The U.S. Federal Trade Commission has made a settlement agreement with Invibio, Inc. ("Invibio"), a British-owned supplier of implant-grade polymer, to resolve allegations that the company used exclusive supply agreements to maintain its monopoly power in the market for high-tech polymer material. In the Matter of Victrex plc, et al.
This is one of several recent matters in which U.S. antitrust enforcers have challenged exclusivity provisions that allegedly prevented a dominant supplier's customers from purchasing products from rivals. In the government's view, the challenged provisions impeded competitors from developing into effective rivals, thus reinforcing the dominant supplier's monopoly position.
Invibio supplies medical device makers with polyethertherketone ("PEEK"), a high-performance polymer used to construct spinal, orthopedic, and other human implants. From the time that Invibio first began supplying implant-grade PEEK, it entered into long-term supply contracts with its customers. Many of those contracts included exclusivity terms requiring medical device makers to use only Invibio's PEEK for their implantable devices, and restricting medical device makers' ability to switch to an alternative PEEK supplier even after the contract expired.
Invibio was the sole supplier of implant-grade PEEK until the late 2000s, when Solvay Specialty Polymers LLC ("Solvay") and Evonik Corporation ("Evonik") entered the market. Solvay and Evonik began selling PEEK at prices significantly below those of Invibio. In response, Invibio allegedly sought to broaden the exclusivity provisions in its customer agreements. If a customer refused to accept Invibio's terms, Invibio threatened to cut off PEEK supply for the customer's existing products, refuse to sell Invibio's new brands of PEEK to the costumer, and withhold support necessary for obtaining FDA approval. According to the Commission, these threats were effective because medical device manufacturers could not quickly obtain regulatory approval to use a new source of PEEK for existing products. In some cases, Invibio offered a manufacturer a "small price discount or other benefit" in exchange for exclusivity. According to the FTC complaint, these exclusive contracting practices gave Invibio the ability to maintain a 90 percent market share and high prices for PEEK despite entry by Solvay and Evonik. FTC also asserted that Invibio's exclusive agreements hampered incentives for Solvay and Evonik to develop new and improved forms of PEEK.
The FTC proposed consent order generally prohibits Invibio and its parent Vitrex from entering into contracts with certain exclusive clauses in the future. The prohibition includes provisions that set minimum purchasing requirements, condition discounts on a customer's purchase from Invibio, and provide retroactive volume discounts. The consent order also allows consumers to modify existing contracts and requires Invibio to set up an antitrust compliance program for employees.
Prior Government Enforcement Actions With Respect To Exclusive Agreements
This case follows on the heels of a court of appeals affirming a similar FTC challenge, McWane v. FTC, 783 F.3d 814 (11th Cir. 2015). The Commission determined that McWane, a domestic manufacturer of iron pipe fittings, unlawfully maintained monopoly power through a rebate program. The rebate program in McWane was akin to an exclusive dealing arrangement, in that it deprived distributors of rebates and cut off supply if distributors bought fittings from competitors. The Commission concluded that the rebate program limited a competitor's ability to compete for government-funded projects that required domestic fittings. Other enforcement actions in recent years include the Department of Justice's enforcement action against a leading supplier of dental implants, United States v. Dentsply, 399 F.3d 181 (3d Cir. 2005), and the FTC's consent agreement with a major distributor of pool equipment, In re Pool Corp, FTC File No. 101 0115 (Jan. 10, 2012).
The Commission's consent order with Invibio demonstrates the government's willingness to challenge exclusive supply contracts, particularly if a supplier has a large share of the market or uses threats to coerce customers into accepting exclusivity provisions.
Exclusivity provisions are analyzed pursuant to the rule of reason: an exclusivity provision is unlawful only if it has the probable effect of substantially lessening competition. If an exclusivity provision results in customers purchasing more than they otherwise would from a dominant supplier and less than it otherwise would from new entrants or smaller rivals, this could support a finding of an effect on competition.
A supplier may be able to identify procompetitive benefits that would help to justify an exclusivity provision. However, the government enforcement agencies typically will credit only those procompetitive benefits that could not be achieved through less restrictive means. This poses a challenge for a supplier seeking to justify exclusivity provisions, as it may be possible to achieve many of the benefits of exclusivity provisions through the use of long-term volume commitments, volume discounts, or other less restrictive measures.
A company with a significant market share that seeks to enter into or retain customer contracts with exclusivity provisions may want to consider taking steps to identify clearly the procompetitive reasons for the exclusivity provisions, with particular attention to why other, less-restrictive provisions could not achieve those benefits, and document diligently and consistently those procompetitive benefits in its everyday business documents.
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