District Court Allows Loyalty Discount Claims to Proceed Despite Lack of Market Power | Practical Law

District Court Allows Loyalty Discount Claims to Proceed Despite Lack of Market Power | Practical Law

The US District Court for the Eastern District of Pennsylvania allowed bundling, exclusive dealing and tying claims to proceed in Schuylkill Health Sys. v. Cardinal Health 200, LLC despite defendants not possessing market or monopoly power.

District Court Allows Loyalty Discount Claims to Proceed Despite Lack of Market Power

by Practical Law Antitrust
Published on 11 Aug 2014 • USA (National/Federal)
The US District Court for the Eastern District of Pennsylvania allowed bundling, exclusive dealing and tying claims to proceed in Schuylkill Health Sys. v. Cardinal Health 200, LLC despite defendants not possessing market or monopoly power.
On July 30, 2014, Judge Juan Sanchez of the US District Court for the Eastern District of Pennsylvania held that bundling, exclusive dealing and tying claims could proceed in Schuylkill Health Sys. v. Cardinal Health 200, LLC, despite plaintiff's failure to establish defendants' market or monopoly power in the sutures and endomechanical (endo) products market (No. 12-7065 (E.D.P.A. July 30, 2014)). In Schuylkill Health, plaintiff Schuylkill Health Systems (SHS) alleged that defendant Cardinal Health and its competitor Owens & Minor (Defendants) violated the Sherman Act and Clayton Act by illegally:
  • Bundling the relevant products with their other medical and surgical (med-surg) products. Defendants' bundled discount program levied a 1-5% penalty on customers that purchased more than 10% of their relevant products from Defendants' competitors, but purchased the remainder of their med-surg products from Defendants (Discount Program).
  • Maintaining exclusive dealing arrangements to ensure that customers did not buy the relevant products from Defendants' competitors.
  • Using the Discount Program to tie the relevant products to their med-surg products.
SHS alleged that because of Defendants' illegal behavior, customers like itself were unable to purchase the relevant products from other, more cost-efficient suppliers that sell only the relevant products.
SHS's complaint also contained allegations of monopolization and conspiracy to monopolize the relevant product market. However, because Defendants' market shares were 39% and 33%, respectively, the court dismissed those claims for failure to establish monopoly power.
Judge Sanchez relegated his analysis of why he was allowing the surviving claims to proceed (despite no showing of market power) to a footnote.

Bundling Claim

The court allowed SHS's bundling claim to proceed despite its failure to allege Defendants' market or monopoly power. The court held that SHS alleged sufficient facts to support its claim, including that:
  • Defendants' Discount Program forced customers to pay an increased distribution fee.
  • To compete with Defendants' Discount Program, Defendants' competitors would have had to sell the relevant products at a loss.
  • Defendants had no procompetitive justification for the Discount Program.
  • The totality of Defendants' actions produced anticompetitive effects, including artificially high prices for the relevant products.
Because there is no bright-line test to determine when bundled discounts are illegal as opposed to aggressively competitive, courts have differed in how they analyze those discounts. Courts have specifically differed on how much market share is required to support a claim for anticompetitive bundling. In LePage's Inc. v. 3M, 324 F. 3d 141 (3d Cir. 2003) and Cascade Health Solutions v. PeaceHealth, 515 F. 3d 883 (9th Cir. 2008), both of which this court cited as support for its decision, the US Courts of Appeals for the Third and Ninth Circuits held that market shares of 75% to over 90% were sufficient to support claims for illegal bundling. Here, SHS's claims were allowed to proceed based on the Defendants' 39% and 33% market shares, which are significantly lower than what most courts require.

Exclusive Dealing Claim

The court reasoned that although purchase contracts between Defendants and their customers did not include exclusive terms for purchase of the relevant products, SHS's exclusive dealing claim should nevertheless proceed because Defendants' Discount Program foreclosed competitors from the relevant product market. SHS alleged that Defendants had entered into exclusive dealing contracts with approximately half of their customers, or about 19.5% and 16.5% of the relevant product market, respectively. The court found that percentage to be significant and a potential violation of the Clayton Act.
The court stated that in determining whether an exclusive arrangement substantially forecloses the market, it considers factors in addition to market power, including the "real world" impact of the contracts.

Tying Claim

Finally, the court allowed SHS's tying claim to proceed on a rule of reason basis. Because SHS did not allege that Defendants held a monopoly in the market for med-surg products (the tying products), Defendants' Discount Program could not be per se illegal. However, the court reasoned that the claim should proceed under the rule of reason because SHS alleged that:
  • Defendants' Discount Program adversely affected competition by raising prices for all med-surg products.
  • Defendants' Discount Program was coercive because purchasers had no economic alternative to it.
Although the court did not dismiss the tying claim, the court noted that because of Defendants' relatively low market power and the fact that the tied products could feasibly be purchase separately, the claim was not likely viable.
The FTC and DOJ recently held a workshop on conditional pricing practices to explore legal policy and economics surrounding loyalty discounts such as bundling and exclusive dealing. The workshop participants largely agreed that without market dominance, conditional pricing practices are not likely to be of concern. However, judicial analysis of conditional pricing is still undefined. As demonstrated by this court's analysis of Defendants' loyalty discounts, courts give weight to many different factors in deciding whether conduct is illegal or simply competitive. This case serves as a warning that although market power plays an important role in loyalty discount analysis, lack of market power is not always a safeguard against antitrust violations.
For more information on conditional pricing practices, see Practices Notes, Customer Loyalty Programs in the US and Exclusive Dealing Arrangements.