On April 17, the Federal Trade Commission (FTC) voted three-to-two to enter into a consent agreement In the Matter of Cardinal Health, Inc., requiring Cardinal Health to disgorge funds as part of the settlement in this monopolization case. As ably explained by dissenting Commissioners Josh Wright and Maureen Ohlhausen, the U.S. Federal Trade Commission (FTC) wrongly required the disgorgement of funds in this case. The settlement reflects an overzealous application of antitrust enforcement to unilateral conduct that may well be efficient. It also manifests a highly inappropriate application of antitrust monetary relief that stands to increase private uncertainty, to the detriment of economic welfare.
The basic facts and allegations in this matter, drawn from the FTC’s statement accompanying the settlement, are as follows. Through separate acquisitions in 2003 and 2004, Cardinal Health became the largest operator of radiopharmacies in the United States and the sole radiopharmacy operator in 25 relevant markets addressed by this settlement. Radiopharmacies distribute and sell radiopharmaceuticals, which are drugs containing radioactive isotopes, used by hospitals and clinics to diagnose and treat diseases. Notably, they typically derive at least of 60% of their revenues from the sale of heart perfusion agents (“HPAs”), a type of radiopharmaceutical that healthcare providers use to conduct heart stress tests. A practical consequence is that radiopharmacies cannot operate a financially viable and competitive business without access to an HPA. Between 2003 and 2008, Cardinal allegedly employed various tactics to induce the only two manufacturers of HPAs in the United States, BMS and GEAmersham, to withhold HPA distribution rights from would-be radiopharmacy market entrants in violation of Section 2 of the Sherman Act. Through these tactics Cardinal allegedly maintained exclusive dealing rights, denied its customers the benefits of competition, and profited from the monopoly prices it charged for all radiopharmaceuticals, including HPAs, in the relevant markets. Importantly, according to the FTC, there was no efficiency benefit or legitimate business justification for Cardinal simultaneously maintaining exclusive distribution rights to the only two HPAs then available in the relevant markets.
This settlement raises two types of problems.
First, this was a single firm conduct exclusive dealing case involving (at best) questionable anticompetitive effects. As Josh Wright (citing the economics literature) pointed out in his dissent, “there are numerous plausible efficiency justifications for such [exclusive dealing] restraints.” (Moreover, as Josh Wright and I stressed in an article on tying and exclusive dealing, “[e]xisting empirical evidence of the impact of exclusive dealing is scarce but generally favors the view that exclusive dealing is output‐enhancing”, suggesting that a (rebuttable) presumption of legality would be appropriate in this area.) Indeed, in this case, Commissioner Wright explained that “[t]he tactics the Commission challenges could have been output-enhancing” in various markets. Furthermore, Commissioner Wright emphasized that the data analysis showing that Cardinal charged higher prices in monopoly markets was “very fragile. The data show that the impact of a second competitor on Cardinal’s prices is small, borderline statistically significant, and not robust to minor changes in specification.” Commissioner Ohlhausen’s dissent reinforced Commissioner Wright’s critique of the majority’s exclusive dealing theory. As she put it:
“[E]even if the Commission could establish that Cardinal achieved some type of de facto exclusivity with both Bristol-Myers Squibb and General Electric Co. during the relevant time period (and that is less than clear), it is entirely unclear that such exclusivity – rather than, for example, insufficient demand for more than one radiopharmacy – caused the lack of entry within each of the relevant markets. That alternative explanation seems especially likely in the six relevant markets in which ‘Cardinal remains the sole or dominant radiopharmacy,’ notwithstanding the fact that whatever exclusivity Cardinal may have achieved admittedly expired in early 2008. The complaint provides no basis for the assertion that Cardinal’s conduct during the 2003-2008 period has caused the lack of entry in those six markets during the past seven years.”
Furthermore, Commissioner Ohlhausen underscored Commissioner Wright’s critique of the empirical evidence in this case: “[T]he evidence of anticompetitive effects in the relevant markets at issue is significantly lacking. It is largely based on non-market-specific documentary evidence. The market-specific empirical evidence we do have implies very small (i.e. low single-digit) and often statistically insignificant price increases or no price increases at all.”
Second, the FTC’s requirement that Cardinal Health disgorge $26.8 million into a fund for allegedly injured consumers is unmeritorious and inappropriately chills potentially procompetitive behavior. Commissioner Ohlhausen focused on how this case ran afoul of the FTC’s 2003 Policy Statement on Monetary Equitable Remedies in Competition Cases (Policy Statement) (withdrawn by the FTC in 2012, over Commissioner Ohlhausen’s dissent), which reserves disgorgement for cases in which the underlying violation is clear and there is a reasonable basis for calculating the amount of a remedial payment. As Ohlhausen explained, this case violates those principles because (1) it does not involve a clear violation of the antitrust laws (see above) and, given the lack of anticompetitive effects evidence (see above), (2) there is no reasonable basis for calculating the disgorgement amount (indeed, there is “the real possibility of no ill-gotten gains for Cardinal”). Furthermore:
“The lack of guidance from the Commission on the use of its disgorgement authority [following withdrawal of the Policy Statement] makes any such use inherently unpredictable and thus unfair. . . . The Commission therefore ought to reinstate the Policy Statement – either in its original form or in some modified form that the current Commissioners can agree on – or provide some additional guidance on when it plans to seek the extraordinary remedy of disgorgement in antitrust cases.”
In his critique of disgorgement, Commissioner Wright deployed law and economics analysis (and, in particular, optimal deterrence theory). He explained that regulators should be primarily concerned with over-deterrence in single-firm conduct cases such as this one, which raise the possibility of private treble damage actions. Wright stressed:
“I would . . . pursue disgorgement only against naked price fixing agreements among competitors or, in the case of single-firm conduct, only if the monopolist’s conduct violates the Sherman Act and has no plausible efficiency justification. . . . This case does not belong in that category. Declining to pursue disgorgement in most cases involving vertical restraints has the virtue of taking the remedy off the table – and thus reducing the risk of over-deterrence – in the cases that present the most difficulty in distinguishing between anticompetitive conduct that harms consumers and procompetitive conduct that benefits them, such as the present case.”
Commissioner Wright also shared Commissioner Ohlhausen’s concern about the lack of meaningful FTC guidance regarding when and whether it will seek disgorgement, and agreed with her that the FTC should reinstate the Policy Statement or provide new specific guidance in this area. (See my 2012 ABA Antitrust Source article for a more fulsome critique of the antitrust error costs, chilling effects, and harmful international ramifications associated with the withdrawal of the Policy Statement.)
In sum, one may hope that in the future the FTC: (1) will be more attentive to the potential efficiencies of exclusive dealing; (2) will proceed far more cautiously before proposing an enforcement action in the exclusive dealing area; (3) will avoid applying disgorgement in exclusive dealing cases; and (4) will promulgate a new disgorgement policy statement that reserves disgorgement for unequivocally illegal antitrust offenses in which economic harm can readily be calculated with a high degree of certainty.