Contact Lenses, Costco, and Price Floors


Contact Lenses, Costco, and Price Floors

Trending Legal Issue |

Under antitrust’s Colgate doctrine, manufacturers may unilaterally announce resale prices and refuse to do business with retailers who will not conform. Retailers may independently decide whether to implement the announced prices or not. On the other hand, antitrust law is much more suspicious once manufacturers and retailers start jointly setting resale prices. Telling the difference between those two situations can be complex, as manufacturers, retailers and customers in the contact lens industry have discovered in a series of recent cases and legislative actions.

Supreme Court: Colgate and Leegin

The Supreme Court set out the Colgate doctrine in the 1919 United States v. Colgate decision. Colgate circulated retail price lists to its retailers, and refused to do business with retailers who did not comply. The Supreme Court found no violation of antitrust law in Colgate’s pricing conduct. There was no price-fixing agreement between Colgate and its retailers. Colgate unilaterally announced prices; retailers independently chose whether or not to adopt Colgate’s prices as their own; and Colgate chose not do business with non-compliant retailers.

A manufacturer generally has a right to deal, or refuse to deal, with whomever it likes, as long as it does so independently. Under Colgate, a manufacturer can announce its resale prices in advance and refuse to deal with those who fail to comply. And a distributor is free to acquiesce in the manufacturer’s demand in order to avoid termination.

Note that the Colgate doctrine applies only to prices that are unilaterally set by the manufacturer. It does not apply to prices mutually agreed upon by both manufacturer and retailers, which is known as resale price maintenance (“RPM”). For nearly a century, RPM was treated as a per se violation of the antitrust law under Dr. Miles Medical Co. v. John D. Park & Sons Co. Per se violations of the antitrust laws are always illegal; no procompetitive justification can redeem them.

In 2007, the Supreme Court overruled Dr. Miles in Leegin Creative Leather Products, Inc. v. PSKS, Inc., making RPM subject to rule of reason analysis. Per se analysis is appropriate only when a restraint is well understood and is one that would always or almost always restrict competition and decrease output. But RPM may be procompetitive, particularly when it increases interbrand competition by decreasing intrabrand competition.

RPM encourages retailers to invest more in services or promotions that better position a manufacturer’s product against rivals. It makes sure that low-cost retailers can’t free ride on the services (like nice showrooms or well-trained employers) provided by higher-cost retailers. It supports new entrants, who can convince retailers to invest capital and labor in new products. And it gives manufacturers a tool to encourage retailers to provide additional services to customers.

RPM can, of course, still be anticompetitive. It might facilitate a manufacturer cartel or retailer cartel. It can be abused by a dominant manufacturer or retailer. But applying the rule of reason under Leegin gives courts the opportunity to weigh the anticompetitive and procompetitive elements of a given RPM program against each other.

Unilateral Pricing Policy or Minimum Resale Price Program?

The question of whether a policy is a legal unilateral pricing policy under Colgate or RPM subject to the rule of reason under Leegin is front and center in a recent series of cases brought against contact lens manufacturers, distributors and retailers.

In the United States, contact lenses are prescribed by eye care professionals (“ECPs”) such as optometrists and ophthalmologists. A customer can only purchase contacts for which he has a prescription; once he has a prescription, he cannot substitute another brand without getting a new prescription. Contact lenses are sold both by ECPs and by other retailers, including big box and online low-cost retailers.

Over the last two years, the major contact lens manufacturers have adopted policies that set a pricing floor for contact lenses. If a retailer sold contacts below the specified price, the manufacturer had the right to discontinue selling to the retailer.

One of those retailers, Costco Wholesale Corp. (“Costco”), objected to this policy and filed suit against Johnson & Johnson Vision Care (“J&J”) in March 2015. Costco characterized the policy as minimum resale price maintenance, presumptively governed by Leegin. Costco claimed that ECP retailers were tired of losing out to the lost-cost retailers, like Costco, so the ECP retailers convinced J&J to implement a RPM policy – and then continued to discuss and revise the policy after its initial implementation. Costco said that because interbrand competition is so restricted in the contact lens market (since customers can only buy the brand they are prescribed), RPM creates incentives for ECP retailers to prescribe and fill the brand and type of contact lens that provides the greatest profit. Costco claimed that it is now forced to charge higher prices for J&J contact lenses.

J&J moved to dismiss Costco’s claims in April 2015. J&J argued that its pricing policy was not RPM but was instead a unilateral pricing policy (“UPP”) under Colgate. J&J further stated that Costco had alleged no facts to show that J&J had conspired with ECPs or distributors in creating the UPP. Under Colgate, a manufacturer may seek feedback from its customers or refuse to deal with customers who won’t abide by its pricing policies without running afoul of the antitrust laws. As of the writing of this article, Costco has yet to oppose the motion to dismiss.

A putative class action has also been filed against J&J and four other contact lens manufacturers and wholesalers — Cooper Vision, Alcon Laboratories, Bausch + Lomb, and ABB Optical Group. The putative class members are individuals who purchased contact lenses manufactured by one of the defendants. The complaint alleges that the manufacturers acted in concert with one another and the ECPs to implement RPM programs in the guise of UPPs.

A second putative class action has been filed against contact lens manufacturers and retailers — including Costco itself. The complaint largely tracks the allegations of the other two cases, with the added wrinkle of naming retailers — Wal-Mart, Meijer, Costco, and — as defendants, claiming that retailers’ agreement to implement and follow the RPM policies creates antitrust liability.

There are now over 40 contact lens antitrust cases pending across the country in federal courts. The Judicial Panel on Multidistrict Litigation is currently deciding if and where the cases should be centralized.

Meanwhile, Utah has passed a law making it illegal for a contact lens manufacturer or distributor to knowingly enter into any agreement that controls the price retailers can change for contacts lenses. Contact manufacturers Bausch + Lomb, Alcon and J&J all filed challenges, claiming that the law violates the United States Constitution by regulating interstate commerce and controlling business activity that occurs beyond Utah’s borders. On May 11, 2015, the District of Utah denied the manufacturers’ preliminary injunction motions, finding that it was unlikely that they would be able to prove that the Utah law had effects outside the state.