Statement of Chairman Robert Pitofsky and Commissioners Sheila F. Anthony and Mozelle W. Thompson
Federal Trade Commission v. Mylan Laboratories, Inc., et al.
FTC File No. X990015
The Commission has voted to accept a consent settlement of its action against Mylan Laboratories, Inc. ("Mylan"), Cambrex Corporation ("Cambrex"), Profarmaco S.R.L. ("Profarmaco"), and Gyma Laboratories of America, Inc. ("Gyma"). The Commission's complaint alleged that Mylan, a large generic drug manufacturer, conspired with the other defendants to enable Mylan to monopolize the U.S. market for two generic drugs, lorazepam (which is used to treat anxiety, tension, agitation, and insomnia), and clorazepate (which is used to treat anxiety and hypertension). After the district court in this matter affirmed the Commission's authority to seek disgorgement in a competition case under Section 13(b) of the FTC Act, F.T.C. v. Mylan Labs, et al., 62 F. Supp. 2d 25, 37 (D.D.C. 1999), defendants agreed to pay $100 million to settle the Commission's suit. Under the consent settlement, defendants will pay the money into an escrow fund which will be distributed to consumers and state agencies that overpaid for lorazepam and clorazepate. Commissioner Leary concurs in the Commission's decision to settle this case, but dissents in part from the financial aspects of the settlement. Commissioner Leary also expresses concern that the court's broad ruling allowing the Commission to obtain disgorgement in this antitrust case and the Commission's use of the money obtained to settle its claim to compensate consumers may create undesirable precedent for antitrust enforcement. For the reasons set forth below, we disagree.
The complaint alleged that Mylan entered into long-term exclusive licenses with the other defendants to supply Mylan alone with the active ingredients necessary to produce lorazepam and clorazepate.(1) Thus, competitors of Mylan were left with insufficient sources of supply of the essential raw materials necessary to continue manufacturing their competing generic lorazepam and clorazepate products. As a result, the complaint alleged, Mylan succeeded in monopolizing the markets for these products. Mylan thereupon raised the price of clorazepate by as much as 3,200 percent and raised the price of lorazepam by as much as 2,600 percent, depending on the bottle size and strength. For example, Mylan raised the price of a 500 count bottle of 7.5 mg clorazepate tablets from $11.36 to $377.00, and raised the price of a 500 count bottle of 1 mg lorazepam tablets from $7.30 to $191.00. The complaint alleged that the ultimate consumers of these drugs paid even higher prices, and many consumers may have reduced the quantity of these drugs they took, or stopped taking them altogether, because they could no longer afford them. In light of the egregious nature of the alleged conduct, the Commission's complaint asked the court, among other things, to order defendants to rescind their unlawful exclusive licenses and to disgorge the ill-gotten gains they earned as a result of their unlawful conduct.
To settle this action, the Commission and defendants have agreed to ask the court to enter an Order and Stipulated Permanent Injunction which provides that Mylan will pay $100 million to an escrow fund to settle the Commission's claim for disgorgement. The Order further provides that of this amount, $71,782,017 is for the purpose of satisfying the claims of consumers who paid inflated prices for the products at issue, and $28,217,983 is for the purpose of satisfying the claims of state agencies that similarly overpaid for those products. A number of states also sued defendants for the conduct alleged in the Commission's complaint, and have settled their claims as well. See The State of Connecticut, et al., D.D.C., Cv. 98-3115 (TFH). Those states will distribute the money in the escrow fund to consumers who submit claims and to the state agencies.
Commissioner Leary expresses concern that a suit by the Commission for disgorgement in an antitrust case may undercut the Supreme Court's holding in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). As discussed below, we believe the Commission's claim for disgorgement in this case and its use of the settlement monies to compensate injured consumers does not undercut the Court's ruling.
The district court's conclusion that the Commission may seek disgorgement in a competition case was based on clear Supreme Court precedent. In Porter v. Warner Holding Co., 328 U.S. 395, 398 (1946), the Supreme Court held that the district courts may exercise all their inherent equitable powers in enforcing federal statutes that provide for injunctive relief, including the award of monetary relief unless the statute in question expressly prohibits such relief. Moreover, "'[w]hen Congress entrusts to an equity court the enforcement of prohibitions contained in a regulatory enactment, it must be taken to have acted cognizant of the historic power of equity to provide complete relief in light of the statutory purposes.'" F.T.C. v. Mylan Labs, et al., 62 F. Supp. 2d at 37 (quoting Mitchell v. DeMario Jewelry, Inc., 361 U.S. 288, 291-92 (1960)). The district court observed that "[b]ased on the principle of statutory construction set forth in Porter and reaffirmed in DeMario, five courts of appeals and numerous district courts have permitted the FTC to pursue monetary relief under § 13(b)," including disgorgement in at least one previous case. Id. Given that defendants could cite no authority to the contrary, the district court held that the Commission could indeed obtain disgorgement under Section 13(b) in this antitrust case. Id.
Commissioner Leary's concerns are based on the Supreme Court's holding in Illinois Brick that indirect purchasers cannot recover damages for overcharges under Section 4 of the Clayton Act-the vehicle by which private parties may obtain treble damages for injury caused them by violations of the antitrust laws.(2) The Court identified three principal reasons for disallowing indirect purchaser recovery under the Clayton Act. First, the Court reasoned that allowing indirect purchasers to recover the amount of the overcharge passed on to them would create the risk of subjecting defendants to multiple liability. 431 U.S. at 730. This was because the Court had earlier ruled in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968), that a defendant in a suit by direct purchasers may not set off the amount of the overcharge passed on by the direct purchasers. Second, the Court believed that it would be too complicated to trace the amount of the overcharge that the direct purchasers passed on to the indirect purchasers. Id. at 731-32. Third, the Court believed that allowing direct purchasers to sue to recover the entire amount of the overcharge would be the best way to encourage the "vigorous private enforcement of the antitrust laws." Id. at 745.
It is important to recognize the distinction between a Commission claim for disgorgement and a private claim by an indirect purchaser for damages. The purpose of a disgorgement order is to ensure that the defendant does not reap the rewards of its unlawful conduct, whereas an order for damages or restitution is aimed at making the injured plaintiff whole. The proper measure of the monetary award in an action for disgorgement is the amount of ill-gotten gains realized by the wrongdoer. Thus, the Commission in this case sought a monetary award equaling the full amount of the unlawful overcharge the defendant imposed without regard to whether the direct purchasers absorbed the overcharge or passed it on to the indirect purchasers. See SEC v. Wang, 944 F.2d 80, 81 (2d Cir. 1991) (explaining that, in contrast to damages or restitution, a disgorgement order focuses on the wrongdoer's unlawful profits, not "on those who have been duped out of their money").
The consent settlement in this matter requires the parties to pay $100 million into an escrow fund for the purpose of compensating consumers who submit claims because they paid inflated prices for lorazepam or clorazepate as a result of defendants' conduct. In other words, the money obtained by the Commission to settle its claim for disgorgement will be paid, at least in part, to indirect purchasers. It is therefore entirely appropriate to consider whether the Commission's decision to seek disgorgement in this matter and to turn that money over to consumers is somehow inconsistent with the policy of Illinois Brick.
The holding of Illinois Brick has been strictly limited to actions by indirect purchasers under the Clayton Act. Indeed, in California v. ARC America Corp., 490 U.S. 93 (1989), the Supreme Court rejected the argument that state statutes permitting indirect purchasers to sue for overcharges violated the policy of Illinois Brick. The Court emphasized that "the issue before the Court in both [Illinois Brick] and Hanover Shoe was strictly a question of statutory interpretation-what was the proper construction of § 4 of the Clayton Act." 490 U.S. at 102-03. That being the case, the Court concluded that its earlier holding in Illinois Brick did not preempt states from adopting statutes that permit indirect purchasers to recover damages for overcharges paid as a result of violations of state antitrust laws.
Here, the Commission sought a permanent injunction and disgorgement under Section 13(b) of the FTC Act, not under the Clayton Act. Commissioner Leary acknowledges that the Illinois Brick decision has been limited to actions by indirect purchasers under Section 4 of the Clayton Act, and that, therefore, the Commission's decision to turn over to consumers the money paid by defendants to settle the Commission's claim for disgorgement does not "literally conflict" with Illinois Brick. Commissioner Leary expresses concern that a Commission action for disgorgement could nonetheless conflict with the policy underlying Illinois Brick. This is a legitimate concern. We cannot agree, however, that because a claim for disgorgement in some future case under a different set of facts might conflict with the policy of Illinois Brick, the Commission should never seek disgorgement (or use disgorged monies to compensate overcharged consumers) or should not have done so here. The Commission carefully considered these issues before it decided to seek disgorgement in this matter, and, as described below, the Commission's claim for disgorgement in this case offends none of the policy concerns raised in Illinois Brick.
The district court here correctly observed that "the [Supreme] Court's concern [in Illinois Brick] for the complexity of the damages proceeding is not implicated by a disgorgement action" such as this. Mylan Labs., 62 F. Supp. 2d at 41. The measure of disgorgement is easily calculated-it is simply the totality of Mylan's unjust enrichment. A court requiring disgorgement of ill-gotten gains will not become entangled in the measurement problems that prompted the indirect purchaser doctrine of Illinois Brick. Thus, the Commission's decision to seek disgorgement in this case-or in any case-does not conflict with the Court's concern in Illinois Brick regarding the difficulty of tracing the amount of the overcharge passed on to indirect purchasers.
The Supreme Court's belief that allowing direct purchasers to recover the full amount of the overcharge would encourage vigorous private enforcement of the antitrust laws is likewise not implicated by a Commission claim for disgorgement. The rationale behind allowing direct purchasers to recover the entire amount of the overcharge rather than splitting the damages between direct and indirect purchasers was to ensure sufficient enforcement of the antitrust laws. Obviously, vigorous enforcement of the antitrust laws is ensured when the Commission brings an action for an alleged violation of the FTC Act. Moreover, to the extent that the Supreme Court was interested in ensuring vigorous private enforcement of the antitrust laws, the Commission's suit in this case has surely not chilled incentives. Until the Commission investigated and prosecuted this case, there were no private lawsuits pending. Once the Commission's action became public, numerous class actions were filed on behalf of both direct and indirect purchasers.
It seems that the only policy concern raised in Illinois Brick that is likely to ever be implicated by a Commission claim for disgorgement is the possibility of multiple recovery. Illinois Brick, however, was not concerned that a defendant's overall liability might exceed treble damages. Rather, the Court was concerned that multiple recoveries under the same statute would violate the Clayton Act's legislative intent. As the Court explained in ARC America:
Appellees' only contention is that state laws permitting indirect purchaser recoveries pose an obstacle to the accomplishment of the purposes and objectives of Congress. State laws to this effect are consistent with the broad purposes of the federal antitrust laws: deterring anticompetitive conduct and ensuring the compensation of victims of that conduct.
490 U.S. at 102. According to the Court's logic, the possibility that a defendant's total liability might exceed treble damages therefore does not constitute justification for denying relief under other statutes. In any event, there is little risk of multiple recovery in excess of the treble damage amount in the present case, nor should there be in most cases. Courts have routinely coordinated remedies in government disgorgement actions and private damage actions, and are readily able to surmount the potential problem of duplicative recovery.(3) The district court judge is well-equipped to do so here, particularly given that all the relevant cases are consolidated before him.
We agree with Commissioner Leary that the Commission should cautiously exercise its prosecutorial discretion to seek disgorgement in antitrust cases. Such relief is best reserved for cases, like this one, in which the defendants have engaged in particularly egregious conduct. Past history demonstrates that the Commission has used its ability to obtain disgorgement sparingly. The Commission's decision to seek disgorgement in light of the facts of this particular case, and its decision to use the settlement monies to compensate consumers who suffered the consequences of defendants' conduct, were entirely appropriate and consistent with the policy considerations raised by the Supreme Court in Illinois Brick.
1. According to the complaint, in 1997, Cambrex's subsidiary Profarmaco supplied U.S. generic drug manufacturers with 90% of the active pharmaceutical ingredient ("API") necessary to produce lorazepam, and 100% of the API necessary to produce clorazepate. Gyma was the U.S. distributor for Profarmaco's APIs.
2. Section 4 of the Clayton Act provides in part: "Any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor . . . and shall recover threefold the damages by him sustained . . . ." 15 U.S.C. § 15.
3. See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996) (upholding award of disgorgement to agency with set-off of amounts paid to private litigants in prior settlement), cert. denied, 118 S. Ct. 57 (1997); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307 (2d Cir.) (establishing escrow fund "[t]o protect [the defendants] from double liability"), cert. denied, 404 U.S. 1005 (1971); McGhee v. Joutras, No. 94 C 7052, 1995 U.S. Dist. LEXIS 2040, at 1-3 (N.D. Ill. Feb. 14, 1995) (holding that private litigant's damages would be reduced by any amounts the litigant receives from disgorged funds paid to the SEC); SEC v. Penn Central Co., 425 F. Supp. 593, 599 (E.D. Pa. 1976) ("In the event that we deem disgorgement [to the SEC] appropriate, defendants will have the opportunity to prove that they have already relinquished their ill-gotten gains [in a private damages action].")