The Federal Trade Commission announced a puzzling complaint filed in a new consummated merger & monopolization case in the U.S. District Court for the District of Minnesota. Here’s the explanation of the case from the press release:

The Federal Trade Commission today filed a complaint in federal district court challenging Ovation Pharmaceuticals, Inc.’s January 2006 acquisition of the drug NeoProfen, which eliminated its only competitor for the treatment of a serious and potentially deadly congenital heart defect affecting more than 30,000 babies born prematurely each year in the United States. When it acquired NeoProfen, Ovation already held the rights to Indocin I.V., the only other drug used to treat this serious condition. After ensuring that it would not face competition from NeoProfen, Ovation promptly raised the price of Indocin nearly 1,300 percent, from $36 to nearly $500 a vial. When it launched NeoProfen in July 2006, Ovation set a similarly inflated price.

There are two transactions here.  In the first, Ovation purchased the rights to Indocin from Merck.  In the second transaction, Ovation purchased the rights to NeoProfen from Abbott while NeoProfen was awaiting FDA approval.  NeoProfen was apparently the only potential substitute for Indocin with respect to treatment of PDA in premature babies.  The press release emphasizes the apparent and remarkable 1300% price hike that occurred after the second transaction.

Here’s where things get interesting.  The Complaint challenges the second, Neoprofen transaction on the grounds that it violates both the Clayton Act Section 7 and Section 2 of the Sherman Act, though both Commissioners Rosch and Leibowitz indicate in their Concurring Statements that they would also challenge the consummated Indocin transaction with fell below the HSR reporting thresholds.  I don’t want to comment on the Section 7 case associated with the NeoProfen transaction.  The theory appears reasonable in that the FTC alleges that it is challenging a 2-1 merger in drugs for the treatment of PDA in premature babies.  This will ultimately be resolved on the facts.  But there is no reason to believe that the theory is flawed.  I don’t think the same can be said for the statements from Comissioners Rosch and Leibowitz that are largely dedicated to letting the world know that they would also challenge the Indocin/Merck transaction.

Commissioners Rosch‘s Concurring Statement, in particular, has me puzzled on two fronts: (1) the proposed theory of harm that he would support in pursuing the Indocin transaction which amounted to a transfer of the drug from Merck to Ovation rather than a combination of horizontal competitors, and (2) why is this a monopolization case?

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William Kolasky (Wilmer Hale, and one of the frontrunners for the DOJ AG spot according to the rumormill) has an interesting piece in the Antitrust Source on the DOJ Section 2 Report arguing that while:

even the objecting Commissioners would probably agree that the Justice Department Report does a good job analyzing particular types of exclusionary conduct, such as price predation, tying, bundled and loyalty discounts, refusals to deal, and exclusive dealing …. The principal focus of the three Commissioners’ objections is not to this part of the Report, but rather to the general standard it proposes for exclusionary conduct. And, in that regard, their concerns appear to have some merit.

The most interesting paragraph in the article, and the one most likely to grasp the attention of the antitrust community, is the closer:

With a new Administration in January, we should have further discussion of the standards the agencies and courts should use in enforcing Section 2. Until then, we should treat the Justice Department’s Report, not as its final word, but rather as a discussion draft, and continue to search for a common standard that both agencies could apply. That was how the European Commission presented its report on Article 82 and abuse of dominance. It is an approach that makes particularly good sense here, so that we do not have the Justice Department applying one, highly laissez-faire standard to single-firm conduct and the FTC a different, more restrictive standard.

There are a couple of ways this might go.  Defenders of the Report might argue that the Section 2 Hearings involved plenty of discussion over the appropriate standards and it is for the FTC to either join the DOJ or offer a better alternative.  Alternatively, the new DOJ could go a bit further than Kolasky’s suggestion here and renounce or reject the Report in some fashion, clearing that path for FTC/DOJ convergence on some new (and presumably more aggressive) standard.  Of course, a third possibility is that the FTC and DOJ continue to apply divergent standards to single firm conduct.  That would be costly.  But if you are of the view that the DOJ Section 2 Report offers a good set of substantive monopolization rules and provides valuable guidance in the area of antitrust law that needs it the most — I hold this view — it is not so clear to me that the uncertainty between agencies is less costly than converging to a yet to be determined and possibly worse set of rules.

At some point, and this goes for the conversation about convergence and divergence between Section 2 and Article 82, we are going to have to have a frank discussion about the optimal monopolization standards.  Yes, institutional design matters here.  The absence of private rights in the EU compared to the high cost of false positives in the United States given treble damages and private actions means that the domestic standards should be less restrictive than those overseas.  But the discussion shouldn’t stop there.  Private rights of action and generous remedies in the U.S. system is only one reason to optimal monopolization standards should under-deter.  The more general point is an Easterbrookian one.  The costs of false positives are higher even without those institutional concerns both because they are self-correcting where as false negatives are not and, importantly but often ignored in this context, we just aren’t very good at distinguishing anticompetitive from pro-competitive conduct in the single firm context yet. That’s as true in Europe as it is in the United States.  It’s the same economics.

Other thoughts on the FTC v. DOJ Section 2 ruckus here and here).