In the past several months, two life sciences companies were sued by antitrust plaintiffs alleging illegal bundling practices and a third company settled a 3-year-old bundling suit. These cases, as well as the recommendations by the Antitrust Modernization Commission regarding bundling and a request by the Ninth Circuit for amicus briefs in a bundling case, illustrate how bundling continues to raise tough antitrust issues, particularly in the health care industry.

On February 21, 2007, Southeast Missouri Hospital (SMH) filed a putative class action suit against C.R. Bard, Inc. and two affiliates of Tyco International alleging that the defendants utilized exclusionary tactics, including bundled discounts and rebates, to eliminate competition from other urological catheter manufactures. The complaint by SMH follows a 2004 lawsuit by Rochester Medical Corp., a competing urological catheter manufacturer, against Bard, Tyco, and two group purchasing organizations (GPOs), Novation, LLC and Premier Purchasing Partners L.P. (Rochester settled with Bard and Novation in late 2006). According to the SMH complaint, Bard and Tyco’s combined share of the market for urological catheters exceeds 90 percent. Rochester alleged that the defendants tried to exclude it from the market for urological catheters by entering into contracts with GPOs and other customers that provided the largest discounts and rebates to customers who purchased not only a specified percentage (typically 90 percent) of its urological products from Bard or Tyco, but also a specified percentage of unrelated products that the defendants, but not Rochester, manufactured.

Becton, Dickinson and Company is another recent target of bundling-related class action complaints. In 2004, Becton settled an antitrust lawsuit by its competitor, Retractable Technologies, Inc. (RTI) for $100 million. On March 28, 2007, a Beckton customer filed a putative class action suit against Becton in the Southern District of New York and another customer followed with a nearly identical suit eight days later in the District of New Jersey. Both complaints are based on the same factual allegations at issue in the RTI lawsuit, that Becton utilized bundling discounts and other tactics to eliminate competition for syringes and other disposable hypodermic products. On March 31, 2007, Johnson & Johnson (J&J), a leading provider of surgical endoscopy products, settled a similar 3-year-old antitrust lawsuit with CONMED Corporation for $11 million. COMED, a competing endoscopy supplier, had made allegations very similar to those made by Rochester and RTI in the cases described above. The essence of CONMED’s bundling complaint was that J&J attempted to monopolize the endoscopy market by offering better deals on its sutures, a product line on which J&J has a large market share and in which CONMED does not compete, to customers that agreed to purchase a certain percentage of their endoscopy instruments from J&J. In addition to the monetary settlement, J&J announced that it would no longer engage in the practices that gave rise to the complaint.

These cases are particularly noteworthy in light of two other bundling-related developments. On April 2, 2007, the Antitrust Modernization Commission (AMC) submitted its Report and Recommendations. The AMC was created in 2002 by an act of Congress for the purpose of examining the antitrust laws and recommending possible changes to Congress and the president. On the issue of bundling, the AMC was critical of a 2003 decision handed down by the 3rd Circuit, LePage’s v. 3M, because the court did not even attempt to evaluate whether the bundled rebates at issue represented competition on the merits or were predatory. The AMC found that “[t]he lack of clear standards regarding bundling, as reflected in LePage’s v. 3M, may discourage conduct that is procompetitive or competitively neutral and thus may actually harm consumer welfare.” Instead, the AMC recommended that courts require a plaintiff to show each of the following elements before imposing liability under Section 2 of the Sherman Act:

“(1) after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product;

“(2) the defendant is likely to recoup these short-term losses; and

“(3) the bundled discount or rebate program has or is likely to have an adverse effect on competition.”

Notably, the AMC was unanimous in making this recommendation except that Commissioners Carlton and Garza thought that it was too strict. They expressed the concern that “the first screen in the three-part test would still require many pricing schemes where exclusion is not an issue to receive further scrutiny under the second and third parts of the test.” These comments are particularly significant because both Commissioners are now in senior positions in the Antitrust Division of DOJ; Carlton is the deputy assistant attorney general for economic analysis and Garza was recently named deputy assistant attorney general for regulatory matters.

Around the same time that the AMC submitted its Report and Recommendations, a three-judge panel of the Ninth Circuit that is grappling with these very issues in Cascade Health Solutions et al. v. PeaceHealth took the extremely unusual step of soliciting amicus briefs on the appropriate standard that should be applied in a bundling case. Eight briefs were filed in response, ranging from an endorsement of the stricter standard proposed by the AMC to significantly looser standards. Uncertainty in this area will persist until more definitive guidance is provided in either Cascade or another bundling case to be decided in the future.