The Right Price

A major pharmaceutical company made a decision several years ago that made good business sense--give big volume customers such as HMOs discounted prices to help improve sales of branded drugs.

"It was economically sensible to offer the discount because the HMO, unlike the retailer, had control over its buying population and therefore could help drive sales," says Peter Thomas, a partner at Simpson Thacher & Bartlett.

The problem was that the decision didn't make sense to retail pharmacies, which promptly sued the company, alleging it violated the Robinson-Patman Act. On a literal reading, the 93-year-old Act requires companies to sell their products to all purchasers at the same price. Faced with the cost of defending the case and the potentially adverse publicity, the pharmaceutical company settled and paid up.

"It seemed inappropriate that the claim could be brought in the first place," Thomas says. And this isn't just the bleating of a single sore defendant's attorney.

"Antitrust practitioners and economists have been saying for 30 years that this law should be repealed," says John Talady, an antitrust partner at Howrey.

Indeed, the repeal of Robinson-Patman is but one of a host of "tentative recommendations" recently released by the Antitrust Modernization Commission, which Congress created to examine U.S. antitrust laws.

Court Opinion

Scholars have long criticized Robinson-Patman as limiting the ability of many businesses to offer lower prices to customers. Indeed, only two of the 12 members of the Antitrust Modernization Commission--the members of which were appointed by the president, the leadership of the Senate and leadership of the House--dissented from the recommendation to repeal Robinson-Patman.

"There's a general impression out there that Robinson-Patman protects the mom-and-pop operation," Talady says. "But what it really does is stop people from taking advantage of economies of scale, which serves to reduce prices overall. So it harms the big guy without protecting the little guy."

The Supreme Court seems to agree. In its January 2006 decision in Volvo Trucks North America Inc. v. Reeder-Simco GMC, the High Court signaled it would continue to construe Robinson-Patman narrowly in cases where the impugned conduct actually stimulates competition.

"The commission's preliminary recommendation indicates it wants to move antitrust laws in the direction in which the courts have been going for a couple of decades, which is to deal with them from the perspective of a careful analysis of economic issues, rather than just attach labels to certain kinds of competitive activity and hold that they are per se illegal," Thomas says.

However, general impressions frequently drive politics and decide the political fate of even the most well-reasoned recommendations.

"For Congress to repeal a law that's viewed as protecting the little guy will be a significant challenge even if it's the most rational thing to do and in everyone's interests," Talady says. "This is perhaps the most important but the least politically palatable of all the commission's recommendations."

Ironically, although the future looks bleak for a recommendation that follows naturally on two decades of jurisprudence, it looks brighter for a recommendation that seeks to overturn the High Court.

Consolidating Claims

Since the Supreme Court's 1977 decision in Illinois Brick Co. v. Illinois, consumers have been precluded from suing for Sherman Act violations in federal courts. What this meant, for example, was that if a group of manufacturing companies conspired to fix prices for a product, only direct purchasers of that product had standing in federal courts while indirect purchasers (consumers) were limited to state courts.

The difficulty was that the bifurcation raised the possibility of multiple claims and double jeopardy for defendants.

"A direct purchaser that recovers damages may have passed some of the cost on to consumers," Talady explains. "If consumers then recover the full amount of their losses in another court, the defendant will have paid out twice and the dealer will have a windfall."

To avoid this result, the commission recommended that Congress enact a statute to facilitate the consolidation of direct and indirect purchaser cases in one federal court action.

"If implemented, the recommendation would be a sea change in the way that a lot of civil antitrust litigation is tried," Thomas says.

Arguably, the recommendation strikes a balance between the interests of defendants and plaintiffs. And that makes it much more politically attractive than repealing Robinson-Patman.

"This recommendation is more achievable because suddenly mom-and-pop operations and consumers get standing in federal court," Talady says.

Giving direct purchasers standing in federal court, however, is a double-edged sword. Consolidation of price-fixing claims could, for example, boost the number of such claims and make trials longer and more complex.

"Apportioning the damages between direct and indirect purchasers will require some very involved evidence, including expert evidence," Talady says.

Overall, however, Thomas believes the trade-off is worthwhile.

"There may be more suits but plaintiffs wouldn't have the ability to abuse the system by playing off one set of proceedings against the other and letting the possibility of double recovery hover out there as a way of forcing settlement," he says.

Whether any of these changes will come to fruition remains to be seen.

Future Revisions

To begin with, the recommendations are just tentative. However, because the only recommendations included in the tentative list are those that enjoy the support of at least half the commissioners and because there will be no further public input, it's unlikely that the recommendations will change substantially.

What may change is emphasis and wording. Congress will receive the final report from the commission in April 2007. At that point the recommendations will tread the usual, tortuous route through the House and Senate Judiciary Committees, where the Democrats' new majority may favor implementation of the recommendations perceived to be favorable to small business and consumers.

So while it's unclear just what the recommendations will engender or when they might achieve fruition, some see hope in the mere fact that Congress will finally have concrete proposals for change before it.

"The sheer momentum of the commission's recommendations might just start the ball rolling on modernization," Talady says.

Contributor

Julius Melnitzer

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