BILL ANALYSIS Ó
AB 789
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Date of Hearing: May 5, 2015
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Susan Bonilla, Chair
AB 789
(Calderon) - As Amended April 22, 2015
NOTE: This bill is double referred, and if passed by this
Committee, it will be referred to the Judiciary Committee.
SUBJECT: Contact lens sellers: prohibited practices: fines.
SUMMARY: Specifies that sellers of contact lenses are not
subject to a manufacturer's unilateral pricing policy (UPP) and
raises the minimum fine for violating the Nonresident Contact
Lens Seller Registration Act from $1,000 to $1,500.
EXISTING LAW:
1)Provides that the right to dispense, sell or furnish
prescription ophthalmic devices at retail or to the person
named in a prescription is limited exclusively to licensed
physicians and surgeons, licensed optometrists, and registered
dispensing opticians, except as provided in the Nonresident
Contact Lens Seller Registration Act. (Business and
Professions Code (BPC) § 2543)
2)Under the Nonresident Contacts Lens Seller Registration Act,
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prohibits a person located outside California from shipping,
mailing, or delivering in any manner, contact lenses at retail
to a patient at a California address unless registered with
the Division of Licensing of the Medical Board of California,
and provides that only replacement contact lenses provided
pursuant to a valid prescription may be shipped, mailed, or
delivered directly to a patient. (BPC § 2546.1)
3)Defines a "trust" as a combination of capital, skill or acts
by two or more persons for specified purposes, including:
a) To fix at any standard or figure, whereby its price to
the public or consumer shall be in any manner controlled or
established, any article or commodity of merchandise,
produce or commerce intended for sale, barter, use or
consumption in this State.
b) To make or enter into or execute or carry out any
contracts, obligations or agreements of any kind or
description, by which they do all or any combination of the
following:
i) Bind them not to sell, dispose of or transport any
article or any commodity or any article of trade, use,
merchandise, commerce or consumption below a common
standard figure, or fixed value.
ii)Agree in any manner to keep the price of such article,
commodity or transportation at a fixed or graduated
figure.
iii)Establish or settle the price of any article, commodity
or transportation between them or themselves and others,
so as directly or indirectly to preclude a free and
unrestricted competition among themselves, or any
purchasers or consumers in the sale or transportation of
any such article or commodity. (BPC Section 16720)
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4)Makes every trust, subject to specified exemptions, unlawful,
against public policy, and void. (BPC § 16726)
THIS BILL:
5)Excludes a licensed physician and surgeon, licensed
optometrist, registered dispensing optician, or nonresident
contact lens seller from a manufacturer's unilateral pricing
policy or similar practice or agreement that purports to
establish a minimum advertised or selling price for contact
lenses.
6)Raises the minimum fine for a violation of the Nonresident
Contact Lens Seller Registration Act from $1,000 to $1,500.
FISCAL EFFECT: None. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS:
Purpose. This bill is sponsored by the author. According to
the author, "Ensuring market competition is a fundamental
principle in our Capitalist society. When market competition
is upheld and respected, consumers will almost always benefit
by the cost of a product decreasing due to the rivalry among
sellers to gain market share. It is crucial that all who
participate in business activities in California uphold these
principles in order to not only protect consumers from over
spending on a given product unjustly, but also protecting
industries from unilateral price policies that create unfair
competition for businesses."
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Background. Bausch + Lomb developed and distributed the first
soft contact lenses to eye care practitioners (ECPs) in the
United States in 1971. At that time, it was common for an ECP
to perform an eye exam on a patient, fit contact lenses to the
patient's eyes and write a prescription for the contact lenses
that the patient would in turn purchase at their ECPs office.
By the late 1980's, contact lenses had grown in popularity and
new technology emerged including frequent replacement and
disposable contact lenses. Today, there are approximately 35
million consumers in the U.S. that wear contact lenses. These
consumers spend approximately $4.2 billion dollars annually on
the purchase of contact lenses. Approximately 98 percent of
contact lenses are manufactured by four companies. Ninety
percent of lenses are sold in ECPs offices and retail stores.
Ten percent of contact lenses are sold online.
The Stark Act. The introduction of the "Contact Lens
Prescription Act of 2001" (Stark Act) required ECPs to change
their practices and release a complete contact lens
prescription to their patients following the fitting process.
This act resulted in price competition among contact lens
retailers as patients were able to shop for their lenses.
Alternative methods of delivery, such as online retailers and
discount retailers, grew in popularity and subsequently drove
down contact lens prices making it difficult for private ECPs
to compete and remain profitable.
UPPs. A unilateral pricing policy (UPP) is when a manufacturer
unilaterally establishes a minimum sales price on their
products, and the development of that policy or its content is
made without agreement from retailers. Under a UPP, a
manufacturer sets a minimum price below which the product
cannot be sold or advertised; a retailer may sell at a price
they wish, but if they choose to sell below the minimum price,
the manufacturer will no longer sell to the retailer. The
policy was first identified in United States v. Colgate & Co.,
250 U.S. 300 (1919).
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Resale Price Maintenance (RPM). A RPM agreement is a contract
or agreement between the manufacturer and the retailer that
establishes the price at which the retailer can sell above
(minimum RPM) or below a price ceiling (maximum RPM). For
nearly one hundred years, RPMs (also known as vertical price
fixing) were recognized as illegal under federal antitrust
laws. However, in 2007, a U.S. Supreme Court decision, Leegin
Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877
(2007), ruled that manufacturers should be allowed to have
more discretion in setting prices, and held that minimum
pricing policies could be legal under certain circumstances
and should be judged based on its actual effects on
competition. While this decision opened up the possibility
that some RPMs may be legal, California state law, under the
Cartwright Act, abrogates RPMs .
The Cartwright Act. In California, the Cartwright Act
"prohibits the combination of resources of two or more
independent interests for the purpose of restraining commerce
and preventing market competition in the variety of ways
listed in the statute." In essence, RPMs are prohibited
(Lowell v. Mother's Cake & Cookie Co. (1978) 79 Cal.App.3d
12). However, "unilateral refusal by a producer to deal with
a distributor, absent proof that it was pursuant to an illegal
conspiracy, does not violate the antitrust laws" because the
Cartwright Act only applies to a combination of two or more
persons (Kolling v. Dow Jones & Co. (1982) 137 Cal.App.3d.
709). As a result, if a seller acts unilaterally, e.g., by
establishing a UPP, that policy alone is not illegal.
Contact Lens Manufacturer's Impose UPPs. There are four major
contact lens manufacturers who account for approximately 98
percent of contact lenses sold in the nation. These
manufacturers are: 1) Johnson & Johnson Vision Care, 2) Bausch
+ Lomb, 3) Alcon and 4) Cooper Vision. According to the New
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York Times, over the last year and a half, all four
manufacturers have enacted UPPs, thereby setting minimum
retail prices for what contact lens retailers can charge for
certain products, and threatening to cut off supply if
retailers do not comply.
Proponents of these policies assert that these UPPs reduce
consumer prices for their contact lenses and increase pricing
transparency. They believe that prescribers of contact lenses
can now focus more on patient vision needs than pricing and
rebates. They cite studies that indicate the purchase of
contact lenses outside of an ECPs practice can increase the
risk of medical complications associated with contact lens
wear. For example, Fogel and Zidile (2008) published results
of a survey of contact lens wearers and found that consumers
who purchased their contact lenses either online, or at a
vendor other than their ECP, were significantly less likely to
follow FDA-recommended contact lens care and wearing
behaviors. A study conducted by Stapleton et al (2008) found
that those individuals who purchased their contact lenses over
the Internet were at approximately 4.8 times greater risk of
developing microbial keratitis compared to patients who
purchased their lenses at their ECP's office.
Opponents assert that these policies are anti-competitive and
amount to illegal price-fixing, and restrict consumer choices.
They indicate that the manufacturers are more interested in
serving the needs of ECPs versus the needs of patients. For
example, opponents cite an article in Vision Monday in which
the President of Johnson & Johnson Vision Care, North America,
stated, "[UPP] is a holistic multifaceted pricing policy to
refocus the conversation between the doctor and the patient on
eye health and product performance rather than price. This
gives the optometrist the ability to improve his or her
capture rate in the office ? Now the patient has no incentive to
shop around ."
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Congressional Hearings. In August of 2014, the U.S. Senate
Judiciary Committee's antitrust panel met to consider whether
decisions by Johnson & Johnson Vision Care, Alcon and Bausch +
Lomb, to institute UPPs for some of their products,
constitutes anticompetitive behavior by limiting competition
and possibly resulting in higher prices. Senator Klobuchar
remarked,
This is intended as an exploratory hearing. More than 35
million Americans use contact lenses. Tens of millions of
consumers pay for contact lenses each year; price matters.
Some consumers wear lenses longer than they should. Price can
impact this? As I understand it the market for contact lenses
is different than other markets. The retailer of the product
is a kind of essential gatekeeper. Without his involvement or
RX, [this] might impact the sale of the products. Three
manufacturers have announced pricing [plans] whereby there are
minimum price agreements?In some instances, [such] agreements
can be justified. But in most cases the most immediate
results is an increase in price, as the consumer can no longer
seek the product at a lower price.
The three major retailers testified and indicated that UPPs were
created with the needs of consumers in mind. The matter is
now pending investigation by the Federal Trade Commission.
Other States. According to the author, several states are
pursuing legislation to ban the use of UPPs for contact lenses
in their state including: Oregon, Idaho, Arizona, Minnesota,
Florida, New York, Illinois and Louisiana. In March of 2015,
Utah successfully passed a law banning UPPs for contact
lenses. In response, Johnson & Johnson Vision Care, Bausch +
Lomb and Alcon filed lawsuits to stop Utah's attorney general
from enforcing the new law. The litigation is still pending.
There is also a cadre of pending class action lawsuits against
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manufacturers for imposing UPPs on retailers.
Prior Related Legislation. AB 2020 (Correa) Chapter 814,
Statutes of 2002, requires optometrists and ophthalmologists
(prescribers) and registered dispensing optician to
provide a patient with a copy of his or her contact lens
prescription, with certain exceptions, specifies the
requirements of an expiration date on a prescription, and
requires that out-of-state sellers of contact lenses must
attempt to verify the prescription with the prescriber, under
specified conditions.
SB 640 (Craven) Chapter 853, Statutes of 1995, prohibited any
person located outside of California from shipping, mailing,
or delivering contact lenses to residents of California unless
registered with the Division of Licensing of the Medical Board
of California, and provided that only replacement lenses may
be shipped, mailed, or delivered to a patient.
ARGUMENTS IN SUPPORT:
The California Retailers Association supports the measure and
writes, "Under AB 789, our members will be able to offer
affordable prices on contact lenses which provides consumers
with more choice, convenience and increased access to these
products. Additionally, by allowing retailers to offer discount
prices on contact lenses, consumers may experience a reduction
in their out of network costs for contact lenses?AB 789 creates
an open market which allows consumer choice to drive profits."
Consumers Union also supports the bill and writes, "This
legislation will restore a fair opportunity for consumers to
shop for contact lenses at more affordable prices."
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ARGUMENTS IN OPPOSITION:
The California Optometric Association opposes the bill and
writes, "COA opposes AB 789 because it's bad for patients.
Studies have shown that patients have less lens-related
complications when they get contact lenses from their local
optometrist versus online merchants."
Johnson & Johnson Vision Care also opposes the bill and writes,
"In the summer of 2014, JJVCI concluded an exhaustive analysis
of its business and determined that many of its best-selling
contact lenses were priced too high to consumers relative to
other products in the market. While JJVCI does not sell its
lenses directly to consumers it embarked on a comprehensive plan
designed to lower prices for the overwhelming majority of
consumers. AB 789 is focused on one industry, which goes
against the overwhelming trend in antitrust law of keeping
antitrust general and avoiding industry-specific rules. If
passed, the precedent the policy would have for other industries
is significant."
In a joint letter, the Advanced Medical Technology Association ,
Biocom , Biotechnology Industry Organization , California
Healthcare Institute and the California Manufacturers &
Technology Association write, "UPPs generally increase service
levels, increase choice, provide pricing transparency, increase
innovation, strengthen competition between manufacturers, and
can lower consumer prices?By targeting only one industry, this
bill is counter to the overwhelming trend that has led to
general antitrust laws which seek to avoid industry-specific
rules?Also of note, this measure violates the Commerce Clause as
it attempts to regulate sales that occur wholly outside of
California."
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POLICY ISSUE FOR CONSIDERATION:
This measure seeks to ban the practice of a manufacturer
establishing a UPP for the sale of contact lenses in California.
In consideration of the pending court cases regarding the
implementation of UPPs, and the investigation by the Federal
Trade Commission, this measure may be premature. The Committee
may wish to consider waiting for the outcome of the litigation
before passing a bill that may ban a practice of which the
legality is being examined by state courts and the Federal Trade
Commission.
AMENDMENTS:
In the interest of consumers, the Committee may wish to consider
amendments that would enable a consumer to purchase contact
lenses at a competitive price. The UPPs that manufacturers
have created for some products specify that the product may
not be sold below the UPP. Retailers that would like to
provide a rebate to customers are only able to offer the
rebate if the rebate does not result in the product being sold
below the UPP set by the manufacturer-making the rebate offer
less useful and attractive to consumers. The author should
consider an amendment that specifies that a manufacturer's UPP
should not be inclusive of rebates offered by the retailer.
Additionally, it may be prudent to impose a sunset date in
consideration of the ongoing litigation and Federal Trade
Commission investigation as outlined below:
7)On page 2, strike lines 3-10 inclusive.
8)On page 2, on line 3, insert: (a) Until January 1, 2019, if a
contact lens manufacturer imposes a pricing policy, practice
or agreement that establishes a minimum advertised or selling
price for contact lens sellers, a licensed physician and
surgeon, licensed optometrist, registered dispensing optician,
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or nonresident contact lens seller may sell contact lenses
below that price to account for the rebates offered by the
retailer.
9)(b) This section shall not be construed as authorizing minimum
price agreements between contact lens manufacturers and
contact lens retailers under Chapter 2 (commencing with
Section 16700) of Division 7.
10)On page 3, strike lines 30-40, inclusive.
11)On page 4, strike lines 1-7, inclusive.
REGISTERED SUPPORT:
California Retailers Association
Consumers Union
REGISTERED OPPOSITION:
Advanced Medical Technology Association
Biocom
Biotechnology Industry Organization
California Healthcare Institute
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California Manufacturers & Technology Association
California Optometric Association
Johnson & Johnson Vision Care
Analysis Prepared by:Le Ondra Clark Harvey, Ph.D. / B. & P. /
(916) 319-3301