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The U.S. Federal Trade Commission has announced that a Puerto Rican pharmacy cooperative has settled price-fixing charges in relation to allegations that pharmacy owners, through a cooperative, had negotiated, entered into and implemented agreements among its member pharmacies to fix the prices on which they contracted with insurers and pharmacy benefit managers.

In making the announcement, the FTC said that the pharmacy cooperative’s actions over the past five years had led to higher prices for Puerto Rico’s health care consumers, and that the cooperative consisted of approximately 300 pharmacy-owner members owning more than 350 pharmacies in Puerto Rico (about one-third of Puerto Rico pharmacies).

Key issues raised by the FTC included collective negotiations by the pharmacy cooperative with more than 10 payers over reimbursement rates, execution of seven “master contracts” on behalf of member pharmacies and threats of collective refusals to supply by cooperative members to achieve higher negotiated rates for the supplying pharmacies.

The proposed consent order in this case includes terms to prohibit the cooperative from entering into or facilitating agreements between or among pharmacies to: (i) negotiate on behalf of any pharmacy with any payer, (ii) refuse to deal or threaten to refuse to deal with any payer, (iii) include any term, condition or requirement upon which any pharmacy deals, or is willing to deal, with any payer, including price terms and (iv) not to deal individually with any payer (or not to deal with any payer) other than through the pharmacy cooperative.

This recent association case caught my eye given that there have been a number of Canadian joint negotiation cartel cases involving associations.

Association involvement in collective negotiations may appear to be a natural role for a trade or professional association.  Joint negotiations of this kind can, however, raise the same types of price-fixing concerns under the criminal conspiracy provisions of the Competition Act as other types of price coordination among competitors.  In particular, the concern is that joint negotiation will either result in exchanges of price information (or other competitively sensitive information) that may support allegations by the Competition Bureau, a court or private plaintiff of price-fixing conduct or, alternatively lead to price-fixing arrangements that violate the Act.

While labour unions and employer associations have limited exemptions from the Competition Act under section 4 of the Act, which contains several collective bargaining exemptions, these exemptions are narrow, applying to collective negotiations by unions for the reasonable protection of workmen or employees (and employer associations negotiating with their employees in relation to salary, wages or terms and conditions of employment).

In this regard, there is no express Competition Act exemption for voluntary trade or professional association which are, generally speaking, subject to the application of the Competition Act, unless they have the benefit of other federal or provincial legislative authorization for joint negotiation (and therefore may have the benefit of the regulated conduct defence).  As a practical matter, however, voluntary trade and professional associations typically have no such legislative safe harbour for collective negotiations.

A number of Canadian association cases have also involved challenges to joint negotiation arrangements, although with mixed success.  For example, in one of Canada’s most well-known cases, R. v. Nova Scotia Pharmaceutical Society (“PANS”), two defendant Nova Scotia pharmacy associations attempted to negotiate a maximum fee tariff on behalf of their member pharmacists and pharmacy operators with third party insurers.  While the prosecution successfully established three of the four elements required at the time under Canada’s former conspiracy provision (section 45 of the Competition Act), the Nova Scotia Supreme Court held that a fourth objective mens rea element had not been established (that the association was aware, or ought to have been aware, that its efforts to collectively establish a maximum fee tariff would lessen competition unduly).  As such, this case is known, among other things, as a case not clearly involving a hard core cartel.  Having said that, section 45 of the Competition Act (criminal conspiracy agreements) has been amended to remove two of the former elements required, including the element on which the pharmacy associations’ acquittal turned in this case.

Several other association cases in Canada have also involved challenges to collective negotiations involving associations and the Competition Bureau has issued advisory opinions on the subject from time-to-time.  For example, in one case, an association proposed to negotiate a fee schedule with federal government departments on behalf of its members.  Members were not obliged to participate in the program and the only limitation on pricing was that prices could not go beyond a maximum; otherwise, members were free to charge fees that were below that maximum.  The Bureau concluded that the association could proceed to negotiate the fee schedule because, among other things, it decided that there was no agreement between the association members to fix prices and the association would not take steps to coerce or persuade members to follow the schedule.  The Bureau also suggested several additional steps, namely: (i) that members be cautioned not to try to persuade or coerce colleagues to adhere to the schedule; and (ii) that the association make it clear to members that they were under no obligation to charge the maximum fees listed in the negotiated fee schedule.

Having said that, the Bureau has periodically issued cautions over the years that the “line” between merely voluntary or suggested fee guidelines or tariffs and price-fixing agreements that contravene the Competition Act is not clear.  For example, one former Commissioner said:

“It is not surprising that the principal concerns which arise under the Competition Act, when considering the activities of professional associations, relate to the conspiracy provisions. This may be explained in part by the ease with which activities that are originally conceived as unobjectionable cross the line, which separates lawful from unlawful conduct.  We have found that in periods of intensified competition, there is a strong temptation for some associations, for example, to include in codes of ethics anti-competitive rules designed to alleviate the rigors of competition or maintain the revenues or incomes of their members.”

The joint negotiation issue has also been considered in a number of other international jurisdictions as well.  For example, U.S. antitrust authorities have considered criteria including any efficiencies associated with joint negotiation, whether information collected and negotiations are conducted by an independent party, whether member specific information and communications will be kept confidential from other members, whether participants are required to adhere to negotiated rates (or are free to negotiate individual terms) and the market position of parties.

Other antitrust agencies, such as the Irish Competition Authority, have formulated models for associations to remain involved in collective negotiation activities while reducing antitrust risk.

For the FTC news release see: Puerto Rican Pharmacy Cooperative Settles Price-Fixing Charges.

For more information about Canadian competition law and trade associations see: Associations and Competition Law.

For some of the more interesting Canadian cases involving associations see: Association Cases.

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