In the words of the director of the Federal Trade Commission's (FTC's) Bureau of Competition, the recent enforcement against Invibio, Inc., the first company to sell implant-grade polyetheretherketone, known as PEEK, to medical device makers, "affirms that the first company to enter a market cannot rely on anticompetitive contract terms to lock up customers and box out rivals." But what if you are not the first company to enter the market? More on that below, but first, what exactly did Invibio do when faced with new rivals?
According to the FTC's administrative complaint, Invibio responded to new rivals seeking to sell PEEK at lower prices by adopting a strategy of expanding the scope and coverage of exclusivity terms in its own PEEK supply contracts. Concerned that if it did not block these new rivals, it would be forced to engage in painful price competition, Invibio implemented its exclusivity strategy through negotiations with existing and potential customers.
Significantly, Invibio sought to broaden its exclusivity terms by (1) inserting more explicit exclusivity provisions into supply contracts, (2) expanding the scope of and limiting the exceptions to its exclusivity requirements, and (3) implementing more restrictive contract terms that impeded customers' ability to switch to an alternative PEEK supplier for products at the expiration of a contract. Invibio also threatened to withhold needed supply or regulatory support to gain exclusivity. For example, Invibio threatened (1) to cut off PEEK supply for all of a device maker's existing products, (2) not to sell Invibio's new brands of PEEK to a device maker unless the device maker agreed to buy Invibio's main brand of PEEK on an exclusive basis, and (3) to withhold access to regulatory support if device makers did not agree to exclusivity. In certain circumstances, Invibio also provided a small price discount or other benefit in exchange for exclusivity.
Invibio's efforts apparently paid off, because nearly all medical device makers that purchased PEEK from Invibio did so under contracts containing some form of exclusivity. Invibio's exclusivity terms took one of three forms: (1) requiring that the customer use Invibio PEEK for all PEEK-containing medical devices, (2) requiring that the customer use Invibio PEEK for a broad category of PEEK-containing devices, or (3) requiring that the customer use Invibio PEEK for a list of identified PEEK-containing devices – with the list often including nearly every device in the customer's portfolio.
What did Invibio agree to do (or not do) to resolve the FTC's administrative complaint?
Invibio agreed to "cease and desist" from adopting or implementing any agreement or policy that results in exclusivity with customers. Invibio also agreed not to enforce any provision in an existing contract that would prevent a medical device maker from using other suppliers of implant-grade PEEK for any device, or from switching suppliers for any current device, and it agreed not to retaliate against customers for using or preparing to use an alternative PEEK supplier.
Invibio also agreed not to enter into any new contracts that (1) require minimum purchases, either as a condition of sale or as a condition for receiving important contract terms or services, and (2) offer volume discounts that are applied retroactively once a customer reaches a specified threshold. Each of those prohibitions is designed to prevent de facto exclusivity.
But what if you are not the first company to enter the market? Can you then introduce or broaden your use of exclusivity provisions?
It depends. To be safe, "seek immediate [legal] help . . ."
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