Anybody who litigates antitrust cases should pay attention to Procaps v. Patheon, currently pending in the Southern District of Florida. It’s a debacle. Procaps is getting crushed. Morgan Lewis is running circles around Carlton Fields. I tell you, it’s a scene man.
Let’s start with a little background: Procaps S.A. is a Colombian pharmaceutical manufacturing and distribution company. Patheon, Inc. is a Canadian pharmaceutical development and manufacturing company. As of 2010, Patheon did not have the manufacturing capabilities to produce softgels. Patheon wanted to enter the softgel market through acquiring Banner Pharmacaps Europe. Banner was the world’s second largest commercial manufacturer of softgel capsules, but had placed its softgel business up for sale in 2009.
Throughout 2011, Patheon engaged in talks to acquire Banner, but those talks failed. In late 2011, Patheon and Procaps engaged in talks about possible collaboration in the softgel space. In January 2012, Patheon and Procaps signed a Collaboration Agreement. Under the Collaboration Agreement, Procaps would produce softgel capsules for Patheon’s pharmaceutical customers. Patheon received the exclusive right to market Procaps’ softgel technology in North America, Europe and Asia and received licenses to use all of Procaps’ intellectual property.
On October 22, 2012, Patheon and Procaps held an urgent meeting in Miami: As it turned out, Patheon had resumed talks with Banner and a deal seemed eminent. A week later, Patheon acquired Banner.
On December 10, 2012, Procaps sued Patheon and Banner for antitrust and violations of the Florida Deceptive & Unfair Trade Practices Act (“FDUTPA”). The upshot of Procaps’ complaint: Because Patheon acquired Banner, the Collaboration Agreement now created a horizontal restraint of trade in violation of the Sherman Act.
The case has been in litigation for 2 and ½ years. Here are some of the highlights and some general observations:
Procaps beat a motion to dismiss by arguing that it was stating a per se antitrust claim and – as a result – did not need to allege market power. Throughout the litigation, Procaps repeatedly took this position. Patheon nonetheless sought discovery that would go to a rule of reason claim. For instance, Patheon requested information related to market definition, market shares and market power. Procaps resisted all of this discovery, repeatedly objecting on the basis that such evidence was irrelevant given that it was only pursuing a per se antitrust claim. Here are a few of Procaps’ representations:
- In response to an interrogatory, Procaps stated: “Given the nature of the restraint at issue and the parties’ relationship as horizontal competitors, there is no need to undertake an analysis under the rule of reason, or any of its forms, including the ‘quick look’ mode of analysis. Therefore, Procaps is not affirmatively asserting a rule of reason or quick look case.”
- At a discovery hearing, Procaps’ counsel stated: “I repeat. We will not assert other than a per se claim of antitrust violation in this case with respect to any type of antitrust analysis save in defense of allegations or expert opinions put forth by Patheon.”
- At another hearing, Procaps’ counsel stated: “Whatever they want to do with regard to defining a relevant market, fine. They can do it. We’re not going to come back on rebuttal and say, Judge, their definition of relevant market is defective, and here’s why. We’re simply going to say, their definition of the relevant market is irrelevant to this case. That’s all we’re going to do.”
But then…. In opposing Patheon’s motion for summary judgment, Procaps dropped a footnote saying that it “reserved the right to prove at trial anticompetitive effects within the markets defined by Patheon’s expert” if the court determined that “the full blown rule of reason mode of analysis applie[d]”.
The court concluded that the rule of reason applied, but did not grant summary judgment. Instead, the court reopened discovery to allow Patheon to obtain rule of reason evidence. Procaps had completely changed its position and managed to avoid getting wacked for it. One might expect them to cooperate with this new round of discovery. But that didn’t happen.
Rather than comply with its discovery obligations, Procaps provided absolute trash in response to Patheon’s new rule of reason discovery requests. Here are few of the higlights:
- Patheon asks for present and projected market share for all of the competitors in the softgel market. Procaps objects arguing that the market share of Procaps’ competitors is irrelevant. Procaps’ response is, of course, utter nonsense. The Court denied summary judgment but held that rule of reason applies. So everybody’s market share is clearly relevant. But instead of actually providing market share information, Procaps offers a bogus objection. Then, Procaps’ answer refers to market share evidence that Patheon’s expert put forward. But Procaps does not claim that it’s adopting that market share information— it just refers to it (??).
- Patheon asks Procaps to explain whether or not any competitors will lose market share. Procaps objects saying market share is irrelevant.
- Patheon asks Procaps to identify all customers who have been or will be harmed by the alleged anticompetitive conduct and to describe the harm. Procaps responds by stating that all of its customers were harmed, but does not name any customers and does not provide any details on the actual harm.
The Court was not too impressed with Procaps’ absurd responses. The court says it best:
If Procaps contends that market share is irrelevant, then it must implicitly be taking the position that it is going to use the first method of establishing an anticompetitive effect. But it has not expressly made this concession, and Patheon is concerned that Procaps may shift its position at trial and seek to use the second theory, which would require evidence about the relevant market and power in the market.
Therefore, Procaps must either announce in writing a binding decision to not use the second method of proof or it must answer this interrogatory with more-detailed information. If Procaps does not provide the binding concession but lacks specific details about market power, then it must state so specifically—but the Court will not permit Procaps to change, supplement, revise or otherwise modify its “we-have-no-specific-information-on-market-share” interrogatory answer at trial (or in pre-trial motion practice).
So let’s recap. After the Court reopened discovery so Patheon could obtain rule of reason evidence, Procaps refused to provide adequate answers and repeatedly objected, suggesting such evidence was irrelevant. The Court disagrees, and orders Procaps either to (1) provide adequate discovery responses or (2) state in writing that it will not use actual evidence of anticompetitive effect at trial.
After the Court’s order, Procaps provides supplemental interrogatory responses. At the core, Patheon wants to know what evidence Procaps has regarding anticompetitive effects. Here is how Procaps answers: “Patheon’s behavior harmed the competitive process by removing the Banner assets from the relevant markets, thereby preempting the normal working and proper functioning of market forces.” Procaps also noted, on a different page of its supplemental interrogatory answer, that “withdrawing the Banner assets from the relevant markets and the resulting exclusion of Procaps would, based on well-established economic principles, lead to further anticompetitive effects as to price and output, compared to the ‘but for’ world where Banner and Procaps would be competing.”
This is absolutely mind boggling. The Court has already held that the rule of reason applies. Even after this ruling, Procaps stipulated that it was not proceeding under a theory that an inference of anticompetitive effects could be made based on market power or present/projected market shares. So Procaps already had abandoned any effort to provide an antitrust violation under the rule of reason by showing (1) market power and (2) the anticompetitive nature of the restraints at issue. As such, Procaps is boxed in: At this point, the only way Procaps can prove its case is by providing actual evidence of anticompetitive effects. And rather than proffer any evidence of anticompetitive effects, Procaps relies on an amazingly generic argument that Patheon’s acquisition of Banner harmed competition“based on well-established economic principles.”
This absurd response resulted in Patheon filing yet another motion to compel, this time requiring Procaps to file a binding notice regarding how it intended to prove anticompetitive effects under a rule of reason analysis. But at this point, the Court had seen enough and ruled that Procaps had already made its decision:
At the risk of being redundant, the Court underscores the critical point that Procaps’ view and its litigation position may have far-reaching consequences. Having opted to rely, at least in part, on economic theory and antitrust assumptions, instead of actual evidence of actual effects, Procaps must understand that its strategy will surely generate consequences. If the law supports Procaps’ view, then its failure to provide sufficient amounts of precise evidence and specific illustrations of detrimental, actual effects will not prove fatal. But if the law is exactly what Patheon says it is, then Procaps’ “we’ve-disclosed-enough,” “we’re-relying-on-general-principles,” “we’re-not-providing-more-specific-evidence-in-discovery” and “we-have-no-more-facts-to-provide” approaches may be fatal or significantly damaging to its case.
It’s really hard to tell exactly what’s going on. Does Procaps simply have no evidence whatsoever? Even though they beat the motion to dismiss by arguing it was a per se violation, didn’t they realize that things could change? That they should at least try to obtain evidence regarding the market, market power and anticompetitive effects? Has Procaps created this entire debacle by itself, or has Carlton Fields contributed to this mess? Nobody will ever know.
On the flip side, Morgan Lewis has done a fantastic job. Although widely regarded as labor and employment firm, they also have some excellent antitrust lawyers. And Magistrate Judge Jonathan Goodman, who is presiding over the entire case, has been thorough, thoughtful and incredibly fair. He is an excellent jurist.
The case is Procaps, S.A. v. Patheon, Inc., No. 12-24356-CIV, 2015 WL 2239087 (S.D. Fla. May 12, 2015).
Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida. His office can b reached at 954-332-2380.