The Second Circuit recently affirmed a lower court ruling dismissing claims brought by retail pharmacies against Johnson & Johnson, Caremark, Express Pharmacy Services of PA, and American Home Products, alleging that lower prices offered to certain “favored purchasers” amounted to unlawful price discrimination under the Robinson-Patman Act. Among other things, the Robinson-Patman Act makes it illegal “to discriminate in price between different purchasers of commodities of like grade and quality…where the effect of such discrimination may be substantially to lessen competition…”
In the case, Drug Mart Pharmacy Corp., et al. v. Johnson & Johnson, et al., retail pharmacies alleged that drug manufacturers offer lower prices to certain purchasers—namely HMOs and pharmacy benefit managers (PBMs)—that are able to use their drug formularies to extract lower prices and that these discounts harm their ability to compete and cause them to lose customers.
Plaintiffs’ Matching Process Yielded Insufficient Evidence
In affirming dismissal of the retail pharmacies’ claims, the court concluded that plaintiffs had failed to establish that the discounts had caused them to lose a significant number of customers to favored purchasers – a key element of a Robinson-Patman claim. Plaintiffs attempted to identify patients who had stopped purchasing drugs for chronic conditions from plaintiffs and match them to patients on the customer list of a favored purchaser. The court explained that, “a matched customer was one who filled a prescription for one of the specified drugs, or a common substitute, at one of the five favored purchasers’ pharmacies within six months of the last time they filled that prescription at one of the twenty-eight plaintiff pharmacies.”
According to the court, the results of this matching process showed that plaintiffs lost “exceedingly few” customers to favored purchasers—amounting to just 3%. Indeed, the data “showed an average of approximately 18 lost customers and 54 lost transactions per pharmacy per year, numbers that represented only one quarter of one percent of the average number of transactions of such pharmacies during that period” and that “many pharmacies lost no more than ten customers per defendant during the entire twelve-year period covered by the process.” The court characterized these results as only de minimis evidence of lost customers when compared to the total transactions carried out by each pharmacy during that period. Therefore, the evidence was insufficient to demonstrate a threshold level of competitive injury—a necessary element of any Robinson-Patman Act claim.
This case confirms the difficulty many plaintiffs are likely to face in attempting to establish a sufficiently large number of lost sales to satisfy the injury element of a Robinson-Patman Act claim. It also serves as a cautionary tale to plaintiffs that attempt to do so. In particular, plaintiffs that try and fail to show a threshold number of actual lost customers, may at the same time lose their ability to take advantage of the so-called Morton Salt inference, which enables plaintiffs to establish an inference of competitive injury by showing that a favored purchaser received a significant discount over a substantial period of time. In Drug Mart, the Second Circuit held that plaintiffs themselves rebutted the Morton Salt inference by failing to show a sufficient number of lost sales.
Plaintiffs have had limited success in proving Robinson-Patman Act claims. Neverthless, depending on the circumstances, they can take a substantial amount of time to defeat. This case was initially filed more than 20 years ago! Accordingly, the risk of Robinson-Patman litigation should be considered if companies are planning aggressive sales and distribution strategies in situations where there are potential plaintiffs who believe they may be disadvantaged.