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SMITHKLINE CORP. v. ELI LILLY & CO.

November 2, 1976

SMITHKLINE CORPORATION
v.
ELI LILLY AND COMPANY



The opinion of the court was delivered by: HIGGINBOTHAM

I. INTRODUCTION

 The plaintiff, SmithKline Corporation ("SmithKline"), instituted this antitrust action against the defendant, Eli Lilly and Company ("Lilly"), for purported violations of sections one, two and three of the Sherman Act, as amended, 15 U.S.C. §§ 1, *fn1" 2, *fn2" and 3, *fn3" and for an alleged violation of section three of the Clayton Act, 15 U.S.C. § 14. *fn4" The plaintiff and defendant corporations are major manufacturers of prescription pharmaceuticals, engaged in both interstate and foreign commerce. This complaint was occasioned by the defendant's marketing practices in the sale of certain pharmaceutical products, cephalosporins. *fn5" More specifically, plaintiff claims that a marketing scheme Lilly created in April, 1975, known as the Revised Cephalosporin Savings Plan ("Revised CSP"), violated the antitrust laws. Under the Revised CSP, participating hospitals were eligible for two rebates: (1) a rebate based on the total volume of a hospital's purchases of Lilly cephalosporins, the "base dividend"; *fn6" and (2) a 3% rebate conditioned on the purchase of certain minimum quantities of each of any three of Lilly's five cephalosporin products, the "bonus rebate". The minimum quantity which had to be purchased in order to qualify for Lilly's bonus rebate was separately calculated for each hospital.

 SmithKline brought this private antitrust action alleging that the Revised CSP is an unlawful tying device in violation of sections one and three of the Sherman Act and section three of the Clayton Act. Furthermore, the plaintiff contends: (1) that Lilly has monopoly power; and (2) that the Revised CSP is a device designed to unlawfully foreclose competition or exclude competitors from the United States nonprofit hospital market in cephalosporins and, thus, enables Lilly to commit the offense of monopolization in violation of section two of the Sherman Act. Finally, SmithKline avers that the Revised CSP is a technique for the abuse and misuse of certain Lilly cephalosporin patents, in abrogation of sections one, two and three of the Sherman Act. *fn7"

 Plaintiff, on May 14, 1975, filed a motion for a preliminary injunction; pursuant to conferences with the Court and a stipulation by the parties it was determined that a hearing on a final injunction would be held promptly. [See Document Nos. 11, 12, 15 and 41.] After extensive discovery and numerous pre-trial conferences, a non-jury hearing on liability commenced on November 24, 1975 and ended on January 6, 1976. Counsel delivered their closing arguments on March 19, 1976. The pretrial conduct of this matter was a model of cooperation among counsel and, once again, was a reminder of the cause with which a complex case can be effectively presented without undue antagonism or histrionics among counsel.

 Cephalosporins are extraordinary semisynthetic, antibacterial agents which on certain occasions can save the lives of the ill or reduce significantly extraordinary suffering. Neither plaintiff nor defendant disputes the significance of the pharmaceutical breakthrough caused by cephalosporins. Lilly persuaded the medical profession to purchase more than $519,730,000 of its cephalosporins from 1970 through the first quarter of 1975. [Finding of Fact para. 96.] At issue here is not solely the efficacy of the products, but also the appropriateness of Lilly's merchandising scheme -- the Revised CSP. While claiming to better the medical condition of the seriously ill, has Lilly impermissibly sought to mortally wound SmithKline, so that it would no longer be the only viable competitor in the cephalosporin field? In the injury which it imposes on SmithKline by the Revised CSP, Lilly has clearly overstepped the boundaries of restraint required by the antitrust laws.

 After a most careful consideration of the detailed record and the parties' respective briefs and proposed findings of fact, I find, for the reasons noted below, that since April 1, 1975, the date of the institution of the Revised CSP, that Lilly has monopolized the nonprofit hospital market for cephalosporins, in violation of section two of the Sherman Act; consequently, the plaintiff is entitled to final injunctive relief. I further find that SmithKline has failed to prove that the Revised CSP constitutes an illegal tying arrangement and, thus, Lilly has violated neither sections one and three of the Sherman Act nor section three of the Clayton Act. There is no need to separately consider SmithKline's averment of patent misuse.

 This entire opinion, including the legal discussion, constitutes my Findings of Fact and Conclusions of Law, and any proposed findings of fact and conclusions of law inconsistent with those here found are hereby rejected in accordance with Rule 52 of the Federal Rules of Civil Procedure.

 II HISTORY OF THE CEPHALOSPORIN MARKET

 While the Findings of Fact note with greater specificity the issues and relevant data, the following history is a brief synopsis of the development of the cephalosporin industry and the relevant marketing practices of the parties. In 1964 cephalosporins first became available for use in United States hospitals when Lilly introduced cephalothin, under the Lilly brand name Keflin, into the United States market. Subsequently Lilly marketed three additional cephalosporins: cephalexin (Keflex), *fn8" cephaloridine (Loridine), and cephaloglycin (Kafocin), all of which, including Keflin, are covered by the United States patents owned by Lilly under which it has exclusive rights.

 Lilly was the sole United States supplier of cephalosporins until October, 1973 when SmithKline brought yet another cephalosporin, cefazolin (Ancef), into the drug market. SmithKline markets cefazolin under a non-exclusive license obtained from a United States patent owner, Fujisawa, a Japanese pharmaceutical company. In November, 1973, Lilly, also under a non-exclusive license, began marketing cefazolin under the brand name Kefzol. Later, Bristol and Squibb also began selling cephalosporins. *fn9" Cephalosporins are distributed by both parties through independent wholesalers, who, then, sell the products to the hospitals. Lilly and SmithKline promote their respective products through sales representatives ("detail men"), who consult with both physicians and pharmacists within the hospitals. *fn10" Cephalosporins are available for administration by a physician in a given hospital, in most instances, only if they are included within that hospital's formulary -- a list of drugs approved and available for use in that institution. Drugs are listed on the formulary as a result of: (1) a recommendation that a drug be so included by a physician affiliated with the hospital; (2) the review and approval or rejection of that recommendation by a committee composed of representatives from a hospital's staff of physicians, nurses and pharmacists -- the Pharmacy and Therapeutics Committee ("P & T Committee"); and (3) the P&T Committee's independent recommendation that a certain drug be included in or deleted from the hospital's formulary. The P&T Committee ultimately determines which drugs shall be listed on the formulary. The hospital pharmacists generally purchase drugs for the hospital. On occasion, hospital pharmacists from several institutions work in a collective purchasing group in order to secure bids from drug manufacturers.

 Lilly, in selling its cephalosporin products, has varied its marketing approach. In October, 1972 Lilly instituted a marketing program entitled the Cephalosporin Savings Plan ("CSP"), a volume rebate scheme available to participating hospitals. A participating hospital could receive a percentage rebate based on its total Lilly cephalosporin purchases, the rebate to be paid in the form of Lilly merchandise. After the introduction of SmithKline's Ancef in October, 1973 and Lilly's Kefzol in November of that same year, Lilly altered its marketing strategy. The CSP was expanded to include Kefzol within the volume rebate scheme. *fn11" In April, 1975 Lilly instituted the aforementioned Revised CSP.

 SmithKline, also, has offered hospitals several different rebate programs over the past few years. Its initial approach was the Pricing Insurance Plan ("PIP"), adopted in response to Lilly's inclusion of Kefzol in the CSP, which provided that participating hospitals could receive up to a five percent rebate on Ancef purchases. Furthermore, hospitals were eligible for an additional five percent rebate on each individual order for five hundred vials or more of Ancef. *fn12" Later, PIP, like the CSP, was revised to grant a third rebate equal to five percent of a hospital's Anspor purchases, if the hospital's combined volume of Ancef-Anspor purchases equaled or exceeded five hundred grams per quarter. SmithKline changed its marketing scheme again in April, 1975 after Lilly instituted the Revised CSP. The plaintiff eliminated its rebate on combined Ancef-Anspor purchases. Instead, hospitals qualified for rebates in the following manner: (1) a five percent rebate was returned on any Ancef purchases per quarter; (2) in addition, a five percent rebate was paid for any individual orders of Ancef of five hundred or more vials per quarter; and (3) a third five percent rebate was available for Anspor purchases of five hundred grams or more per quarter. *fn13"

 III. FINDINGS OF FACT:

 Some record references are given to substantiate many of the findings of fact appearing herein. However, some of these findings are predicated on the cumulative facts and inferences from the testimony, and facts which are further documented on numerous other pages of the record which are not cited. I recognize that many, if not most, judges make no page references in support of their general findings. See, e.g., United States v. International Boxing Club of N.Y., 150 F. Supp. 397, 401-419 (S.D.N.Y. 1957) aff'd 358 U.S. 242, 3 L. Ed. 2d 270, 79 S. Ct. 245 (1959); United States v. Brown Shoe Company, 179 F. Supp. 721 (E.D. Mo. 1959), aff'd 370 U.S. 294, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962). Thus, these record references are supplemental, but not exclusive.

 A. THE PARTIES AND JURISDICTION.

 1. Plaintiff SmithKline Corporation ("SmithKline") is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania with its principal place of business in Philadelphia, Pennsylvania. [Stipulation 1.1]

 2. SmithKline manufacturers, among other products, human ethical pharmaceutical products which it sells in interstate and foreign commerce. SmithKline markets its human ethical pharmaceutical products through independent wholesalers, who in turn sell the products to hospitals. [Stipulation 1.2; van Roden, Tr. 14, 36.]

 3. In 1974, worldwide sales of SmithKline and French Laboratories, the division of SmithKline that conducts its human ethical pharmaceutical business, exceeded $250,000,000, of which 65% to 70% were sales in the United States. [van Roden, Tr. 16]

 4. Eli Lilly and Company ("Lilly") is a corporation organized and existing under the laws of the State of Indiana with its principal place of business in Indianapolis, Indiana. [Stipulation 1.4]

 5. Lilly manufactures, among other products, human ethical pharmaceutical products which it sells in interstate and foreign commerce. In 1974, Lilly's worldwide sales of human ethical pharmaceutical ...


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