Anticompetitive agreements

Assessment framework

What is the general framework for assessing whether an agreement or concerted practice can be considered anticompetitive?

Under Section 1 of the Sherman Act, agreements that unreasonably restrict trade are prohibited, with agreements among competitors receiving the closest scrutiny. Certain ‘horizontal’ agreements (eg, price-fixing or market allocation) are considered per se illegal. Under the ‘per se rule’, a plaintiff need not define the affected relevant market or prove anticompetitive effects, and the defendant does not have the opportunity to put forward justifications for the agreement, although the plaintiff must still prove that it suffered an injury caused by the challenged conduct. Horizontal agreements that are reasonably necessary to achieve efficiencies are judged under the ‘rule of reason’, where the agreement’s pro-competitive benefits are weighed against its anticompetitive effects within the relevant product and geographic markets.

Vertical agreements, such as those between suppliers and customers, are more likely to have legitimate business justifications and less likely to have anticompetitive effects than horizontal arrangements, and therefore generally are judged under the more lenient rule of reason. In the pharmaceutical industry, antitrust enforcers have applied close antitrust scrutiny to agreements that have the effect of restricting or delaying generic competition. These cases are discussed in greater detail in question 23.

Section 2 also prohibits exclusionary or predatory conduct by firms with monopoly power or a dangerous probability of achieving a monopoly. Pharmaceutical companies are at particular risk of challenges under section 2 because they may be accused of having a monopoly position in a narrowly defined product market, perhaps limited to a single product (see question 27 et seq).

Technology licensing agreements

To what extent are technology licensing agreements considered anticompetitive?

Technology licensing agreements are generally analysed under the rule of reason, in which the agreement’s pro-competitive benefits are weighed against its potential anticompetitive effects. If, however, a court or agency concludes that a licensing agreement is merely a means towards accomplishing a per se illegal objective (eg, a market allocation scheme), the per se rule might be applied. In 1995, the Antitrust Agencies published Antitrust Guidelines for the Licensing of Intellectual Property (the IP Guidelines), which set forth the Antitrust Agencies’ analytical approach. For licensing agreements that are not subject to per se condemnation, the IP Guidelines provide for a safe harbour where the parties involved have no more than a 20 per cent share of each market affected by the licensing arrangement.

Certain restrictions in licensing agreements can create antitrust risk. Exclusivity provisions, for example, may be challenged if they foreclose competition unreasonably. Courts assessing the foreclosure effect of such agreements examine the term and scope of the exclusivity, the market share of the parties, the business justifications for the exclusivity and the availability of less restrictive alternatives obtaining. A requirement that the licensee acquire other products or licences from the licensor as a condition for the licence can also raise antitrust issues in certain circumstances, particularly where the licensor has market power in the ‘tying’ product (see discussion of tying arrangements in question 24).

Co-promotion and co-marketing agreements

To what extent are co-promotion and co-marketing agreements considered anticompetitive?

Co-promotion and co-marketing agreements, like other joint ventures or competitor collaborations, are generally analysed under the rule of reason. The Antitrust Agencies’ Antitrust Guidelines for Collaboration Among Competitors explain how they evaluate these types of agreements. To determine whether an agreement is a legitimate competitor collaboration entitled to rule of reason treatment, an agency or court will look first to whether the agreement integrates the resources of the companies to develop potential efficiencies. For example, a joint marketing or promotion agreement might result in the combination of complementary assets that permits the participants to commercialise products faster or more efficiently. These types of arrangements are likely to be considered lawful under a rule-of-reason analysis as long as the pro-competitive benefits outweigh the likely anticompetitive effects. If, however, the arrangement will merely make it easier for the participants to exercise market power or increase prices, or if the potentially anticompetitive effects outweigh the efficiency-enhancing aspects of the arrangement, the arrangement may violate antitrust laws.

In addition, the FTC has challenged co-promotion and co-marketing agreements between brand-name and generic pharmaceutical companies in connection with patent settlements. In that context, the concern is that a co-promotion or co-marketing agreement might be one way for the brand company to surreptitiously transfer value to the allegedly-infringing generic as an alleged ‘payment’ to delay generic entry.

Other agreements

What other forms of agreement with a competitor are likely to be an issue? How can these issues be resolved?

Joint ventures among competitors carry possible antitrust risks. The Antitrust Agencies have investigated research joint ventures, production joint ventures and joint-purchasing arrangements, among other types of agreements.

All of these types of agreements raise more significant antitrust risks when the participants have a high combined market share. Courts and agencies are especially concerned about restrictions in collaboration agreements that may impact competition outside the scope of the collaboration and are not reasonably necessary to achieve the arrangement’s pro-competitive effects.

Even if there is no direct agreement to reduce competition outside of the collaboration, information obtained by the participants as a result of the collaboration sometimes can have spillover effects that can facilitate coordination or otherwise reduce competition between the participants. In some cases, these spillover effects can outweigh the pro-competitive effects of the collaboration. Companies entering into competitor collaborations can reduce antitrust risk by limiting the participants’ access to competitively sensitive information from the other party or the joint venture. That process can involve limiting the types of information that are shared (eg, the parties may decide to not share customer-specific or forward looking pricing information) or creating ‘firewalls’ between employees involved in the collaboration and those who with responsibility for making competitive decisions for their respective companies.

Issues with vertical agreements

Which aspects of vertical agreements are most likely to raise antitrust concerns?

Vertical agreements are generally evaluated under the rule of reason and may raise antitrust issues when they have the effect of foreclosing competitors from a significant portion of the market. For example, if a dominant seller enters into an exclusive arrangement with customers or suppliers that accounts for more than 30 per cent of the relevant market, it may become more difficult for competitors of the seller to compete. Loyalty discounts that condition a customer’s receipt of discounts on purchasing most or virtually all of its volume from the seller can have similar foreclosure effects under certain circumstances and have been challenged in private litigation and by the FTC.

Tying arrangements can raise similar antitrust issues and are one of the few vertical restrictions that are at least technically considered illegal per se. Tying occurs where a seller requires a purchaser of one product or service (the tying product) to also purchase a second product or service (the tied product). Where the seller has market power in the tying product, such an arrangement can foreclose competition from rivals selling products that compete with the tied product.

Bundled discounts may have similar effects where they require a customer that purchases one product to purchase a bundle of products to obtain a discount on the product that the customer wants. Bundled discounts, however, are a highly unsettled area of US antitrust law, with courts applying different standards to determine when a bundled discount is unreasonably exclusionary. See, eg, Cascade Health Solutions v PeaceHealth, 515 F3d 883 (9th Cir 2008) (conduct is exclusionary where bundled discounts result in prices below an appropriate measure of the defendant’s costs); LePage’s Inc v 3M Co, 324 F3d 141 (Third Circuit 2003) (en banc) (allowing a monopolisation claim to proceed based solely on potential for exclusion, without requiring evidence of below-cost pricing); Ortho Diagnostics Sys Inc v Abbott Lab Inc, 920 F Supp 455 (SDNY 1996) (requiring evidence that bundled discounts led to prices below the defendant’s average variable costs and that the plaintiff was at least as efficient a producer of the competitive product). Moreover, although the FTC has relied on the Ninth Circuit’s approach in pursuing an enforcement action, it has stated that it retains the right to pursue claims against any alleged monopolist based on a different legal standard, including the Third Circuit’s approach that requires no evidence of below cost pricing (See In the Matter of Intel Corporation, FTC File No. 0610247, https://www.ftc.gov/sites/default/files/documents/cases/2010/08/100804intelanal_0.pdf).

Patent dispute settlements

To what extent can the settlement of a patent dispute expose the parties concerned to liability for an antitrust violation?

Settlements of patent litigation between brand-name and generic pharmaceutical companies may create antitrust risk where the agreement has two elements: the generic company agrees to wait until a certain date to enter the market and a payment of some form is made by the brand-name manufacturer to the generic manufacturer. These types of arrangements have been referred to as ‘pay-for-delay’ or ‘reverse payment’ patent settlements and the FTC has taken the position that such settlements may be illegal under the antitrust laws.

One such reverse-payment case involving the drug AndroGel reached the US Supreme Court (See FTC v Actavis, 570 US 136 (2013)). In that case, a branded pharmaceutical company settled patent litigation with several generic drug manufacturers and in the process made cash payments to the generic drug manufacturers totalling millions of dollars. The Supreme Court concluded that the patent settlements should be evaluated under the rule of reason, emphasising that a ‘large and unjustified’ payment to a generic manufacturer may be evidence of harm to competition.

Joint communications and lobbying

To what extent can joint communications or lobbying actions be anticompetitive?

Otherwise anticompetitive conduct is not immunised from antitrust scrutiny because the conduct took place at the meeting of a trade association. Because trade associations bring competitors together, they can provide an opportunity to engage in illegal conduct such as the exchange of competitively sensitive information or an agreement among trade association members to fix prices. In addition, when a trade association engages in standard setting, such as setting minimum safety standards, it raises the possibility of anticompetitive behaviour, particularly where members involved in the standard setting activities have the opportunity to disadvantage their competitors through the standard-setting process. See American Institute of Intradermal Cosmetics v Society of Permanent Cosmetic Professionals, 2013 US District LEXIS 58138, at *22 (CD Cal 2013) (denying the defendant’s motion to dismiss where the plaintiff sufficiently pled that a cosmetics professionals trade association had allegedly established pretextual standards that were not based on objective criteria and selectively enforced by the trade association in order to stifle competition).

Lobbying actions, where competitors seek to petition some agency of the government to take an action that has the effect of restraining competition, may be immunised from antitrust scrutiny under the Noerr-Pennington doctrine. Noerr-Pennington immunity, which is based on constitutional principles, including the right to petition the government, encompasses a range of conduct intended to induce any of the three branches of the US government to take a particular action, even if the result of that governmental action would be anticompetitive in a particular market. There are, however, exceptions to Noerr-Pennington immunity, including if the petitioning activity is deemed a sham.

Public communications

To what extent may public communications constitute an infringement?

To violate Section 1 of the Sherman Act, there must be an agreement between parties. While public statements themselves may not constitute an agreement, there are cases where plaintiffs have alleged that the defendants used public statements to signal their competitive intentions in furtherance of either an explicit or tacit agreement. Public statements may create particular antitrust risk when they suggest that a company’s competitors (or the industry generally) should adopt a particular action or course of conduct (such as raising prices or reducing capacity), or when they suggest a company’s willingness to ‘follow’ if a competitor adopts a particular course of action.

Exchange of information

Are anticompetitive exchanges of information more likely to occur in the pharmaceutical sector given the increased transparency imposed by measures such as disclosure of relationships with HCPs, clinical trials, etc?

To the extent that pharmaceutical companies are merely complying with legal or reasonable contractual obligations (ie, obligations serving legitimate goals unrelated to any potential reduction in competition) in disclosing information, those disclosures should not create substantial antitrust risk. As with any disclosure of information, however, companies should be careful to share only information that is necessary to achieve those goals. Companies should also be careful when disclosing competitively sensitive information, such as prices or future competitive plans. To the extent that information is part of a competitor collaboration, companies should ensure that proper safeguards are taken with respect to that information.