The Third Circuit Once Again Declines to Apply the Price Cost Test to a Loyalty Discount Case
On May 4, 2016, the Third Circuit—following the principles it set forth in LePage’s, Dentsply, and ZF Meritor—affirmed a decision by District of New Jersey Judge Mary L. Cooper granting summary judgment in favor of the defendant in Eisai, Inc. v. Sanofi-Aventis U.S., LLC. Eisai is the latest in a line of Sherman Act decisions by the Third Circuit challenging what it characterizes as de facto exclusive dealing, and the third such case to consider when loyalty discounts run afoul of the antitrust laws. It is, however, the first to be decided against the plaintiff. For that reason, Eisai may strike practitioners as a departure from the Third Circuit’s recent ZF Meritor loyalty discount decision and its landmark bundled loyalty discount en banc decision in LePage’s. Perhaps supporting that narrative, the two members of the Eisai panel who had voted for the plaintiff in LePage’s voted against the plaintiff in Eisai, and ceded authorship of the Eisai opinion to the sole member of the panel who had not participated in the LePage’s decision. A close look, however, reveals that Eisai wholly comports with the Circuit’s prior decisions. In fact, while Eisai lost on the facts, it won on key issues of law, and if anything was changed by Eisai, it is that the Third Circuit has likely signaled the death of the Brooke Group price cost test in what it calls de facto exclusive dealing cases involving loyalty discounts.
During the relevant six-year period, Sanofi was a monopolist in the market for anticoagulant drugs, with its anticoagulant—Lovenox—occupying between 81.5% and 92.3% of the market. Eisai’s anticoagulant—Fragmin—held the second largest share over two other competing drugs, although it never captured more than 8.2% of the market. Fragmin was the lower priced drug, even after accounting for Sanofi’s Lovenox loyalty discounts, but an FDA-indication for treating more severe forms of heart attack was unique to Lovenox. The result of this unique indication was that even if a hospital preferred Fragmin as a general matter, it would have to purchase at least some Lovenox to meet the demand associated with its unique indication, which Fragmin and the two other competing drugs could not satisfy. Eisai dubbed this unique anticoagulant demand “uncontestable” Lovenox demand, and the balance of anticoagulant demand, for which it could compete, as “contestable” demand.
Sanofi responded to Fragmin’s 2005 entrance into the market in three ways, which Eisai challenged as violative of the antitrust laws. First, Sanofi employed a loyalty discount program with a market share requirement. If a hospital purchased more than 25% of its anticoagulant needs from Sanofi’s rivals in a quarter, the hospital would forfeit a discount on purchases of Lovenox in the next quarter of between 15% and 30% of Lovenox’s wholesale price—depending upon the extent to which the hospital’s Lovenox purchases exceeded 75% of its needs—leaving the hospital with only a basic 1% discount that effectively was Lovenox’s list price. Although Fragmin’s price was even lower than Lovenox’s 30% discounted price, Eisai claimed the monetary penalty associated with switching its contestable demand to Fragmin foreclosed Eisai from a substantial share of the anticoagulant market.
Second, Sanofi implemented a formulary access clause under which hospitals were “forbidden by the contract to adopt any restrictions or limitations on marketing or promotional programs for Lovenox,” and prohibited them from “favoring [other] drugs over Lovenox” in any manner—essentially a “most favored nations” clause. If a hospital violated the formulary access clause, just like a violation of the loyalty discount program, it would incur the same price penalty on its purchases of Lovenox in the next quarter.
Third, according to Eisai, Sanofi endeavored to create “fear, uncertainty, and doubt” (“FUD”) as to Fragmin’s efficacy and safety. Eisai claimed that pursuant to this so-called “FUD” campaign, Sanofi: paid doctors to publish articles attacking Fragmin on false grounds and without disclosing such payments; paid doctors to present educational programs regarding the medical and legal risks of switching away from Lovenox, casting doubt on Fragmin’s efficacy and promoting a belief that Fragmin use would expose a hospital to malpractice liability; and Sanofi representatives assertedly claimed that Lovenox was superior to other drugs, and promoted Lovenox for non-indicated uses in violation of FDA rules.
Sanofi moved for summary judgment, arguing that Eisai’s claims failed as a matter of law because, applying the price cost test established in the Supreme Court’s decision in Brooke Group, its contracts did not result in predatory below cost pricing. Specifically, Sanofi contended that its conduct: (a) involved only single product loyalty discounts, not multi-product or “bundled” loyalty discounts, which distinguished LePage’s from Brooke Group; (b) was predominately based on price, not illicit non-price conduct, which distinguished ZF Meritor from Brooke Group; and (c) regardless of whether Brooke Group’s price cost test applied, Eisai’s claims failed under the rule of reason because it could not show that Sanofi’s conduct foreclosed it from a substantial share of the market, which distinguished the case from Dentsply.
For its part, Eisai countered that as in ZF Meritor, Sanofi’s conduct did not predominately involve price because the formulary access clause and FUD campaign were significant non-price components of the alleged anticompetitive campaign. Eisai also took the position that Sanofi offered bundled discounts like the defendant in LePage’s because its contracts effectively bundled uncontestable anticoagulant demand for Lovenox, for which Fragmin could not compete, with the contestable portion of demand, for which it could. If either proposition was true, then under Third Circuit law Brooke Group’s price cost test would not apply, and Eisai need not show predatory pricing to succeed. Finally, Eisai claimed that properly evaluated under the rule of reason, not the Brooke Group price cost test, the 15% to 30% price penalty in Sanofi’s contracts foreclosed Eisai from as much as 84% of the anticoagulant market, well above the foreclosure thresholds actionable under Denstply.
The district court granted Sanofi’s summary judgment motion, and the Third Circuit affirmed.
Perhaps the focal point of confusion about Eisai is that the plaintiff won on the law. The Third Circuit panel concluded that Sanofi’s conduct did not predominately relate to price, and declined to grant Sanofi a safe harbor under Brooke Group’s price cost test. Although the Eisai panel declined to extend the holding of LePage’s to single product loyalty discounts (which the ZF Meritor court also had previously declined to do), it explicitly left LePage’s undisturbed as it pertains to multi-product loyalty discounts. Actually, the point essentially was moot once Eisai had avoided the price cost test—which it was undisputed that Eisai could not satisfy. Significantly, the Third Circuit called into question the continued vitality of the price cost in any type of loyalty discount case, declining to decide “when, if ever, the price-cost test applies to this type of claim.”
Where Eisai lost was on the facts. The Third Circuit concluded that under the rule of reason, Eisai had not proven either substantial foreclosure or anticompetitive effects. As to the FUD campaign, the court observed that deceptive marketing violates the antitrust laws only under rare circumstances, and held there was insufficient evidence that the FUD campaign influenced hospital decisions to survive summary judgment. As to the formulary access clause, the Third Circuit held that the consequence was only that Fragmin and Lovenox need be treated equally; it did not cause Lovenox to be favored over Fragmin, and thus caused no concerns under the Sherman Act. In so ruling, the Third Circuit rejected hospital testimony discussing the clause’s influence as involving only an insignificant share of the hospital market, though apparently there was no contrary testimony in the record.
Finally, the Circuit held that there was insufficient evidence in the record to support Eisai’s claim that the 15% to 30% penalty for violating Sanofi’s single product loyalty discount program foreclosed competition. The Third Circuit also declined to characterize the lost discount as a penalty because none of its previous independent legal bases for finding de facto exclusive applied: lost discounts were not aggregated across multiple products, as in LePage’s; and there was no risk of termination or loss of Supply, as in ZF Meritor or Dentsply.
Although there is an argument to be made that the Circuit misapplied the summary judgment standard by rejecting uncontroverted testimony about the conduct’s effects and failing to put the discount versus penalty question to a jury (as the courts in LePage’s and ZF Meritor had done), none of these evidentiary conclusions alters the legal landscape governing loyalty discount programs in the Third Circuit. In sum, Eisai does not signal a sea shift in the Third Circuit’s antitrust jurisprudence. It is not a retreat from past decisions, but a continual move away from rigid bright line rules like the Brooke Gfoup price cost test towards robust application of the rule of reason.
If Eisai sends a message to plaintiffs, it is to come to court with facts to support your theory of liability. If it sends a message to defendants, it is that whatever safe harbor may still exist in loyalty discount cases, its availability will be forfeited by coupling loyalty discounts with non-price conduct that may disadvantage rivals, or conditioning discounts on the purchase of multiple products, i.e., multi-product loyalty bundling. For all antitrust practitioners, the Third Circuit continues to be a hot bed for these cutting edge issues that must be monitored closely.