The Court of Appeals for the Ninth Circuit has revisited the test used to determine whether bundled discounts for products or services amounts to unlawful monopolization under Section 2 of the Sherman Act. The case, McKenzie-Willamette Hospital v. PeaceHealth, involved bundling of medical services at discount prices. McKenzie alleged that PeaceHealth used its monopoly position to offer insurers “bundled” discounts on tertiary health care services – including complex surgical procedures – if the insurers made PeaceHealth their sole preferred provider for primary, secondary and tertiary care. McKenzie, which offered only primary and secondary care, argued that it could provide its services at lower prices than PeaceHealth, but was unlawfully excluded from the market because it could not offer the same array of services as PeaceHealth. At trial, a federal jury found in favor of McKenzie on its attempted monopolization claim.
Reversing the district court, the Ninth Circuit held that “bundled discounts may not be considered exclusionary conduct within the meaning of [Sherman Act Section 2] unless the discounts resemble the behavior that the Supreme Court in Brooke Group identified as predatory.” Thus, the exclusionary conduct element of a claim arising under Section 2 “cannot be satisfied by reference to bundled discounts unless the discounts result in prices that are below an appropriate measure of the defendant’s costs.” The court next addressed the issue of how to define the appropriate measure of the defendant’s costs in a bundled discount case. The court, using what it called a “discount attribution standard,” stated that “the full amount of the discounts given by the defendant on the bundle are allocated to the competitive product or products. If the resulting price of the competitive product or products is below the defendant’s incremental cost to produce them, the trier of fact may find that the bundled discount is exclusionary for the purpose of Section 2. This standard makes the defendant’s bundled discounts legal unless the discounts have the potential to exclude a hypothetical equally efficient producer of the competitive product.”
The test adopted by Ninth Circuit in PeaceHealth marks a significant departure from that endorsed by the Third Circuit four years earlier in the LePage’s case. LePage’s involved claims against 3M challenging the company’s bundled rebate program which linked discounts on its private label transparent tape to sales goals in each of six product lines. LePage’s, which sold only transparent tape, successfully argued that it was excluded from the market because it could not offer a comparable range of products and discounts. In siding with LePage’s, the Third Circuit concluded that as a monopolist, 3M could be held to unlawfully exclude competition without a showing of below-cost pricing. The Ninth Circuit in PeaceHealth disagreed, stating the “fundamental problem with the LePage’s standard is that it does not consider whether the bundled discounts constitute competition on the merits, but simply concludes that all bundled discounts offered by a monopolist are anticompetitive with respect to its competitors who do not manufacture an equally diverse product line.”