 and 2 of the Sherman Act, Section 3 of the Clayton Act, and the New Jersey Antitrust Act.

De Facto Exclusive Dealing

The court noted that an exclusive dealing claim requires a showing of substantial foreclosure of a relevant market. The court found that the principal concern in analyzing the amount of foreclosure is whether customers are free to choose other products in the market, not whether they actually do so.

In previous Third Circuit cases addressing de facto exclusive dealing, the court observed that it had found that in certain circumstances a monopolist can use its monopoly power to deprive customers of a meaningful choice, such as through:

Bundled rebates offered where competitors cannot offer an equally diverse line of products (LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003)).
Prohibitions on customers purchasing competing products combined with the ability to terminate customers' access to the monopolist's product (United States v . Dentsply Int'l, Inc., 399 F.3d 181 (3d Cir. 2005)).
Forcing manufacturers into long term agreements for the supply of a key input where manufacturers feared being unable to meet customer demand if they did not agree (ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012)).

Here, the court found that the plaintiff did not show that customers were deprived of a meaningful choice by Sanofi's conduct. The plaintiff's reliance on testimony from several dozen hospitals that wanted to purchase Fragmin but could not was not sufficient, given that there are 6,000 hospitals in the US.

The court also found that the plaintiff's theory of bundling the two types of hospital demand for Lovenox was novel and not supported by precedent because it involved the bundling of demand for a single product, rather than bundling of multiple products. The court further found that:

The record did not show that an equally efficient competitor could not compete with Sanofi, such as by obtaining the FDA indication that currently only Lovenox has.
The plaintiff did not explain how much of the incontestable demand for Lovenox was based on its unique FDA indication.
There were no concrete examples of anticompetitive consequences of Sanofi's program in the record.

The court distinguished ZF Meritor and Dentsply by noting that, unlike in those cases, Sanofi never threatened to cut off supply to Lovenox if the hospitals did not comply with the program. Rather, hospitals could continue to purchase Lovenox, even if they did not sign a contract with Sanofi at all.

The court also rejected evidence of high prices in conjunction with Sanofi's high market share as proof of anticompetitive effects, particularly because Lovenox's prices increased at a rate similar to Fragmin's.

Price-Cost Test

Sanofi argued that its Lovenox program involved above-cost pricing and was therefore per se legal. The court agreed that, under the price-cost test, pricing practices are per se legal as long as they involve above-cost prices. However, the court found that the price-cost test did not apply to the plaintiff's claims, which did not fundamentally relate to pricing practices.

To determine whether antitrust claims involve an exclusive dealing arrangement (subject to the substantial foreclosure test) or a pricing practice (subject to the price-cost test), the court noted that:

In a pricing practice claim, price is the predominant mechanism of exclusion. This typically occurs in cases involving a single-product loyalty discount or rebate that is used to compete with similar products.
In an exclusive dealing claim, competitors are not given an opportunity to compete in the first place, rather than being driven out of the market because they cannot compete on price.

Here, the court found that bundling, not pricing, was the primary tool allegedly used by Sanofi to exclude rivals. The court declined to rule on whether the price-cost test could ever apply to this type of claim, but found that the plaintiff's claims could not be dismissed on that basis.

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