FTC v. Surescripts, LLC - 424 F. Supp. 3d 92 (D.D.C. 2020)

Rule:

For an exclusionary act to be anticompetitive, it must harm the competitive process and thereby harm consumers.

Facts:

The Federal Trade Commission petitioned for equitable relief, including a permanent injunction and monetary relief, against Surescripts, LLC. In sum, the FTC alleged that Surescripts has violated Section 2 of the Sherman Act by maintaining a monopoly in two markets—electronic prescription routing and eligibility (explained below)—through anticompetitive conduct, including an exclusive loyalty- based pricing policy.

Surescripts is a health information technology company operating in two complementary markets: electronic prescription routing ("routing") and eligibility, collectively known as "e-prescribing." Surescripts charges pharmacies a fee for each routing transaction and charges PBMs a fee for each eligibility transaction. According to the FTC, Surescripts maintains at least a 95% share (by transaction volume) in each market using various anticompetitive measures. Beginning around 2009, Surescripts implemented a pricing policy that rewarded "loyal" (i.e., exclusive) customers with lower prices. To be considered exclusive, Surescripts requires that a pharmacy route 100% of its transactions through and only through the Surescripts network. The same structure exists for PBMs in eligibility. Surescripts structured its contracts with EHR providers such that loyalty in either the routing or eligibility markets resulted in an incentive payment to the EHR provider of the fees paid by the customers in that market; exclusivity in both markets resulted in an incentive payment of the fees from both markets. The FTC contended that "[t]hose effectively exclusive contracts foreclosed at least 70% of each market, eliminating multiple competitive attempts from other companies ... that offered lower prices and greater innovation." Beyond the loyalty program, Surescripts employed "threats and other non-merits based competition" to keep its customers from working with its competitors. The FTC alleged that these exclusive arrangements have allowed Superscripts to impose heightened prices on large portions of the markets, and have stifled innovation and reduced quality in the two e-prescribing markets. Surescripts moved to dismiss the FTC's complaint, arguing that this case was both procedurally and substantively defective. 

Issue:

Was the FTC able to state a claim under Section 2 of the Sherman Act?

Answer:

Yes.

Conclusion:

Here, the FTC alleged that Surescripts's loyalty programs—and the implicit threat to charge non-exclusive customers higher prices—prevented the entrance of competitors into e-prescribing markets. The absence of competitors, in turn, allegedly led to increased prices for pharmacies and PBMs and lower incentive payments for EHRs. At least on the face of its complaint, then, the FTC appears to allege facts sufficient to state a claim under Section 2 of the Sherman Act.

Surescripts's arguments to the contrary were unavailing. First, the company emphasized that its loyalty programs were entirely optional and thus did not necessarily constitute exclusive contracts. But a contract need "not contain specific agreements not to use the [services] of a competitor" as long as "the practical effect . . . is to prevent such use." The FTC alleged that the threat of increased prices had the "practical effect" of preventing customers from working with other e-prescribing platforms, "since doing so would trigger the massive penalty provisions in their contracts with Surescripts . . . and cost routing [and eligibility] customers millions of dollars through increased prices or, for EHRs, decreased incentive payments." Surescripts highlighted that some customers, like Kroger, did manage to "multihome" and have a non-exclusive relationship with Surescripts, but the test of whether a monopolist forecloses competition "is not total foreclosure, but whether the challenged practices bar a substantial number of rivals or severely restrict the market's ambit." Here, the government was able to plead facts demonstrating such substantial foreclosure.

Surescripts next suggested that optional low pricing loyalty programs were unlawful only when they constitute "predatory" pricing, which the FTC has not pled. But none of the authorities Surescripts cited stood for the proposition that a plaintiff must allege predatory pricing to succeed on a Section 2 claim.

Surescripts also mischaracterized the holdings in Microsoft. It quoted the court's statement that "offering a customer an attractive deal is the hallmark of competition" unless that price is "predatory," but that statement concerned only Microsoft's offering Internet Explorer free of charge. The relevant portion of the en banc D.C. Circuit's decision for this case is its ruling that Microsoft's exclusive contracts did violate Section 2 of the Sherman Act; the court noted that Microsoft's exclusive dealing with fourteen of the fifteen access providers in North America effectively cut off one of the two major channels by which competitors could enter the internet browser market. These contracts "clearly ha[d] a significant effect in preserving its monopoly; they help[ed] keep usage of [Microsoft's competitor] below the critical level necessary for [it] or any other rival to pose a real threat to Microsoft's monopoly." Like the behavior at issue in Microsoft, Surescripts's alleged practice of charging loyal pharmacies and PBMs less, and paying loyal EHRs greater incentives, did not need to constitute predatory pricing for Surescripts's exclusionary practices to constitute illegal maintenance of a monopoly.