May 4, 2016

Beware When A First-Mover Advantage Runs Out: FTC Brings Another Monopolization Case Based on Exclusive Dealing

Arnold & Porter Advisory

Promoting innovation is one of the primary goals of the antitrust laws, and product introduction is routinely welcomed by antitrust agencies. But when a product is successful and achieves a dominant or monopoly market position, companies are at risk if they engage in sales practices or other conduct that may be seen as maintaining that high market share by unfairly impeding competition. On April 27, 2016, Invibio, a manufacturer of a high-performance polymer for medical implants, agreed to settle Federal Trade Commission (FTC or Commission) charges that Invibio engaged in unlawful exclusive dealing to maintain its initial monopoly position and prevent new entrants from competing effectively against it. The case comes just one month after the Supreme Court declined to review an Eleventh Circuit ruling upholding the Commission's last exclusive dealing case, and it serves as a reminder that companies need to be cautious when utilizing exclusivity requirements as well as rebate and loyalty programs.

Invibio's Use of Exclusivity Provisions

UK-based polymer manufacturer Victrex plc, through its wholly owned subsidiaries Invibio, Inc. and Invibio Limited (collectively Invibio), supplies polyetheretherketone (PEEK), a specialty polymer used by medical device makers to build spinal, orthopedic, and other human implants.1 In 1999, Invibio was the first company to develop and sell PEEK for medical implants. When entering the market, Invibio sold under long-term supply contracts, many of which included exclusivity requirements.

Invibio was the only supplier until Solvay Specialty Polymers LLC (Solvay) obtained Food & Drug Administration (FDA) approval in 2010 and Evonik Corporation (Evonik) obtained approval in 2013. According to the FTC's Complaint, both Solvay and Evonik developed implant-grade PEEK at the request of customers who desired a competitive alternative to Invibio.2

The FTC alleged that Invibio responded to the entry of Solvay and Evonik by unlawfully expanding its exclusivity provisions with the goal of preventing Solvay and Evonik from developing into effective rivals.3 Moreover, Invibio allegedly threatened to withhold supply and/or regulatory support (e.g., access to required FDA information) if customers did not agree to abide by its new, more restrictive exclusivity provisions.4 According to the FTC, customers had little choice but to accept the restrictive terms because they could not quickly obtain regulatory approval to use a new PEEK source.5

According to the Complaint, Invibio's strategy was successful in maintaining its initial monopoly position. As of 2014, Solvay and Evonik had managed to achieve less than a 10 percent share combined, despite offering significantly lower prices than Invibio and despite significant interest from customers.6

Consent Agreement

Invibio entered into a consent agreement with the FTC to settle the case. Invibio agreed that for a period of 20 years it will not condition sales, support, or discounts on exclusivity; discriminate or retaliate against customers that use or test a competitor's PEEK; or otherwise restrict customers from utilizing competing sources of PEEK. Moreover, the consent prohibits Invibio from imposing minimum purchase requirements (as to either units or revenue) or offering retroactive volume-based discounts in future contracts.

Invibio is allowed to offer forward-looking volume-based discounts,7 "meet competition" through discounts and non-price incentives, and require exclusivity in situations where it is providing a customer specialized support or collaborating with a customer on a custom or jointly developed product. However, depending on the situation, total sales under any such exclusive contracts cannot account for more than 30 percent of the customer's PEEK purchases or 30 percent of Invibio's PEEK sales, and the term of any such exclusive contract must be limited to 3 - 5 years.8

FTC Continues Enforcement Even Where There is Not Complete Foreclosure

The case against Invibio is another example of FTC enforcement against exclusive dealing practices even where competitors enter and gain share. In 2012, the FTC brought a case against McWane, Inc., a manufacturer of iron pipe fittings for municipal waterworks, alleging that its "Full Support" program pressured customers to buy exclusively or primarily from McWane.9 The Commission found that McWane had a 90 percent share in the market for domestically manufactured fittings and that its program constituted a de facto exclusive dealing requirement unlawfully maintaining McWane's monopoly position. Even though a competitor had entered using domestic contract manufacturing and achieved a 10 percent share in two years during McWane's program, the Commission found that the program still harmed competition. In particular, the Commission found that the entrant did not gain enough business to justify opening its own domestic facility, which would have allowed it to compete more aggressively and effectively. In doing so, the Commission relied on evidence that McWane's program prevented two of the largest fittings customers (two distributors accounting for 50 - 60 percent of distribution) from purchasing from the new entrant.10

Similarly, the Commission here highlighted evidence that Invibio's exclusivity strategy was focused on "lock[ing] up the largest and most sophisticated medical device makers . . . as doing so would prevent Solvay and Evonik from achieving success at these device makers and then building on that success with other customers."11 The FTC also alleged that Solvay and Evonik were unable to become "effective" competitors because of Invibio's use of exclusivity provisions, despite their combined share approaching 10 percent in four years.

The case against Invibio is an important reminder that firms with strong market positions need to consider carefully the risks of exclusivity requirements, even where those exclusivity requirements do not fully exclude competitors from the market. Moreover, the case is a reminder that first-movers need to be increasingly concerned about such issues as they become established and face new competition. The risks associated with such contracting practices extend not just to explicit exclusivity requirements such as those employed by Invibio, but also to practices that may create de facto exclusivity, such as retroactive volume-based discounts or minimum purchasing requirements, which the FTC also prohibited in its consent with Invibio.

  1. Complaint, Victrex plc, No. 1410042 (FTC Apr. 27, 2016) {hereinafter Complaint}.

  2. Id. ¶¶ 17, 19.

  3. The FTC's Complaint highlighted Invibio's "strategy of expanding the scope and coverage of exclusivity terms," but also noted Invibio's use of exclusivity provisions prior to the entry of Solvay and Evonik. Id. ¶¶ 3, 22. It is possible that the FTC might have viewed the original, pre-entry exclusivity requirements as problematic in and of themselves given the changing competitive dynamics in the relevant market, but this issue was not specifically addressed in the Complaint.

  4. Id. ¶¶ 28-29.

  5. Id. ¶ 27. Medical devices that contain PEEK must be approved by the FDA, id. ¶ 12, and FDA approval is specific to the source of PEEK being used, see id. ¶¶ 18, 20.

  6. Id. ¶¶ 4, 21, 41.

  7. Forward-looking volume-based discounts apply only to sales beyond a certain threshold. For example, if the threshold is 10 units, the discount would apply to unit 10 and any subsequent purchases (but not to units 1 through 9). In contrast, retroactive volume-based discounts, which are prohibited under the consent agreement, apply a discount to all prior purchases once certain threshold criteria are met. To use the same example, if the threshold is 10 units, the first 9 units purchased would be at full price, but once the tenth unit is purchased the customer would receive a discount on the purchase of unit 10 as well as a credit for the same discount on units 1 through 9. Such a discount creates a strong incentive to keep all sales with the company offering the discount and can in certain situations be viewed as anticompetitive.

  8. If Invibio is providing a customer with specialized support, it may require that customer to use Invibio's PEEK for a specified volume or percentage of the customer's PEEK requirements, which cannot exceed 30 percent of the customer's requirements for the product(s) related to the specialized support; such an exclusivity provision may not last more than three years. If Invibio is collaborating with a customer on a custom or jointly developed product, Invibio and the customer can agree to mutual exclusivity with respect to that product for a term of up to three years for custom products or five years for jointly developed products, but such sales cannot exceed 30 percent of all of Invibio's PEEK sales in any given twelve-month period.

  9. McWane, Inc., No. 9351 (FTC Jan. 30, 2014) (opinion of the Commission), at 9-10; Complaint, McWane, Inc., No. 9351 (FTC Jan. 4, 2012).

  10. See McWane, Inc. v. FTC, 783 F.3d 814, 821 (11th Cir. 2015).

  11. Complaint ¶ 23.

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