Federal Register, Volume 78 Issue 2 (Thursday, January 3, 2013)

[Federal Register Volume 78, Number 2 (Thursday, January 3, 2013)]
[Notices]
[Pages 300-303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-31571]

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FEDERAL TRADE COMMISSION

[File No. 101 0023]

IDEXX Laboratories, Inc.; Analysis of Proposed Consent Order To
Aid Public Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed Consent Agreement.

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SUMMARY: The consent agreement in this matter settles alleged
violations of federal law prohibiting unfair or deceptive acts or
practices or unfair methods of competition. The attached Analysis to
Aid Public Comment describes both the allegations in the draft
complaint and the terms of the consent order--embodied in the consent
agreement--that would settle these allegations.

DATES: Comments must be received on or before January 24, 2013.

ADDRESSES: Interested parties may file a comment at https://ftcpublic.commentworks.com/ftc/idexxlabconsent online or on paper, by
following the instructions in the Request for Comment part of the
SUPPLEMENTARY INFORMATION section below. Write ``IDEXX, File No. 101
0023'' on your comment and file your comment online at https://ftcpublic.commentworks.com/ftc/idexxlabconsent by following the
instructions on the Web-based form. If you prefer to file your comment
on paper, mail or deliver your comment to the following address:
Federal Trade Commission, Office of the Secretary, Room H-113 (Annex
D), 600 Pennsylvania Avenue NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Lisa Kopchik (202-326-3139), FTC,
Bureau of Competition, 600 Pennsylvania Avenue NW., Washington, DC
20580.

SUPPLEMENTARY INFORMATION: Pursuant to Section 6(f) of the Federal
Trade Commission Act, 15 U.S.C. 46(f), and FTC Rule 2.34, 16 CFR 2.34,
notice is hereby given that the above-captioned consent agreement
containing a consent order to cease and desist, having been filed with
and accepted, subject to final approval, by the Commission, has been
placed on the public record for a period of thirty (30) days. The
following Analysis to Aid Public Comment describes the terms of the
consent agreement, and the allegations in the complaint. An electronic
copy of the full text of the consent agreement package can be obtained
from the FTC Home Page (for December 21, 2012), on the World Wide Web,
at http://www.ftc.gov/os/actions.shtm. A paper copy can be obtained
from the FTC

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Public Reference Room, Room 130-H, 600 Pennsylvania Avenue NW.,
Washington, DC 20580, either in person or by calling (202) 326-2222.
You can file a comment online or on paper. For the Commission to
consider your comment, we must receive it on or before January 24,
2013. Write ``IDEXX, File No. 101 0023'' on your comment. Your
comment--including your name and your state--will be placed on the
public record of this proceeding, including, to the extent practicable,
on the public Commission Web site, at http://www.ftc.gov/os/publiccomments.shtm. As a matter of discretion, the Commission tries to
remove individuals' home contact information from comments before
placing them on the Commission Web site.
Because your comment will be made public, you are solely
responsible for making sure that your comment does not include any
sensitive personal information, like anyone's Social Security number,
date of birth, driver's license number or other state identification
number or foreign country equivalent, passport number, financial
account number, or credit or debit card number. You are also solely
responsible for making sure that your comment does not include any
sensitive health information, like medical records or other
individually identifiable health information. In addition, do not
include any ``[t]rade secret or any commercial or financial information
which * * * is privileged or confidential,'' as discussed in Section
6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR
4.10(a)(2). In particular, do not include competitively sensitive
information such as costs, sales statistics, inventories, formulas,
patterns, devices, manufacturing processes, or customer names.
If you want the Commission to give your comment confidential
treatment, you must file it in paper form, with a request for
confidential treatment, and you have to follow the procedure explained
in FTC Rule 4.9(c), 16 CFR 4.9(c).\1\ Your comment will be kept
confidential only if the FTC General Counsel, in his or her sole
discretion, grants your request in accordance with the law and the
public interest.
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\1\ In particular, the written request for confidential
treatment that accompanies the comment must include the factual and
legal basis for the request, and must identify the specific portions
of the comment to be withheld from the public record. See FTC Rule
4.9(c), 16 CFR 4.9(c).
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Postal mail addressed to the Commission is subject to delay due to
heightened security screening. As a result, we encourage you to submit
your comments online. To make sure that the Commission considers your
online comment, you must file it at https://ftcpublic.commentworks.com/ftc/idexxlabconsent by following the instructions on the web-based
form. If this Notice appears at http://www.regulations.gov/#!home, you
also may file a comment through that Web site.
If you file your comment on paper, write ``IDEXX, File No. 101
0023'' on your comment and on the envelope, and mail or deliver it to
the following address: Federal Trade Commission, Office of the
Secretary, Room H-113 (Annex D), 600 Pennsylvania Avenue NW.,
Washington, DC 20580. If possible, submit your paper comment to the
Commission by courier or overnight service.
Visit the Commission Web site at http://www.ftc.gov to read this
Notice and the news release describing it. The FTC Act and other laws
that the Commission administers permit the collection of public
comments to consider and use in this proceeding as appropriate. The
Commission will consider all timely and responsive public comments that
it receives on or before January 24, 2012. You can find more
information, including routine uses permitted by the Privacy Act, in
the Commission's privacy policy, at http://www.ftc.gov/ftc/privacy.htm.

Analysis of Agreement Containing Consent Order To Aid Public Comment

The Federal Trade Commission has accepted for public comment an
Agreement Containing Consent Order to Cease and Desist (``Agreement'')
with IDEXX Laboratories, Inc. (``IDEXX''). The Agreement seeks to
resolve charges that IDEXX engaged in exclusionary conduct to maintain
its monopoly power in the companion animal diagnostic testing equipment
and supplies industry in violation of Section 5 of the Federal Trade
Commission Act, 15 U.S.C. 45.
Specifically, the proposed Complaint that accompanies the Agreement
(``Complaint'') alleges that IDEXX has used its monopoly power to
impose exclusive deals with its distributors. As a result, IDEXX has
foreclosed rivals from key distribution channels and limited
competition in the relevant market, leading to higher prices, lower
output, reduced innovation and diminished consumer choice.
The Commission anticipates that the competitive issues described in
the Complaint will be resolved by accepting the proposed Order, subject
to final approval, contained in the Agreement. The Agreement has been
placed on the public record for 30 days for receipt of comments from
interested members of the public. Comments received during this period
will become part of the public record. After 30 days, the Commission
will again review the Agreement and comments received, and will decide
whether it should withdraw from the Agreement or make final the Order
contained in the Agreement. IDEXX has already entered into a non-
exclusive distribution agreement with MWI Veterinarian Supply Co., Inc.
(``MWI''), and that distribution agreement has been incorporated into
the terms of the proposed Order.
The purpose of this Analysis to Aid Public Comment is to invite and
facilitate public comment concerning the proposed Order. It is not
intended to constitute an official interpretation of the Agreement and
proposed Order or in any way to modify their terms.
The Agreement is for settlement purposes only and does not
constitute an admission by IDEXX that the law has been violated as
alleged in the Complaint or that the facts alleged in the Complaint,
other than jurisdictional facts, are true.

I. The Complaint

The Complaint makes the following allegations.

A. Industry Background

Point of care (``POC'') diagnostic products include rapid assay
tests, equipment and supplies that permit a companion animal
veterinarian to test, diagnose and treat certain conditions such as
heartworm during a single office visit. POC diagnostic products provide
real-time results that cannot be obtained through other testing
alternatives, such as services offered by outside reference labs.
Veterinarians are the primary consumers of POC diagnostic products.
Veterinarians use POC diagnostic products to assess the general health
of animals and to identify pathologies. Veterinarians perform
diagnostic testing at veterinary clinics with instruments or test kits
manufactured and sold by IDEXX and its competitors. POC testing
provides veterinarians and pet owners the medical advantage and
convenience of almost-immediate results.
As of 2009, more than 75% of veterinarians used POC diagnostic
testing. Each year, veterinarians in the United States purchase
approximately $500 million worth of POC diagnostic products.
There are no close substitutes for POC diagnostic products.
Although veterinarians can purchase some diagnostic services by sending

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specimens to outside laboratories, POC testing allows veterinarians to
provide timely, state-of-the-art care. Veterinarians value faster
results, particularly when testing is associated with emergencies, pre-
surgery, and for diagnoses of conditions that may require the
veterinarians to perform follow-up testing or dispense or prescribe
medicine as soon as possible.
Nearly all veterinarians buy their supplies, including POC
diagnostic products, from distributors who specialize in supplying
companion animal veterinary clinics. Veterinarians overwhelmingly
prefer to buy through distributors because of the efficiency and
customer service they offer. Other purchasing options are less
efficient and more costly.
Most veterinarians buy a majority of their equipment and supplies
from a preferred distributor. More than 75% of veterinarians name
Butler Schein Animal Health (``Butler''), Webster Veterinary Supply,
Inc. (``Webster''), MWI, Midwest Veterinary Supply, Inc. (``Midwest''),
or Victor Medical Company (``Victor''), as their preferred distributor.
Combined, these top tier distributors sell more than 85%, by revenue,
of the products sold to companion animal veterinarians in the United
States.
Butler, Webster and MWI are recognized by manufacturers,
distributors and veterinarians as the pre-eminent national companion
animal veterinary supply distributors in the United States. There are
no other distributors that provide equivalent levels of service to
manufacturers and regularly visit veterinarians in as wide a geographic
area as Butler, Webster or MWI. Midwest and Victor are large, regional
distributors, also with strong reputations for high-quality service.
IDEXX and other POC diagnostic product manufacturers use
distributors because distributors provide important services to the
manufacturer and are the most efficient way for the manufacturer to
channel their products to veterinarians. Manufacturers who do not use
distributors face more significant obstacles to sales, marketing and
delivery than manufacturers who use distributors.
The top tier distributors provide better services to their
manufacturer clients than other distributors. Those better services can
include, but are not limited to, more sales, better sales and inventory
data transfer, more experienced sales representatives, better market
forecasting, more timely payments, and more frequent visits to
veterinarian clients.

B. The Respondent

IDEXX Laboratories, Inc. is a corporation with its principal place
of business located in Westbrook, Maine. IDEXX develops, manufactures
and sells diagnostic products to veterinarians through distributors.
IDEXX has monopoly power in the POC diagnostic products market.
IDEXX's core business is companion animal diagnostics, including
POC instruments and their related consumables, rapid assay test kits
(SNAP(copyright) tests), digital radiography equipment, practice
management software, and diagnostic services through wholly owned and
operated reference laboratories. IDEXX's share of the POC diagnostic
products market has been at least 70% during each of the past five
years (2006-2011). No other firm had more than a 20% share of the
relevant market in those same five years.

C. IDEXX's Conduct

IDEXX bars its distributors from carrying any competing POC
diagnostic testing products. IDEXX distributors include all three of
the major, national distributors of these products and the two large,
regional distributors named above. As noted previously, these
distributors sell 85% of equipment and supplies that companion animal
veterinarians buy through distributors.

D. Competitive Impact of IDEXX's Conduct

Because IDEXX has a broad line of products and a dominant position
in the POC market, large distributors need to carry the IDEXX line.
While distributors need to carry the IDEXX line, they would prefer to
carry competing products as well. However, by insisting that
distributors make an ``all-or-nothing'' choice, IDEXX compels
distributors to forgo competitors' products. The features of the market
that make anticompetitive exclusion possible--IDEXX's status as a
``must carry'' supplier coupled with its insistence on exclusivity--
have endured for many years, and thus the relatively short nominal
duration of IDEXX's distribution contracts has not mitigated the
anticompetitive effects of the exclusive deals.
IDEXX's control of distributors means that it forecloses its
competition from effectively and efficiently reaching large segments of
the veterinarian market, and forces veterinarians to incur greater
costs to obtain non-IDEXX products.
IDEXX has used its monopoly power, the threat of termination, and
explicit agreements to prevent those top tier distributors from selling
rival POC diagnostic products that the distributors would otherwise
choose to sell. As a result, IDEXX has foreclosed its competitors from
distributors that sell over 85% of all products purchased through
distribution by companion animal veterinary clinics in the United
States, and those competitors are impeded from effectively and
efficiently marketing their POC diagnostic products to veterinarians.
IDEXX's exclusionary practices have blocked rivals from the most
efficient sales channel. IDEXX has used its exclusionary practices to
successfully diminish, marginalize or force its competitors from the
U.S. market.
IDEXX intentionally engages more distribution than it needs, even
though that excess distribution is costly and inefficient for IDEXX.
Nevertheless, IDEXX continues to engage the excess distribution because
it allows IDEXX to block its rivals from using those distributors and
insulates IDEXX from competition from its rivals. Thus, IDEXX maintains
its monopoly and harms both distributors who would prefer to offer a
greater variety of POC diagnostic products, and veterinarians who could
buy cheaper, superior, and more convenient POC diagnostic products.
IDEXX's exclusionary acts and practices require competing manufacturers
to settle for less efficient means to sell their products to
veterinarians.
IDEXX's exclusionary acts and practices erect significant barriers
to entry for those manufacturers that have developed, would otherwise
have developed, or offered for sale POC diagnostic products that would
compete with IDEXX products, thereby resulting in reduced choice for
veterinarians.

II. Legal Analysis

The offense of monopolization under Sec. 2 of the Sherman Act has
two elements: (1) the possession of monopoly power in the relevant
market; and (2) the willful acquisition, enhancement or maintenance of
that power through exclusionary conduct.\2\ Exclusive dealing by a
monopolist is condemned when the challenged conduct significantly
impairs the ability of rivals to compete effectively with the
respondent and thus limits the ability of those rivals to constrain the
exercise of monopoly power.\3\
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\2\ Verizon Commc'ns v. Law Offices of Curtis v. Trinko LLP.,
540 U.S. 398, 407 (2004); United States v. Grinnell Corp., 384 U.S.
563, 570-71 (1966).
\3\ See, e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,
472 U.S. 585,605 & n.32 (1985) (exclusionary conduct ``tends to
impair the opportunities of rivals'' but ``either does not further
competition on the merits or does so in an unnecessarily restrictive
way'') (citations omitted); Lorain Journal Co. v. United States, 342
U.S. 143, 151-54 (1951) (condemning newspaper's refusal to deal with
customers that also advertised on rival radio station because it
harmed the radio station's ability to compete); United States v.
Microsoft, 253 F.3d 34, 68-71 (DC Cir. 2001) (condemning exclusive
agreements because they prevented rivals from ``pos[ing] a real
threat to Microsoft's monopoly''); United States v. Dentsply, 399
F.3d 181, 191 (3d Cir. 2005) (``test is not total foreclosure but
whether the challenged practices bar a substantial number of rivals
or severely restrict the market's ambit''); LePage's, Inc. v. 3M,
324 F.3d 141, 159-60 (3d Cir. 2003) (same).

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The Complaint alleges that IDEXX has monopoly power and used it to
create competitive harm. IDEXX's policy of requiring exclusivity from
its distributors has foreclosed its rivals from over 85 percent of
available sales opportunities at this level of the distribution chain.
This foreclosure is particularly significant because nearly all POC
diagnostics are sold to veterinarians through distributors, and other
channels to the veterinarians are inconvenient, impractical and more
expensive for both the veterinarians and IDEXX's competitors.
A monopolist may rebut a showing of competitive harm by
demonstrating that the challenged conduct is reasonably necessary to
achieve a pro-competitive benefit.\4\ Any proffered justification, if
proven, must be balanced against the harm caused by the challenged
conduct.\5\ In this case, however, no pro-competitive efficiency
justifies IDEXX's exclusionary and anticompetitive conduct. Further,
IDEXX cannot show that the exclusive arrangements were reasonably
necessary to achieve a procompetitive benefit.
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\4\ E.g., Microsoft, 253 F.3d at 59.
\5\ Id.
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A concern about interbrand free-riding also does not justify the
substantial anticompetitive effects found here.\6\ Free-riding might
occur if, for example, IDEXX provided a great deal of training or
services to its distributors, and if the training or services help
promote the product category as a whole rather than just IDEXX's
product. In such an instance, promotion of the competitors' products
would ``free-ride'' on IDEXX's activities. In this case, however, the
vast majority of IDEXX's promotional efforts are relevant to IDEXX's
products only, thereby reducing the risk of free-riding by IDEXX's
competitors. While IDEXX's marketing efforts may generate some consumer
interest in the product category as a whole--and not just in IDEXX's
own products--this is a part of the natural competitive process. This
type of consumer response does not raise a free-riding concern
sufficient to justify the substantial anticompetitive effects found
here.\7\
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\6\ ``Interbrand free-riding'' occurs when a manufacturer
provides services, training, or other incentives in the promotion of
its products for which it cannot easily charge its dealer, and that
dealer ``free-rides'' on these demand-generating services by
substituting a cheaper, more profitable product made by another
manufacturer that does not invest in comparable services. See
generally, Howard P. Marvel, Exclusive Dealing, 25 J.L. & ECON. 1, 8
(1982).
\7\ See United States v. Dentsply Int'l, Inc., 277 F. Supp. 2d
387, 445 (D. Del. 2003), aff'd in rel. part, 399 F.3d at 196-97;
Marvel, Exclusive Dealing, 25 J.L. & ECON. at 8 (explaining that an
interbrand free-riding justification ``does not apply if the
promotional investment is purely brand specific. In such cases, the
dealer will not be in a position to switch customers from brand to
brand.'').
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III. The Order

Together with the distribution agreement between IDEXX and MWI
Veterinary Supply, Inc., signed in September 2012, the proposed Consent
Order is designed to make the market for POC diagnostic testing
products more competitive. Generally, the Order prohibits IDEXX from
maintaining exclusive distribution arrangements with all three national
distributors. Specifically, Part II of the Order addresses this core
provision. Part III imposes reporting requirements for four years.
Parts IV and V impose other reporting and compliance requirements.
Unless otherwise indicated, the Order will expire in ten years.
The Order defines the ``national distributors'' as Butler, MWI and
Webster, so long as they continue to distribute companion animal POC
diagnostic equipment and supplies. Starting in January, 2013, MWI can
distribute both IDEXX products and competitive products. Either IDEXX
or MWI can terminate the agreement. If the parties agree that MWI will
return to an exclusive arrangement with IDEXX, IDEXX must have a non-
exclusive agreement with one of the two other national distributors.
All future non-exclusive agreements between IDEXX and a national
distributor must meet the requirements of the Order. Paragraph II.B
requires that such an agreement begin with a two year term, and provide
for additional renewal terms of at least one year; that IDEXX shall not
urge, induce, coerce, threaten, pressure, penalize, withhold the sale
of product, or otherwise retaliate against the non-exclusive national
distributor in order to limit its sales of other manufacturers'
products.
Paragraph II.B also requires IDEXX to notify the Federal Trade
Commission about the termination of any non-exclusive distribution
agreement. Paragraph II.C orders that IDEXX show any future non-
exclusive distribution agreement to the Commission at least thirty (30)
days before it is signed.
Further, if the non-exclusive national distributor merges with,
acquires, or is acquired by a distributor that has an exclusive
distribution arrangement with IDEXX, the non-exclusive distribution
agreement stays in effect.

By direction of the Commission, Commissioner Ohlhausen
abstaining.
Richard C. Donohue,
Acting Secretary.
[FR Doc. 2012-31571 Filed 1-2-13; 8:45 am]
BILLING CODE 6750-01-P