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From Antitrust Law Daily, January 3, 2017

Softgel manufacturer failed to show actual harm to competition

By Edward L. Puzzo, J.D.

Softgel manufacturer Procaps was unable to pursue claims that Patheon, its partner in a collaboration agreement, committed a Sherman Act violation when it acquired a competitor because it could not show concerted action or actual harm to competition, the U.S. Court of Appeals in Atlanta has ruled (Procaps S.A. v. Patheon, Inc., December 30, 2016, Marcus, S.).

In January 2012, Procaps and Patheon, both providers of softgel capsule services to pharmaceutical companies, entered into a collaboration agreement to market softgel manufacturing and developing services. After Patheon acquired another softgel company, Banner Pharmcaps, in December 2012, Procaps believed that going forward with the collaboration agreement would violate antitrust law and therefore it could no longer perform under that agreement.

When Patheon refused to pay Procaps to leave the agreement or to divest Banner, Procaps filed suit, alleging that the Banner acquisition placed Patheon in direct competition with Procaps, thus transforming the parties’ legitimate joint venture into a per se illegal horizontal restraint in violation of Section 1 of the Sherman Act. Patheon responded that the collaboration agreement should be evaluated under the rule of reason, instead of the per se approach, due to the potential for pro-competitive efficiencies. The district court agreed, and in October 2015, that court granted Patheon’s motion for summary judgment, finding: (1) Procaps was unable to provide any actual empirical evidence of detrimental effects; and (2) there was no genuine dispute of material fact that Procaps failed to demonstrate substantial anticompetitive actual effects. Procaps appealed.

Concerted action. The appellate court stated that it rejected Procaps' argument that the simple existence of the collaboration agreement between the parties, standing alone, was enough to satisfy the concerted action requirement. While all contracts restrain trade to some extent, the court continued, the Supreme Court has read "in restraint of trade" as used in Section 1 to prohibit only contracts that unreasonably restrain trade. All parties conceded that the collaboration agreement was lawful at the outset. It was never transformed into an illegal arrangement, the court stated, because there was never any concerted action between Procaps and Patheon to unlawfully restrain trade.

Procaps did not challenge the merger itself as anticompetitive or any pre-merger conduct between Patheon and Banner. All of the alleged anticompetitive effects arose from Patheon’s unilateral decision to remove the Banner assets from the market, to which Procaps never acquiesced. However, post-merger coordination between a corporation and its wholly owned subsidiary did not qualify as concerted action for purposes of the Sherman Act because those entities already shared a singular economic interest. The appellate court stated that there was simply no other basis for finding any concerted action between two or more parties required for a Section 1 claim. Having failed to establish concerted action, Procaps could not establish an illegal agreement or conspiracy in restraint of trade.

Rule to apply. Procaps argued that the lower court should have applied the per se rule and presumed anticompetitive effects rather than the more commonly applied rule of reason, because the post-acquisition agreement between Patheon and Banner was a horizontal market allocation agreement between competitors. The appellate court responded that just because an agreement was capable of being characterized as a market allocation agreement did not mean that the per se rule applied. Both parties pointed to some pro-competitive efficiencies that might flow from the collaboration agreement, even post-acquisition. The court ruled that rule of reason was the correct standard to apply in this case.

Harm to competition. Under the rule of reason analysis, a plaintiff is required to point to specific facts demonstrating harm to competition. Procaps, the court continued, was unable to cite any actual detrimental effects such as an actual reduction in output, an increase in price, or a deterioration in quality. The testimony of Procaps' expert economists relied on inferences drawn from an abstract understanding of market conditions rather than pointing to any particular data, the court stated. Expert testimony on the likely effects of removing a competitor could not take the place of presenting specific and concrete empirical evidence of actual effects, the court stated. Thus, Procaps failed to meet its burden of demonstrating harm to competition.

The appellate court opined that the dispute between Procaps and Patheon was essentially a breach of contract case. As such, Procaps was unable to establish concerted action and thus could not maintain a Section 1 claim. The court therefore affirmed the lower court's grant of summary judgment in favor of Patheon.

The case is No. 15-15326.

Attorneys: Chris S. Coutroulis (Carlton Fields Jorden Burt, PA) for Procaps SA; Michael J. Klisch (Cooley, LLP) and Robert M. Brochin (Morgan Lewis & Bockius, LLP) for Patheon, Inc. and Sobel USA, Inc.

Companies: Procaps SA; Patheon, Inc.; Sobel USA, Inc.

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