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Bruce Colbath, Nadezhda Nikonova, Jul 29, 2014
Imagine that a drug manufacturer figured out how to compete with a blockbuster drug by making a cheaper and more effective alternative. The pharmaceutical company that makes the blockbuster drug starts flooding the market with false advertisements about the safety of the alternative drug before it is even available to consumers, effectively taking away the new drug’s ability to compete. In this hypothetical, there are two potential victims: the new manufacturer that could have competed on the merits and the consumers (and possibly third-party payors) that lost the ability to choose a potentially better product or benefit from the price decrease of the blockbuster drug. Should antitrust law remedy this situation?
Typically, consumer protection laws safeguard consumer victims of false advertising and the Federal Lanham Act is a remedy to protect parties with reasonable commercial interests affected by the conduct. But in some instances, when the conduct is significantly exclusionary, false advertising may come under the purview of the antitrust laws, specifically Section 2 of the Sherman Act.
In the United States, the circumstances under which a false advertising claim can form the basis of a Section 2 violation are unclear. As detailed below, there are three competing theories: the Seventh Circuit prohibits such claims unless the false advertising is accompanied by a “coercive enforcement mechanism,” while the Second, Sixth, and Ninth Circuits allow material false advertising to constitute a monopolization claim if it is significantly exclusionary. This stands in contrast to how false advertising is treated in Canada, where the Competition Act allows for civil as well as criminal punishment of false and misleading advertising without a showing of anticompetitive effect.
The disparity in the law can be thought of as a continuum, with American law at one side and Canadian law at the other. The significant debate in U.S. law, highlighted by the Canadian approach, is deeply rooted in policy. Questions of whether competition and consumer protection law should overlap tend to drive the diverging opinions. At least one academic proposal attempts to balance the diverging approaches and suggests an intermediate position.
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False Advertising and Antitrust Law: Sometimes the Twain Should Meet
