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How conditional pricing practices should be treated under the antitrust laws has been the subject of significant debate in recent years.  As such, on June 23, 2014, the Federal Trade Commission ("FTC") and the Antitrust Division of the U.S. Department of Justice ("DOJ") hosted a workshop to explore the economic and legal implications of conditional pricing practices such as loyalty discounts, market share rebates, bundled pricing, and similar incentives.


The goal of the workshop (set forth by the FTC and DOJ) was to advance the economic understanding of the potential harms and benefits of conditional pricing practices and to reexamine their treatment under the antitrust laws.


DOJ Assistant Attorney General Bill Baer and FTC Commissioner Maureen Ohlhausen opened with the stated understanding that while some types of conditional pricing practices are procompetitive, other practices could restrict competition and allow monopolists to maintain market power within supply chains. The difficulty is in drawing the line between pricing practices that injure competition and those that do not.


The FTC raised concerns about relying on the Ninth Circuit's "price-cost test" as defined in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (2008).  Certainly, there is some difficulty in calculating the appropriate measure of cost. Using the "price-cost test", a plaintiff challenging a defendant's pricing practice must prove that the defendant set prices below-cost. But what happens if you ignore the test?  DOJ attorneys voiced concern that  dismissing the price-cost standard in favor of a looser, "smell test" or "I'll know it when I see it test"  could increase compliance issues. However, practitioners and professors argued that using the ridged price-cost standard could have a chilling effect on meritorious cases and may result in companies being wrongly accused of antitrust violations.


Interestingly, FTCs Bureau of Competition Director Deborah L. Feinstein, while evaluating other possible standards, questioned whether the use of an efficiency model (whether a particular pricing practice reduces competition by raising a rival firms cost or otherwise impedes their ability or incentives to achieve efficiencies) would be a more appropriate rationale.


We will certainly see how the Ninth Circuit feels about the efficiency model in the next year. The Ninth Circuit will directly address the efficiencies defense  in Saint Alphonsus Medical Center, et al v. St. Luke's Health System, Ltd. In late June, St. Luke's appealed the district court's decision that its acquisition of a physician group violated antitrust laws.


There were many questions left unanswered, however, the existence of the program itself makes it clear that DOJ and FTC are closely watching these issues.