On May 4, 2016, the U.S. Court of Appeals for the Third Circuit announced its decision in Eisai, Inc. v. Sanofi Aventis U.S., LLC,1 rejecting antitrust claims predicated on a supplier’s market-share discount program and other promotional tactics. While the court’s decision adds some definition to an amorphous standard that has long plagued companies with strong U.S. market positions, bundling and other aggressive price-based behavior by such firms unfortunately remains an issue that poses uncertainty and antitrust risk. Nevertheless, the Eisai decision reinforces several key tenets of U.S. monopolization law, including that lack of coercion of customers is key to avoiding antitrust liability and that the result of bundling must be to injure competition and not just one or more competitors.
Sanofi’s Alleged Monopoly and “Bundled” Rebates
Sanofi and Eisai are two of four pharmaceutical companies that sell injectable anticoagulant drugs used in hospitals to combat deep vein thrombosis. Between 2005 and 2010, Sanofi’s Lovenox drug was the preferred anticoagulant among hospitals and physicians, comprising between 82 and 93 percent of sales in the market. Furthermore and significantly to Eisai’s antitrust claims, the FDA had approved Lovenox for at least seven different specific uses or applications (known as “indications”), including as the only anticoagulant indication for the treatment of certain severe heart attacks. Eisai sold Fragmin, an injectable anticoagulant similar to Lovenox, which held the second largest, albeit single digit, market share for injectable coagulants in the U.S.
At issue was Sanofi’s price discount program, which was based on a combination of market share and volume. Hospitals, the major purchasers of Lovenox, had two options to purchase Lovenox: wholesale or through a supply contract. If a hospital purchased Lovenox through a supply contract, it immediately received a one percent discount on the wholesale purchase price. If a hospital purchased more than 75 percent of its anticoagulants from Sanofi, the discount increased considerably, at times as high as 30 percent off of the wholesale price. Significantly to the appellate court, Sanofi never threatened to withhold hospital supply, but if the hospital’s purchases dropped below 75 percent of total anticoagulant purchases, the contractual discount immediately reverted to one percent.2
In 2008, Eisai sued Sanofi in federal court in New Jersey for violating sections 1 and 2 of the Sherman Act, claiming that Sanofi’s pricing program, contractual clauses, and other promotional tactics were anticompetitive.3 On competing motions for summary judgment, the district court found that Sanofi had not violated the Sherman Act. The lower court decided the case based on the application of the price-cost test to Sanofi’s product discount program, which requires, among other things, that the plaintiff show that the “defendant’s prices ‘are below an appropriate measure of its ... costs.’”4 The court concluded that Sanofi was not selling Lovenox below its costs, and therefore could not be liable for such pricing.
Circuit Court Rejects Eisai’s Novel Bundling Theory
Instead of relying on the district court’s reasoning under the price-cost test, the court of appeals analyzed Sanofi’s behavior under the framework applicable to exclusive dealing. Under an exclusive dealing analysis, bundling creates antitrust liability when a supplier offers discounts for purchases across several products, at least one of which competitors cannot provide.5 When a supplier has a dominant market position, such discounts may sometimes foreclose competition, thereby depriving customers of meaningful choice and hurting consumer welfare.
In this case, Eisai argued that Sanofi’s price discount scheme was tantamount to bundling, even though it only involved a single product, because it required hospitals to bundle incontestable demand (i.e., the heart attack indication for which only Lovenox was approved) with a hospital’s contestable demand (i.e., demand for the indications that both Lovenox and Fragmin could address). Because hospitals had significant incontestable demand for Lovenox, Eisai argued that the significant discounts when hospitals purchased 75 percent or more of their anticoagulants from Sanofi amounted to an illegal exclusionary contract.
The court of appeals disagreed. The court noted that traditional bundling requires different products offered to meet consumer demands. Here, however, Sanofi sold a single product to its customers, and offered price discounts at greater purchase quantities. The court said that “[e]ven if bundling of different types of demand for the same product could, in the abstract, foreclose competition, nothing in the record indicates that an equally efficient competitor was unable to compete with Sanofi.”6 The court also highlighted the fact that Eisai had its own unique indication for certain cancer treatments, something that could, in theory, allow Eisai to pursue a similar “exclusionary” discount program.
Notably, the court distinguished Sanofi’s actions from several other precedents involving bundling behavior. The court noted that, unlike these other cases, Sanofi never threatened to withhold supply for failure to meet target thresholds, nor did its contracts prevent hospitals from purchasing anticoagulants from other providers like Eisai.7 Instead, while hospitals faced higher prices if it opted out of Sanofi’s program, “nothing in the record demonstrates that a hospital’s supply of Lovenox would be jeopardized in any way or that discounts already paid would be refunded. . . . [t]he threat of a lost discount is a far cry” from the anticompetitive conduct at issue in other Third Circuit monopolization cases.8
Potential Implications of the Decision
The legal standards to evaluate exclusive dealing claims and claims that bundled discounts violate the antitrust laws are unclear, at best, and vary by jurisdiction. Unfortunately, the Third Circuit’s decision in Eisai fails to provide a bright-line rule for which large companies have long hoped, opting instead for a highly fact-intensive analysis that turned on whether customers had been coerced into purchasing Sanofi’s product. Nevertheless, the Third Circuit refused to extend liability to bundling theories predicated on sales of a single product simply because that product has different uses and different customer demand. In addition, Eisai v. Sanofi-Aventis provides businesses with some additional clarity as to what type of bundling may well run afoul of the antitrust laws. Specifically, the court reiterated that the bundling must substantially foreclose competition, or actually result in measurable anticompetitive effects, and not simply injure a supplier of competing products.
Using Sanofi’s contracts as an example, the following conduct will likely help keep conditioned bundled discounts from impugning liability:
- Do not threaten to withhold supply if customers choose not to maintain purchase targets (Sanofi provided 1 percent discounts below target and wholesale access);
- Allow customers to terminate contracts with minimal notice provisions (Sanofi required 30 days notice);
- Maintain preferred status with customers without excluding other customers (Sanofi contracts allowed hospital formulary lists to include competitors so long as Lovenox was also listed);
- Price above the incremental cost of the bundle.
1 2016 WL 2600321 (3d Cir. 2016). Opinion available at http://www2.ca3.uscourts.gov/opinarch/142017p.pdf.
2 Eisai also challenged contractual so-called non-discrimination clauses in Sanofi’s supply agreements with purchasers. These clauses required hospitals to provide Lovenox with preferred status on its formulary (a formulary is a list of approved drugs for various medical circumstances). Lovenox did not prohibit hospitals from including other anticoagulants on the formulary, but giving preference on the formulary to other drugs reduced the hospital’s discount on Lovenox to 1 percent.
3 Eisai also sued for violations of Section 3 of the Clayton Act and under the New Jersey Antitrust Act. Eisai Inc. v. Sanofi-Aventis U.S., LLC, 2014 WL 1343254 (D. N.J. 2014).
4 Id. at *15 (quoting Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222-24 (1993)).
5 See LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003).
6 Eisai, 2016 WL 2600321, at *6, op. at 19.
7 Cf. United States v. Dentsply Int'l, Inc., 399 F.3d 181 (3d Cir.2005).
8 Eisai, 2016 WL 2600321, at *7, op. at 21.
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