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Eighth Circuit Affirms District Court Against FTC in Lundbeck

Here’s the decision; here is my prior post concerning the district court decision.  I suspect the FTC was fairly confident it would succeed in persuading the panel to reverse.  The appeal turns on whether the district court was clearly erroneous in ruling that the FTC had failed to properly define a relevant market, and in turn, whether evidence of switching between the two drugs (Indocin IV and NeoProfen) by neonatologists (and/or hospitals) supported the a product market that encompassed both drugs.  The Eighth Circuit concluded the district court’s findings were not clearly erroneous, and thus, affirmed its judgment.

Here, I think, is the key paragraph on the FTC’s argument about behavior of marginal consumers and market definition:

Further attacking the district court’s reliance on consumer preference, the FTC argues that the court ignored the ability of marginal customers to constrain prices.  Whether there are enough marginal consumers to constrain prices is a factual question
that requires analyzing consumer-demand and profit-margins. See Tenet Health Care Corp., 186 F.3d at 1050-51, 1054 (marginal consumer substitution and profit-margins must be supported with more than “common sense.” This court pointed to the “compelling and essentially unrefuted [critical loss analysis] evidence that the switch to another [product] by a small percentage of [consumers] would constrain a price increase” as evidence of marginal consumer’s ability to constrain prices in a broader geographic market); see also United States v. Engelhard Corp., 126 F.3d 1302, 1306 (11th Cir. 1997) (requiring evidence in order to evaluate the possibility that losing marginal customers responsible for high-margin purchases may constrain prices). The FTC offered testimony of one expert explaining that “marginal customers”–neonatologists who are ambivalent between prescribing Indocin IV or NeoProfen–may constrain prices on either drug. Although not addressing this testimony in its fact-findings, the district court did state that it generally found the FTC expert unpersuasive. See Fox v. Dannenberg, 906 F.2d 1253, 1256 (8th Cir. 1990) (“The question of the expert’s credibility and the weight to be accorded the expert testimony are ultimately for the trier of fact to determine.”). Critically, the
district court did credit Lundbeck’s expert who stated that the number of neonatologists willing to switch between the drugs based on price was insufficient to exercise price constraint. See Pioneer Hi-Bred Int’l v. Holden Found. Seeds, Inc., 35 F.3d 1226, 1238 (8th Cir. 1994) (“[This court] will not disturb the district court’s decision to credit the reasonable testimony of one of two competing experts.”).
Lundbeck’s expert was clear that even those neonatologists who might be willing to switch in response to a price difference would do so only if there was a very significant price decrease, indicating that the level of cross-elasticity was low.

The Eighth Circuit panel also quickly dismissed the Commission’s arguments based upon internal documents and apparent functional similarity between the drugs.   On the internal documents, here is the relevant portion of the opinion:

According to Lundbeck’s internal documents, it anticipated that a dramatic price increase of Indocin IV would draw generic competitors into the market. As a result, it ceased promoting Indocin IV, focusing instead on increasing the market share of NeoProfen–as a superior PDA treatment. The FTC argues that this business strategy–to market NeoProfen as better than Indocin IV–means that Lundbeck viewed NeoProfen as a direct competitor to Indocin IV, and thus the drugs must be in the same product market. However, Lundbeck’s strategy to discontinue promoting Indocin IV in favor of NeoProfen can also be interpreted to mean that while Indocin IV was vulnerable to generics, NeoProfen was not, and thus the products are not interchangeable. If there are two permissible views of evidence, the factfinder’s choice between them is not clearly erroneous. Anderson, 470 U.S. at 574.

Judge Kopf offers up an interesting and reluctant concurrence, which appears here in full:

When defining the product market, and considering the issue of cross-elasticity of demand, the district court relied heavily upon the testimony of doctors that they would use Indocin or NeoProfen without regard to price. Admittedly, those doctors had no responsibility to pay for the drugs or otherwise concern themselves with cost. Thus, the doctors had scant incentive to conserve the scarce resources that would be devoted to paying for the medication. Why the able and experienced trial judge relied upon the doctors’ testimony so heavily is perplexing. In an antitrust case, it seems odd to define a product market based upon the actions of actors who eschew rational economic considerations. See, e.g., F.T.C. v. Tenet Health Care Corp., 186 F.3d 1045, 1054 & n.14 (8th Cir. 1999) (observing that “market participants are not always in the best position to assess the market long term” and that is particularly so where their testimony is “contrary to the payers’ economic interests and thus is suspect”).  That oddity seems especially strange where, as here, there is no real dispute that (1) both drugs are effective when used to treat the illness about which the doctors testified
and (2) internal records from the defendant raise an odor of predation. The foregoing having been said, the standard of review carries the day in this case as it does in so many others. As a result, I fully concur in Judge Benton’s excellent opinion.

It will be interesting to see whether the Commission press release on this doubles down on its earlier assertion that “Ovation’s profiteering on the backs of critically ill premature babies is not only immoral, it is illegal.”

Filed under: antitrust, federal trade commission, merger guidelines, mergers & acquisitions