On June 23, 2014, the Federal Trade Commission and Department of Justice Antitrust Division conducted a workshop on so-called "conditional pricing practices," such as loyalty and bundled discounts. Economists, law professors and practitioners discussed the rationale for and potential effects of such marketing practices, as well as the current and appropriate legal standards for judging them under the antitrust laws. While no definitive answers were reached, the program did provide some clues on how enforcers and courts might judge these practices in the future. The importance of those standards cannot be overemphasized: At the same time as the program, Eaton was announcing a $500 million settlement of its long-running loyalty pricing litigation.

Loyalty discounts and similar pricing practices have been controversial antitrust topics for some time. On the one hand, such discounts lower prices for customers; on the other hand, there seem to be circumstances when those discounts prove so attractive to customers that other competitors cannot survive and competition is ultimately harmed. The proper standard to use to balance those interests has bedeviled courts for some time, as we have previously addressed. For instance, early last year we discussed one appellate court's multiple opinions on the questions in the Eaton case. (See client alert here.) The Supreme Court declined an opportunity to reviewEaton and provide guidance.

The confusion in the courts from multiple tests is evident in a survey of recent court opinions. For instance, the majority of a 2011 8^th Circuit panel extended its 2000 Concord Boat decision on loyalty pricing to bundled discounts in Southeast Missouri Hospital v. C.R. Bard, Inc. A grant of summary judgment for the defendant was affirmed because buyers of hospital products were not required to buy 100 percent of their needs to obtain discounts and could choose to buy from competitors at any time. The dissent would have remanded for further consideration of evidence that buyers felt forced to purchase from the defendant because the discounts were substantial. Also, the dissent would have applied the 9^th Circuit's discount attribution test from Cascade Health to the bundled discount claims. In March 2014, the New Jersey District Court in Eisai Inc. v. Sanofi-Aventis U.S. followed the 3^rd Circuit's Eaton case to determine how to characterize a drugmaker's loyalty discounts to hospitals. Unlike Eaton, however, the court found that price was the dominant method of exclusion—and so the defendant-friendly price-cost test applied—despite the plaintiff's arguments that the defendant's requirements for display of the drugs in a hospital's formulary could not be distinguished from Eaton's requirements regarding truck builders' databooks.

The workshop devoted the morning and one session after lunch to a discussion of the economics of such pricing practices. Several economists explained models under which such pricing practices might be anticompetitive. A smaller number discussed the limited research dedicated to explaining the usual goals and effects of such programs. The programs usually get distributors to better focus on a manufacturer's products, through methods like sales training and shelf space, and influence the resale price, either higher or lower, to be more consistent with the manufacturer's desired brand image. Still, because these programs are embodied in private contracts and their effects are entwined with other economic factors, there is very little real world evidence from which to draw conclusions.

Later in the day, the workshop turned to a discussion of the law of such practices and predictions about how courts will treat them going forward. Some speakers supported the price-cost test or some other limited or structured rule of reason. Several others would open up the analysis to consider "raising rival's costs" theories under something more like a full rule of reason. As with the economists, there were disagreements among the lawyers about the usual real-world facts concerning the elements of these programs and their usual effects. As expected, those speakers who were more sanguine about the likely effects of such programs emphasized the need for clear rules that did not chill practices that lowered prices for customers. Those more suspicious of such programs advocated for closer scrutiny. The workshop would have benefited from input not just from economists and lawyers, but from real-world pricing managers who have implemented such programs.

The workshop was a useful discussion of the antitrust issues potentially raised by these common marketing practices. There were no definitive answers or specific guidance offered by the antitrust enforcers; however, all the enforcers who spoke indicated interest in further exploring the issues raised by such programs.

So, companies looking to implement loyalty or bundled discounts, especially those with arguably high market shares, should continue to seek advice before doing so.