Disgorgement and Damages in Ovation

Mary Coleman —  15 January 2009

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.

RELATED POSTS:  Josh Wright, No Ovation for FTC’s Latest Enforcement Theory

7 responses to Disgorgement and Damages in Ovation

  1. 

    Then I guess this is an issue that won’t come up in this matter. One wonders though if private plaintiffs would have the incentive to tackle this issue – as noted, they usually do not.

  2. 

    Mary — yours is a problem for private plaintiffs, and an interesting one. Disgorgement is just that–disgorgment of unlawful profits. The remedy relies on equity, not law, for its basis. The fact that Ovation lost sales because of the higher price is irrelevant to them–that’s the deadweight loss, not a shift in surplus from customers to them. Disgorgement seeks *only* to divest them of the profits they made, nothing more.

  3. 

    Just another thought – it is interesting that the cases where the potential for lost sales due to higher prices are likely to be most important and interesting – i.e., when the price increase is large – are also the times when the assumptions one makes about the shape of demand and thus the size of the volume loss matters more. As I noted, in this case, there might be some ability to actual try to estimate what happened to demand and the growth in demand rather than just rely on the shape of demand. Of course, all of this assumes one can show that the price change was due to the challenged conduct which has been noted itself will be a challenge (and of course impacts not only any attempt to estimate damages from lost sales but also damages from actual sales).

  4. 

    No – not at all. First, the demand issue has little impact on seeking disgorgement related to sales that actually occurred. What I was discussing was whether or not one should seek damages for sales that did not occur as a result of the price increase. Clearly this is most attractive when there is a large price increase and thus more likely to be higher lost sales but it also makes estimating demand and thus lost sales more difficult as usually we try to estimate demand within a relative small range of price changes (although clearly one could try a range of alternative formulations for demand to get a range of possible estimates).

  5. 
    antitrust entity 15 January 2009 at 4:57 pm

    Comment 2 puzzles me. I agree that it may be hard to understand what would happen to demand if price rose so much, in the sense that the magnitude of the change in the quantity sold may be difficult to estimate with precision. But do you truly mean to say that this presents a “problem for even pursuing this”? Are you suggesting that the FTC should be MORE reluctant to pursue disgorgement when the alleged price increase is high then when it is low? Would you apply the same theory to a private damages action, and argue that a court should be particularly cautious in awarding damages when customer injury is likely to be very high?

  6. 

    I agree that demand is likely to be fairly inelastic particularly for a product like this but given the large price increase, even a very low elasticity would lead to a fairly sizeable change in demand. They are claiming a price increase of almost 1000%. Say the elasticity of demand were only -0.1 (very low) – you could still end up with a very high % reduction depending on the shape of the demand curve.

    However, this raises another problem for even pursuing this – trying to understand what demand would look like with such a large change is likely to be hard. Of course, one thing they could do is see what happened to sales after the price increased – did they go down or did the growth rate significantly decline?

    I also agree that proving the baseline price is likely to be the real challenge here.

  7. 

    From the halls of rank speculation, wouldn’t we expect these drugs to have fairly inelastic demand? It’s for treating babies with a condition where the alternatives are (a) surgery or (b) death and is in many cases likely paid for by insurance.

    What may be more difficult is proving the baseline price but for the second acquisition. Here, Comm’r Rosch’s theory that the first transaction was also a violation of Section 7 (by removing pricing constraints) would have, if used, avoided this proof problem because the price originally charged would then be a very good benchmark.