A couple of weeks ago, I posted a blog discussing the FTC’s complaint against Ovation. One of the interesting factors of that complaint was the FTC’s decision to seek disgorgement of profits allegedly improperly gained as a result of the challenged acquisition. The FTC has only infrequently sought disgorgement in antitrust matters and it is interesting that it has chosen to do so in this consummated merger challenge. Seeking disgorgement raises several practical issues as to the methods the FTC might use to estimate the appropriate amount of disgorgement as well as of course the policy issues as to when disgorgement is appropriate and what implication this has for follow-on suits that might arise should the FTC be successful.
The practical issues associated with seeking disgorgement fall of course in the well-trodden landscape of damages in antitrust cases. In this case, the FTC will likely argue that the appropriate level of disgorgement is the consumer overcharge that allegedly occurred as a result of the merger. Of course, this is very similar to what occurs in many antitrust cases, particularly when the plaintiffs are customers. In such cases, damages experts generally gather information on what actual prices have been during the period and in the geographic area allegedly implicated by the challenged behavior. The key challenge then is developing a reasonable estimate as to what the price would have been “but-for” the challenged behavior. Economists use many methods for these estimates – for example, using prices outside the impacted geographic area or prices before or after the alleged behavior occurred as benchmarks. This frequently requires the use of econometrics or other statistical techniques to control for other factors that might impact pricing. The key areas of dispute are generally whether the appropriate benchmark is being used and whether other factors are taken into account. In this case, a key issue is likely to be whether the pre-merger price of $35 is the relevant benchmark or not.
Price overcharges are not of course the only measure of damages in antitrust cases – particularly when competitors bring monopolization cases, lost profits for the competitor may also be used as the measure of damages. Moreover, even when overcharges are the relevant measure, issues can arise as to overcharges at which level of the supply chain and who is likely to be damaged.
Of interest in damages matters generally (and in this case in particular) is that damages almost always relate to overcharges on sales that did occur but only infrequently are there attempts to estimate what additional damages might exist a result of sales that did not occur. Simple demand theory would of course indicate that higher prices lead to lower sales. Consumers who would have made sales at lower prices thus lose the value they place on the product above the “but-for” price. For economists, it is these lost sales that create the economic inefficiency associated with from anticompetitive behavior but as noted damages generally do not take into account these lost sales – and for good reason. First, estimating these lost sales requires an estimate of demand, which can often be very difficult. Second, the damages associated with lost sales generally will be small relative to the overcharges on actual sales. Third, sellers of course give up potential profits on those sales and one must consider whether these “lost” profits should also be taken into account. Fourth, identifying who are the “victims” who did not purchase is difficult.
Of interest, is whether in a disgorgement case, it would be appropriate to try to take into account these issues since the government in theory should be going after all damages and does not have to worry about identifying the precise victims. Of course, all of the other issues mentioned above still hold making it a challenge even such matters. However, in this case, the alleged overcharge is so large that one wonders whether there would be some sizeable amount of lost sales (unless demand is very inelastic). Certainly, one might think that the FTC would try to play up the specter in the liability part of the case that the overcharges might mean less care for premature babies. It will be interesting to see if the FTC at least raises this issue – even if it does not try to specifically quantify the harm.
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