Eighth Circuit Not Ready to Move Away from Traditional Market Definition Process
The United States Court of Appeals for the Eighth Circuit recently issued a panel decision affirming a Minnesota district court bench trial dismissal of an FTC and State of Minnesota (jointly the “FTC”) challenge against the previously consummated acquisition of NeoProfen, Inc. by Lundbeck, Inc. (formerly Ovation Pharmaceutical) from Abbott Laboratories Inc. The district court had dismissed on the ground that the FTC failed to prove that two prescription drugs had sufficient cross-price elasticity to be in the same relevant product market, despite the fact that they had been the only two drugs available to treat a particular heart condition in infants, and that ‘but for’ the merger, the FTC claimed, consumer prices for the drugs would have been much lower.
The 2010 FTC/DOJ Horizontal Merger Guidelines declare that the agencies had been relying, and would continue to rely, less on traditional market definition and more on the potential overall competitive effects of a transaction (with price increases being a key relevant factor). The Lundbeck decision demonstrates, however, that despite the 2010 Merger Guidelines’ reduced focus on market definition, in order for an enforcement agency to prevail in an antitrust challenge to an acquisition, the courts (at least in the Eighth Circuit) will still require sufficient evidence of cross-price elasticity to prove a relevant product market, not just a theory that the merger would have an adverse effect on consumer prices.
The FTC’s Suit
The FTC brought the action against Lundbeck in December 2008, alleging infringement of Section 7 of the Clayton Act, Section 5 of the FTC Act, Section 2 of the Sherman Act, and (State of Minnesota only) the Minnesota Antitrust Law of 1971. The Complaint alleged a relevant product market of FDA-approved drugs to treat patent ductus arteriosus (PDA), a life threatening heart condition affecting pre-mature babies. Lundbeck maintained that the FTC failed to prove that the two drugs were in the same product market, however defined.
The only alternatives available to patients with PDA are surgery and pharmacological treatment, and surgery is only considered after pharmacological treatments are ineffective. At the time the case was brought, Indocin IV and NeoProfen were the only two FDA-approved drugs for PDA. Hospitals order and pay for the drugs, doctors prescribe them, but doctors do not pay the hospitals for the drugs-- patients or their insurance carriers pay the hospitals.
Lundbeck acquired the rights to Indocin IV in 2005 and to NeoProfen in 2006. Until generics were introduced in 2010, Lundbeck owned all of the available drug treatments for PDA. When Lundbeck purchased Indocin IV in 2005, it immediately raised its price dramatically. When it acquired NeoProfen in 2006, it did it again. By 2008, when the FTC sued, the consumer prices of both drugs had increased by approximately 1300%.
The District Court Decision
At trial, the FTC argued that FDA-approved drugs to treat PDA constituted the relevant product market because those drugs were the only ones available to treat the condition. Lundbeck, however, offered the testimony of several doctors to the effect that they based their treatment decisions on the perceived clinical advantages of the two drugs, “without regard to cost.” But, as already noted, doctors do not bear the cost of the drugs.
The district court stressed that “the determination of the relevant market is a ‘necessary predicate’ to a finding of a Clayton Act violation.” In ascertaining the market definition, the court found that: (i) in “launching NeoProfen, an independent owner would not have disregarded Indocin IV’s price.” (ii) the two drugs were the only drugs available at the time they were approved by the FDA to treat PDA; (iii) both drugs were injectable; (iv) published studies found the active ingredients in the two drugs to be equally efficacious in treating PDA; and (v) some physicians and hospitals considered the two drugs reasonable substitutes, using one of the two exclusively. On the other hand, the district court also found that Indocin IV and NeoProfin are not bioequivalent and have different side effects. Additionally, the FTC produced several Lundbeck internal documents indicating that it expected NeoProfen to compete with Indocin IV. However, the district court discounted these documents, relying on a Sixth Circuit decision to the effect that “internal marketing documents do not provide a sound economic basis for assessing a market in the way that a proper interchangeability analysis would.” 
The district court concluded that the FTC had failed to establish that the two drugs at issue were in the same relevant product market, because doctors generally did not base their decisions on which drug to prescribe on the basis of price.
The Eighth Circuit Decision
On appeal, the Eighth Circuit referred to Circuit precedent to the effect that the relevant product market is a question of fact, which the plaintiff bears the burden of proving. It applied the “clearly erroneous” standard in its review of the district court’s decision. It affirmed dismissal of the suit because it concluded there were no errors of law in the district court’s conclusion that the FTC had failed to establish a relevant market based on increased consumer prices, when physician testimony showed that price had not been a significant factor in their determination of the drugs to prescribe for the treatment of PDA. In support of this conclusion, the court relied on precedent holding that cross-price elasticity was an essential element in establishing a product market, including in particular, the Supreme Court’s Brown Shoe decision (“the outer boundaries of a product market can be identified by the reasonable interchangeability, or cross-elasticity of demand, between the product and possible substitutes for it”) and the Eighth Circuit’s prior SuperTurf decision (“determining a product market requires identifying the choices available to consumers, focusing on “whether consumers will shift from one product to the other in response to changes in their relative cost”). The Eighth Circuit also referenced the agencies’ 1992 Horizontal Merger Guidelines and not the revised 2010 guidelines, even though the 2010 guidelines had been issued a year before the decision was issued.
Judge Kopf, a district court judge sitting by designation, wrote a concurring opinion questioning the other panelists’ reliance, in considering market definition and cross-elasticity of demand, upon the testimony of doctors who have no responsibility to pay for the drugs at issue. According to Judge Kopf, reliance on “the actions of actors who eschew rational economic considerations” where “there is no real dispute that (1) both drugs are effective when used to treat the illness and about which the doctors testified and (2) internal records from the defendant raise an odor of predation” may have been misguided. However, indicating that the bottom line was that the standard of review was met by the defendant, he agreed the district court’s decision should stand.
The plaintiffs filed a petition for rehearing en banc that was denied on November 22nd. Central to the petition, in addition to the points made in the concurring opinion, are the contentions that the Eighth Circuit should have reversed the district court because it had improperly: (1) relied on the defendant’s economist, whose conclusions allegedly were contrary to the actual price effects evidence; (2) improperly failed to considered a hypothetical “but-for” market; (3) focused solely on cross-price elasticity of demand and not on the reasonable interchangeability of use of the products; and (4) failed to place appropriate importance on internal business documents supporting the plaintiffs’ views.
The Take Aways
Despite the agencies’ announcement of revised merger guidelines in 2010 indicating that they had been reducing the role of market definition in bringing merger cases, the courts are still requiring the agencies to define a relevant product market using traditional methods, including showing cross-price elasticity in order to prevail in an antitrust action -- and it appears, in another recent case, that the DOJ may be responding in kind.
The agencies often place emphasis on a party’s internal documents, but the courts seem to be less swayed by such evidence in merger cases. Lundbeck’s files contained a number of documents showing, according to the FTC, that it believed Indocin IV and NeoProfen were competing products, but the district court was not persuaded that these documents required a conclusion that consumers viewed the products as substitutes.
In the healthcare industry there are added difficulties in identifying the relevant customer for market definition purposes because the party making the purchase decision often differs from the one who pays for the product. Hospitals have formularies designed to keep costs down, but doctors are the ones who prescribe treatments, not always in line with the formularies; insurance companies and Medicaid have their own focus; and the patient may have little to no role in the process. This differs from most product markets where the decision makers are also the parties who bear the cost of the purchase decision.
Because drugs are often used for more than one disease, pharmaceutical substitutability (and identifying the relevant antitrust product market) can depend on a number of factors. A doctor’s decision to use one drug over another is very fact specific. As theLundbeck case shows, drugs can differ based on a number of factors, including prescription requirements, delivery methods, dosage form and amount, bioequivalence, side effects, physician preference, and FDA approval.
Merger cases usually settle due to the length of time and related costs of litigation. Accordingly, merger decisions are rare, and none have made it to the Supreme Court since the early-1970’s. The agencies’ merger guidelines have changed since then, as has antitrust theory in the United States. But while the transaction in Lundbeck had closed at the time of trial, given the nature of the assets in question (i.e., the right to manufacture a patented, FDA-approved drug), in this post-transaction challenge it would not be so difficult to "unscramble the eggs" upon receipt of a decision in favor of the FTC's claims. On the other hand, given the 2010 Merger Guideline’s movement away from market definition and the evidence that prices went up dramatically post transaction, the FTC may have a strong reason for continuing its fight to the Supreme Court. The fact that the case involves the healthcare industry is yet another reason it may go forward.
Although the FTC was not able to convince the Eighth Circuit to rehear the appeal en banc, it seems that neither side has any incentive to walk away from this case until a truly final decision is handed down.
FTC v. Lundbeck, Inc., 650 F.3d 1236 (8th Cir. 2011), affirming FTC v. Lundbeck, Inc., 2010 U.S. Dist. LEXIS 95365 (D. Minn. Aug. 31, 2010).
Lundbeck, Inc., 2010 U.S. Dist. LEXIS 95365, at *47.
Id., at *60.
Id., at *23-24.
Id., at *56 (citing Ky. Speedway, LLC v. Nat’l Ass’n of Stock Car Auto Racing, Inc., 588 F.3d 908, 919 (6th Cir. 2009)).
Lundbeck, Inc., 650 F.3d at 1239 (quoting HDC Med., Inc. v. Minntech Corp., 474 F.3d 543, 547 (8th Cir. 2007)).
Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).
SuperTurf, Inc. v. Monsanto Co., 660 F.2d 1275, 1278 (8th Cir. 1981).
Lundbeck, Inc., 650 F.3d at 1240.
Id. at 1243.
Petition for Rehearing En Banc of Plaintiffs-Appellants FTC and State of Minnesota, FTC v. Lundbeck, Inc., No. 10-3458/10-3459 (8th Cir. Oct. 3, 2011).
See United States v. H&R Block, Inc., Civ. Action No. 1:11-00948, (D.C. Cir. 2011) (mem. op.).
Lundbeck, Inc., 650 F.3d at 1242.