On August 1, 2024, following five years of litigation, Tevra’s antitrust suit against Bayer Healthcare LLC came to an end. Tevra, a manufacturer of generic version topical flea and tick medications, alleged that Bayer engaged in anticompetitive conduct to secure exclusivity for its own name brand Advantage and Advantix products in the market for topical flea and tick medications, in violation of Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act. As an element of these exclusive dealing and monopoly maintenance claims, Tevra needed to define the relevant market the parties’ products competed in, and establish at trial that such a market actually existed. Tevra’s proposed definition—which excluded other flea and tick medications with similar functions but different active ingredients—faced skepticism from the court at each stage of the litigation, even as the court denied Bayer’s dispositive motions. The issue ultimately proved dispositive when a jury in the Northern District of California found that Tevra failed to prove its relevant market by a preponderance of the evidence, and judgment was entered in Bayer’s favor.
Background
Prior to August 2020, Bayer Healthcare LLC (“Bayer”) made name-brand versions of over-the-counter imidacloprid topical flea and tick products (‘imidacloprid topicals”) called Advantage and Advantix. In 2019, Tevra filed suit against Bayer, alleging that Bayer engaged in anticompetitive conduct to foreclose sales of Tevra’s generic version of imidacloprid topicals. Specifically, Tevra alleged that Bayer entered into agreements with retailers and distributors of imidacloprid topicals that required the retailers not to carry generic versions of the flea and tick treatments, provided rebates for sales of certain amounts of Bayer products, and tied purchases of and rebates on Bayer’s Seresto flea collar to purchases of Bayer’s Advantix products. Tevra also alleged that Bayer made up approximately 85% of the relevant market and received patent royalties for most of the other 15%, thus dominating the imidacloprid topical market as a monopolist while taking steps to protect its monopoly. The case was assigned to Judge Beth Labson Freeman in the Northern District of California (the “Court”).
Alleged Exclusive Dealing Agreements
Throughout the pleading and summary judgment stages, Bayer argued that its agreements with retailers did not constitute anticompetitive conduct under Omega Env’t, Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1162 (9th Cir.1997), because they were short-term and easily terminable, both factors that weighed against a finding of exclusive dealing in Omega. Tevra, however, pointed to evidence in the record that Bayer’s contracts were never actually terminated early due to marketplace realities such as annual shelving practices, and punitive measures taken by Bayer in response to actual early termination.
The Court acknowledged in its summary judgment order that on their face, Bayer’s contracts had multiple provisions permitting retailers to opt in or out of its imidacloprid discounts, permitting early termination, and setting short terms, and there were retailers in at least one contract cycle who took advantage of those opt-outs. However, Tevra’s own evidence that Bayer used discounts, monetary levers, and informal avenues such as pitches and presentations to pressure retailers into exclusivity was enough to create a genuine issue of material fact to be resolved by the jury.
The Evolution of Tevra’s Market Definition
At the heart of the dispute from the case’s inception was Tevra’s proposed market definition. A threshold requirement for a plaintiff bringing exclusive dealing and monopoly claims is to define what market the defendant is alleged to be excluding competitors from, which allows the court (and ultimately the jury) to evaluate whether the defendant’s conduct was anticompetitive based on its effect on the defined market. In its summary judgment decision, the Court relied on the 2023 DOJ/FTC Merger Guidelines—which we’ve written about here—for the definition of a relevant market: “an area of effective competition, comprising both product (or service) and geographic elements.”
Tevra proposed a market definition in the First Amended Complaint limited to “[t]opical flea and tick products containing Imidacloprid sold at wholesale by manufacturers to Over-the-Counter retailers in the U.S.” To support its market definition, Tevra relied on a formulation of the hypothetical monopolist test (“HMT”) called the SSNIP test. According to the 2023 Merger Guidelines, the SSNIP test asks (1) whether a hypothetical profit-maximizing firm that was the only present and future seller of a group of products would, if not prevented from doing so by regulation, undertake “at least a small but significant and non-transitory increase in price (‘SSNIP’) . . . for at least one product in the group,” (2) such that the price increase would result in profit for the hypothetical monopolist (rather than a loss of sales as a result of consumers turning to a reasonable alternative product instead).
The Court dismissed with leave to amend because it found that Tevra failed to allege facts that would support defining the market to include only one type of distribution channel and topical products using only imidacloprids, to the exclusion of competitor products such as topical flea and tick medications manufactured by Frontline that use a different active ingredient (fipronil). In the Second Amended Complaint (“SAC”), Tevra broadened its market definition to eliminate the limitations on distribution channels, but Tevra maintained its allegation that the market was limited to the topicals using imidacloprid as the active ingredient.
This time, the market definition survived a motion to dismiss. The Court found that Tevra’s allegations that Bayer had been able to enact a price increase for its brand-name imidacloprid topicals over five years while losing little to no sales plausibly supported Tevra’s allegations that Bayer was able to impose an SSNIP. However, even as it denied the motion to dismiss the SAC, the Court cautioned Tevra that its market definition might face difficulties at the expert stage if it relied on an SSNIP test as currently articulated, and that Tevra had not yet provided persuasive support for differentiating the market based on the difference between the imidacloprid topicals at issue and fipronil topicals.
Battle of the Experts Over the Scope of the Relevant Market
As the Court had predicted, the market definition dispute surfaced once more at summary judgment. After the close of discovery, Tevra’s expert Dr. Paul Wong submitted a report in which he purported to perform an SSNIP test and a “differences-in-differences” regression framework (“DiD”) showing the impact on both Bayer’s product and Frontline’s fipronil topicals when other generic fipronil products were introduced. Dr. Wong explained that because fipronil generic products had been introduced to the market in 2011, it permitted him to do a “natural experiment” as part of his SSNIP test that measured whether customers viewed generic fipronil products as a reasonable alternative. Dr. Wong’s analysis found that while both Frontline and Bayer increased prices during that period, Frontline sales decreased after implementing a slight price increase in fipronil products, while Bayer’s sales increased, suggesting that consumers were willing to substitute one fipronil product for another, but not fipronil products for Bayer’s imidacloprid products. Accordingly, Dr. Wong opined that the market for fipronil products is distinguishable from the market for imidacloprid products.
The Court’s analysis recognized that even if well-established and accepted tests such as the SSNIP test easily pass muster under the portion of FRE 702 requiring use of “reliable principles and methods,” the lack of guidelines for how SSNIP tests should be performed still poses challenges to courts seeking to apply the fourth prong of FRE 702—determining whether the testimony reflects a “reliable application of the principles and methods to the facts of the case.” Given the wide variety of methods for conducting an SSNIP test reflected both in Ninth Circuit case law and authorities such as the Merger Guidelines and law review articles, the Court started its analysis by ruling out what types of SSNIP tests would not suffice.
Specifically, the Court focused on a decision from the Sixth Circuit that addressed an SSNIP analysis that examined only the change in price and sales of a single product over a long period of time. Ky. Speedway, LLC v. Nat’l Ass’n of Stock Car Auto Racing, Inc., 588 F.3d 908, 918 (6th Cir. 2009). In Ky. Speedway, the expert’s SSNIP test examined ticket prices and attendance figures over an eight-year span, and then concluded that both price and demand increased. However, the Sixth Circuit found that such a test was excludable under Daubert because it failed to consider “whether a price increase at a particular point in time would result in consumer substitution of an alternative product.”
The Court distinguished Dr. Wong’s analysis from the one in Ky. Speedway because the “natural experiment” portion of his SSNIP test, the evaluation of the impact that the introduction of generic fipronil topicals had on both Bayer’s product and competitor Frontline’s sales, adequately considered the prospect of consumer substitution of an alternative product. While the Court acknowledged that Bayer had leveled other criticisms at Dr. Wong’s analysis, such as his failure to account for intervening events, inflation, and studies and surveys that Bayer argued showed competition between Bayer and Frontline products, the Court found that the critiques went to the weight, rather than admissibility, of Dr. Wong’s opinion.
Although the Court allowed Tevra’s claims to proceed, it warned Tevra that its market definition was likely to pose significant challenges to Tevra’s ability to prove its case at trial. For example, the Court found that Dr. Wong’s substantial foreclosure analysis was sufficient to create a genuine issue of material fact because Dr. Wong’s approach was consistent with Tevra’s definition of the relevant market as excluding fipronil topicals entirely. However, the Court acknowledged the viability of Bayer’s argument that Dr. Wong failed to consider mass-market retailers of fipronil products as an alternative distribution channel, warning that “it may be no small task for Tevra to prove at trial that other distribution channels were not viable alternatives for selling generic imidacloprid topicals.”
Tevra’s Claims at Trial
Trial began July 22, 2024. Tevra argued that its evidence would show that Bayer planned to keep generic versions of its imidacloprid topicals from the market by offering retailers like PetSmart and PetCo an anticompetitive 2% exclusivity discount. However, Bayer claimed that Tevra’s losses stemmed from Tevra’s competition with other generic flea-and-tick product makers, and that Tevra’s market definition was implausible because consumers do not buy pet medication based on the active ingredient.
The jury instructions, like the evidence at trial, devoted substantial time to addressing how to define the relevant market. The instructions explained that Tevra’s alleged relevant antitrust market was topical imidacloprid flea and tick treatments for dogs and cats, whereas Bayer contended that the “relevant antitrust market also includes other flea and tick topicals, such as those containing fipronil, as well as other types of flea and tick treatments, such as oral medications and flea collars.”
To determine which proposed definition was correct, the Court instructed the jury to use the SSNIP test, explaining that it was required to determine whether enough customers would accept a small but significant, non-transitory increase in the price of one product (approximately 5 percent) such that the price increase would be profitable, or whether so many customers would switch to an alternative produce that the price increase would be withdrawn. If the customers would switch, the product would be in the relevant market; if they would not switch, the alternative product was outside the product market.
The Court’s skepticism throughout the case over Tevra’s proposed market definition ultimately proved prescient. On August 1, the jury returned a verdict finding that Tevra had failed to prove “that the relevant antitrust market is topical imidacloprid flea and tick products for dogs and cats in the United States” by a preponderance of the evidence. Because the jury found that Tevra had not proved the relevant market, it did not reach the remainder of the elements of the exclusive dealing and monopoly claims.
Tevra’s Next Steps
Tevra has not yet filed a notice of appeal or announced whether it intends to do so. However, Tevra filed a new lawsuit on the same day the verdict was issued, this time against Elanco Animal Health Incorporated and Elanco US, Inc. for claims of exclusive dealing and maintenance of a monopoly in the market for flea and tick topicals. Elanco purchased Bayer Healthcare LLC in 2020, but was not a party to the original Tevra lawsuit; Tevra initially sought damages against Bayer even for the period following the sale, but the Court granted summary judgment to Bayer for any damages after Elanco’s purchase of Bayer Healthcare LLC on or around August 1, 2020.
