Opinion ID: 3012576
Heading Depth: 3
Heading Rank: 1

Heading: Applicability of SmithKline

Text: In discussing 3M's bundled rebates, the majority recognizes that it must address our decision in SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir. 1978), where this court held that conduct substantially identical to 3M's was anticompetitive and sustained the finding of a violation of S 2. SmithKline concerned sales to hospitals by Eli Lilly & 41 Company, the pharmaceutical manufacturer, of three of its cephalosporins which it sold under the trade names Kefzol, Keflin and Keflex. Cephalosporins, which are broad spectrum antibiotics, were at that time indispensable to hospital pharmacies. Lilly had a monopoly on both Keflin and Keflex because of its patents. However, those drugs faced competition from the generic drug cefazolin which Lilly sold under the trade name Kefzol and which SmithKline sold under the trade name Ancef. Lilly's profits on the patented Keflin were far higher than those on Kefzol where its pricing was constrained by the existence of a competitor (SmithKline). Thus, Lilly sought to preserve its market position in Keflin and discourage sales of Ancef and even its own Kefzol. Id. at 1061. To do this, Lilly instituted a rebate program that provided a 3% bonus rebate for hospitals that purchased specified quantities of any three of Lilly's five cephalosporins. SmithKline brought a S 2 monopolization claim, alleging that Lilly used these multi-line volume rebates to maintain its monopoly over the nonprofit hospital market for cephalosporins. The district court (Judge A. Leon Higginbotham, later a member of this court) found that Lilly's pricing policy violated S 2. SmithKline Corp. v. Eli Lilly & Co., 427 F. Supp. 1089 (E.D. Pa. 1976). We affirmed by a unanimous decision. Although customers were not forced to select which cephalosporins from Lilly's stable they purchased, we recognized that the effect of the rebate program was to induce hospitals to conjoin their purchases of Kefzol with Keflin and Keflex, Lilly's leading sellers. SmithKline, 575 F.2d at 1061. As we stated, [a]lthough eligibility for the 3% bonus rebate was based on the purchase of specified quantities of any three of Lilly's cephalosporins, in reality it meant the combined purchases of Kefzol and the leading sellers, Keflin and Keflex. Id. The gravamen of Lilly's S 2 violation was that Lilly linked a product on which it faced competition with products on which it faced no competition. Id. at 1065. The effect of the 3% bundled rebate was magnified by the volume of Lilly products sold, so that in order to offer a rebate of the same net dollar amount as Lilly's, SmithKline had to offer purchasers of Ancef rebates of some 16% to 42 hospitals of average size, and 35% to larger volume hospitals. Id. at 1062. Lilly's rebate structure combining Kefzol with Keflin and Keflex insulat[ed] Kefzol from true price competition with [its competitor] Ancef. Id. at 1065. LePage's private-label and second-tier tapes are, as Kefzol and Ancef were in relation to Keflin, less expensive but otherwise of similar quality to Scotch-brand tape. Indeed, before 3M instituted its rebate program, LePage's had begun to enjoy a small but rapidly expanding toehold in the transparent tape market. 3M's incentive was thus the same as Lilly's in SmithKline: to preserve the market position of Scotch-brand tape by discouraging widespread acceptance of the cheaper, but substantially similar, tape produced by LePage's. 3M bundled its rebates for Scotch-brand tape with its second-tier and private-label tape in much the same way that Lilly bundled its rebates for Kefzol with Keflin and Keflex. In both cases, the bundled rebates reflected an exploitation of the seller's monopoly power. Just as [cephalosporins] [were] carried in . .. virtually every general hospital in the country, SmithKline , 575 F.2d at 1062, Scotch-brand tape is indispensable to any retailer in the transparent tape market. In light of the manifest comparability between the facts in SmithKline and here, this court's analysis of S 2 of the Sherman Act in SmithKline and our conclusion in that case is not only directly relevant but controlling. Speaking