By Nicole D. Prysby, J.D.
Pet medication distributors’ antitrust claims against an operator of veterinary clinics and a medication distributor that the clinic operator merged with failed for lack of allegations of a relevant market or market power.
Antitrust claims brought by pet medication distributors against an operator of veterinary clinics and medication distributor failed, as the plaintiffs failed to allege market power in a relevant market, held the federal district court in San Francisco. The plaintiffs alleged that the clinic operator merged with a distributor, and then used the veterinary status to obtain large quantities of pet medication to sell to the distributor, to then sell to retailers—thus removing the distributor as an independent competitor and closing off competition from the plaintiffs and similar companies. However, the claims failed because the plaintiffs did not allege a relevant market. They failed to define their market of "veterinary wellness and medication products" and one of their product categories (direct purchasing from animal health suppliers for delivery to retailers) had no meaningful boundaries. They also excluded relevant participants such as veterinarians and manufacturers. The plaintiffs also failed to allege market power. They did not allege any output restriction or supracompetitive pricing (or any price increase at all), nor any other actual harm to competition due to the merger. Their effort to show market power circumstantially also fails because they provided no figures relating to market share and did not explain barriers to entry or expansion in the market (Med Vets Inc. v. VIP Petcare Holdings, Inc., April 22, 2019, Chesney, M.).
Background. The plaintiffs are wholesale distributors who specialize in the distribution of pet prescription and certain over-the-counter medications. They have access to such products despite a policy whereby major animal-health manufacturers claim to limit the sale thereof to veterinary practices and pharmacies. In particular, a "secondary distribution system" exists, whereby plaintiffs and other wholesale distributors obtain these ostensibly restricted items and resell them to retailers.
Defendants VIP Petcare Holdings, Inc. (VIP) operates veterinary clinics and has served as an independent wholesale source for distributors. PetIQ, Inc. (PetIQ) is a wholesale distributor of OTC pet products. In 2018, PetIQ acquired VIP. According to the plaintiffs, the defendants are using VIP’s veterinarian status to acquire large quantities of the medications for the purpose of re-selling them to PetIQ for sale to retailers, thereby removing an independent competitor, VIP, from the market and foreclosing competition from other wholesaler/distributors such as themselves. The plaintiffs brought antitrust claims (for unlawful merger, monopolization, and attempted monopolization), challenging the merger.
Antitrust claims fail. The defendants challenged the claims, arguing that the plaintiffs failed to allege market power in a relevant market. The court agreed. As to the relevant market, the plaintiffs alleged a single market: the wholesale distribution to non-veterinary retailers of unmeasured veterinary wellness and medication products. "Unmeasured" was defined as products available in retail stores but not tracked by retail measurement services, but a market definition based on whether business entities find it economically advantageous to collect and publish certain types of sales data is facially unsustainable, according to the court. The plaintiffs also failed to define which products are included in the proposed market of "veterinary wellness and medication products," which is so broad on its face that it would include pet food. The plaintiffs alleged that two product categories comprise the relevant product market: Rx in Retail and direct purchasing from animal health suppliers for delivery to retailers. But the second category has no meaningful boundaries, the court observed. The plaintiffs also defined the market too narrowly with respect to its participants. They alleged that the secondary distribution system is the only mechanism through which retailers can obtain unmeasured veterinary wellness and medication products, but did not include any factual allegations in support. They excluded veterinarians from the alleged market, but veterinarians are horizontal competitors. And their exclusion of manufacturers conflicted with factual allegations (specifically, that retailers also obtain pet medications from manufacturers and their approved distributors).
The plaintiffs also failed to allege market power. They did not allege any output restriction or supracompetitive pricing (or any price increase at all). Nor did they allege any other actual harm to competition, due to the merger.
Their effort to show market power circumstantially also failed. They allege defendants claim to control over 90 percent of the alleged market, based on a PetIQ presentation slide. However, a review of the entire slide made clear the 90 percent figure pertains to the source of PetIQ’s own supply of products for distribution, not its share of the alleged wholesale market. They also alleged PetIQ claims to distribute a 95 percent share of Rx in retail, but that allegation did not correspond to the alleged market, which encompasses "unmeasured pet wellness and medication products," a different, and much broader, array of products than prescription products. The plaintiffs provided no figures corresponding to PetIQ’s share of ostensibly restricted OTC products or its share of prescription and such restricted OTC products combined, nor any figures as to what share of the market either defendant possessed prior to the merger. With respect barriers to entry and barriers to expansion, the plaintiffs alleged that offering distribution services in the secondary market requires veterinary licensing and other regulatory authorizations and appropriate relationships with manufacturers and retailers but provided to elaboration as to the degree of difficulty involved in obtaining such authorization, and failed to explain their assertion that it would be "practically impossible" to cultivate the above-referenced business relationships.
The court dismissed the claims with prejudice, finding that further leave to amend would be futile.
This case is No. 3:18-cv-02054-MMC.
Attorneys: Daniel Jay Mogin (MoginRubin, LLP) for Med Vets, Inc. Dana Lynn Cook-Milligan (Winston And Strawn LLP) for VIP Petcare Holdings, Inc. and PetIQ, Inc..
Companies: Med Vets, Inc.; VIP Petcare Holdings, Inc.; PetIQ, Inc.
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