On April 20, 2015, the Federal Trade Commission announced a proposed settlement1 of allegations that Cardinal Health, Inc. used its monopoly power in 25 local markets to exclude potential entrants by obtaining de facto exclusive rights to distribute a key pharmaceutical. The FTC alleged that Cardinal engaged in a variety of tactics to ensure that the only two suppliers of this product refused to distribute to potential competitors. Cardinal agreed to a $26.8 million penalty for ill-gotten gains as a result of its conduct, as well as injunctive relief to prevent future violations and to restore competition in six local markets. The disgorgement penalty is the second largest financial award that the FTC has ever obtained for a violation of the antitrust laws. The proposed settlement is a reminder that: 1) antitrust disgorgement penalties are gaining prominence at the U.S. antitrust agencies; and 2) conduct short of an explicit exclusive agreement by firms with high market shares may run afoul of the antitrust laws, absent a procompetitive justification.
Cardinal operates the nation’s largest chain of radiopharmacies, which provide hospitals and clinics with radiopharmaceuticals for nuclear imaging and other procedures.2 The FTC alleged that through two acquisitions (both of which it declined to challenge at the time),3 Cardinal became the sole radiopharmacy operator in 25 local geographic markets. Cardinal was also the largest purchaser of radiopharmaceuticals during the relevant time period.
The FTC alleged that Cardinal “excluded potential entrants and maintained monopoly power” in the 25 local markets in which it was the sole operator by “obtaining the de facto exclusive right” to distribute heart perfusion agents (“HPAs”),4 an essential drug that a radiopharmacy must offer in order to compete. During the relevant period, HPAs were available from only two manufacturers: Bristol-Myers Squibb and General Electric Co.5 The FTC alleged that having HPA distribution rights was a requirement for entry because HPAs are used to perform the most common radiopharmaceutical procedure (heart stress tests) and constitute 60 percent of a typical radiopharmacy’s revenue.6 At the time of the relevant conduct, the FTC alleged that GE and BMS had plans in development to expand distribution to Cardinal’s competitors.7
Cardinal allegedly used various tactics to coerce BMS and GE to refuse to distribute to potential entrants in these 25 markets. Cardinal allegedly conditioned its future relationship with both suppliers on their agreement to provide de facto exclusivity, and threatened various forms of retaliation if BMS and GE did not comply. In particular, Cardinal threatened to incent BMS customers (by altering prices and using promotions) to switch to GE’s HPAs and actually did so in select markets to demonstrate the credibility of its threats. Cardinal also allegedly shifted purchases of other types of pharmaceuticals to competitors of BMS and threatened additional shifts if BMS did not cease licensing to other distributors. In addition, in exchange for de facto exclusivity, Cardinal told GE that it would not promote BMS’s products and also offered BMS the opportunity to avoid competition with Cardinal’s generic HPAs.
The FTC alleged that Cardinal’s tactics were successful, and GE and BMS denied HPA distribution rights to numerous radiopharmacies that sought to enter the 25 markets. As a result, the FTC alleged that Cardinal “acquired, maintained, and exercised” monopoly power to the detriment of hospitals and clinics in those areas, including through charging higher prices and excluding lower-cost competitors.8 According to the FTC, Cardinal could cite to no legitimate business justification or efficiency arising from the exclusivity.
Cardinal agreed to pay $26.8 million in disgorgement for ill-gotten gains resulting from its alleged anticompetitive conduct. The FTC settlement also imposes various injunctive remedies, including prohibitions and requirements governing Cardinal’s relationship with suppliers and potential radiopharmacy entrants, as well as the obligation to provide notice to the FTC prior to closing certain future transactions. Further, the settlement includes provisions to restore competition in the six markets where Cardinal still has a dominant presence and requires Cardinal to establish an antitrust compliance program.
In addition to the traditional remedies of divestitures and conduct restrictions, disgorgement is becoming an increasingly important weapon in the U.S. antitrust agencies’ enforcement arsenal. The FTC signaled this change in 2012 with the withdrawal of its nine year-old policy statement that had limited disgorgement to “exceptional” cases.9 Likewise in 2011, the Antitrust Division of the Department of Justice sought disgorgement from Morgan Stanley for its alleged indirect participation in a derivative agreement that led to higher energy prices in violation of Section 1 of the Sherman Act.10 In 2014, the DOJ also required disgorgement penalties for alleged “gun jumping” in connection with a pending transaction in violation of the Sherman Act and HSR Act.11 This week’s FTC settlement with Cardinal, and the FTC’s pending cases against Cephalon, Inc. and AbbVie, Inc. in which it is seeking disgorgement, suggest that more disgorgement penalties will be forthcoming. In their dissents, two Commissioners expressed concern regarding the lack of guidance by the FTC regarding when it will seek disgorgement in antitrust cases.
The FTC/Cardinal settlement also serves as a useful reminder that conduct that falls short of an explicit exclusive agreement with a supplier can still run afoul of the antitrust laws. Although Cardinal never entered a formal exclusivity agreement with GE or BMS, the FTC concluded that Cardinal’s tactics were “expressly designed to … prevent competitors from entering” the relevant markets,12 and thus that disgorgement was appropriate. Even conduct that arguably falls short of a “clear violation” of the antitrust laws, as the dissenting Commissioners concluded to be the case here,13 may be subject to a disgorgement penalty.
Companies with a significant presence in a market should be mindful of these trends. Even without explicitly seeking contractual exclusivity, conduct by a firm with a strong market position that is intended to exclude rivals’ access to an essential input may pose antitrust issues and potentially subject a firm to significant penalties. This is particularly true where the firm lacks a compelling business justification in defense of its conduct. Companies with significant market shares should carefully review arrangements made with vertical partners and exercise care with respect to incentives, conditions, or other methods that may have the effect of excluding rivals.