On May 4, 2016, the Third Circuit affirmed a summary judgment finding that Sanofi’s loyalty discounts for its anticoagulant drug Lovenox were not anticompetitive. In doing so, the court distinguished several of its earlier opinions and provided some guidance on when these common marketing programs violate the antitrust laws.

Because the Supreme Court has not reviewed a loyalty discount case in decades, the courts of appeal have struggled to apply modern antitrust thinking to these arrangements. The Third Circuit has been one of the most prolific courts in this area, with such important opinions as LePage’s, Dentsply and, most recently, ZF Meritor. In ZF Meritor, the court limited the oft-criticized LePage’s to discounts that bundled the sale of multiple products. The court also found the defendant-friendly price-cost test of Brooke Group, rather than a more fulsome exclusive dealing or foreclosure analysis, to be the appropriate test when the competitive effect arises only from pricing. This case gave the Third Circuit another opportunity to decide which test to use and explain which details of such discount programs are important when evaluating their competitive effects.

The Discount Program and its Alleged Anticompetitive Effects

Sanofi’s Lovenox was the sales leader in the product market, with a share ranging from 81% to 92% during the appropriate period. The plaintiff Eisai’s product, Fragmin, was the largest of the three other competing drugs, with a share ranging from 4% to 8%. Both Lovenox and Fragmin had several FDA-approved uses, most of which overlapped (although each also had one unique approved use).

Eisai alleged that three elements of the Lovenox sales program that Sanofi offered to Group Purchasing Organizations violated the antitrust laws. (GPOs are organizations that negotiate discounts from suppliers on behalf of their hospital members.)

First, Sanofi offered significant discounts to GPO members depending on both the share and volume of Lovenox purchased. For individual hospitals, the discounts ranged from 9% to 30% for shares above 75%. When certain criteria were met, GPOs could aggregate their Lovenox purchases across all their hospital members and obtain discounts ranging from 15% to 30%. Significantly, none of these discounts reduced the price of Lovenox below Sanofi’s costs. Also, none of these discounts needed to be repaid if later purchases did not meet the thresholds. Under the GPO agreement, if the customer’s share of Lovenox fell below 75%, then the discount was reduced to 1% no matter the volume of purchases. Customers who terminated the agreements could still buy Lovenox, but with no discount.

Second, Sanofi required each hospital to include Lovenox on its formulary for all its FDA-approved uses. (A formulary is a list of medications approved for use based on factors such as cost, safety, and efficacy.) While Lovenox competitors could also be listed on the formulary, Sanofi prohibited hospitals from favoring those other drugs over Lovenox.

Third, Sanofi allegedly combined those marketing elements with a campaign to spread “fear, uncertainty and doubt” about Fragmin. For instance, Sanofi allegedly paid doctors to publish articles or present educational programs that made deceptive statements about the medical and legal risks of switching from Lovenox.

Third Circuit Analysis under an Exclusive Dealing Test

The Third Circuit chose the exclusive dealing or foreclosure test to evaluate Eisai’s allegations. Under that test, it found that Eisai could show neither substantial foreclosure of the market nor any anticompetitive effect such as increased prices.

As to substantial foreclosure, the court emphasized the statements it had made in LePage’s, Dentsply, and ZF Meritor that foreclosure was not when many consumers chose the defendant’s product but when “the defendant’s anticompetitive conduct rendered that choice meaningless.” Without specifying a specific threshold, the court held that Eisai’s identification of “a few dozen hospitals out of almost 6000” in the market who might have been prevented from switching to Fragmin was not “substantial foreclosure, particularly if the reason … was due to … the loss of the [Lovenox] discounts.”

Eisai also tried to show foreclosure by alleging Sanofi bundled the “incontestable” demand for Lovenox for its unique FDA-approved use with the “contestable” demand for the uses where Fragmin or the others could be used. The court saw this as an attempt to extend LePage’s oft-criticized analysis of bundling of different products and rejected it.

The court also distinguished Sanofi’s discounts from those found anticompetitive in Dentsply and ZF Meritor. Unlike the defendants in those two cases, Sanofi did not require that the discounts be repaid or threaten supply disruptions if customers terminated the program. Unlike the ZF Meritor defendant’s requirement that customers delete competitive product from their databooks shown to customers, Sanofi allowed Fragmin and other competitive drugs to be presented in a hospital’s formulary.

The court also found insufficient direct evidence of anticompetitive effects. While the price of Lovenox increased throughout the period, the increase was similar to that of Fragmin and other drugs. While the price of Lovenox was the highest of these drugs, the court found “no reason to believe that Sanofi’s allegedly anticompetitive conduct was the cause.”

The court used a footnote to quickly dispose of Eisai’s claims that Sanofi’s alleged campaign of “fear, uncertainty and doubt” harmed competition. The Third Circuit upheld the lower court’s finding of insufficient evidence of reliance by customers on such false or deceptive statements. As a result, this case was not one of the “rare circumstances” when such statements can be part of an antitrust claim. The Third Circuit also completely ignored internal Sanofi documents that Eisai had contended showed Sanofi’s bad intent. The lower court had discounted quotes about the goals of the Lovenox marketing program such as “increase the Price of Poker” and “create obstacles for competitive products.”

Why Not the Price-Cost Test?

The Third Circuit’s foreclosure analysis largely mimicked the foreclosure analysis of the district court. For that lower court, however, the analysis under that test had been the secondary rationale for granting Sanofi’s summary judgment motion. The lower court had chosen the price-cost test because, following ZF Meritor, it found that price was the principal means of exclusion. Because there was no allegation that Sanofi’s price was below its costs, the lower court found that the discount program was not anticompetitive.

The Third Circuit confirmed that ZF Meritor stands for the proposition that “when pricing predominates over other means of exclusivity, the price-cost test applies. This is usually the case when a firm uses a single-product loyalty discount…” In this case, however, Eisai claimed that it was not price but Sanofi’s bundling of incontestable and contestable demand that was exclusionary. Because the court rejected such claims under an exclusive dealing or foreclosure analysis, it declined to “opine on when, if ever, the price-cost test applies to this type of claim.”

Conclusion

This case provides guidance for when a firm with a high market share can use a loyalty discount program safely under the antitrust laws. Customers should have a real choice to opt in or out of the discount program and not have to face, as in prior cases, a fear of supply disruptions or a need to repay earned discounts. Competitors should not be disadvantaged by being foreclosed from lists of approved products or uses. And even incendiary internal documents can be overcome if there is insufficient proof of an anticompetitive effect. Unfortunately, this opinion seemed to imply that the price-cost test would not be used so long as the plaintiff alleges exclusion by some method other than price.

While Sanofi had its summary judgment victory confirmed, it had to go through nearly eight years of litigation (so far) to get it. Firms with high market shares should consider the antitrust risks as they structure any discount programs.