Law360, New York (April 14, 2011) -- The parties and amicus curiae in FTC v. Lundbeck Inc. have now filed their opening briefs in the appeal pending before the Eighth Circuit. However the Court of Appeals ultimately rules, the decision promises to have broad-reaching impact on how product markets are defined in antitrust matters, especially when the alleged anti-competitive conduct involves pharmaceuticals. The Eighth Circuit's ruling may also serve to shape the circumstances in which the FTC can seek divestiture and disgorgement as remedies.
Lundbeck involves a challenge under the Clayton Act and related antitrust laws to pharmaceutical-manufacturer Lundbeck's acquisition of drugs used to treat patent ductus arteriousus (PDA), a heart condition affecting premature babies. The FTC and the State of Minnesota, which filed its own suit, allege that Lundbeck's closely timed acquisitions of the (then) only available pharmaceutical treatments for the condition represent a willful and illegal maintenance of monopoly power. The suit sought to divest Lundbeck's ownership of one of the drugs and disgorge it profits from both.
After a bench trial, Minnesota Federal District Court Judge Joan Ericksen dismissed the challenge, finding that the two drugs were not in the same product market because of the low cross-elasticity between them. The State of Minnesota and the FTC (collectively, "the FTC") appealed.
A consortium of attorneys general from ten states and the American Antitrust Institute ("AAI") - a nonprofit "think tank" for the promotion of competition - filed amicus briefs in support of the FTC's appeal. All the briefs, including Lundbeck's response, address the appropriate test for determination of product market following a monopolist's acquisition of a competing product.
In 2005, Indocin IV was the only FDA-approved drug available to treat PDAs, with neonate open-heart surgery the only other possible treatment option when the condition failed to resolve on its own. Merck owned Indocin IV and sold it at a price of $77.77 per three-vial treatment. In late 2005, Merck sold Indocin IV as part of a portfolio of injectable drugs to Ovation Pharmaceuticals, Lundbeck's predecessor in interest (collectively "Lundbeck "). Lundbeck's acquisition of Indocin IV gave it a monopoly in the pharmaceutical control of PDAs.
In early 2006, Lundbeck also acquired NeoProfen, a new drug for the treatment of PDAs. The FDA approved NeoProfen for the treatment of PDAs shortly after Lundbeck's acquisition of it. NeoProfen is not bio-identical to Indocin IV and the two drugs have different wording on their FDA-approved labels.
Two days after acquisition of NeoProfen, Lundbeck raised the price of Indocin IV by almost 1,300 percent to $1,500 per three-vial treatment. Lundbeck priced a treatment dose of NeoProfen at $1,450. Indocin is off-patent and its higher price attracted a generic manufacturer, although production difficulties delayed generic entry into the marketplace until 2010, after trial on the case began.
The FTC argued at trial that "but for" Lundbeck's wrongful acquisition of NeoProfen, the two drugs would have been subject to price competition and claimed that the pharmacy formulary process would have allowed hospitals to negotiate between the two drugs for better pricing.
Lundbeck claimed the different side effects and comparative benefits of each drug put them in different product markets. Lundbeck used the testimony of eight neonatologists to demonstrate the treatment-based preferences establishing those different markets.
The district court found the drugs were reasonably interchangeable therapeutic substitutes but determined that, because of strong physician preference for one drug over another, they were not part of the same product market, noting the low cross-elasticity between the drugs.
Appellant and Amicus Arguments
In its opening brief, the FTC argues the district court committed multiple legal errors. The FTC alleges that, to define product market correctly, the district court needed to compare the market that exists with the one that would likely have existed "but for" the transaction. Under this standard, the court should have then determined the likely competitive dynamics absent Lundbeck's conduct.
The FTC argues further that the district court made numerous findings about the but-for world but erroneously based its market finding on the status of post-acquisition preferences where an accurate measure of the degree to which the price of one of the drugs affected the other, or cross-elasticity, could not be calculated because no time ever existed when the drugs were independently owned.
The FTC also seeks to assign error to the district court for failure to consider Lundbeck's pre-litigation documents regarding the applicable product market as well as its failure to consider the existence of "marginal customers." Citing the district court's multiple findings about these customers without a strong preference for either drug, the FTC claims that the court's failure to account for their role in the definition of the relevant product market made the court's definition of the market wrong as a matter of law.
Instead, the FTC maintains that the court should have considered other factors beyond cross-elasticity to determine product market. According to the FTC, the district court made factual findings regarding the existence of "practical indicia" like functional interchangeability and industry recognition of a single production market but failed to properly account for their role in determining the existence of two separate markets.
Pursuant to this argument, these factors make the drugs economic substitutes for each other and part of the same product market for which Lundbeck's efforts marketing efforts to switch Indocin IV users to NeoProfen in anticipation of the entry of a generic Indocin-substitute served as further proof.
The joint amicus brief from the attorneys general of the States of Missouri, Illinois, Arkansas, Iowa, Maryland, Nevada, New Mexico, North Dakota and West Virginia echoes the arguments raised by the FTC. The attorneys general also argue that the two drugs were reasonably interchangeable and that Lundbeck's efforts to switch physician preference proved that the drugs were part of one product market.
In addition, the attorneys general contend that physician preference demonstrated brand loyalty and product differentiation within a single market rather than proving two separate markets. Analogizing to Coke and Pepsi, the attorneys general say the fact that some cola drinkers would never change brands does not mean the two sodas are part of a different market.
The attorneys general also raise evidentiary concerns regarding the district court's determination of low cross-elasticity. The district court based its finding on the testimony of Lundbeck's expert, but the expert did not calculate a specific cross-elasticity. According to the attorneys general, this makes the testimony regarding cross-elasticity merely speculative and lacking in a sufficient evidentiary basis to serve as the foundation of the court's ruling regarding the relevant product market.
The amicus brief of the AAI takes a different tack. The AAI first argues that a lack of price competition between two functionally interchangeable products does not preclude a determination that they are in the same relevant market.
Instead, the AAI says the antitrust laws protect quality competition and innovation as well as price competition, citing the Supreme Court's decision in United States v. Continental Can Co., 378 U.S. 441 (1964) and the Eighth Circuit's decision in FTC v. Tenet Health Care Corp., 186 F.3d 1045 (8th Cir. 1999) as dispositive.
The AAI also contends that, because Lundbeck's acquisition of NeoProfen removed an actual or potential constraint on a monopolist's ability to exercise monopoly power, the court should have found the acquisition preempted the competition that would have existed had the drugs been separately owned - an anti-competitive constraint prohibited by the Clayton Act's incipiency standard.
And, like the rest of the appellants, the AAI alleges that the district court's cross-elasticity finding is at odds with its other factual findings.
In its 99-page response brief, Lundbeck takes the position that cross-elasticity of demand is the key factual component of market determination in an antitrust action and that two products cannot exist within the same product market unless they exhibit high cross- elasticity. Lundbeck provides both case law and FTC Merger Guidelines in support of its core position.
Lundbeck argues that the district court's findings regarding low cross-elasticity and product market are fact findings that cannot be disturbed on appeal unless clearly erroneous. Lundbeck cites evidence including physician and expert testimony as well as internal business documents that support the district court's cross-elasticity determination and states that evidence establishes that the district court was thorough in its findings rather than inconsistent.
Lundbeck alleges that the FTC's appeal is based on a quarrel with how the district court weighed various pieces of evidence rather than identifying any true questions of law. Lundbeck also maintains that the record disproves the FTC's characterization of what would have happened in a "but-for" world, providing independent grounds to affirm the district court.
The FTC's theory of price competition assumes Lundbeck would have reduced the price it charged for Indocin in light of the competition an independent purchaser of NeoProfen would have provided and that a series of price reductions would have then ensued. According to Lundbeck, this theory - and the FTC's associated monopoly maintenance claim - fails because the FTC never established the casual mechanism that would have triggered the initial, critical price competition.
Lundbeck also criticizes the nonprice competition arguments advanced by the AAI. Lundbeck says the AAI's arguments contradict the FTC's theory of the case, raise new issues beyond the scope of the appeal and contain legal and factual flaws. Lundbeck challenges the AAI's characterization of the decision in Tenet as dispositive on the role of nonprice competition, arguing that case merely confirms the significance nonprice factors can have in the key issue of price elasticity.
Appellate resolution in Lundbeck is still months away, awaiting final briefing, oral argument and the Eighth Circuit's decision. But review of the parties' arguments on appeal reveals the competing legal theories that will most likely serve to support the court's opinion, whether it ultimately affirms or reverses the district court's ruling in the case, and provides insight into the law and facts beneath this deeply divided dispute.
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