Product Hopping: A New Framework

Posted by Social Science Research Network

Product Hopping: A New Framework

Michael A. Carrier (Rutgers Law School) & Steve Shadowen (Hilliard & Shadowen LLP)

Abstract:     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 offer only a trivial medical benefit but significantly impair generic competition.

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 version 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 characteristics of the pharmaceutical industry. For starters, it 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 sacrifices profits through its reformulation. Imposing antitrust liability on behavior involving “profit sacrifice” — 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 litigated cases 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.