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When Customer Supply Contracts Lead to Trouble: Exclusive Dealing Provisions Result in FTC Monopolization Action against Invibio

The Federal Trade Commission (FTC) continues to aggressively enforce the antitrust laws. On April 27, 2016, the FTC took action against Victrex, plc and its wholly owned subsidiaries, Invibio, Inc. and Invibio Limited (collectively, Invibio) because of exclusivity terms in its supply contracts. The consent order requires Invibio to cease and desist from enforcing most of the exclusivity terms in its current supply contracts and generally prohibits Invibio from requiring exclusivity in future contracts. Invibio is also prohibited from using other pricing strategies, such as market-share discounts, that would effectively result in exclusivity.

Exclusive dealing by a monopolist may be challenged and prohibited when the acts allow the monopolist to maintain its monopoly power. Total foreclosure is not a requirement for unlawful exclusive dealing—it simply must foreclose competition in a substantial share of the relevant market so as to adversely affect competition.

The FTC’s complaint alleged that Invibio’s exclusive dealing provisions in its customer contracts foreclosed a substantial share of the market from two entrants despite those entrants offering a similar product at lower prices. In addition to using exclusivity terms in its long term supply contracts to impede its competition and maintain its monopoly power in the worldwide market for implant-grade polyetheretherketone (PEEK), the FTC complaint also alleged that Invibio used strategies to “coerce or induce device makers to accede to exclusivity terms, including threatening to discontinue PEEK supply or to withhold access to regulatory support.” (more…)




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House Passes GOP-Backed SMARTER ACT Aiming to Harmonize Merger Review Process for FTC and DOJ

On March 23, 2016, the U.S. House of Representatives passed the Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act by a vote of 235-171, despite strenuous objections from the Federal Trade Commission (FTC).  The FTC and the Department of Justice (DOJ) review proposed mergers and acquisitions.  Currently, the FTC can challenge transactions under different processes and standards than the DOJ, and those procedures provide several advantages to the FTC.  The SMARTER Act would neutralize those advantages for the FTC by: (1) eliminating the FTC’s ability to use its internal administrative proceedings to challenge unconsummated transactions; and (2) standardizing the criteria for the FTC and DOJ to obtain a preliminary injunction to block a merger in federal court.

The FTC has the authority to pursue administrative relief to challenge a transaction.  Even if the FTC is denied a preliminary injunction in federal court, the agency may continue to seek to block or unwind a transaction in an administrative trial at the FTC’s own in-house court.  That process creates two procedural advantages for the FTC.  First, the FTC can continue to challenge a transaction even after a federal district court denies an injunction.  Second, because the full trial will take place in the FTC’s court, some courts have said that the the standard the FTC uses to obtain a federal court injunction is lower than the standard the DOJ must meet.  The courts will generally grant the FTC an injunction if the case “raise[s] questions going to the merits so serious, substantial, difficult and doubtful as to make them fair ground” for a full hearing “by the FTC in the first instance and ultimately by the Court of Appeals.”  Under that standard, the FTC need not show a substantial likelihood of success at the trial on the merits or irreparable harm.

The DOJ can only challenge transactions in federal court proceedings.  The DOJ can seek a preliminary injunction under Section 15 of the Clayton Act (15 U.S.C. § 25) on the grounds that the transaction is likely to substantially lessen competition.  The DOJ is subject to a traditional equitable injunction standard including criteria such as a showing of a substantial likelihood of success and the potential for irreparable harm.

Supporters of the SMARTER Act argue that reform is necessary to ensure consistent and fair application of the antitrust laws.  SMARTER Act supporters also argue that courts apply a more lenient standard to the FTC for blocking a transaction than to the DOJ.  However, those that oppose the SMARTER Act argue that in practice, courts impose the same standards on the FTC and DOJ during injunction hearings.  Those against the SMARTER Act also argue that workload statistics compiled in the DOJ and FTC Annual Competition Reports actually demonstrate that mergers reviewed by the DOJ are more likely to be challenged or receive a Second Request than mergers reviewed by the FTC.  FTC Chairwoman Edith Ramirez expressed concern that the SMARTER Act “risks undermining the effectiveness of the FTC.”  Chairwoman Ramirez also [...]

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FTC’s Feinstein Declines to Provide Safe Harbor Guidance for Low GUPPIs

At a recent panel discussion during George Mason Law Review’s annual antitrust symposium, Deborah Feinstein, director of the Federal Trade Commission’s (FTC) Bureau of Competition, was asked what levels of gross upwards pricing pressure index (GUPPI) could raise concern in the FTC’s merger review process.  Feinstein declined to provide a specific level that would raise concern, thereby rejecting movement towards a safe harbor for merging parties in markets where the GUPPI is particularly low.

The FTC’s policy regarding a GUPPI safe harbor has a substantial impact on its investigations of mergers with potential unilateral price effects.  Generally unilateral price effects exist where the merged entity has the incentive to raise the price of the products of one or both firms.  One way to conceptualize the potential unilateral effects of a merger is to consider the opposing forces of downwards and upwards pricing pressures.  The elimination of competition between merging firms creates upwards pricing pressure.  The benefits gained from efficiencies generate downward pricing pressure.  GUPPI is an economic measure that attempts to estimate the upwards pricing pressure for a particular product resulting from a merger.  Three market conditions lead to a higher GUPPI: 1) a high diversion ratio to the merging partner’s product; 2) a higher margin for the merging partner’s product; and 3) a higher price for the merging partner’s product (Moresi 2010). (more…)




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Drug Testing Company Settles FTC Case Alleging Invitation to Collude

The FTC has entered into a final settlement with Drug Testing Compliance Group LLC (DTC Group) by order issued January 21, 2016, resolving an administrative case that alleged DTC Group had invited a competitor to collude with respect to customer allocation in violation of §5 of the Federal Trade Commission Act.

Specifically, the FTC complaint alleged that the president of DTC Group, an Idaho-based compliance company servicing the trucking industry, approached an unnamed direct competitor to complain about the competitor’s acquisition of a DTC Group customer.  This allegedly led to a meeting, wherein the DTC Group president proposed to the principals of the competitor that the two companies agree not to solicit or compete for each other’s customers, and that they abide by a “first call wins” approach to customers.  Allegedly the DTC Group president explained that this arrangement would allow each company to sell its services without fearing that its rival would later undercut with a lower price offer.  This alleged conduct ran afoul of the §5 prohibition on “unfair methods of competition in or affecting commerce” even without any proof or allegation that the competitor accepted the invitation.  Indeed, there exists legal precedent under which the FTC can pursue an action for such conduct even without a demonstration of market power on the part of the respondent.

The settlement agreement prohibits DTC Group from communicating with competitors about pricing or rates, though public posting of rates is permitted.  DTC Group is further prohibited from soliciting, entering into, or maintaining an agreement with any competitor to divide markets, allocate customers or fix prices.  DTC Group is additionally prohibited from urging any competitor to raise, fix or maintain prices, or to limit or reduce service.  The settlement requires DTC Group to report to FTC as to its compliance for the next 20 years.  Based on publicly available information, there has been no apparent action taken against the unnamed competitor with respect to these allegations.

Of note for corporate counsel, there was no allegation in the case that DTC Group and its competitor had actually entered an agreement – rather, the underlying allegation was simply that DTC Group had invited a competitor to enter a customer allocation agreement.  While it is unclear from the publicly-released materials how the FTC was alerted to this alleged invitation, this is an important reminder to companies that invitations to competitors to collude can result in legal action even if no further communications occur on the subject.  Such overtures further provide an approached competitor with the opportunity to gain a competitive advantage by reporting the approaching company to the FTC.




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Virginia’s Certificate of Need Laws May Stay, Fourth Circuit Says

On January 21, the U.S. Court of Appeals for the Fourth Circuit upheld Virginia’s Certificate of Need (CON) laws, ruling that the scheme does not illegally discriminate against out-of-state health care providers. See Colon Health Ctrs. v. Hazel, No. 14-2283 (4th Cir. Jan. 21, 2015).

In Virginia, and the 35 other states with CON laws, health care facilities are required to obtain government approval before establishing or expanding certain medical facilities and undertaking major medical expenditures. CON laws require applicants to show sufficient public need for the expenditure in question and thereby attempt to reduce healthcare costs by preventing excess capacity and unnecessary duplication of services and equipment.

The plaintiff-appellants in the case were two out-of-state outpatient providers that sought to open facilities to provide medical imaging services in Virginia. Their request for a CON for new CT scanners and MRI machines was denied. The plaintiff-appellants subsequently challenged the laws as putting an undue burden on interstate commerce in violation of the dormant commerce clause. The Fourth Circuit affirmed the district court’s ruling that the CON requirement neither discriminated against nor placed an undue burden on interstate commerce because both in-state and out-of-state providers were required to abide by the CON requirement.

Previously, in October 2015, the Federal Trade Commission (FTC) and U.S. Department of Justice’s Antitrust Division (DOJ) issued a joint statement urging Virginia to consider changes to its CON laws. Both agencies argued that CON requirements create significant competitive concerns by suppressing supply and misallocating resources. Moreover, FTC and DOJ said the requirements have not been shown to lower costs or improve the quality of care for consumers. The agencies said that CON requirements can hinder “the efficient functioning of health care markets” by allowing an existing provider to file challenges to prevent or delay competition from a rival. Additionally, they may enable anticompetitive agreements among providers to pursue CON approval for separate services. The Fourth Circuit’s recent opinion may lessen the likelihood that the FTC or DOJ would separately challenge Virginia’s CON laws, but the agencies are likely to remain active in speaking out against CON requirements in Virginia and elsewhere.




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FTC and Pennsylvania Attorney General Challenge Health System Combination

The Federal Trade Commission (FTC) and Pennsylvania Attorney General (AG) have challenged the proposed combination of The Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle) in Harrisburg, Pennsylvania. The FTC complaint alleges that the combination would create a dominant provider, reduce the number of competing health systems in the area from three to two, and result in a 64 percent share of the market for general acute care inpatient hospital services.

Hospitals and health systems pursuing mergers with a competitor should be mindful of the antitrust enforcement climate in health care and incorporate antitrust due diligence into their early transaction planning. Moreover, this case highlights that providers seeking to proactively alleviate the potential anticompetitive effects of a transaction should anticipate continued skepticism by the FTC of claims of procompetitive efficiencies and its dismissal of the merging parties’ newly negotiated, post-closing pricing agreements with payors.

Summary of Administrative Complaint

Parties and Transaction

Hershey is a nonprofit healthcare system headquartered in Hershey, Pennsylvania, about 15 miles west of Harrisburg. The system has two hospitals in the Harrisburg area: the Milton S. Hershey Medical Center, an academic medical center affiliated with the Pennsylvania State University College of Medicine, and the Penn State Hershey Children’s Hospital, the only children’s hospital in the Harrisburg area.  Hershey has 551 licensed beds and employs 804 physicians offering the full range of general acute care services.  In its 2014 fiscal year, Hersey generated $1.4 billion in revenue and discharged approximately 29,000 patients.

Pinnacle is nonprofit healthcare system headquartered in Harrisburg. Pinnacle’s system includes three hospitals in the Harrisburg area: PinnacleHealth Harrisburg Hospital, PinnacleHealth Community General Osteopathic Hospital, and PinnacleHealth West Shore Hospital. The system has 662 licensed beds divided among the three hospitals. In its 2014 fiscal year, Pinnacle generated $850 million in revenue and discharged more than 35,000 patients.

Pursuant to a letter of intent executed in June 2014, the parties would create a new legal entity to become the sole member of both health systems. The parties would have equal representation on the board of directors of the new entity.

Relevant Markets

The FTC complaint alleges that the appropriate scope within which to evaluate the proposed transaction is the market for general acute care (GAC) inpatient hospital services in a four-county area around Harrisburg. This alleged product market encompasses a broad cluster of medical and surgical diagnostic and treatment services that require an overnight in-hospital stay. Although the effect on competition could be analyzed for each affected medical procedure or treatment, the FTC considered the cluster of services as a whole because it considers the services to be “offered to patients under similar competitive conditions, by similar market participants.”

The FTC limited the geographic market to an area which includes Dauphin, Cumberland, Perry and Lebanon Counties. These four counties, according to the FTC, are “the area in which consumers can practicably find alternative providers of [GAC services].” Consequently, hospitals located outside of this area [...]

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FTC Comments Discourage Legislation Purporting to Grant Antitrust Immunity for Health Care Providers

In late September, the Federal Trade Commission (FTC) submitted comments to the Virginia and Tennessee Departments of Health regarding each state’s proposed rules concerning hospital cooperation agreements. These proposed rules permit two or more hospitals to consolidate by merger or other combination of assets if, in the departments of health’s view, the benefits of the cooperative agreement outweigh any disadvantages caused by a reduction in competition. While the main purpose of the comments was to offer FTC assistance in the states’ evaluation of such agreements, the FTC re-iterated its position that “legislation purporting to grant antitrust immunity is un-necessary to encourage procompetitive collaborations among health care providers.” In fact, according to the FTC, such legislation is more likely to harm consumers.

The FTC believes the “antitrust laws are consistent with the laudable public policy goals of improving quality, reducing costs, and improving patient access for health care services.” With that position in mind, the FTC’s letters to the Virginia and Tennessee Departments of Health suggest that antitrust regulators should be focused on prohibiting agreements among providers that could harm competition rather than encouraging the creation of new agreements.  Specifically, the FTC stressed that “efforts to shield such conduct from antitrust enforcement are likely to harm [state] health care consumers, no matter how rigorous or well-intentioned the regulatory scheme may be.”

Under the proposed rules, the states must weigh the benefits resulting from the cooperation agreements against any potential disadvantages likely to result from a reduction in competition.  Both states’ rules specifically outline factors to be considered during the process. Potential benefits of cooperation agreements as noted in the FTC comments include the following:

  • Enhancement in quality of care and population health status
  • Preservation of hospital facilities to ensure access to care
  • Gains in cost-efficiency of hospital services provided
  • Improvements in utilization of hospital resources and equipment
  • Avoidance of duplication of hospital resources
  • Increases in access to hospital services for medically underserved populations
  • Participation in the state Medicaid program
  • Reductions in the total cost of care

Dis-advantages of such agreements that the states propose to consider include the following:

  • The adverse impact on the ability of payers to negotiate reasonable payment and service arrangements with providers
  • A reduction in competition among providers
  • An adverse impact on patients in the quality, availability and price of health care services
  • The availability of alternative arrangements that are less restrictive to competition and achieve the same benefits or a more favorable balance of benefits over dis-advantages

While these factors align with those that the FTC considers when reviewing a potential provider transaction, state authorities and the FTC differ on whether it is sound policy to encourage cooperation agreements among providers. The state legislators seek to allow cooperation agreements to move forward without fear of potential antitrust enforcement. Conversely, the FTC thinks legislation protecting provider cooperation agreements is un-necessary to encourage procompetitive collaborations and potentially harmful to the extent it shields anticompetitive collaborations from antitrust enforcement. In any event, providers entering such [...]

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FTC Settles Allegations of HSR Act Violation by Activist Investment Fund

The Federal Trade Commission (FTC) announced a settlement on August 24, 2015, with Third Point Funds for failing to file a notification under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) in connection with the acquisition of shares in Yahoo! Inc. (Yahoo) in 2011. Third Point Funds initially did not file and observe the HSR waiting period because it believed its acquisitions were exempt under the so-called “investment-only” exemption. The settlement provides insight into how the FTC interprets the investment-only exemption, and an important reminder that the HSR Act is a procedural statute for which the lack of competitive effect has no bearing on how the FTC chooses to enforce violations of its reporting requirements.

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Has Antitrust Enforcement Been ‘Reinvigorated’ Under Obama?

In the 2008 presidential election campaign, then-candidate Barack Obama promised to “reinvigorate” antitrust enforcement. Over the last few years, several observers have concluded that the Obama administration’s antitrust record is not substantially different from that of his predecessor. Conventional wisdom suggests that antitrust enforcement is non-partisan. Some key statistics bear out this conclusion, but a comparative review of the data in Hart-Scott-Rodino (HSR) Annual Reports published jointly by the Federal Trade Commission (FTC) and the U.S. Department of Justice (DOJ), including the recently issued fiscal year 2014 report, reveals some significant differences in antitrust enforcement during the Obama administration.

Analyzing the first six years of each administration reveals some superficial differences, but also significant continuity. Between 2001 and 2006, the agencies received a total of 9080 HSR filings; in 2009–2014 they received only 7530 filings. The total number of filings reviewed by the agencies also declined in absolute terms in the Obama years (Bush: 1537; Obama: 1251). Yet the percentage of filings reviewed has been remarkably consistent at slightly less than 17 percent of filings received in each period (Bush: 16.9 percent; Obama: 16.6 percent). The same consistency applies to Second Requests issued. The agencies actually issued a higher number of Second Requests in the first six years of the Bush administration compared to the same period in the Obama administration (Bush: 284; Obama 275). Given the lower number of filings in 2009–2014, the number of Second Requests as a percentage of all filings reviewed was higher in the Obama years, but only slightly (Bush: 3.1 percent; Obama: 3.7 percent).

If the analysis stopped there, we might conclude that antitrust review and enforcement has changed little during the Obama years. But data for the individual agencies reveals a different picture. In the Bush years, the FTC issued 142 Second Requests compared to 134 during the Obama years. Once again, given the different volume of transactions, this difference in absolute numbers results in no meaningful change in the Second Requests issued as a percentage of the transactions reviewed (Bush: 15.3 percent; Obama: 15.4 percent). For the DOJ, however, the numbers reveal a different story. Although the DOJ issued an almost equal number of second requests in each administration (Bush: 142; Obama: 141), as a percentage of all transactions reviewed by the DOJ, this steady rate results in a significant increase in the total as a percentage of the transactions reviewed; 23.4 percent during the Bush administration, compared to 37.1 during the Obama administration.

The number of enforcement actions pursued by each agency also reveals significant differences. The FTC launched nine more actions under Obama than it did under Bush (Bush: 113; Obama: 124). These totals translate to a modest two percent increase when measured as a percentage of the transactions reviewed by the agency (Bush: 12.1 percent; Obama: 14.2 percent). At the DOJ, the total number of enforcement actions also increased, from 86 under Bush to 101 under Obama. Given the different number of transactions reviewed, however, this change almost doubled [...]

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FTC Releases Section 5 Guidelines

On Thursday, August 13, 2015, the Federal Trade Commission (FTC) released a Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act. The statement was passed by a 4–1 vote, with Commissioner Ohlhausen voting against the statement. This is the first time the Commission has issued formal guidelines regarding its Section 5 authority. The guidelines were released after growing calls from Republican commissioners and congressmen to clarify the reach of the Commission’s enforcement power under Section 5.

The Commission set out the following three principles that the FTC will adhere to when challenging unfair methods of competition on the basis of Section 5 alone:

  • the Commission will be guided by the public policy underlying the antitrust laws, namely the promotion of consumer welfare;
  • the Commission will evaluate the act or practice under a framework similar to the rule of reason, that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications; and
  • the Commission is less likely to challenge an act or practice as an unfair method of competition on a stand-alone basis if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm arising from the act or practice.

Commissioner Ohlhausen’s dissenting statement criticized the content of the guidance as “seriously lacking” and noted that “what substance the statement does offer ultimately provides more questions than answers, undermining its value as guidance.” Ohlhausen went on to condemn the lack of public comment and discussion that went into the preparation of the policy statement. Finally, she warned that the FTC staff would be “embolden[ed] . . . to explore the limits of [unfair methods of competition] in conduct and merger investigations” and that the guidance would “ultimately lead to more, not less, uncertainty and burdens for the business community.”

The policy statement notes that its purpose “is to provide the Commission’s view on how it approaches the use of its statutory authority.” Chairwoman Ramirez stated in her prepared remarks that “[t]he statement formally aligns Section 5 with the Sherman and Clayton Acts” and “does not signal any change of course.”

 

 




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