EMBARGOED UNTIL 1:30 P.M. (EASTERN) JUNE 11, 1992
FTC SETTLEMENTS WITH TWO LEADING U.S. INFANT-FORMULA MAKERS IN CONNECTION WITH BIDDING PRACTICES NETS 3.6 MILLION POUNDS OF POWDERED INFANT FORMULA AS RESTITUTION TO THE FEDERAL GOVERNMENT
Two of the three leading U.S. manufacturers of infant formula have agreed to settle charges announced today by the Federal Trade Commission. The FTC settled three separate charges against Mead Johnson & Company and one charge against American Home Products (AHP). The charge common to both companies relates to their bidding practices for the Puerto Rico contract to provide formula to more than 40,000 infants through a federally- subsidized nutrition-assistance program. In connection with the Puerto Rico bidding, the settlements, to be filed for approval in federal district court, require these companies to deliver a total of 3.6 million pounds of powdered infant formula to the U.S. Department of Agriculture (USDA), which administers the nutrition assistance program, known as WIC (the Special Supplemental Food Program for Women, Infants and Children).
The FTC also has settled charges relating to the absence of advertising directly to consumers through the mass media by Mead Johnson during a period prior to 1988. The complaint alleges that Mead Johnson exchanged information with competitors about its plans with regard to mass media advertising, and charges that this reduced uncertainty among competitors and injured competi- tion. The complaint also alleges that Mead Johnson participated Mead Johnson/AHP--06/11/92)
in the information exchange with no independent legitimate business reason. The proposed settlement prohibits Mead Johnson from engaging in certain information exchanges with its competi- tors relating to direct consumer advertising through the mass media, although it preserves Mead Johnson's right to decide independently whether or not to advertise. Finally, the FTC settled a charge that Mead Johnson engaged in an unfair method of competition relating to bidding for WIC contracts in 1990 by sending out letters on March 6, 1990 to four states announcing, in advance, the amount of rebates it would offer for what were supposed to be sealed bids. The complaint also alleged that Mead Johnson knew or should have known that its competitors would become aware of the information contained in those letters.
Mead Johnson, an Evansville, Indiana corporation and a wholly-owned subsidiary of Bristol-Myers Squibb Company, manu- factures and sells "Enfamil" and "Prosobee" brands of formula and had more than 30 percent of the 1990 infant formula market. AHP is based in New York City and manufactures and sells "SMA" and "Nursoy" brands of formula through its Radnor, Pennsylvania-based Wyeth-Ayerst Laboratories division. Wyeth-Ayerst was the third largest manufacturer of infant formula in the United States in 1990.
According to the FTC, approximately 90 percent of the infant formula market was concentrated among Mead Johnson, AHP and a third company, Abbott Laboratories (against whom the FTC also announced charges today -- see separate news release) during the relevant period. The complaint alleges that the market is difficult to enter, and there has been limited competition among brands based on wholesale prices. Throughout the relevant period, there was virtually no advertising through the mass media directly to consumers, the FTC said.
Alleged Improprieties in the 1990 Puerto Rico WIC Bid:
More than a third of the infant formula sales in the United States are subsidized by the federal government through the Special Supplemental Food Program for Women, Infants and Children (WIC), administered by USDA. States solicit bids from manufac- turers to supply formula to WIC participants in either of two ways. Under an open-market system, several manufacturers can offer rebates and supply formula. Under the alternative, a sole- source system, the manufacturer who submits a sealed bid with the lowest unit price or highest rebate to the state is selected to supply formula to that state's WIC participants.
In general, under both systems, WIC participants receive vouchers to purchase the supplemental food at a local grocery (Mead Johnson/AHP--06/11/92)
store. Under the sole-source system, the voucher is good only for the designated manufacturer's product. The grocery store redeems the vouchers received with the state WIC agency for the prevailing retail price. The state then submits the voucher to the manufacturer and receives the agreed upon rebate.
Because under an open market system, all companies -- even those who do not offer any rebate -- can sell their product through the WIC program, generally the preferred choice from a cost containment standpoint is sole source. Manufacturers usually offer a larger rebate to win such a contract).
According to the FTC complaints against Mead Johnson and AHP, Puerto Rico requested bids to supply infant formula for its WIC program in June 1990, giving companies the option of bidding for a sole-source system and an open-market system. Thereafter, the FTC charged, each company provided information showing to its competitors that it preferred the open-market system and would bid in a manner to ensure that it would prevail in Puerto Rico. According to the FTC complaints, Mead Johnson and AHP then sub- mitted identical bids for both the open-market and the sole- source options. The first bid was cancelled and a new request was issued, and the companies submitted the same bids again. The FTC alleged that these bids "were significantly below contempor- aneous rebate bids submitted in response to requests from other WIC programs." The bidding resulted in the implementation of an open market system.
The provision of information reduced uncertainty relating to Mead Johnson's and AHP's rebate bids, the FTC alleged, and reduced competition among the defendants' and their competitors for the Puerto Rico WIC contract during 1990, resulting in sub- stantial injury, including the loss of millions of dollars, to the federal government's WIC program.
According to the FTC complaint, at meetings of the Infant Formula Council (the industry trade association), held during the 1980's to draft guidelines that would have prohibited the use of consumer advertising, Mead Johnson exchanged information with competitors about its plans with regard to mass media advertising and other forms of direct-to-consumer promotions. The FTC alleged this conduct by Mead Johnson also injured competition. No consumer advertising violations were charged against AHP.
March 6, 1990 Letters:
In the final allegation against Mead Johnson, the FTC charged the company with reducing uncertainty among competitors (Mead Johnson/AHP--06/11/92)
by sending letters in March 1990 to four states announcing the dollar amount it intended to bid when those states requested sealed bids for new WIC contracts. The FTC alleged that Mead Johnson knew, or should have known, that the information would be shared with its competitors. The complaint also alleges that these competitors did become aware of the content of the letters, and that, consequently, competition between the three major formula manufacturers for WIC contracts in 1990 was reduced.
Settlement Agreements with Mead Johnson and AHP:
Under proposed settlement agreements with Mead Johnson and AHP, which require federal district court approval, the defendants would be prohibited from:
-- requesting or encouraging any WIC official to administer bidding in violation of federal or state requirements;
-- agreeing, attempting to agree, or enforcing an agreement with a competitor regarding rebate bids for WIC programs;
-- exercising any third-year option on their July 1990 contracts with the Puerto Rico WIC program, or exercising any right to protest should Puerto Rico terminate those contracts and issue a new invitation for bids; and
-- disclosing prior to the date for submission of sealed bids to provide formula through a state WIC program, the amount of their bid for that request or any other WIC program request, or their intention to bid in a manner that will increase the likelihood that an open-market system will prevail over a sole-source system.
The settlement agreement with Mead Johnson would further prohibit that company from: intentionally exchanging information with a competitor about mass media advertising directly to con- sumers; agreeing or attempting to agree with a competitor to refrain from or restrict marketing practices that are otherwise legal; and from soliciting adherence from competitors to either restrict mass media advertising directly to consumers or to adopt an Infant Formula Council code or the codes of other organiza- tions that would restrict such advertising. Mead Johnson would be permitted to communicate any positions it holds on such prac- tices or codes to entities other than to its competitors, how- ever. Moreover, Mead Johnson remains free to unilaterally decide whether or not to advertise, or to issue its own advertising code, or to engage in certain activity with its competitors which is protected by the first amendment, such as petitioning the government to enact legislation relating to advertising. The (Mead Johnson/AHP--06/11/92)
proposed consent order also would allow the exchange of tech- nical, scientific, and safety information as long as it does not involve information relating to direct consumer advertising through the mass media.
NOTE: These proposed consent orders are for settlement purposes only and do not constitute an admission by the defendants of law violations. They require the court's approval and have the force of law when signed by the judge.
Both complaints and proposed settlement agreements were filed in U.S. District Court for the District of Columbia, this morning. The Commission vote to initiate these actions was 3-1, with Commissioner Roscoe B. Starek, III recused and Commissioner Mary L. Azcuenaga dissenting. Commissioner Azcuenaga said that she voted against the complaint because it failed to allege a bid-rigging conspiracy. She stated she would have voted in favor of the complaints and settlements with Mead Johnson and AHP relating to the Puerto Rico bidding if the complaints had alleged a conspiracy. In addition, Commissioner Azcuenaga indicated that she would have voted in favor of the complaint and settlement with Mead Johnson relating to the advertising issue if the complaint against had alleged a conspiracy.
Copies of the complaints, proposed settlements and Commis- sioner Azcuenaga's dissenting statement are available from the FTC's Public Reference Branch, Room 130, 6th Street and Penn- sylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY 1-866-653-4261.
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MEDIA CONTACT: Bonnie Jansen, Office of Public Affairs 202-326-2161
STAFF CONTACT: Kevin J. Arquit, Bureau of Competition 202-326-2556 or Michael E. Antalics 202-326-2662
(FTC File No.: 901 0119) (Civil Action Nos. were not available at press time.) (meadahp)