65 Pages Posted: 16 Mar 2016 Last revised: 25 Feb 2017
Date Written: August 3, 2016
One of the most misunderstood and anticompetitive business behaviors in today’s economy is “product hopping,” which occurs when a brand-name pharmaceutical company switches from one version of a drug to another. The concern with this conduct is that some of these switches can significantly decrease consumer welfare, impairing competition from generic drugs to an extent that greatly exceeds any gains from the “improved” branded product.
The antitrust analysis of product hopping is nuanced. It implicates the intersection of antitrust law, patent law, the Hatch-Waxman Act, and state drug product selection laws. In fact, the behavior is even more complex because it occurs in uniquely complicated markets characterized by doctors who choose the product but don’t pay for it, and consumers who buy the product but don’t choose it.
It thus should not be a surprise that courts have offered inconsistent approaches to product hopping. They have paid varying levels of attention to the regulatory structure, offered a simplistic analysis of consumer choice, adopted an underinclusive antitrust standard based on coercion, and focused on whether the brand firm removed the original drug from the market.
Entering this morass, we offer a new framework that courts, government enforcers, plaintiffs, and manufacturers can employ to analyze product hopping. The framework, which is balanced and rigorous, is the first to incorporate the economic characteristics of the pharmaceutical industry. For starters, it defines a “product hop” to include only those instances in which the brand manufacturer (1) reformulates the product in a way that makes the generic non-substitutable and (2) encourages doctors to write prescriptions for the reformulated product rather than the original. The test then offers two safe harbors that are more deferential than current case law and that ensure that the vast majority of reformulations will not be subject to antitrust scrutiny.
The analysis then examines whether a brand’s product hop passes the “no economic sense” test. In other words, would the reformulation make economic sense for the brand if it did not have the effect of impairing generic competition? Merely introducing new products would pass the test. Encouraging doctors to write prescriptions for the reformulated rather than the original product — “cannibalizing” the brand’s own sales — might not. Imposing antitrust liability on behavior that does not make business sense other than through its impairment of generic competition offers a conservative approach and minimizes “false positives” in which courts erroneously find liability. Showing just how far the courts have veered from justified economic analysis, the test would recommend a different analysis than that used in each of the five product-hopping cases that have been litigated to date, and a different outcome in two of them.
By carefully considering the regulatory environment, practicalities of prescription drug markets, manufacturers’ desire for clear-cut rules, and consumers’ needs for a rule that promotes price competition without deterring valued innovations, the framework promises to improve the antitrust analysis of product hopping.
Keywords: product hopping, pharmaceuticals, drugs, antitrust, no economic sense, reformulations, Hatch Waxman, state DPS laws
JEL Classification: I18, K21, L40, L41, L43, L65, O34, O38
Suggested Citation: Suggested Citation
Carrier, Michael A. and Shadowen, Steve, Product Hopping: A New Framework (August 3, 2016). 92 Notre Dame Law Review, 167 (2016). Available at SSRN: https://ssrn.com/abstract=2747526
By Keith Hylton