Will the FTC resuscitate the Robinson Patman Act in an effort to bring down prescription drug prices?
Pharmacy benefit managers (PBMs) are intermediaries paid by health care insurers to manage their prescription benefits programs. Today, PBMs not only negotiate the prices charged by pharmaceutical manufacturers to the insurers, but they also have enormous influence on which drugs are prescribed to patients by creating formularies (lists of prescription drugs covered by the insurers for their patients), and how much patients ultimately pay at the pharmacy counter. They create the prescription drug formularies and surrounding policies for the health care insurers, and reimburse pharmacies for patients’ prescriptions.
The largest PBMs are now vertically integrated into the largest health insurance companies as well as wholly owned mail order and specialty pharmacies. PBM functions depend on highly complicated, opaque contractual relationships that are difficult or impossible to understand across the prescription drug system.
On June 6th, the Federal Trade Commission (FTC or Commission) announced the launching of an inquiry into the PBM industry, requiring information and records from the six largest PBMs: CVS Caremark; Express Scripts, Inc.; OptumRx, Inc.; Humana Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc. The FTC announced that the inquiry seeks information about a number of PBM practices that have drawn legal scrutiny, including in particular the fees and “clawbacks” PBMs charge unaffiliated pharmacies (often called “rebate walls”). While the practices differ, essentially a pharmaceutical manufacturer provides a rebate to a PBM so that the manufacturer’s drug gets listed on and remains on a health insurer’s formulary. Competing pharmaceuticals—often lower cost generics—are given “second class” listings or totally excluded. Supposedly, some or all of the savings may be passed on to patients, but adding a lower-cost competing product to a formulary may result in the loss of the PBM’s rebate. Obviously, this risk is lowered by not making the lower-cost product available to patients, with considerably more cost to uninsured consumers. Additionally, a competing pharmaceutical may be given secondary access to the formulary because patients may be required to use the preferred product if it is available.
Ten days later, on June 16th, the FTC issued a Policy Statement by a 5-0 vote, addressing PBM “Rebates and Fees in Exchange For Excluding Lower-Cost Drug Payments.” The Policy Statement does not declare that any particular conduct it identified in fact is unlawful. Instead, it announced that it would "ramp up enforcement against" the practices that led the Commission to investigate the practices at issue.
According to the Policy Statement, when formulary agreements “favor high-cost drugs that generate large rebates and fees that are not always shared with patients,” they create the potential for misaligned incentives, increased costs to consumers, and reduced competition from generic and biosimilar drugs. Of particular note, the now-Democrat controlled FTC not only emphasized the traditional “consumer welfare” oriented concerns resulting from increased prices, but also the harms caused by loss of consumer choice, e.g., an employee not changing employment because of fear of loss of health insurance.
Lacking the authority to bring suits under the Sherman Act, the Policy Statement identified the legal tools the FTC said it does have available if it decides that any disfavored conduct warrants an enforcement action:
- Section 5 of the FTC Act, which prohibits unfair methods of competition and deceptive acts and practices, pursuant to which the Commission can challenge practices otherwise subject to Section 1 (agreements in restraint of trade) and Section 2 (monopolization or attempted monopolization) of the Sherman Act, as well as practices violating the policies of those statutes if not their letter, or constitute “incipient” violations of those statutes;
- Section 3 of the Clayton Act, which prohibits exclusive dealing and tying arrangements that potentially harm competition substantially, as well as practices violating the policies of that statutory provision, if not its letter, or constitute “incipient” violations of that statutory provision, which can be challenged under Section 5 of the FTC Act; and
- The Robinson-Patman Act, and in particular Section 2(c), which was originally targeted at dummy brokerage fees, and which prohibits a seller's payments of fees or discounts in lieu of fees to a buyer or to the buyer’s agent, “except for services rendered.”
The FTC noted that it is not concerned with rebates and fees for services that are negotiated in good faith “for legitimate services that increase value to payers and patients.” Rather, the Policy Statement relates to pharmaceutical manufacturers that use a dominant market position to stifle through PBMs competition from less expensive biosimilars or generics, in which case the FTC asserted it has the authority to act. The FTC identified two specific practices of specific concern that are within its authority:
- Manufacturer inducement of PBMs “to place higher-cost drugs on formularies instead of less expensive alternatives in a manner that shifts costs to payers and patients” may violate Section 5 of the FTC Act; and
- Manufacturer payments or PBM acceptance of rebates or fees in exchange for PBM exclusion of lower-cost drugs may violate Section 2(c) of the Robinson-Patman Act, which prohibits payments to agents, representatives and intermediaries who represent another party’s interests” in the purchase or sale of goods.
The FTC did not refer to Section 3 of the Clayton Act in its examples because that statutory provision is by its terms limited to “sales” of “commodities.” PBMs are not purchasers of commodities, but are representatives providing purchasing services for health insurers who are the actual purchasers of the applicable commodities. This also likely explains why the FTC only referred to Section 2(c) of the Robinson-Patman Act, since that is the only provision of that statute that is not limited to purchasers of commodities. The other statutory provisions, which deal with pricing or promotional discrimination are, like Section 3 of the Clayton Act, limited to the sale of commodities or promotion of purchased commodities.
On the other hand, Section 2(c) of the Robinson-Patman is broader in coverage than the other statutory provisions, and may apply to PBM conduct. Specifically, Section 2(c), the so-called “brokerage” provision, prohibits any party to a sales transaction—seller, purchaser, or sales or purchaser representative—from paying to or receiving from the other party a “commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered.” While a sale of a commodity must be involved, the provision clearly applies to a broker, sales or purchasing representative, not just to the seller or buyer of the commodity.
Section 2(c) is a self-contained provision that differs considerably from the remainder of the statute. It was intended for a specific, limited purpose--to protect the fees paid to food brokers during the 1936 depression period when the Robinson-Patman Act was enacted. Congress adopted Section 2(c) to prohibit payments to fictitious brokers created by supermarket chains as a device for obtaining lower prices, and to forbid discounts given to buyers in lieu of brokerage payments.
The most recent Supreme Court Section 2(c) decision, FTC v. Henry Broch & Co., was issued more than 60 years ago. It involved a seller that reduced its selling price to a retailer by passing on to that customer the defendant broker’s agreed reduction in its commission. The courts have since ruled that a seller’s payment to a buyer’s broker, whether or not passed on to the buyer, can violate Section 2(c). So apparently this is the basis for the reference to Section 2(c) in the FTC Policy Statement. Of interest, it has been 40 years since the last decision in a case brought by the FTC under Section 2(c).
However, the FTC’s use of Section 2(c) to challenge the legality of payments to PBMs would not be without considerable risk. This is because the Supreme Court stressed in Henry Broch that it would have been “quite a different case” if the customer had “rendered any services to the seller” or the broker. The comment referred to the statutory “for services rendered” exception. Almost immediately thereafter, the Ninth Circuit ruled in a case brought by the FTC that a seller’s payments for the “reasonable value” of a buyer’s “services of a promotional nature” were exempt from Section 2(c) because the payments were “for services rendered.” Since then the exemption has been applied to payments for such services as a buyer’s agent’s guarantee to a supplier of payment by the buyer, a school’s provision of space to a photographer to photograph students, and retailer payments to tour operators for bringing tourists to their outlets.
On the other hand, the “for services rendered” exemption has been rejected when an agent has acted against the interests of its principal. Accordingly, the exemption may not apply to payments to PBMs that are against the interest of their insurer principals.
Most courts also have applied Section 2(c) to commercial bribery claims.  Indeed, the Supreme Court noted in Henry Broch that “debates on the bill show clearly that Section 2(c) was intended to proscribe . . . the ‘bribing’ of a seller’s broker by the buyer.” In later dicta, the Court declared in 1972 that “bribery of a public purchasing agent may constitute a violation of Section 2(c) . . . .”  Significantly, most courts have determined that to violate Section 2(c) the alleged bribe must be kept secret from the principal. So that limitation may affect a future FTC action against a PBM as well. However, the Second Circuit did say in 2005: “for purposes of § 2(c), it is irrelevant whether an improper payment that is given to a purchaser's agent is kept by the agent for personal gain rather than transferred to the purchaser.” In any event, the Robinson-Patman Act may not be the magic bullet the FTC Policy Statement suggested.
While the FTC does not have the authority to enforce the Sherman Act, it can use Section 5 of the FTC Act to challenge practices that violate the Sherman Act, and it does have direct authority to enforce both the Clayton and Robinson-Patman Acts. But even if an anticompetitive practice does not violate any of the other statutes, it may still constitute an unfair method of competition under Section 5 of the FTC Act. The Supreme Court and courts of appeal specifically have given the Commission the authority to proscribe three types of anticompetitive conduct as violations of Section 5 even though the conduct does not violate any of the three federal antitrust statutes :
- conduct that violates the “policy” or “spirit” of one of the other statutes because its anticompetitive effects are similar to or the same as violations of them;
- conduct that would violate one of the other statutes but for some limiting provision in those statutes; and,
- conduct that, unless challenged, may develop into a significant restraint of trade— a so-called “incipient” antitrust violation. 
While the lower courts have at times dismissed FTC cases applying these standards as being overly aggressive, the Commission clearly does have this authority if used judiciously. Whether it will be used during the pendency of the current Democrat controlled FTC and, if so, whether reviewing courts of appeals will consider such enforcement to be judicious, is to be seen.
*Irving Scher is Senior Counsel in the firm's New York office.
 15 U.S.C. §14. See CDC Techs. V. IDEXX Labs., 186 F.3d 74, 78 (2d Cir. 1999).
 Section 2(a), 15 U.S.C. §13(a). See e.g., Bruce’s Juices v. American Can Co., 330 U.S. 743, 755-56 (1947); Seaboard Supply Co. v. Congoleum Corp., 770 F.2d 367, 373 (3rd Cir. 1985) (sales agent not a purchaser).
 Sections 2(d), 2(e), 15 U.S.C. §§13(d), 13(e). See, e.g., Freightliner of Knoxville, Inc. v. DaimlerChrysler Vans, LLC, 484 F.3d 865, 872 (6th Cir. 2007); Lewis v. Philip Morris Inc., 335 F.3d 515, 524 (6th Cir. 2004).
 Section 2(c), 15 U.S.C. §13(c).
 See FTC v. Henry Broch & Co., 363 U.S. 166 (1960); FTC v. Simplicity Pattern Co., 360 U.S. 55 (1959).
 FTC v. Henry Broch & Co., 363 U.S. 166 (1960).
 See, e.g., Ideal Plumbing Co. v. Benco. Inc., 529 F.2d 972 (8th Cir. 1976); El Salto, S.A. v. PSG Co., 444 F.2d 477 (9th Cir. 1971).
 See Herbert R. Gibson, Sr. v. FTC, 682 F.2d 554 (5th Cir. 1982).
 363 U.S. at173.
 FTC v. Washington Fish & Oyster Co., 282 F.2d 595, 597 n.4 (1960).
 Leonard v. J.C. ProWear, Inc., 64 F.3d657 (4th Cir. 1995) (unpublished opinion).
 Burge v. Bryant Pub. Sch. Dist., 658 F.2d 611 (8th Cir. 1981).
 Harris v. Duty Free Shoppers Ltd., 1989 WL 108203 (N.D. Cal., July 17, 1999), aff’d on other grounds, 940 F.2d 1272 (9th Cir. 1991).
 See Grace v. E.J Kozin Co., 538 F.2d 170 (7th Cir. 1976); Rangen, Inc. v. Sterling Nelson & Sons, 351 F.2d 851 (9th Cir. 1965), cert. denied, 383 U.S. 1936 (1966).
 See, e.g., 2660 Woodley Road Joint Venture v. ITT Sheraton Corp., 369 F.3d 732, 737 (3rd Cir. 2005); Envtl. Tectonics v. W.S. Kirkpatrick, Inc., 847 F.2d 1052, 1066 (3d Cir. 1988), aff'd on other grounds, 493 U.S. 400 (1990); Calnetics Corp. v. Volkswagen of Am., Inc., 532 F.2d 674 (9th Cir.), cert. denied, 429 U.S. 940 (1976). Compare Augusta News Co. v. Hudson News Co., 269 F.3d 41, 45–46 (1st Cir. 2001) (open question in First Circuit as to whether commercial bribery is covered by § 2(c)); Excel Handbag Co. v. Edison Bros. Stores, Inc., 630 F.2d 379 (5th Cir. 1980) (declining to assume commercial bribery is within coverage of § 2(c)).
 363 U.S. 166, 169 n.6 (1960).
 Cal. Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 513 (1972).
 See Stephen Jay Photography, Ltd. v. Olan Mills, Inc., 713 F. Supp. 937, 941 (E.D. Va. 1999), aff’d on other grounds, 903 F.2d 988 (4th Cir. 1990); Burge v. Bryant Pub. Sch. Dist., 520 F. Supp. 328 (E.D. Ark. 1980), aff’d per curiam, 658 F.2d 611 (8th Cir. 1981).
 Blue Tree Hotels Invest. (Canada) Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 223–24 (2d Cir. 2005).
 See FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 454 (1986); FTC v. Motion Picture Adver. Serv., 344 U.S. 392, 394-95 (1953).
 15 U.S.C. §§ 12-27, 44; 29 U.S.C. §§ 52-53. See FTC v. Cement Institute, 333 U.S. 683, 694(1948).
 See FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972).
 See Atlantic Ref. Co. v. FTC, 381 U.S.357,369 (1965) (conduct had “central competitive characteristic.” of tying arrangement).
 See Grand Union Co. v. FTC, 300 F.2d 92, 98-99(2d Cir. 1962) (language prohibiting inducement of promotional allowance perhaps mistakenly omitted from Robinson-Patman Act).
 See FTC v. Brown Shoe Co., 384 U.S. 316, 322 (1966); Motion Picture Adver. Serv., 344 U.S. at 394-95.
 See E.I. duPont de Nemours & Co. v. FTC, 729 F.2d 128, 138-40 (2d Cir. 1984); Boise Cascade Corp. v. FTC, 637 F.2d 573, 579-82 (9th Cir. 1980); Official Airline Guides v. FTC, 630 F.2d 920, 927 (2d Cir. 1980).