Antitrust: restrictive agreements and dominancei Significant casesMarket allocation
In June 2015, the DOJ and the State of Michigan filed suit in Michigan against four hospital systems. The case alleged that the systems illegally made a 'gentlemen's agreement not to market services'. Three of the four systems settled, but the fourth is litigating. The case was initially scheduled to go to trial in April 2017. In June 2017, Judge Judith E Levy, of the US District Court for the Eastern District of Michigan, denied cross motions for partial summary judgment. After several delays, trial was scheduled for March 2018. In the interim, the case was referred to mediation, and in February 2018 the parties settled the case in the form of a proposed final judgment. Among other things, the settlement prohibits the hospital system from entering into any agreement with any other hospital system that prohibits or limits marketing or otherwise allocates any service, customer, or geographic market. The settlement also requires the hospital system to appoint an antitrust compliance officer.
Separately, in April 2018, following a public comment period, the FTC approved a negotiated final order prohibiting Oregon Lithoprint Inc from making or attempting to make any agreement to refuse publication of legal notices or to allocate customers who wish to publish these notices. According to the FTC's complaint, Oregon Lithoprint, Inc, the owner of the Yamhill, Oregon News-Register, a bi-weekly community newspaper, invited The Newberg Graphic, its closest rival in Yamhill County, to divide geographic markets for printing foreclosure notices, thereby inviting collusion that endangered competition and violated Section 5 of the FTC Act.
In a potentially significant case concerning online advertising, the FTC issued an opinion, affirming the initial decision of an Administrative Law Judge, that 1-800 Contacts, the largest online retailer of contact lenses in the US, unlawfully entered into anticompetitive agreements with rival online contact lens sellers that suppressed competition in certain online search advertising auctions, thereby restricting truthful and non-misleading internet advertising to consumers. According to the administrative complaint filed by the FTC, as part of a settlement of a trademark dispute, 1-800 Contacts entered into bidding agreements with at least 14 competing online contact lens retailers providing that they would not bid against one another in certain search advertising auctions. The major online search engine companies, such as Google and Bing, sell advertising space on their search engine results pages through computerised auctions. Following a 19-day administrative hearing involving testimony from 43 witnesses and more than 1,250 exhibits, Chief Administrative Law Judge Michael D Chappell issued an initial decision holding that the advertising restraints at issue unreasonably harmed competition and costumers in the market for the sale of contact lenses online. Respondents appealed and the Commission issued at 59-page opinion upholding Judge Chappell's initial decision. The Commission's order requires 1-800 Contacts to cease and desist from enforcing the unlawful provisions in its existing agreements and from entering into similar agreements in future. In December 2018, 1-800 Contacts applied to the Commission to stay its order in part pending review by a US Court of Appeals, and that application remains pending.Steering restrictions
The DOJ's civil antitrust lawsuit against Carolinas HealthCare System (CHS) appears likely to settle soon. In June 2016, the DOJ filed suit against CHS accusing it of improperly using its market share in the Charlotte, North Carolina, area to prevent commercial health insurers from steering patients to lower-cost hospitals. CHS is the largest healthcare system in North Carolina and one of the largest not-for-profit healthcare systems in the United States. In August 2016, CHS moved for judgment on the pleadings and in March 2017, Judge Robert J Conrad, Jr of the US District Court for the Western District of North Carolina denied CHS's motion for judgment on the pleadings. The case was subsequently stayed and, in December 2018, Judge Conrad preliminarily approved a proposed final judgment, which according to his order may be filed and entered by the court on motion of either party or on the court's own action. The proposed final judgment prohibits CHS from enforcing steering restrictions in its existing contracts with major insurance companies and expressly prohibits steering, requirements of prior approval for the introduction of new benefit plans, requirements that CHS be included in the most-preferred tier of benefit plans, and any actions that penalise, or threaten to penalise, an insurer for providing a steered plan.'Pay for delay' and 'sham litigation'
The FTC has continued its efforts to prohibit 'pay for delay' settlements, in which brand-name drug manufacturers settle patent infringement suits against potential generic manufacturers by making payments to generic manufacturers as long as the manufacturer remains out of the market for some period of time. As we reported in 2018, following the Supreme Court's decision in FTC v. Actavis, Inc, the FTC was active in prosecuting such agreements and the total number of potential pay-for-delay patent dispute settlements dropped. In the past two years, however, the FTC's broad interpretation of what constitutes an actionable 'pay for delay' settlement has encountered some judicial resistance.
The FTC has brought antitrust claims against Endo Pharmaceuticals, Inc, the manufacturer of Lidoderm, an anaesthetic and antiarrhythmic, and against Impax Laboratories, Inc, the manufacturer of Opana ER, an extended-release opioid. Although the claims against Endo have settled, the case against Impax was dismissed. In 2016, the FTC filed a complaint against Endo and other pharmaceutical companies alleging that Endo paid the first generic companies that filed for FDA approval to eliminate the risk of competition for the drugs and in violation of the FTC Act. The enforcement action was the first FTC case challenging an agreement not to market an authorised generic drug – often called a 'no-AG commitment' – as a form of reverse payment.
A court in Philadelphia, however, granted defendants' motion to sever the claims against the several drug companies, causing the FTC to dismiss its complaint against Endo voluntarily. In January 2017, the FTC refiled its complaint in federal court in California and filed a proposed order to resolve the charges. The FTC also refiled charges against Watson Laboratories, Inc, and its former parent, Allergan plc, alleging illegal blocking of a lower-cost generic version of Lidoderm when it entered into a pay-for-delay agreement with Endo. Thereafter Endo agreed to settle the charges in a stipulated order. Under the order, Endo agreed to the appointment of a monitor and agreed not to enter into anticompetitive patent settlements used to delay generic competition.
Additionally, the Commission issued an administrative complaint against Impax Laboratories, Inc for engaging in similar conduct with respect to Opana ER. In May 2018, an administrative law judge dismissed the FTC's complaint against Impax. Chief Administrative Law Judge D Michael Chappell concluded that the FTC had failed to prove that the agreement between Impax and Endo violated the FTC Act. Having found it unlikely that generic manufacturers would have been able to enter the market earlier absent the challenged agreement, the magnitude and extent of any anticompetitive harm was theoretical. The FTC's complaint counsel has filed a notice of appeal seeking a full review by the FTC.
Likewise, the District Court of Delaware dismissed the FTC's action against Shire ViroPharma Inc. In February 2017, the FTC filed a complaint in federal district court charging the company with violating the antitrust laws by abusing government processes to delay generic competition to its branded prescription drug, Vancocin HCI Capsules, which are used to treat diarrhoea associated with bacterial infection. According to the FTC's complaint, between 2006 and 2012, ViroPharma made 43 'sham' filings with the US Food and Drug Administration (FDA) and filed three lawsuits against the FDA to delay the FDA's approval of generic Vancocin Capsules and to exclude competition. The FTC alleged that ViroPharma failed to provide any clinical data to support the arguments advanced in its filings. In September 2018, District Judge Richard Andrews dismissed the case on grounds that the FTC lacked authority to bring the proceedings absent allegations that VioPharma's conduct violated, or was about to violate, the law. In April 2018, the FTC appealed to the Court of Appeals for the Third Circuit, which heard oral argument this past December.
In the FTC's case against pharmaceutical company AbbVie, Inc, however, the District Court for the Eastern District of Pennsylvania ruled that AbbVie had used so-called 'sham litigation' illegally to maintain its monopoly over Androgel, a testosterone replacement drug, and ordered US$448 million in monetary relief to consumers who were overcharged for Androgel as a result of AbbVie's conduct. The FTC filed its complaint in 2014 alleging that AbbVie and Besins Healthcare Inc had illegally blocked consumers' access to lower-cost generic alternatives to Androgel by filing baseless patent infringement lawsuits against potential generic competitors. AbbVie has appealed to the Third Circuit.
Relatedly, the FTC responded to the FDA's request for comment on its revised draft guidance aimed at deterring pharmaceutical companies from abusing the citizen petition process to delay approval of and competition from generic drugs. The FTC, referring to its case against Shire ViroPharma, expressed concerns about patient access to lower-cost drugs and a readiness to work closely with the FDA on citizen-petition abuse and other issues that may harm competition.Vertical restraintsPayment card acceptance rules
In June 2018, the US Supreme Court decided Ohio v. American Express Co, holding that American Express's so-called anti-steering provisions in its merchant contracts, which allegedly prohibit merchants from avoiding fees by discouraging customers' card use at the point of sale, do not violate federal antitrust law. American Express, like other credit-card companies, provides services to two different groups – cardholders and merchants – who use the credit-card companies to intermediate between them. In such two-sided markets, it is important to strike a balance in the prices charged to the parties on each side of the transaction. American Express, unlike its competitors Visa and Mastercard, provides better rewards to encourage consumer spending rather than focusing on consumer lending. To fund investments in its rewards programme, American Express charges merchants higher fees than Visa and Mastercard. To avoid these higher fees, merchants sometimes attempt to dissuade customers from using American Express. To counteract this tendency, American express places anti-steering provisions in its contracts with merchants. The United States and several states sued American Express claiming that its anti-steering provisions violated Section 1 of the Sherman Antitrust Act.
In the proceedings below, the DOJ prevailed in the trial court in its antitrust challenge to certain 'non-discrimination provisions' in American Express's merchant acceptance agreements. The district court found after trial that the specific challenged rules had anticompetitive effects by, among other things, allowing American Express to charge supra-competitive rates to merchants and that American Express had failed adequately to prove countervailing pro-competitive justifications. The court treated the credit-card market as two separate markets – one for merchants and one for cardholders – and found that American Express's anti-steering provisions were anticompetitive because they resulted in higher merchant fees.
American Express appealed to the United States Court of Appeals for the Second Circuit, which reversed and remanded the case with instructions for the court to enter judgment in favour of American Express. According to the appellate court, the government failed to demonstrate that American Express possessed sufficient market power to affect competition adversely in the relevant market, which the appellate court defined as the market for cardholders generally as opposed to the narrower, more specific market for network services that the district court employed.
The Supreme Court held that the both sides of the two-sided credit-card market – merchants and cardholders – had to be considered. The Court went on to hold that evidence of a price increase on one side of a two-sided transaction platform cannot, by itself, demonstrate an anticompetitive exercise of market power. Instead, plaintiffs must prove that the alleged anticompetitive practice increases the cost of credit-card transactions generally above a competitive level, reduce the number of credit-card transactions, or otherwise stifle competition in the two-sided credit card market.ii Trends, developments and strategies
Under President Trump the FTC and the DOJ, albeit perhaps to a lesser extent than the FTC, have continued to pursue restrictive agreements. As expected, the FTC remained vigilant in its policing of 'pay for delay' settlements and the related abuse of sham petitioning. The far-reaching implications of the Supreme Court's decision in Actavis, although decided in 2013, are still being determined in ongoing court cases, including those directly related to 'pay for delay' as well as the rule-of-reason more generally, as the 1-800 Contacts case demonstrates.
In addition, in the area of patent law and dominance, the head of the Antitrust Division of the DOJ, in several recent speeches, has expressed his view 'why an antitrust cause of action premised on a failure to abide by FRAND [fair, reasonable and non-discriminatory patent licensing] commitments would be inconsistent with Section 2 of the Sherman Act.' Instead, he suggested that such disputes are properly the province of contract law. FRAND licensing commitments are often made by patent holders when their patents are incorporated into technology standards set by standard-setting organisations. In certain cases, licensees have brought Section 2 monopolisation actions wherein they allege – as evidence of exclusionary or predatory conduct – that patent holders have failed to live up to alleged FRAND commitments or allegedly deceived the standards organisation 'by making a commitment to license on FRAND terms when [they] purportedly never had any intention of granting such a license.' Noting the threat of treble damages under the antitrust laws, he stated: 'It can be a serious mistake for a court to allow either type of claim to proceed under the Sherman Act . . . [and to so allow] would contravene the underlying policies of the antitrust' and patent laws, which include 'increasing dynamic competition by fostering greater investment in research and development, and ultimately in innovation.' The DOJ has begun to file statements of position in private litigations raising these issues. We will watch with interest to see how these cases develop in light of the DOJ's expressed views. The FTC, for its part, may take a different view on these issues. It continues to litigate a case against Qualcomm concerning certain of its patent licensing practices. The bench trial in that case concluded at the end of January, but a decision has not yet been issued.iii Outlook
As we anticipated last year, the agencies have continued to pursue civil non-merger investigations of potentially anticompetitive conduct, but the full implications of the cases brought by the FTC, many of which are on appeal, will depend on the rulings of the appellate courts. In particular, the FTC's broad interpretation of 'pay for delay' and 'sham petitioning' is now subject to multiple appeals. Likewise, the 1-800 Contacts decision may have far-reaching implications, and may presage further developments in the FTC's policing of anticompetitive conduct on the internet, but it remains to be seen whether the Commission's opinion will be upheld. Although it may be some time before these cases are finally adjudicated, for now at least the Supreme Court's decision in Ohio v. American Express has established how lower courts will apply the rule of reason in cases involving two-sided markets.