Bayer v. Sandoz: Upping the Relevant Market Pleading Requirements

Defining an antitrust market is a difficult and complex task, but the analysis is guided by firmly established economic principles.  In the latest and seemingly last round of the Bayer v. Sandoz Yaz/Yasmin patent litigation, the Southern District of New York ignored these principles, and the relevant pleading standard, in dismissing Sandoz’s monopolization counterclaim against Bayer.[1]  Sandoz’s antitrust counterclaim was based upon patent infringement litigation that Bayer (the manufacturer of brand name Yaz/Yasmin) brought against Sandoz and Watson when the latter filed Abbreviated New Drug Applications seeking to market generic formulations of Yaz/Yasmin (a birth control drug).

To survive a motion to dismiss, a claim under Sections 1 and 2 of the Sherman Act must allege a relevant geographic and product market in which trade was unreasonably restrained or monopolized.[2]  The “goal in defining the relevant market is to identify market participants and competitive pressures that restrain an individual firm’s ability to raise prices or restrict output.”[3]  Plaintiffs must provide the court with a rational explanation of the boundaries of the market and must define the market using the rules of interchangeability and cross-elasticity.[4]  Despite citing these rules, and the correct pleading standard,[5] the Sandoz court went on to evaluate the plausibility of the relevant market allegations with its own brand of subjective “gut-instinct” analysis.

In the Bayer v. Sandoz amended complaint briefing, Sandoz claimed that the relevant market was restricted to Yaz and Yasmin because there was no substitute drug that provided the same combination of birth control and Premenstrual Dysphoric Disorder (“PMDD”) treatment.[6]  Sandoz acknowledged that there were other drugs, typically SSRI antidepressants, that could be combined with birth control drugs in order to provide a similar type of combination treatment, but it argued that the alternate combinations were not interchangeable with Yaz/Yasmin for antitrust market purposes because the antidepressant/birth control combinations had drug interaction and side effect risks that made them undesirable for many women.[7]  Specifically, Sandoz alleged that the alternative PMDD treatments were known to decrease the efficacy of oral contraceptives.[8]  Sandoz also gave the court economic cross-elasticity of demand evidence—market information showing that millions of Yaz/Yasmin prescribers continued to purchase the drug, despite monopoly pricing, even with the availability of much lower priced “substitutes.”[9]

In dismissing Sandoz’ antitrust counterclaim, the Southern District of New York held that Sandoz failed to allege sufficient facts showing a plausible relevant market at the pleading stage.[10]  The Court reasoned that Sandoz failed to address the potential interchangeability of non-SSRI antidepressants and non-steroidal anti-inflammatory drugs, “such as ibuprofen and aspirin, that are widely used for PMS.”[11]  The Court claimed that “Sandoz need not address every conceivable, far-fetched alternative to Yasmin and Yaz for the treatment of PMDD and associated symptoms, [but] it must allege sufficient facts about other treatments to make its proposed product market plausible.”[12]

The court in this case held Sandoz to a higher pleading standard than it should have.  Assuming the factual allegations are true, as required at the pleading stage, Sandoz outlined the contours of a plausible relevant antitrust market.  It is plausible that there is a broad consumer group of women that do not view aspirin and efficacy-decreasing antidepressants as suitably interchangeable with a single drug that provides the same treatment, without the attendant side effects.  The court’s failure to address Sandoz’s cross-elasticity of demand allegations is even more puzzling than its unwillingness to accept, at the pleading stage, the idea that many women do not view aspirin as a valid substitute for a brand name combination drug (which presumably has some functional uniqueness since it holds a U.S. patent).  The court claimed that Sandoz was not required to address “every conceivable, far-fetched alternative,” but it went on to hold otherwise, seemingly requiring a level of expert economic evidence at the pleading stage.

Courts and counselors should be wary of succumbing to the temptation to analyze antitrust market definition through “gut-instinct” intuition.  It may seem perfectly logical to simply ask the question, “What else is substitutable for this product, in this region?” but it is exactly this kind of subjective approach that adds more unnecessary unpredictability into antitrust litigation and merger planning.  Since this analysis lacks any type of economic grounding, it allows creative lawyers to come up with all sorts of smoke-and-mirrors arguments regarding exactly what products are and are not interchangeable.  When it comes to market definition, we should leave the argument to the economics and not our “guts”; a threshold showing that there is little cross-elasticity of demand between products should be sufficient to establish relevant market on a motion to dismiss.  Plaintiffs should not be required to explain all the distinguishing features of myriad products throughout the conceivable market range when the numbers already tell the story.

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