Two Circuit Court Opinions Confirm Central Role of Market Definition in Merger Litigation

August 29, 2011

As we reported in our 2011 Mid-Year Merger Enforcement Update, federal courts are currently reviewing a number of cases that could have a significant impact on the antitrust analysis of mergers and acquisitions.  Two noteworthy circuit court decisions were handed down recently.  In City of New York v. Group Health Inc., No. 10-2286-CV, 2011 WL 3625097 (2d Cir. Aug. 18, 2011), the Second Circuit upheld the dismissal of a case in which the City attempted to block a merger between two health insurers that provide coverage to municipal employees.  In doing so, the Second Circuit held that a plaintiff (including government agencies) seeking to enjoin a merger on antitrust grounds must allege and prove a relevant market in which the merger will impair competition.   

In FTC v. Lundbeck, No. 10-3458, 2011 WL 3629347 (8th Cir. Aug. 19, 2011), a decision involving a series of pharmaceutical acquisitions, the Eighth Circuit further confirmed that the government "bears the burden of identifying a relevant market" in opposing a transaction.  Testimony from physicians who prescribed the allegedly competing drugs indicated that physicians do not take price into account when deciding which of the drugs to use for a given patient.  In other words, although the drugs in question treat the same medical condition, the Eighth Circuit observed that there is little evidence that a price increase for one drug would lead physicians to prescribe the other drug more frequently — a strong indication, in the courts view, that the drugs in fact do not compete in the same relevant market as alleged by the FTC.     

As we observed shortly after the DOJ and FTC published the 2010 Horizontal Merger Guidelines, a number of analytical methods introduced by the 2010 Guidelines have never before been tested in merger litigation.  In one of the more controversial passages in the new Guidelines, the agencies assert that certain new analytical methods — such as the "Upward Pricing Pressure" (UPP) test — allow the agencies to diagnose competitive effects of a merger without relying on market definition. These two recent decisions strongly suggest that the courts are not ready to embrace this element of the new Guidelines.  Indeed, the Second Circuit in Group Health makes clear that the UPP test is not a "substitute for a definition of the relevant market in the pleadings."  As explained by the Eighth Circuit in Lundbeck, the traditional factors used to evaluate an alleged market definition, particularly the substitutability and cross-elasticity of demand between the products in the candidate market, will continue to apply.

Additional analyses of recent merger enforcement trends and developments are available in our 2011 Mid-Year Merger Enforcement Update

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