[Federal Register Volume 81, Number 151 (Friday, August 5, 2016)]
[Notices]
[Pages 51885-51888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18565]
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FEDERAL TRADE COMMISSION
[File No. 1410042; Docket No. C-4586]
Victrex, plc; Invibio, Limited; and Invibio, Inc.
AGENCY: Federal Trade Commission.
ACTION: Consent Order and Statement of the Commission.
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SUMMARY: The Commission has approved a final consent order in this
matter, settling alleged violations of federal law prohibiting unfair
methods of competition, and has issued a Statement of the Commission.
The attached Analysis to Aid Public Comment and Statement of the
Commission describe both the allegations in the Complaint and the terms
of the Decision and Order.
DATES: Issued on July 13, 2016.
SUPPLEMENTARY INFORMATION:
Analysis of Agreement Containing Consent Order To Aid Public Comment
I. Introduction
The Federal Trade Commission has approved a final consent order
with Victrex plc and its wholly owned subsidiaries Invibio Limited and
Invibio, Inc. (collectively, ``Invibio''). Invibio makes and sells
implant-grade PEEK, a high-performance polymer contained in implantable
devices used in spinal interbody fusion and other medical procedures.
The order seeks to address allegations that Invibio used exclusive
supply contracts to maintain its monopoly power in the market for
implant-grade PEEK, in violation of Section 5 of the Federal Trade
Commission Act, 15 U.S.C. 45.
The order requires Invibio to cease and desist from enforcing most
exclusivity terms in current supply contracts and generally prohibits
Invibio from requiring exclusivity in future contracts. The order also
prevents Invibio from adopting other mechanisms, such as market-share
discounts or retroactive volume discounts, to maintain its monopoly
power.
The order was placed on the public record for 30 days in order to
receive comments from interested persons. Comments received during this
period became part of the public record. After the public comment
period, the Commission determined to make the proposed order final.
The purpose of this analysis, which was placed on the Commission
Web site on April 27, 2016, was to facilitate public comment on the
proposed order. It is not intended to constitute an official
interpretation of the complaint, the consent agreement, or the order,
or to modify their terms in any way. The consent agreement is for
settlement purposes only and does not constitute an admission by
Invibio that the law has been violated as alleged in the complaint or
that the facts alleged in the complaint, other than jurisdictional
facts, are true.
II. The Complaint
The complaint makes the following allegations.
A. Industry Background
Implant-grade PEEK has properties, such as elasticity,
machinability, and radiolucency, that are distinct from other materials
used in implantable medical devices, such as titanium and bone. These
properties make PEEK especially suitable for many types of implantable
medical devices, particularly spinal interbody fusion devices. Invibio
was the first company to develop and sell implant-grade PEEK. The
United States Food and Drug Administration (``FDA'') first cleared a
medical device containing Invibio PEEK in 1999. Upon introducing
implant-grade PEEK, Invibio sold the product to its medical device
maker customers under long-term supply contracts, many of which
included exclusivity requirements.
For a number of years, Invibio was the only supplier of implant-
grade PEEK. In the late 2000s, however, first Solvay Specialty Polymers
LLC (``Solvay'') and then Evonik Corporation (``Evonik'') took steps to
enter the market. The FDA cleared the first spinal implant device
containing Solvay PEEK in 2010, and the first one containing Evonik
PEEK in 2013.
B. Invibio's Use of Exclusivity Terms To Impede Competitors
Invibio responded to Solvay's and Evonik's entry by tightening and
expanding the scope of exclusivity provisions in its supply contracts
with medical device makers. Invibio did this to impede Solvay and
Evonik from developing into effective rivals. Invibio knew that if
Solvay and Evonik could gain reputation and experience, in particular,
by developing supply relationships with leading medical device makers,
this would validate their status as PEEK suppliers with other potential
PEEK buyers and ultimately lead to significant price competition--
painful for Invibio but beneficial to medical device makers.
Invibio extracted exclusivity terms from customers both by
threatening to withhold critical supply or support services and by
offering minor inducements. For example, Invibio threatened to withhold
access to new brands of its PEEK and to Invibio's FDA master file if a
customer declined to purchase exclusively from Invibio. Where
necessary, Invibio offered small price discounts in exchange for
exclusivity.
Due to Invibio's efforts, nearly all medical device makers that
purchase PEEK from Invibio do so under contracts that impose some form
of exclusivity. Although precise exclusivity terms vary, they generally
take one of three forms: (1) Requiring the use of Invibio PEEK for all
PEEK-containing devices; (2) requiring the use of Invibio PEEK for a
broad category of PEEK-containing devices; or (3) requiring the use of
Invibio PEEK for a list of identified PEEK-containing devices. Even
where exclusivity terms apply at the device level, i.e., to a list of
specified devices, the foreclosure effect is substantial: The list
often includes nearly every device in the customer's portfolio and the
customer thus cannot source substantial volumes of PEEK from Invibio's
competitors. Taken together, Invibio's exclusive contracts foreclose a
substantial majority of PEEK sales from Invibio's rivals.
C. Invibio's Monopoly Power
Both direct and indirect evidence demonstrate that Invibio has
monopoly power in the market for implant-grade PEEK. Invibio has priced
its PEEK substantially higher than competing versions of PEEK, without
ceding material market share, and has impeded competitors through its
exclusive contracts. In addition, Invibio has consistently held an
over-90% share of a relevant market with substantial entry barriers,
which indirectly evidences its monopoly power. PEEK has distinctive
properties from other materials used in spinal and other implants.
Physician preferences typically drive the choice of materials used in
an implant, and these preferences largely reflect material properties
rather than price. Other materials are therefore not sufficiently
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close substitutes to prevent a monopolist PEEK supplier from profitably
raising prices. The relevant product market is therefore no broader
than implant-grade PEEK, i.e., PEEK that has been used in at least one
device cleared by the FDA.
D. Competitive Impact of Invibio's Conduct
Through its exclusive contracting strategy, Invibio has maintained
its monopoly power and harmed competition by marginalizing its
competitors. In addition, Invibio's exclusive contracts have prevented
its customers from exercising a meaningful choice between implant-grade
PEEK suppliers and from enjoying the full benefits of competition,
including price competition.
Invibio's exclusivity terms have prevented Solvay and Evonik from
achieving a significant volume of implant-grade PEEK sales,
notwithstanding their offering of significantly lower prices. Invibio
has also excluded Solvay and Evonik from forming supply relationships
with key medical device makers. As a result, Solvay and Evonik have
been unable to achieve significant market share and have consistently
missed sales targets. There is a significant risk that continued
enforcement of Invibio's exclusive contracts would preclude Solvay and
Evonik from achieving sufficient returns to justify future investments,
including in innovative technologies. Without those investments, the
firms would be even less effective competitors in the future.
Additionally, Invibio's exclusive contracts have deprived medical
device makers of the opportunity to make a meaningful choice among
competing suppliers and thereby enjoy the benefits of price,
innovation, and quality competition. Even medical device makers that
would not have switched to a competitor of Invibio would have benefited
from a more competitive market. In addition, many medical device makers
prefer to have more than one source of PEEK in order to mitigate risk
and for other commercial benefits. Absent Invibio's exclusivity
requirements, a significant number of device makers would contract with
Solvay or Evonik to secure lower-priced PEEK and additional or
alternate sources of supply. However, medical device makers locked into
long-term exclusive contracts have been precluded from pursuing their
preferred procurement strategy.
III. Legal Analysis
Monopolization is among the ``unfair methods of competition''
prohibited by Section 5 of the FTC Act.\1\ A firm unlawfully maintains
monopoly power when it ``engage[s] in anti-competitive conduct that
reasonably appears to be a significant contribution to maintaining
monopoly power.'' \2\
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\1\ See, e.g., McWane, Inc. v. FTC, 783 F.3d 814, 827 n.10 (11th
Cir. 2015), cert. denied 577 U.S.--(Mar. 21, 2016).
\2\ McWane, 783 F.3d at 833 (internal quotation marks and
citations omitted); accord United States v. Dentsply Int'l, Inc.,
399 F.3d 181, 187 (3d Cir. 2005); United States v. Microsoft Corp.,
253 F.3d 34, 79 (D.C. Cir. 2001) (en banc) (citing 3 Philip E.
Areeda & Herbert Hovenkamp, Antitrust Law ] 651c, at 78 (1996)).
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Exclusive dealing by a monopolist may be condemned when it ``allows
[the] monopolist to maintain its monopoly power by raising its rivals'
costs sufficiently to prevent them from growing into effective
competitors.'' \3\ Of particular relevance is whether an exclusive
dealing policy has ``foreclose[d] competition in such a substantial
share of the relevant market so as to adversely affect competition.''
\4\ To be unlawful, exclusive dealing need not have foreclosed all
competition from the market.\5\
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\3\ McWane, 783 F.3d at 832 (citing XI Philip E. Areeda &
Herbert Hovenkamp, Antitrust Law ] 1804 a, at 116-17 (2011)); accord
Dentsply, 399 F.3d at 191; Microsoft, 253 F.3d at 69-71; see also In
re McWane, Inc., No. 9351, 2014 WL 556261 at *19, *28 (F.T.C. Jan.
30, 2014) (exclusive dealing by a monopolist may be unlawful where
it ``impair[s] the ability of rivals to grow into effective
competitors that might erode the firm's dominant position'' or
``denie[s] its customers the ability to make a meaningful choice'')
(internal quotation marks and citations omitted), aff'd, McWane,
Inc. v. FTC, 783 F.3d 814 (11th Cir. 2015).
\4\ ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 271 (3d Cir.
2012); see also Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320,
327 (1961) (``In practical application, even though a contract is
found to be an exclusive-dealing arrangement, it does not violate
the section unless the court believes it probable that performance
of the contract will foreclose competition in a substantial share of
the line of commerce affected.'').
\5\ Dentsply, 399 F.3d at 191.
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The factual allegations in the complaint support a finding of
monopolization. Invibio's exclusivity strategy has not prevented entry
entirely. But its exclusivity terms--whether full exclusivity terms or
terms that apply at the product or product category level across a wide
range of products--have foreclosed its rivals from a substantial
portion of available sales opportunities in the relevant market and
prevented those rivals from competing effectively. Among the foreclosed
sales opportunities are key customers that would validate the
reputations of Solvay and Evonik as legitimate rivals of Invibio,
notwithstanding their more recent entry into the market. Invibio's
exclusionary conduct has also reduced incentives to innovate and
prevented PEEK consumers from exercising a meaningful choice among
suppliers.
A monopolist may rebut a showing of competitive harm by
demonstrating that the challenged conduct is reasonably necessary to
achieve a procompetitive benefit.\6\ Any proffered justification, if
proven, must be balanced against the harm caused by the challenged
conduct.\7\ Here, no procompetitive efficiencies justify the scope of
Invibio's exclusionary and anticompetitive conduct. Any procompetitive
benefit could have been achieved through less restrictive means.
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\6\ See, e.g., Microsoft, 253 F.3d at 59.
\7\ Id.
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IV. The Consent Order
The Decision and Order remedies Invibio's anticompetitive conduct
and imposes certain fencing-in requirements in order to prevent de
facto exclusivity between Invibio and its customers.
Paragraph I of the order defines the key terms used throughout the
rest of the order.
Paragraph II addresses the core of Invibio's anticompetitive
conduct. Paragraph II.A prohibits Invibio from adopting or implementing
any agreement or policy that results in ``exclusivity'' with customers.
``Exclusivity'' is defined to include any limit or prohibition by
Invibio on its customers dealing with a competing implant-grade PEEK
supplier or any requirement by Invibio that a customer use only Invibio
PEEK in (1) all of its devices, (2) in any group of devices, or (3) in
any one device. The order thus applies to all forms of exclusivity that
appear in Invibio's contracts.
Under Paragraph II.A, Invibio may not require exclusivity for any
new contract, except in the limited circumstances set forth in
Paragraph II.E (described below). Further, Invibio may not enforce
exclusivity terms in an existing contract with any medical device maker
that chooses to use an alternate implant-grade PEEK supplier instead of
Invibio for any or all future devices. In addition, Paragraph II.A, in
conjunction with Paragraph II.F (described below), prohibits Invibio
from enforcing provisions in an existing contract that would prevent a
medical device maker from using other suppliers of implant-grade PEEK
for any device, or from switching suppliers for any current device,
provided that the device maker agrees to the tracking requirements
contained in Exhibit C of the order. The
[[Page 51887]]
tracking requirements are designed to accommodate Invibio's concerns,
related to potential product liability actions, about maintaining the
ability to identify devices that use Invibio PEEK and are generally
consistent with industry practice.
Paragraph II.B prohibits Invibio from retaliating against customers
for using or preparing to use an alternate PEEK supplier. Prohibited
retaliation includes cutting off PEEK sales or withholding access to
regulatory support.
Paragraph II.C contains provisions designed to prevent de facto
exclusivity in the future. For all new contracts, Invibio may not
require minimum purchases, either as a condition of sale or as a
condition for receiving important contract terms or services, other
than as described in Paragraph II.D. Invibio may not offer volume
discounts that are applied retroactively once a customer reaches a
specified threshold. For example, Invibio may provide a discount on
sales beyond 100 units but it may not lower the price of the first 99
units if and when the customer buys the 100th unit. Invibio may,
however, provide certain discounts and non-price incentives designed to
meet competition.
Paragraph II.D allows Invibio to condition its provision of certain
types of extraordinary support to a customer for new devices on minimum
purchase requirements for three years after the date of FDA clearance
for such devices, so long as the minimum purchase amounts to less than
30 percent of the customer's implant-grade PEEK requirements for the
device(s) that received the support. Extraordinary support excludes
routine services such as maintaining and granting access to Invibio's
FDA master file.
Paragraph II.E contains provisions designed to allow for
procompetitive collaboration with a customer and preserve Invibio's
incentives to innovate, including through investments that may be
susceptible to free-riding by competitors. The paragraph allows Invibio
to enter into a mutually exclusive contract with a customer when
Invibio and the customer have engaged in the joint development of a new
product that has required the contribution of significant capital,
intellectual property rights, or labor by both Invibio and the
customer, or when a customer asks that Invibio manufacture a custom
component to the customer's specifications. Current PEEK sales subject
to such contracts represent a small portion of the relevant market.
Nonetheless, several limitations apply under this paragraph. The
contracts must be: In writing, time-limited, applicable only to the
jointly developed or custom product, and notified to the Commission.
Invibio may not tie the availability of other forms, grades, or types
of PEEK to a customer's willingness or agreement to enter into this
type of contract. Further, sales resulting from these exclusive
contracts may not account for more than 30 percent of Invibio's total
annual sales.
Paragraph II.F allows Invibio to maintain limited exclusivity in
existing contracts if customers do not agree to certain tracking
requirements. Specifically, Invibio may enforce specified product-level
exclusivity terms in existing contracts if the customer does not accept
the terms set forth in Exhibit C to the order, thereby agreeing: (1)
Not to mix (commingle) PEEK from different suppliers in a single unit
of a device; (2) to maintain records that identify which supplier's
PEEK is used in any batch of devices that are dual-sourced; and (3) to
notify Invibio in the event of an adverse event related to Invibio's
PEEK. These tracking requirements are generally consistent with
existing industry practice.
Paragraph III requires Invibio to implement an antitrust compliance
program, which includes providing notice of the order to Invibio's
customers. Paragraphs IV-VI impose reporting and other compliance
requirements.
The Decision and Order will expire on July 13, 2036.
Statement of the Federal Trade Commission
The Commission has approved a final consent order settling charges
that Victrex plc, together with its subsidiaries Invibio Limited and
Invibio, Inc. (collectively ``Invibio''), violated Section 5 of the
Federal Trade Commission Act by using exclusive supply contracts to
maintain Invibio's monopoly power in the market for a high performance
polymer used in medical implants known as polyetheretherketone or PEEK.
Our order aims to facilitate price competition, spur innovation, and
provide medical device makers with a meaningful choice among PEEK
suppliers. This enforcement action reflects our commitment to intervene
when a dominant firm employs exclusionary practices to maintain its
monopoly power and harm competition.
It is well established that exclusive dealing can promote or harm
competition, depending on the circumstances.\1\ The Commission
therefore examines exclusive dealing under the rule of reason to
determine whether the probable net effect of an exclusive dealing
policy is to benefit or harm competition. In particular, we focus on
evidence that the suspect conduct has affected or is likely to affect
prices, output, quality, innovation, and consumer choice. Because its
legality turns on its impact on competition, an exclusive dealing
policy may be lawful when used by a firm in a competitive market, but
unlawful if a monopolist uses the policy to maintain its dominant
position, for example, by diminishing its rivals' ability to
compete.\2\ We have reason to believe that the latter occurred here.
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\1\ See, e.g., McWane, Inc. v. FTC, 783 F.3d 814, 827-28 (11th
Cir. 2015), cert. denied, 136 S. Ct. 1452 (2016); United States v.
Dentsply Int'l, Inc., 399 F.3d 181, 187 (3d Cir. 2005); Ilya R.
Segal & Michael D. Whinston, Exclusive Contracts and Protection of
Investments, 31 RAND J. Econ. 603, 603 (2000); Eric B. Rasmusen, J.
Mark Ramseyer & John S. Wiley, Jr., Naked Exclusion, 81 Am. Econ.
Rev. 1137, 1137-38 (1991), as corrected by Ilya R. Segal & Michael
D. Whinston, Naked Exclusion: Comment, 90 Am. Econ. Rev. 296, 307
(2000).
\2\ See, e.g., Dentsply, 399 F.3d at 187 (``Although not illegal
in themselves, exclusive dealing arrangements can be an improper
means of maintaining a monopoly.'').
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Invibio was the first, and for several years the only, PEEK
supplier in the market. We charge that, when faced with the entry of
two new rivals in the late 2000s, Solvay Specialty Polymers LLC and
Evonik Corporation, Invibio sought to lock up its customers and lock
out these rivals. Invibio recognized that denying Solvay and Evonik
access to the largest and most influential customers was critical to
preventing the two entrants from validating their reputations in the
market and achieving the experience needed to pose a serious threat to
Invibio's market dominance.
As described in our complaint, Invibio had entered into long-term
exclusive contracts with nearly every medical device maker producing
implants using PEEK. We allege that, to prevent Solvay and Evonik from
gaining scope, experience, and supply relationships, Invibio tightened
the exclusivity terms of its supply agreements. Some of these
provisions explicitly require the use of Invibio's PEEK for all of a
customer's PEEK-containing devices, while others impose exclusivity for
a list of product categories or designated products that often comprise
nearly every PEEK-containing device in a customer's portfolio.
Invibio threatened customers that resisted its demand for
exclusivity with retaliation, including termination of the
[[Page 51888]]
PEEK supply for all of a device maker's products, lack of access to new
types of PEEK developed by Invibio, and the loss of necessary
regulatory support. In certain cases, Invibio provided customers with a
small price discount or other benefit in exchange for exclusivity.
Notably, both Solvay and Evonik offered PEEK at prices significantly
below those charged by Invibio, lower even than prices reflecting
discounts Invibio offered to secure customer exclusivity.
As alleged in the complaint, this strategy worked. Even after
Solvay and Evonik's entry, Invibio still accounted for approximately 90
percent of implant-grade PEEK sales. Invibio's exclusive dealing policy
foreclosed a substantial majority of PEEK sales for which its rivals
otherwise could have competed. The evidence shows that Invibio has been
able to charge supracompetitive prices to many device makers
notwithstanding Solvay and Evonik's entry. Largely limited to competing
for small or start-up device makers that do not have exclusive
contracts with Invibio, Solvay and Evonik missed their respective sales
targets. Absent the Commission's enforcement action, Invibio's conduct
would continue to deny Solvay and Evonik the opportunity to contest
most sales opportunities. They would be unable to achieve sales volumes
sufficient to incentivize continued investment in the business that
would yield further innovations in PEEK technology. Importantly,
Invibio has failed to identify any procompetitive justification that
would offset the harm that its exclusive supply contracts inflicted on
competition.
In order to safeguard competition, the Commission's order generally
prohibits Invibio from entering into exclusive supply contracts and
from preventing current customers from using an alternative source of
PEEK in new products. The order also prohibits Invibio from imposing
contract terms that would deter a customer from purchasing additional
units of PEEK from a rival. In general, Invibio may neither condition
price or other sales terms on a customer's purchase of a specified
portion or percentage of its PEEK requirements from Invibio, nor offer
volume discounts that are applied retroactively once a customer's total
purchases of Invibio PEEK reach a specified threshold. Invibio may,
however, offer volume discounts that are not retroactive.
At the same time, we recognize that collaborative research and
development efforts involving a PEEK supplier and a device maker
present a different set of issues, including potential concerns about
free riding. Consequently, our order leaves room for limited exclusive
arrangements where Invibio and a device maker jointly research and
develop new or custom PEEK products or devices.
In sum, our order appropriately addresses Invibio's exclusionary
conduct, provides its rivals a meaningful opportunity to compete, and
opens the door for price competition, innovation, and more choice for
PEEK customers.
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 2016-18565 Filed 8-4-16; 8:45 am]
BILLING CODE 6750-01-P