Monopoly Money by Carlton A

TUESDAY, OCTOBER 30, 2007

SINCE 1888 OFFICIAL NEWSPAPER OF THE LOS ANGELES SUPERIOR COURT AND UNITED STATES SOUTHERN DISTRICT COURT Focus Monopoly Money By Carlton A. Varner the area and provided acute, secondary ‘Le Page’s’ Lead and tertiary care. The plaintiff owned a In Le Page’s, the plaintiff was the mar- undled discounts, the practice of selling smaller hospital that provided only acute ket leader for private-label transparent tape. Bmultiple products for a single price, are and secondary care. The defendant had The defendant, 3M, had a monopoly on the ubiquitous in America, ranging from Happy 90 percent of the market for tertiary care, manufacture of Scotch tape, manufactured Meals at your local McDonald’s to a single and 75 percent of the market for the other some private-label tape and manufactured price for telephone, Internet and television services. many other products, such as health care service from your local cable or satellite The defendant offered insurers and pre- and automotive products. 3M’s bundled- provider. ferred provider organizations in the area a rebate structure offered progressively Courts have struggled to develop an ana- 35 percent to 40 percent discount if they higher rebates when customers increased lytical model to determine when bundled contracted exclusively with it for all three purchases across its multiple product lines. discounts violate antitrust laws. They do services. The defendant’s offered discount Le Page’s could not match these discounts not fit the tying paradigm because there is was smaller if they also contracted with because it did not offer the same diverse no conditioning; that is, a buyer the plaintiff. product line. Thus, its market share and can purchase the products in Courts have The plaintiff filed suit, and the profitability declined. Le Page’s filed suit, the bundle separately, albeit at struggled to court used the Le Page’s rule to saying that the bundled-rebate program higher individual prices. Like- develop an instruct the jury on the bundled- was an unlawful attempt by 3M to maintain wise, unless the discount causes analytical discount issue. The jury rejected its monopoly power over Scotch tape. The the seller’s prices to be below the model to the plaintiff’s claims of monopo- jury found in favor of Le Page’s. seller’s incremental cost, bundled lization, conspiracy to monopo- On appeal, 3M argued that its rebate discounts do not constitute pred- determine lize and exclusive dealing but structure was legal as a matter of law be- atory pricing. when awarded damages of $5.4 mil- cause it never priced below cost. 3M relied bundled lion each on attempted monopo- heavily on Brooke Group v. Brown & Wil- 9th Circuit Answer discounts lization, price discrimination liamson, 509 U.S. 209 (1993), which held The 9th Circuit addressed and violate and tortious interference claims. that a predatory-pricing claim in a single- resolved these issues in Cascade The defendant’s appeal centered product case required below-cost pricing Health Solutions v. Peace Health, antitrust on the conduct element of the coupled with the likelihood of recoupment 2007 DJDAR 13732 (9th Cir. laws. attempt-to-monopolize claim, of its losses after the period of predation. Sept. 4, 2007). It held that only asserting that the District Court The 3rd Circuit rejected the analogy to when the discount at issue results in a incorrectly instructed the jury about when Brooke Group, stating that it did not in- price below the seller’s incremental cost bundled discounting can amount to anti- volve the bundling issue and should not for the competitive product at issue do competitive conduct. apply to cases in which the defendant had bundled discounts or rebates constitute In a decision by Judge Ronald M. monopoly power and thus could recoup its exclusionary conduct under Section 2 of Gould, the 9th Circuit began by noting losses readily. Instead, it permitted the jury the Sherman Act. that bundled discounts are generally pro- to find an antitrust violation when - abun In doing so, the 9th Circuit “declined to competitive because buyers “get more for dled rebate is offered by a monopolist and follow” a recent decision of the 3rd Circuit, less” and sellers often achieve some cost thus forecloses portions of the market to a Le Page’s Inc. v. 3M, 324 F.3d 141 (3rd Cir. savings. Here, however, where the plain- competitor that does not offer the full range 2003), which banned such discounts when tiff apparently showed it could provide of products. offered by a monopolist, without regard primary and secondary care at a lower Citing the recent report by the bipartisan to whether such discounts were below the price than the defendant, bundling may Antitrust Modernization Commission, the seller’s costs. This clear split in the circuits have been anti-competitive, because it court criticized the Le Page’s rule as pro- sets up the bundled-discount issue for reso- was used to exclude a less-diversified but tecting a less-efficient competitor at the ex- lution by the Supreme Court. more-efficient rival. The issue, accord- pense of consumer welfare. Cascade involved the pricing of hospi- ing to the court, was how to draw the line The Supreme Court, according to the 9th tal services in Lane County, Oregon. The between lawful and unlawful bundling in Circuit, has emphasized repeatedly that an- defendant owned the largest hospital in such cases. titrust law should protect competition, not competitors. Absent the “clearest” show- approach, it wrote, “the full amount of the that the tying product was the tertiary ser- ing that injury to the competitive process discounts given by the defendant on the vices and the tied products were the pri- will result, courts should leave “unham- bundle are allocated to the competitive mary and secondary services. The lower pered” pricing practices that might benefit product or products.” court’s grant of summary judgment was consumers. Because bundled discounts are “If the resulting price of the competitive based on the absence of coercion, with the price discounts, the 9th Circuit concluded product or products is below the defen- court finding that the defendant did not co- that the exclusionary conduct of an attempt dant’s incremental cost to produce them, erce the purchase of the tied products by to monopolize claim is not satisfied unless the trier of fact may find that the bundled offering a price discount. the discount results in prices that are below discount is exclusionary for purposes of The 9th Circuit rejected the plaintiff’s an appropriate measure of cost. section 2,” the court wrote. assertion, based on Heatransfer Corp. v. This standard, said the court, makes Volkswagenwork, A.G., 553 F.2d 964 (5th Measuring Pricing the defendant’s bundled discounts lawful Cir. 1977), that, as a third party to the tying The court considered the various price/ unless the discounts have the potential to arrangements, it need not show coercion. cost tests that could be used. The 9th Cir- exclude a hypothetical equally efficient It did, however, find a disputed factual is- cuit rejected the defendant’s suggested test producer of the competitive product. The sue regarding coercion, such that summary - the discounted price of the entire bundle court concluded that the appropriate mea- judgment was inappropriate. must be below the bundling firm’s incre- sure for incremental costs is average vari- Although higher prices to purchase the mental cost to produce the entire bundle - able costs. tied products separately do not, standing as one that would allow discounts that harm The court also addressed the plaintiff’s alone, create a fact issue on coercion, the competition to escape liability, because an price-discrimination and tortious-inter- fact that only a trivial portion — 14 percent equally efficient competitor could be- ex ference claims, as well as the plaintiff’s — of the insurers purchased the services cluded. appeal of the lower court’s grant of sum- separately may indicate some degree of co- It also rejected a test from Ortho Diag- mary judgment to the defendant on its tying ercion. It also may indicate that the package nostic Sys. Inc. v. Abbott Labs, 920 F. Supp. claim under Section 1 of the Sherman Act. discount is as effective as an outright refus- 455 (S.D.N.Y. 1996). Under the Ortho test, The price-discrimination claim was based al to sell the tying product — the tertiary an above-cost discount would be anti-com- on Oregon law patterned after the fed- services — separately. This fact, coupled petitive if the plaintiff proved that it was an eral Robinson-Patman Act. Under Brooke with the market power of the defendant as equally efficient producer and was exclud- Group, this federal price-discrimination the only provider of tertiary services in the ed only because the defendant sold in more law requires that in primary line cases relevant geographic area, was sufficient to product markets. (those between sellers), the plaintiff must create a factual issue for the 9th Circuit to The downside to the Ortho test, how- show below-cost pricing and the likelihood vacate the summary judgment in favor of ever, is that it does not provide adequate of recoupment. the defendant on the tying claim. guidance to sellers, because it looks to the After finding that the Oregon Supreme Although the Supreme Court denied cer- costs of potential plaintiffs — to which a Court likely would follow Brooke Group, tiorari in Le Page’s, Cascade has created an potential defendant considering a bundled the 9th Circuit vacated the jury verdict on environment in which the antitrust legality discount would not have access. It also the price-discrimination claim. It had the of bundled pricing likely will have to be ad- would, according to the 9th Circuit, require same defect as the attempt-to-monopolize dressed by the Supreme Court soon. multiple suits to determine the legality of a claim: the failure of the jury instruction to single bundled discount. address the below-cost issue. The verdict Carlton A. Varner is a partner of Sheppard The court adopted the “discount attribu- on the tortious interference, based as it was Mullin Richter & Hampton in Los Angeles, tion” standard advocated by the Antitrust on antitrust violation, was also vacated. where he specializes in antitrust counseling and litigation, as well as complex business Modernization Commission. Under this In its tying claim, the plaintiff asserted litigation.