There has long been legal uncertainty as to the antitrust standards that should govern the granting of bundled discounts by a firm that has monopoly power over some of the products subject to the discount. On July 7 2009 the Ninth Circuit issued a potentially important decision in Doe v Abbott Laboratories(1) that gives greater comfort to firms considering offering bundled discounts – as long as the resulting prices remain above any reasonable measure of the costs of the product.
Abbott Laboratories manufactures HIV drug Norvir, which is a protease inhibitor. Abbott originally sold Norvir as a standalone product, but it turned out that Norvir was more useful when used together with another protease inhibitor, in which case Norvir worked to boost the effectiveness of the second protease inhibitor. At some point Abbott began selling Norvir in two forms: (i) as part of a combination pill called Kaletra, which combined Norvir with Abbott's protease inhibitor lopinavir; and (ii) as a standalone product, with patients typically taking Norvir together with a separate protease inhibitor manufactured by one of Abbott's competitors.
The plaintiffs alleged that Abbott engaged in pricing tactics that leveraged its purported 'booster' monopoly into the purported market for boosted protease inhibitors. The plaintiffs alleged that Abbott charged significantly more (four times as much) for Norvir when sold on a standalone basis, as opposed to when sold as a component of Kaletra. According to the plaintiffs, this gave a significant price advantage to Kaletra when Kaletra was competing with the other options in the relevant market – which the plaintiffs considered to be combinations of a competing protease inhibitor, plus standalone Norvir as a booster. However, the plaintiffs objected solely to the disparity in the Norvir pricing and did not specifically allege that Norvir or Kaletra was being sold for a price that was below an appropriate measure of Abbott's costs.
The Ninth Circuit has largely adopted the standard proposed by the Antitrust Modernization Commission(2) for evaluating bundled discounts.(3) Under that standard, bundled discounts are lawful if, after attributing all the discounts in the bundle to the competitive product at issue, the competitive product is still being sold above its average variable cost. Abbott filed a motion for summary judgment in the Norvir case based on various grounds, including the plaintiffs' failure to plead below-cost pricing in compliance with the PeaceHealth standard. However, the district court denied the motion. Among other things, the district court ruled (as it had in a widely reported related case) that the PeaceHealth standard should not apply in the pharmaceutical context due to the nature of the products involved (specifically, the existence of high fixed costs and very low variable costs). The parties then entered into a complex settlement arrangement which involved an appeal to the Ninth Circuit.
Rather than address whether the PeaceHealth standard should apply when measuring costs in the pharmaceutical context, the Ninth Circuit found a dismissal required by the Supreme Court's intervening decision in Pacific Bell Telephone Co v linkLine Communications, Inc.(4) The linkLine decision limited antitrust claims based on 'price squeeze' allegations. A price squeeze involves a manufacturer of a product that has a monopoly on a key input for that product. A price squeeze occurs when the manufacturer sells the input to competing manufacturers at a higher price as compared to the retail price of the manufacturer's final product, thus making it difficult, if not impossible, for competitors to match the manufacturer's price for the final product. The Supreme Court in linkLine held that such allegations do not state an antitrust claim where the manufacturer is under no obligation to sell the input to competitors in the first place (and where there are no allegations of below-cost pricing with respect to the final product). The Supreme Court reasoned that in the absence of an obligation to sell an input, it would not make sense to find liability where the manufacturer chose to sell the input, but at an allegedly excessive price.
The Ninth Circuit in Norvir considered the allegations of monopoly leveraging in Norvir to be analogous to a price squeeze claim. In the absence of any allegation of a refusal to deal or below-cost pricing, the plaintiffs solely challenged the differential in pricing between Norvir when sold in different forms. Essentially, Abbott engaged in pricing that allegedly made the price of Kaletra (its final product) less expensive, while charging a higher amount for the input (Norvir) when used with competing products, rendering those alternatives relatively more expensive. The Ninth Circuit held that without allegations of an improper refusal to deal or below-cost pricing, these kinds of allegation could not survive the Supreme Court's decision in linkLine. The court also concluded that the fact that Abbott sold Norvir directly to consumers, instead of to competitors as an intermediate product, did not warrant a different standard for liability.
The decision in Norvir is potentially an important one for the antitrust analysis of bundled discounts. The decision aligns the Ninth Circuit with the Seventh Circuit and others that have rejected monopoly leveraging claims based on bundled pricing without some allegation of below-cost pricing. Thus, it creates greater comfort for firms adopting bundled discounts that result in prices that are above any reasonable measure of costs.
However, the decision does not address the thorny issue of how to measure costs where the plaintiffs do allege below-cost pricing – as they are likely to do in future cases. The particular facts of the Norvir Case – where Norvir's price was set at an initial level (which presumably was profitable) and then its standalone price was increased – provided the plaintiffs with a difficult fact pattern to allege unprofitable, below-cost pricing. But in another context, it is easy to anticipate arguments by plaintiffs that a drug's implicit price after factoring in bundled discounts is below cost when considering all the drug's development costs. It is this issue – whether the PeaceHealth decision requires the exclusion of those fixed development costs when measuring costs in the pharmaceutical context – that the Ninth Circuit declined to decide.
Finally, it is possible that the Norvir court's analysis could be limited to situations where the discounted product is an essential input into (or complement of) a competitor's final product or solution. The fact that the discounted product in Norvir was needed by competitors to offer a competitive solution (ie, a boosted protease inhibitor) allowed the Ninth Circuit to analogize the situation to the price squeeze in linkLine. But where discounts are bundled across products that are not inputs (or otherwise complementary to) a competitor's product, it is less clear that the Norvir court's reasoning will apply.
(1) Available online at http://caselaw.lp.findlaw.com/data2/circs/9th/0817699p.pdf.
(2) See http://govinfo.library.unt.edu/amc/.
(3) See Cascade Health Solutions v PeaceHealth, 479 F 3d 726, 727 (9th Cir 2007).
(4) 129 S Ct 1109 (2009); online at www.supremecourtus.gov/opinions/08pdf/07-512.pdf.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription