Is It A Price Fight? Competitor’s Exclusionary Practices Subject to Rule of Reason Rather Than Price-Cost Test
Difference Between the Price-Cost Test and the Rule of Reason
When a business complains that its competitor has illegally excluded it from the market, the court must first figure out how. Getting a sense of the methods used to restrict market access will determine which legal test to apply: the price-cost test, typically applied in below-cost pricing cases, or the rule of reason. The choice of legal test is critical. It impacts the probability of whether the case proceeds at all, and if so, the type of discovery that will follow. So let’s consider the difference.
When applying the price-cost test, the court scrutinizes the defendant’s prices and costs to determine if prices are below the cost of production. If they are, then the defendant may have engaged in what is known as predatory pricing, this is where the competitor prices goods or services at such a low level that other suppliers cannot compete and are forced to leave the market. Generally, low prices benefit consumers. This conduct harms consumers if the below-cost pricing allows a dominant competitor to kick its rivals out of the market and subsequently raises prices to above-market (also known as supracompetitive) levels for a substantial time. Applying the price-cost test, however, is very unusual. According to the Supreme Court, “predatory pricing schemes are rarely tried, and even more rarely successful.” It’s thus a perilous path the plaintiff treads if the court applies the price-cost test.
The rule of reason test, on the other hand, gives the plaintiff a more spacious and accommodating path. Here, the court will determine whether the defendant’s exclusive practices forecloses such a large share of the market that any and all competition is negatively affected or whether the firm’s independent decision to reduce prices to a level below its own costs simply reflects particularly vigorous competition. To make that determination, the court considers the defendant’s ability to raise and maintain prices above a competitive level (also known as “market power”), the duration of the defendant’s exclusionary contracts, the coercive behavior of the defendant, and whether the rival has been kept out of a substantial share of the market.
Recently, Judge Slomsky, District Judge for the United States District Court for the Eastern District of Pennsylvania, ruled that LifeScan Inc.’s efforts to exclude rival UniStrip Technologies, LLC from the market for blood glucose test strips would be judged by the rule of reason rather than the price-cost test. LifeScan did employ price-based methods to compete against UniStrip, such as conditioning customers’ rebates and price discounts on the requirement that they not buy UniStrip’s less-expensive glucose test strips, but price was not the primary method of exclusion alleged by Unistrip. The court therefore rejected LifeScan’s argument that the price-cost test applied and denied LifeScan’s motion to dismiss UniStrip’s Second Amended Complaint.
The court’s decision did acknowledge that LifeScan employed price-based methods of exclusion, but noted the weight of UniStrip’s additional allegations. LifeScan used multi-year contracts, held a dominant share in both the market for blood glucose test strips and glucose test strips compatible with LifeScan blood glucose monitoring meters, and contacted UniStrip’s potential customers in person, over the phone and in written correspondence, threatening to terminate rebates and price discounts on all LifeScan products, not just glucose test trips. As this scholarly paper explains, the price cost test does sometimes apply when the method of exclusion involves rebates and loyalty discounts. But here Unistrip’s additional allegations were sufficient for the court to reject L’s argument that the price-cost test applied.
The court also paid particular attention to UniStrip’s illegal bundling claims to determine that the rule of reason test applied. Anticompetitive bundling occurs when a dominant producer of one product induces customers to purchase its product instead of a competitor’s by offering conditional discounts on one or more of its other products, products that the rival does not produce. Bundling has clear potential anticompetitive effects. For example, making a buyer’s receipt of rebates and discounts on other products the competitor does not produce conditional on the buyer’s also purchasing the dominant producer’s product instead of the competitors’, makes it impossible for rival companies to compete on a level playing field. (This research paper provides more information about bundling).
In this case, UniStrip alleged that LifeScan, in some instances, required buyers to purchase its more-expensive glucose test strips—the bundled product—or lose rebates and discounts on other LifeScan products that UniStrip does not make or sell, like the LifeScan blood glucose monitoring meters. Because UniStrip alleged that LifeScan had market power in the market for the bundled product and UniStrip only manufactured the glucose test strips—not the glucose test meter—the court upheld UniStrip’s antitrust bundling claims under a rule of reason analysis, without applying the price-cost test.
Lesson from LifeScan
There are lessons to be learned from the LifeScan case for any plaintiff antitrust practitioner representing an excluded competitor. To avoid the perilous price-cost test at the motion to dismiss stage, be sure to include allegations about the duration of the dominant competitor’s contracts, the market share of and amount of market foreclosed by the dominant firm’s exclusionary conduct, the products covered by the termination of rebates, and discounts and factual allegations about the means the dominant competitor used to keep its customers from purchasing its rival’s product.
With its antitrust claims of exclusionary dealing, agreements in restraint of trade, attempted monopolization and anticompetitive bundling intact, UniStrip now proceeds to discovery and trial of the scope and effect of LifeScan’s methods to compete against UniStrip in the blood glucose test strip market, under the antitrust rule of reason.
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About Neill W. Clark
Neill W. Clark is an associate at Faruqi & Faruqi, LLP with over 17 years of antitrust experience. He is co-counsel for UniStrip in the LifeScan litigation. Please feel free to contact Neill regarding any questions concerning this blog post or any questions related to F&F’s practice areas.