# Petition — Eli Lilly & Co. v. Smithkline Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1251%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1978 - **Citation:** 439 U.S. 838 ## Text et ity ’ i Supreme Court, U.S, FILED JUN 80 1978 eitpitniiieniaiitsneadiaibttai dataset {_ MICHAEL RODAK, JR., CLERK In THE Supreme Court of the United States OCTOBER TERM, 1977 ELI LILLY AND COMPANY, ¢7-1869 Petitioner, SMITHKLINE CORPORATION, Respondent. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT Epwarp N. SHERRY Attorney for Petitioner Eli Lilly and Company 140 Broadway New York, New York 10005 Of Counsel: JacK KauFMANN J. Jay Raxow Dewey, Ballantine, Bushby, Palmer & Wood Joun G. Harkins, JR. Pepper, Hamilton & Scheetz INDEX PAGE eric kasccncccee 1 PS ea ae 2 A ae 2 Statutory Provision Involved ..................... 2 UIE GE te I ta Webware s oo ccc sc csc cceee. 3 Reasons for Granting the Writ ................... 12 I. The Lawful Boundaries of Business Conduct by a Holder of a Legally Acquired Monopoly - Is a Substantial Federal Question Requiring Decision by This Court .................. 12 A. No Adequate Standard of Conduct Under Section 2 of the Sherman Act Has Been EE OE 12 B. The Revised CSP Is Not an Illegal Act ESET ERPS 15 II. The Third Cireuit Adopted a New Stand- ard in Conflict With the Standards Set by This Court in Defining the Relevant Market to Include Only Cephalosporins .......... 23 A. The Applicable Standards for Determin- ing Relevant Market .................. 24 B. The Third Cirenit’s Error in Relying Upon the Alleged Lack of Price Sensitiv- BR 27 C. The Erroneous Equal Interchangeability Standard Applied by the Courts Below 30 EE I 36 ii TABLE OF CONTENTS Appendix A, Table I—Physician Selection of Anti- Infectives by Diagnosis .........+-seeeeeeeees Appendix A, Table II—Physician Selection of Anti- Infectives by Pathogen ..........--sseeeeeeee Appendix A, Table I1I—Physician Use of Anti-Infec- tives Without a Culture Test ............--++-- Appendix B, Trend in Purchases of Selected Anti- biota WAN onc cick ccc ck cesestescasautede Appendix C, Opinion and Judgment of the Court of Appeals ......ccccccccsescccccccsvesccsccce Appendix D, Opinion and Orders of the District Caiat kad bib ou wad cee eee eh Ranke nee PAGE la 2a 5a Sikes shah Pes cha): A A ere a TaBLE OF AUTHORITIES iii A. Cases: PAGE Berkey Photo, Inc. v. Eastman Kodak Company, No. 73 Civ. 424 (S.D.N.Y., filed January 29,1973) 13 Brown Shoe Co. v. United States, 370 U.S. 294 OE 45 5 suena iw ENG Nes oo se Aiea Ras oo 23, 26 GAF Corp. v. Eastman Kodak Company, No. 73 Civ. 1893 (S.D.N.Y., filed April 30, 1973) .......... 13 IBM Peripheral EDP Devices Antitrust Litigation, FOR, ee A RIED he 5600 bb 6 dnd Kes cenedes 14 In re Kellogg Company, F.T.C. Docket No. 8883 (filed FE a sockin 4658 neds 00% och ama ases 14 Lorain Journal Co. v. United States, 342 U.S. 143 NE cl Hi Gas. ch iG paula deakabake Kanak adel wx 13 Northern Pacific Ry. v. United States, 356 U.S. 1 EE Ln de hac acetawanewariunenasesaiwse uss 14 Otter Tail Power Co. v. United States, 410 U.S. 366 EPA eer ror EN Eo oak: eer, Sere ee 13 SCM Corporation v. Xerox Corporation, No. 15807 (D. Conn., filed July 31, 1973) .......:........ 14 Standard Oil Co. of N.J. v. United States, 221 U.S. 1 SAME SRR we da wakad bards 07 kad dakee os x ons 12 Telex Corp. v. International Business Machines Corp., 510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S. I eee nad ia titon bi nakns. 6% Oe 13, 15, 21, 22 United States v. American Tel. & Tel. Co., No. 74-1698 (D.D.C., filed November 20, 1974) ............. 14 United States v. American Tobacco Co., 221 U.S. 106 PRD UD EGA a il @s 644 ned Ree USS eb ts bate ces 12 United States v. E.I. du Pont de Nemours & Co., 351 Jf St a: GaSe eS Sse eee ore eed oe See 23-27, 30, 31, 35 United States v. Everest & Jennings International, No. 77-1648-R (C.D. Cal, filed May 6, 1977) ..... 14 iv TABLE OF AUTHORITIES PAGE United States v. Griffith, 334 U.S. 100 (1948) .....--. 13 United States v. Grinnell Corp., 384 US. vel "1 (19GB)... care ceccercccccnccceesccccosess , 15, United States v. International Business Machines Corp., 69 Civ. 200 (S.D.N.Y., filed January 17, - WOGD) onc c ce cccccnccvccccccsccessscesccacsess } 110 United States v. United Shoe Machinery Corp., F.Supp. 295 (D. Mass. 1953), aff'd per curtam, 347 US. 521 (1954) ... 2. e eee ee eee eee eee 15 U.S. Steel Corp. v. Fortner Enterprises, Inc., 429 US. a GIO (1977) 20... cece cence eee e eee cesccecceeces Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965) .....-++-- 20 B. Statutes: | 15 UB. B81 on cccvcccccccsccnccccsvcenscsssaes ibe WS UGC. $B 2c. cccccceccncnsccssscsoseserssase passim 1 USC. $8 nc. cccccvccccccccccsccsuasenpeeenes * 1B U.S.C. $14 2... ccccccccccccececcccccesscosens passim 1 USC. $18. .....cccccccccccccscccccssccseseces 24 WW U.S.C. 1254(1) 2... eee cece eee eee cece eee eeeees 2 98 U.S.C. 1292(a)(1) ....- ee ee eee eee rete ee eeees 4 OB UBC. WRT ..wccccccccescccccssenatscesesesss 3 C. Miscellaneous: Areeda & Turner, Predatory Pricing and Related Practices under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975) .......---++---++: 21 L. Sullivan, Antitrust (West 1977) ........---- 20 Note, Telex v. IBM: Monopoly Pricing under Section 2 of the Sherman Act, 84 Yale L.J, 558 (1975)... ccccncscccccccesscasuesasnaeeeaeens 21 ODN! Wh a TL est od i Neb ANE Oh el a In THE Supreme Court of the United States OCTOBER TERM, 1977 + ELI LILLY AND COMPANY, Petitioner, v. SMITHKLINE CORPORATION, Respondent. *% vr PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT The petitioner Eli Lilly and Company (“Lilly”) respect- fully prays that a writ of certiorari issue to review the judgment and opinion entered on April 3, 1978, by the United States Court of Appeals for the Third Circuit in SmithKline Corporation v. Eli Lilly and Company, No. 77-1232. Opinions Below The opinion of the Court of Appeals is reported at 5 Trade Reg. Rep. (CCH) { 62,007, and appears in Appendix C to this petition. The opinion of the District Court is re- ported at 427 F. Supp. 1089 and appears in Appendix D to this petition. Jurisdiction _ The judgment of the Court of Appeals for the Third Cir- cuit was entered on April 3, 1978, and this petition for certiorari was filed within 90 days of that date. This Court’s jurisdiction is invoked under 28 U.S.C. § 1254(1). Questions Presented 1(a) What conduct by the holder of a lawful monopoly, not otherwise violative of the antitrust laws, consti- tutes an unlawful act of monopolization in violation of section 2 of the Sherman Act? (b) Did the Court of Appeals for the Third Circuit err in concluding that Lilly’s marketing plan known as the Revised CSP, which admittedly did not violate section 1 of the Sherman Act or section 3 of the Clayton Act, was an unlawful act of monopolization in violation of section 2 of the Sherman Act? 2(a) Are findings of price sensitivity and equal inter- changeability among different products necessary to include them in the same relevant market? (b) Did the Court of Appeals for the Third Circuit err in concluding that cephalosporin antibiotics alone, and not cephalosporins and other antibiotics used interchangeably with cephalosporins, form the rele- vant product market in this action? Statutory Provision Involved Section 2 of the Sherman Act, 15 U.S.C. § 2 (1976): “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other per- son or persons, to monopolize any part of the trade or ——— me ee a a ee 3 commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on con- viction thereof, shall be punished by fine not exceeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars or by imprison- ment not exceeding three years, or by both said punish- ments, in the discretion of the court.” Statement of the Case A. Proceedings Below. On April 1, 1975, petitioner Lilly instituted a marketing program, described more fully below, known as the Revised Cephalosporin Savings Plan (“Revised CSP”), for its cephalosporin antibiotics. (FF 90 at 60a-6la.)* Two weeks later, respondent SmithKline Corporation (“SmithKline’’) commenced this action in the United States District Court for the Eastern District of Pennsylvania attacking the legality of the Revised CSP. In its Complaint, SmithKline alleged that the Revised CSP constituted: (i) a tying arrangement in violation of sections 1 = 3 of the Sherman Act and section 3 of the Clayton ct; (ii) an act of monopolization in violation of section 2 of the Sherman Act; and (iii) an abuse and misuse of Lilly’s lawfully obtained patents in violation of sections 1, 2 and 3 of the Sher- man Act. The jurisdiction of the District Court was invoked under 28 U.S.C. § 1337. _ *“FF” refers to the District Court’s Findings of Fact; citations identified by the letter “x” refer to the pl io this Petition, Portions of the record other than those appearing in the Appendix to this petition are identified by references to the Joint oe ( Cag Mage in mys! mtg of Appeals, which will be ourt as part of t d pg ays e ah p e record below, or by references 4 SmithKline requested that the District Court prelim- inarily and permanently enjoin Lilly from selling or offer- ing to sell its cephalosporin antibiotics to any hospital pursuant to any plan under which a hospital received a quantity purchase rebate for Lilly cephalosporin antibiotics on other than a product-by-product basis. SmithKline also requested that the District Court award it three times an unspecified amount of the profits which SmithKline claimed it lost as a result of the Revised CSP. (The Complaint is set forth in full at JA 8 JA 17.) The District Court refused to grant SmithKline’s request for a preliminary injunction. Pre-trial discovery was limited to liability issues and a non-jury trial on liability con- eluded on January 6, 1976. Final oral argument in the matter was held on March 19, 1976. (30a-31a.) On November 2, 1976, the District Court filed its opinion. The Court concluded that the Revised CSP was neither a tying arrangement nor an abuse or misuse of Lilly’s patents on cephalosporin antibiotics. The Court, however, agreed with SmithKline’s contentions that cephalosporins alone form a relevant product market and that the Revised CSP constituted an illegal act of monopolization of that narrow market. In accordance with its opinion, the District Court on December 28, 1976, issued an order (amended on Decem- ber 29, 1976), which, among other things, permanently en- joins Lilly from selling or offering to sell any of its cephalo- sporin antibiotics to any hospital pursuant to any plan under which a hospital would receive a quantity purchase rebate for Lilly cephalosporin antibiotics on other than a product-by-product basis. (The Order and Amended Order are set forth in full at 116a-118a.) A timely interlocutory appeal from the District Court’s order pursuant to 28 U.S.C. § 1292(a)(1) was taken to the United States Court of Appeals for the Third Circuit. In an opinion and order dated April 3, 1978, the Court of Ap- peals affirmed the judgment of the District Court in its en- ee ee ny 5 tirety, on substantially the same grounds as those expressed in the District Court’s opinion. Lilly now-seeks review of the judgment below in this Court. B. The Parties. Plaintiff SmithKline, a Pennsylvania corporation with its principal place of business in Phila- delphia, and defendant Lilly, an Indiana corporation with its principal place of business in Indianapolis, are major manufacturers of human ethical pharmaceutical products, including antibiotics, which they sell in interstate and for- eign commerce. (FF 1-5, 26 at 36a-37a, 40a.) C. Antibiotics. Antibiotics are one type of anti-infective drug used by physicians in the treatment of infectious dis- eases in humans. They include ampicillins, carbenicillins, cephalosporins, chloramphenicol, erythromycins, gentamy- cins, penicillins, tetracyclines, and nitrofurantoins. Other anti-infectives, such as sulfa drugs, are non-antibiotics.* Antibioties are available in parenteral (injectable, whether intravenous or intramuscular) and oral forms. (FF 26-27 at 40a-41a; JA 1094, JA 795-JA 796.) Physicians treating hospitalized patients determine which antibioties should be used. The principal factors involved in that determination are efficacy and safety. Cost is not a significant factor in the choice of an anti-infective drug by a prescribing physician. As the Third Circuit stated, [p]rescribing physicians are not cost-conscious in their choice of an antibiotic for a hospitalized patient, and so do not opt for a less expensive over a more costly medica- tion.” (18a-19a.) * Antibioties are substances produced by microorganisms are active ag: st other microorganisms. The satan tos pater are not antibivtics, as they are chemicals not produced by living organisms. (JA 1240. ) For convenience, however, the term anti- biotics as used herein includes non-antibioties such as sulfa drugs. 6 D. The Introduction of Cephalosporin Antibiotics.® For over forty years, from the advent of the antibiotic pharm.ceutical industry, Lilly has been one of, if not the leading, developer and marketer of such drugs. (JA 673- JA 675.) Lilly continued this history by introducing the first cephalosporin antibiotic, Keflin (cephalothin),** into the United States market in 1964. Subsequently, it added four additional cephalosporin antibiotics: Keflex (cepha- lexin), Loridine {cephaloridine), Kafocin (cephaloglycin), and Kefzol (cefazolin). As a result of its innovative re- search and development, Lilly has United States patents on all of its cephalosporin antibiotics except Kefzol (cefazolin). (FF 52-55, 57, 61 at 50a-dla.) In October, 1973, following the proven success of cephalo- sporin antibiotics (JA 132), SmithKline introduced its first cephalosporin, Ancef (the generic equivalent of Lilly’s cefazolin product Kefzol). In doing so, SmithKline deliberately determined to position Ancef in direct com- petition with Keflin as well as Kefzol, among other drugs. (FF 56 at 50a-5la; FF 73-75 at 54a-55a; JA 1020.) Thereafter, in May, 1974, Bristol-Myers Co. introduced Cefadyl (cephapirin), an injectable antibiotic. Subse- quently, in August, 1974, E. R. Squibb & Sons introduced Velosef (cephradine), which it markets in oral and inject- able form. Then, in October, 1974, SmithKline began market- ing Anspor, the generic equivalent of Squibb’s Velosef in oral form. As a result, seven cephalosporin antibiotics marketed under nine brand names are presently commer- * Cephalosporins are “ . | gemisynthetie antibacterial agents that are closely related chemically to the penicillins and, like them contain a beta lactam ring as part of the nucleus.” {[A.M.A. Drug Evaluations 523 (2d Ed. 1973).] (FF 33 at 42a-43a.) ** Products are identified by their brand name first and then, in parentheses, by their generic or chemical name. sits Rand | bliin thas hen iss Wo Og linden Li fh oo ey ee 7 cially available from four separate American manu- facturers.* (FF 58-60 at 51a, FF 72 at 54a-5da. ) As indicated, some of the cephalosporins currently marketed are generic** equivalents. The District Court found, and no one has disputed, that all cephalosporins may pe ae interchangeably with one another. (FF 35 at 43a- a. Moreover, as shown below, the undisputed evidence in this case shows that (1) no cephalosporin antibiotic is the drug of choice*** for treatment of any given infection; and (2) there is no infection which can be treated by a cephalosporin antibiotic which in actual practice is not also treated by a wide variety of other antibiotics. Rather, the evidence shows that a wide variety of antibiotics have in fact been used interchangeably with cephalosporins for treatment of infectious diseases or infectious agents. *The names of the cephalosporin antibiotics in : : : current in the United States are listed below. As shown below, Kefzol ai a ee gp rye ya same generic drug cefazolin rand Velosef are different brands of th ie drug cephradine. (FF 72 at 54a.) rece ee Injectable Generic Name cephalothin— (1964) cephaloridine—( 1967) eefazolin—( 1973) Brand Name Keflin (Lilly) Loridine (Lilly) Kefzol (Lilly) and Ancef (SmithKline) Cefadyl (Bristol) Velosef (Squibb) Keflex (Lilly) Kafocin (Lilly) Anspor (SmithKline) and Velosef (Squibb) ** Generic equivalents are drugs th re identi i structures. (FF 31 at 42a.) gs that have identical chemical *** The term “drug of choice” identifies the preferred pet ype. = ar emg ye various therapeutic corp, tery nsiderations are en into ( 493-. SI6JA 517, JA 1008) account. (JA 493-JA 494 JA cephapirin—( 1974) cephradine—( 1974) cephalexin—(1972) cephaloglycin— (1971) cephradine—(1974) 8 E. Marketing Programs. In October, 1972, Lilly adopted a marketing program known as the Cephalosporin Savings Plan (“CSP”). At the time the CSP was adopted, no com- petitor of Lilly marketed cephalosporin antibiotics and none would do so for about a year. Lilly’s cephalosporins were competing with other antibiotics and, as the Third Circuit specifically found, the CSP was adopted in order to make Lilly cephalosporin antibiotics more competitive on a price basis with other antibiotics and to expand sales of cephalo- sporins at the expense of other antibiotics. (lla; FF 79 at 56a-57a; JA 1232 at 37.) The CSP was simply a form of quantity discount. Es- sentially, it provided for a rebate to be paid to participating not-for-profit hospitals in the form of certain Lilly mer- chandise of the hospital’s choice at an established rate based solely upon the total number of grams of Lilly cephalo- sporins purchased by the hospital. (FF 80 at 57a.) The CSP was not challenged by SmithKline in this case and is not in issue here. Competition from other antibiotics, including additional cephalosporins manufactured by Bristol, Squibb, and Smith- Kline, began to increase, and Lilly increased its efforts to find ways to make its cephalosporin antibiotics more competitive in the antibiotic market. (FF 79 at 56a-57a.) Consequently, in the second half of 1974, Lilly organized a “Cephalosporin Task Force” to consider possible revisions of the original CSP. The Cephalosporin Task Force recommended a Revised Cephalosporin Savings Plan (“Re- vised CSP”) which Lilly adopted in April, 1975. (FF 90 at 60a-61a.) The Revised CSP essentially involved the addition of a package pricing component to the quantity discount com- ponent of the original CSP. Thus, the Revised CSP, like the original CSP, provided for a rebate (“base dividend”) to be paid to participating not-for-profit hospitals in the Te ee ered 9 form of certain Lilly merchandise of the hospital’s choice at an established rate based upon the total number of grams of Lilly cephalosporins purchased by the hospital.* However, in addition the Revised CSP provided for an additional 3% rebate (‘‘bonus dividend’’) to be paid upon the hospital’s total cephalosporin purchases if the hos- pital bought established minimum quantities of each of any three of Lilly’s five cephalosporin antibiotics. (FF 90 at 60a-6la.) Those minimum quantities represented a very small percentage of the hospital’s total cephalosporin purchases. ** Thus if, for example, a hospital purchased a total of 15,000 grams of Lilly cephalosporin antibiotics in a given quarter, it would be entitled to a base dividend of 2%. In addition, if its purchases included at least 400 grams of each of any three of Lilly’s five cephalosporin antibiotics, it was entitled to a bonus dividend of 3%. (FF 91 at 61a.) * The rates at which rebates were paid upon a given number of grams of Lilly cephalosporins purchased were somewhat lower than the rates at which rebates were paid for the purchase of the same number of grams under the original CSP. ** The base dividend and bonus dividend schedul i follows (FF 91 at 61a): ee. fe Base Base Dividend Bonus Bonus Dividend Dividend Qtr. Purchase Dividend Qtr. Purchase Level (Total Grams) Level (Total Grams) 0% 0- 7,999 3% 150 1% ~— 8,000-10,999 3% 300 2% 11,000-16,999 3% 400 3% 17,000-22,999 3% 500 4% 23,000-29,999 3% 750 5% 30,000-38,999 3% 1,000 6% 39,000-47,999 3% 1,250 7% . 48,000-71,999 3% 1,500 8% 72,060-95,999 3% 1,750 9% 96,000-or more 3% 2,000 10 It is this bonus dividend of 3% which is the subject of this action.* As the District Court found (FF 95 at 62a-63a), es ye Third Cireuit agreed (14a, n.3), the Revised CSP, a adopted and implemented, did not contain: (i) any provision requiring that any hospital = chase any Lilly product in order to obtain any other Lilly product; | (ii) any provision requiring that any hospital re- frain from purchasing any product from any source in order to obtain any Lilly product; or (iii) any provis'on which conditions the anagpe of any rebate on the purchase of any Lilly product, other- wise unavailable to the purchaser, upon an agreement that a hospital shall refrain from purchasing any prod- uct from any source. Rather, all of Lilly’s cephalosporin antibioties er separately available for purchase, at reasonable ae 7 any hospital in the United States, whether or oe ss participated in the Revised CSP, and whether or ¥ 4. purchased any other Lilly cephalosporin or any other illy product. For example, both before and after the adoption of the Revised CSP, hospitals purchased substantial volumes of Lilly’s patented cephalosporin antibiotics Keflin and Keflex without participating in either the CSP or the Revised CSP. (Ex. D-1143.) "a , ed * SmithKline never contended in its pleadings or present any pe arm that the original CSP, identical to the a volume rebate aspect of the Revised CSP but a: ae rebates, was an antitrust Romy “oye Re mae Hagen or _— imilar marketing plans for its cephalospo i . Mo pay District Genet specifically held that price ss existed when the original CSP was in effect | (110a), = : _ its finding of monopolization to the period since April 1, , the date of the institution of the Revised CSP.” (31a.) ll Lilly was not alone in instituting marketing programs in order to make cephalosporin antibiotics more competitive with other antibiotics. SmithKline, for example, adopted several programs under which it, too, offered price dis- counts or rebates of pharmaceutical products to hospitals based on the quantity of SmithKline cephalosporins pur- chased by a hospital. Under one of these programs, known as the Price Insurance Plan (“PIP”), SmithKline initially granted to hospitals a rebate equal to 5% of their Ancef purchases if those purchases exceeded 500 grams of Ancef per quarter, and also provided an additional 5% rebate for each individual order of 500 vials or more of Ancef. After SmithKline introduced Anspor and began marketing both it and Ancef in direct competition with Lilly’s leading cephalosporin antibiotics, Keflin, Keflex, and Kefzol, among other antibiotics, the PIP was revised so that hospitals were eligible for rebates in an amount equal to 5% of their combined Ancef-Anspor purchases if those combined pur- chases exceeded 500 grams per quarter. Moreover, the ad- ditional 5% rebate for each individual order of 500 vials or more of Ancef remained available. (FF 79 at 56a-57a.) In April, 1975, just prior to the commencement of this law- suit, SmithKline again modified its PIP so that hospitals were no longer eligible for a 5% rebate based on a com- bined Ancef-Anspor purchase of 500 grams or more. Rather, although hospitals were still eligible for their regular Ancef rebate, they were required to purchase 500 grams of Anspor within a quarter to qualify for a 5% Anspor rebate. (FF 96 at 63a-6Aa. ) Following the introduction of the Revised CSP, SmithKline’s sales of cephalosporins continued to increase. Monthly sales of Ancef for every month in 1975 through August, the most recent figures available af the time of trial, exceeded sales in the corresponding months in 1974, and sales of Anspor in the second quarter of 1975 almost doubled those in the first quarter of 1975. Moreover, sales 12 of Ancef following the introduction of the Revised CSP were made at substantially the same net prices as those prior to its introduction. (JA 1250; SmithKline Response to Lilly Interrogatory No. 79.) Reasons for Granting the Writ Il. The Lawful Boundaries of Business Conduct by a Holder of a Legally Acquired Monopoly Is a Sub- stantial Federal Question Requiring Decision by This Court. A. No Adequate Standard of Conduct Under Section 2 of the Sherman Act Has Been Established. Since the Sherman Act was enacted in 1890, this Court has of course had many occasions to determine the types of eonduct which violate section 1 of that Act. Moreover, it was early concluded that conduct which violates section 1 of the Act would also violate section 2 of the Act if done by the holder of a monopoly or in an attempt to monopolize a par- ticular market. E.g., Standard Oil Co. of NJ. v. United States, 221 U.S. 1 (1911); United States v. American To- bacco Co., 221 US. 106 (1911). Although this Court has frequently stated in general terms that anticompetitive conduct by a monopolist will violate section 2,* it has decided only a handful of cases dealing with allegations that conduct not involving viola- tions of section 1 was unlawful under section 2, and most of those cases have dealt with instances where a monopoly was * For example, perhaps the most frequently cited statement of this Court declares that “the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or his- torie accident” violates section 2. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). However, Grinnell involved a classic conspiracy in restraint of trade by four defendants which was found to be a per se violation of section 1 as well as section 2. cesta tw re Mall ‘neers 5 3 ; N \ 3 E 13 alleged to have been illegally attempted or attained. In only three cases* has this Court considered any aspect of the issue presented by this case: what acts by a holder of a le- gally acquired monopoly, nut otherwise violative of sec- tion 1 of the Sherman Act, constitute illegal monopolization under section 2 of the Sherman Act. Each of those cases, however, involved refusals to deal by a monopolist, and provide no guidance in the present case, which does not in- volve refusals to deal but rather Lilly’s marketing practices under the Revised CSP. Nor has any clear authority been established by the lower federal courts to determine what course of conduct is avail- able to the holder of a legal monopoly. Apart from cases involving predatory pricing (usually defined to mean sales below cost) no clear pattern of acceptable conduct emerges. Indeed, only in Telex Corp. v. International Business Ma- chines Corp., 510 F.2d 894 (10th Cir.), cert. dismissed,** 423 U.S. 802 (1975), was the issue squarely presented, and in that case, in a holding directly contrary to the present case, the Tenth Circuit held that a monopolist is not fore- closed from engaging in non-predatory price competition. The question of what scope of competitive conduct is available to the holder of a lawful monopoly has assumed even greater importance since in recent years a number of significant private and public section 2 actions dealing with that issue have been brought and are pending in the lower courts.*** The increasing number of section 2 cases * Otter Tail Power Co. v. United States, 410 U.S. 366 (1973): Lorain Journal Co. v. United States, 342 U.S. 143 (1951); and United States v. Griffith, 334 U.S. 100 (1948). ** Although a petition for certiorari was filed wi i ; hou, , th th it was dismissed on stipulation of the parties. seb *** E.g., Berkey Photo, Inc. v. Eastman Kodak C v 73 Civ. 424 (S.D.N.Y., filed January 29, 1973); GAF ia g man Kodak Company, No. 73 Civ. 1893 (S.D.N.Y., filed April 30, (footnote continued on following page) 14 underscores the need for this Court to establish what con- duct the holder of a legally acquired monopoly may engage in. In the present case, Lilly’s monopoly (assuming arguendo that the relevant market consists only of cephalosporin antibiotics) was concededly legally acquired and maintained prior to the introduction of the Revised CSP.* The only new element contained in the Revised CSP was a package pricing plan, similar to those re- peatedly upheld by this Court in such cases as Northern Pacific Ry. v. United States, 356 U.S. 1, 6 n. 4 (1958) and U.S. Steel Corp. v. Fortner Enterprises, Inc., 429 US. 610 (1977) (‘‘Fortner II’’), which both the District Court and the Third Circuit conceded did.not violate section 1 of the Sherman Act or section 3 of the Clayton Act. No issue of predatory or below-cost pricing was even raised. Neverthe- less, the Third Circuit concluded, in a single paragraph, without meaningful discussion and without citation to a single authority, that Lilly’s Revised CSP violated section 2 of the Sherman Act. (22a.) In the absence of any meaningful guidance from this Court as to what conduct by the holder of a legally acquired monopoly is permitted under section 2 of the Sherman (footnote continued from preceding page) : Peripheral EDP Devices Antitrust Litigation, No. 16) COPMDL 1976). SCM Corporation v. Xerox Corporation, No. 15807 (D. Conn., filed July 31, 1973); United States v. Amert- can Tel. & Tel. Co., No. 74-1698 (D.D.C., filed November 20, 1974) ; United States v. Everest & Jennings International, No. 77-1648-R (C.D. Cal, filed May 6, 1977); United States v. International Business Machines Corp., No. 69 Civ. 200 (S.D.N.Y., filed January 17, 1969); In re Kellogg Company, F.T.C. Docket No. 8883 (filed April 26, 1972). * For example, the Third Circuit r= - “Although ory, Y enjoyed the status of a legal monopolist when it was engage the aeatir acc and sale of its original patented products, that status changed when it instituted the Revised CSP.” (23a.) i i } ; 15 Act, the decision of the Third Circuit, if allowed to stand, will result in confusion and a lessening of competition by prohibiting, or at least leaving open to question, virtually any conduct by the holder of a lawful monopoly, even where, as shown below, such conduct is otherwise legal and results in price competition to the benefit of consumers. B. The Revised CSP Is Not an Illegal Act of Monopo- lization. This Court has stated that the offense of monopoly under section 2 of the Sherman Act requires not only the pos- session of monopoly power in the relevant market but also ‘‘the willful acquisition or maintenance of that power as distinguished from growth or development as a con- sequence of a superior product, business acumen, or his- toric accident.’’? United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). In other words, the existence of the power to control prices and exclude competition does not, by itself, constitute unlawful monopolization. Rather, where, as here, a monopoly has been legally obtained, there must be proof that competitors were foreclosed from the market by predatory or exclusionary acts other than normal competitive practices. E.g., Telex Corp. v. Inter- national Business Machines Corp., supra, 510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S. 802 (1975); United States v. United Shoe Machinery Corp., 110 F. Supp. 295 (D. Mass. 1953), aff’d per curiam, 347 U.S. 521 (1954). In finding that the Revised CSP constituted an ex- clusionary act of monopolization, the Third Circuit did not discuss the issue or cite any authority, apparently relying on the analysis of the District Court. The District Court, for its part, misconstrued the operation and effect of the Revised CSP by ignoring its own findings as to the competi- tion among cephalosporins, and misapplied the law with regard to acts of monopolization. 16 As illustrated earlier, supra, pp. 8-9, the Revised CSP was a modification of Lilly’s previous CSP* whose only new feature was a package pricing plan. Under the Re- vised CSP, in addition to receiving specified quantity dis- counts when their combined total purchases of any or all Lilly cephalosporins exceeded a specified amount of grams, as with the original CSP, purchasers received an addi- tional discount when they bought a “package”, consisting of any three of Lilly’s five cephalosporins in excess of certain minimum quantities. The District Court found, and the Third Circuit agreed, that the Revised CSP did not constitute a tying arrange- ment or any other type of conduct violative of section 1 of the Sherman Act or section 3 of the Clayton Act be- cause, as stated by the Third Circuit: “The district court found, and it is not disputed, that Lilly did not condition the availability of any of its products on the purchase of any other of its prod- ucts or on the refusal of purchasing hospitals to deal with its competitors. Thus, Lilly did not ‘tie’ pur- chases of Kefzol to purchases of Keflin or Keflex.” (14a. ) The Third Circuit necessarily also found, as a corollary to its finding that cephalosporins comprise a relevant prod- uct market, that all cephalosporin drug products were interchangeable. Moreover, the District Court found, and neither SmithKline nor the Third Circuit disputed, that SmithKline positioned Ancef directly against Keflin, and indeed 80% of SmithKline’s sales of Ancef were at the expense of Lilly’s Keflin, rather than Kefzol. (FF 73, 75, 77 at 54a-56a; FF 88 at 60a.) In addition, it is undisputed that SmithKline’s Anspor competed directly with Lilly’s Keflex. *Both the District Court and the Third Circuit. of course, recognized that the original CSP did not violate section 2. (See 22a-23a; 31a; 110a.) ee 4 b ; i = : ; 3 x ; ‘ 17 The significance of these findings is this: since hospitals were concededly not required to accept the Lilly package, all hospitals were free to purchase SmithKline’s Ancef and/or Anspor in place of any three, or all five, Lilly cephalosporins at prices less than Lilly’s even under the Revised CSP. In other words, a hospital could purchase its full range of cephalosporin requirements from Smith- Kline cheaper than from Lilly. In light of this crucial fact, the errors of the courts below become apparent. 1. The Operation and Effect of the Revised CSP. In assessing the competitive impact of the Revised CSP on SmithKline, the District Court, and hence the Third Cir- cuit, relied entirely on a report prepared on behalf of SmithKline by the Boston Consulting Group which was based upon the assumption that, contrary to the court’s own findings enumerated above, SmithKline’s Ancef com- peted only against Lilly’s Kefzol, its generic equivalent, and not against Keflin, and that SmithKline’s Anspor did not compete against Lilly’s Keflex. As a result of this erroneous assumption, the entire bonus rebate earned by a hospital on all of its Lilly cephalosporins was attributed to Kefzol to reduce its effective price, and that artificially constructed low price was the price the Boston Consulting Group and the District Court used to assess whether SmithKline could compete with the Revised CSP. (See FF 109 at 67a-68a; 100a-101a.) Had the District Court adhered to its own findings that Ancef competes with Keflin rather than just Kefzol (FF 73, 75, 77 at 54a-56a; FF 88 at 60a), and that cephalosporins are interchangeable, it would have realized that there was no justification for attributing all bonus rebates earned on purchases of Lilly cephalosporins to Kefzol in analyzing the effect of the Revised CSP on SmithKline. The bonus rebate can only be used once in analyzing its impact. If the entire bonus rebate of 3%, earned on all of a hospital’s pur- chases of cephalosporins, including its purchases of Keflin, is applied to a single cephalosporin, Kefzol, to lower its ef- 18 fective price, then no part of that rebate could be attributed to Keflin, and Keflin would be increasingly subject to price competition from and replacement by Ancef, which Smith- Kline priced 7% below Keflin. (FF 74 at 55a.) Similarly, Keflex would be subjected to price competition from and replacement by Anspor. In view of the competition between SmithKline’s and Lilly’s cephalosporins, the bonus rebate must be allocated on a product by product basis, with the result that the aver- age effective price of each Lilly cephalosporin purchased by a hospital under the Revised CSP will be lowered by 4%. (JA 1042, JA 782.) On the other hand, SmithKline’s aver- age rebate under its PIP plan was 714%. (JA 1248 at p. 16.) It is obvious, therefore, that a hospital could purchase all of its cephalosporin requirements from SmithKline at a lower cost than if it purchased those requirements from Lilly.* In light of its undisputed findings that cephalosporins are interchangeable with ne another and that Ancef and An- spor compete with Keflin and Keflex, the District Court’s assumption that the entire bonus rebate under the Revised CSP may be attributed to Kefzol, and its resulting conclu- sion that SmithKline will suffer negative returns of -10.2% of Ancef sales to average hospitals and -3.4% of Ancef sales to large hospitals (FF 109 at 67a48a), ignore the realities of the market and merely serve to illustrate the general confusion and internal inconsistencies which char- acterize the opinions of the District Court and the Third Circuit.** * Lilly was able to compete with SmithKline’s lower average net prices in part because of its reputation with physicians (par- ticularly surgeons) (FF 100 at 64a) and SmithKline’s inexperi- ence in selling antibiotics (FF 62 at 51a; FF 68 at 53a) and in selling to hospitals. (FF 71 at 53a.) ** For the same reasons, the District Court’s finding that “hos- pital-consumers have been damaged by their inability to obtain (footnote continued on following page) 10 ae nme endian ser naan tlalil q ) ; { 19 2. Lilly’s “monopoly power” over Keflin and Keflez. Having failed to find a tie-in or any other conduct violative of section 1 of the Sherman Act or section 3 of the Clayton Act, both the Third Circuit and the District Court pro- ceeded to base their findings of illegal monopolization on the theory that Keflin and Keflex allegedly faced no competition. For example, the Third Circuit held that “the act of willful acquisition and maintenance of monopoly power was brought about by linking products on which Lilly faced no competition—Keflin and Keflex—with a com- petitive product, Kefzol.’’ (22a.) Similarly, the District Court held that Lilly “used its monopoly power in Keflin and Keflex to stifle competition posed by a less favorably situated competitor (Smith- Kline) in the cephalosporin marketplace.” (96a. ) However, the conclusion that Keflin and Keflex faced no competition is clearly erroneous. Since both courts found that all cephalosporins were interchangeable (since they were found to be in the same relevant market), and that 80% of Ancef sales were at the expense of Keflin rather than Kefzol, it is utterly absurd, in the context of a relevant market consisting of (at least) all cephalosporins, to speak of “monopoly power” in a single product within that relevant market. Keflin and Keflex were patented, as the courts below recognized. (10a, 22a-23a; FF 61 at 51a; 95a-96a, 111a.) However, it does not follow that Lilly faced no competition (footnote continued from preceding page) lower Keflin prices which would have resulted from a one-on-one price competition between Ancef and Keflin in the absence of the Revised CSP” (FF 122 at 71a) is also clearly erroneous. As shown above, nothing contained in the Revised CSP prevented competition between Ancef and Keflin; the District Court specif- ically found that such competition in fact existed (FF 88 at 60a) ; and hospitals did obtain lower Keflin prices in the form of rebates under the Revised CSP. 20 in those products. As one commentator has stated: “A patent, although creating a legal monopoly of the patented art, does not do away with the need to show possession or intent to acquire that degree of market power called monopoly. The existence of monopoly power cannot be inferred merely from the possession of one or more patents. The protected invention or process may be very narrow. By excluding others from it the patentee may attain very little market power, for there may be numerous other products or processes not covered by the patent which are cciumercially feasible substitutes...” L. Sullivan, Antitrust 507 (West 1977) (emphasis added). This Court reached the same conclusion in Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 177-78 (1965). In that case, this Court held that conduct alleged to constitute an act of monopoliza- tion must be evaluated in the coucext of the relevant market as defined for section 2 purposes, and the existence of a patent does not prove monopoly power in that relevant market, because there may be substitutes for that patented product. Thus, one may speak of “monopoly power” in a single product for section 2 purposes only if that product forms its own relevant market, not where it is one of sev- eral products in a relevant market. In short, either cephalosporins are interchangeable or they are not interchangeable. Both the Third Circuit and the District Court found that they are interchangeable, and the effect of such a finding is to render meaningless the find- ing of an act of monopolization consisting of the use of “monopoly power” in individual products within the relevant market whether or not they are patented. 3. The price eompetition resulting from the Revised CSP, Finally, even if, contrary to the District Court’s own findings, Ancef did not compete with Keflin, and nein, lial ) 4 t F i ' i i 21 Anspor did not compete with Keflex, the Revised CSP would still not be an act of monopolization, but simply a form of price competition. Price competition is, of course, encouraged by the anti- trust laws, and even a monopolist may lower his prices to be competitive, at least so long as he receives a reason- able rate of return on his sales. Telex Corp. v. Interna- tional Business Machines Corp., supra, 510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S. 802 (1975); see Areeda & Turner, Predatory Pricing and Related Practices under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697 (1975) ; Note, Telex v. IBM: Monopoly Pricing under Section 2 of the Sherman Act, 84 Yale L. J. 558 (1975). In Telez, supra, the Tenth Cireuit confronted the un- resolved issue of what pricing actions the holder of a law- fully acquired monopoly may take under section 2 of the Sherman Act. Telex Corporation alleged that IBM, by selectively reducing its prices on products competing with Telex, while increasing its prices on other products, en- gaged in illegal acts of monopolization in violation of section 2. The trial court characterized IBM’s acts as predatory and ruled in favor of Telex. The Tenth Circuit reversed. The Tenth Circuit assumed, for purposes of discussing the alleged acts of monopolization, that IBM possessed monopoly power in the relevant market. The Court then asked whether a monopolist can ‘‘reduce prices not below a point where they will derive a reasonable profit,’’? 510 F.2d at 926, and answered the question affirmatively: ‘‘There must be some room to move for a defendant who sees his market share acquired by research and technical innovations being eroded by those who mar- ket copies of its products. It would seem that tech- nical attainments were not intended to be inhibited or penalized by a construction of section 2 of the Sherman Act to prohibit the adoption of legal and 22 ordinary marketing methods already used by others in the market, or to prohibit price changes which are within the ‘reasonable’ range, up or down.’’ 510 F.2d at 927. In the present ease, it is undisputed that, far from pric- ing below its costs, Lilly was selling its cephalosporins at an adequate profit. (FF 107-108 at 67a.) The Revised CSP was a competitive pricing practice—package pricing— which arose out of the realization that Lilly faced com- petition not only from other antibiotics but from Smith- Kline’s cephalosporins as well. The plan merely repre- sented an effort to make each individual Lilly product more competitive on a price basis. Indeed, even assuming, as the District Court erroneously did, that the Lilly re- bates on all of its cephalosporins should be attributed entirely to Kefzol in assessing the impact of the Revised CSP on SmithKline, the only effect would be to reduce the net price on Kefzol, and SmithKline has never con- tended that sales of Kefzol at such resulting net prices, whether done directly or by means of rebates from what- ever source,* would be too low to provide a reasonable return to Lilly,** or are lower than those expressly per- mitted in Telex. In short, the Third Cirenit condemned the Revised CSP as an act of monopolization despite the fact that the Re- vised CSP was a form of normal price competition— * Of course, to differentiate between rebates on the one hand and direct price reductions on the other, as the District Court attempted to do in discussing Telex (106a-110a), would be to exait form over substance. ** Insofar as the District Court suggested (FF 107, 109 at 67a- 68a; 107a-109a) that Lilly may not lower its effective price on Kefzol to a point where Lilly is still earning an adequate return, but SmithKline, in order to meet that price, cannot earn an ade- quate return because of its higher costs, the District Court’s find- ings seek to protect competitors rather than competition and are at variance with the purposes of the antitrust laws. A 23 package pricing—which did not violate section 1 of the Sherman Act or section 3 of the Clayton Act. In doing so, it confused the concept of monopolization of a relevant market with a monopoly over the art represented by a patented product. This Court should grant the writ of certiorari to review the judgment of the Third Circuit, both because of the errors committed by the Third Circuit and to establish the range of competitive conduct permitted a monopolist with a lawfully acquired monopoly under section 2 of the Sherman Act. II. The Third Circuit Adopted a New Standard in Conflict With the Standards Set by This Court in Defining the Relevant Market to Include Only Cephalosporins. This Court has on a number of occasions enunciated the standards to be applied in determining the appropriate relevant market in cases brought under section 2 of the Sherman Act. The leading case, of course, is United States v. EJ. du Pont de Nemours & Co., 351 U.S. 377 (1956) (“the Cellophane case”), which established a test of rea- sonable interchangeability of use in determining relevant market. As shown below, in the present action the Third Circuit committed plain error by adopting a new and different standard in conflict with the standards of the Cellophane ease. Among other things, it held that, contrary to the specific holdings of both the Cellophane case and Brown Shoe Co. v. United States, 370 U.S. 294 (1962), price sen- sitivity is an essential element in determining relevant market, despite the fact that it was undisputed that cost is not a significant factor in selecting antibiotics, and de- spite the fact that undisputed evidence showed substantial actual interchangeability among all antibiotics. If the Third Circuit’s decision that a demonstration of price sensitivity is necessary to define relevant market is 24 allowed to stand, in direct conflict with the decisiors of this Court, it will cause considerable uncertainty as to the correct definition of relevant market in all cases brought under section 2 of the Sherman Act or section 7 of the Clayton Act. Thus, the question of the correct standard to be applied in relevant market cases, particularly with regard to the issue of price sensitivity, is an important federal questicn which this Court should clarify. As shown below, when the correct standard is applied to the present action, the proper relevant market will nec- essarily be found to consist of all antibiotics and not cephalosporins alone. A. The Applicable Standards for Determining Rele- vant Market. In United States v. E. I. du Pont de Nemours € Co., supra, this Court enunciated the now classic test for deter- mining the relevant market in actions brought pursuant to section 2 of the Sherman Act: “Tn considering what is the relevant market for deter- mining the control of price and competition, no more definite rule can be declared than that commodities reasonably interchangeable by consumers for the same purposes make up that ‘part of the trade or com- merce,’ monopolization of which may be illegal.” 351 U.S. at 395. In the Cellophane case, the Court considered whether sales of cellophane, manufactured by du Pont and others under patented processes, constituted a relevant market for purposes of determining whether a violation of section 2 of the Sherman Act had occurred. The District Court had determined that such sales did not, in fact, form the rele- vant product market and that du Pont, which produced almost 75% of the cellophane sold in the United States, had not violated section 2 of the Sherman Act. This 25 Court agreed and affirmed, holding that sales of “flexible packaging” materials constituted the relevant product market. In reaching that conclusion, this Court expressly re- jected a relevant product market test proposed by the Gov- ernment to the effect that only “substantially fungible” and ‘‘like priced” products should be included in the rele- vant market. 351 U.S. at 380.* As the Court pointed out: “. . . where there are market alternatives that buyers may readily use for their purposes, illegal monopoly does not exist merely because the product said to be monopolized differs from others. If it were not so, only physically identical products would be a part of the market.” 351 U.S. at 394. Rather, the Court emphasized: “In determining the market under the Sherman Act, it is the use or uses to which the commodity is put that control.” 351 U.S. at 395-96. The Court then found that although cellophane differed in many ways, including price and possible end uses, from other flexible packaging materials, and was superior to some and inferior to others with regard to its qualities and uses, nevertheless, it had to meet competition from other flexible packaging materials in each of its uses, and thus, did not alone comprise a relevant product market. Numerous subsequent decisions reaffirm that the rea- sonable interchangeability of use test set forth in the Cellophane case is the proper standard for determining relevant market for antitrust purposes. For example, in Umited States v. Grinnell Corp., 384 U.S. 563 (1966), an * As demonstrated below, the District Court in this action applied a test that results in a market limited to substantially fungible and like-priced products such as that rejected in the Cellophane case. 26 action brought pursuant to §2 of the Sherman Act, this Court, citing the Cellophane case approvingly, held that various different types of central station property protection services, including automatic fire alarm, water- flow alarm and sprinkler supervision, and watchman’s re- porting and manual fire alarm services formed the relevant product market. In so holding, the Court noted: “We see no barrier to combining in a single market a number of different products or services where that combination reflects commercial realities.” 384 U.S. at 572. Similarly, in Brown Shoe Co. v. United States, 370 U.S. 294 (1962), an action brought pursuant to §7 of the Clay- ton Act, this Court held that men’s women’s and children’s shoes each formed a relevant line of commerce for anti- trust purposes. The Court noted, among other things, that men’s, women’s and children’s shoes each have char- acteristics peculiar to themselves rendering them “gen- erally noncompetitive with the others” and that “each is, of course, directed toward a distinct class of customers.” 370 U.S. at 326. The Court refused, however, to further subdivide these markets on the basis of “ ‘price/quality’ . distinctions” on the ground that such subdivision “would be unrealistic” and “would be equivalent to holding that medium-priced shoes do not compete with low-priced shoes.” 370 U.S. at 326. As the Court noted: “ . . the boundaries of the relevant market must be. drawn with sufficient breadth to include the competing products of each of the merging companies and to rec- ognize competition where, in fact, competition exists.” 370 U.S. at 326. In sum, the reasonable interchangeability of use test set forth in the Cellophane case is the test for determining relevant market for antitrust purposes. Indeed, the Dis- trict Court conceded this. (83a, JA 394-JA 395.) Never- a ES eee) = eee 27 theless, in the present case, the courts below committed two errors in defining the relevant market, each of which, standing alone, is sufficient ground for reversal. First, after finding that cost is an insignificant factor in the selection of an antibiotic by a physician, the Third Cireuit gave controlling weight to the alleged lack of price sensitivity between cephalosporins and other antibiotics in determining that cephalosporins alone comprise the relevant product market. Second, the courts below applied an erroneous test of equal interchangeability which resulted in a market limited to substantially fungible and like-priced products notwith- standing the rejection of such a standard by this Court in the Cellophane case. B. The Third Circuit’s Error in Relying Upon the Alleged Lack of Price Sensitivity. SmithKline contended, and the District Court found, that cost is an insignificant factor in the choice of an anti- biotic by a physician. (FF 39 at 45a.) Notwithstanding this finding, the Third Circuit placed substantial, if not controlling emphasis on the District Court’s finding of a lack of price sensitivity* between cephalosporins and other antibiotics in concluding that cephalosporins alone com- prise the relevant market. Indeed, the Court of Appeals devoted a significant por- tion of its opinion to a discussion concerning the lack of price sensitivity. (18a-19a.) This was plain error be- cause, obviously, significant price sensitivity between products will not be found where cost is not a factor in the choice between those products. * Lilly does not here concede that the District Court’s finding of a lack of price sensitivity was correct, since the evidence estab- lished that there was indeed price sensitivity between cephalo- sporins and other antibiotics. (JA 414-JA 417; JA 467-JA 470, JA 477-JA 478, JA 795-JA 796, JA 847, JA 877.) 28 As previously noted, in the Cellophane case, supra, this Court stated that interchangeability of use was the test for determining the relevant market, and that in “deter- mining the market under the Sherman Act, it is the use or uses to which the commodity is put that control.” 351 U.S. at 396. That price sensitivity is merely one factor which may be looked to in determining relevant market was made clear in Cellophane, 351 U.S. at 400, and in Brown Shoe Co. v. United States, supra, 370 U.S. at 325. The Third Circuit’s error results from a misunderstand- ing of this Court’s use of the term “cross-elasticity of de- mand” in the Cellophane and Brown Shoe decisions. In those cases, this Court used the term “cross-elasticity of de- mand” to mean the same thing as interchangeability of use. Thus, in Cellophane, this Court stated: “An element for consideration as to cross-elasticity of demand between products is the responsiveness of the sales of one product to price changes of the other.’’ 351 USS. at 400. Similarly, in Brown Shoe, the Court stated: “The outer boundaries of a product market are de- termined by the reasonable interchangeability of use or the cross-elasticity of demand between the product it- self and substitutes for it.” 370 U.S. at 325. The Court then specified that “sensitivity to price changes” was but one of seven “practical indicia” which might be evaluated in making that determination. Id. However, the term “cross-elasticity of demand” is some- times used by economists in a narrower sense tu be synonymous vot with reasonable interchangeability of use, as used by this Court in the Cellophane and Brown Shoe eases, but rather with price sensitivity. Thus, the Court of Appeals in the present case read the term “cross-elasticity of demand” in the narrower sense rather than in the sense ee. ee 29 the term was used by this Court and stated: “Elasticity of demand for a product has been defined. as the degree by which the amount of a product pur- chased will change in response to changes in its price.” (18a.) As a result of its reading of the term “cross-elasticity” to be synonymous with price sensitivity rather than inter- changeability of use, the Third Circuit held that unless price sensitivity between different products is demonstrated those products cannot be in the same relevant market. That hold- ing, of course, is directly contrary to the holdings of this Court specifying that price sensitivity is but one factor which may be considered in determining interchangeability of use and hence, the relevant market. Moreover, that holding is even contrary to one of the Third Circuit’s own findings. In its opinion, the Third Circuit stated: “The greater the positive cross-elasticity of demand be- tween two products is, the closer substitutes they are.” (18a.) As the Third Circuit’s own finding recognizes, the ultimate relevant market issue is substitutability, or interchange- ability, and price sensitivity is but a means of dem- onstrating that interchangeability.* The present case presents an unfortunate example of how reliance on price sensitivity can lead to an incorrect and confusing result. It is absurd to give any significant weight, as the Third Circuit did in this case, to a lack of price sensitivity between products in determining whether they may be included in the same relevant market, in the face of a finding that cost is an insignificant factor : * As shown below, where direct evidence of interchangeability is available, as in this case, a finding of price sensitivity is unneces- sary. 30 in the choice between those products in the marketplace. Taken to its logical conclusion, the Third Cireuit’s hold- ing as to price sensitivity in this case would require that in any marketplace in which cost is not a significant fac- tor, each product comprises its own relevant market. Indeed, if price sensitivity were an essential factor, then the finding here of a relevant market consisting of all cephalosporins would still be incorrect because the record is devoid of any meaningful evidence showing that any one cephalosporin was responsive to price changes of any other cephalosporin. In fact, both the District Court and the Third Circuit found that cost is not a significant factor in the selection of an antibiotic. (FF 39 at 45a; 18a-19a.) Hence, if price sensitivity is a critical factor in determin- ing relevant market, then the Third Circuit would have had to conclude that each cephalosporin forms a separate relevant market, which of course it could not do because it is undisputed that, for example, Ancef competes with Keflin, and Anspor with Keflex. As shown in Point C below, the overwhelming evidence in this case showed that cephalosporins, in actual practice, are used interchangeably with other antibiotics. By ig- noring that evidence and by giving controlling weight to the alleged lack of price sensitivity, the Third Circuit completely ignored the realities of the competition existing in the antibiotic marketplace. C. The Erroneous Equal Interchangeability Standard Applied by the Courts Below. The courts below applied an erroneous test of equal interchangeability which resulted in a market limited to substantially fungible and like-priced products, notwith- standing the rejection of that standard by this Court in the Cellophane case. As shown above, in the Cellophane case, cellophane and several other wrappings were included in the relevant mar- Fe ee ne ee eee Saeed nt et er eerie 31 ket because in every one of its uses, cellophane had to meet competition from some, but not all, of those other wrappings. For example, as shown in this Court’s Ap- pendix A to the Cellophane opinion, 351 U.S. at 405, 407- 10, as a fresh produce wrapping, cellophane was inter- changeable primarily with papers and films but not foil or glassine. As a snack wrapping cellophane was inter- changeable primarily with glassine and papers but not foil or films. The facts of the present case are thus strikingly similar to those of the Cellophane case. As shown below, the undisputed documentary evidence in this case, contained in the Hospital Disease and Therapeutic Index (“HDTI”), shows that for every one of their uses, cephalosporins compete with at least one and usually a number of other antibiotics or families of antibiotics. The HDTI is a nationwide study of the prescribing prac- tices of hospital-based physicians which describes their actual selection of antibiotics in over seven million uses with hospitalized patients over a six month period.* Tables I, If and III, annexed as Appendix A to this petition, contain a distillation of the relevant data set forth in the HDTI. The HDTI shows that in actual practice, for virtually every purpose for which hospital physicians use cephalo- * The HDTI is not a study prepared for litigation. It is a periodic report prepared for the pharmaceutical industry by an independent market research organization. The HDTI introduced into evidence in this case covered a six month period relevant to or been period involved in this action and is set forth in full at In addition, the discussion of the HDTI is equally applicable to the NDTI—the National Disease and Therapeutic Index (set forth at JA 1080 and described at JA 699-JA 711)—which re- ports the actual practices of office based physicians treating hos- pitalized patients and which confirms the HDTI by showing the actual interchangeability of us. between cephalosporins and other antibiotics for treating infections. 32 sporins they also use other antibiotics, and that for vir- tually all purposes, cephalosporins are not even the prin- cipal antibiotic used. For exemple, as summarized in Table I of Appendix A to this petition, there were over two million uses of anti- biotices to treat respiratory diseases during the period covered by the HDTI. Cephalosporins accounted for only 213,40 of those uses, while penicillins accounted for 1,223,000 uses and other antibiotics accounted for 730,000 uses. Similarly, as shown in Table II, there were 613,000 uses of antibiotics to treat infections caused by Escherichia Coli, by far the most common pathogen to be treated with antibiotics. Cephalosporins accounted for only 114,000 of those uses, while penicillins accounted for 234,000 uses, sulfa drugs accounted for 93,000 uses, and other antibio- ties such as tetracyclines accounted for 127,000 uses.” Neither SmithKline nor the courts below challenged the accuracy or veracity of the HDTI and NDTI. Rather, the District Court and the Third Circuit avoided the clear showing of interchangeability in the HDTI and NDTI only because they applied a standard of equal interchangeability, notwithstanding the rejection of that standard by this Court. Thus, the District Court stated: “Generally, on an overall basis, the cephalosporins are probably more effective for more conditions than penicillin or other antibiotics. Thus, there is inter- changeability for the treatment of some illnesses but for other illnesses there is no equal interchange- ability.” (Footnote omitted; emphasis added) (86a.) *In addition to the HDTI and NDTI, the record is replete with uncontroverted expert medical testimony, professional litera- ture, independent market research publications, promotional litera- ture from major pharmaceutical manufacturers and SmithKline’s own internal marketing documents, all of which show that for every one of their uses cephalosporins compete with other anti- bioties. a AL cD 33 Further examination of the District Court’s findings, which were relied upon as dispositive by the Third Cir- cuit, demonstrates beyond question that the District Court was applying a standard of equal interchangeability. For example, the District Court found (FF 36 at 44a- 45a), and the Third Circuit agreed (20a), that cephalos- porins and penicillins are not interchangeable in treating Klebsiella infections because penicillins are of limited efficacy in combating Klebsiella, and erroneously concluded that cephalosporins and penicillins are not includible in the same relevant market. However, the District Court erred in failing to consider the HDTI evidence showing that for Klebsiella infections, cephalosporins and antibiotics other than penicillins, such as Garamycin, are in fact used interchangeably (e.g., JA 1094, p. 48; Table IT at 2a), and that for types of infections other than Klebsiella, such as Proteus Mirabilis and Staphylococus Aureus, cephalo- sporins and penicillins are in fact used interchangeably. (£.g., Table IT at 2a.) Similarly, the Third Circuit approved the District Court’s finding (FF 36 at 44a-45a) that cephalosporins are “active against both staphylococci and gram negative bacilli,” whereas no single pencillin can be relied on against both. But as shown in the HDTI and summarized in Table II in Appendix A to this petition (2a), cephalosporins represent only 25% of hospital uses against all staphylococcus infec- tions, and only 19% of uses against Escherichia Coli, a Gram-negative pathogen which by itself accounts for 50% of all antibiotic uses against identified pathogens. Again, the HDTI shows conclusively that cephalosporins are in- terchangeable and compete with other antibiotics in treat- ing those indications. The District Court also stated that “cephalosporins are far less toxic than the aminoglycosides.” (FF 36 at 44a- 45a.) However, the HDTI shows that two aminoglycosides alone, Garamycin and Kantrex, accounted for 824,000 uses 34 during the relevant period. (JA 1094, pp. 48, 49.) And, as shown below, usages of Garamycin tripled in the period 1970 to 1974, with usage expanding at a faster rate than with cephalosporins. But of all the errors made by the District Court and em- braced by the Third Circuit in their relentless efforts to dis- tinguish cephalosporins from other antibiotics, the most misleading was their limitation of price comparisons to a comparison between all cephalosporins and one penicillin— Penicillin G, which accounted for only 17 percent of total penicillin uses in 1974 and only 8 percent of all antibiotic uses in hospitals in the United States in the six months ending in February, 1974. (HDTI, JA 1094, pp. 1, 54, 76, 121, 123, 136, 142.) Specifically, the District Court found that “during the period from 1966 through 1974, hospital purchases of cephalosporins increased nearly 700 percent”, while “in the same period hospital purchases of Penicillin G decreased by nearly 60 percent’’. (FF 46 at 48a.) This is true. How- ever, the very same chart (a copy of which is annexed as Appendix B to this petition at 4a) which the District Court relied upon for its finding also shows that ampicillin® uses increased over 1,300 percent during the same period of time, that uses of gentamycin (Garamycin) and carbenicillins** each more than tripled in a shorter period of time, from 1970 to 1974, and that clindamycin (Cleocin) nearly doubled in use in one year, 1973 to 1974. Even a glance at that table shows that in focusing on Penicillin G the District Court erred by selecting the one antibiotic shown whose uses were substantially declining while ignoring all the other antibiotics indisputably used interchangeably with cephalosporins. * Ampicillin is one of the penicillins. (E.g.. HDTI, JA 1094 at pp. 54-58.) ** Carbenicillins are also penicillins. (£.g., HDTI, JA 1094 at pp. 54, 117.) 35 In short, the District Court looked at each use of cephalo- sporins, found that for each use, some other antibiotie was not interchangeable and did not compete with cephalo- sporins, and failed to consider that for the same use several other antibiotics were in fact interchangeable and com- peted with cephalosporins. In so doing, the District Court applied a test of equal interchangeability of use, for only by doing so was it able to avoid dealing with the undisputed evidence of actual interchangeability established as a matter of law by the HDTI and NDTI. ; The Third Circuit, in adopting the District Court’s find- ings and conclusions, even though based on an erroneous legal standard, chose not to address the questions raised by the evidence of actual interchangeability of use represented by the HDTI, preferring instead to dismiss the HDTI with the following observation: “Tt scarcely need be commented that [the HDTI] was evidence presented at the trial, not a fact found by the fact finder.” (20a; emphasis in original.) Scarce indeed were the comments of the Third Cir- cuit, and thus the District Court’s application of a legal standard directly contrary to the standard enunciated by this Court in Cellophane, and its clearly erroneous findings of fact, were permitted to stand. Thus, in defining the relevant market to include only cephalosporins, the courts below misapplied the standards set by this Court for determining relevant market by giving controlling emphasis to the concept of price sensitivity and by employing a standard of equal interchangeability not- withstanding the decisions of this Court. This Court should therefore grant the writ of certiorari to review the judg- ment of the Third Cireuit in order to clarify and reaffirm the standard for determining relevant market. 36 Conclusion For the foregoing reasons, a writ of certiorari should issue to review the judgment and opinion of the Third Circuit. Dated: June 30, 1978 Respectfully submitted, Epwarp N. SHERRY Attorney for Petitioner Eli Lilly and Company 140 Broadway New York, New York 10005 Of Counsel: Jack KAUFMANN J. Jay Rakow Dewey, Ballantine, Bushby, Palmer & Wood Joun G. Harkins, JR. Pepper, Hamilton & Scheetz APPENDIX la Appendix A. TABLE I* PuysiciaN SELECTION OF ANTI-INFECTIVES BY DIAGNOSIS Diagnosis Anti-Infective Selected (000) Ceph- Ceph. Other Strepto- Other alospo- % of B&M* Pen? mycin Suljas Urin8 A/B+ rins Total Total Genitourinary DisorGars ooccsvcccess 465 729 8 309 143 7 289 1950 15% Diseases of the — — — Respiratory System... 730 1223 9 213-2075 15% Digestive Disorders .... 241 172 7 _— _— 12 181 794 23% Accidents and Poisoning 112 189 3 10 — os 157 475 33% Diseases of the Skin or Cellular Tissue .... 273 417 6 — — 17 123 836 15% Mesglees. 200 sveervesns 77 — 4 8 — 15 81 185 44% Circulatory Disorders ... 46 116 —_ 17 — 2 76 257 30% Infective or Parasitic EROUGRS: sccccurenseane 162 307 10 — _ _— 43 522 8% 1 Broad and Medium Spectrum Antibiotics, except for cephalosporins. In- eludes, among others, tetracyclines, erythromycins, chloramphenicol, cleocin, eleocin phosphate, kantrex, lincocin. ? Penicillins. Includes, among others, penicillin G, ampicillins and deriva- tives, anti-staph penicillins, carbenicillin, geocillin, geopen. ’ Urinary Antibacterials. * Other Antibiotics. Includes, among others, bacitracin, neomycin and gara- mycin. * This and the following two tables contain a distillation of certain data set forth in the HDTI (JA 1094). 2a 3a Appendix A. Appendix A. TABLE II i TABLE III PHYSICIAN SELECTION OF Puysician Use oF ANTI-INFECTIVES ANTI-INFECTIVES BY PATHOGEN WitHout a CuLture Test* (000) Pathogen Anti-Infective Seiected (000) Total . Used % of Uses er Estimated Without Without Ceph- Ceph. Uses Culture Test Culture Test Other Strepto- Other alospo- % of B&M* Pen.* mycin Sulfas Urin* A/B* rins Total Total NG ti 7478 4594 61% Escherichia Coli ........ a a 93 42 3 114 613, «19% Other B&M** ....... 2070 1217 59% Klebsiella-Unspecified ... 39 17 — — + — 47 107 44% Cephalosporins rea ems 1153 668 58% No-Growth ............ ce 44 3 = 6 1 26 114 23% Pr Soil cnn so ae 9 2344 Staphylococcus Aureus .. 17 66 — — — _ 22 105 21% Pen.** .... 3597 65% Staphylococcus Aureus Streptomycins ...... 64 44 69% Coagulase Positive .... 23 29 — _ — — 19 71 27% Proteus Mirabilis ...... in 24 a 7 3 ee 17 51 33% eS ere 358 208 58% Proteus Unspecified .... 16 20 == 4 2 — 14 58-24% a 149 54 36% Staphylococcus Aureus Coagulas Positive .... 15 = — — — 1 10 26 39% Other A/ ee teem nes 87 59 68% Pseudomonas Aeruginosa 4 14 _ 1 2 1 7 59 12% Escherichia Coli & Klebsiella- Unspecified 18 + a - — _ 7 29 24% * The term “culture test” refers to a procedure through which infecting organisms are identified. (JA 1066 at pp. 118-19.) ** See definitions in Table I. * See definitions in Table I. pre 4a Appendix B, Trend in Purchases of Selected Antibiotic Entities.* Measured in Grams (000’s) LE Ampicillins Injectable ....... NR 19,492.6 12,421.3 12,535.2 1,382.0 Penicillin G Injectable ....... NR_ 57,299,940 102,537,150 195,594,220 166,526,778 Tetracyclines Injectable ...... NR 348.5 306.9 608.7 623.0 Gentamicin Injectable ........ NR 806.1 687.3 226.1 — Cephalosporins Injectable .... NR 32,844.1 30,324.6 23,460.1 4,511.5 Carbenicillins Injectable ...... NR 7,045.4 7,896.3 2,114.7 _— Clindamycin Injectable ....... 614.8 2,016.0 1,201.6 — — All data measured in thousands of grams with exception of Penicillin G’s which are thousands of MU’s. NR—Not Required. * This table is Table III to Exhibit P-170 of the record. 5a Appendix C, Opinion and Judgment of the Court of Appeals (Filed April 3, 1978). UNITED STATES COURT OF APPEALS For THe Txurrp Circuit No. 77-1232 SmithKline Corporation v. Eli Lilly and Company, Appellant Appeal from the United States District Court for the Eastern District of Pennsylvania (D. C. Civil Action No. 75-1102) Argued February 21, 1978 Before: AupisErT, VAN Dusen and Weis, Circuit Judges. Pepper, Hamilton & Scheetz 2001 The Fidelity Building Philadelphia, Pennsylvania 19109 Dewey, Ballantine, Bushby, Palmer & Wood 140 Broadway New York, New York 10005 6a Appendix C. Of Counsel: John G. Harkins, Jr., Esq. Edward N. Sherry, Esq. Jack Kaufmann, Esq. John F. Collins, Esq. CouNSEL FOR APPELLANT Frederic L. Ballard, Esq. William S. Rawls, Esq. Lewis A. Grafman, Esa. Of Counsel: Ballard, Spahr, Andrews & Ingersoll 30 South 17th Street Philadelphia, Pennsylvania 19103 John L. Boyle, Esq. Richard L. Sherman, Esq. 1530 Spring Garden Street Philadelphia, Pennsylvania 19130 CouNSEL FOR APPELLEE ALpIsERT, Circuit Judge. The major question for decision is whether the district court in a non-jury trial erred in defining the relevant product market in a proceeding brought by SmithKline Corporation against Eli Lilly and Company under § 2 of the Sherman Act, which proseribes monopolies and at- tempts to monopolize. The court determined that the relevant product market is the nonprofit hospital market for a class of antibiotic drugs known as cephalosporins and that the relevant geographic market is the United States. Having so defined the relevant market, the court concluded that Lilly had illegally monopolized it. A per- 7a Appendix C. manent injunction against Lilly’s illegal marketing prac- tices was issued. Lilly has appealed, taking issue with the court on its market formulation; it would expand the relevant product market to include all anti-infective drugs prescribed by physicians. We affirm.’ 2 At the outset, SmithKline asserted claims for damages and injunctive relief, alleging that Lilly’s marketing practices consti- tuted: (a) a tying arrangement in violation of §§ 1 and 3 of the Sherman Act, 15 U.S.C. §§ 1, 3, and §3 of the Clayton Act, 15 U.S.C. § 14; (b) monopolization in violation of § 2 of the Sherman Act, 15 U.S.C. § 2; and (c) abuse and misuse of Lilly’s patents in violation of §§ 1, 2 and 3 of the Sherman Act, 15 U.S.C. §§ 1, 2, 3. Following a non-jury trial the district court, in a meticulous and comprehensive treatment of the relevant facts and law by Judge Higginbotham, determined that liability exists only on the monopolization claim. 427 F. Supp. 1089 (E.D. Pa. 1976). Pursu- ant to § 16 of the Clayton Act, 15 U.S.C. § 26, the district court entered a permanent injunction against those marketing practices of Lilly found to violate §2 of the Sherman Act. A separate trial on the issue of damages has been stayed pending disposition of this appeal. 15 U.S.C. § 1, as amended, provides: Every contract, combination in the form of trust or other- wise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy declared by sections 1 to 7 of this title to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not ex- eeeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court. 15 U.S.C. § 2, as amended, provides: Every person who shall monopolize, or attempt to monopo- lize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by (footnote continued on following page) 8a Appendix C. I, The parties to this lawsuit are major manufacturers of human ethical pharmaceutical products which they sell in interstate and foreign commerce. Both manufacture anti- biotic or anti-infective drugs; these are substances pro- duced by micro-organisms that are active against other micro-organisms. Used by physicians to treat bacterial infections, antibiotics include, e.g., ampicillins, carbeni- (footnote continued from preceding page) fine not exceeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars or by impris- onment not exceeding three years, or by both said punish- ments, in the discretion of the court. 15 U.S.C. § 3, as amended, provides: Every contract, combination in form of trust or otherwise, or conspiracy, in restraint of trade or commerce in any Terri- tory of the United States or of the District of Columbia, or in restraint of trade or commerce between any such Territory and another, or between any such Territory or Territories and any State or States or the District of Columbia, or with for- eign nations, or between the District of Columbia and any State or States or foreign nations, is declared illegal. Every person who shall make any such contract or engage in any such combination or conspiracy, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding one million dollars if a corporation, or, if any other person, one hundred thousand dollars or by imprison- ment not exceeding three years, or by both said punishments, in the discretion of the court. 15 U.S.C. § 14 provides: It shall be unlawful for any person engaged in commerce, in the course of such commerce, to lease or make a sale or contract for sale of goods, wares, merchandise, machinery, supplies, or other commodities, whether patented or un- patented, for use, consumption, or resale within the United States or any Territory thereof or the District of Columbia or any insular possession or other place under the jurisdiction (footnote continued on following page) pom £8 cur en tenet 9a Appendix C. cillins, gentamycins, penicillins, tetracyclines, and nitro- furantoins. The companies also manufacture other bacteria inhibiting drugs, such as sulfas, which are not denominated antibiotics because they are composed of chemicals not produced by living organisms. Antibiotics are available in parenteral (administered by intravenous or intramuscular injection) and oral forms. In 1964 Lilly introduced the first cephalosporin antibio- tic, Keflin (cephalothin), into the United States market. It has subsequently introduced four additional cephalo- sporin forms: Kefiex (cephalexin), Loridine (cephalori- dine}, Kafocin (cephaloglycin), and Kefzol (cefazolin). Lilly has United States patents on all its cephalosporin antibiotics except cefazolin. It is Lilly’s marketing prac- tices for cefazolin that bring this case before us. (footnote continued from preceding page) of the United States, or fix a price charged therefor, or dis- count from, or rebate upon, such price, on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in the goods, wares, merchandise, machinery, supplies, or other commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale, or contract for sale or such condition, agreement, or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce. 15 U.S.C. § 26, as amended, provides: Any person, firm, corporation, or association shall be en- titled to sue for and have injunctive relief, in any court of the United States having jurisdiction over the parties, against threatened loss or damage by a violation of the antitrust laws, including sections 13, 14, 18, and 19 of this title, when and under the same conditions and principles as injunctive relief against threatened conduct that will cause loss or damage is granted by courts of equity, under the rules governing such proceedings, and upon the execution of proper bond against damages for an injunction improvidently granted and a show- ing that the danger of irreparable loss or damage is immediate, a preliminary injunction may issue... . 10a Appendix C. From 1964 until 1973, a period during which cephalo- sporins gained wide acceptance in the medical field, Lilly enjoyed a complete and legal monopoly by virtue of its patents. Beginning in 1973, however, competition emerged as other manufacturers began to market new varieties of cephalosporin drugs. The first such competitor was plaintiff-appellee SmithKline, who entered the competition with cefazolin, which it marketed under the trade name Ancef. SmithKline’s Ancef is identical to the cefazolin introduced shortly thereafter by Lilly under the trade name Kefzol. SmithKline and Lilly, the only producers of cefazolin in the United States, hold non-exclusive United States licenses granted by the Japanese developer of the formula. The following chart lists the various cephalosporins now on the market: CEPHALOSPORINS INJECTABLE Brand Name Keflin (Lilly) Loridine (Lilly) Kefzol (Lilly) (generic Ancef (SmithKline) equivalents) Cefadyl (Bristol) Velosef (Squibb) OraL Keflex (Lilly) Kafoein (Lilly) Anspor (SmithKline) (generic Velosef (Squibb) equivalents ) Generic Name Cephalothin (1964) Cephaloridine (1967) Cefazolin (1973) Cephapirin (1974) Cephradine (1974) Cephalexin (1972)? Cephaloglycin (1971) Cephradine (1974) ? Although not affecting the disposition of this case, the record of the district court contains an inconsistency and so it is unclear whether Keflex and Kafocin were first marketed, respectively, in 1972 and 1971, or 1971 and 1970. Ce and ere ee a Ok es bee lla Appendix C. SmithKline’s entry into the cephalosporin market was preceded by a five-year research and market development program during which more than $20,000,000 was ex- pended. Some 500 sales representatives visited physicians to explain Ancef’s characteristics and effectivness as an antibiotic, particularly its superiority over Keflin for in- tramuscular, as opposed to intravenous, injection. Both companies introduced price-related marketing plans, Lilly to combat competition, and SmithKline to break into the cephalosporin market. Prior to encountering competition, Lilly had adopted a marketing program known as the Cephalosporin Savings Plan (CSP), designed to make its cephalosporins more competitive with other antibiotics and to expand its sales. The CSP provided that a rebate in the form of Lilly mer- chandise would be paid to hospitals based on the total amount of Lilly cephalosporin purchased. As competition increased, Lilly instituted a Revised CSP effective in April 1975. The monopolistic effects of this revised plan con- stitute the gravamen of the present dispute. The Revised CSP provides for a rebate in much the same form, but at lower rates than the original CSP. In addition, however, the Revised CSP provides for an additional three percent (3%) bonus rebate, based on the purchases of established minimum quantities of any three of Lilly’s five cephalo- sporins. At the same time, SmithKline had a rebate program of its own, the Price Insurance Plan (PIP), allowing a five percent (5%) rebate, paid in the form of SmithKline mer- chandise, on hospital purchases of Ancef; additional re- bates were available for certain volume purchases of Ancef and Anspor, SmithKline’s other cephalosporin. 12a Appendix C. The comparative market positions of the cephalosporins are illustrated by the district court findings: Total Cephalosporins** ...... BIS ca vacivanasasoneansess Keflin (9/64) ........66- ee GATED ciccs carves Kefzol (11/73) ........: Keflin Neutral (5/75) .... Loridine (3/68) ........- Kafocin (7/70) ......+6- Cephaloridine (9/68) .... Bristol Cefadyl (5/74) ......+:- SmithKline Ancef (10/73) ......00e: Anspor (10/74) .......+- Squibb Velcsef (8/74) ....cce0. Total Cephalosporins** ...... BI peataciakacsaces sees J re Bee ana havnnes Motet CUAs/7E) sv iscncese Keflin Neutral (5/75) .... Loridine (3/68) ......... Kafocin (7/70) ......... Cephaloridine (9/68) .... Bristol Cefadyl (5/74) ..ccccees SE. kena sagees sacs Ameet CIB/78) .caceccee Anspor (10/74) ......... Squibb Velosef (8/74) ........ *6 Months data. 1970 197i 1972 Volume Share Volume Share Volume Share $ 67,325 100.0% $ 81,239 100.0% $98,520 100.0% 67,325 100.0 81,239 100.0 98,520 100.0 40,693 60.4 51,062 62.9 62,796 63.7 Thegrn a! rath a 11,239 13.8 20,752 «21.1 35622 381 «17,916 221 14607 148 994 1.5 1,016 1.3 356 0.4 Aa 6 9 1973 1974 1975* Volume Share Volume Share Volume Share $105,405 100.0% $123,771 100.0% $65,007 100.0% 103,858 98.5 111,177” 89.8 57,611 88.6 68,233 64.7 67,854 548 30,630 47.1 22,945 218 25,346 20.4 13,834 21.3 1,149 1.4 13,593 11.0 8355 12.9 See se ry eRe eae 3,340 5.1 10,996 10.4 4,322 3.5 1,430 2.2 191 0.2 61 0.1 yes 14 SED cucu duns oon _ _ 0.1 304 0.5 errr _ _ 304 0.3 338 0.5 *6 Months data. ** Dates in parentheses are dates of introduction. [P-170, Table VIII, at 36.] 46. Changes in the relative amounts of cephalosporins and non-cephalosporins purchased by hospitals are not di- rectly related to the relative costs thereof. During the period from 1966 through 1974, hospital purchases of cephalosporins increased by nearly 700%. In the same period hospital purchases of penicillin G decreased by nearly 60%. [Ex. P-170, Table III; Chappell, Tr. 113; P-38; P-154 at 66.] 47, A small number of pharmacist [sic] and physicians are encouraging the decreased usage of cephalosporins, in favor of other antibiotics for reasons of economy. The vast majority of hospitals do not purchase their antibiotic re- quirements in accordance with the efforts of these persons. 49a, Appendix D. [Kass, Tr. 819-820, 825; Nudelman, Tr. 704; Holloway, Tr. 857-858.] 48. There has been no erosion in the price of Keflin in the last ten years. [Step, Tr. 1062.] v. Price Sznsirrviry AND INTERCHANGEABILITY Or UsE AmonG CEPHALOSPORINS IN THE ABSENCE OF LILLY’s Revisep CSP 48. Many hospitals purchase their drug requirements for specific periods by letting formal bids and buying from the lowest bidder for the ¢ tire period (usually from one ealendar quarter to one year in length). This is par- ticularly true of an increasing number of hospitals who are forming ‘‘Buying groups’’ for the purpose of making such bids. [DiMatteo, Tr. 293-294, 298-301, 305-307, 356- 358; P-129 at 11; P-135 at 7-8; P-144 at 5-6; P-164 at 7-8.] 49. When there are two reputable manufacturers of the same generic pharmaceutical, as in the case of cefazolin, most hospitals can be expected to fill most, if not all of their requirements with the brand which costs.the least. This is particularly true of hospitals that buy such products on a bid basis. About 50% of hospital purchases of cefazolin are made on this basis. [DiMatteo, Tr. 293-296, 301, 356-358; Step, deposition at 60 (pharmacist deposi- tions); van Roden, Tr. 38-39; P-57; P-71; Nudelman, Tr. 653-655, 660, 706; Schiefe, Tr. 1013-1015; P-164 at 7-12, 24 25; P-144 at 8-9, 11, 32, 35; P-129 at 13-15, 42; P-135 at 12- 13, 47; P-154 at 8-10, 43, 63; P-105 at 13-14, 34-35, 47; P-114 at 62, 82.] 50. Ancef and Kefzol are equivalent drugs, so that most hospitals stock only one brand. Thus, of hospitals pur- chasing cefazolin, about 75% purchase only one brand 50a Appendia D. (either Ancef or Kefzol but not both). Of those purchasing both brands, about half purchase 70% or more of one of them. [Exhibit P-170, Table V; Chappell, Tr. 115-121; Exhibits P-57, P-71; DiMatteo, Tr. 294, 295a; Exhibits P-105 at 15, P-114 at 66; P-129 at 24, P-135 at 17, P-144 at 16; P-154 at 12; P-164 at 15.] 51. Dr. Weston’s economic theory of price responsive- ness and cross-elasticity of demand among _ several hypothetical current and future generations of antibiotic drugs is rejected; the evidence does not establish that the relevant product market is all antibiotic or all anti-in- fective drugs. [Weston, Tr. 1624-1628; Exhibit P-188.] p. History Or CEPHALOSPORINS 52. The first cephalosporin became available for use in the treatment of patients with infectious diseases in United States hospitals when Lilly introduced cephalothin into the United States market in 1964. Lilly markets cephalothin under the brand name Keflin. Keflin is administered parenterally. [D-2000] 53. In 1967, Lilly introduced another cephalosporin, cephaloridine, under the brand name Loridine. Loridine is administered parenterally. [D-2002.] 54. In 1971, Lilly introduced another cephalosporin, cephaloglycin, under the brand name Kafocin. Kafocin is administered orally. [D-2003.] 55. In 1972, Lilly introduced another cephalosporin, cephalexin, under the brand name Keflex. Keflex is ad- ministered orally. [D-2004.] 56. In October, 1973, SmithKline introduced a cephalo- sporin, cefazolin, under the brand name Ancef. Ancef 5la Appendia D. is the generic equivalent of Lilly’s Kefzol, and was intro- duced prior to Kefzol. Ancef is administered parenterally, both intramuscularly and intravenously. [van Roden, Tr. 23, 43; Stipulation 3.9.] 57. In November, 1973, Lilly began marketing another cephalosporin, cefazolin, under the brand name Kefzol. Kefzol is administered parenterally, both intramuscular and intravenously. [D-2001.] 58. In May, 1974, Bristol introduced cephapirin under the brand name Cefadyl. Cefadyl is a parenteral product. [D-1047.] 59. In August, 1974, Squibb introduced cephradine under the brand name Velocef. Velocef is marketed in oral and parenteral forms. [Exhibit D-2008.] 60. In November, 1974, SmithKline began marketing Anspor, the generic equivalent of Squibb’s Velocef, in oral form. [van Roden, Tr. 53-55.] 61. All Lilly cephalosporins except cefazolin are cov- ered by U.S. patents under which Lilly has exclusive rights, and Lilly is the sole U.S. source of these products. Cefazolin is also covered by a U.S. patent or patents, under which both SmithKline and Lilly have non-exclusive licenses, as to each other, and these two companies are the only sources of cefazolin in the United States. [Ad- mitted by Lilly in its proposed final pretrial order; Lilly’s Answer, para. 6-8; Lilly’s answers to plaintiff’s inter- rogatories 14-18; Hutchinson deposition at 21.] E. SmirHKurve’s Entry Into THe Market 62. Ifistorically, SmithKline’s prescription pharmaceu- ticals have not included antibiotics to any significant degree. [van Roden, Tr. 16.] 52a Appendiz D. 63. In the late 1950’s SmithKline made a substantial commitment of research and development resources toward antibiotic discovery, concentrating on the cephalosporin field. Accordingly, SmithKline in the late 1950’s and early 1960’s, did substantial research in semi-synthetic penicillins and cephalosporins. Its interest in cephalo- sporins goes back to 1959. [van Roden, Tr. 19, 22.] 64. In 1962 SmithKline negotiated with Lilly for the right to use Lilly’s patented process for producing a basic cephalosporin intermediate called 7ACA. Alternatively, SmithKline sought to buy 7ACA from Lilly. [Admitted by Lilly in its proposed final pretrial order. } 65. In the late 1960’s SmithKline’s interest revived. Management felt that cephalosporins would be the anti- biotics of the 1970’s and that SmithKline, as a result of previous efforts, was in an excellent position to enter this market. It adopted a two-pronged approach: (1) a long- te-m research and development effort to develop new e.ntibiotics with therapeutic advantages over those already on the market; (2) a licensing program to obtain imme- diate rights to products already developed by others. [van Roden, Tr. 19, 22-23.] 66. SmithKline’s licensing program resulted in 1971 agreements with Fujisawa Pharmaceutical Company of Japan for cefazolin and with Squibb for cephradine. Squibb and SmithKline each had patents relating to cer- tain aspects of cephradine. [Admitted by Lilly in its pro- posed final pretrial order; van Roden, Tr. 23.] 67. Cefazolin was originally synthesized by Fujisawa. Clearance for marketing in the United States resulted from SmithKline’s efforts with respect to Ancef. Lilly obtained clearance for Kefzol by “piggy backing” on 53a Appendiz D. SmithKline’s clinical studies. [First sentence admitted by Lilly in its proposed final pretrial order, van Roden, Tr. 23-28.] 68. SmithKline’s decision to enter the field of anti- biotics with Ancef entailed a very substantial commit- ment. As of the present time, SmithKline’s investment in Ancef, including research, development, clinical test- ing, promotion, personnel and production facilities totals more than $20 million. [van Roden, Tr. 25-26, 66-67; Ex. P-5.] 69. In October 1973, wher SmithKline began to market Ancef, SmithKline considered cefazolin (Ancef) a promis- ing drug, much better than Keflin for IM, equally good for IV. It believed that the primary market for Ancef would be in hospitals. [Admitted by Lilly in its proposed final pretrial order; van Roden, Tr. 23-24, 27, 72.] 70. SmithKline knew that its cost of goods for Ancef would be substantially higher than Lilly’s cost for Kefzol. However, SmithKline management believed there would be a number of possibilities for lowering SmithKline’s cost to a level competitive with Lilly’s, once SmithKline achieved a substantial level of sales. [Admitted by Lilly in its proposed final pretrial order. ] 71. SmithKline would not have entered the hospital antibiotic market if its prospects had been limited to Ancef alone or even to Ancef and Anspor, because such a limited market entry would not have justified the re- quired large investment in money and effort. Jn deciding to make antibiotics a major commitment, SmithKline viewed Ancef and Anspor as the first of a series of spe- cialty antibiotics, in which SmithKline, through its re- search efforts, would play a substantial part as originator and/or developer. [van Roden, Tr. 22, 31-32.] o4a Appendix D. 72. The names of the cephalosporins in current use in the United States are listed below. There is no generic equivalent for any of these cephalosporins except in the eases noted. The dates in parentheses, are the dates the particular cephalosporin was introduced in the market. Injectable Generic Name Brand Name cephalothin—(1964) Keflin (Lilly) cephaloridine—(1967) Loridine (Lilly) cefazolin—(1973) Kefzol (Lilly) ** Ancef (SmithKline)** cephapirin—(1974) Cefadyl (Bristol) cephradine—(1974) Velosef (Squibb)*** Oral cephalexin—(1972) Keflex (Lilly) cephaloglycin—(1971) Kafocin (Lilly) cephradine—(1974) Anspor (SmithKline) *** Velosef (Squibb)*** ** Generic equivalents *** Generic equivalents F. Competition Between SmrruKurse & Litty—1973 & 1974 73. When SmithKline entered the market with Ancef, it felt that there was only a limited potential for overall expansion in injectable cephalosporins. Consequently, SmithKline felt that Ancef would have to obtain its growth at the expense of Lilly’s established preducts, Loridine and Keflin. Because Keflin was used much more than Loridine (the use of which was declining), SmithKline eee o08a Appendix D. decided to position Ancef in competition with Keflin. Ac- cordingly, SmithKline decided to price Ancef about 5% below Keflin on a recommended daily dosage basis. [van Roden, Tr. 27-29, 34; Exhibits P-49, P-53.] 74. About one month after SmithKline introduced Ancef, Lilly countered with Kefzol, which it priced 2% under Ancef. SmithKline matched this price, increasing its spread beiow Keflin to 7%. [van Roden, Tr. 34, Lilly’s Answer to Plaintiff’s Interrogatory No. 7.] 75. SmithKline’s sales strategy was to emphasize that Ancef is equally efficacious and more convenient than Keflin as far as the doctor and the hospital staff are con- cerned, in addition to being lower in cost to the patient. Thus: —Since Ancef can be administered both IM and IV, whereas Keflin is rarely administered IM, there is no need to change drugs when the mode of ad- ministration is changed. —Because Ancef provides higher and more sustained blood levels, Ancef can be administered less often. —To the extent Ancef is administered IM rather than IV, there may be savings in hospital procedure costs. [van Roden, Tr. 23-24, 29; Exhibits P-13, P-14, P-44; Shotwell, Tr. 899-902, 905. ] 76. Initially, SmithKline concentrated its promotional efforts on large teaching hospitals which not only use cephalosporins in quantity, but also sometimes influence the doctors they train and, through their prestige, the medical profession generally. [van Roden, Tr. 29-30.] 56a Appendiz D. tend to use propor- 77. Also, large hospitals strongly prop tionately much more Keflin, so that Ancef’s ap age directly against Keflin would be directly related to su hospitals. [Lochridge, Tr. 387-390. | 78. Prior to the institution of the Revised pak ne Kline provided the only effective competition viper the cephalosporin market. By the end of 1974 p “ys sales of Ancef were at an annual level in excess — million and its share of cefazolin sales was _ = pai 40%. However, at the end of 1974, ern vey ene manded only 8.5% of os ae aes ecw Bristol had a 1.5% share asst Squibb enjoyed only 0.37% of all eying sales. [van Roden, Tr. 33-34; Exhibit P-170, “ “ me at 32, Table VIII at 36; Exhibit P-6; Exhibit P-53; hibit P-54.] 79. Initially, SmithKline and Lilly set per ge same net price to wholesalers. Lilly, in Pig he competition from cephalosporins sold by — a i viously adopted, in October, 1972, a Cepha pre ei ings Plan (“CSP”) under which hospitals receiv fee lative graduated vagy {oP a eas ) bP” — ayes - purchases of Lilly’s Keflin, . — ye of November, 1973, Lilly expanded art ned to include Kefzol. SmithKline, in response to - y expanded CSP, countered with its Price Insurance “3 (“PIP”), a flat 5% rebate on total Ancef purchases plus an additional 5% for Ancef orders of 500 vials = more. After the introduction of Anspor into the Pn market, and again in response to Lilly’s inclusion of Ke = Keflex, Kafocin and Loridine for rebate purposes under the CSP, SmithKline expanded PIP to inelude ee Hospitals were then eligible not only for the 5% rebate 57a Appendiz D. on their total volume of Ancef purchases, plus the addi- tional 5% rebate on orders for 500 vials or more of Ancef, but also for a 5% rebate on Anspor purchases each quarter—provided that the hospital’s total purchases of SmithKline cephalosporins were equal to or greater than 500 grams per quarter. The rebates on Ancef were in no way conditioned on the purchase of Anspor, nor were hospitals required to make any minimum purchase of both Anspor and Ancef to qualify for the new rebate. Later, on bid business, SmithKline went to graduated rebates between 5% and 10%, and sometimes above 10%. Smith- Kline’s PIP rebates averaged about 7.5% of sales. [van Roden, Tr. 35-37; Exhibits P-28, P-39, P-40, P-41, P-48: Hutchinson deposition at 38-39; Step Deposition at 11-12; Lilly’s answers to plaintiff’s interrogatories No. 201, 202, 203; D-437; P-189.] 80. The original CSP provided for a rebate to be paid to participating not-for-profit hospitals, in the form of Lilly merchandise of the hospital’s choice (with certain very limited exceptions such as controlled substances), at an established rate based solely upon the total number of grams of Lilly cephalosporins purchased by the hospital. Rebates were payable quarterly, but the rate of rebate was also computed retroactively on an annualized basis in order to give each hospital the benefit of any higher rate of rebate it could earn on such a basis. [D-1010; P-76, Luedke deposition at 15-16; Southard deposition at 18-19.] 58a Appendix D. 81. The rebate dividend levels under the original CSP were as follows: ividen uarterly Purchase a see . s (Total Grams) 2 0- 5,999 34 6,000- 8,999 4% 9,000-11,999 37% 12,000-17,999 67% 18,000-23,999 7% 24,000-29,999 8% 30,000-38,999 9% 39,000-47 ,999 10% 48,000-71,999 11% Lr age 96,000-or more ge [D-1009. } 82. During 1974 SmithKline and Lilly reduced their prices in many instances to permit and encourage the wholesalers to offer lower prices to hospitals inviting bids or otherwise negotiating for the purchase of cefazolin. [Ad- mitted by Lilly in its proposed final pretrial order; Ex. P-7; P-42; P-50.] 83. The competition between SmithKline and Lilly re- sulted in lower cefazolin’s [sic] cost to hospitals, par- ticularly those purchasing on bids. There has been no com- parable reduction in the price of Keflin. [First sentence admitted by Lilly in its proposed final pretrial order; Ex. P-7; P-50; Step deposition at 98-100; Lilly’s answers to plaintiff’s interrogatories No. 42 and 42(a); Step, Tr. 1062; Lange, Tr. 1122-1124. } G. Lutty’s Apoption Or THe Revisep CSP 84. Cephalosporins are particularly important to Lilly, accounting for 15% of the company’s total consolidated net 59a Appendix D. sales in 1972 and 25% in 1974. The cephalosporins involved in this litigation (7.e., those sold to U.S. hospitals) ac- counted in 1974 for nearly 10% of Lilly’s sales and more than 15% of Lilly’s profits. [P-27; P-29; P-33; P-36; P-37; Responses No. 42, 43 and 44 to Lilly’s answers to Smith- Kline’s interrogatories; P-33 at 18; see “Memorandum to the Court explaining calculations made in Plaintiff’s Trial Memorandum,” at 2. ] 85. When Lilly began to market Kefzol, it promoted Kef- zol as a replacement for Loridine for IM use and continued to promote Keflin for IV use. This was in Lilly’s interest because Lilly had exclusive rights to Keflin (but not to Kef- zol) and because Lilly’s profit margins were very much higher on Keflin. [Admitted by Lilly in its proposed final pretrial order, to the extent that Lilly promotes Kefzol for IM use and continues to promote Keflin for IV use; P-43; P-45; P-49; Step deposition at 11; Hutchinson deposition at 26-27, 34; Leudke deposition at 14-15; Lilly’s answers to plaintiff’s interrogatories No. 42, 43, 45, 60, 60(a); P-53; P-32; Step, Tr. 1056-1058, 1074.1 86. Lilly’s objective was to obtain 75% of cefazolin sales, which, when combined with sales of its exclusive cepha- losporins, would maintain its share of the cephalosporin market at or above 90%. [Admitted by Lilly in its proposed final pretrial order to the extent that Lilly’s objective was to capture 75% of cefazolin sales; Ex. P-170, Tables VIb, VIII; Chappell, Tr. 124-126, 131-133; P-29; P-45; P-50; Step deposition at 57; P-32; P-54.] 87. Despite Lilly’s earlier estimates that cefazolin would only replace Keflin for 15% of uses, early in 1974 Lilly found that Ancef and Kefzol were being used as a replace- ment for Keflin more than 60% of the time and that Lilly was falling substantially short of its 75% goal in sales of 60a Appendix D. cefazolin. [Admitted by Lilly in its proposed final pretrial order; P-49; P-50; Leudke deposition at 11-12; P-48; P-52; P-53.] 88. Thereafter, Lilly placed additional emphasis on efforts to avoid replacing Keflin with Kefzol and succeeded in cutting the percentage of cases in which Kefzol replaced Keflin to less than 50%. Meanwhile, the rate of replace- ment of Keflin by Ancef increased to more than 80%. [Admitted by Lilly in its proposed final pretrial order; Leudke deposition at 12-14; P-52; P-53.] 89. Also, in the second half of 1974, Lilly set up a Cephalosporin Task Force to devise a means of combatting SmithKline. The guidelines for the task foree were that any new program must: (a) include as many as possible of the hospitals that were participating in the original CSP, (b) be more competitive price-wise than the original CSP, and (ce) cost no more dollars than the orginal CSP to Lilly. [Second sentence admitted by Lilly in its proposed final pretrial order; Hutchinson deposition at 51; poaere deposition at 55; Leudke deposition at 31-32, 45-46; Lilly’s answer to plaintiff’s interrogatory No. 21(a); P-58; P-71.] 90. The task force recommended, and Lilly adopted, the Revised CSP which was put into effect by Lilly on April 1, 1975, and provides for a rebate to be paid to participating hospitals, in the form of Lilly merchandise of the hospital’s choice (with the same limitations as under the original CSP), at an established rate (the ‘‘base dividend’’) based upon the total number of grams of Lilly cephalosporins purchased by the hospital. The rates at which rebates are paid upon a given number of grams of Lilly cephalosporins purchased are somewhat lower, by approximately 3%, than the rates at which rebates were paid for the purchase of the same number of grams under the original CSP. In 6la Appendiz D. addition, however, the Revised CSP provides for an addi- tional 3% rebate (the ‘‘bonus dividend’’) to be paid upon the hospital’s total cephalosporin purchases if the hospital buys established minimum quantities (separately estab- lished for each hospital) of each of any three of Lilly’s five cephalosporin products. [Admitted by Lilly in its proposed final pretrial order; P-73; P-78.] 91. The purchase levels to qualify for the base dividend, and the corresponding levels to qualify for the bonus dividend under the Revised CSP are as follows: Base Dividend Bonus Dividend Dividend Qtr. Purchase Qtr. 3 Percent Level (Total Grams) (Total Grams) 0% 0- 7,999 150 1% 8,000-10,999 300 2% 11,000-16,999 400 3% 17,000-22,999 500 4% 23,000-29,999 750 5% 30,000-38,999 1,000 6% 39,000-47,999 1,250 7% 48,000-71,999 1,500 8% 72,000-95,999 1,750 9% 96,000-or more 2,000 [Exhibit P-78.] 92. Lilly anticipated that virtually all hospitals would purchase the specified minimum in Keflin and Keflex; that virtually none would purchase the minimum in Kafocin; and that only a handful would purchase the minimum in Loridine. This meant that the great bulk of hospitals, in accordance with the prescribing habits of their physicians and in order to qualify for the bonus rebate on Keflin and Keflex, would purchase Kefzol in the specified minimum amount. [See Finding of Fact 30; Lilly’s answer to 62a Appendix D. plaintiff’s interrogatory No. 68; van Roden, Tr. 40; Di- Matteo, Tr. 297-298, 305; P-75; P-76; P-164 at 12-13, 20-22, 97-28; P-144 at 22-23, 35, 47; P-129 at 29-33, 64; P-135 at 24, 36, 73-74; P-154 at 21-22, 30-31, 61-62; P-105 at 11, 21- 22: P-114 at 58-59, 70, 75, 88-89.] 93. Lilly knew, and instructed its salesmen to emphasize, that the entire bonus rebate (including the bonus rebate on Keflin and Keflex) should be considered as an inducement to buy Kefzol instead of Ancef. Lilly supplied its sales- men with calculations showing that to meet this induce- ment SmithKline would have to offer a rebate on Ancef in excess of 20%. [DiMatteo, Tr. 315; Ex. P-15, P-16, P-18, P-19, P-92; Leudke, deposition at 43; pharmacists’ deposi- tions; P-72; P-95; P-96; P-97; P-98; P-99; P-100; P-164 at 39; P-144 at 29-31.] 94. Lilly hoped that the popularity of Keflin and Keflex would cause hospitals to opt to participate in the Revised CSP’s bonus rebate option. However, all of Lilly’s cepha- losporin products, including its patented products Keflin and Keflex, are now and have been at all times separately available for purchase by any hospital in the United States, whether or not it participated in the original CSP or the Revised CSP. Both before and after the adoption of both the original CSP and the Revised CSP, some hospitals purchased Keflin and Keflex without participating in either pian. Hospitals always retained the option of losing the rebate and purchasing mus: of their cephalosporin require- ments from other cephalosporin manufacturers. [See Plaintiff’s Exhibit P-90, at 2; Step, Tr. 1046-1047: Lange, Tr. 1114-1119; D-1143.] 95. The Revised CSP as adopted and as implemented does not contain any provision requiring that any hospital purchase any Lilly product in order to obtain any other imam 63a Appendix D. Lilly product; nor does it contain any provision which re- quires any hospital to refrain from purchasing any product from any source in order to obtain any Lilly product, or which conditions the payment of any rebate on the purchase of any Liily product, otherwise unavailable to the pur- chaser, upon an agreement that the hospital shall refrain from purchasing any product from any source. [Step, Tr. 1046; P-78; D-1100A.] 96. After Lilly instituted its Revised CSP, SmithKline, in an attempt to survive in the marketplace during the trial of this lawsuit, changed its PIP rebate program. Under this new arrangement the plaintiff eliminated its rebate on combined Ancef-Anspor purchases. Instead, hospitals qualified for rebates in the following manner: (1) a five percent rebate was returned on any Ancef purchases per quarter; (2) in addition, a five percent rebate was paid for any individual orders of Ancef of five hundred or more vials per quarter; and (3) a third five percent rebate was available for Anspor purchases of five hundred grams or more per quarter. Ancef and Anspor were not linked in any way through SmithKline’s revision of its PIP market- ing scheme—rebates were available upon the separate pur- chase of each of SmithKline’s products. [Plaintiff’s Ex- hibit P-189.] H. Litty’s Prictne Srratecy 96. Lilly has a unique position in the cephalosporin market. Until 1973, Lilly commanded 100% of the cepha- losporin market. At that point in time, SmithKline intro- duced Ancef into the market, garnering 1.5% of the cepha- losporin business; Lilly retained 98.5% of the market. As late as the end of 1974, Lilly continued to control 89.9% of the relevant product market, despite the fact that three 64a Appendiz D. other companies were marketing cephalosporin products. SmithKline, in that same year, secured only 8.5% of the gross sales. Lilly, from 1970 through the first quarter of 1975 has received $519,730,000 in gross sales of its cepha- losporin products. By comparison, SmithKline has grossed $17,264,000 in sales of Ancef and Anspor, Squibb has re- ceived $642,000 on its sales of Velocef, and Bristol in mar- keting Cefadyl had gross sales of $3,631,000. [Exhibit P-170, Table VIII at 36; See Finding of Fact { 56.] 97. Although the Revised CSP does not constitute an illegal tying arrangement, only 2% of Keflin purchases in the second quarter of 1975 were made outside of the Re- vised CSP. [Lange, Tr. 1118-1119.] 98. Lilly knew that cost is not an important factor in a physician’s choice of an antibiotic for a hospitalized patient. It caleulated that even a 50% reduction in the price of Keflin would not greatly increase Keflin sales. [Ex. P-38; Step, deposition at 47-48. ] 99. Lilly calculated that SmithKline’s profit margins on Ancef were as much as 25% lower than Lilly’s margin on Kefzol. [P-38; P-46; P-47.] 100. So long as its price on Kefzol was equal to or not much higher than SmithKline’s, Lilly counted on its repu- tation with physicians (particularly surgeons) and the reluctance of hospitals to suffer a decline in rebates (as compared with the rebates previously received under the CSP) because of their failure to participate in the Revised CSP, as a strategy to achieve its domination (goal of 757%) uf the cefazolin market. [P-42; P-45; P-48; P-50; Step, Dep. at 57-64, 81; P-51; Step, Tr. 1029-1030. ] a = 65a Appendix D. 101. In many other cases, to keep its domination of the market, Lilly quoted a special price to its wholesalers where the hospital had received, or was about to receive, a bid on Ancef lower than the bid on Keizol. One purpose of this procedure was to minimize the inroads that Ancef would otherwise make on Keflin. [Lilly’s answers to plain- tiff’s interrogatories No. 19(d), 38, 58(a) (3); P-53; P-70.] I. Competitive Errects Or Tue Revisep CSP 102. Exclusive of the impact of the Revised CSP, the competitive factors applicable to the human pharmaceutical industry would be equally applicable to the broad anti- biotic market. Thus, such competitive elements would necessarily be operative in the cephalosporin submarket. [See Step, Tr. 1042; See Finding of Fact ¥ 12.] 103. The barriers to entry and survival in the cephalo- sporin product market are substantial. It is difficult to dislodge the first company which introduces a line of prod- ucts from its position of dominance. Absent the invention of a new cephalosporin which eclipses the performance of Lilly’s Keflin, a new market entrant must concentrate on marketing efforts to convince the hospital-based physician population of the merits of its cephalosporin product. The cost of marketing a cephalosporin product, absent the ex- pense for salesmen (detail men)—the most costly and im- portant aspect of the marketing effort—is set forth in Lilly’s answers to interrogatories. Lilly has spent since 1973, more than $2,400,000 on Kefzol’s promotion (benefit- int from SmithKline’s earlier research and development expenditures for cefazolin) ; since 1970, $9,929,007 on Keflin promotion; and $22,277,561 on Keflex promotion since 1970. SmithKline has spent more than $20,000,000 on Ancef promotion and development, including its expenses for de- 66a Appendix D. tail men; Lilly spent $2,361,000 on Kefzol’s development. Plaintiff’s total promotional expenditures for Ancef amount to $13,112,000 to date; from 1973 through 1975 alone, SmithKline spent $8,670,000 in detailing expenditures for Ancef. [Step, Tr. 1028-1035; See Step, Dep. 57; See Find- ings of Fact 1] 16-18; Additional Responses of Eli Lilly & Company to Interrogatories of Plaintiff SmithKline Cor- poration—First Set, Nos. 49-50, 52, 54; see Finding of Fact { 68; Exhibit P-5, Attachment ‘‘B’’.] 104. The Revised CSP calculates the rebate on one product in substantial part on the basis of sales of two other products. There is no way a competitor of Lilly can calculate a price on a product that competes with one Lilly product, unless the competitor knows the amount of the rebates the hospital will receive on the other two Lilly products. This is not public information. Lilly instructs its salesmen to be secretive about rebates. Often the hos- pital is uncertain what its Lilly rebate percentage will be until Lilly tells it, which does not oceur until after the close of the quarter, when aggregate quarterly purchases are known. [van Roden, Tr. 40, 68-69; Exhibits P-171; Memorandum to the Court prepared by Charles H. Curl, Jr.; Lochridge, Tr. 417-419; Southard deposition at 19; P-78. ] 105. If SmithKline could obtain the necessary informa- tion to calculate the rebate it would have to give to hospitals in order to match the rebate under the Revised CSP, it would find that such compensatory rebates would be in the order of 16% for average accounts and 35% or more for large accounts. [Lochridge, Tr. 394-413; P-171; P-172; P-173; Memorandum to the Court Prepared by Charles H. Curl, Jr.] 67a Appendix D. 106. The rebates under the Revised CSP are payable in Lilly merchandise and are actually paid largely in Keflin and Keflex. By reason of the nature of the products, as well as Lilly’s integration of manufacturing processes, Lilly’s cost of goods is very substantially lower on Keflin and Kef- lex than on Kefzol, which means that any manufacturer with a product in competition with Kefzol, or with any other cephalosporin having a higher cost than Keflin and Keflex, will be at an automatic and substantial competitive disadvantage. [P-173; Lilly’s Answers to Plaintiff’s Inter- rogatories No. 42, 43, 45; Responses of Eli Lilly & Com- pany to Interrogatories of Plaintiff SmithKline Corpora- tion—Second Set 62(a), 76.] 107. The competitive strength of the Revised ‘CSP is a function of Lilly’s dominance of the cephalosporin market. In the absence of the Revised CSP, and using SmithKline’s cost of goods for its pharmaceutical division and Lilly’s ex- pense averages, the plaintiff has a pretax return on Ancef sales of 4.6% ; the defendant’s return on sales of Kefzol is 17.6%. A 4.6% return on sales does not warrant continued marketing of cefazolin by SmithKline without the potential for significant improvement in profitability. SmithKline and Lilly have gross margins of 47.5% and 55% respec- tively on their sales of cefazolin. [Exhibit P-172, at 1.] 108. Lilly’s ability to offer the bonus and volume rebates under the Revised CSP is a function, not of its lower pro- duction costs, but, instead, the result of Lilly’s ability to recoup the resultant decline in Kefzol profits through its large profit margins on Keflin and Keflex. [See P-172 at 3; P-173 at 1-2.] 109. If SmithKline remained in the cephalosporin mar- ket long enough to achieve Lilly’s cost ratio on cefazolin, the plaintiff’s return on sales would be 8.5% pretax, a suffi- 68a Appendix D. cient return on sales to warrant remaining in the market. However, since the adoption of the Revised CSP, the pay- ment of rebates constitutes a significant cost in marketing Ancef. When the effect of the rebates SmithKline would have to give on Ancef in order to compete effectively with Lilly’s Revised CSP is taken into consideration, Smith- Kline’s profitability disappears, even if SmithKline were able to reduce its costs of goods to Lilly's level. Using SmithKline’s actual cost of goods, and considering the re- bates plaintiff must offer in order to compete with the Re- vised CSP, SmithKline receives a negative return on Ancef sales to average hospital accounts (-10.2%) and to large accounts (-3.4%). Even when Lilly’s cost of goods is used in calculating the impact of the Revised CSP on Smith- Kline’s profitability, the plaintiff receives a negativ [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1251%3A1. Public record. Not legal advice.