On April 20, 2015, the Federal Trade Commission (“FTC”) announced that Cardinal Health, Inc. (“Cardinal”), agreed to pay $26.8 million to resolve allegations that it violated Section 2 of the Sherman Act by monopolizing the market for the sale and distribution of low-energy radiopharmaceuticals to hospitals and physicians in 25 metropolitan areas across the United States. This settlement represents the FTC's first disgorgement in a competition case in nearly a decade and the second-highest antitrust disgorgement in FTC history.
The Alleged Anticompetitive Conduct
Cardinal, the largest operator of radiopharmacies in the United States, distributes and sells drugs containing radioactive isotopes to hospitals and physicians for use in diagnosing and treating various diseases. The FTC alleged that heart perfusion agents (“HPAs”), a type of radiopharmaceutical used in cardiac stress tests, account for a significant portion of radiopharmacy revenue (at least 60 percent). Thus, the FTC’s position was that having access to HPAs is necessary for a radiopharmacy to survive financially and remain competitive. Between 2003 and 2008, there were only two manufacturers of HPAs in the United States: Bristol-Myers Squibb (“BMS”) and General Electric (“GE”).  A radiopharmacy operator could therefore not enter a new market and profitably compete without obtaining the right to distribute either BMS’s or GE’s brand products in that geographic market.
The FTC alleged that, during this five-year period, Cardinal prevented new radiopharmacies from entering 25 markets by coercing BMS and GE to withhold distribution rights from new competitors in the relevant markets.  Because new entrants could not successfully operate without access to HPAs from BMS or GE, the FTC alleged that Cardinal’s arrangement represented a de facto exclusivity in the market.
To support its claim, the FTC alleged that Cardinal engaged in a variety of other anticompetitive conduct in violation of Section 2 of the Sherman Act. For example, Cardinal allegedly attempted to reprimand BMS when it began to license distributors for its HPAs nationwide—threatening to switch customers from BMS’s to GE’s HPAs in markets where Cardinal was the sole radiopharmacy. Cardinal also allegedly threatened to cancel its orders from BMS and conditioned future purchases of BMS products on BMS not licensing other radiopharmacies in markets where Cardinal was the sole radiopharmacy. The FTC also alleged that Cardinal threatened similar repercussions with GE, warning GE that its current and future agreements with Cardinal were contingent on Cardinal remaining the exclusive distributor of GE’s HPAs.
Terms of the Settlement
Under the terms of the settlement agreement, Cardinal is barred from engaging in certain conduct and has a variety of obligations aimed at restoring displaced competition. For example, Cardinal is prohibited from engaging in future conduct similar to that alleged in the FTC’s complaint and must take specific steps to restore competition in six markets where it is the sole or dominant radiopharmacy operator.  Cardinal must also permit customers to terminate exclusive contracts in these markets (a court-appointed monitor will oversee the process of notifying customers and administering any termination of contracts). Moreover, Cardinal must notify the FTC before entering into new exclusive distribution agreements or buying radiopharmacy assets that would not otherwise be subject to the notification requirements of the Hart-Scott Rodino Act. Finally, and perhaps most significantly, Cardinal is required to disgorge $26.8 million in allegedly “ill-gotten gains.” The $26.8 million is slated to go into a fund to be distributed to customers purportedly injured by Cardinal's anticompetitive practices.
Along with the FTC’s recent Cephalon victory in the Eastern District of Pennsylvania—reaffirming its readiness to seek disgorgement—the Cardinal settlement demonstrates the agency’s increasing willingness to utilize disgorgement as a remedy. This is a significant development, because, in 2012, the FTC withdrew its 2003 Policy Statement on disgorgement titled “Monetary Equitable Remedies in Competition Cases.” The FTC noted in its Policy Statement that while disgorgement and restitution were useful tools in some competition cases, they were not intended to displace more conventional remedies, such as private damages, civil or criminal penalties, and divestiture. The 2003 Policy Statement also provided criteria for when the FTC would seek disgorgement in competition cases, and many observers believed that the lack of industry guidance would result in disgorgement being pursued only in egregious cases, like naked price-fixing among competitors.
Dissenting Statements of Commissioners Ohlhausen and Wright
The FTC commissioners are far from unified on the use of disgorgement, and the desire for formal guidance was evident from the dissenting statements of Commissioners Maureen K. Ohlhausen and Joshua D. Wright. In separate statements, both Commissioners voiced concern about the lack of clear guidance and transparency in determining when disgorgement was an appropriate antitrust remedy. Commissioner Ohlhausen asserted that the disgorgement remedy used in the proposed settlement represented a “significant departure” from the FTC’s use of cease-and-desist orders and noted that much of the alleged conduct occurred prior to the withdrawal of the 2003 Policy Statement.  She explained that “[o]veruse of this remedy fundamentally changes the nature of the [FTC] and the role it was designed to play." Moreover, Commissioner Wright was particularly concerned about disgorgement resulting in over-deterrence. He did not reach the point of expressing an opinion on Cardinal’s alleged conduct but “disagree[d] with the Commission’s assertion that ‘there was no efficiency benefit or legitimate business justification’ for Cardinal’s conduct.” Commissioner Wright’s position was that the disgorgement decision “should end if the conduct to be challenged has a plausible efficiency justification.” Both dissents emphasized that disgorgement should be limited to exceptional cases, such as horizontal price-fixing.
The majority defended its use of disgorgement, stating that “[t]he imposition of injunctive relief alone would fail to adequately remedy the harm caused by Cardinal’s past conduct and would have insufficient deterrent effect.”  Noting that the withdrawal of the 2003 Policy Statement was done in order to “dispel the notion that the FTC would seek disgorgement and restitution remedies only in ‘exceptional’ cases,” the majority asserted that its view is “wholly consistent with that of the Supreme Court” and is necessary to prevent an outcome that “would thwart the goals of the antitrust laws.”
Key Takeaways: Antitrust Enforcement May Grow Costlier
Disgorgement has long been perceived as a remedy reserved only for the most pernicious of antitrust violations, such as horizontal price-fixing. Granted, the Cardinal case is unique inasmuch as the alleged anticompetitive conduct ceased seven years ago, making other conventional forms of relief (such as injunctive relief) impractical. However, when read in conjunction with the FTC’s recent win in Cephalon, there is an emerging line of case law signaling that FTC enforcement may be significantly more costly to companies than merely the prospect of facing an injunction against perpetuating the anticompetitive conduct.