FTC's use of 'disgorgement' poses new risks for healthcare industry

In 2012, the Federal Trade Commission withdrew its 9-year-old Policy Statement on Monetary Equitable Remedies in Competition, signaling more aggressive use of monetary penalties. The FTC issued the policy statement in 2003, establishing the factors it would consider in determining whether to seek monetary relief, following its decision to impose significant monetary penalties in two competition cases in the early 2000s. The FTC abruptly withdrew this policy statement in 2012, without a clear catalyst prompting it to do so, and over internal FTC dissent, on the grounds that it unnecessarily restricted the FTC's options for imposing monetary remedies. Over the period that the policy statement was in effect, the FTC sought “disgorgement,” or court-ordered repayment of illegal profits, in only two cases; in the 2½ years following withdrawal of the policy statement, the FTC has pursued disgorgement in three cases, all involving the healthcare industry.

In April, the FTC announced a settlement with Cardinal Health to resolve allegations that Cardinal had monopolized the markets for the sale and distribution of low-energy radiopharmaceuticals in 25 metropolitan areas. Cardinal had allegedly tied up the only two manufacturers of an essential product through a combination of contractual terms, threats to switch business from one to the other, and threats to enter into the supply of the product itself. The FTC alleged that Cardinal effectively prevented other distributors from entering the markets, and led to increased prices for customers.

The settlement requires Cardinal to pay $26.8 million into a fund for injured consumers, as “disgorgement” of its allegedly ill-gotten profits. Cardinal stated that it voluntarily entered into the settlement without admitting wrongdoing to avoid the costs and unpredictability of litigation, particularly in light of the time elapsed since the conduct at issue had occurred (from 2003 to 2008).

The FTC's pursuit of disgorgement and the size of the monetary settlement in the Cardinal case demonstrate an increasingly aggressive enforcement stance on a broader range of potentially anticompetitive conduct and heighten risks for consolidating healthcare entities.

The other two cases in which the FTC has sought disgorgement since its withdrawal of the policy statement both involve challenges to pharmaceutical patent settlements in which the patent holder paid generic pharmaceutical manufacturers to delay entering into the market for a drug in order to extend the patent holder's monopoly (so-called “pay-for-delay” cases). The decision to pursue disgorgement in the Cardinal case, which raised questions of vertical conduct (i.e., arrangements affecting suppliers or customers), stands out as a change in course. Indeed, in several other cases brought by the FTC over the last several years focusing on “vertical” conduct, the FTC only sought injunctive relief.

Pursuit of disgorgement in the Cardinal case sparked sharp debate within the FTC itself, prompting two of the five commissioners to dissent. Those dissenting argued that use of disgorgement was inappropriate because other market factors, such as insufficient demand, could have deterred competing radiopharmacies from entering into the markets at issue, and that there was little to no demonstrable consumer harm from Cardinal's conduct. The dissenting commissioners were also concerned about the absence of guidance to the business community regarding when the FTC will pursue disgorgement in antitrust cases.

Although pursuit of disgorgement in a case like Cardinal is unusual, what may have tipped the balance was the lack of convincing business justifications for Cardinal's practices (which appear solely designed to exclude competition) and the time that had passed since the conduct, potentially limiting private litigation on statute of limitations grounds.

In a healthcare environment increasingly characterized by consolidation, the FTC's decision to pursue large disgorgement penalties in the Cardinal case potentially creates new risks for consolidated entities. The FTC's focus on vertical relationships in markets with few sellers or those dominated by a single seller, and the specter of significant monetary penalties for contracting practices involving suppliers or customers are now heightened, ongoing risks to be considered by entities with significant market power.

These risks are particularly significant in light of the diverse forces driving consolidation in the healthcare market, and may create new tensions for healthcare organizations responding to these forces. The Cardinal decision may prompt healthcare entities to re-evaluate consolidation plans to avoid the uncertainties of aggressive enforcement for post-merger conduct. The existence of such contracting practices may also become a factor in merger review. Finally, for entities with significant market power, the case highlights the need for effective and comprehensive post-consolidation antitrust compliance policies and practices. The case demonstrates that even where the FTC has not challenged a consolidation, scrutiny does not end there; the FTC is willing to use its broad discretion to impose significant penalties on powerful players who flex their market muscles post-consolidation.

Lisl Dunlop is a litigation partner and Ashley Antler is an associate in healthcare at the law firm Manatt, Phelps and Phillips.