D.C. District Court Denies Motion To Dismiss FTC Monopolization Claim Based On Loyalty Discount Program And Exclusive Dealing Arrangements
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  • D.C. District Court Denies Motion To Dismiss FTC Monopolization Claim Based On Loyalty Discount Program And Exclusive Dealing Arrangements 

    On January 17, 2020, District Judge John D. Bates of the United States District Court for the District of Columbia denied defendant’s motion to dismiss an FTC complaint alleging monopolization in violation of Section 2 of the Sherman Act against a health information technology company (the “Company”), rejecting the Company’s arguments that the Court lacked subject matter jurisdiction under Section 13(b) of the FTC Act, and finding that FTC had adequately pleaded a Section 2 violation.  FTC v. Surescripts LLC, 19-1090 (D.D.C. Jan. 17, 2020).

    The Company operates in two complementary markets: (1) electronic prescription routing, and (2) electronic prescription eligibility, or “e-prescribing” for its clients.  Electronic prescription routing involves transmitting prescription-related data in a patient’s electronic health records from a prescriber to a pharmacy.  E-prescribing involves transmitting a patient’s benefit information from the payer, often a pharmaceutical benefit manager (“PBM”), to the prescriber’s electronic records system. 

    The FTC alleged that defendant maintains a 95% market share (by transaction volume) in both markets through anticompetitive practices, the most important of which are loyalty programs that provide pricing incentives for customers who route 100% of their transactions through the Company.  The FTC also alleged that the Company threatened competitors and used non-compete agreements and other exclusive arrangements to limit competitors’ ability to enter the market without a substantial customer base in place. 

    The Company argued first that the Court lacked subject matter jurisdiction, because Section 13(b) of the FTC Act limits courts’ ability to issue injunctions requested by the FTC to “proper cases.”  “Proper cases” under Section 13(b), the Company argued, are limited to “routine, straightforward” cases rather than cases that present complex or novel issues of antitrust law.  The Court rejected this interpretation, finding it ran afoul of the Supreme Court’s decision in Arbaugh v. Y&H Corp., 546 U.S. 500 (2006).  Arbaugh held that, absent a “clear statement” that a statutory limitation is jurisdictional, the statutory limitation should be treated as “nonjurisdictional in character.”  546 U.S. at 516.  In addition, the Court found that the Company’s proposed interpretation of “proper case” under Section 13(b) would create a cumbersome and impractical test in which a court would need to analyze the novelty and complexity of claims before determining whether to hear the case in the first place. 

    Turning to the specific allegations of the FTC’s complaint, the Court acknowledged that the Company’s argument that “proper cases” under Section 13(b) should not mean “all cases” brought under the FTC Act had “considerable weight,” but found that the Court’s role was not to create a test for the standards of a “proper case” that would apply in all cases brought under the FTC Act, but merely to determine whether the FTC had sufficiently pleaded facts establishing that this case was a proper case under Section 13(b).  On this issue, the Court accepted the FTC’s reasoning that the D.C. Circuit’s landmark opinion on monopolization in United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001), established the legal framework for the FTC complaint, and there would be no need to rely on agency expertise to develop the law.  Surveying other circuits, the Court also found that courts had frequently considered FTC claims for equitable relief in cases that went beyond “routine.”  Thus, the Court found that the FTC sufficiently pleaded a “proper case” for a permanent injunction under Section 13(b).   

    The Court then addressed the Company’s argument that the FTC failed to state a claim under Section 2 of the Sherman Act.  In its motion to dismiss, the Company did not contest the allegations of monopoly power, but argued that the complaint did not establish that its conduct was anticompetitive or exclusionary because: (1) the loyalty program was optional and did not constitute predatory pricing, and (2) the FTC’s allegations of exclusive dealing did not establish a violation of the rule of reason.  Again, the Court sided with the FTC on both arguments.  First, the Court noted analysis of an allegedly anticompetitive agreement or program requires not only an examination of the express restrictions in the agreement but of the practical effect as well.  The FTC’s allegations, the Court found, were adequate to plead that the loyalty program had the practical effect of preventing customers from working with competitors and resulted in substantial foreclosure of the marketplace.  The Court similarly rejected the argument that predatory pricing was required to plead a Section 2 violation, citing a number of cases involving different contracting and pricing arrangements, including loyalty programs, in which the alleged exclusionary effects of the challenged practices were found adequate to establish a violation without establishing predatory pricing,  quoting, for example, ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 281 (3d Cir. 2003) (“‘where, as here, a dominant supplier enters into de facto exclusive dealing arrangements with every customer in the market, other firms may be driven out not because they cannot compete on a prices basis, but because they are never given an opportunity to compete. . . .’”).

    With regard to the rule of reason, the Company contended that even if its loyalty contracts were exclusive dealing, the FTC still failed to plead facts sufficient to demonstrate the foreclosure of a substantial share of commerce.  In particular, the Company argued that electronic prescription routing and “e-prescribing” are both two-sided markets and the FTC failed to allege substantial impacts to the market as a whole.  Here, the Court again found that the FTC met its burden.  For example, the Court noted that in Microsoft, exclusivity provisions covered 40-50% of the relevant market, while the Company’s loyalty program allegedly restricts 70-80% of both routing and eligibility markets, and emphasized that defendant’s monopoly market shares had not been contested on the motion to dismiss.  Based on this analysis, the Court concluded that the FTC had adequately alleged exclusionary conduct and substantial foreclosure, and denied the motion to dismiss.    

    Although almost two decades have passed since the Third Circuit’s controversial opinion in LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2001), the issue of the proper treatment of loyalty discounts and related arrangements under both Section 1 and 2 of the Sherman Act remains unsettled.  Further guidance may be forthcoming as cases such as FTC v. Qualcomm, 5:17-cv-00220 (N.D. Cal.) progress through the courts, but for firms with very high market shares, bright-line safe harbors from litigation risks do not appear on the immediate horizon.