Pharmaceutical Commerce - November/December 2016 - 25

Legal & Regulatory
Pharma pricing and antitrust law
US courts fail to clarify when pricing may violate antitrust laws
By Bobby R. Burchfield, King & Spalding

With US sales of
close to $300 billion
dollars during 2015,
the pharmaceutical
industry is both a vital
part of the national
economy and an
intensely competitive
business. As in any competitive business,
price competition, including discounts
and rebates, can be an important part of a
pharmaceutical executive's responsibility.
Competition in the pharmaceutical
industry can be complex as well as intense.
Branded drugs compete with generics.
Broad product portfolios compete with
narrower portfolios or even individual
drugs. One drug may have some FDAa p p rove d i n d i c a t i o n s t h a t ove r l a p
with those of another drug, as well as
some indications that do not overlap.
Manufacturers sell directly to hospitals
and physicians, as well as to g roup
purchasing organizations. Intermediaries
such as pharmacy benefit managers
can influence competition with their
own rebates and formulary selections.
All this means that pharmaceutical
executives seeking to create a competitive
value proposition must consider many
changeable elements.
Unfortunately, a series of antitrust
decisions by the influential US Court of
Appeals for the Third Circuit has clouded
the rules governing price competition.
Because of these decisions, even prices
above cost may create antitrust risks. Even
though the US Court of Appeals for the
Sixth and Ninth Circuits have disagreed
with the Third Circuit, decisions of the
Third Circuit are especially significant to
the pharmaceutical industry because the
Third Circuit has jurisdiction over New
Jersey, Pennsylvania and Delaware. These
states are home to many pharmaceutical
companies, and comprise a large market
for the pharmaceutical industry. Lawyers
representing antitrust plaintiffs are
well aware of circuits presenting favorable
legal precedents.
The Third Circuit's precedents tend to
be friendly to plaintiffs alleging antitrust
violations based on product pricing. For
example, in 2003, the Third Circuit ruled
in LePage's Inc. v. 3M, 324 F.3d 141 (3d Cir.
2003)(en banc), that 3M had violated the
antitrust laws by paying volume rebates
over a large portfolio of products. LePage's
argued that the portfolio rebate program
undermined its ability to compete against
one of those portfolio products, 3M's
"Scotch" brand transparent tape. Even
though 3M's prices were above its costs

of production, the court considered these
"bundled discounts" akin to a "tying
arrangement"-which makes one product
available only on the condition that the
customer take other products-and
thus held the discounts illegal under the
antitrust laws.
Since the antitrust laws are intended
to promote competition, and especially
price competition, the LePage's decision
has received considerable criticism. For
example, in its 2007 Report to Congress,
the bipartisan Antitrust Modernization
Co m m i s s i o n c r i t i c i ze d L e Pa g e 's a s
being "too vague" and "likely to chill
welfare-enhancing bundled discounts or
rebates." "Lower prices," the Commission
continued, "may harm a rival but benefit
consumers." Thus, businesses attempting
to comply with the LePage's test might
tend to play it safe by avoiding aggressive
discount or rebate policies, especially if
multiple products are involved. The US
Court of Appeals for the Sixth and Ninth
Circuits have also been critical of LePage's.
More recent decisions by the Third
Circuit have narrowed LePage's, but have
not yet provided clarity on when pricing
structures will pass muster under the
antitrust laws, especially when considered
with other competitive activities. In 2012,
in ZF Meritor LLC v. Eaton Corp., 696 F.3d
254 (3d Cir. 2012), the court observed
that the Supreme Court's decisions on
price competition since LePage's have
established that above cost product
pricing is always, or virtually always,
allowable. Heeding these Supreme Court
decisions, the Third Circuit announced
that its LePage's ruling in 2003 must be
read narrowly, and limited to situations
in which a multi-product seller offers a
bundled discount in competition with a
single product seller. The court also said
that an antitrust challenge based solely
on pricing practices would be judged
on whether the defendant's pricing was
above its costs.
In response to these Supreme Court
precedents allowing aggressive price
competition, antitrust plaintiffs now add
allegations of other exclusionary conduct
to their complaints about aggressive
conduct, and these additional allegations
can be successful. Indeed, in the 2012 ZF
Meritor decision, the Third Circuit ruled
for the plaintiff based on the plaintiff 's
allegations that the defendant had used
its monopoly position in addition to its
pricing policies to force customers into
long-term exclusive agreements. These
agreements, the court ruled, were anticompetitive.

The Eisai/Sanofi ruling
Then, in May of this year, the Third
Circuit appeared to move a step closer
to clarifying its antitrust pricing law by
rejecting a claim by Eisai that Sanofi's
volume discounts on Lovenox violated
the antitrust laws. Eisai, Inc. v. Sanofi
Aventus U.S., LLC, 821 F.3d 394 (3d Cir.
2016). Eisai argued that Lovenox was
approved for more indications than its
competing product, Fragmin, and that
some of those unique indications made
Lovenox highly desirable for hospitals
and group purchasing organizations.
As a result, Eisai argued, the different
indications for Lovenox made the volume
discounts tantamount to the multiproduct
discount rejected in LePage's. Eisai alleged
that a hospital could never completely
switch from Lovenox due to the unique
indications Lovenox had obtained, and
that a hospital purchasing even a small
amount of Eisai's product would lose
substantial discounts that Eisai could not
reasonably replace. Eisai admitted that
Sanofi's net pricing was above Sanofi's
cost, but argued that it was foreclosed
from competing against Lovenox at many
Even though the Eisai case, unlike
LePage's and ZF Meritor, focused primarily
if not exclusively on pricing practices
of a single product, the court missed an
opportunity to clarify when aggressive
pricing practices, standing alone, violate
the antitrust laws. The court recognized
that "when pricing predominates over
other means of exclusivity," such as
"when a firm uses a single-priced product
loyalty discount or rebate to compete with
similar products," the court will find the
conduct illegal only if the seller's net price
is below its cost.
Unfortunately, however, the court
deemed this "price-cost test" inapplicable
to Eisai's allegations, apparently because
Lovenox had more indications than the
competing products. On that basis, Eisai
argued that Lovenox should be treated
a s mu l t i p l e pro du c t s , a n d S a n of i 's
pricing structure treated as a "bundled"
discount on multiple products rather
than as a single product discount. The
court analyzed Eisai's claim as one for
exclusionary conduct, not predatory
Even under the test for exclusionary
conduct, the Third Circuit rejected Eisai's
claim. The court reasoned that Eisai had
failed to prove that it was, in fact, excluded
from a substantial part of the market.
By failing to evaluate the case on the more
straightforward and objective "price-

cost" test, and authoritatively confirm
that pricing decisions will be upheld
if the price is above cost, however, the
court prolonged the confusion about when
aggressive pricing violates the antitrust
laws. Future cases with similar
a l l e g a t i o n s m ay b e re q u i re d t o g o
through expensive and time-consuming
discovery, and perhaps even trial, before
the defendant will know for certain
that its pricing structure is legal. More
l i ke l y, t h e co n t i n u i n g u n c e r t a i n t y
will temper aggressive but procompetitive price competition.
Future direction
The good news is that the Eisai decision
may show further movement of the Third
Circuit toward a more objective above cost
standard for evaluating antitrust pricing
claims. The decision strongly suggests that
the Third Circuit will approve volume
discounts and rebates
if they involve a single product
(ii)	 if the resulting net price is
above cost
(iii)	if the seller imposes no
other restrictions.
Thus, a pharmaceutical company
selling its product above cost and without
explicit contractual restrictions or other
actions that impede customers from
purchasing competing products can have
greater confidence that its prices will be
deemed legal under the antitrust laws. The
bad news is that the Eisai decision seems
to invite future plaintiffs to challenge
pricing decisions with creative theories
of exclusionar y conduct, which may
allow plaintiffs to subject defendants to
expensive and intrusive civil discovery.
T h e T h i r d C i r c u i t 's g r a d u a l
movement toward a more objective and
straightforward antitrust test for pricing
is welcome news. Even so, executives
eager to comp ete effec tively in the
complex pharmaceutical marketplace
would benefit from greater clarity from
that court on when, if ever, aggressive
pricing standing alone will run afoul of
the antitrust laws.
About the author
Bobby R. Burchfield is partner, King &
Spalding, Washington, DC. By appointment
of President George W. Bush, Bobby
served on the Antitrust Modernization
Commission from 2004 to 2007.

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Table of Contents for the Digital Edition of Pharmaceutical Commerce - November/December 2016

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Pharmaceutical Commerce - November/December 2016 - Table of Contents
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Pharmaceutical Commerce - November/December 2016 - Cover4