Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Johnson & Johnson’s retail pricing policy for contact lenses alleged to be anticompetitive, (Mar 3, 2015)

By Linda O’Brien, J.D., LL.M.

Contact lens manufacturer Johnson & Johnson has engaged in a concerted action with eye care professional trade associations and buying groups to restrain competition by other retailers through the imposition and enforcement of minimum retail prices on the sale of contact lenses to consumers, according to a complaint filed in the federal district court in San Francisco (Costco Wholesale Corporation v. Johnson & Johnson Vision Care, Inc., March 2, 2015).

Costco is a membership-based warehouse club and offers a variety of merchandise, including food, furniture, office supplies, and eye care products. Costco’s optical department buys contact lenses directly from manufacturers and sells them to members at prices generally lower than those of other retailers. Johnson & Johnson (J&J) manufactures and sells contact lenses to retailers pursuant to a qualified retail account agreement.

Eye care professionals (ECPs) charge consumers a fee for services related to eyes or vision and determine the appropriate vision prescription. Many ECPs also fill prescriptions and sell contact lenses. ECPs are the only retailers that can legally prescribe contacts for consumers. Once they do so, neither the consumer nor a competing retailer can substitute that prescription for an alternative or cheaper option.

According to the complaint, Costco purchases a large volume of contact lenses from J&J and seeks to attract members away from those who sell J&J lenses at higher prices. Prior to 2014, J&J did not dictate the prices at which Costco and other retailers sold J&J contacts and supported efficient retailers by lowering prices to consumers through coupons and rebates. In 2014, J&J responded to requests by ECPs to limit competition by “discounters” and agreed to impose minimum retail price (RPM) policies. This has resulted in substantially higher prices on the J&J lenses that Costco sells. The RPM policies also created financial incentives for ECPs that both wrote and filled prescriptions to favor RPM lenses.

The complaint also stated that the concerted action among ECPs, their trade associations and buying groups, and J&J to restrain competition by imposing minimum retail prices has been implemented through negotiations to adopt, implement, and enforce minimum retail prices; agreements that J&J and distributors will not sell to any retailer that does not follow the minimum retail prices; and offers to reinstate suspended retailers that indicate their compliance with the RPM policies. The RPMs are unreasonably anticompetitive in light of (1) increased consumer harm in terms of increased prices and reduced choices; (2) increased incentives for prescription choices by ECPs; (3) increased barriers to entry at the wholesale level; absence of effective interbrand price competition; (4) concentrated nature in the manufacturing and wholesale market; and (5) control over consumer choice exercised by ECPs through the prescription process.

The wholesale contact lens market is highly concentrated as there are only four primary manufacturers of contact lenses, Costco claimed. J&J has market power in the wholesale contact lens market with a market share of at 43 percent. Moreover, there are high barriers to entry, since the design and manufacture of contact lenses requires complex technology, skilled labor, substantial research and development, advertising, patents, and regulatory approvals, the complaint alleges.

The complaint states that ECPs have historically sought to leverage control over prescriptions to force manufacturers to limit the effects of price discounting and other competition. In 2001, the attorneys general from 32 states and a class of consumers brought actions against major contact lens manufacturers, including J&J, and trade associations for conspiring to restrain competition. The parties settled, and the consent decree resolving the dispute has expired. Additionally, Congress passed the Fairness to Contact Lens Consumers Act (FCLCA), which prohibits ECPs from requiring the purchase of contacts from themselves or tying their service to the purchase. However, the manufacturers and some ECPs continue to seek to restrict competition by implementing the RPMs.

Costco objected and continues to object to the imposition of J&J’s RPM policy and its initial refusal to comply resulted in threats from J&J that it would cease selling lenses to Costco. Through negotiations with Costco and other retailers, J&J has agreed to a series of revisions to the policy which have modestly reduced the harmful impact on consumers.

Costco asserts claims for breach of contract, restraint of trade, unfair competition, and violations of Section 1 of the Sherman Act, California’s Cartwright Act and Unfair Competition Law, New York General Business Law, and Maryland Antitrust Act. The action seeks declaratory and injunctive relief, damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 3:15-cv-00941.

Attorneys: David P. Chiappetta, Mara Boundy, David J. Burman, Shylah R. Alfonso, and David S. Steele (Perkins Coie LLP) for Costco Wholesale Corporation.

Companies: Costco Wholesale Corporation; Johnson & Johnson Vision Care, Inc.

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