On June 23, 2014, the Federal Trade Commission (“FTC”) and the Antitrust Division of the U.S. Department of Justice (“DOJ”) hosted a one day workshop to explore the economic and legal implications of conditional pricing practices such as loyalty discounts, market share rebates, bundled pricing, and similar incentives.  How the antitrust laws should treat conditional pricing practices has been the subject of significant debate in recent years.  

The stated goal of the workshop was to advance the economic understanding of the potential harms and benefits of conditional pricing and to reexamine their treatment under the antitrust laws.  Panelists drawn from the agencies, academia, and the private bar discussed a number of practices that explicitly or effectively tie pricing to customer commitments to purchase a specified share or volume of products or achieve a stated share of sales.  The workshop participants considered both the theoretical and empirical developments in the economic understanding of these practices, discussed developments in the relevant case law, and assessed the implications for the proper treatment of these practices under the antitrust laws.

In opening comments, DOJ Assistant Attorney General Bill Baer and FTC Commissioner Maureen Ohlhausen both noted that while some types of conditional pricing practices are procompetitive, other practices could restrict competition and allow monopolists to maintain market power within supply chains.  In a comment echoed by numerous panelists, Baer said that “the difficulty is in drawing the line between pricing practices that injure competition and those that do not.”  

Ohlhausen raised concerns about relying on the Ninth’s Circuit price-cost test in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (2008), noting the difficulty associated “with calculating the appropriate measure of cost.”  Under this test, a plaintiff challenging a defendant’s pricing practice must prove that the defendant set prices below-cost.  However, DOJ Deputy Assistant Attorney General for Criminal and Civil Operations Renata B. Hesse cautioned against ignoring the price-cost standard in favor of a looser “I know it when I see it” assessment, noting that such a test would increase compliance issues.  In evaluating other potential standards, the FTC’s Bureau of Competition Director Deborah L. Feinstein questioned whether the use of an efficiency model, which examines whether a particular pricing practice reduces competition by raising a rival firm’s cost or otherwise impedes their ability or incentives to achieve efficiencies, would be a more appropriate rationale. 

A number of panelists pressed the agencies to use a case-by-case rule of reason analysis in assessing the competitive effects of conditional pricing practices.  American University Washington College of Law Professor Jonathan Baker argued that applying the rigid rules of the price-cost standard could have a “chilling effect” on meritorious cases and may result in companies being wrongly accused of antitrust violations.  Steve Salop, a law and economics professor at Georgetown University Law Center, said that the price-cost test may also lead to under-deterrence of potential anti-competitive conduct because it is a test of intent, not of effect.  

However, Leah Brannon, a lawyer with Cleary Gottlieb, countered that the bright line guidance of the price-cost test is a valuable tool for counseling clients.  But as Massachusetts Institute of Technology Professor Michael Whinston noted, “[t]here are potentially other kinds of safe harbors that would be useful for counseling as well.”

As might be expected, the workshop produced more questions than answers, but the June 23 workshop may signal renewed DOJ and FTC attention to this issue.  In follow-up to the workshop presentations, the FTC is seeking comments on conditional pricing practices through August 22, 2014  Additional information relating to the workshop, including presentations and copies of the written presentations will be available at the FTC website