Welcome to the Antitrust Antidote—a quarterly publication analyzing significant U.S. antitrust decisions from legal and economic perspectives. Authored by former Federal Trade Commission (FTC) enforcer Koren W. Wong-Ervin with former FTC economist co-authors Jeremy Sandford and Nathan Wilson, alternating each quarter. The title of this series, “Antitrust Antidote,” while mostly meant to be humorous (perhaps limited to those who have heard of Koren’s “let’s talk economics” as a cure for a bad day), also refers to the practical guidance we aim to provide throughout the series. We hope you enjoy it!
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There were a number of decisions from April-May 2024, covering topics such as (1) the use of the SSNIP test in monopolization (as opposed to merger) cases, which raises the issue of the proper benchmark for the competitive price; (2) the proper methodologies for damages models; and (3) the Noerr-Pennington doctrine’s application to litigation incentive provisions in licensing agreements. Below we consider these issues in the context of recent decisions in Tevra v. Bayer, MSP Recovery v. Express Scripts, and Realtek v. MediaTek.
In April 2024, a California federal district court denied Bayer’s motion for summary judgment on Tevra’s claims that Bayer entered into an exclusionary scheme with retailers and distributors of over-the-counter flea and tick treatments in order to preserve its monopoly position. The alleged scheme consisted of “a verbal ‘no generics’ agreement with retailers, under which retailers would agree not to sell generic competitors to Bayer’s product, in exchange for monetary compensation.” Bayer also allegedly “punish[ed] those who carried generic competitors to Bayer’s products, and reward[ed] those who did not with discounts, growth bonuses, and trade funds.” Tevra alleged that it was foreclosed from the market despite offering lower prices and a more effective product.
The court rejected Bayer’s argument that Tevra failed to allege a cognizable relevant market. Tevra’s expert defined the market as “sales of imidacloprid spot-on flea and tick treatments by manufacturers to wholesale customers in the United States.” The expert performed a SSNIP test that observed historical sales and price data for Bayer’s imidacloprid topicals and Frontline fipronil topicals in response to the introduction of generic fipronil products in 2011. To aid his comparison, he also applied a “difference-in-differences [“DiD”] regression framework . . . to formally test the comparison between Bayer’s Advantage/Advantix and Frontline.” Bayer challenged both the SSNIP test and the DiD regression, and also argued that Tevra’s expert “fail[ed] to meaningfully account for the extensive record evidence showing competition between Frontline and Bayer’s products.” On balance, the court found Tevra’s expert’s work robust. Crucial to the court’s conclusion appears to have been the exploitation of Frontline’s loss of exclusivity over its active ingredient, which the expert showed had different effects on the price and quantity of Frontline than Bayer’s product.
Interestingly, the court did not address the issue of whether the SSNIP test is well suited in the monopolization (as opposed to the merger) context. While the SSNIP test is widely accepted in the merger context, problems can arise when used in any monopolization case that asserts that the defendant already possesses market power. The key issue is the difficulty of determining the benchmark competitive price.
In general, when a firm possesses monopoly power and actual prices are the base price against which the profitability of a SSNIP increase is tested, the test will define an overly wide market because a rational monopolist would have already increased its price to the point at which further increases are not profitable. In other words, this use of the SSNIP test implicates the “Cellophane Fallacy.” While some have attempted to avoid the cellophane fallacy by using the price at which the alleged monopolist would earn “competitive profits,” this approach is fraught. The analyst must make a determination as to what the relevant “competitive” price is, which may require disentangling the legitimate market power a firm may possess from the illegitimate additional power gained through its allegedly problematic conduct. The difficulty involved has led some to assert that the right benchmark simply allows the firm to recoup its marginal economic costs, which cover the costs of producing the good and the opportunity cost of deploying the firm’s capital towards alternative endeavors. In practice, this approach carries significant risks of defining artificially narrow markets. For one thing, this may ignore the legitimate market power a firm may possess. And, due to the difficulty of estimating firms’ economic costs, some have relied on more readily available accounting cost information, which may commonly understate firms’ economic costs by failing to account for their opportunity costs of capital. This is consistent with the fact that many firms may have material variable accounting margins yet not possess much—if anything—in the way of market power.
In Tevra, these issues may not have been as front and center as in some other matters. The plaintiff’s expert appears to have structured his SSNIP test around the exploitation of natural experiments wherein the competitive environment plausibly changed through the introduction of generic fipronil products. Not observing material impacts on the price and quantity of Bayer products (at least as compared to Frontline) is consistent with those products being materially differentiated.
With respect to the foreclosure analysis, Bayer was able to point to evidence that its contracts could easily be left by customers or not entered into at all, yet the court ultimately concluded that the “evidence of pressure and monetary incentives not to carry imidacloprid generics is enough to create a genuine dispute of material fact as to whether Bayer’s agreements are not short-term and easily terminable.”
MSP Recovery v. Express Scripts
In April 2024, an Illinois federal court issued a decision providing guidance on damages models in the context of class certification. The suit involves MSP Recovery’s allegation that Mallinckrodt (a pharmaceutical manufacturer) and Express Scripts (a drug distributor, among other things) conspired to act anticompetitively and thereby raised the price of one of Mallinckrodt’s drugs—Acthar—to a supracompetitive level. MSP sought to certify two classes seeking damages: (1) a direct purchaser class; and (2) an indirect purchaser class.
Plaintiffs’ damages expert proposed two ways of estimating class damages: (1) the “legacy” approach, which was based on a 2006 document forecasting 8% increases per year over the next five years; and (2) the “benchmark” or “yardstick” approach, which assumed the drug’s price would increase at the same pace as the producer price index (PPI) for pharmaceuticals published by the Bureau of Labor Statistics. The court did not fault either approach as a general matter but rather took issue with the expert’s underlying assumptions; specifically, the assumption (under the “legacy” approach) that prices would have increased at a constant percentage over a 16-year period (from 2006 to 2022); and the unverified assumptions (under the “benchmark” approach) that the “demand and the availability and cost of therapeutic substitutes” are the prime determinants of pharmaceutical prices and that the goods used to produce the PPI are similar in these dimensions to Acthar.
As to the first assumption, the court faulted the expert for relying on the 2006 planning document that was not only “conditional and predictive” as “evident from the fact that it also mooted other possible pricing strategies,” but also only a five-year plan. The court reasoned that, in order for the assumption (that the 8%-increase-per-year pricing strategy would persist for a 16-year period) to be a reliable conclusion, “we would have to know something about (1) what Mallinckrodt expected to be the case from 2006-2011; (2) what in fact was the case during that time; (3) how, if at all, any divergence between (1) and (2) might reasonably be expected to have changed its behavior; and (4) whether and to what extent (1) through (3) can be extrapolated from to predict the but-for price over the succeeding decade”—all questions left unanswered by the defendants’ expert.
With respect to the second assumption, the court stated that, in order to be reliable, the expert needed to have established that (a) the “characteristics of the drugs composing the PPI bear a rough similarity to [the drug at issue],” and (b) “any other likely, non-conspiratorial determinants of price—market power, for instance—were irrelevant, or if not, that they somehow be accounted for, by a regression or otherwise.”
As the court implied, using ordinary course documents or an external reference value as a means of forecasting the future can be sensible. However, in our view, the court also correctly concluded that such projections may be unreliable if reasonably intuitive robustness checks are not conducted to address questions that even impartial observers may have. As with many other aspects of antitrust analysis, assertions are more likely to be compelling if they can be supported with a variety of evidence rather than hinging on individual documents or potentially arbitrary methodological choices.
In May 2024, a California federal district court dismissed (with leave to amend) Realtek’s claims that MediaTek and IPValue conspired to monopolize the market for TV semiprocessors. The claim was premised on a litigation incentive provision in MediaTek’s licensing agreement with IPValue that allegedly incentivized a subsidiary of IPValue to pursue meritless patent litigation against Realtek.
The court concluded that Realtek’s claim was precluded by the Noerr-Pennington doctrine, explaining that First Amendment-protected petitioning cannot form a basis for federal antitrust claims or related state-law claims. The court rejected Realtek’s argument that the license agreement’s litigation bounty is more akin to settlement agreements that courts subject to antitrust scrutiny, notwithstanding their origin in litigation. The court reasoned that an agreement “that promotes and promises payment in support of litigation is ‘sufficiently related to petitioning activity’ to be protected by Noerr-Pennington.”
The court found that the facts did not support the plaintiffs’ argument that the “sham litigation” exception applied. The court reasoned that, by the agreement’s own terms, MediaTek owed IPValue the full amount of the incentive upon the filing of a single initial lawsuit against Realtek (i.e., the litigation incentive did not provide IPValue with any reason to pursue a series of additional lawsuits against Realtek), and Realtek failed to allege other facts plausibly explaining why or how MediaTek caused IPValue to initiate the subsequent lawsuits.
The court explained that the sham exception “encompasses situations in which persons use the governmental process—as opposed to the outcome of that process—as an anticompetitive weapon.” The court concluded that Realtek’s own allegations suggested that the defendants genuinely desired the relief sought in the four proceedings. According to the court, to evade Noerr-Pennington, Realtek must identify the specific ways in which the defendants used the litigation itself—rather than the relief sought therein—as an “anticompetitive weapon.”
In our view, the ruling makes economic sense given that Realtek’s position in the market would only have been meaningfully impacted if the litigation(s) were successful, which would mean that any increased share would have been the result of Realtek’s infringement, not unlawful monopolization.
Nathan Wilson and Koren W. Wong-Ervin
The authors thank Ben Baek for his research assistance. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect the views or opinions of the organizations with which they are affiliated or those organizations’ management, affiliates, employees, or clients.
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| Citation: Nathan Wilson and Koren W. Wong-Ervin, Antitrust Antidote: December 2023-February 2024, Network Law Review, Spring 2024. |
