“Monopoly leveraging,” or the use of monopoly power in one market to achieve an advantage in a related market, is not in itself a violation of Sherman Act section 2, according to a recent opinion from the U.S. Court of Appeals for the Seventh Circuit. Schor v. Abbott Laboratories, No. 05-3344 (7th Cir. 2006). The complaint alleged that defendant Abbott Laboratories (“ABBOTT”) attempted to leverage a monopoly on its patented AIDS drug Norvir to obtain a second monopoly on other drugs that can be combined with Norvir. The District Court dismissed the complaint for failure to state a claim and the Seventh Circuit affirmed. The court reasoned that such a practice cannot increase a monopolist’s profits. “A monopolist can take its monopoly profit just once,” Judge Frank H. Easterbrook wrote for the unanimous panel. “An effort to do more makes it worse off and is self-deterring.” Therefore, the court concluded, monopoly leveraging does not violate the antitrust laws unless it takes a particular form, such as predatory pricing, tie-in sales or a refusal to deal.
Abbott holds a patent on Norvir. The drug belongs to a class called protease inhibitors, which are used to battle the human immunodeficiency virus (HIV), the retrovirus that causes the acquired immune deficiency syndrome (AIDS). When used alone, in doses high enough to be effective, Norvir causes serious side effects. However, Norvir can be combined with other protease inhibitors to boost their effectiveness. Abbott itself sells one such combination, called Kaletra. Plaintiff Gary Schor (“SCHOR”), a user of AIDS drugs, complained that Abbott, in an effort to establish a monopoly over protease inhibitors, charged an unduly high price for Norvir and an unduly low price for Kaletra. Schor alleged that Abbott was attempting to drive other vendors out of the market, freeing it to raise the price of Kaletra.
The court begins the analysis by rejecting alternate theories for antitrust liability. The complaint cannot allege illegal tying because Norvir is available as a product separate from Kaletra. Schor cannot allege a refusal to deal because Abbott will sell to anyone willing to meet its price. Schor cannot allege price discrimination because a patent holder is entitled to charge whatever price the market will bear. The complaint does not allege predatory pricing, as Abbott’s rivals are still able to sell their protease inhibitors for a profit. Finally, the disparity of prices between Norvir and Kaletra is not a price squeeze in the mold of United States v. Aluminum Co. of America, 148 F.2d 416, 436-38 (2d Cir. 1945) (Sherman Act violated by selling processed aluminum sheets for less than the price of raw aluminum), because Kaletra sells for more than its Norvir component sold separately.
This leaves the plaintiff with a claim that “monopoly leveraging,” standing alone, is a violation of Section 2. The court rejects this claim, saying there is no antitrust concern because such leveraging cannot increase Abbott’s profits. A monopolist that controls an essential component of a product can extract its monopoly profit by charging a high price for that component. If the monopolist controls other components as well, and tries to raise prices on those components, the effect is the same as setting an excessive price for the original, monopolized component. Rather, the court finds, a monopolist’s profit-maximizing strategy would be to promote competition among makers of the complimentary components, reducing their price so that the monopolist can charge more for its product. “Thus Microsoft does not make computers but encourages vigorous competition among Dell, Hewlett-Packard, Sony, Lenovo, and other participants in that market; the less it costs to buy the hardware, the more sales of operating system software there will be and the more Microsoft can charge.”
With Schor, the Seventh Circuit joins the Federal Circuit in rejecting “monopoly leveraging” as a stand-alone theory. See In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322, 1327 (Fed. Cir. 2000). Several other courts have expressed doubts about the validity of the theory. See, e.g., Willman v. Heartland Hosp. E., 34 F.3d 605, 613 (8th Cir. 1994); Key Enters. v. Venice Hosp., 919 F.2d 1550, 1566-68 (11th Cir. 1990); Advanced Health-Care Servs. v. Radford Cmty. Hosp., 910 F.2d 139, 149 n.17 (4th Cir. 1990). The opinion places the circuit at odds with “[p]erhaps some portions of” Berkeley Photo v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1980), and Image Technical Services Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1203-13 (9th Cir. 1997). (Although it’s possible to categorize Image Technical as a refusal-to-deal case, the court said, “[W]e think it better to join the Federal Circuit in saying that Image Technical just got it wrong.”)
The Schor court rejects the notion, suggested by Image Technical and espoused by the plaintiff, that market power achieved via patent leaves a monopolist more susceptible to claims of leveraging than market power achieved via other means. In fact, the court said, Abbott’s patents do more to support its position than to assist Schor. Because Norvir is patented, the court reasons, Abbott effectively has a patent on the product “Norvir in combination with other drugs.” Therefore, Abbott is entitled to monopolize such a combination. Yet it hasn’t done so – doubtless, the court reasons, because Abbott has an economic interest in encouraging competition among the makers of the complimentary drugs. “It would make little sense to use the antitrust laws to condemn Abbott for a strategy (a) that it has not in fact pursued; (b) that would disserve its own interests; and (c) that the patents entitle Abbott to pursue if it chooses.”
Finally, the panel rejects Schor’s attempt to use rulings in two related cases in Northern California to dictate the result of the instant case. A federal judge in San Francisco denied Abbott’s motion to dismiss one of the California suits, and later denied Abbott’s motion for summary judgment in both of the suits. Schor argued that these decisions conclusively prove that his complaint states a ground for relief. The Seventh Circuit disagreed, however, for two reasons. First, the California decisions are not final, as they must be before they can have any preclusive effect on other lawsuits. Second, there is a difference in the governing law; California district courts must apply the Ninth Circuit’s Image Technical decision, while Seventh Circuit courts need not.