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Antitrust UCL and Privacy

Pet Medication Distributors’ Antitrust Claims Highlight Importance of Defining Relevant Market

Elizabeth T. Castillo
Cotchett, Pitre & McCarthy, LLP

On April 22, 2019, the United States District Court for the Northern District of California granted a motion by Defendants VIP Petcare Holdings, Inc. (VIP) and PetIQ, Inc. (PetIQ) to dismiss with prejudice an amended complaint by Plaintiffs Med Vets Inc. (“Med Vets”) and Bay Medical Solutions Inc. (“Bay Medical”), which alleged unlawful merger and other antitrust violations, finding that Plaintiffs failed to allege a relevant market and market power in such a market. Med Vets, Inc. v. Vip Petcare Holdings, Inc., No. 18-cv-02054-MMC, 2019 U.S. Dist. LEXIS 68099 (N.D. Cal. Apr. 22, 2019). United States District Judge Maxine M. Chesney issued the decision.

Background

Plaintiffs are wholesale distributors specializing in the distribution of pet products, namely, prescription medications and certain over-the-counter (OTC) medications. Id. at *2. Defendant VIP operates veterinarian clinics and is an independent wholesale source for distributors. Id. at *2-3.PetIQ is a wholesale distributor of OTC pet products and acquired VIP on January 17, 2018. Id. at *3. Plaintiffs allege Defendants are using VIP’s veterinarian status to acquire large quantities of pet medications for the purpose of re-selling them to PetIQ for sale to retailers, thereby removing VIP as a wholesale source for distributors like Plaintiffs. Id.

Plaintiffs claim the effect of VIP and PetIQ’s merger “may be substantially to lessen competition or tend to create a monopoly” and sued for unlawful merger in violation of Section 7 of the Clayton Act as well as monopolization and attempted monopolization under Section 2 of the Sherman Act. Id. at *7-8. To bring claims under these statutes, Plaintiffs are required to allege a relevant market in which Defendants have market power. Id. at *8. Consistent with the initial complaint, Defendants moved to dismiss the amended complaint because Plaintiffs failed to allege “market power in a relevant market.” Id. at *4, 9.

Last August, the district court granted Defendants’ motion to dismiss Plaintiffs’ initial complaint, finding Plaintiffs had not pled a plausible market but giving Plaintiffs leave to file an amended complaint. Id. at *4. In the initial complaint, Plaintiffs defined two relevant markets— “the wholesale markets for prescription and restricted pet parasiticides for distribution to non-veterinary retailers (the secondary distribution system for prescription and restricted OTC pet parasiticides, respectively).” Id. at *3. In the amended complaint, which focused on the distribution channel and omitted the limitation to pet parasiticides, Plaintiffs defined a single relevant market—”the wholesale distribution to non-veterinary retailers of unmeasured veterinary wellness and medication products”—where “[m]easured products are those that are tracked by retail measurement services” and “[u]nmeasured products are available in retail stores …, but sales of these products are not tracked” by such services. Id. at *10. The change in the relevant market definition did not change the district court’s decision.

Relevant Market

In determining that the relevant market was facially unsustainable and dismissing the amended complaint, the district court relied on Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1044 (9th Cir. 2008), which held that “the relevant market must be a product market . . . encompass[ing] the product at issue as well as all economic substitutes for the product[.]” Id. Judge Chesney found Plaintiffs’ market definition facially unsustainable because it was not based on the products themselves or their producers but on whether the sales were unmeasured (i.e., “whether one or more business entities find it economically advantageous to collect and publish certain types of sales data”). Id. at *10. The court also indicated the amended complaint “provides no meaningful way to otherwise identify a product market” and “define[s] the market too narrowly with respect to its participants, whether actual or potential.” Id. at *10-13. The court determined the proposed market to be facially unsustainable but continued to analyze market power.

Market Power

The court found Plaintiffs’ allegations that Defendants have market power in the relevant market unavailing, relying on Rebel Oil Co., Inc. v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995), which set forth that market power may be demonstrated through either (1) “direct evidence of the injurious exercise of market power”; or (2) “circumstantial evidence pertaining to the structure of the market.” Id. at *15. The court found Plaintiffs’ allegation that the PetIQ-VIP merger came to “dominate the secondary distribution market and forced other secondary distributors to exit by virtue of its acquired market power” was insufficient to show market power because Plaintiffs failed to allege “any output restriction or supracompetitive pricing; indeed, as to price, plaintiffs do not allege any increase at all.” Id. at *16. The court noted Plaintiffs’ reliance on a PetIQ presentation slides to show PetIQ’s market power was misplaced and that Plaintiffs failed include any allegation bearing on barriers to expansion. Id. at *17-19. In sum, the court determined that Plaintiffs had not presented sufficient direct or circumstantial evidence of PetIQ’s market power.

Conclusion

Judge Chesney denied Plaintiffs another opportunity to amend the complaint, suggesting that Plaintiffs have pleaded all the facts they have, those facts are not sufficient to support their claims, and leave to amend would be futile. This case illustrates the importance of properly defining a relevant market as courts may not always grant repeated requests for leave to amend.

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