united states of america before the federal … · fundamentals of the prescription and...
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UNITED STATES OF AMERICA BEFORE THE FEDERAL TRADE COMMISSION
OFFICE OF ADMINISTRATIVE LAW JUDGES
In the Matter of
Otto Bock HealthCare North America, Inc.,
a corporation,
Respondent.
Docket No. 9378
COMPLAINT COUNSELS CORRECTED POST-TRIAL BRIEF
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TABLE OF CONTENTS
INTRODUCTION .......................................................................................................................... 1
ARGUMENT ................................................................................................................................ 10
I. Background ............................................................................................................................. 12
A. Overview of Respondent and the Merger ......................................................................... 12
B. Industry Background ......................................................................................................... 14
1. General Background ................................................................................................... 14
2. Fundamentals of the Prescription and Reimbursement of MPKs and MPK Competition....................................................................................................................... 15
a) Fundamentals of the Prescription by Healthcare Professionals and Reimbursement by Insurers of MPKs in the United States ................................................................... 17
b) Fundamentals of Competition among MPK Suppliers for Sales of MPKs to U.S. Prosthetic Clinics ........................................................................................................ 20
II. Respondents Consummated Merger is Presumptively Unlawful by a Wide Margin ............ 22
A. The Relevant Product Market is Microprocessor Prosthetic Knees ................................. 25
1. Brown Shoe Practical Indicia Demonstrate MPKs Are a Relevant Product Market .. 28
a) MPKs Have Peculiar Characteristics Not Possessed by Mechanical Knees ........ 29
b) MPKs Have Distinct End-Users from Mechanical Knees .................................... 36
c) MPK Sales Prices to Clinics and Insurance Reimbursement Amounts Differ Significantly From Those of Mechanical Knees ........................................................ 36
d) In Negotiations between Clinics and Manufacturers, MPK Prices Are Not Sensitive to Mechanical Knee Prices .......................................................................... 37
e) The U.S. Prosthetics Industry Recognizes MPKs Are Sold in a Separate Market from Mechanical Knees .............................................................................................. 39
(1)Respondent Recognizes MPKs Are Sold in a Separate Market from Mechanical Knees ................................................................................................. 40
(2)The Rest of the Industry Also Recognizes MPKs Are Sold in a Separate Market from Mechanical Knees ............................................................................ 41
f) MPKs Are Sold By Specialized Vendors ............................................................. 43
2. The Hypothetical Monopolist Test Shows That the Sale of MPKs to Prosthetic Clinics
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is a Relevant Product Market ............................................................................................ 45
3. Respondents Alleged Relevant Product Market is Unsupported by Evidence and Based on a Flawed Understanding of How the U.S. Prosthetics Industry Works ............ 49
B. The Relevant Geographic Market is the United States ..................................................... 52
1. Respondent Agrees that the United States is the Relevant Geographic Market ......... 53
2. Commercial Realities Show that the United States is the Relevant Geographic
Market ............................................................................................................................... 53
3. The Hypothetical Monopolist Test Confirms that the United States is the Relevant Geographic Market ........................................................................................................... 55
C. High Market Concentration and Market Shares Establish an Extremely Strong Presumption that the Merger is Illegal .................................................................................... 56
III.The Merger Substantially Reduced Competition in the U.S. MPK Market ........................... 59
A. The Merger Eliminated Aggressive Head-to-Head MPK Competition Otto Bock and Freedom Engaged in to the Benefit of Clinics and Patients ................................................... 63
1. Otto Bocks MPK Market Dominance Prior to the Launch of the Pli 3 ................... 63
2. Freedoms Pli 3 Launch in 2014 ............................................................................... 63
3. Otto Bocks Competitive Response to the Pli 3 in 2014 and 2015 ........................... 64
a) Otto Bocks C-Leg 3 Pricing and Promotional Response .................................... 65
b) Otto Bocks Launch of the C-Leg 4 in 2015 ......................................................... 65
(1)Otto Bocks C-Leg 4 Launch Plan .................................................................. 66
(2) Impact of the C-Leg 4 on Freedoms Pli Sales ............................................. 67
4. Freedoms Response to the C-Leg 4 Launch from 2015 into 2017 ............................ 69
a) Creation of Freedoms Ideal Combo ..................................................................... 69
b) Reduced Pli 3 Pricing and Aggressive Marketing Targeting the C-Leg 4 .......... 70
c) Impact of Freedoms Competitive Response to the C-Leg 4 Launch ................... 71
5. Customers Benefitted from Head-to-Head Competition between Otto Bock and Freedom through Lower Prices ......................................................................................... 72
B. The Merger Eliminated Competition Set to Intensify Between Freedoms and Otto Bocks Next-Generation MPKs .............................................................................................. 74
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1. The Merger Eliminated Competition from Freedoms Quattro Poised to Launch and Target Otto Bocks C-Leg 4 in the Near Future ............................................................... 74
2. The Merger Will Prevent Otto Bocks C-Leg 5 From Ever Competing against the Quattro .............................................................................................................................. 80
C. Eliminating its Close Competitor was One of Otto Bocks Core Merger Rationales ...... 80
1. Pre-Due Diligence Discussions between Otto Bock and Freedom Described Quattro as the C-Leg 4 Killer ..................................................................................................... 81
2. Due Diligence by Otto Bock Confirmed that Otto Bock Perceived the Quattro to be a Significant Threat to Its C-Leg 4 Business ....................................................................... 82
3. Another Merger Rationale was Eliminating Competition from Freedoms Pli 3 and Increasing Otto Bocks MPK Market Share ..................................................................... 85
D. Post-Merger Evidence Confirms the Likelihood of Unilateral Effects ............................ 87
1. Otto Bocks Plan for the Pli 3 ................................................................................... 88
2. Otto Bocks Plan for the Quattro ................................................................................ 89
3. Customers Have Voiced Concern that the Transaction Will Deprive Them of the Benefits of Competition between Freedom and Otto Bock .............................................. 90
E. The Merger Has Already Harmed Competition ................................................................ 92
1. Otto Bock Cancelled the Launch of Freedoms { } and the Merger Delayed the Launch of Freedoms Quattro .......................................................... 92
2. Post-Merger, Otto Bock and Freedom No Longer Compete Against Each Other as Aggressively as Before the Merger to the Detriment of Consumers ................................ 93
IV.Respondent Did Not Rebut the Strong Presumption that the Merger is Illegal ...................... 94
A. Remaining MPK Sellers Will Not Prevent the Mergers Anticompetitive Effects .......... 95
B. New Entry Will Not be Timely, Likely, or Sufficient to Prevent the Mergers Anticompetitive Effects ........................................................................................................ 100
1. Launch of a New MPK Would Not Be Timely ........................................................ 101
2. Launch of a New MPK is Not Likely ....................................................................... 103
a) Barriers to Entry .................................................................................................. 103
b) Failed Entry Attempts by Prosthetic Companies Highlight the Difficulty of Developing an MPK ................................................................................................. 106
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3. Launch of a New MPK Would Not Be Sufficient to Prevent Harm from the
Merger ............................................................................................................................. 107
C. Respondents Asserted Efficiencies Do Not Rebut the Strong Presumption of Competitive Harm ................................................................................................................. 107
1. Respondents Claimed Efficiencies are Not Cognizable .......................................... 109
a) Respondents Claimed Efficiencies are Not Verifiable ...................................... 109
b) Respondents Claimed Efficiencies are Not Merger Specific ............................ 112
2. There is No Evidence that Respondents Claimed Efficiencies Would Be Passed on to Customers ....................................................................................................................... 114
D. Respondent Has Failed to Meet its Burden to Show that Freedom is a Failing Firm ..... 116
1. Freedom Was Able to Meet Its Near-Term Financial Obligations ........................... 117
a) Freedoms Financial Condition Prior to the Merger ........................................... 117
b) Clean Audit of Freedoms 2016 Financial Statements is Inconsistent with an Inability to Meet Near-Term Financial Obligations ................................................. 120
c) Freedoms Actions Were Inconsistent with an Inability to Meet Near-Term Financial Obligations ................................................................................................ 122
d) Respondent Has Not Shown that, Absent the Merger, Freedoms Creditors Would Likely Have Forced Freedom Into Bankruptcy or Liquidation ................................ 123
2. Freedom Did Not Seriously Consider Chapter 11 Reorganization ........................... 124
3. Freedom Did Not Make Good Faith Efforts to Elicit Reasonable Alternative
Offers .............................................................................................................................. 125
a) Freedoms Sales Process Focused on Otto Bock to the Exclusion of Other
Options ...................................................................................................................... 126
b) Freedoms Sales Process Precluded Likely Additional Reasonable Alternative Offers ........................................................................................................................ 128
c) Freedom Received a Reasonable Alternative Offer from ssur ........................ 130
(1)Respondent Did Not Show that the Liquidation Value of Freedoms Assets Exceeded ssurs Offer ...................................................................................... 130
(2)Respondent Did Not Show that an ssur Acquisition of Freedom Would Raise the Same or More Significant Antitrust Issues than the Merger ............... 133
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E. Respondent Failed to Demonstrate that Freedom is a Flailing Firm ........................... 134
F. Respondents Other Arguments Fail to Rebut the Strong Presumption that the Merger is Illegal .................................................................................................................................... 136
1. Respondents Claim that Freedoms Pli 3 is not a True MPK is Refuted by the Trial Record .................................................................................................................... 136
2. Respondent Fails to Show that Insurer Reimbursement Rates Will Prevent Post-Merger MPK Price Increases .......................................................................................... 138
3. Respondent Fails to Show that Hanger is a Power Buyer that Will Prevent Post-Merger MPK Price Increases .......................................................................................... 140
G. Respondents Divestiture { } Fail to Cure its Anticompetitive Merger........... 142
1. Materiality of Evidence Related to Respondents Proposed { } ............ 142
2. Future Divestiture Cannot Undo the Mergers Consummation in Violation of Section 7 or the Additional Harm That Has Already Occurred ................................................... 143
3. Respondent Fails to Show that Its Proposed { } Would Prevent Anticompetitive Effects and Fully Restore Competition ................................................ 145
4. Respondents { } Incomplete and Inadequate Divestiture ............................................................................................. 146
a) { } ......... 147
b) { } .................................................................................................................... 149
c) { } ............................................................................... 150
5. Significant Risks Exist that Respondents Divestiture { } Will Not Fully Restore Competition ....................................................................................................... 153
a) Respondent Does Not Plan to Divest an Ongoing Business ............................... 154
b) Respondents Exclusion of Assets Freedom Uses to Compete in the U.S. MPK Market Increases the Risk of Failure ........................................................................ 155
(1)Respondents Exclusion of { } Increases the Risk that Divestiture Would Not Fully Restore Competition ....... 156
(2)Respondents Exclusion of { } Increases Risks of Divestiture Failure .............................................. 158
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(3)Respondents Exclusion of MPK-Related Intellectual Property Increases Risks of Divestiture Failure .......................................................................................... 162
c) Post-Divestiture Entanglements with Respondent Increase the Risks that the { } Would Fail to Restore Competition ................................................. 164
6. Respondents Failure to Provide Fulsome Due Diligence { } Increases Risks of Divestiture Failure ............................................................................ 165
7. Respondents Failure to Divest an Ongoing Business Increases Risks that { } Will Not Have Personnel Needed to Compete Effectively ............................................. 169
a) Key Quattro Employees Are Not Included in { } Divestiture Proposal ........ 171
b) Several Key Pli Employees Are Not Included in { } Divestiture Proposal . 173
c) Several Key Sales and Clinical Employees Are Not Included in { } Divestiture Proposal..................................................................................................................... 174
8. { } Recognize that Respondents { } of Limited Assets Create Significant Risks of Failure ........................................................ 176
9. Respondents { } Increasing Risks of Divestiture Failure ...................................................................................................... 177
10.Respondent Has Failed to Show that { } .................................................................................. 179
V. Remedy ................................................................................................................................. 179
A. Divestiture of Freedoms Ongoing Business is the Proper Remedy and Will Restore Competition........................................................................................................................... 180
1. Divestiture of Freedoms Ongoing Business is Straightforward Because Freedom Exists as a Viable, Separate Business ............................................................................. 181
2. Divestiture of Freedoms Ongoing Business is Necessary to Minimize Execution Risks and to Fully Restore Competition ......................................................................... 182
3. Anticompetitive Harm Will Result without the Divestiture of Freedoms Ongoing Business to a Qualified Buyer......................................................................................... 185
B. Every Provision of the Proposed Order is Supported by Case Law and Sound Competition Policy ............................................................................................................... 186
CONCLUSION ........................................................................................................................... 192
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TABLE OF AUTHORITIES
Cases
Brown Shoe Co. v. United States, 370 U.S. 294 (1962) ........................................................ passim
Chi. Bridge & Iron Co. v. FTC, 534 F.3d 410 (5th Cir. 2008) .............................................. passim
Citizen Publg Co. v. United States, 394 U.S. 131 (1969) .......................................... 116, 124, 125
Dr. Pepper/SevenUp Co. v. FTC, 991 F.2d 859 (D.C. Cir. 1993) ............................................ 125
FTC v. Advocate Health Care Network, 841 F.3d 460 (7th Cir. 2016) ................................. passim
FTC v. Ardagh Group, 13-CV-1021 (D.D.C. Sept. 24, 2013).................................................... 152
FTC v. Bass Bros. Enter., Inc., 1984 WL 355 (N.D. Ohio 1985) ......................................... 11, 142
FTC v. Butterworth Health Corp, 946 F. Supp. 1291 (W.D. Michigan 1996) ............................. 53
FTC v. Cardinal Health Inc., 12 F. Supp. 2d 56 (D.D.C 1998) ............................................ passim
FTC v. CCC Holdings Inc., 605 F. Supp. 2d 37 (D.D.C 2009) ............................................ passim
FTC v. Coca Cola Co., 641 F. Supp. 1128 (D.D.C. 1986) ..................................................... 26, 37
FTC v. Consolidated Foods Corp., 380 U.S. 592 (1965) ........................................................... 143
FTC v. H&R Block, Inc., 833 F. Supp. 2d 50 (D.D.C 2011) ................................................. passim
FTC v. H.J. Heinz Co., 246 F.3d 708 (D.C. Cir. 2001). ........................................................ passim
FTC v. Harbour Grp. Invs., L.P., 1990 WL 198819 (D.D.C 1990) ................................... 125, 129
FTC v. Libbey, Inc., 211 F. Supp. 2d 34 (D.D.C. 2002) ............................................................. 145
FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327 (3d Cir. 2016) .................................... passim
FTC v. ProMedica Health Sys., Inc., 2011 WL 1219281 (N.D. Ohio 2011) ........................ passim
FTC v. Staples, Inc., 190 F. Supp. 3d 100 (D.D.C. 2016). .................................................... passim
FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) ................................................... 25, 26, 60
FTC v. Swedish Match, 131 F. Supp. 2d 151 (D.D.C. 2000) ................................................. passim
FTC v. Sysco Corp., 113 F. Supp. 3d 1 (D.D.C. 2015).......................................................... passim
FTC v. Tronox Ltd., 2018 WL 4353660 (D.D.C. 2018) ....................................................... 10, 109
FTC v. Univ. Health, Inc., 938 F.2d 1206 (11th Cir. 1991) ................................................... passim
FTC v. Warner Communications, 742 F.2d 1156 (1984) ................................................... 116, 134
FTC v. Wilh. Wilhelmsen Holding ASA, 2018 WL 4705816 (D.D.C. 2018) .............. 107, 108, 109
Ford Motor Co. v. United States, 405 U.S. 562 (1972) ......................................................... passim
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In re Chi. Bridge & Iron Co., 138 F.T.C. 1024 (2004).......................................................... passim
In re B.F. Goodrich Co., No. 9159, 110 F.T.C. 207, 1988 WL 1025464 (Mar. 15, 1988) ........ 180
In re OSF Healthcare Sys., 2012 FTC LEXIS 76 (Apr. 4, 2012) ................................................. 11
In re Polypore Intl, Inc., 150 F.T.C. 586 (2010) .................................................................. passim
In re Polypore, Intl, Inc., 149 F.T.C. 486 (Mar. 1, 2010)..................................................... passim
In re ProMedica, 2012 WL 1155392 (Mar. 28, 2018) .......................................................... passim
In re RSR Corp., 88 F.T.C. 800 (Dec. 2, 1976) .......................................................................... 180
Intl Shoe Co. v. FTC, 280 U.S 291 (1930) ................................................................................ 116
Jacob Siegal Co. v. FTC, 327 U.S. 608 (1946) .......................................................................... 181
Kaiser Aluminum & Chem. Corp. v. FTC, 652 F.2d 1324 (7th Cir. 1981)................................. 134
Mich. Citizens for an Indep. Press v. Thornburgh, 868 F.2d 1285 (D.C. Cir. 1989) ................. 116
ProMedica Health Sys., Inc. v. FTC, stee F.3d 559 (6th Cir. 2014) ....................................... 10, 60
RSR Corp. v. FTC, 602 F.2d 1317 (9th Cir. 1979) ............................................................. 153, 182
U.S. Steel Corp. v. FTC, 426 F.2d 592 (6th Cir. 1970) ................................................................ 10
United States v. Aetna Inc., 240 F. Supp. 3d 1, (D.D.C. 2017) ............................................. passim
United States v. Anthem, Inc., 236 F. Supp. 3d 171 (D.D.C. 2017) ............................................. 25
United States v. Baker Hughes, Inc., 908 F.2d 981 (D.C. Cir. 1990) .................................... passim
United States v. E.I. du Pont De Nemours & Co., 351 U.S. 377 (1956) ............................... passim
United States v. Energy Sols., Inc., 265 F. Supp. 3d 415 (2017) .......................................... passim
United States v. Gen. Dynamics Corp., 415 U.S. 486 (1974) ............................... 10, 116, 123, 144
United States v. Greater Buffalo Press, Inc., 402 U.S. 549 (1971). ........................................... 129
United States v. Marine Bancorp., 418 U.S. 602 (1974) ............................................................. 10
United States v. Phila. Natl Bank, 374 U.S. 321(1963) ................................................ 52, 56, 113
United States v. Visa U.S.A., Inc., 163 F. Supp. 2d 322 (S.D.N.Y. 2001) .................................. 101
White Consol. Indus. v. Whirlpool Corp., 781 F.2d 1224 (6th Cir. 1986) .................................. 164
StatutesandRegulations
Clayton Act 7, 15 U.S.C. 18 (2012) ................................................................................ passim
Federal Trade Commission Act 5, 15 U.S.C. 45..............................................................passim
OtherAuthorities
Evanston Northwestern, Commn Op. on Remedy (Apr. 28, 2008) .......................................... 179
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FED. TRADE COMMN AND U.S. DEPT OF JUSTICE, COMMENTARY ON THE HORIZONTAL MERGER (2006). ............................................................................................................................. 111, 115
Fed. Trade Commn, The Evolving Approach to Merger Remedies, 2000 WL 739461
(May 1, 2000) .................................................................................................................. 155, 166
Fedl Trade Commn, NEGOTIATING MERGER REMEDIES: STATEMENT OF THE BUREAU OF
COMPETITION OF THE FEDERAL TRADE COMMISSION (JAN. 2012) .......................................... 154
FTCs Merger Remedies 2006-2012 (January 2017) ............................................................ passim
U.S. Dept of Justice & Fed. Trade Commn, 2010 Horizontal Merger Guidelinespassim
U.S. DEPT OF JUSTICE, ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES 3 (2011) .. 146
U.S. DEPT OF JUSTICE, ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES 4 (2004) .. 146
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INTRODUCTION
Section 7 of the Clayton Act prohibits mergers that create the incentive and ability for
merged firms to raise prices and sidestep competition from innovative new products that threaten
their profits, but would benefit consumers. In most cases, courts must rely on only pre-merger
evidence to predict whether a merger will harm consumers. Here, the evidence is clear that Otto
Bock HealthCare North America, Inc.s (Otto Bock) acquisition of FIH Group Holdings, LLC
(Freedom) will result in significant anticompetitive effects. Respondents post-merger plans
remove all doubt. For years, Freedom challenged Otto Bocks market dominance in the U.S.
microprocessor knee (MPK) market. After buying Freedom, Respondents top executives set
out their plans for the future of Freedoms Pli 3 and its next-generation microprocessor knee,
the Quattro, dubbed the C-Leg 4 Killer due to its singular focus on Otto Bocks flagship MPK.
Their { } was to discontinue the product or {
} For Quattro, they developed a
plan to reposition it { } These are
precisely the consumer harms that Congress sought to prevent when it enacted Section 7.
Consummated on September 22, 2017, the Otto Bock/Freedom merger (the Merger)
created a behemoth that now controls more than { } percent of the U.S. MPK market. The
intense, pre-Merger rivalry between Otto Bock and Freedom had resulted in lower prices, rapid
innovation, and higher-quality products for U.S. prosthetic clinics and amputees. By ending this
competition and preventing the intensification of the rivalry that Freedoms Quattro launch
would have created, Respondent violated Section 7 of the Clayton Act and Section 5 of the FTC
Act, and harmed consumers. This illegal Merger will continue to harm consumers until this
Court fully restores the competition that was lost when Otto Bock eliminated Freedom as an
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independent challenger to its market dominance.
Complaint Counsel has proven, through an enormous body of evidence, that Otto Bocks
acquisition of Freedom violates the antitrust laws. At trial, Complaint Counsel clearly
established that the Merger is presumptively illegal by demonstrating the combination of Otto
Bocks share of approximately { } percent of the U.S. MPK market with Freedoms share of
more than { } percent significantly increases concentration in an already highly concentrated
market. The market share and concentration levels calculated by Complaint Counsels expert are
accurate and use real world sales data from every seller of MPKs in the United States.
Respondents own ordinary course market share analyses, generated over several years and
presented at the highest levels of each company, corroborate Complaint Counsels market shares.
Even the calculations of Respondents own expert, using his faulty product market definition,
result in concentration levels that far exceed the thresholds in the case law and the Merger
Guidelines that establish a presumption that Respondents Merger is likely to enhance market
power and therefore illegal.
There is no dispute between the parties that the proper geographic market in this case is
the United States. While the parties dispute on product market does not affect the conclusion
that the merger is presumptively illegal (it is under both sides definitions), Complaint Counsel
has clearly demonstrated that the appropriate definition is the manufacture and sale of MPKs to
U.S. prosthetic clinics. The record is clear that the Court should exclude mechanical knees from
the relevant product market because they function very differently than MPKs, provide less
safety and performance, are used by different patients, and have significantly different sales
prices and insurance reimbursement amounts than MPKs. In the ordinary course of business,
Otto Bock and Freedom, as well as other market participants, analyze the U.S. MPK market
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separately from markets for mechanical knees. Testimony and documents from MPK
manufacturers show that they do not view mechanical knees as significant competitors, and
mechanical knee manufacturers confirm they do not compete with MPKs. Evidence from
several sources establishes the critical fact that in negotiations between U.S. prosthetic clinics
and MPK manufacturers, mechanical knees do not play a role in setting MPK prices. The
hypothetical monopolist test performed by Complaint Counsels economic expert confirms the
reality that clinic customers would not switch to mechanical knees in the face of a price increase
on the MPKs they purchase to meet the medical needs of the amputees they serve.
Complaint Counsel has proven that the Merger violates Section 7 not only by establishing
an extremely strong presumption that the Merger is illegal, but also with an enormous amount of
direct evidence that the Merger will result in unilateral anticompetitive effects. The trial record
is replete with evidence showing that Otto Bock and Freedom competed head-to-head and
aggressively prior to the Merger, creating significant price and quality benefits for U.S.
prosthetic clinics and amputees. For example, Freedoms Pli 3 launch in 2014 directly
challenged Otto Bocks dominant market position and resulted in significant share gains for
Freedom and lower prices from both companies for customers. In response, Otto Bock launched
the C-Leg 4, which had the stated goal to {
}
Respondents documents and testimony show that the C-Leg 4 initially took significant business
away from the Pli 3, to which Freedom responded by lowering its prices and developing
aggressive promotions. Freedoms response enabled it to claw back share from Otto Bock and,
in the process, customers benefitted greatly from the vigorous competition that continued up
until the time of the Merger.
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Moreover, the trial record shows that Otto Bock intended to eliminate a close competitor,
knowing full well that acquiring Freedom would insulate Otto Bock from competition to the
detriment of consumers. Long before the Merger, Otto Bock was aware that Freedom was
developing the Quattro to target its C-Leg 4 business. After performing substantial due diligence
on Freedom, Otto Bock determined that acquiring Freedom constituted a {
}
Another important reason Otto Bock decided to acquire Freedom was to control its MPK market
share, which was the {
}
From Otto Bocks perspective, its rationale for acquiring Freedom made sense and
proved accurate, because after the Merger when it had full access to the Quattro project, Otto
Bock verified that Quattro was, in fact, a serious threat to the C-Leg 4. Thus, in November
2017, a month and a half after the transaction closed, Respondents top executives developed a
plan to reposition Quattro away from the C-Leg 4, to minimize cannibalization and prevent the
intense competition that would have occurred between those products absent the Merger. The
November plan called for either discontinuing the Pli 3 or raising its price. An internal
diversion analysis showed Otto Bocks plan for the Pli 3 made business sense because
executives determined that Otto Bock would recapture no less than { } percent, and as much as
{ } percent, of all Pli sales lost if the merged firm discontinued the product.
The only thing that stopped Otto Bocks plans from taking full effect was the Complaint
filed in this case and the related decision by Respondent to enter into a hold separate agreement
to avoid the need for a federal court proceeding seeking an injunction to hold the companies
apart. Absent this litigation, there is no doubt that Otto Bock would have already acted upon its
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plan to raise the price of the Pli 3 to U.S. clinic customers. Even with this litigation ongoing,
irreversible consumer harm has occurred. Freedom planned to launch an upgraded version of its
Pli 3, called the { } in October 2017, but Otto Bock scuttled those plans,
depriving customers of those product enhancements and the increased competition that would
have been introduced without the Merger. Testimony from Respondents executives also shows
that the Merger (and litigation to unwind it) has contributed to delays in Freedoms Quattro
development and projected launch date. Thus, this illegal Merger has already harmed
consumers.
Respondent has failed to rebut Complaint Counsels extremely strong prima facie case,
much less produce evidence that would overcome the overwhelming additional evidence of
anticompetitive effects that Complaint Counsel presented at trial. None of Respondents
arguments about product market can rebut the presumption that the Merger is illegal, because, by
Respondent experts own admission, the transaction is presumptively illegal even under his
improperly broad market definition.
Respondent has failed to demonstrate that new entry or expansion will prevent the clear
harm that Complaint Counsel has proven will occur. It takes several years to develop and launch
a new MPK, even for current MPK sellers, and it typically takes new entrants into the U.S. MPK
market several years to build a reputation that allows them to compete effectively. The record is
clear that no company is positioned to enter the U.S. market with a new MPK for the next several
yearseven Respondents expert testified that he could not identify any entrants likely to enter
in a timely fashion. Similarly, expansion by existing market participants will not prevent harm
from the Merger. ssurs Rheo MPK functions very differently than the C-Leg 4 and Pli 3,
which function more like each other. Moreover, Otto Bock expects Quattro to be a significantly
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better product and compete more closely with the C-Leg 4 than ssurs Rheo, and Freedom had
planned to price the Quattro lower than the C-Leg 4 and Rheo. Therefore, ssur cannot replace
the competition lost by eliminating Quattro as a competitor to the C-Leg 4. Despite selling
MPKs in the United States for more than a decade, Endolite has struggled to gain significant
market share and suffers from quality and reputational issues, and Nabtesco and DAW each have
microscopic MPK sales and limited customer recognition, making them incapable of replacing
the competition lost by eliminating Freedom.
Respondent has also failed to prove that the Merger will result in significant cognizable
efficiencies. At trial, Respondent did not submit evidence of any substantiated, verifiable,
merger-specific efficiency that would likely result from this Merger and be passed on to
consumers. Rather, Respondent submitted the testimony of its expert witness who, rather than
performing a rigorous independent analysis, simply relied on incomplete, early-stage integration
work performed by Otto Bock and its outside consultant that never even reached the stage of
setting a synergy target for any claim. The flaws in Respondent experts work are so serious
and numerous that the record does not support a finding that any cognizable efficiencies will
result from the Merger, much less that it would result in cognizable efficiencies that would
outweigh the clear anticompetitive harm Complaint Counsel has shown will occur.
Respondent also failed to meet its extremely high burden to prove that Freedom was a
failing firm because the record is clear that, prior to the Merger, Freedom was able to meet its
near-term financial obligations, it had never seriously considered filing for bankruptcy
protection, and it had several options other than an anticompetitive sale to Otto Bock for moving
forward. The Freedom sales process focused solely on garnering the highest price for the
company, even if a sale to the highest bidder ran afoul of Section 7. Sworn testimony shows that
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several companies were interested in buying Freedom, but never approached because it was
determined they likely would not pay as much as a company like Otto Bock. Many of these
firms remain interested in buying all of Freedom. Moreover, at the time of the Otto Bock
transaction, Freedom had another offer in hand from ssur that would have resulted in a less
anticompetitive merger than the sale to Otto Bock. These facts make it impossible for
Respondent to meet its high burden.
In the face of the enormous body of evidence showing that its Merger is anticompetitive,
Respondent has made a Hail Mary attempt to cast off a limited set of hand-selected Freedom
assets in the hopes of escaping the need to fully remedy its illegal Merger by selling an ongoing
Freedom business, the natural remedy to a Section 7 violation. From the time it filed its
Answer, Respondent has promised a divestiture that would address[] any conceivable
anticompetitive effect in the U.S. MPK market. It never did so. While complete divestiture of
all pre-merger assets is the usual remedy for a Section 7 violation, Respondent has submitted
{ } lack important assets that { } would need to
restore competition lost by the Merger, and { } has several critical terms that
remain uncertain and need to be negotiated.
Respondent has failed to meet its burden to show that {
} sufficiently non-speculative and would replace the competitive intensity lost as a result
of the merger. {
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}
And critical aspects { } are contingent on further negotiations,
including which specific employees each buyer could seek to hire {
} the scope and cost of any transition services
Respondent would provide, and a host of other terms.
Based on record evidence, { } includes
Freedoms facilities or equipment used to develop and make MPKs. {
} would transfer ownership of all of Freedoms intellectual property used to develop its
Quattro MPK, and { } places restrictions on licensed IP that would prevent any
buyer from using key technology to develop next-generation MPKs and related products, such as
a microprocessor ankle. To that end, {
} explicitly
restrict which Freedom employees the buyer can seek to hire or leave that issue unresolved.
{
} would not have the opportunity to hire a large number of Freedom
employees performing critical work on its Pli and Quattro that Respondent internally
identified as difficult to replace. In addition, { } divest
any of Freedoms prosthetic foot products, including those regularly used by Freedom to drive its
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MPK sales. Otto Bock refuses to sell these products because evidence shows that it wants to
keep Freedoms Kinterra and other feet {
}. Respondent withholds these
assets despite Otto Bocks own CEO at the time of the Merger testifying at trial that {
} would not be able to compete as effectively as Freedom had pre-Merger if it
does not acquire any of Freedoms foot products.
Complaint Counsel has proven, beyond a doubt, that Otto Bocks acquisition of Freedom
violated Section 7 of the Clayton Act and Section 5 of the FTC Acta remedy is therefore
justified and required to prevent the Merger from continuing to harm competition. Complaint
Counsel respectfully requests the Court issue its Proposed Order, which would divest an ongoing
Freedom business to a qualified buyer and fully restore competition in the U.S. MPK market.
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ARGUMENT
Section 7 of the Clayton Act bars mergers the effect of [which] may be substantially to
lessen competition, or to tend to create a monopoly in any line of commerce or . . . activity
affecting commerce in any section of the country. 15 U.S.C. 18 (2012). As the statutory
language suggests, Congress enacted Section 7 to curtail anticompetitive harm in its incipiency.
In re Polypore Intl, Inc., No. D-9327, 150 F.T.C. 586, 2010 WL 9549988, at *8 (F.T.C. Nov. 5,
2010) (citing Chi. Bridge & Iron Co. v. FTC, 534 F.3d 410, 423 (5th Cir. 2008)). Congress
used the words may be substantially to lessen competition . . . to indicate that its concern was
with probabilities, not certainties[.] FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 337
(3d Cir. 2016) (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962)) (emphasis
in original). Thus, a merger violates Section 7 if it create[s] an appreciable danger of
[anticompetitive consequences] in the future. A predictive judgment, necessarily probabilistic
and judgmental rather than demonstrable, is called for. FTC v. H.J. Heinz Co., 246 F.3d 708,
719 (D.C. Cir. 2001). Even in a consummated merger, the ultimate issue under Section 7 is
whether anticompetitive effects are reasonably probable in the future, not whether such effects
have occurred as of the time of trial. Polypore, 150 F.T.C. at *8 (citing United States v. Gen.
Dynamics Corp., 415 U.S. 486, 505-06 (1974)). Courts typically assess whether a merger
violates Section 7 by determining the relevant product market, the relevant geographic market,
and the mergers probable effect on competition in those relevant markets. See United States v.
Marine Bancorp., 418 U.S. 602, 618-23 (1974); see also U.S. Steel Corp. v. FTC, 426 F.2d 592,
595-96 (6th Cir. 1970).1
1 Courts often rely on the Merger Guidelines framework to assess how acquisitions may harm competition. PX08040 (U.S. Dept of Justice & Federal Trade Commission, Horizontal Merger Guidelines (2010)) [hereinafter Merger Guidelines]; see, e.g., ProMedica Health Sys., Inc. v. FTC, 749 F.3d 559, 565 (6th Cir. 2014); FTC v. Tronox Ltd., No. 1:18-cv-01622, 2018 WL 4353660, at *12 (D.D.C. Sept. 12, 2018); FTC v. Sysco Corp., 113 F.
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Courts analyze Section 7 cases using a burden-shifting framework consisting traditionally
of three steps. See, e.g., In re Polypore, Intl, Inc., No. 9327, 149 F.T.C. 486, 799-801 (F.T.C.
Mar. 1, 2010) (Chappell, A.L.J.). First, the government must establish a prima facie case that
an acquisition is unlawful. Id.; see also Heinz, 246 F.3d at 715; United States v. Baker Hughes,
Inc., 908 F.2d 981, 982 (D.C. Cir. 1990); FTC v. ProMedica Health Sys., Inc., No. 3:11 CV 47,
2011 WL 1219281, at *53 (N.D. Ohio Mar. 29, 2011). If the government can show that a
transaction will lead to undue concentration in the market for a particular product in a particular
geographic area, the government establishes a presumption that the transaction will substantially
lessen competition. Polypore, 149 F.T.C. at 850 (quoting Baker Hughes, 908 F.2d at 982).
Respondent can then attempt to rebut the presumption by producing evidence to cast
doubt on the accuracy of the governments evidence. Polypore, 149 F.T.C. at 800; see also Chi.
Bridge, 534 F.3d at 423; Baker Hughes, 908 F.2d at 982. The stronger Complaint Counsels
prima facie case, the greater Respondent[s] burden of production on rebuttal. In re OSF
Healthcare Sys., No. 9349, 2012 FTC LEXIS 76, at *46 (Apr. 4, 2012); see also Heinz, 246 F.3d
at 725; In re ProMedica Health Sys., Inc., No. 9346, 2012 WL 1155392, at *12 (F.T.C. Mar. 28,
2012). If Respondent successfully rebuts the prima facie case, the burden shifts again to the
government, which has the ultimate burden of persuasion. Chi. Bridge, 534 F.3d at 423; Baker
Hughes, 908 F.2d at 983; ProMedica, 2011 WL 1219281, at *53.
At trialthrough an enormous body of witness testimony, ordinary course documents,
and empirical evidence from its economic expertComplaint Counsel established an extremely
strong prima facie case that the Merger is unlawful. Indeed, Respondents own economic expert
also concluded that the Merger is presumptively illegal by a wide margin. Complaint Counsel
Supp. 3d 1, 39 (D.D.C. 2015); FTC v. Bass Bros. Enter., Inc., Nos. C84-1304, C84-1311, 1984 WL 355, at *24 (N.D. Ohio June 6, 1985).
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buttressed its prima facie case with evidence of vigorous head-to-head competition between Otto
Bock and Freedom for the sale of MPKs and Respondents explicit post-Merger plans to
discontinue Freedoms Pli 3 or raise its price in the United States and to extinguish the
heightened competition set to emerge with the launch of Freedoms Quattro. Respondents
attempts to rebut Complaint Counsels strong prima facie case failed. The trial record shows that
remaining MPK suppliers will not prevent the competitive harm resulting from the loss of
Freedom as an independent competitor and entry will not be timely, likely, or sufficient to
prevent harm to consumers. Likewise, Respondent did not prove any cognizable efficiencies or
that Freedom was a failing or even flailing firm at the time of the Merger. Finally,
Respondent did not prove that { } would restore competition
lost from the Merger and cure the Mergers anticompetitive effects.
I. Background
A. Overview of Respondent and the Merger
Otto Bock is a Minnesota corporation headquartered in Austin, Texas. (CCFF 1). It
employs approximately six hundred people in the United States and, in addition to Austin, has
locations in Salt Lake City, Utah; Louisville, Kentucky; Sacramento, California; and Southern
California. (CCFF 2-3). Otto Bock provides upper and lower limb prosthetics, orthotics,
mobility solutions, and medical-related services to customers in the United States and around
the world. (CCFF 4). Otto Bock is the dominant manufacturer and supplier of MPKs in the
United States, (CCFF 7), a position it has held since it launched the first version of its C-Leg in
1999, (CCFF 1008). Today, Otto Bock sells the C-Leg 4 in the United States. (CCFF 6).
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Otto Bocks parent companyOtto Bock HealthCare GmbHwas founded in 1919 and
has its headquarters in Duderstadt, Germany.2 (CCFF 11). Otto Bock HealthCare GmbH
employs over seven thousand employees worldwide and operates in fifty countries. (CCFF
12). {
} (CCFF 16).
Freedom was founded in 2002. (CCFF 20). Prior to the Merger, it had its headquarters
in Irvine, California and employed approximately 150 people. (CCFF 25). The company
began by selling carbon fiber feet and later introduced its first MPK, the Pli, in 2007. (CCFF
21, 23). Today, Freedom manufactures and sells the Pli 3its only prosthetic knee on the
market at the time of the Merger and the only American-made MPKas well as a range of
high-quality prosthetic feet and ankles. (CCFF 23-24). Its next-generation MPK, the Quattro,
is in development, (CCFF 30), { }
(CCFF 32). Prior to the Merger, Freedom was privately owned. Its two largest shareholders
were Health Evolution Partners (HEP), its majority shareholder, and Parker Hannifin, its
largest minority shareholder. (CCFF 25, 34).
On September 22, 2017, Otto Bock acquired Freedom for an acquisition price of
approximately { } million. (CCFF 109). The Merger was not reportable under the Hart-
Scott-Rodino Act. (CCFF 110). In late September 2017, after receiving a complaint from
outside counsel for a large clinic customer, (CCFF 115-116), the FTC began its preliminary
investigation into the Merger. (CCFF 114). On December 19, 2017, Otto Bock and the FTC
entered into a Hold Separate and Asset Maintenance Agreement. (CCFF 145). On December
20, 2017, the FTC filed its Complaint alleging that the Merger substantially lessened competition
2 Post-Merger, Otto Bock HealthCare GmbH changed its legal designation and name to Otto Bock SE & Co. KGaA. (CCFF 19).
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in the relevant market in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. 18,
and is an unfair method of competition in violation of Section 5 of the FTC Act, as amended, 15
U.S.C. 45. (CCFF 176). The administrative hearing in this case commenced on July 10,
2018 and lasted through October 4, 2018. (CCFF 253, 256).
B. Industry Background
1. General Background
An estimated 1.9 million individuals in the United States live with the loss of a limb,
including slightly more than 350,000 transfemoral, or above-the-knee, amputees. (CCFF 303).
Most people who require an above-the-knee amputation suffer from vascular disease, a traumatic
injury, cancer, or were born with a congenital deformity. (CCFF 304). Above-the-knee
amputees typically receive a prosthetic leg that includes a prosthetic knee component. (CCFF
339).
According to Respondents public website, [i]n general, there are two kinds of prosthetic
knees: non-microprocessor (or mechanical) and microprocessor. Mechanical knees all use a
mechanical hinge to replace your knee joint. How quickly or easily the hinge swings is often
controlled by friction, some type of hydraulic system or a locking mechanism. Microprocessors,
on the other hand, provide a more sophisticated method of control to a prosthetic knee. These
more complex knee joints are designed to help you walk with a much more stable and efficient
gait that more closely resembles a natural walking pattern. (CCFF 356). As Respondent goes
on to explain, [t]he internal computer monitors each phase of your walking pattern (your gait
cycle) using a series of sensors. The continuous monitoring and control of fluid allows the
processor to make adjustments in resistance so you can walk more efficiently at various speeds
and walk more safely down ramps and stairs. (CCFF 364).
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MPKs provide amputees enormous, verified clinical benefits, (CCFF 617-48), but they
are far more expensive than mechanical knees. (CCFF 701-06). Amputees typically rely on
insurance to cover the cost of an MPK. (CCFF 372-76). Insurers will not pay for high-priced
MPKs unless there is solid, documented evidence that an amputee will benefit from an MPK,
rather than a much lower cost mechanical knee. (CCFF 496-514). To understand how the U.S.
MPK market functions, and how this Merger will harm consumers, it is important to understand
the fundamentals of how medical professionals prescribe, insurers reimburse for, and clinics
purchase MPKs from manufacturers like Otto Bock and Freedom.
2. Fundamentals of the Prescription and Reimbursement of MPKs and MPK Competition
In the United States, two important, but separate, processes determine (1) how medical
professionals prescribe MPKs to patients and how insurers decide whether to reimburse clinics
for fitting an MPK on a patient, and (2) how clinics go into the marketplace to purchase MPKs
they need to fit on patients who have been prescribed an MPK and have insurance coverage.
Understanding the differences between these two processes, and the fact that the Merger
significantly affects the second process, but not the first, is important to understanding how Otto
Bocks acquisition of Freedom will harm consumers.
In the first process, several different players in the U.S. healthcare system collectively
determine whether it is medically appropriate to prescribe and reimburse the fitting of an MPK
on a particular amputee. (CCFF 400-29). The interplay among surgeons, prosthetists,
patients, and insurers determines whether a given patient receives an MPK or a mechanical
kneewith decisions driven primarily by the medical ethics of healthcare professionals,
preferences of patients for the feel of different prosthetic knees, and reimbursement regulations
established by insurers. (CCFF 392-561). The price that a clinic must pay out-of-pocket for a
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particular MPK, and the general difference in out-of-pocket prices for MPKs and mechanical
knees paid by clinics, do not play a significant role in whether a particular patient is prescribed
an MPK or mechanical knee. (CCFF 524-29). The evidence shows that this decision is based
on what healthcare professionals determine is medically best for the patient and justifiable to the
patients insurer. (CCFF 392-523). Otto Bocks acquisition of Freedom does not
significantly affect how medical professionals determine what is best for patients, whether
patients prefer MPKs or mechanical knees, or how insurance companies determine whether to
reimburse clinics for MPKs.
The Otto Bock/Freedom Merger does significantly alter how U.S. prosthetic clinics
negotiate competitive prices and terms with manufacturers for the MPKs that their prosthetists
need to fit on patients who would benefit medically from walking on an MPK. In the United
States, prosthetic clinics that treat amputees who have been prescribed an MPK must go into the
marketplace to purchase them directly from manufactures. (CCFF 563). Clinics pay MPK
manufacturers upfront for purchases and wait for a patients insurer to reimburse them at a later
date for the cost of the MPK, as well as other costs associated with fitting a lower-limb
prosthesis. (CCFF 372, 377). Clinics receive a fixed amount from insurers, (CCFF 380-
83), so it is important to clinics to purchase MPKs from manufacturers at the lowest prices
possible. (CCFF 575). Market forces determine the outcomes of negotiations between clinics
and MPK manufacturers. Each clinics bargaining leverage turns largely on its ability to play the
few manufacturers selling high-quality MPKs in the United States (including Otto Bock and
Freedom) against each other to obtain the lowest prices and the best terms possible. (CCFF
581-96). By eliminating Freedom as an independent competitor that clinics can purchase from
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or use to negotiate better terms from Otto Bock and other MPK suppliers, the Merger
significantly undermines the bargaining leverage of clinics in these negotiations.
a) Fundamentals of the Prescription by Healthcare Professionals and Reimbursement by Insurers of MPKs in the United States
The process by which healthcare professionals and insurers, respectively, prescribe and
cover MPKs determines which specific K3/K4 amputees receive MPKs, and ultimately it is a
process that is largely unaffected by the Merger. In the United States, there are two steps to
determine the eligibility of a K3/K4 amputee for an MPK. First, a patients healthcare
professionals (i.e., his or her surgeon and/or prosthetist) determine whether an MPK (rather than
a mechanical knee) is the best medical option for the patient. (CCFF 392-93, 430-87).
Second, the patients insurance provider determines whether to reimburse a prosthetic clinic for
fitting the patient with an MPK (rather than approving only a mechanical knee). (CCFF 394-
99, 488-523). If both a patients medical team and insurer determine an MPK is appropriate, and
the patient is comfortable wearing one, the patient will be prescribed an MPK, the prosthetist at
his or her clinic will fit the patient with one, and the patients insurer will reimburse the clinic for
the cost of fitting the patients entire lower-limb prosthesis. (CCFF 392-561).
Several categories of healthcare professionals play a role in determining whether fitting a
K3/K4 amputee with an MPK is medically appropriate. The surgeon, who performs the
amputation, or another medical doctor, must write a prescription for a prosthetic knee. (CCFF
402-04). The prosthetist at the clinic to which the amputee is referred post-surgery typically
plays a critical role in evaluating the amputees ability to ambulate and which type of lower-limb
prosthesis would be optimal for the patient. (CCFF 411-17, 430). These two healthcare
professionals, sometimes along with others (e.g., a patients physiatrist), work initially to
determine a patients K-level by evaluating his or her strength and ability to ambulate. (CCFF
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431, 433-39). Healthcare professionals in the United States know that insurers typically do not
provide reimbursement to clinics for fitting MPKs on K0, K1, or K2 patients. (CCFF 440-
44). Therefore, only amputees identified as K3 or K4 ambulators (and sometimes K2 patients
who would become K3 ambulators with a particular prosthesis) are considered candidates for an
MPK by their healthcare professionals. (CCFF 445-46, 427, 557).
To determine whether an MPK is medically appropriate for a particular K3/K4 patient,
healthcare professionals consider several factors, beyond just K-level, that inform whether an
MPK would provide substantial benefits over a mechanical knee. (CCFF 447-87). Among
other factors, they evaluate (1) a patients age, overall health, and fitness; (2) the activities in
which the patient engages or desires to engage; (3) the degree to which the patient stumbles,
falls, or experiences other negative consequences when wearing a mechanical knee; and (4) the
patients comfort with an MPK. (CCFF 461-87). If a patients healthcare professionals
determine an MPK would provide significant medical benefits over a mechanical knee (i.e., she
would fall or stumble less, engage in more activities, or otherwise experience improved health or
quality of life), they will prescribe an MPK and the clinic treating her will evaluate whether
insurance is likely to cover the MPK. (CCFF 428, 445-87).
U.S. insurers typically determine whether an amputees clinic should receive
reimbursement for an MPK based on evaluating whether the clinic has documented evidence that
an MPK is a medical necessity relative to a lower-cost product, such as a mechanical knee.
(CCFF 496-514). Although medical necessity requirements vary to some degree based on the
policy, in general, insurers require clinics to document evidence showing that a patient will
experience significant, health, safety, or quality of life benefits by wearing an MPK rather than a
mechanical knee. (CCFF 515-19). This evidence includes physicians notes, narrative
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justifications of medical necessity from the prosthetist, and/or completed PAVET forms (or the
like). (CCFF 515-19). If a clinic cannot document medical necessity, an insurer will deny
coverage for an MPK, and approve coverage only for a mechanical knee. (CCFF 520-23).
In the United States, the vast majority of K3/K4 patients who are prescribed an MPK by
medical professionals and have insurance coverage for an MPK receive and wear one. (CCFF
531-37). That does not mean every K3/K4 amputee receives, or from a medical perspective
should receive, an MPK. K3/K4 amputees typically wear a mechanical knee when their
insurance company denies coverage for an MPK or their medical professionals determine that an
MPK is not medically appropriate given an amputees specific health or lifestyle characteristics.
(CCFF 538-55). For example, some amputees engage in activities or work that is not
conducive to wearing an MPK, such as fishing or farming, where exposure to water or dust, or
general wear and tear, are problematic for wearing a high-tech MPK. (CCFF 543-44, 549,
554-55). Those patients typically wear a mechanical knee when engaging in such activities. In
addition, even K3/K4 amputees who may become eligible for an MPK are typically fitted with a
mechanical knee for their initial and temporary prostheses, worn during the post-surgery
recovery process. (CCFF 556-58). Finally, a small number of K3/K4 amputees simply prefer
the feel of a mechanical knee, particularly when they have worn one for many years. (CCFF
559-61).
Ultimately, the Merger does not affect which K3/K4 amputees are likely to be prescribed
or receive reimbursement for MPKs in the future. The U.S. healthcare system sorts K3/K4
amputees into two buckets: those with an MPK prescription and insurance coverage, and those
who only have access to or prefer a mechanical knee. (CCFF 530-61). U.S. prosthetic clinics
need to go into the marketplace to purchase MPKs to fit on patients who want and would benefit
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medically from an MPK. Patients are not switched from MPKs to mechanical knees based on
the prices paid by clinics for those two classes of products. (CCFF 525-29). Clinics cannot
simply provide a mechanical knee to patients who would benefit medically from an MPK.
(CCFF 524).
b) Fundamentals of Competition among MPK Suppliers for Sales of MPKs to U.S. Prosthetic Clinics
A prosthetic clinic must go into the marketplace and purchase MPKs to fit on those
patients whose prosthetists and other medical professionals determine would benefit medically
from an MPK and have insurance coverage, ensuring the clinic will not lose money. (CCFF
430-523, 562-67). If patients qualify for MPKs, clinics do not try to switch them to mechanical
knees over the recommendations of medical professionals; they purchase MPKs for those
patients, because to do otherwise would be a disservice to the patients and poor patient care.
(CCFF 565-66). Clinics typically purchase MPKs directly from manufacturers, (CCFF
563), and the prices and terms on which MPKs are sold in the United States are established in
one-on-one negotiations between clinics and manufacturers. (CCFF 569).
Although MPK manufacturers publish list prices, the price each clinic actually pays is
individually negotiated and is almost always well below the published list price. (CCFF 570).
Clinics generally negotiate MPK sales prices with manufacturers at least once per year during
contract renewals, although manufacturers also offer lower prices to respond to competitive
pressure from other MPK manufacturers at other times. (CCFF 571-73). The record shows
that by discounting their MPK prices, MPK manufacturers are able to generate greater sales at
the expense of other MPK manufacturers, and that clinics increase their MPK purchases from
manufacturers that offer more favorable pricing. (CCFF 574). Price matters to a clinic because
the lower the price of an MPK, the higher the clinics margin, (CCFF 575-76), which clinics
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use to provide better patient care, improve their facilities and patient support services, and train
their clinical staffs, (CCFF 577-79, 1437-45).
A clinics bargaining leverage in negotiations with an MPK supplier turns on its ability to
credibly threaten to switch some portion of its purchases to another MPK. (CCFF 581-86).
During negotiations with MPK manufacturers, clinics often use a competitors MPK prices to
negotiate lower prices. (CCFF 583-84, 587). According to Mr. Carkhuff, Freedoms
Chairman, {
} (CCFF 584). Clinics
regularly play MPK manufacturers, including Otto Bock and Freedom, off each other to
negotiate lower MPK prices, (CCFF 587, 590-93, 595-96), because the ability to switch to
competing MPKs provides clinics bargaining leverage, (CCFF 588, 590-93, 595-96). For
example, at trial, Mark Ford, President and Managing Partner of Prosthetic & Orthotic
Associates, testified that he has used the presence of Freedoms Pli 3 in negotiations with Otto
Bock to get better pricing for the C-Leg 4. (CCFF 591). Mr. Ford testified that having both
Freedom and Otto Bock allows him to negotiate with both companies knowing there are
alternatives, that our clinicians are both are comfortable with both alternatives, so it allows us
to negotiate. (CCFF 593).
Mechanical knees do not play a role in negotiations between manufacturers and clinics
purchasing MPKs. The record is clear that MPK prices do not respond to price changes for non-
microprocessor knees, (CCFF 597-98, 600, 602-04), and mechanical knee prices do not
respond to prices charged for MPKs, (CCFF 599-601). MPK manufacturers do not consider
the price of mechanical knees when setting their MPK prices. (CCFF 602-04). For example,
Stephen Blatchford, Executive Chairman of Blatchford, which does business in the United States
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as Endolite, testified that {
} (CCFF
602-03).
The Merger does not affect how doctors and prosthetists decide which patients would
benefit medically from wearing an MPK, rather than a mechanical knee, or how insurers
determine which patients to cover for an MPK. See supra I.B.2.a. But, as explained above, it
does significantly harm clinics that previously preferred to buy Freedoms MPKs or used
Freedom to negotiate lower prices from Otto Bock and other MPK manufacturers. As the
Commission has held in the past, prices that emerge from negotiations are a function of each
sides bargaining leverage, and a merger may increase an acquirers bargaining leverage by
removing an important competitor. See ProMedica, 2012 WL 1155392, at *32. This Merger
increases the combined firms ability to impose higher prices on U.S. clinics in negotiations by
removing Freedom as an independent competitor.
II. Respondents Consummated Merger is Presumptively Unlawful by a Wide Margin
Complaint Counsel has proven that Respondents Merger led to undue concentration in
the market for a particular product in a particular geographic areathe manufacture and sale of
MPKs to prosthetic clinics in the United Statesestablish[ing] a presumption that the
transaction will substantially lessen competition. Polypore, 149 F.T.C. at 850 (Chappell,
A.L.J.) (quoting Baker Hughes, 908 F.2d at 982). Complaint Counsels market definition is
unassailable. Respondent itself has consistently, and at all levels of both Otto Bock and
Freedom, defined the market in which they used to compete as the U.S. MPK Market. (CCFF
717-28). For example, in November 2017, after the Merger, top executives at Otto Bock
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performed { } concluded that Otto Bock controlled a { } percent share
of the { } market, while Freedom controlled { } percent. {
} Similarly, shortly before the Merger, an independent Freedom analyzed the
} in which its Pli 3 competed to include only three other products,
all MPKs, with Otto Bocks C-Leg accounting for a { } percent share and Freedoms Pli
accounting for { } percent. {
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}
There is no dispute on geographic market definitionboth sides agree it is the United
Statesand Respondents ordinary course U.S. market share analyses consistently exclude
mechanical knees. See, e.g., (CCFF 718-19, 829-31). If the Court were to do nothing more
than calculate HHIs based on Otto Bocks and Freedoms own analyses of the MPK market in
which they viewed themselves as competing, those concentration calculations would trigger a
strong presumption that the Merger is illegal. When the enormous body of evidence confirming
not only Complaint Counsels relevant market definition, but also the anticompetitive impact of
the Merger is considered, there is no doubt that the Merger violates Section 7.
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A. The Relevant Product Market is Microprocessor Prosthetic Knees
The relevant product market refers to the product and services with which the
defendants products compete. United States v. Anthem, Inc., 236 F. Supp. 3d 171, 193 (D.D.C.
2017), affd 855 F.3d 345 (D.C. Cir. 2017). The Supreme Court established the basic rule for
defining a product market3 in Brown Shoe: The outer boundaries of a product market are
determined by the reasonable interchangeability of use or the cross-elasticity of demand between
the product itself and substitutes for it. Brown Shoe, 370 U.S. at 325. Stated another way, a
product market includes all goods that are reasonable substitutes. Sysco, 113 F. Supp. 3d at 25
(citing FTC v. Cardinal Health, 12 F. Supp. 2d 34, 46 (D.D.C. 1998)); FTC v. Staples, Inc., 970
F. Supp. 1066, 1074 (D.D.C. 1997) (hereinafter Staples 1997)); see also United States v. H&R
Block, Inc., 833 F. Supp. 2d 36, 51 (D.D.C. 2011) (holding courts look at whether two products
can be used for the same purpose, and, if so, whether and to what extent purchasers are willing to
substitute one for the other) (internal citation omitted). Whether goods are reasonable
substitutes depends on two factors: cross-elasticity of demand and functional
interchangeability, which refers to whether buyers view similar products as substitutes. Sysco,
113 F. Supp. 3d at 25; see also Staples 1997, 970 F. Supp. at 1074 (Whether there are other
products available to consumers which are similar in character or use to the products in question
may be termed functional interchangeability.). For cross-elasticity of demand between
products, one should consider the responsiveness of the sales of one product to price changes
of the other. United States v. E.I. du Pont De Nemours & Co., 351 U.S. 377, 400 (1956)
(hereinafter du Pont 1956); Sysco, 113 F. Supp. 3d at 25. For example, [i]f an increase in the
price for product A causes a substantial number of customers to switch to product B, the
3 FTC v. Staples, Inc., 190 F. Supp. 3d 100, 11617 (D.D.C. 2016) (hereinafter Staples 2016).
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products compete in the same market. Sysco, 113 F. Supp. 3d at 25; see also du Pont 1956, 351
U.S. at 400. Evaluating whether an increase in the price for MPKs would cause a substantial
number of customers to switch to mechanical knees is an essential part of defining the product
market in this case.
A relevant market definition does not need to include all of the firms competitors; it
needs to include the competitors that would substantially constrain [the firms] price-increasing
ability. FTC v. Advocate Health Care Network, 841 F.3d 460, 469 (7th Cir. 2016) (citations
omitted); determination of the relevant product market is a matter of business realitya matter
of how the market is perceived by those who strive for profit in it. Staples 1997, 970 F. Supp.
at 1079 (internal quotations and citation omitted); see also FTC v. Coca Cola Co., 641 F. Supp.
1128, 1132 (D.D.C. 1986). Courts frequently define relevant product markets using two
analysesthe Brown Shoe practical indicia and the hypothetical monopolist test. See, e.g.,
Sysco, 113 F. Supp. 3d at 2734; Staples 2016, 190 F. Supp. 3d. at 11822.
In Brown Shoe, the Supreme Court identified a series of practical indicia that courts
have used to determine the relevant product market. See Sysco, 113 F. Supp. 3d at 2733; FTC
v. CCC Holdings Inc., 605 F. Supp. 2d 26, 3844 (D.D.C. 2009); FTC v. Swedish Match, 131 F.
Supp. 2d 151, 159165 (D.D.C. 2000); Cardinal Health, 12 F. Supp. 2d at 4649; Staples 1997,
970 F. Supp. at 107580; see also H&R Block, 833 F. Supp. 2d at 5160. These practical indicia
include industry or public recognition of the [relevant market] as a separate economic entity, the
products peculiar characteristics and uses, unique production facilities, distinct customers,
distinct prices, sensitivity to price changes, and specialized vendors. Brown Shoe, 370 U.S. at
325; see also United States v. Aetna Inc., 240 F. Supp. 3d 1, 21 (D.D.C. 2017); Sysco, 113 F.
Supp. 3d at 27; H&R Block, 833 F. Supp. 2d at 51.
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Courts and the Commission also rely on the approach prescribed by the Merger
Guidelines to define the relevant product marketthe hypothetical monopolist test. See, e.g.,
Advocate, 841 F.3d at 46869 (applying the hypothetical monopolist test to define a relevant
geographic market); ProMedica, 2012 WL 1155392, at *14 (citations omitted); Polypore, 150
F.T.C. at *11; see also Sysco, 113 F. Supp. 3d at 3334; Staples 2016, 190 F. Supp. 3d at 121
22; Merger Guidelines 4. The hypothetical monopolist test defines a relevant product market
in economic terms, by asking whether a monopolist of a particular group of substitute products
could profitably impose a small but significant non-transitory increase in price (SSNIP)
typically 5 percentover those products, or whether customers switching to alternative products
would make such a price increase unprofitable. Merger Guidelines 4.1.14.1.2; see also CCC
Holdings, 605 F. Supp. 2d at 38 n.12. The Merger Guidelines instruct that in determining the
bounds of the relevant product market, it is appropriate to apply first the hypothetical monopolist
test on a candidate market comprised of at least one product of each merging firm. Merger
Guidelines 4.1.14.1.3. If enough customers would switch to products outside the candidate
market in the face of a SSNIP to render the price increase unprofitable, the candidate market is
too narrow. Merger Guidelines 4.1.14.1.3. Additional products should be added to the
candidate market only until a hypothetical monopolist could profitably impose a SSNIPat
which point, a relevant antitrust product market has been defined. Merger Guidelines 4.1.1
4.1.3.
Applied to the facts here, both the Brown Shoe practical indicia and the hypothetical
monopolist test clearly demonstrate that MPKs sold to U.S. clinics constitute a distinct relevant
product market in which to assess the competitive effects of the Mergerand mechanical knees
are properly excluded from the market.
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1. Brown Shoe Practical Indicia Demonstrate MPKs Are a Relevant Product Market
The Brown Shoe practical indicia point to a distinct relevant product market consisting
only of MPKs. First, MPKs have peculiar characteristics and uses that clearly distinguish
them from mechanical knees. (CCFF 607-700). The microprocessors in MPKs provide
unique functionality for amputees who wear them, resulting in significant safety, health, and
quality of life benefits mechanical knees cannot match, as demonstrated by a large body of
clinical research. (CCFF 617-700). Second, MPKs are used by a distinct subset of K-3 and
K-4 amputees that prosthetists have determined are healthy enough and regularly engage in
activities that make wearing an MPK a medical necessity. For this distinct class of end-user, if a
prosthetic clinic can obtain insurance reimbursement for an MPK, the patient will almost always
receive one instead of a mechanical knee. (CCFF 531-37). Third, manufacturers sell MPKs
to clinics at prices that are much higher than mechanical knees, and insurance companies
reimburse clinics at rates that are far higher than mechanical knees. (CCFF 701-11). Fourth,
in one-on-one negotiations between MPK manufacturers and their clinic customers, MPK prices
are sensitive to prices of other MPKs but not mechanical knees. (CCFF 712-16). Clinics play
MPK manufacturers off each other to negotiate lower MPK prices, but cannot credibly threaten
to substitute mechanical knees for MPKs. (CCFF 712-16). Fifth, industry participants,
including Respondent, other MPK manufacturers, mechanical knee manufacturers, prosthetic
clinics, and others recognize MPKs as a separate market from those in which mechanical knees
are sold (i.e., in the language of Brown Shoe, MPKs are an economic entity that is distinct from
mechanical knees). (CCFF 717-66). Sixth, MPKs are sold by highly specialized personnel
who possess deep knowledge about MPKs to assist prosthetists with fittings and to provide
clinics a variety of educational and other services they find valuable. (CCFF 1676, 1680-81,
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1685, 1687, 1692-1705). Collectively, these practical indicia establish MPKs as a separate
relevant product market for purposes of assessing the Mergers impact on competition.
a) MPKs Have Peculiar Characteristics Not Possessed by Mechanical Knees
MPKs possess unique physical attributes as well as provide patients with significant
safety and performance benefits beyond what mechanical knees can achieve. MPKs provide
amputees who wear them unique functionality compared to non-microprocessor knees. Otto
Bocks own website explains that there are two kinds of prosthetic knees: non-microprocessor
(or mechanical) and microprocessor, with MPKs providing a more sophisticated method of
control to a prosthetic knee. (CCFF 607). Freedoms CEO at the time of the Merger, David
Smith, testified that MPKs and mechanical knees are completely different products and
distinguished them from each other by explaining [o]ne is rudimentary and one is sophisticated.
One doesnt allow mobility and ambulation and one does. (CCFF 608). William Carver,
President and COO of College Park, which manufactures mechanical knees, testified that the
microprocessor in an MPK acts as the brain and is {
} while a mechanical knee requires manual adjustments by a prosthetist to adapt to
new environments. (CCFF 613). As Freedom highlights in ordinary course documents,
mechanical knees are on the { } and MPKs are on the
{ } (CCFF 616).
A large body of clinical research demonstrates that amputees who wear MPKs experience
significant safety, health, and quality of life benefits over those who wear mechanical knees. Dr.
Kenton Kaufman of the Mayo Clinic, a [v]ery highly respected member of the MPK clinical
research community, testified that [t]he published articles have shown improved safety, [MPKs]
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have improved mobility, better satisfaction, and one of the recent articles show[s] that in a ten-
year time frame they would have less arthritis. (CCFF 617, 622).
One recent and important clinical study comparing the benefits of MPKs over mechanical
knees, called the RAND report, concluded that compared with NMPKs [non-microprocessor
knees], MPKs are associated with meaningful improvement in physical function and reductions
in incidences of falls and osteoarthritis. (CCFF 635). Published in 2017, the study found that
there is strong evidence suggesting that compared with [non-microprocessor knees], MPKs are
associated with improvements in walking speed, gait symmetry, and the ability to negotiate
obstacles in the environment[.] (CCFF 632, 636). As a result of these improvements,
patients wearing MPKs experience fewer falls and lower incidences of osteoarthritis in the
intact limb. (CCFF 637). MPK manufacturers find the RAND report valuable and reliable.
For example, Maynard Carkhuff, Freedoms Chairman and former CEO, agreed at trial that the
importance of the RAND report includes establishing that MPKs are safer than mechanical knees
and provide greater stability for patients, which together helps lower healthcare costs associated
with falls. (CCFF 638).
At trial, Dr. Kenton Kaufman of the Mayo Clinic testified about another clinical study
that shows that MPKs are not only medically superior to mechanical knees for the K3 and K4
patients who currently have access to insurance coverage for them, {
} which would greatly grow the size of the U.S. MPK market.
(CCFF 948-52). As Dr. Kaufman wrote, {
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}
Numerous other peer-reviewed studies prove the many safety and performance benefits
that MPKs provide amputees over mechanical knees. (CCFF 641) (clinical study showing that
MPK users improve their gait mechanics and stability as compared to mechanical knees); (CCFF
642-43) (clinical studies showing that microprocessor knee users have increased ability to
walk on difficult terrain as compared with mechanical knee users and that MPK users experience
fewer falls as compared with mechanical knee users); (CCFF 645) (clinical study showing that
there is evidence to suggest that [MPKs] provide greater ambulatory safety and improve
environmental obstacle negotiation when compared to [mechanical knees]); (CCFF 645)
(clinical study showing that MPK use may significantly reduce uncontrolled falls by up to 80%
as well as significantly improve indicators of fall risk.). As a result of these safety and
performance benefits of MPKs over mechanical knees, the clinical research has also found that
MPK users engage in more physical activity than mechanical knee users and experience overall
improvement in quality of life. (CCFF 644).
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Dr. Kaufman testified that the key findings of his research on MPKs are a recurring
theme that the patients have more safety, they have improved mobility, and they have better
quality of life when they wear an MPK instead of a mechanical knee. (CCFF 646). Jason
Kahle of the University of Southern Florida and Prosthetics Design & Research similarly
testified that, based on his research of MPKs, the reduction in stumbles and falls is the biggest
benefit of a microprocessor knee and is the reason why microprocessor knees are paid for by
both CMS and most insurance companies. (CCFF 648).
Both Freedom and Otto Bock routinely use published clinical studies to educate their
customers on the benefits of MPKs over non-MPKs and to market their products. For example,
Freedoms website includes a Microprocessor Knee Literature Review which collects and
summarizes academic articles in an effort to understand where the research in [MPKs] has been
focused and to determine where significant outcomes exist. (CCFF 672). The materials tout
the conclusions of MPK clinical studies, stating that, research has been able to show that the
[MPK] user feels more stable on stairs, inclines, and uneven terrain, while reducing the cognitive
demand required for walking. (CCFF 672). Additionally, Otto Bock has regularly provided
customers with clinical research and other documentation discussing the benefits of MPKs
relative to mechanical knees {
} (CCFF 685-86). Andreas Kannenberg, Otto Bocks
Executive Medical Director of North America, testified that Otto Bock provides these materials
because {
} (CCFF 686).
The results of these clinical studies, as well as the opinions of the clinical researchers
themselves, are not merely of academic interest. Prosthetists consider these clinical studies when
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deciding whether to fit a patient with an MPK or a mechanical knee, and in practice, prosthetists
testify that they observe the clinical benefits of MPKs in the patients they fit with them. (CCFF
618-20). Clinic customers agree that MPKs provide more safety and stability than mechanical
knees, leading to fewer stumbles and falls. (CCFF 653). Clinic customers also agree that
MPKs allow patients to more easily traverse everyday environmental barriers, such as curbs,
steps, and slopes, as well as walk in crowded areas. (CCFF 654). Mark Ford, President and
Managing Partner of Prosthetic & Orthotic Associates, attributes this benefit of MPKs to their
ability to accommodate variable cadence, which enable MPKs to behave much more fast and
more responsively than a mechanical knee. (CCFF 654); see also (CCFF 655) (Keith Senn
of Center for Orthotics & Prosthetic Care testifying that from my observation, [MPKs users are]
able to have a much better gait, which means to walk better, as well as amputees go, to be able to
improve their gait.). In addition, clinic customers testified that MPKs are associated with fewer
health risks, such as back pain and osteoarthritis, compared to mechanical knees. (CCFF 656).
For example, Rob Yates, President and CEO of Jonesboro Prosthetic & Orthotic Laboratory,
testified that the documented benefits of MPKs include a l