United States: Second Circuit Tells Pharmacies The Antitrust Claims They Cooked Up Need More Than A Little Morton Salt

Last Updated: December 22 2015
Article by Brian C. Kimball

Cash & Henderson Drugs, Inc. v. Johnson & Johnson,1 recently decided by the Second Circuit, concerns Robinson-Patman Act2 claims that retail pharmacies brought against pharmaceutical manufacturers. The retail pharmacies alleged that since the early 1990's the manufacturers had charged them higher prices for pharmaceuticals than the prices charged to certain favored purchasers, like HMO's. That conduct, the pharmacies argued, violated § 2(a) of the Act.

Section 2(a) concerns price discrimination.   A seller violates § 2(a) when it charges different prices to different purchasers of the same or similar commodities and by doing so "substantially . . . lessen[s] competition . . . ." The manufacturers in Cash freely admitted that they had sold brand name drugs to different purchasers at different prices.   The remaining issue for the Second Circuit, then, was whether that "price discrimination had a prohibited effect on competition."

The pharmacies had proposed to the district court a procedure to identify customers lost to the favored purchasers as a result of the price differences. The procedure was a matching process that the magistrate judge approved and supervised. A "match" was a person who had filled a prescription at a favored purchaser within six months of when that person had last filled a prescription at the plaintiff pharmacy. In other words, a match was someone who stopped buying his or her pharmaceuticals from the plaintiff pharmacy and started buying from the favored purchaser.

After extensive discovery, matches were identified, but not many. The number was disappointing to the plaintiffs and unimpressive to the district court. The district court considered the effect of the price discrimination on competition "di minimis." The district court dismissed the § 2(a) claims on summary judgment. On appeal, the Second Circuit disagreed with the pharmacies' interpretation of two key Supreme Court decisions and upheld the district court's decision.

The pharmacies argued that the Supreme Court in the 2006 decision of Volvo Trucks North America v. Reeder-Simco GMC, Inc.3 held proof of competitive injury only required a showing of "substantial[]" differences in prices charged. The Second Circuit disagreed. In its view, the Volvo substantiality requirement focused on the frequency the plaintiff and the favored purchaser competed head-to-head and the frequency in which sales were actually diverted from the plaintiff to the favored purchaser. Based on that interpretation of Volvo, the Second Circuit believed the pharmacies' di minimus losses, as proven by the matching procedure, demonstrated that the manufacturers' price discrimination had not substantially affected competition.

The pharmacies also argued that the Morton Salt inference should have saved their claims from summary judgment. In the 1948 Morton Salt4 decision, the Supreme Court held in certain circumstances direct proof of competitive injury was unnecessary if the harm was "obvious" and "self evident." That holding was refined in the 1983 Supreme Court decision in Falls City Industries, Inc. v. Vanco Beverage, Inc.5 In Falls City, the Court held an inference of competitive injury arose upon a showing of a "substantial price difference . . . over a significant period of time."

The pharmacies argued that the extensive period of price differences they had shown raised the Morton Salt inference. That inference, according to the pharmacies, became irrebuttable when the matching procedure revealed actual lost sales, even though few in number. The Second Circuit held that the Morton Salt inference is never completely irrebuttable because the "ultimate question is whether there has been an injury to competition." In the Second Circuit's view, the matching procedure had shown that there was no such injury to competition, or at least not a "substantial" injury, as the Act itself requires.

The primary takeaway from Cash is that cold, hard facts trump judicially created inferences if those facts prove the § 2(a) conduct only had a minor effect on competition.

Footnotes

1 799 F.2d 202 (2nd Cir. 2015).

2 15 U.S.C. § 13.

3 546 U.S. 164 (2006).

4 334 U.S. 37 (1948).

5 460 U.S. 428 (1983).

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