Castro v. Sanofi Pasteur Inc.

134 F.Supp.3d 820

Adriana M. Castro, et al., on behalf of themselves and all others similarly situated, Plaintiffs,

v.Sanofi Pasteur Inc., Defendant.

Civil Action No. 11–7178

United States District Court, D. New Jersey.

Signed September 30, 2015

Eric L. Cramer, Michael J. Kane Zachary, D. Caplan, Berger & Montague, P.C., Philadelphia, PA, Co-Lead Counsel, Linda P. Nussbaum, Bradley J. Demuth, Hugh D. Sandler, Nussbaum Law Group, P.C., New York, NY, Co-Lead Counsel, Peter S. Pearlman, Cohn Lifland Pearlman Herrmann & Knopf LLP, Saddle Brook, NJ, Liaison Counsel, James E. Cecchi, Carella, Byrne, Cecchi, Olstein, Brody & Agnello, P.C., Roseland, NJ, Liaison Counsel, for Plaintiffs Adriana M. Castro, M.D., P.A., Sugartown Pediatrics, LLC, Marquez & Bengochea, M.D., P.A.

John P. Barry, Wanda L. Ellert, Proskauer Rose LLP, Newark, NJ, for Defendant.

OPINION

ARLEO, District Judge

Before the Court are Defendant's Motion to Exclude Plaintiffs' Class Experts [Dkt. No 337] and Plaintiffs' Motion for Class Certification [Dkt. No. 309]. The Court conducted a Daubert hearing from September 9th to September 11th, 2015. Considering the testimony and briefing, the Court is convinced that Plaintiffs' expert, Professor Einer Elhauge, cannot be excluded as unreliable. Plaintiffs have also presented proof common to the proposed class on all elements of their antitrust claim, so this class will be certified.

I. FACTS

A. General Background

This case concerns bundling of pediatric vaccines by Sanofi Pasteur Inc. ("Sanofi" or "Defendant"). For many years, Sanofi had a 100% monopoly over the conjugate quadrivalent meningococcal vaccine ("MCV4") market. Sanofi's MCV4 vaccine, Menactra, usually is administered to children to inoculate against four strains of meningitis bacterium. Sanofi also had dominant market share in several other pediatric vaccine markets, including: (1) Diphteria, Tetanus, and Pertussis ("DTaP") vaccines; (2) Inactivated Polio Virus ("IPV") vaccines; and Haemophilus influenzae type B ("HIB") vaccines.

Novartis—which did not sell other pediatric vaccines—planned to bring a competing MCV4 vaccine, Menveo, to market by late 2009. In mid–2009, Sanofi became aware of the potential competition. It responded by bundling Menactra with its other pediatric vaccines and substantially increasing its prices. Customers who purchased from Sanofi a certain percentage of all four pediatric vaccines—MCV4, DTaP, IPV, and HIB—received a "loyalty discount" that dropped prices back to what those customers had paid immediately before Menveo entered the market. Customers who did not purchase a sufficient percentage of the relevant vaccines from Sanofi paid substantially higher prices on all four vaccines. This loyalty discounting scheme is referred to throughout this Opinion as the "Sanofi bundle" or "the bundle." Prices for MCV4 vaccines subsequently rose when Novartis entered the market.

Plaintiffs are three pediatric physician practices—Adriana M. Castro, M.D., P.A., Sugartown Pediatrics, LLC, and Marquez & Begochea, M.D., P.A.—who seek to represent the following proposed class:

All persons or entities in the United States and its territories that purchase Menactra directly from defendant Sanofi Pasteur Inc. ("Sanofi") or any of its divisions, subsidiaries, predecessors or affiliates, such as VaxServe, Inc., during the period from March 1, 2010 through such time as the effects of Sanofi's illegal conduct have ceased ("Class Period"), and excluding all governmental entities, Sanofi, Sanofi's divisions, subsidiaries, predecessors, and affiliates, Kaiser Permanente and the Kaiser Foundation (collectively "Kaiser"), and any purchases by entities buying Menactra pursuant to a publicly-negotiated price (i.e., governmental purchasers).

Most of the physicians in the proposed class are members of physician buying groups ("PBGs") or group purchasing organizations ("GPOs"), which buy the vaccines from Sanofi or Novartis and then distribute them to member doctors or hospitals.

B. Procedural Posture

This case was initially filed on December 9, 2011. Dkt. No. 1. The first consolidated amended complaint was filed on January 20, 2012. Dkt. No. 28. Sanofi moved to dismiss the case and filed a counterclaim for violation of the Sherman Act on February 27, 2012. Dkt. Nos. 50, 54. Plaintiffs subsequently moved to strike the counterclaim. Dkt. No. 74. Judge Jose Linares denied the motion to dismiss. Dkt. No. 106, Mot. To Dismiss Opinion (hereinafter "MTD Op."). He later granted in part Plaintiffs' motion to dismiss, eliminating the counterclaim and certain affirmative defenses from this case. Dkt. No. 135. A request for interlocutory appeal of Judge Linares' dismissal of Sanofi's counterclaim was denied. Dkt. No. 169. The parties then proceeded through fact and expert discovery for class certification purposes. Plaintiffs filed their motion for class certification on December 15, 2014. Dkt. No. 309. Sanofi opposed and filed a motion to exclude Plaintiffs' class experts, particularly Professor Einer Elhauge, on February 13, 2015. Dkt. No. 337.

The Court held Daubert hearings on the admissibility of Professor Elhauge's reports on September 9 to September 11, 2015. During these hearings, the Court heard testimony from Professor Elhauge and Mr. Kaplan and attorney argument on either side regarding the admissibility of Professor Elhauge's testimony.

C. Expert Reports of Einer Elhauge

Professor Einer Elhauge, a preeminent antitrust scholar at Harvard Law School, presented expert reports for Plaintiffs.¹ He opines on five issues. First, he defines the markets relevant to this case: (1) DTaP vaccines ; (2) IPV vaccines; HIB vaccines; and (4) MCV4 vaccines. Elh. Rpt. ¶¶ 32–34, 72–97. Sanofi has monopoly power in each of these markets during the relevant period due to its market share: 55–71% DTaP, 63–73% IPV, 82–90% HIB, and 81–90% MCV4. Id. ¶¶ 50, 79, 88, 95.

Second, Professor Elhauge opines that the bundle had no procompetitive effects. He notes that it resulted in identical prices after the discount, simply imposing higher penalty prices (by 3757% in the relevant vaccines) on disloyal customers. Id. ¶¶ 111–36, 158–60. No procompetitive benefit was mentioned in Sanofi's internal documents. Id. ¶¶ 128–36. And Sanofi added the bundle only after it learned Menveo would enter the market. Id. ¶¶ 158–69. Professor Elhauge therefore concludes that the bundle was a penalty, not a discount.

Third, this bundle divided the MCV4 market into customers receiving discounts under the bundle ("Sanofi-loyal customers") those who did not ("disloyal customers"). Id. ¶¶ 174–78. Professor Elhauge bases this conclusion on three forms of evidence: economic literature, Sanofi and Novartis internal documents and testimony, and data analysis and regressions. Professor Elhauge has previously published on how loyalty discounts can split markets, causing anticompetitive effects. See Einer Elhauge, How Loyalty Discounts Can Perversely Discourage Discounting, 5 J. Competition L. & Econ. 189, 218 (2009); Einer Elhauge & Abraham L. Wickelgren, Robust Exclusion and Market Division Through Loyalty Discounts (With/Without Buyer Commitment), Harvard Public Law Working Paper No. 14–12 (2014), available at: http://ssrn.com/abstract=2419722. Sanofi and Novartis documents and testimony show that they believed the bundle divided the market. See Elh. Rpt. ¶¶ 179–89; Elh. Reb. ¶ 188. They also acknowledged that the bundle had a restraining effect. Elh. Rpt. ¶¶ 203–05.

Market division is apparent in the data, Elhauge testifies. Menveo's share with disloyal customers was 33%, while its share with Sanofi-loyal customers was only 6%. Elh. Reb. ¶ 129. The size of the loyalty discounts required Novartis to price below cost in order to compete for customers who were Sanofi-loyal; Novartis would have to price Menveo at $9.15 to attract Sanofi-loyal customers compared to $102.66 to attract disloyal customers. Elh. Rpt. ¶ 198, Table 10. Non-compliant sales (i.e. purchases of Menveo by Sanofi-loyal customers) were a rare 1.1% of all sales.

Elh. Reb. ¶ 111. Furthermore, Professor Elhauge conducts a share regression which indicates that but-for the bundle, Menveo's share of restrained buyers would have been at least three times higher (20% instead of 6.6%). Elh. Rpt. ¶¶ 213–15; Elh. Reb. ¶¶ 41–63; Elh. Suppl. ¶¶ 89–102, 106–44. Based on this, he concludes that the bundle split the MCV4 market into Sanofi-loyal and disloyal customers. Elh. Rpt. ¶¶ 174–190. This enabled Novartis and Sanofi to avoid competition on price because there was a very large gap between the prices where disloyal customers would purchase Menveo versus those where Sanofi-loyal customers would do the same. See id. ¶¶ 183–86, 198. As a result, Novartis and Sanofi could coordinate on price and impose higher prices on the whole market.

Fourth, Elhauge opines that this market division inflated prices to the whole class by disincentivizing competition between Sanofi and Novartis and enabling the firms to reach a relatively stable price equilibrium, preventing price competition which would otherwise have resulted. Professor Elhauge points to three market changes that should have led to lower prices in the relevant period—change from monopoly to duopoly, lower marginal costs, and lower market demand. Elh. Rpt. ¶¶ 168, 226–27; Elh. Reb. ¶¶ 155, 254, 324–27; Elh. Suppl. ¶¶ 1, 201, 227–28. But market prices increased. Elh. Rpt. ¶ 140, Fig. 17. Professor Elhauge also applied a differentiated Bertrand competition model to discern the but-for prices without the bundle. He gave three reasons for using this model. The market was differentiated, with distinct preferences making Menactra and Menveo meaningfully different, though they were substitutable. The market was Bertrand; firms competed in the market by setting prices, not quantity, and there were no relevant capacity constraints. Finally, the market would be (but-for the alleged conduct) characterized by competition, not...