Bundled pricing occurs when a supplier sells two or more products at a lower combined price than the total price at which it will sell the two products individually. U.S. federal courts have long struggled to find an appropriate way to distinguish bundled pricing which is simply a form of the price competition the antitrust laws seek to protect, from that which is anticompetitive. The recent decision of the U.S. District Court for the Northern District of California in Meijer, Inc. v. Abbott Laboratories, 544 F.Supp.2d 995 (N.D. Cal. 2008) declines to apply recent Ninth Circuit precedent and holds that, at least in the pharmaceutical industry, such bundling may violate federal antitrust laws even where the various products in the bundle are sold at or above their average variable cost.

Meijer involved an antitrust challenge by retail chains and competing pharmaceutical companies to Abbott’s pricing for protease inhibitors (PIs) used to treat HIV. Abbott had initially introduced a PI (Norvir) that may be used on a “stand-alone” basis or in combination with other PIs to “boost” their performance. It later introduced another PI (Kaletra) that consisted of a combination of two PIs (lopinavir with ritonavir, the active ingredient in Norvir, as a booster).

Bristol-Myers Squibb (BMS) and GlaxoSmithKline (GSK) later introduced competing PIs (Reyataz and Lexiva, respectively) that when used with Norvir (as a booster) were allegedly just as effective as Kaletra. After GSK successfully introduced its PI, the market share of Abbott’s combination PI (Kaletra) fell. Abbott subsequently raised the wholesale price of Norvir by 400 percent, while keeping the price of its combination PI (Kaletra) constant. Abbott said that this price increase was taken on Norvir to reflect its considerable clinical value as a boosting agent.

Various plaintiffs sued to challenge this price increase, contending in part that it represented illegal attempted or actual monopolization of an alleged market for PIs that are prescribed for use in combination, with one of them (Norvir) acting as a booster. Abbott moved to dismiss, contending that plaintiffs’ claims were barred by the recent decision by the U.S. Court of Appeals for the Ninth Circuit in Cascade Health Solutions v. PeaceHealth (PeaceHealth). The district court denied Abbott’s motion, along with its motion to dismiss related federal and state law claims. In PeaceHealth, the Ninth Circuit had used a cost-based test to distinguish lawful and unlawful bundling. In doing so, it advised that courts should first determine a supplier’s net price for the “competitive” products in a bundle (i.e., those that face competition) by attributing the entire discount on the bundle to those “competitive” products and then compare that net price with the supplier’s average variable cost in providing them. If the net price is greater than average variable cost, the Ninth Circuit concluded, the bundled pricing could not constitute attempted or actual monopolization.

The district court in Meijer held that PeaceHealth was not controlling. It questioned initially whether Abbott’s selling price for its combination PI (Kaletra) could even constitute bundling, since Abbott does not sell lopinavir on a standalone basis. It then concluded that, even if Abbott were deemed to be bundling the two constituent products of Kaletra, the rationale of PeaceHealth should not apply in the pharmaceutical context. It reasoned that PeaceHealth was intended to ensure that only pricing that would exclude equally efficient competitors from the market would be condemned under the antitrust laws. It then observed that, unlike many other product and service markets, including the healthcare market in PeaceHealth, the incremental production cost for pharmaceuticals is typically negligible, is dwarfed by the fixed cost of research and development, and is almost certainly less than the pharmaceuticals’ net sales price under the PeaceHealth bundling analysis. Thus, the district court concluded, the manufacturing cost-focused analysis under PeaceHealth would not necessarily protect equally efficient competitors in the pharmaceutical industry and should not be applied. The district court subsequently denied Abbott’s request that the issue be certified for immediate appeal to the Ninth Circuit.

The antitrust analysis of bundling remains a controversial area. The Ninth Circuit decision in PeaceHealth may not be the last word on the matter, which likely will need to wait until the Supreme Court addresses these issues. Nevertheless, the cost-based test enunciated in PeaceHealth provided a shelter against antitrust challenges involving some bundling arrangements. The decision in Meijer indicates, however, that this safe harbor may not be readily available in the pharmaceutical context and highlights the importance of counseling in this area.