Bundled discount programs have received significant antitrust scrutiny over the past decade, even though these marketing programs may benefit both consumers and competition. Typically, bundled discounts have been evaluated as either exclusive dealing or tying arrangements under Section 1 of the Sherman Act (and Section 3 of the Clayton Act in the case of a tying claim), or under Section 2 of the Sherman Act questioning whether such marketing plans result in unlawful monopolization. While the appropriate legal analysis under these doctrines has continued to confound the courts, one consistent prerequisite to a finding of liability has been the existence of market or monopoly power, or in the case of an exclusive dealing arrangement, that the arrangement caused substantial foreclosure from the market. A recent decision by a Pennsylvania district court, Schuylkill Health Systems v. Cardinal Health, Inc., et al., has further confused the analysis of the lawfulness of bundled discounts by allowing a bundling claim to proceed under Section 1 of the Sherman Act (challenged as an exclusive dealing claim) and Section 3 of the Clayton Act (as a tying claim), even though it found that the defendants lacked market power and the discount programs failed to foreclose a sufficient portion of the relevant market.
In late 2012, Schuylkill Health Systems (SHS) accused Cardinal Health (Cardinal) and Owens & Minor (O&M) of various anticompetitive conduct. Cardinal and O&M sell dozens of medical-surgical products, including sutures and endomechanical products (“endo products”), and SHS is a customer of both companies. Each company allegedly enjoys a market share of less than 40% in each of the medical-surgical product markets.
According to the complaint, Suture Express sells only sutures and endo products, and, allegedly, was doing so successfully before Cardinal and O&M allegedly instituted nearly identical bundled discount programs. According to plaintiff, under those programs, customers who purchased less than 10 percent of their sutures and endo products from a competitor received one pricing structure from the defendant supplier. Customers who purchased more than 10 percent from a competitor allegedly were forced to pay a “steep penalty” on all medical-surgical product purchases. That price penalty was alleged to overwhelm any potential savings to customers for purchasing their sutures and endo products from competitors.
SHS sued, alleging several antitrust violations, including: monopolization and conspiracy to monopolize under Sherman Act Section 2; exclusive dealing under Clayton Act Section 3; and anticompetitive horizontal agreements, tying and bundling under Sherman Act Section 1.
Defendants moved to dismiss the complaint in its entirety.
The court dismissed both the conspiracy to monopolize and illegal horizontal agreement claims because plaintiff did not adequately allege the existence of an unlawful agreement among the defendants. Interestingly, the conspiracy to monopolize claim may have been a strategic insertion to allow plaintiff to argue that the defendants’ market shares (33% and 39%) should be combined so as to surpass the “monopoly power” threshold.
The court dismissed the monopolization claim because the individual market shares of each defendant – below 40 percent – were inadequate to satisfy the requisite showing that each possessed monopoly, let alone market power. Also, SHS made only conclusory statements about entry barriers or any other market factors that might otherwise suffice allege actual evidence of monopoly power.
In a lengthy footnote, the district court refused to dismiss plaintiff’s Section 1 tying claim. Despite dismissing plaintiff’s monopolization claims for failure to allege adequately either actual or constructive monopoly or market power, and recognizing that defendants individually did not possess market shares sufficient to render their programs per se unlawful, it allowed the tying claim to go forward on a rule of reason basis noting that plaintiff’s complaint sufficiently alleged actual adverse effects in competition, namely increased prices on all medical and surgery products.
The district court also refused to dismiss plaintiff’s exclusive dealing claim, namely that each defendant’s bundled discount marketing program effectively precluded customers from purchasing medical and surgical products from defendants’ competitors, thus foreclosing these competitors from certain product markets. The district court noted that one defendant entered into challenged discount programs with 19.5% of the relevant market and the other defendant did so with respect to 17.5% of the relevant market. Relying upon a 1975 decision of the Third Circuit, in which that court found that 14.7% foreclosure was sufficient for an exclusive dealing argument to survive dismissal, the district court refused to dismiss plaintiff’s exclusive dealing claim.
Also addressed in a lengthy footnote, the Court refused to dismiss plaintiff’s Section 1 claim that challenged defendants’ alleged bundled discount programs as an unlawful exclusive dealing arrangement. In language cloaked in rule of reason concepts (balancing pro-competitive justifications against anticompetitive effects), the district court concluded that plaintiff alleged facts sufficient to support its Section 1 claim that the bundled discount programs unreasonably restrained trade. However, the district court did not address the question of the sufficiency of plaintiff’s allegations that defendants possessed the requisite market power to trigger Section 1 scrutiny.
Schuylkill Health is the latest decision adding yet further uncertainty to the task of advising clients with respect to “bundled” discount programs, especially with respect to ascertaining applicable thresholds regarding market power and foreclosure.