Andrea Agathoklis Murino, Goodwin Proctor LLP
One need only check the headlines to see that enforcement of the antitrust laws is alive and well at the Federal Trade Commission (“FTC”) today. On both the merger and conduct front, the FTC’s Bureau of Competition has proven incredibly active—and successful. In a continuing example of its willingness to use all tools in its competition enforcement arsenal, the FTC resurrected use of its disgorgement authority in dramatic fashion, collecting nearly $27 million from Cardinal Health, Inc. (“Cardinal”) for conduct dating back to the early and mid- 2000s. The FTC’s willingness to challenge Cardinal’s conduct and the significance of the fine serve as reminders that the agency’s powers are broad and that under Chairwoman Edith Ramirez, the FTC will not hesitate to seek bold relief.
Background on FTC’s Use of Disgorgement
The FTC’s disgorgement authority is vested in Section 13(b) of the Federal Trade Commission Act (“FTC Act”). It provides the Commission with equitable powers to enjoin acts or transactions violating the FTC Act’s proscription of unfair competition. There is some scholarly debate over whether the FTC has authority to seek disgorgement at all; the FTC Act does not specifically provide for powers of disgorgement or monetary relief. But, following the FTC’s successful 1999 challenge against Mylan Pharmaceuticals for entering into certain exclusive licensing agreements that prevented competitors from gaining access to certain inputs for competing pharma products, federal courts have largely put that claim to rest under the theory that monetary relief is a natural extension of the FTC’s remedial powers which are present in Section 13(b).
Nevertheless, use of disgorgement has been sporadic. FTC utilized it first in 1992, some 78 years after the Commission’s establishment. The next time the FTC sought disgorgement was not until the 1999 Mylan case, and it has done so just six additional times since* including this case against Cardinal, with mixed success.
Despite the relatively infrequent usage of this tool, the topic of disgorgement has captured significant intellectual energy at the FTC. Shortly after the Mylan case, the FTC studied the issue, accepted public comments, and in 2003, issued its first ever Policy Statement on Disgorgement. The statement required a three-part balancing test to determine whether it would be appropriate, as a matter of prosecutorial discretion, for the Commission to seek monetary relief. The three prongs required determining whether: (1) the underlying violation was clear; (2) there was a reasonable basis for calculating the amount of the remedial payment; and (3) the value of the FTC’s seeking monetary relief in light of any other remedies available in the matter, including private actions or criminal proceedings.
This Policy Statement was widely lauded and issued by a bipartisan Commission. It also created an environment where the next generation of Commissioners concluded “[t]he practical effect of the Policy Statement was to create an overly restrictive view of the Commission’s options for equitable remedies.” Rather than seeing an increase in use of disgorgement as a remedy, following issuance of the Policy Statement, there were just two additional cases calling for disgorgement. As a result, on July 31, 2012, the Policy Statement was withdrawn.
2015 and Cardinal Health
Which brings us back to Cardinal Health. In this case, the FTC alleged that Cardinal monopolized 25 local markets for the sale and distribution of low-energy radiopharmaceuticals and forced hospitals and clinics to pay inflated prices. Cardinal did so through a series of acquisitions between 2003 and 2008, making Cardinal the largest operator of radiopharmacies in the US and the sole radiopharmacy operator in the 25 local markets subject to the Complaint. As Cardinal grew in size, it then employed various tactics that coerced suppliers to refuse to grant competitors distribution rights and in some cases prevented new entry entirely. Thus, Cardinal obtained de facto exclusive distribution rights and prevented numerous potential competitors from gaining access to these radiopharmaceuticals. FTC required Cardinal required to pay $26.8 million as disgorgement and subsequently barred it from entering into simultaneous exclusive deals with manufacturers of the same radiopharmaceutical product, among other conduct restrictions. (In a great feat of irony, these very same Cardinal acquisitions were cleared by the FTC under the normal Hart-Scott-Rodino merger control rules. While it seems incongruous, the law is clear that the FTC (and its sister antitrust enforcement agency, the DOJ) have full authority to revisit previously cleared transactions to determine if anticompetitive effects in fact resulted.)
The Commission’s vote split along ideological lines on a 3-2 vote, with the minority Commissioners issuing separate dissents. The majority explained that the FTC cannot allow bad actors to retain the dividends of their monopolistic practices and that because the conduct here was “highly” anticompetitive and that additional remedies were not available at law, disgorgement was particularly appropriate. Commissioner Ohlhausen’s dissent seemed centered on the unfairness of seeking disgorgement without providing transparent guidance to parties first. She also appeared fundamentally concerned that the underlying conduct was not itself anticompetitive. Commissioner Wright, for his part, raised similar though somewhat different concerns. His focus was on the possibility that Cardinal’s conduct was inappropriate for the imposition of monetary remedies because of the efficiencies that resulted.
What It Means
Given the current composition of the FTC (a solid Obama Administration majority, indeed Commissioner Wright will resign effective August 24, 2015), companies that are found to have engaged in anticompetitive conduct must be alert to the possibility of disgorgement as a remedy. The FTC’s recent successes naturally will embolden them to consider monetary relief more than ever before. Indeed, the Commission’s Bureau of Competition director remarked in a 2014 speech that FTC aspired to impose a billion-dollar disgorgement in one of its actions against pharmaceutical companies for their “reverse-payment” settlement of patent litigation. In June, FTC entered into a $1.2 billion disgorgement settlement with Teva’s Cephalon unit in a reverse-payment settlement case.
Time will tell whether this trend holds or is ultimately only a wave in the sea of the ever-changing FTC’s use of disgorgement.
*Information on each of these actions is available from multiple sources online but those dating back to the 1990s offer less of an online presence. Again, some proved successful for the FTC while others did not. FTC v. Mead Johnson & Co., 1:92-CV-01366 (D.D.C. June 11, 1992); FTC v. Mylan Labs, Inc., No.1:98CV03114 (TFH) (D.D.C. Feb. 9, 2001); Hearst (2001); Perrigo (2006); Ovation/Lundbeck (2008); Cephalon (initially brought in 2013 but settled 2015); AbbVie (2014); and Cardinal Health (2015).