Can Commercial Speech Be Exclusionary Conduct?

The U.S. Supreme Court recently denied Retractable Technology Inc.’s (“Retractable’s”) writ of certiorari seeking to reverse the Fifth Circuit’s decision rejecting its monopolization claim against competing syringe maker Becton, Dickinson and Co. (“Becton”). The Fifth Circuit had held that commercial speech does not constitute exclusionary conduct in a Sherman Section 2 monopolization case and reversed a previous $340 million treble damages jury verdict against Becton. Retractable alleged that Becton attempted to monopolize the U.S. market for certain safety syringes by making false claims that its needles were the “world’s sharpest” and had “low waste space.” (Safety syringes are designed to prevent the transmission of blood-borne diseases through accidental needle sticks.)

The Circuit Court panel that overturned the lower court verdict found that while false advertising was undisputed on appeal, the conduct could not support an antitrust claim, since it did not result in any lasting harm to competition or to the ability of other firms to enter the syringe market. The false advertising caused Retractable to lose sales, but it remained a vigorous competitor. Retractable, supported by amicus briefs from a committee of primarily plaintiff-oriented law firms, a number of law and economics professors, and several groups of inventors, argued for certiorari by claiming there was a well-defined circuit split on whether false commercial speech can violate the Sherman Act. Becton maintained that the appeals court correctly held that false commercial speech is not anti-competitive conduct.

The Fifth Circuit decision, delivered in December 2016, made a number of arguments in striking down the jury verdict against Becton. The major contested issue was the false advertising count (there were also counts related to patent infringement and “tainting” the market). The opinion stated that “false advertising is a slim, and here nonexistent, reed for a § 2 claim.” Several reasons were given, based on prior case law. First, even if comparative sales pitches are erroneous or misleading, the Court argued they are still competition on the merits that constitute attempts to persuade buyers to favor one product over another. False claims, the Court stated, can be mitigated by rivals who can counter-advertise to persuade consumers, who will make the eventual buying decision. Such false claims do not directly restrain rivals, given consumers’ ability to ignore them or be persuaded by counter-advertising. In this view, far from restricting competition, the Court found that false or misleading advertising “sets competition in motion,” allowing the maligned competitor to “counter with its own advertising to expose the dishonest competitor and turn the tables competitively against the malefactor.”

Moreover, the Court stated that it will often be difficult to determine if buyers attached any weight to the false claims or were persuaded by them in any way, a necessary pre-requisite to a finding of anticompetitive effects. Such an impact was found to be particularly unlikely in the syringe market, where the relevant consumers were viewed as sophisticated hospitals and group purchasing organizations (GPOs) who had experience with competing products. The Court observed, for example, that no customers stated that their purchases were motivated by Becton’s false claims. Therefore, the Court was comfortable following previous circuit court precedent adopting “a rebuttable presumption that false advertising has only a de minimis effect on competition.” To overturn that presumption and support an antitrust claim based on false advertising, plaintiffs would need to meet a six-part test first suggested in the Areeda and Turner antitrust treatise. The test requires that the advertising statements issued must be (1) clearly false, (2) clearly material, (3) clearly likely to induce unreasonable reliance, (4) made to unsophisticated parties, (5) continued for long periods, and (6) not readily cured by rivals. This test was proposed to distinguish ordinary false advertising torts from a course of conduct that could conceivably exclude competition.

On that basis, the Fifth Circuit upheld the de minimis presumption, not only based on sophistication of customers, but also because the court found that the false advertising claims were not shown to be “clearly likely to induce unreasonable reliance,” and there was no showing that the false claims could not be readily disproved. The Court noted that there appeared to be no harm to competition, since Retractable continued to compete in the larger market and had a share as high as 67% in the safety syringe “sub-market,” and several other competitors also provided robust competition. Moreover, according to the Fifth Circuit, Retractable’s economic expert, who argued that Retractable should have had an even higher share, could not substantiate any causal connection between Becton’s false advertising and its sales. The Court further noted that no customers testified they were misled and confused, and record evidence indicated that one customer, Walgreens, increased its purchases of Retractable syringes after being shown one of Becton’s erroneous claims.

Retractable, along with the amici, argued for certiorari on a number of grounds. First, they presented evidence that Circuit Court decisions are actually very divided on the issue of whether and when deception can lead to an antitrust claim, with decisions ranging from “never” to “when some or all of the elements of the Areeda-Turner 6-part test are met,” to “based on a rule of reason such as would be applied to any other type of exclusionary conduct.” These different standards needed to be resolved, it was stated, since deceptive commercial speech is not (and was not claimed to be) protected by the First Amendment.

Second, Retractable and Amici argued that false advertising cannot be viewed as “competition on the merits,” even if it produces counter-advertising and increased competition in the advertising market to correct the mis-information. That is particularly the case when the deception is by a dominant firm that targets a smaller competitor, because a smaller rival might have fewer resources to counter the dominant firm’s advertising. Thus, the false advertising would increase the smaller firm’s costs and erect barriers to its expansion. Competition on the merits, according to this line of argument, involves developing a superior product or service, not inhibiting market participants from being fully informed so as to make efficient buying decisions. Furthermore, an important element of a competitive market is that market participants are fully informed of relevant economic and technological data. Amici argue that dishonest commercial dealings can drive out honest dealing if honest-dealing entrants are put at an asymmetric disadvantage.

Third, Amici argued that there should not be rules or presumptions against deception-based antitrust claims because recent scholarship has shown that deception can injure competition (not just competitors) where rivals’ costs are raised and competitive opportunities abridged. According to this argument, the proper mode of analysis is a rule of reason based on the facts in each specific case.

Nonetheless, with no comment, the Supreme Court last month declined to hear Retractable’s appeal asking for the reinstatement of the award on antitrust and false advertising claims against Becton. The 5th Circuit opinion stands.

Robert D. Stoner was previously a manager in the FTC’s Bureau of Economics and has provided expert assistance in many exclusionary conduct cases since joining Economists Incorporated.