Costco Sues J&J Over Alleged Contact Lens Price Fixing

NEW BRUNSWICK, NJ–Costco Wholesale Corporation is suing city-based Johnson & Johnson (J&J) because the pharmacuetical giant is trying to set minimum resale prices for its Acuvue brand contact lenses in order to prevent competition, according to a complaint filed in a federal court in March.

J&J disclosed Costco’s complaint in its quarterly report to the Securities and Exchange Commission (SEC) on May 2.

In the SEC filing, J&J also said that it was facing more than 30 lawsuits filed by contact lens patients claiming it, together with other makers, “reached agreements between each other and certain distributors and retailers concerning the prices at which some contact lenses could be sold to consumers.”

J&J has been accused of price-fixing in the past.  As we reported last year, China fined J&J and four other companies including Bausch + Lomb more than $3 million for allegedly manipulating the prices of eyeglasses and contact lenses.

J&J "is the dominant company in a unique marketplace," reads the complaint, which seeks monetary damages and was filed in California federal court.

As the largest manufacturer of contact lenses in the country J&J sells some 43% of all lenses sold in the United States, according to the complaint.  

Eye care professionals (ECP’s) charge consumers a fee when they diagnose a patient's eye condition and determine the right contact lens prescription.

“In addition to the service or 'fitting' fee, many ECPs also fill the prescriptions and make additional profit on sales of contact lenses,” according to the complaint, which also says that Costco previously sold Acuvue Oasys contacts for about 30% less than many competitors.

But only ECPs "can legally prescribe contacts for consumers," who need to replace their contacts "as often as daily" and "make repeated purchases," according to the lawsuit.

Costco gets a lot of business from contact lens buyers because it offers the best prices on J&J's Acuvue contact lenses. Costco pulls its members "away from those who sell J&J lenses at higher prices," known as “intrabrand competition.” 

The Federal Trade Commission (FTC) has recognized the "importance of intrabrand price competition," according to the suit. 

The Fairness to Contact Lens Consumers Act (FCLCA) "increases consumers’ ability to shop around with buying contact lenses,” the suit quotes the FTC as stating in 2004. 

But several retailers, trade associations, and ECP buying groups, "have engaged in concerted action to restrain competition by restricting other retail competitors and by imposing minimum retail price or resale price maintenance policies (RPM's)." 

According to the complaint,  a consent decree settling a disupute regarding price fixing was resolved in 2001, but it has expired.

"J&J and J&J’s retailers and distributors have once again acted together to impose minimum retail prices and to increase prices to consumers, without any corresponding benefit to consumers," reads the complaint.

While J&J did not control or suggest what price Costco or other contact retailers would charge for lenses for at least ten years, in June, J&J "responded again to the requests of ECPs to limit competition by 'discounters,' " says the complaint.

J&J consented with ECP's and others to "require certain minimum retail prices," known as a "retail price maintenance" (RPM) policy.  

Costco argues that price maintenance practices reduce competition and give more incentive to retailers that both prescribe and fill prescriptions to prescribe the brand that yields the greatest profit or leads to repeat business. 

However, when Costco violated J&J's RPM Policy it received threats from J&J that it would not sell lenses to the retailer. Subsequently, J&J agreed to revisions to the RPM Policy, but Costco still objected to the "entire premise of an RPM policy." 

But while Costco indicates in the lawsuit that it has had to comply with the revised policy so as to mimimize the cost and inconvenience to its members, its members are now paying much higher prices on J&J lenses at Costco.

The suit alleges that RMP's are anticompetitive for several factors, including:

  • Increased consumer harm in terms of increased prices and reduced choices and innovation without gaining anything in return
  • Increased incentives for prescription choices by ECPs to be influenced by profit considerations that threaten patient care
  • False statements made by J&J as to the motivations for and effects of the minimum prices
  • Increased barriers to entry at the wholesale level.  Facilitation of collusion to increase and stabilize prices
  • Absence of effective interbrand price competition
  • Significance of J&J’s market power
  • Control over consumer choice and ultimate demand for manufacturer’s products exercised by ECPs through the prescription process

The American Antitrust Institute told federal regulators last year to take action against retail price floors used by top contact lens manufacturers. It said in October that price controls are illegal and result in higher prices for consumers.

"J&J is not entitled to dictate Costco’s retail prices or to threaten to terminate Costco or otherwise constrain Costco’s purchasing from J&J on the basis that Costco rejects retail price maintenance policies,” said a Costco representative.

But J&J insists their policy is legal.

“The policy is lawful, and it is working: Initial pricing data shows that nearly 60 percent of consumers have seen a price reduction on Acuvue brand products. We will defend against Costco Wholesale Corp.’s lawsuit,” said the company which has been based in New Brunswick since 1888.

Online sellers of contacts have also been affected by the suit, which says that one online distributor was forced to double its prices to comply with the RPM policy.

Dave is an award-winning business reporter who has authored over 200 articles for New Brunswick Today.