Pharmaceutical manufacturers utilize a variety of sales and marketing techniques to maximize sales of their products. But programs including price incentives and loyalty discounts often run into antitrust risks. Historically, cases brought by disgruntled competitors could be dismissed on the basis of the "price-cost test": if the discounted price was higher than the manufacturer's costs of production, the program was effectively per se legal. Over the last several years, however, the courts have been chipping away at this doctrine, requiring a more nuanced analysis of the overall nature of marketing programs and their competitive impact.
On May 4, 2016, the Third Circuit considered the applicability of the price-cost test to a marketing scheme for Sanofi-Aventis's anticoagulant drug, Lovenox.1 Sanofi's competitor Eisai alleged that Sanofi's discount program for Lovenox was an anticompetitive de facto exclusive dealing arrangement. The District Court had granted Sanofi summary judgment on the basis of the price-cost test. The Third Circuit affirmed the dismissal of the case, but rejected the price-cost test as the basis for the decision.
Background to the Lovenox Case
During the relevant period, Lovenox was the leading treatment for deep vein thrombosis, with a market share for anticoagulants between 81% and 92%. Part of its popularity may have been due to the fact that in addition to the approved indications that it shared with competitors (including Eisai's Fragmin), Lovenox was then the only FDA-approved drug for severe forms of heart attack.
Sanofi's marketing plan was called the "Lovenox Acute Contract Value Program." Notably, hospitals were not contractually obligated to purchase from Sanofi, and there was no suggestion that Sanofi would terminate supply if a hospital did not engage in the Program. There were two aspects to the Program: a discount structure based on purchase volume and restrictive provisions.
The Program offered discounts based on the amount of the drug that hospitals bought. When a hospital bought less than 75% of its total purchases of anticoagulants, it received a flat 1% discount; more than 75%, the hospital would receive discounts ranging from 9% to 30% depending on the share of its purchases with Sanofi. For multi-hospital systems that met certain conditions for aggregating purchases across participating hospitals, the discounts ranged from 15% to 30%. Importantly, even the maximum discounts did not bring Sanofi's price below its costs, and none of the discounts had to be repaid later if volume levels were not met.
Participating hospitals also had to agree to a formulary access clause that required Lovenox to be included in the hospital's formulary. While competitors' drugs could also be included in formularies, the clause prohibited hospitals from favoring any other drugs over Lovenox.
In addition to alleging that the Program was anticompetitive, Eisai alleged that Sanofi engaged in a long-term marketing campaign spreading "fear, uncertainty and doubt" to discredit the safety and efficacy of Eisai's competitive drug, Fragmin. Eisai alleged that Sanofi paid doctors to present educational programs on Fragmin's medical and legal risks and that Sanofi's representatives claimed that Lovenox was superior to other drugs in violation of FDA regulations.
Reasons for the Court's Decision
The Third Circuit undertook a full "rule of reason" analysis of Eisai's claims, finding that the abbreviated price-cost test was inapplicable where a marketing program effectively bundled incontestable demand (hospitals' demand for Lovenox for severe heart attack indications) with contestable demand (hospitals' demand for Lovenox for other indications for which competitor drugs, including Fragmin, were approved).
The Third Circuit rejected Eisai's claims, finding that it failed to prove damage to competition as a whole. "One competitor's inability to compete does not automatically mean competition has been foreclosed."2 According to the Court, anticompetitive foreclosure takes place when a defendant's actions render consumer choice meaningless, not when consumers choose not to purchase a competitor's product. Eisai's identification of "a few dozen hospitals out of almost 6,000 in the United States" being blocked from purchasing Fragmin due to Sanofi's conduct was found to be insubstantial, particularly where the hospitals chose not to switch due to price.
The Court distinguished Eisai's claims from prior holdings of anticompetitive foreclosure in exclusive dealing cases where consumer choice was rendered meaningless because either (1) failure to comply with defendant's contractual requirements would jeopardize the customers' relationship with the dominant supplier and could result in an obligation to repay prior savings or (2) the defendant threatened to refuse to deal with the customers. Here, in contrast, the Court found that hospitals' failure to comply with the Program would merely result in a lost discount.
The Third Circuit agreed with the district court that Eisai had failed to provide evidence of output reduction and denial of consumer choice. Notably, the Court discredited evidence of price movements as sufficient evidence of anticompetitive effect. Despite the price of Lovenox being higher than Fragmin, the Court found that the price of Lovenox increased at similar rates to Fragmin and the Pharmaceutical Producer Price Index.
The Third Circuit glossed over Eisai's claims that Sanofi's alleged campaign of "fear, uncertainty and doubt" harmed competition, upholding the lower court's finding of insufficient evidence of customers' reliance on such false or deceptive statements. There was apparently no consideration of internal Sanofi documents that Eisai relied upon that included such comments that the Program was intended to "create obstacles for competitive products."3
The Third Circuit's opinion yields some interesting implications for parties implementing or facing pharmaceutical and other marketing plans. First, manufacturers should assume that the price-cost defense will only apply in very limited circumstances, such as a purely discount-based plan with nothing more. Having said this, the Court's requirement for proof beyond what was available in the Lovenox case suggests that even under a rule of reason analysis, the bar for a plaintiff to prove substantial foreclosure is very high.
Second, the details of a discount program are important. Customers should have a real choice to opt in or out of the discount program so that they will not be "foreclosed" to the defendant's competitors. Customers foregoing the discount should not fear supply disruptions or a need to repay earned discounts. Customers accepting the discount should be allowed to maintain competitors' products on lists of approved products or uses. With these safeguards, it appears that even a significant difference in the available discount (such as from 30% to 1% or zero) will not be viewed as sufficient basis for a foreclosure claim.
Finally, the Court's ready dismissal of Eisai's claims of disparagement and Sanofi's alleged FDA violation, as well as internal documents suggesting anticompetitive motives for the discount plan, suggest that such allegations need to rise to egregious levels to support an antitrust claim. This is in contrast to other areas of antitrust enforcement—such as merger enforcement or anticompetitive agreement claims—where such "hot documents" have formed the backbone of many recent cases.