Antitrust Law Daily Wrap Up, ANTITRUST—DMd: Infant Formula Supplement Producer Lacked Antitrust Standing for Failure to Show Harm from Competitor’s Alleged Antitrust Violations, (Apr 1, 2013)

By Tobias J. Gillett, J.D., LL.M.

A producer of docosahexaenoic acid (DHA) and arachidonic acid (ARA) for use in infant formula lacked antitrust standing to bring Sherman Act and Maryland Antitrust Act claims against another producer that held nearly 100% of that market and had sole source agreements with manufacturers who made 70% of the formula containing DHA and ARA, the federal district court in Baltimore has ruled (BNLfood Investments SARL v. Martek Biosciences Corp., March 28, 2013, Quarles, W.). The producer could not show that the alleged antitrust violations had caused it harm.

Martek Biosciences Corp. is a biotechnology company and producer of DHA and ARA for use in infant formula. Martek possesses a nearly 100% market share in that market in the United States through its status as supplier for Mead Johnson & Co., Abbott Laboratories, Nestle, Ltd., and PBM Products, LLC. These companies manufacture nearly all infant formula in the United States.

In 2005-2007, Martek began notifying its customers of its intent to raise its prices for DHA and ARA. Mead, Abbott, and PBM subsequently agreed to sole source agreements (SSAs) with Martek, agreements that were later amended to extend through 2015 or 2016. The agreements require the signatories to employ Martek as their sole supplier for DHA and ARA. Martek extended the agreements when an ARA producer sought to enter the market, and pricing projections showed it could maintain higher prices through the SSAs. Nestle does not have an SSA with Martek, but does have an agreement under which its prices would be considerably higher if it did not purchase all of its DHA and ARA from Martek.

Another producer of DHA and ARA, BNLfood Investments Limited SARL, began trying to market its products in the United States. BNLfood met with all four infant formula manufacturers in 2009-2010, but achieved no success. The manufacturers expressed concerns about BNLfood’s use of DHA and ARA derived from eggs, a potential allergan; about BNLfood’s progress in obtaining generally recognized as safe (GRAS) status for its products from the Food and Drug Administration; and about the price of BNLfood’s products compared to Martek’s products. On November 20, 2012, the FDA sent BNLfood a “No Questions” Letter accepting BNLfood’s GRAS notification.

In January 2007, BNLfood had sought to purchase ARA from Martek for use in chicken feed to produce eggs with ARA and DHA. Martek declined that request, informing BNLfood that it did not sell ARA for animal applications, and that it was not in Martek’s interest to aid competition with its infant formula business. In 2009, Martek obtained literature from BNLfood at a trade show, and Martek employees visited BNLfood and decided to “make an assessment of what sort of threat this is,” although Martek apparently made no further investigation.

On February 17, 2011, BNLfood brought suit against Martek seeking treble damages, a permanent injunction, and attorneys’ fees for violations of Section 2 of the Sherman Act, Section 3 of the Clayton Act, and the Maryland Antitrust Act. Martek moved for summary judgment.

The court initially noted that “exclusive dealing agreements are not per se antitrust violations.” Instead, the court would have to identify a line of commerce, determine the “area of effective competition” in that line of commerce, and decide whether the agreements foreclosed “a substantial share of the relevant market.”

Relevant markets. The court first examined the relevant markets at issue. BNLfood had alleged that the product and geographic markets were “the manufacture and sale of DHA and ARA nutritional ingredients for use in infant formula in the United States.” Martek contended that this definition improperly excluded resellers, companies that made their own DHA and ARA but did not sell to others, and product given away for testing purposes.

The court concluded that under the “interchangeability test” a reasonable jury could find that resellers and manufacturers of their own DHA and ARA could be included in BNLfood’s market. Martek’s argument was “too restrictive,” and did not adequately focus “on the realities and operations of that market.”

Market power. The court then proceeded to address the issue of Martek’s market power in the relevant market. The court noted that Martek controlled nearly 100% of the market for DHA and ARA for infant formula in the United States and had SSAs with three of the four major manufacturers of that formula. These facts were “more than sufficient to raise an inference of monopolization,” and the SSAs “indicate[d] an attempt to control the market in the future.”

The court rejected Martek’s contention that BNLfood’s board itself had stated that Martek had set its prices “too low” in order to exclude competitors from the market, and that a BNLfood document indicated that prices were in decline “due to competition.” Martek’s projections had shown that it could maintain higher prices through the SSAs than it could otherwise, and Mead has expressed concern about buying from a producer of just ARA due to Martek’s ability to restrict the availability and price of DHA. Martek’s SSAs also made it the sole source for 70% of the market, and the FDA’s GRAS clearance requirements and the SSAs raised barriers to entry for competitors. The court concluded “a reasonable jury could find that Martek has monopoly power.”

Rule of reason. The court observed that the rule of reason required it to “consider whether there are any procompetitive justifications” for Martek’s SSAs. Martek argued that the agreements were procompetitive because they offered lower prices, provided Martek with “revenue security” that permitted it to invest in future “product or business lines,” gave its customers certainty regarding their supply volumes, and allowed Martek to focus on product safety.

The court declined to grant summary judgment on that basis. Although Mead may have received a “discount” because the SSAs locked in a price that was not subject to inflation, Martek’s own projections indicated that the SSAs would permit higher prices over time than without. The only investment alleged to have been facilitated by the SSAs was work on a single improved DHA strain. Moreover, testimony differed regarding whether the SSAs made supply more predictable, and Martek had not shown that the SSAs allowed it to focus on safety more than it ordinarily would.

Standing

Preparation to enter market. The court rejected Martek’s contention that BNLfood lacked antitrust standing because it was not prepared to enter the market due to the regulatory requirements it had not yet satisfied. The court observed that the Food, Drug, and Cosmetic Act required manufacturers of infant formula to provide assurances to the FDA. While the FDA had proposed rules for the manufacture of infant formula, they had not gone into effect. Moreover, although manufacturers could not market infant formula without providing materials to the FDA, BNLfood did not have to satisfy those requirements in order to sell DHA and ARA to those manufacturers, and it could work with the manufacturers to obtain FDA clearance for their products.

Harm to competition. The court also dispensed with Martek’s argument that BNLfood could not establish that the SSAs harmed competition. According to the court, the SSAs “essentially locked up” the market, “prohibiting any competition until their expiration,” a harm “of the type the antitrust laws were intended to prevent.”

Harm to BNLfood. However, the court concluded that BNLfood could not show from the evidence in the record that it had been injured by Martek’s actions. BNLfood had not provided any evidence from the infant formula manufacturers that would explain their decisions not to purchase from BNLfood. Moreover, the record indicated that the manufacturers were concerned about BNLfood’s lack of GRAS approval, its lack of clinical testing, its high prices, and potential allergy complications from its egg-derived products. Whether or not these fears were accurate, “it is the customer’s perception of the truth that fueled their decisions, not, for example, whether the products actually can cause allergic reactions.”

BNLfood also failed to show that Martek had targeted it for exclusion from the market, in the court’s view. Martek’s refusal to sell ARA to BNLfood for use in chicken feed was explained by its desire to avoid helping a competitor. Moreover, Martek’s attempts to obtain information about BNLfood did not demonstrate that it was “targeting” BNLfood, but merely that “it was trying to determine whether BNLfood was actually a competitive threat.” Therefore, the court concluded that BNLfood lacked antitrust standing, and granted summary judgment to Martek.

The case is No. WDQ-11-0446.

Attorneys: Charles C. Moore (White & Case LLP) for BNLfood Investments Limited SARL. Andrea William Trento (Hogan Lovells US LLP) for DSM Nutritional Products, LLC, successor by merger to Martek Biosciences Corp.

Companies: BNLfood Investments Limited SARL; Martek Biosciences Corp.; DSM Nutritional Products, LLC

Cases: Antitrust MarylandNews