You know what they say: one man’s price is another man’s bundle. No? Well maybe they should, after this recent decision out of the Third Circuit in Eisai, Inc. v. Sanofi Aventis U.S., LLC involving allegedly exclusionary discounting. The court ultimately found Sanofi’s conduct was not unlawful. But the decision raises questions about how such conduct – a hybrid of price discounts and single-product bundling – will be treated going forward, at least in the Third Circuit.
At issue was Sanofi’s marketing of its anticoagulant drug Lovenox to hospitals through its Lovenox Acute Contract Value Program. Under the Program, hospitals received price discounts based on the total volume of Lovenox they purchased and the proportion of Lovenox in their overall purchase of anticoagulant drugs. A hospital that chose Lovenox for less than 75% of its total purchase of anticoagulants received a flat 1% discount regardless of the volume purchased. But when a hospital’s purchase of Lovenox exceeded that percentage, it would receive an increasingly higher discount based on total volume and percentage share, up to a total of 30% off the wholesale price. A hospital that did not participate in the Program at all was free to purchase Lovenox “off contract” at the wholesale price.
Eisai argued that these discounts constituted de facto exclusive dealing that foreclosed between 68% and 84% of the relevant market. According to Eisai, Sanofi was “bundling” the incontestable demand for Lovenox – i.e., the amount needed to treat conditions for which Lovenox was the only FDA-approved drug – with the contestable demand – i.e., the amount used to treat conditions for which other anticoagulant drugs were also approved and available. The Third Circuit had previously considered bundled-product discounts in LePage’s Inc. v. 3M, when it recognized that such discounts could harm competition by disadvantaging rivals that did not have as wide of a product range. But the court declined to extend its analysis to Sanofi’s single-product conduct, noting that “[s]uch conduct does not present the same antitrust concerns as in LePage’s, and we are aware of no court that has credited this novel theory.” Moreover, the court explained, “[e]ven if bundling of different types of demand for the same product could, in the abstract, foreclose competition, nothing in the record indicates than an equally efficient competitor was unable to compete with Sanofi.” The court focused on the lack of evidence supporting Eisai’s theory of incontestable demand, and the relatively mild consequences of not obtaining Sanofi’s discounts. In the court’s view, Eisai failed to demonstrate that hospitals were foreclosed from purchasing competing drugs as a result of Sanofi’s discounting.
The court then considered Sanofi’s argument that its discounts were simply price-based competition and that Eisai’s suit should therefore be dismissed under the so-called “price-cost test.” The price-cost test applies “when pricing predominates over other means of exclusivity.” Under the test, a plaintiff must show that the defendant sold a product at prices below its cost and still likely recouped its investment. The district court had ruled in Sanofi’s favor on this ground, finding that price was the “predominant mechanism of exclusion” under the challenged Program and there was “no dispute that Lovenox was never sold to hospitals at a price that was below Sanofi’s cost even after discounts were applied.” The Third Circuit, however, disagreed with this approach. Although the court recognized that the price-cost test “usually” applies “when a firm uses a single-product loyalty discount or rebate to compete with similar products,” it found that this was not a usual case. Because Eisai’s allegations rested on the bundling of incontestable and contestable demand, “the bundling – not the price – served as the primary exclusionary tool.” The court declined to opine on when, if ever, the price-cost test could apply to this type of claim.
The court’s refusal to apply the price-cost test because of the non-price conduct at issue potentially opens companies up to increased scrutiny for many of their pricing practices. Here, the non-price conduct – the “bundling” – was inextricably linked to price: the only real effect of the bundling was to enable a discount, and the discount was offered in connection with the bundling. But the court nonetheless was “not persuaded that Eisai’s claims fundamentally relate to pricing practices,” precluding application of the price-cost test. Under the Third Circuit’s reasoning, it seems that while entering into agreements based on a published price list with no collateral promises would fall within the price-cost test, other arguably similar conduct by a monopolist might not. A plaintiff challenging non-price conduct coupled with discounts could argue that there is an issue of fact as to whether the discounts “contaminate” a pure price program, thereby exposing the monopolist to potential antitrust liability.