- District Court Dismisses FTC Complaint Seeking Divestiture and Disgorgement of $100 Million for Consummated Acquisition
- September 27, 2010 | Authors: Michael H. Knight; Geoffrey D. Oliver; Evan P. Singer
- Law Firms: Jones Day - Washington Office ; Jones Day - Dallas Office
In a decision that was filed under seal in late August but released publicly just last week, the U.S. District Court for the District of Minnesota dismissed with prejudice the complaint filed by the Federal Trade Commission (FTC) and the State of Minnesota challenging the already-consummated acquisition by Lundbeck, Inc. (formerly Ovation Pharmaceuticals, Inc.) of the pharmaceutical product NeoProfen from Abbott Laboratories. The FTC and Minnesota alleged that the acquisition substantially lessened competition between NeoProfen and Lundbeck's previously acquired product Indocin IV. Following trial on the merits, the District Court held that the FTC and Minnesota failed to prove that NeoProfen and Indocin IV are in the same relevant product market. The decision highlights the particular difficulties of proving what products compete (and thus prove anticompetitive effects) in the health care industry, and is likely to be of particular interest to companies in industries in which the individuals responsible for selecting products are not those paying for the products. This decision also may set back the FTC's efforts to pursue aggressive remedies, such as disgorgement of allegedly unlawfully acquired profits, for antitrust violations.
The FTC attracted substantial attention when it filed its complaint in this case in December 2008. Lundbeck had completed its acquisition of NeoProfen almost three years earlier. Although the FTC has challenged several consummated acquisitions in recent years, this still is relatively rare. The FTC emphasized its allegation that, after eliminating competition from NeoProfen through the acquisition, Lundbeck increased its price for Indocin IV by almost 1300%. Furthermore, in a highly unusual move, the FTC's complaint sought a court order to force Lundbeck to disgorge allegedly unlawful profits earned as a result of the acquisition. In addition to the prospect of potentially having to unwind a consummated acquisition, Lundbeck faced the possibility of being ordered to pay out more than $100 million in allegedly illegal profits. This marked the first time the FTC sought to obtain a monetary remedy in connection with a consummated acquisition.
Following trial on the merits, the District Court dismissed the complaints filed by the FTC and Minnesota and entered judgment for Lundbeck. The court held that the FTC and Minnesota "did not satisfy their burden of demonstrating that NeoProfen and Indocin IV are in the same product market." The court found that the relevant consumers are neonatologists who select the products to be used in treatment, not the hospitals that pay for the products (as asserted by the FTC and Minnesota). The court gave significant weight to the views of various neonatologists, pharmacists, and hospital pharmacy contracting representatives, who testified that a price differential between Indocin IV and NeoProfen or a change in the price of one of the products would not lead them to switch between the two products. The court also noted that the FTC and Minnesota had not offered any expert opinion as to the cross-elasticity of demand between Indocin IV and NeoProfen. Having failed to establish the relevant product market, the court ruled that the FTC and Minnesota "failed to demonstrate that Lundbeck's acquisition of the rights to NeoProfen substantially lessened competition or tended to create a monopoly" in a relevant market.
The FTC and Minnesota have not yet announced whether they will appeal this decision.
This decision is significant for at least two reasons. First, the decision emphasizes the difficulties with proving a relevant market in the health care industry or in other industries in which consumers do not pay directly for the products at issue. Where product choices are made by persons not paying for the products, it can be difficult to establish the likely effect of an increase in price on purchasing choices. In most cases in the health care industry, courts have accepted to some extent the FTC's argument that the payor should be regarded as the customer. This court's differing approach may reopen that debate.
Second, the decision highlights the challenges to an effort to obtain monetary remedies more frequently. When the FTC announced its complaint against Lundbeck, then-Commissioner Leibowitz wrote in a separate statement, "Recent literature on the subject makes a persuasive case for seeking disgorgement more frequently. I strongly agree: the Commission should use disgorgement in antitrust cases more often." But pursuit of disgorgement requires the FTC to prove its case before a federal judge. The FTC brings most challenges to past or ongoing conduct and consummated mergers before an administrative law judge within the FTC, where the Commission itself acts as the ultimate factfinder, subject to appeal to a U.S. Court of Appeals. However, to obtain disgorgement or other monetary relief, the FTC must file a complaint in federal district court, where a district court judge is the factfinder. The decision in Lundbeck is a reminder that the FTC must first persuade a district court judge of the merits of its underlying antitrust case before it can pursue a novel monetary remedy like disgorgement.