Peterson Drug Company of North Chili, New York, Inc

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IN THE MATTER OF PETERSON DRUG COMPANY OF NORTH CHILI, NEW YORK, INC.

FINAL ORDER, OPINION, ETC., INREGARD TO ALLEGED VIOLATION OF SEC. 5 OF THE FEDERAL TRADE COMMISSION ACT Docket 9227. Complaint, Apr. 19, 1989 -- Final Order, Apr. 22, 1992 This final order grants the respondent's motion to withdraw notice of appeal and adopts the initial decision of the administrative law judge, and the order therein, which prohibits boycotts, or threats of boycotts, of pharmacy participation plans.

Appearances For the Commission: Karen G. Bokat, John R. Hoagland, Micheal McNeely, Kevin J. Arquit and Daniel P. Ducore. For the respondent: Paul Kelly and Thomas Fink, Davidson, Fink, Cook & Gates, Rochester, N.Y.

COMPLAINT Pursuant to the provisions of the Federal Trade Commission Act, and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that the Chain Pharmacy Association of New York State, Inc.; Melville Corporation; Fay's Drug Company, Inc.; Kinney Drugs, Inc.; Peterson Drug Company of North Chili, New York, Inc.; Rite Aid Corporation; and James E. Krahulec have violated the provisions of said Act, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues its complaint stating its charges as follows:

PARAGRAPH 1. Respondent Chain Pharmacy Association of New York State, Inc. ("Chain Association") is a corporation organized, existing and doing business under and by virtue of the PETERSON DRUG COMPANY 493 492 Complaint laws of the State of New York, with its principal office located at 17 Elk Street, Albany, New York.

PAR. 2. Respondent Chain Association is an association composed of the following individual member firms: Brooks Drugs Inc., 15 Sabin St., Pawtucket, RI; Carl’s Drug Company, Success Drive, - Box 203, Rome, NY; CVS, One CVS Drive, Woonsocket, RI; Duane Reade, 4929 Thirtieth Place, Long Island City, NY; Fay's Drug Co., 7245 Henry Clay Blvd., Liverpool, NY; Genovese Drug Stores, 80 Marcus Dr., Melville, NY; Kinney Drugs, Inc., 29 Main St., Gouverneur, NY; The Kroger Co., 1014 Vine St., Cincinnati, OH: Peterson Drug Co., 68 Main St., P.O. Box 166, Oakfield, NY; Revco D.S., Inc., 1925 Enterprise Parkway, Twinsburg, OH; Rite Aid Corp., P.O. Box 3165, Harrisburg, PA; Supermarkets General Corp., 301 Blair Rd., Woodbridge, NJ; Super X Drugs Corp., 1933 Victory Blvd., Staten Island, NY; Walgreen Co., 200 Wilmont Rd., Deerfield, IL. Chain Association's members are engaged in the business of the retails 1 3 3 11 2 646 1571 74 34 97.001068 sales 1 3 3 11 3 736 1571 42 34 97.005852 of5 1 3 3 11 4 789 1572 235 45 96.486221 prescriptions 1 3 3 11 5 1039 1573 118 45 96.357773 drugs.3 1 3 4 0 0 526 1628 1339 394 -1 4 1 3 4 1 0 604 1628 1261 52 -1 5 1 3 4 1 1 604 1628 106 34 96.659103 PAR.5 1 3 4 1 2 732 1629 32 33 96.409790 3.5 1 3 4 1 3 802 1629 232 45 93.277802 Respondents 1 3 4 1 4 1052 1631 99 44 89.033569 Fay's5 1 3 4 1 5 1172 1632 99 44 96.169670 Drugs 1 3 4 1 6 1291 1632 198 46 96.231117 Company,5 1 3 4 1 7 1510 1635 71 33 93.288246 Inc.5 1 3 4 1 8 1603 1635 172 45 76.453201 (Fay's") is a corporation organized, existing and doing business under and by virtue of the laws of the State of New York, with its principal offices located at 7245 Henry Clay Boulevard, Liverpool, New York. In 1986, the retail sale of prescription drugs accounted for a significant portion of the sales of the 110 to 120 pharmacies that respondent Fay's operated in New York State.

PAR. 4. Respondent Kinney Drugs, Inc. ("Kinney") is a corporation organized, existing and doing business under and by virtue of the laws of the State of New York, with its principal offices located at 29 Main Street, Gouverneur, New York. The retail sale of prescription drugs accounts for a significant portion of the sales of the approximately 23 pharmacies that respondent Kinney operates in New York State.

PAR. 5. Respondent Melville Corporation ("Melville") is a corporation organized, existing and doing business under and by virtue of the laws of the State of New York, with its principal offices located at 3000 Westchester Ave., Harrison, New York. CVS (a/k/a CVS Pharmacies or Consumer Value Stores), with principal offices located at One CVS Drive, Woonsocket, Rhode Island, is a division of Melville. In 1986, the retail sale of prescription drugs accounted Complaint 115 F.T.C.

for a significant portion of sales of the approximately 115 pharmacies that respondent Melville operated under the CVS name in New York State.

PAR. 6. Respondent Peterson Drug Company of North Chili, New York, Inc. ("Peterson") is a corporation organized, existing and doing business under and by virtue of the laws of the State of New York, with its principal offices located at 68 North Main Street, Oakfield, New York. The retail sale of prescription drugs accounts for a significant portion of the sales of the approximately 18 pharmacies that respondent Peterson operates in New York State. PAR. 7. Respondent Rite Aid Corporation ("Rite Aid") is a corporation organized, existing and doing business under and by virtue of the laws of the State of Delaware, with its principal offices located at Railroad Ave. and Trindle Road, Shiremanstown, Pennsylvania. In 1986, the retail sale of prescription drugs accounted for a significant portion of the sales of the approximately 260 pharmacies that respondent Rite Aid operated in New York State. PAR. 8. Respondent James E. Krahulec is an individual and was employed by respondent Rite Aid as Vice-President, Government and Trade Relations in 1986 in respondent Rite Aid's principal offices at Railroad Ave. and Trindle Road, Shiremanstown, Pennsylvania. PAR. 9. Except to the extent that competition has been restrained as alleged herein, members of respondent Chain Association have been and now are in competition among themselves and with other pharmacy firms and other health care providers in the state of New York.

PAR. 10. Respondents’ general businesses or activities, and the acts and practices described below, are in or affect commerce, as commerce is defined in the Federal Trade Commission Act, 15 U.S.C. 45.

PAR. 11. Respondent Chain Association is, and has been at all times relevant to this complaint, a corporation organized for the profit of its members within the meaning of Section 4 of the Federal Trade Commission Act, as amended, 15 U.S.C. 44.

PAR. 12. Customers often receive prescriptions through health benefit programs under which a third-party payer compensates the pharmacy for the prescription according to a predetermined formula. The New York State Employees Prescription Program is a prescrip- PETERSON DRUG COMPANY 495 492 Complaint tion drug benefit plan made available by the State of New York to its employees, its retirees, certain other persons, and their dependents. There were approximately 500,000 beneficiaries covered by the Employees Prescription Program in 1986. Since July 1, 1986, The Equitable Life Assurance Society of the United States has insured the Employees Prescription Program, and PAID Prescriptions, Inc., a wholly-owned subsidiary of Medco Containment Services, Inc., has administered it.

PAR. 13. Pharmacies are solicited to participate in the Employees Prescription Program. Pharmacies that participate in the Employees Prescription Program accept as payment in full a reimbursement of the ingredient cost of the drug and a professional fee for dispensing the drug. The Employees Prescription Program provides a formula for determining the reimbursement of the ingredient cost of drugs dispensed.

PAR. 14. Absent collusion between or among pharmacy firms, each pharmacy firm would decide independently whether to participate in the Employees Prescription Program, and the State of New York would enjoy the benefits of competition among pharmacy firms. PAR. 15. In May 1986, PAID Prescriptions, Inc. formally solicited pharmacy participation in the Employees Prescription Program under terms to become effective on July 1, 1986. Among the proposed terms were changes in the reimbursement level for ingredient costs, an increase in the professional fee, and the offer of additional reimbursement for the use of generic drugs. The proposed terms were intended to reduce the price the State paid for the Employees Prescription Program, and thus minimize costs, and yet to offer reimbursement high enough to attract a sufficient number of participating pharmacies to ensure that Employees Prescription Program beneficiaries would have adequate access to medication. PAR. 16. In 1986, respondents Melville, Fay's, Kinney, Peterson, and Rite Aid ("respondent pharmacy firms") participated in many prescription drug benefit plans offered by third-party payers, including the Employees Prescription Program as it existed prior to July |. Each respondent pharmacy firm purchased prescription drugs at a cost which on average was below the Employees Prescription Program's proposed level of reimbursement for ingredient costs. Each respondent pharmacy firm would have suffered a significant Complaint 115 F.T.C.

loss of customers had its competitors participated in the Employees Prescription Program at a time when it was not participating. PAR. 17. Even before PAID formally solicited pharmacy participation in the Employees Prescription Program, New York State began to inform pharmacists’ associations of the proposed terms. In or before March 1986, respondent Chain Association became aware of the proposed terms of the Employees Prescription Program, and, in response, communicated to members that the extent to which pharmacies participated in the Employees Prescription Program could affect state officials' consideration of the reimbursement level. Respondent Chain Association held meetings at which some respondent pharmacy firms informed other pharmacy firms that they would not participate in the proposed Employees Prescription Program. Respondent pharmacy firms communicated information regarding their own intentions concerning participation in the Employees Prescription Program to other pharmacy firms. Respondent Chain Association and respondent Krahulec communicated, to Chain Association members and other pharmacy firms, information regarding the intentions of Chain Association members and other pharmacy firms concerning participation in the Employees Prescription Program. Through these exchanges of information and other acts, and through the activities of respondent Chain Association and respondent Krahulec, respondent pharmacy firms and other pharmacy firms agreed to refuse to participate in the Employees Prescription Program at the proposed reimbursement level, for the purpose of increasing the . level of reimbursement offered by the State of New York under the Employees Prescription Program.

PAR. 18. Respondents have restrained competition among pharmacy firms by conspiring among themselves and others, or by acting as a combination, to increase the price paid to participating pharmacies under the Employees Prescription Program and to deny to the State the benefits of competition. .

PAR. 19. The combination or conspiracy and the acts and practices described above have unreasonably restrained and continue unreasonably to restrain competition among pharmacists and pharmacies in New York, and have injured consumers in the following ways, among others:

PETERSON DRUG COMPANY 497 492 Statement A. Price competition among pharmacy firms with respect to third-party prescription benefit plans has been and continues to be reduced;

B. The State of New York was coerced into raising the prices paid to pharmacies under the Employees Prescription Program; and, C. The State of New York has been and continues to be forced to pay substantial additional sums for prescription drugs provided to Employees Prescription Program beneficiaries, including approximately seven million dollars for the eighteen-month period beginning on July 1, 1986.

PAR. 20. The combination or conspiracy and the acts described above constitute unfair methods of competition in or affecting commerce in violation of Section 5 of the Federal Trade Commission Act. The combination or conspiracy, or the effects thereof, are continuing, will continue, or will recur in the absence of the relief herein requested. .

Commissioners Azcuenaga and Machol voted in the negative. STATEMENT OF COMMISSIONER MACHOL CONCERNING ISSUANCE OF CHAIN PHARMACY ASSOCIATION COMPLAINT The case as presented to the Commission was a very complex one, both factually and legally. It alleged a conspiracy among the Chain Pharmacy Association, a number of drugstore chains operating in New York State, and an executive of one of the chains, to coerce the State into raising proposed prescription drug payments to pharmacies under its employee benefit program by threats of refusal to participate in that program.

Each of the pharmacies and pharmacy chains eligible to participate in the program, of course, was free to make its own decision on whether to agree to do so or to threaten to withhold participation. Liability, under the law we administer, would attach only to conspiracy or collusion in reaching such decisions. Further, the Noerr Pennington line of cases in the Supreme Court teaches us that even commercial enterprises may not be held accountable under the antitrust laws for conspiring or colluding to exercise their right to petition governments, a right protected under the First Statement 115 F.T.C.

Amendment. Though this area of the law is itself complex, it is clear that many of the activities in which the parties engaged in this case were thus protected.

As to the activities alleged in this case which would not be protected by Noerr, the information we received clearly contained no smoking5 1 3 2 3 2 850 911 88 47 84.511780 gun evidence of conspiracy. We could find the necessary reasons 1 3 2 4 2 808 977 37 29 95.921837 to5 1 3 2 4 3 859 970 157 36 96.030380 believe that a violation had occurred only on the basis of circumstantial evidence. But, in the Matsushita/Monsanto line of Supreme Court cases, we are taught that an inference of conspiracy must be supported by at least some significant evidence of activity which was logically consistent only with conspiracy. That is, if the activity of each member of an alleged conspiracy was wholly consistent with its pursuit of its unilateral self-interest, that inference must fail.

In my view, the inference in this case -- on the information available to support issuance of a complaint -- fails for that reason. I believe -- again on this information -- that it was in the independent interest of each chain pharmacy to threaten to refuse to participate in the program unless prices were raised, because, if the threat had failed to achieve a price increase, the pharmacy could then have reversed itself and participated. The costs of such a strategy were very limited; the potential gains were very large. It seems clear that the parties to the alleged conspiracy exchanged a good deal of information. It seems very doubtful that it can be established that they conspired with respect to their decisions to threaten non-participation, however, because they did not need to. Their conversations appear to me to have taken place in the context of protected lobbying activity; their actions seem to have been entirely consistent with their individual economic self-interest; and there simply was not sufficient evidence from which I could find reason to believe in the existence of an unlawful conspiracy.’ 1 Should I have occasion to review this matter following a proceeding before an Administrative Law Judge, I will of course reconsider the factual issues presented solely on the basis of the adjudicative record. PETERSON DRUG COMPANY 499 492 Initial Decision INITIAL DECISION BY MORTON NEEDELMAN, ADMINISTRATIVE LAW JUDGE MAY 17, 1991 I. STATEMENT OF THE CASE The Commission's complaint, which was issued on April 19, 1989, charges a combination or conspiracy in violation of Section 5 of the Federal Trade Commission Act. The complaint centers on an attempt by New York State to reduce the reimbursement received by pharmacies participating in the state's prescription drug plan which benefited some 500,000 public employees, retirees, and their dependents. According to the complaint, the five named pharmacy chains, an executive of one of these chains, a trade association, and unnamed other pharmacy firms had allegedly combined or conspired to refuse to participate in the state's reduced-rate reimbursement initiative. These acts are said to have coerced New York into increasing the reimbursement rate, and to deprive the state of the benefits of competition.

Of the five pharmacy chains named in the complaint -- Fay's, Kinney, Melville (a parent of the CVS chain), Rite Aid, and Peterson -- all but Peterson consented to the entry of a cease and desist order. The one individual named, James E. Krahulec (an officer of Rite Aid), also consented as did the trade association, Chain Pharmacy Association of New York State (CPA). Three other pharmacy chains (Brooks, Carls, and Genovese) consented to the entry of cease and desist orders prior to the issuance of formal complaints. The respondents named in the complaint, and the pre-complaint consenters are treated herein as alleged conspirators. Peterson vigorously maintains that it has not participated in any illegal combination or conspiracy. Its answer dated May 25, 1989, denies the substantive allegations of the complaint and raises the affirmative defense of the Noerr-Pennington doctrine. In the prehearing state, both sides were allowed extensive discovery, including a protracted deposition period. Complaint counsel's case-in-chief was heard between December 3 and Initial Decision 115 F.T.C.

December 14, 1990. The defense case was presented during the week of December 17. A motion to receive uncontested rebuttal exhibits was granted on January 16, 1991, and the record was closed for the receipt of all evidence on January 31. During the hearings, complaint counsel and counsel for Peterson were given full opportunity to be heard and to examine and cross-examine the witnesses. The parties filed their main briefs and proposed findings on February 25. Answers to proposed findings and reply briefs were filed on March 18, 1991.

After reviewing all the evidence, as well as proposed findings and briefs submitted by the parties, and based on the entire record, including my observation of the demeanor of witnesses, I make the following findings of fact:’ ! Proposed findings not adopted in the form or substance proposed are rejected as either not supported by the entire record or as involving cumulative, immaterial, or irrelevant matters.

The following abbreviations are used throughout in citing to the record: CX (Complaint counsel's Exhibits) RX (Respondent's Exhibits) Testimony is cited by the name of the witness, followed by transcript page as in Rosenberg 1885-87.

The appearances of the witnesses were as follows: Name Called By Testimony Pages Priscilla E. Feinberg Complaint Counsel 350-577 (New York State) ("C.C.") Stephen B. Kavanaugh CC. 581-735 (New York State) Thomas Hartnett C.C. 801-982 (New York State) Paul Wutz C.C. 989-1078 (Blue Cross of Western New York ) David T. Painter C.C. 1082-1498 (FTC Accountant) Leonard J. De Mino Respondent 1560-1604 (Natl. Assn of ("Resp.") Chain Drugstores) John T. Kelley Resp. 1606-1649 (formerly, Natl.

Assn of Chain Drugstores) PETERSON DRUG COMPANY 501 492 Initial Decision I. FINDINGS OF FACT A. Identity Of Respondent And The Alleged Conspirators 1. Peterson Drug Company of North Chili, New York, Inc. (hereinafter Peterson or respondent) is a New York corporation with its headquarters located at 68 North Main Street, Oakfield, New York. In 1986, Peterson was the corporate umbrella for 15 affiliated corporations that operated 18 drugstores under the Peterson tradename. Peterson owned four of the stores outright, and it controlled at least 51% of the stock in the affiliated corporations that owned the other 14. The 18 Peterson stores were located in the small Western New York communities of Newfane, Genesco, Williamsville, Akron, Snyder, Chili, Brockport, Bath, North Chili, Albion, Lockport, Wellsville, Chafee, Ontario, Derby, Alden, Perry, and Penfield.” 2. For all practical purposes, Gerald Rosenberg, President of Peterson, represented respondent during the entire course of dealings relevant to this proceeding.® 3. Peterson is the smallest chain named in the Commission's complaint. In 1986, Rite Aid (New York State's largest chain) had about 260 drugstores, CVS approximately 100, Fay's between 110 to 120, and Kinney 23.* Of the other alleged conspirators, Genovese Walter J. Floss, Jr. Resp. 1653-1698 (former New York State Senator) Gerald R. Rosenberg Resp. 1103-1920 (President, Respondent Peterson) 2 Complaint and Peterson's Answer J 6; Rosenberg 1709-10, 1723, 1755; CX's 16 I, J, 682A, B, 2070Z-20, Z-21; RX 275. Aspects of the relationship between the Oakfield headquarters and the individual drugstores particularly relevant to this proceeding are treated in Finding 70.

3 Rosenberg 1715-16, 1718-21, 1745-53, 1776-86; CX's 2Z-240-Z-241, 16K, Z-112, 725J-L. Rosenberg is President of each of the affiliated Peterson corporations except for the corporate entity controlling the Newfane store. CX 726B. 4 Complaint {'s 3-7 and Answers; CX's 9Q, 12J,K, 23M.N, 154A-P, 181A, 2062Z-70.

Initial Decision 115 F.T.C.

owned 75 stores, Brooks (a subsidiary of Adams Drugs) about 60 to 70, and Carls 42 or 43.5 4. James E. Krahulec is the only individual named in the Commission's complaint. He was Rite Aid's Vice President for Government and Trade Relations (i.e., the company's principal lobbyist)® and played a key role in the conduct challenged by the complaint.’ 5. Chain Pharmacy Association ("CPA") is a New York State not-for-profit corporation organized in 1984 to advance the common business interests of its pharmacy members by lobbying state legislators and officials. In 1986, the founding members of CPA were 12 pharmaceutical chains doing business in New York State (Peterson, Brooks, Carls, CVS, Rite Aid, Fay's, Genovese, Kinney, SupeRx Drugs, Duane Reade, Revco, and Walgreen) and the pharmacy operations of Supermarkets General and Kroger, two supermarket chains.® 6. The members of CPA competed against each other in the sale of pharmaceutical prescriptions, nonprescription drugs, and the myriad nondrug items sold by drugstores.’ Peterson's chief competitors in 1986 were Fay's, Rite Aid, and CVS.'° 7. CPA had no staff of its own. Essentially, the work of the association was carried out by its Executive Director, Peter Zimmerman, a retained trade association expert.'' Zimmerman and Krahulec 5 CX's 822A, 1212, 1989D, 2249L, 2250"0", 2252"0", P, 2254L-N, 2269G. 6 Complaint J 8 and Krahulec Answer; CX's 20H, J, K, U-W, 2194"I". ” See Findings 55-59, 74-81.

8 Complaint J 2 and CPA Answer; Kelley 1612, Rosenberg 1715-16; CX's 2'T", J, N, O, 20U, V, 41E-G, 2199H, 2248Z-26, 2249Z-42, 2252N. Revco owns Carls, . but decisions respecting participation in PAID I and other matters relevant to this proceeding were left to the management of the subsid 2251Z-71. Kroger owned SupeRx until December 1986. CX 2266K. Supermarkets General operated pharmacy departments in its Pathmark supermarkets as well as its free-standing Heartland and Pharmacity”5 1 6 1 7 3 943 2501 171 36 93.245255 drugstores.5 1 6 1 7 4 1127 2503 75 29 54.337711 CX's5 1 6 1 7 5 1219 2504 108 34 92.508209 1305B,5 1 6 1 7 6 1341 2506 181 30 41.925014 2191Z-264.2 1 7 0 0 0 652 2558 1334 101 -1 3 1 7 1 0 0 652 2558 1334 101 -1 4 1 7 1 1 0 727 2558 1259 61 -1 5 1 7 1 1 1 727 2558 13 22 26.715858 ?5 1 7 1 1 2 752 2572 164 36 93.301849 Complaints 1 7 1 1 3 925 2574 40 34 74.447571 {'s5 1 7 1 1 4 977 2575 17 27 92.076363 25 1 7 1 1 5 1006 2575 53 28 92.076363 ands 1 7 1 1 6 1072 2575 18 28 95.504402 95 1 7 1 1 7 1102 2577 54 27 95.504402 ands 1 7 1 1 8 1168 2578 146 32 93.265259 Answers;5 1 7 1 1 9 1328 2578 75 29 90.100388 CX's5 1 7 1 1 10 1416 2579 152 35 71.467567 6Z-2-Z-4,5 1 7 1 1 11 1582 2582 55 32 92.822304 7V,5 1 7 1 1 12 1654 2583 119 33 90.959358 18Z-67,5 1 7 1 1 13 1791 2584 70 33 92.365814 22U,5 1 7 1 1 14 1880 2577 106 46 92.365814 2060L,4 1 7 1 2 0 652 2620 904 39 -1 5 1 7 1 2 1 652 2620 253 34 73.955498 2062Z-21-Z-25,5 1 7 1 2 2 919 2622 162 34 91.246300 2189Z-64,5 1 7 1 2 3 1093 2624 85 33 85.955841 Z-65,5 1 7 1 2 4 1191 2626 143 33 91.518166 2206Z-9,5 1 7 1 2 5 1346 2627 84 32 91.518166 Z-10,5 1 7 1 2 6 1444 2629 112 29 91.831306 2269G.2 1 8 0 0 0 727 2680 464 126 -1 3 1 8 1 0 0 727 2680 464 126 -1 4 1 8 1 1 0 727 2680 268 45 -1 5 1 8 1 1 1 727 2680 25 21 72.489044 05 1 8 1 1 2 767 2693 53 29 17.576004 CX5 1 8 1 1 3 833 2695 162 30 78.145271 2070Z-55,4 1 8 1 2 0 727 2756 464 50 -1 5 1 8 1 2 1 727 2756 20 21 0.000000 'l5 1 8 1 2 2 766 2770 75 29 31.830688 X's5 1 8 1 2 3 854 2770 55 34 96.295792 2H,5 1 8 1 2 4 924 2771 50 35 89.235352 I", J, M, 2199G, PETERSON DRUG COMPANY 503 492 Initial Decision of Rite Aid carried the workload for the pharmacists during the events described herein.’ 8. The object of the alleged conspiracy, PAID I, and its eventual successor PAID II, were third party prescription plans whose implementation involved a stream of interstate commerce flowing from consumers and pharmacists in several states,’* to an administrator located in New Jersey,’* and then back to the pharmacists for reimbursement for the cost of pharmaceuticals manufactured throughout the United States.'° While most of Peterson's pharmaceuticals were purchased from a New York distributor, its nonprescription business involved a substantial volume of purchases from out-of-state suppliers.’ Moreover, prescription and nonprescription business are closely linked, and this connection was deeply implicated in the alleged scheme since the pharmacists knew that if PAID I went forward without their participation, they stood to lose both segments of a drugstore's trade.'’ Respondent has not pressed the issues of interstate commerce or the Commission's jurisdiction.* B. NYSEPP And The Development Of PAID I 9. New York State in its capacity of employer has ultimate responsibility for a prescription drug program (New York State Employee Prescription Program or NYSEPP) that is part of the 12 Soe Findings 54-59, 74-81.

8 Although NYSEPP members are concentrated in New York, the plan also covers state employees and retirees who live outside of New York as well as the out-of-state pharmacies enrolled in the plan in order to serve these out-of-state members. Feinberg 360, Kavanaugh 614.

4 Feinberg 371-72, Kavanaugh 614.

Feinberg 354, 473-74; CX 2070Z-24. The flow of commerce (or, if you will, the interruption in the flow of commerce) continued as PAID was compensated by the state for administering the plan. Feinberg 459, Kavanaugh 614. 16 CX 725M.

17 Soe Findings 42-52.

18 Respondent Peterson's Reply To Complaint Counsel's Proposed Findings Of Fact at 327-330 (March 18, 1991).

Initial Decision 115 F.T.C.

package of employee and retiree health benefits the state has negotiated with the principal unions.' 10. In 1986, NYSEPP insured approximately 500,000 public employees, retirees, and their dependents.”° 11. The Governor's Office of Employee Relations (OER) was the state agency charged with responsibility for bargaining with the unions over the public employees' health benefits package including NYSEPP, the prescription drug component. OER shared with the state's Department of Civil Service and Budget Department responsibility for designing a NYSEPP program that met the terms of the negotiated health package.”’ The plan was actually administered by Civil Service.”

12. NYSEPP in its various configurations (PAID I, PAID II, and their predecessor) was a third party program. Instead of paying the prevailing retail price for a prescription, a state employee or retiree, who was enrolled in the plan, presented a card and was charged only a small co-payment fee. The participating pharmacy submitted the claim to a third party payer (the plan administrator in the case of PAID J) for processing and reimbursement of the cost of pharmaceutical ingredients. In addition, the administrator paid the pharmacies a dispensing or professional fee. The plan administrator, in turn, was reimbursed by an insurer who ultimately looked to the state for payment in the form of the premium expense New York incurred for its employees.’ The plan was said to have cost the state roughly $104 million in 1986.”

13. Almost from its inception in 1980, the cost of NYSEPP had grown by leaps and bounds, far exceeding the rise in the medical 19 Feinberg 358-60.

20 Feinberg 359-60. In addition to state employees, NYSEPP covers participating local (town, county, and school district) employees. Feinberg 359. 7! Feinberg 355-58, Kavanaugh 582-84, 22 Kavanaugh 582, 584.

23 Feinberg 358-59, Kavanaugh 584-85, 589, Wutz 1006, Painter 1405. For its part in this process, the state paid the administrator 50 cents per claim. Feinberg 459, Kavanaugh 614.

4 OX 1763A.

PETERSON DRUG COMPANY 505 492 Initial Decision consumer price index. Between 1980 and 1983 alone, the cost to the state for NYSEPP premiums rose from $25 million to $90 million with no end in sight.2> These runaway costs were mainly attributable to an aging population of insureds (with a concomitant increase in usage) and rising pharmaceutical prices.”

14. The tripartite division of functions in the administration of NYSEPP between New York State, an insurer, and an administrator, in no way diminished the overriding role of the state as the prime mover for a cost-containment initiative. The premiums that New York as a purchaser of health insurance benefits paid to the insurer on behalf of its public employees was a function of the ingredient reimbursement costs anticipated and actually experienced by the insurer, With these mounting costs in mind, OER began considering potential cost-containment strategies as early as 1984.” 15. The cost-containment initiative eventually adopted by the state centered around the concept of a reduction from Average Wholesale Price ("AWP"). AWP is the wholesale list price for each drug item. It is either suggested by the manufacturer or developed by the publishers of commonly-used industry sources such as the Red Book, Blue Book, or Medispan.” Although the AWP purports to show the average price which pharmacists are paying, it is universally acknowledged in the industry that drugstores purchase most of their pharmaceuticals at steep discounts off AWP and that these discounts reflect a firm's volume of purchases.” Peterson, for example, during 1985 and the first half of 1986, believed that it 25 Feinberg 363-64, Kavanaugh 589, 604-05, 668, 682-83, Hartnett 973; CX's 1763A, B, 1785F; RX 254"1", 26 Feinberg 495-98; CX's 1763A, B, 1785, 2262Z-212. Another frequently cited cause of rising prescription prices is the reluctance of doctors to prescribe generic substitutes for branded drugs. CX 1763B.

27 Feinberg 363-64, 457-58, 485, 571-72, Kavanaugh 589, 605, 667-68, Wutz 1006, 1015-16; CX's 732A, 1084A, 1785F, 1868Z-6-Z-13, 2257Z-51, 2262Z-108; RX's 86A, 131A, 134D, 142B, 254"I".

28 painter 1092-93; CX's 2062Z-115, Z-116, 2069Z-44. 29 Feinberg 372-375, 379, Kavanaugh 604-05, 696, Hartnett 815, Wutz 1022; CX's 6U,V, 1685H, 1759C, 1760A, 2257X,Y, 2268Z-14, Z-15; RX's 97A, 2038, 254Z-31, Z-35.

Initial Decision 115 F.T.C.

purchased from its main wholesale supplier at AWP minus 14%.2° Studies had shown that industry-wide the average discount off AWP was 16%, and still larger discounts were available to the big chains.” Thus Fay's purchased pharmaceuticals at approximately AWP minus 21%,” Brooks at between AWP minus 16% to AWP minus 18%23 CVS at about AWP minus 21%, Genovese at between AWP minus 16% to AWP minus 22%,” Kinney at AWP minus 20%,° and Rite Aid at AWP minus 21%.*” Carls must have acquired pharmaceuticals at comparable discounts since its warehouse was billing its own stores at AWP minus 15%.*8 16. PAID I, the cost-containment plan based on a reduction from AWP that was eventually selected by OER and the other state agencies charged with responsibility for NYSEPP, was adopted following an administrative process in which the depth of the state's commitment to cost-containment and its lack of alternatives, prevailed over pharmacist opposition to being singled out as the main target for this economy drive. (Findings 17 to 33.) 17. The experience of NYSEPP's 1980-86 administrator (and joint-underwriter), Blue Cross of Western New York ("BCWNY"), was reviewed. BCWNY, which was well aware of the availability of sharp discounts off AWP, had tried to reduce costs by setting the reimbursement rate at actual acquisition cost plus a $3.00 dispensing 30 Rosenberg 1766; CX 72SD. The rate of discount increased to AWP minus 15% after July 1, 1986. Rosenberg 1887-88; CX's 679A, 725D, 2070S. 3! CX's 1084D, 1533A-Z-19, 2257X, Y.

3? Based on Fay's pharmaceutical purchases for NYSEPP prescriptions filled between February 1, 1986, and January 31, 1987. Painter 1433-34; CX's 2203Z-14, Z-15, 2317A-D, 2324.

33 CX 2252V.

* CX's 2189Z-219, 2191Z-22, Z-23, Z-94, Z-95, Z-105, Z-106, Z-110, 2268Z-21. 35 CX 's 2247Z-7, Z-23.

36 Based on Kinney's pharmaceutical purchases for NYSEPP prescriptions filled between January 1, 1986, and December 31, 1986. CX's 2318, 2319. See Painter 1433-34 for the calculation made to arrive at the discount off AWP. *” CX's 2200Z-60-Z-63, Z-113, Z-114, Z-238, Z-239. 38 CX 2251W.

PETERSON DRUG COMPANY 507 492 Initial Decision fee. It was virtually impossible, however, for BCWNY to determine actual acquisition costs. The source of this difficulty was made readily apparent on the record which shows that for the purpose of filing claims with BCWNY, Peterson was billed by its wholesale supplier at full AWP although its actual costs were much lower.” Resigned to the futility of even attempting to monitor such creative bookkeeping, BCWNY eventually departed from the actual acquisition cost formula, and by 1983 settled on a sliding scale reimbursement rate based on discounts off AWP (a tamper-proof benchmark) of 1% to 9% for independents and 12% for chains.” At these discounted reimbursement rates, BCWNY had no difficulty in obtaining a full array of providers as virtually all New York pharmacies participated in NYSEPP.*! 18. OER also surveyed what other employers, both public and private, were doing about cost-containment. Experts were consulted.” An examination of a 1984 U.S. Department of Health and * Feinberg 360-61, Kavanaugh 584-85, 676-77, Wutz 994-95, 998-1000, 1003-04, 1014-15, 1022, 1031-32; CX's 359A, 1084D 1372B-G, 2070Z-41, 2261"0", 2261Z-19, Z-20, Z-53, Z-54, 2268Z-20, Z-21. This practice nicely illustrates the fictive quality of full AWP. Peterson's wholesale supplier offered respondent two options in billing: a choice between an invoice showing both the full AWP and the discount, or one with full AWP only, followed later by a separate credit for the discount. The full AWP- separate credit option -- Peterson's choice -- was specifically designed for use when a third party administrator audited the drugstores in search of actual acquisition costs. Rosenberg 1732-33, 1889-91, 1916-17; CX's 1372C, 2070S-Y. Peterson's practice was by no means unique. BCWNY knew that pharmacists and wholesalers “have been joining forces to beat our system" (CX 2267Z-212), but there was little it could do about it. CX's 2267Z-213, Z-214. See also CX's 1372B-G.

“© Wutz 994-95, 999-1000, 1005-06; CX's 878E, 1372A-G, 1836Z-22, 2267Z-92-Z-108, 2268V; RX 254Z-36. This formula applied to both BCWNY's NYSEPP and non-NYSEPP (i.e., community) plans. The two plans had a small dispensing fee differential -- 20 cents higher for NYSEPP -- until January 1986. Wutz 993-95, 1005; CX's 878B, E, 942B, 2267Z-132, Z-133. “' Feinberg 391, Wutz 1037-38; CX's 2267Z-88, Z-89, Z-114, Z-115, Z-122, Z-123, 22682Z-l.

“* Feinberg 376-78, Kavanaugh 696, Wutz 1014-15; CX 1763B; RX 258"I". Initial Decision 115 F.T.C.

Human Services report confirmed the prevalence of large discounts off AWP.* 19. Conceivably New York might have settled on a plan that could have had a more serious impact on retail pharmacists than a reduction in the ingredient reimbursement rate. The state, for example, might have provided prescription coverage for its employees through a single chain, a designated group of preferred providers, or through mandatory use of mail order.“ There is no evidence, however, that these alternatives were seriously pursued in 1986.

20. The review described in Findings 17 to 19 led to the conclusions that New York was not doing enough to keep prescription costs in check and that its options for doing more were limited. Determined, nevertheless, to set in motion a cost-containment initiative, OER sent out a Requests 1 3 3 5 7 1399 1432 68 35 96.798592 For5 1 3 3 5 8 1486 1431 189 47 92.910637 Proposal ("RFP," in the jargon of the bureaucracy, is a notice that a program is open for bids) on January 22, 1985. The RFP directed that bids should provide for ingredient cost reimbursement at the lesser of 90% of actual acquisition cost or usual and customary charges. The dispensing fee was to be $2.60 per prescription.”

21. In response to this first cost-cutting initiative, PAID Prescription, Inc. ("PAID") a New Jersey-based third party plan administrator (but not insurer) submitted a bid which met the OER target of AWP minus 10%. Based on its limited but successful experience with reduced-rate plans, PAID assumed that a plan of the size of NYSEPP would have no difficulty in attracting an adequate array of participants at the AWP minus 10% rate.“* The first RFP, however, was withdrawn in late 1985. As respondent would have it, the RFP was withdrawn because OER, anticipating widespread pharmacy rejection, beat a hasty retreat from the less than AWP formula, thus proving that it was a non-starter. While the record shows that pharmacy opposition was already apparent when the first 8 CX's 1533B, C, 1759E.

“4 Kavanaugh 684-88, Hartnett 926-27; CX's 1084B, 1989A. 45 Kavanaugh 605, 671; CX's 1868A-Z-27, 2260"I"; RX's 258"0", P. 4 RX's 257M-"0".

PETERSON DRUG COMPANY 509 492 Initial Decision RFP was withdrawn,” there is no evidence that the state had decided at that time to abandon the less than AWP formula. As far as this record will allow, the first RFP was withdrawn because it was proposed on the assumption that the state legislature would pass an enabling law allowing New York to function as its own insurer of NYSEPP. This legislation never passed.“8 22. The second RFP was announced on December 5, 1985. Unlike the first, no specific reduction from AWP was targeted. Instead, OER said that it was aiming for the control of costs through the use of generic drugs and mail order, but the AWP issue was left open as the RFP merely requested that bidders explore other cost containment possibilities.”

23. There were six responses to the second RFP. In this round, the PAID bid was a joint effort of Equitable Life Assurance as the insurer and PAID (Equitable's subcontractor) as the administrator. The PAID-Equitable bid was grounded on AWP minus 5% for both chains and independents. But after the bid was accepted, the reimbursement formula was changed by the state (a combined effort of OER, Civil Service, and Budget) to AWP minus 12% for chains and AWP minus 8% to 2% for independents depending on volume. A professional or dispensing fee of $2.75 to $3.00 (depending on the availability of 24-hour service, deliveries, and patient profiles) was to be added to each prescription. The bid also included a generic drug component and a direct mail provision. This essentially was PAID I.*° 47 CX's 2262"I", J; RX's 107A-J.

“8 Kavanaugh 591-92; CX 2261.

* Feinberg 374-75; CX's 1785A-Z-64, 2261Z-27, 2262]. ”° Feinberg 376, 378, 389, Kavanaugh 594; CX's 1084A-D, 1562A, 1759A-D, 2257Z-20, Z-21, 22595, 2260R, S, 2261Z-47, 2262Z- 07, Z-108; RX's 257Z-6-Z-8. The RFP specifically reserved New York's prerogative of requiring the selected contractor to modify or make additions to its proposal in order to meet the state's specifications. CX 1785G. As it happens, the reimbursement rate adopted by the state was in line with the bid of Empire Blue Cross/Blue Shield, which had recommended AWP minus 12% for chains and a sliding scale for independents. Feinberg 384, 518-19, Kavanaugh 595-96; CX's 1566Z-12, 1836T, 2222C, 2261Z-34, Z-36.

Initial Decision 115 F.T.C.

24. The entire state bureaucracy concerned with NYSEPP recommended the selection of Equitable Life Assurance as the insurer, PAID as the administrator, and PAID I as the reimbursement formula. Since the state retained discretion as to the reimbursement formula, the final selection was mainly based on an assessment of the educational and administrative capabilities (i.e., the ability to inform members about the plan, to process plastic, and to fulfill the mail order component) of the highest-ranked bidders.*! 25. PAID I definitely was not endorsed by the representatives of the pharmacy community. They not only were opposed to its substantive provisions but they also perceived a lack of good faith on the part of the state in the very process by which the PAID I formula was developed and eventually adopted. Although OER had met with pharmacists for the purpose of hearing their grievances against the less than full AWP formula and to consider alternative cost-cutting strategies, the pharmacists felt that their complaints and suggestions had been given short shrift.°? Nevertheless, there is no suggestion in the record that the state was not fully apprised of the pharmacists’ views.” They advanced arguments in opposition to PAID I, which had been made at the first intimation that the state might adopt a less than full AWP formula, and which were to be repeated until the demise of this cost-cutting initiative in late June 1986. (Findings 26 to 32.) 26. According to the pharmacists, just as their costs of dispensing drugs were rising, their margins would be unfairly squeezed by the proposed discount off AWP.** While the pharmacists had little in the way of concrete support for their arguments -- Peterson, for example, 1 Feinberg 363-71, Kavanaugh 594, 596-600, 607, 696; CX's 1084A, 1562A-D, 1563A-D, 1914A-H; RX's 64A-D. The selection of PAID may also have been influenced by the large number of New York pharmacies it already had on line for its non-NYSEPP third party plans. Feinberg 369; RX 64D. 5 Hartnett 853-72, Rosenberg 1746-47, 1773-76; CX's 2T, Z-48-Z-53, Z-82, Z-83, 2-265, Z-266, 5Z-11, Z-18, 53B, C, 732A, B, 733A, B, 1876B, C, 2069Z-138, 2261Z-55, Z-66; RX's 6A, B, 106A-C, 108A, B, 183A-C, 198A-K, 203A, B, 315A-C.

°° See Hartnett 978.

*4 Rosenberg 1752, 1757-60, 1768; CX 1685G. PETERSON DRUG COMPANY 511 492 Initial Decision in 1986 did not know its actual costs for filling a prescription® -there is no dispute that the confrontation between the state and the pharmacists came down to the issue of how much of the pharmacists’ profits, as reflected in their ability to purchase at discounts off AWP, were to be captured by the state.*° From New York's perspective the °° Rosenberg 1878-79; CX's 16Z-23, 2070H.

56 Feinberg 571-72, Kavanaugh 613, Hartnett 858-59, Wutz 1022; CX 732A; RX 107G. No claim was made by any proponent of the less than full AWP formula that dispensing fees were intended to cover all the costs incurred by a pharmacy in filling a prescription. See Feinberg 478-81, 574-76, Kavanaugh 693-95, Wutz 998-99, 1020-23. Although the PAID I dispensing fees (a $2.75 basic fee and $3.00 for full service pharmacies) were higher than the schedule used by BCWNY in administering NYSEPP prior to PAID I (Feinberg 389, 574, Wutz 1021; CX's 1685G, H, 1759C, 2261Z-47), it is fair to conclude on this record that the actual cost of dispensing drugs was higher than the amount generally allowed in any third party plan. See CX's 16Z-22, Z-23, 2200Z-256-Z-281; RX's 107F, G, 325A-Z-148. There is little, however, in the record to suggest that the level of the dispensing fee was the motivating cause for the pharmacists’ anti-PAID I animus, and an argument along these lines would be difficult to sustain given the proof that in the face of competition, pharmacists were willing to waive or discount a comparable amount -- insurance co-payment fees -- in order to retain valuable prescription business. Kavanaugh 609; CX's 7Z-22, Z-23, 11Z-34, Z-35, Z-153-Z-158, 2061Z-82, Z-83, 2062Z-19, Z-20, 2064Z-12, 2069Z-143, 2070Z-14, 2189Z-30, Z-31, Z-212-Z-214, 2196Z-75, Z-76, 22065, T, 2207Z-34, Z-35, 2261Z-21, Z-22; RX 107"I". As indicated in Note 192, infra, several of the alleged conspirators believed that there were profits to be made in PAID I notwithstanding low dispensing fees; moreover, even modest profits from this prescription business would have generated very profitable front-end trade. See Findings 42-51. Neither the litigants in this case nor anyone involved in the state-pharmacists dispute has made a useful calculation as to how various factors -- discounts off AWP, waiver of co-payment fees, package sizes, dispensing fees, generic drug incentives, volume of prescription business represented by the plan, additional front-end business attributable to a third party plan -- interact on bottom-line drugstore profitability. See, e.g. Feinberg 504-05, Kavanaugh 693, Rosenberg 1809-13; CX's 6"O", P, Z-7, Z-12, Z-24, 13Z-37, 16Z-23, 2070Z-54, 2189Z-202, Z-203; see also Painter 1478-81. As far as one can tell from this record, even with respect to only one part of this equation -- the cost of pharmaceuticals -- discounts off AWP may just be the starting point of any inquiry since prices at the wholesale level are also influenced by cash payment discounts, large size package reductions, free goods, seasonal specials, rebates, price increase adjustments, and buy-ins. CX's 2260Z-106-Z-111. In short, all that the record shows is that the state wanted the pharmacists to contribute, in the form of a discounted rate for ingredient reimbursement, some part of their profits -- as reflected in the ability of drugstores to purchase at the less than AWP rate -- to Initial Decision 115 F.T.C.

use of a reimbursement formula based on a discount off AWP, not only interjected an incentive for pharmacies to compete against each other in seeking even greater discounts from manufacturers, but it also gave the state a direct stake in the outcome of that competition.*” 27. The pharmacists expressed deep resentment over being targeted for the state's cost-containment initiative while powerful pharmaceutical manufacturers were left unscathed.°8 Moreover, from the pharmacists’ viewpoint the difference between AWP and their actual costs was a hedge against inflation since it represented a relatively fixed percentage of the increasingly high prices charged by these same manufacturers.”

28. The state was challenged by the pharmacists about its proposed distinction between chains and independents as the basis for the PAID I formula.”

29. The state was also questioned about the very definition of a chain for purposes of the sliding scale reimbursement formula.”! Despite some uncertainty in this area, the Peterson stores were told as early as May 1986 that they would be treated as independents and thus entitled to compensation at the rate of AWP minus 2%, 5%, and 8% (the sliding scale for independent stores depending on volume) rather than the flat rate of AWP minus 12% for chains. And while the state may have contributed to pharmacist confusion by vacillating between several definitions of a chain depending upon such consireducing the cost of NYSEPP, and the pharmacists were not especially receptive to this notion. Feinberg 486, 571-72, Kavanaugh 603-07, 613, 622; CX's 732A, B: RX's 107G, 254Q, R, 257Z-7-Z-13, Z-25.

°” Kavanaugh 625-26, 632-33, 683-84, 697, 700. 8 Feinberg 497-98, Rosenberg 1757-58; CX's 20Z-157, 733A, 2199Z-220, 2-235. In one sense, however, PAID I did target brand name drug manufacturers since it included a generic incentive. See Note 72, infra, and 23Z-59, Z-60. ° RX 107G.

®° Feinberg 400, 515-16, Rosenberg 1759; CX's 10L, 812, 2303A. Note, however, that Fay's did not believe this distinction was unfair. CX's 9Z-26, Z-27. Rosenberg 1753; CX's 2Z-26-Z-28, 2069Z-135, 2070Z-56, Z-57, 2199Z-220, Z-235.

° X's 15X, Y, 711; RX's 260Z-31, Z-32, Z-103, Z-104, PETERSON DRUG COMPANY 513 492 Initial Decision derations as number of stores, common ownership, and the use of central billing,” there is no evidence that either the state or PAID wavered in its classification of Peterson during the entire relevant time period. To the contrary, by June its status as a series of independents had been specifically confirmed.“ 30. Going beyond the reimbursement level, PAID I was opposed by the pharmacists because it contained a direct mail component.” As the retail pharmacists would have it, mail-order pharmacy posed a medical danger to patients who, in the absence of a pharmacist to monitor misuse, might possibly ingest conflicting drugs. To the state officials responsible for meeting the cost of third party plans, the retail pharmacists’ argument was a red herring since the plan had installed multiple checks to insure safety.” Besides, mail order sales were essentially confined to maintenance5 1 3 2 9 6 1382 1379 269 47 77.728661 prescriptions”5 1 3 2 9 7 1667 1399 29 4 84.988678 --5 1 3 2 9 8 1710 1377 57 36 96.740036 thes 1 3 2 9 9 1780 1377 106 45 96.658653 drugs2 1 4 0 0 0 552 1483 593 10 -1 3 1 4 1 0 0 552 1483 593 10 -1 4 1 4 1 1 0 552 1483 593 10 -1 5 1 4 1 1 1 552 1483 593 10 95.000000 2 1 5 0 0 0 553 1513 1333 97 -1 3 1 5 1 0 0 553 1513 1333 97 -1 4 1 5 1 1 0 627 1513 1259 50 -1 5 1 5 1 1 1 627 1513 27 22 71.725510 835 1 5 1 1 2 666 1526 143 37 96.803535 Feinberg5 1 5 1 1 3 820 1524 68 33 95.835960 410,5 1 5 1 1 4 900 1523 121 34 95.835960 516-18,5 1 5 1 1 5 1033 1522 121 33 96.012161 531-32,5 1 5 1 1 6 1166 1521 171 36 96.012161 Rosenberg5 1 5 1 1 7 1352 1518 138 34 93.234337 1821-24;5 1 5 1 1 8 1502 1518 76 29 79.397736 CX's5 1 5 1 1 9 1590 1515 198 34 70.119736 2Z-26-Z-28,5 1 5 1 1 10 1799 1515 87 33 91.635605 Z-89,4 1 5 1 2 0 553 1568 1007 42 -1 5 1 5 1 2 1 553 1576 88 34 91.710670 Z-90,5 1 5 1 2 2 658 1575 145 34 92.685486 16Z-117,5 1 5 1 2 3 817 1574 99 34 96.477272 728A,5 1 5 1 2 4 929 1573 98 33 93.272774 733A,5 1 5 1 2 5 1045 1572 115 33 92.939247 1989A;5 1 5 1 2 6 1174 1570 84 30 91.407486 RX’s5 1 5 1 2 7 1271 1569 168 33 91.185631 260Z-103,5 1 5 1 2 8 1453 1568 107 30 89.348999 Z-104.2 1 6 0 0 0 554 1637 1338 526 -1 3 1 6 1 0 0 554 1637 1338 526 -1 4 1 6 1 1 0 628 1637 1260 49 -1 5 1 6 1 1 1 628 1637 27 21 0.000000 45 1 6 1 1 2 667 1649 171 37 96.947792 Rosenberg5 1 6 1 1 3 853 1647 84 33 96.875938 1824,5 1 6 1 1 4 952 1646 83 33 96.680542 1874,5 1 6 1 1 5 1051 1644 85 34 93.305573 1876;5 1 6 1 1 6 1148 1644 76 29 75.736694 CX's5 1 6 1 1 7 1235 1643 97 33 93.193581 728A,5 1 6 1 1 8 1345 1643 34 32 93.193581 B,5 1 6 1 1 9 1391 1641 164 30 82.163239 2070Z-57.5 1 6 1 1 10 1568 1640 149 37 96.736290 Although5 1 6 1 1 11 1729 1640 46 28 96.963066 thes 1 6 1 1 12 1787 1638 101 29 96.830803 record4 1 6 1 2 0 555 1688 1332 42 -1 5 1 6 1 2 1 555 1701 98 27 96.798378 shows5 1 6 1 2 2 667 1700 58 28 96.840958 that5 1 6 1 2 3 738 1699 47 28 96.993156 thes 1 6 1 2 4 797 1698 138 28 96.798798 Peterson5 1 6 1 2 5 948 1702 90 23 96.798798 stores5 1 6 1 2 6 1051 1695 56 29 96.884506 had5 1 6 1 2 7 1120 1695 73 28 96.992661 been5 1 6 1 2 8 1207 1692 171 38 96.241417 designated5 1 6 1 2 9 1390 1700 31 20 96.888451 as5 1 6 1 2 10 1434 1691 211 37 96.996323 independents5 1 6 1 2 11 1658 1690 30 28 96.939621 in5 1 6 1 2 12 1700 1689 84 36 96.528732 May,5 1 6 1 2 13 1802 1688 85 32 96.938622 1986,4 1 6 1 3 0 555 1735 1332 43 -1 5 1 6 1 3 1 555 1747 57 29 96.550224 ands 1 6 1 3 2 627 1747 59 29 96.567406 that5 1 6 1 3 3 701 1746 57 30 96.949066 this5 1 6 1 3 4 773 1743 225 32 96.933754 determinations 1 6 1 3 5 1013 1743 57 29 97.015068 had5 1 6 1 3 6 1084 1743 75 28 97.001663 been5 1 6 1 3 7 1174 1740 167 30 96.990005 confirmed5 1 6 1 3 8 1356 1740 78 38 96.929558 prior5 1 6 1 3 9 1447 1743 30 24 96.887505 to5 1 6 1 3 10 1490 1738 74 29 96.579056 June5 1 6 1 3 11 1582 1737 36 30 96.861893 105 1 6 1 3 12 1633 1737 157 36 96.982941 (Feinberg5 1 6 1 3 13 1804 1735 83 35 96.727631 410),4 1 6 1 4 0 555 1782 1337 50 -1 5 1 6 1 4 1 555 1795 172 37 96.685570 Rosenberg5 1 6 1 4 2 739 1793 126 31 96.941826 claimed5 1 6 1 4 3 878 1797 27 25 96.910408 at5 1 6 1 4 4 917 1791 62 30 96.308296 trials 1 6 1 4 5 992 1792 57 29 96.990669 that5 1 6 1 4 6 1062 1791 20 29 94.260735 it5 1 6 1 4 7 1095 1798 59 21 94.260735 was5 1 6 1 4 8 1168 1795 49 23 96.342079 not5 1 6 1 4 9 1229 1788 71 30 96.342079 until5 1 6 1 4 10 1312 1788 74 30 96.466125 June5 1 6 1 4 11 1402 1787 33 29 96.466125 155 1 6 1 4 12 1448 1796 33 19 96.922905 or5 1 6 1 4 13 1496 1786 34 29 96.922905 165 1 6 1 4 14 1543 1786 58 29 96.854797 that5 1 6 1 4 15 1613 1786 36 29 96.463951 he5 1 6 1 4 16 1662 1794 61 20 96.463951 was5 1 6 1 4 17 1735 1784 110 30 96.746696 certain5 1 6 1 4 18 1857 1782 35 30 96.238960 of4 1 6 1 5 0 554 1831 1334 47 -1 5 1 6 1 5 1 554 1843 45 30 96.926697 his5 1 6 1 5 2 611 1848 90 25 96.735657 status5 1 6 1 5 3 712 1851 31 21 88.527420 as5 1 6 1 5 4 755 1851 16 21 88.527420 a5 1 6 1 5 5 782 1842 90 30 95.073494 series5 1 6 1 5 6 883 1840 35 30 96.996902 of5 1 6 1 5 7 926 1839 219 39 96.800468 independents.5 1 6 1 5 8 1157 1837 172 38 96.878105 Rosenberg5 1 6 1 5 9 1344 1835 139 34 91.012161 1821-24;5 1 6 1 5 10 1494 1834 77 30 64.685013 CX's5 1 6 1 5 11 1585 1833 124 34 74.598770 16Z-29,5 1 6 1 5 12 1720 1831 168 31 46.998291 20702Z-57.4 1 6 1 6 0 555 1881 1335 48 -1 5 1 6 1 6 1 555 1893 100 30 93.306168 Under5 1 6 1 6 2 665 1890 193 39 74.981064 Rosenberg's5 1 6 1 6 3 870 1889 155 33 96.596436 timetable,5 1 6 1 6 4 1037 1888 20 29 96.596436 it5 1 6 1 6 5 1068 1887 98 30 95.617645 would5 1 6 1 6 6 1178 1894 85 22 95.870926 means 1 6 1 6 7 1275 1886 41 35 95.870926 (a)5 1 6 1 6 8 1328 1886 59 28 97.002716 that5 1 6 1 6 9 1397 1884 135 30 96.884277 Peterson5 1 6 1 6 10 1545 1891 60 21 96.962189 was5 1 6 1 6 11 1617 1881 138 40 96.865379 prepared5 1 6 1 6 12 1767 1890 38 21 96.865379 on5 1 6 1 6 13 1816 1881 74 30 96.939896 June4 1 6 1 7 0 559 1929 1330 49 -1 5 1 6 1 7 1 559 1941 35 29 96.874680 125 1 6 1 7 2 606 1946 30 24 96.874680 to5 1 6 1 7 3 648 1939 172 39 96.423691 participates 1 6 1 7 4 832 1939 30 29 96.042961 in5 1 6 1 7 5 874 1938 93 30 96.042961 PAID5 1 6 1 7 6 969 1928 14 54 64.885651 I5 1 6 1 7 7 1004 1936 39 36 93.480888 (if5 1 6 1 7 8 1053 1936 36 30 96.821716 its5 1 6 1 7 9 1102 1935 190 38 96.731934 competitors5 1 6 1 7 10 1306 1934 57 29 96.986732 had5 1 6 1 7 11 1376 1933 77 30 96.986732 done5 1 6 1 7 12 1466 1932 147 34 96.915283 likewise)5 1 6 1 7 13 1626 1929 263 37 96.656601 notwithstanding4 1 6 1 8 0 555 1978 1334 49 -1 5 1 6 1 8 1 555 1990 48 29 96.987770 thes 1 6 1 8 2 616 1988 166 39 96.864868 possibility5 1 6 1 8 3 795 1988 59 29 92.866882 that5 1 6 1 8 4 866 1987 22 29 92.866882 it5 1 6 1 8 5 899 1986 99 29 96.273598 would5 1 6 1 8 6 1010 1986 75 28 96.921349 have5 1 6 1 8 7 1096 1984 74 29 96.468307 been5 1 6 1 8 8 1183 1982 180 30 96.873634 reimbursed5 1 6 1 8 9 1376 1987 27 24 95.727806 at5 1 6 1 8 10 1414 1981 47 29 96.982712 thes 1 6 1 8 11 1474 1980 86 30 96.922287 chains 1 6 1 8 12 1573 1985 59 24 96.843697 rates 1 6 1 8 13 1645 1979 34 29 96.499352 of5 1 6 1 8 14 1689 1978 90 30 92.300369 AWP5 1 6 1 8 15 1792 1978 97 29 96.334084 minus4 1 6 1 9 0 559 2025 1331 47 -1 5 1 6 1 9 1 559 2037 70 30 96.886795 12%5 1 6 1 9 2 642 2037 62 35 96.733253 (sees 1 6 1 9 3 717 2036 55 29 96.079147 CX5 1 6 1 9 4 784 2034 111 36 94.533936 681A),5 1 6 1 9 5 908 2034 57 30 93.306084 ands 1 6 1 9 6 978 2034 44 34 92.436714 (b)5 1 6 1 9 7 1033 2041 39 21 96.633072 on5 1 6 1 9 8 1084 2033 72 29 96.669113 June5 1 6 1 9 9 1171 2031 35 29 96.219017 185 1 6 1 9 10 1220 2031 84 28 96.780769 when5 1 6 1 9 11 1317 2030 47 29 96.732941 thes 1 6 1 9 12 1377 2029 102 30 96.947609 Akron5 1 6 1 9 13 1493 2033 77 24 96.984756 stores 1 6 1 9 14 1582 2025 231 40 93.046371 departicipated5 1 6 1 9 15 1827 2026 63 35 96.365807 (see4 1 6 1 10 0 556 2074 1334 48 -1 5 1 6 1 10 1 556 2085 124 37 96.893036 Findings 1 6 1 10 2 694 2084 60 35 95.921257 69),5 1 6 1 10 3 767 2083 172 37 95.921257 Rosenberg5 1 6 1 10 4 950 2082 87 29 96.923332 knew5 1 6 1 10 5 1049 2081 59 29 96.182037 that5 1 6 1 10 6 1120 2080 137 29 96.748512 Peterson5 1 6 1 10 7 1271 2077 100 30 96.862953 would5 1 6 1 10 8 1384 2078 36 29 96.927933 be5 1 6 1 10 9 1433 2076 109 30 96.950752 treated5 1 6 1 10 10 1555 2084 31 21 96.892532 as5 1 6 1 10 11 1600 2084 35 20 96.892532 an5 1 6 1 10 12 1648 2074 200 38 96.247314 independents 1 6 1 10 13 1861 2078 29 24 96.467163 to4 1 6 1 11 0 557 2121 1176 42 -1 5 1 6 1 11 1 557 2133 36 30 95.994186 be5 1 6 1 11 2 606 2132 183 30 95.994186 reimbursed5 1 6 1 11 3 802 2137 28 24 93.304657 at5 1 6 1 11 4 841 2130 91 30 92.499901 AWP5 1 6 1 11 5 944 2129 96 30 96.690765 minus5 1 6 1 11 6 1054 2128 51 30 96.741959 2%5 1 6 1 11 7 1118 2133 30 24 93.293991 to5 1 6 1 11 8 1161 2127 89 29 92.793350 AWP5 1 6 1 11 9 1263 2126 97 29 95.886574 minus5 1 6 1 11 10 1374 2125 59 30 95.886574 8%.5 1 6 1 11 11 1458 2124 173 37 96.919678 Rosenberg5 1 6 1 11 12 1648 2121 85 31 96.886772 1876.2 1 7 0 0 0 557 2193 1335 190 -1 3 1 7 1 0 0 557 2193 1335 190 -1 4 1 7 1 1 0 631 2193 1260 49 -1 5 1 7 1 1 1 631 2193 26 22 86.883347 655 1 7 1 1 2 671 2205 143 37 88.048668 Feinberg5 1 7 1 1 3 826 2202 142 34 95.600189 399-400,5 1 7 1 1 4 981 2201 181 38 96.943703 Kavanaugh5 1 7 1 1 5 1174 2199 121 34 96.791832 623-24,5 1 7 1 1 6 1309 2198 121 33 96.724876 689-90,5 1 7 1 1 7 1442 2197 132 30 96.477516 Hartnett5 1 7 1 1 8 1585 2196 121 33 95.665085 858-59,5 1 7 1 1 9 1718 2195 173 36 96.859818 Rosenberg4 1 7 1 2 0 561 2244 1329 45 -1 5 1 7 1 2 1 561 2255 137 34 96.351868 1757-58,5 1 7 1 2 2 714 2253 138 34 93.305145 1768-69;5 1 7 1 2 3 864 2253 76 30 90.908188 CX's5 1 7 1 2 4 955 2251 112 33 92.746941 1685G,5 1 7 1 2 5 1080 2249 183 31 91.754463 2199Z-177.5 1 7 1 2 6 1281 2240 18 53 96.513672 A5 1 7 1 2 7 1325 2257 63 20 96.070465 sores 1 7 1 2 8 1399 2247 81 39 96.070465 points 1 7 1 2 9 1492 2247 67 28 96.789772 with5 1 7 1 2 10 1571 2246 47 29 96.966843 thes 1 7 1 2 11 1628 2244 190 39 96.276619 pharmacists5 1 7 1 2 12 1831 2251 59 21 96.349304 was4 1 7 1 3 0 557 2291 1335 50 -1 5 1 7 1 3 1 557 2304 48 29 97.009972 thes 1 7 1 3 2 622 2301 188 40 96.729507 designations 1 7 1 3 3 828 2301 35 30 96.410767 of5 1 7 1 3 4 877 2309 16 22 96.410767 a5 1 7 1 3 5 910 2308 147 30 96.548889 company5 1 7 1 3 6 1075 2298 145 30 96.689445 affiliated5 1 7 1 3 7 1238 2296 70 30 97.011154 with5 1 7 1 3 8 1325 2295 93 31 96.969353 PAID5 1 7 1 3 9 1435 2304 32 21 96.978035 as5 1 7 1 3 10 1485 2294 47 30 96.955132 thes 1 7 1 3 11 1549 2293 154 30 96.997131 exclusive5 1 7 1 3 12 1720 2291 172 31 96.498070 mail-order4 1 7 1 4 0 558 2345 761 38 -1 5 1 7 1 4 1 558 2351 178 31 93.233284 distributor.5 1 7 1 4 2 751 2350 77 30 92.116348 CX's5 1 7 1 4 3 841 2349 118 34 92.079102 2092A,5 1 7 1 4 4 973 2346 190 34 65.005478 2204Z-238;5 1 7 1 4 5 1177 2346 55 29 93.217567 RX5 1 7 1 4 6 1245 2345 74 29 92.955116 97B.2 1 8 0 0 0 559 2413 1335 335 -1 3 1 8 1 0 0 559 2413 1335 335 -1 4 1 8 1 1 0 632 2413 1260 47 -1 5 1 8 1 1 1 632 2413 27 22 68.612846 65 1 8 1 1 2 673 2425 77 30 90.428467 CX's5 1 8 1 1 3 761 2423 158 31 68.892227 2Z-3-Z-5.5 1 8 1 1 4 940 2423 61 29 96.443085 Thes 1 8 1 1 5 1013 2421 87 39 96.609459 depth5 1 8 1 1 6 1112 2420 33 30 96.609459 of5 1 8 1 1 7 1154 2419 56 30 96.769333 this5 1 8 1 1 8 1222 2427 126 22 96.615189 concerns 1 8 1 1 9 1360 2418 23 29 95.800941 is5 1 8 1 1 10 1396 2421 116 34 96.593994 suspect5 1 8 1 1 11 1524 2416 80 30 96.788528 since5 1 8 1 1 12 1616 2421 59 24 96.906975 two5 1 8 1 1 13 1686 2414 111 35 93.301888 chains,5 1 8 1 1 14 1809 2413 83 38 76.729652 Fay's4 1 8 1 2 0 559 2463 1333 49 -1 5 1 8 1 2 1 559 2476 56 30 96.999985 ands 1 8 1 2 2 626 2476 66 29 96.559288 Rite5 1 8 1 2 3 703 2475 68 33 96.664749 Aid,5 1 8 1 2 4 784 2473 137 39 96.194107 operated5 1 8 1 2 5 933 2471 168 31 96.911415 mail-orders 1 8 1 2 6 1111 2471 205 37 96.423347 departments,5 1 8 1 2 7 1328 2468 88 29 96.948631 while5 1 8 1 2 8 1427 2467 128 33 96.101959 another,5 1 8 1 2 9 1567 2466 86 33 96.101959 CVS,5 1 8 1 2 10 1666 2465 56 29 96.822372 had5 1 8 1 2 11 1735 2463 157 31 96.176537 submitted4 1 8 1 3 0 559 2512 1333 43 -1 5 1 8 1 3 1 559 2534 16 21 96.717041 a5 1 8 1 3 2 593 2525 51 29 96.717041 bids 1 8 1 3 3 663 2524 35 30 97.008858 of5 1 8 1 3 4 714 2524 36 30 96.779930 its5 1 8 1 3 5 769 2532 68 21 96.989479 owns 1 8 1 3 6 855 2522 47 30 96.946487 for5 1 8 1 3 7 919 2522 47 29 93.303612 thes 1 8 1 3 8 984 2520 151 30 91.618591 NYSEPP5 1 8 1 3 9 1152 2518 171 30 96.833099 mail-orders 1 8 1 3 10 1340 2517 146 29 92.791145 business.5 1 8 1 3 11 1520 2515 78 30 81.620537 CX's5 1 8 1 3 12 1620 2513 124 34 92.371651 11Z-38,5 1 8 1 3 13 1763 2512 129 33 19.141701 202-39,4 1 8 1 4 0 563 2560 1331 46 -1 5 1 8 1 4 1 563 2573 114 33 91.178650 1914A,5 1 8 1 4 2 691 2569 298 33 76.124329 2189Z-259-Z-324,5 1 8 1 4 3 1003 2567 186 34 92.862740 2262Z-134,5 1 8 1 4 4 1202 2566 105 29 92.787552 Z-135.5 1 8 1 4 5 1321 2566 55 28 96.142014 Sees 1 8 1 4 6 1388 2564 66 29 96.049904 also5 1 8 1 4 7 1466 2563 54 30 92.602463 CX5 1 8 1 4 8 1532 2562 188 33 92.602463 2202Z-132,5 1 8 1 4 9 1735 2566 83 24 96.995712 notes5 1 8 1 4 10 1831 2560 37 29 96.896324 of5 1 8 1 4 11 1877 2568 17 20 96.896324 a4 1 8 1 5 0 559 2608 1334 50 -1 5 1 8 1 5 1 559 2622 77 29 96.971848 CPA5 1 8 1 5 2 649 2620 138 38 96.382896 meeting,5 1 8 1 5 3 801 2620 29 28 96.924835 in5 1 8 1 5 4 842 2618 98 30 96.960228 which5 1 8 1 5 5 952 2617 76 30 97.009712 CVS5 1 8 1 5 6 1042 2616 144 38 96.803490 reported:5 1 8 1 5 7 1213 2614 118 30 96.709595 MAIL ORDER: After a long discussion it was decided that the committee could not oppose the concept because of the number of members who are or would be involved with mail order." 7 Kavanaugh 709-12, Hartnett 882-83. See also CX 1720B. Initial Decision 11S F.T.C.

which doctors prescribed without any time limit in order to stabilize chronic conditions such as arthritis, hypertension, or heart disease. The pharmacists more or less conceded that the sale of maintenance drugs was a readily identifiable segment of the overall prescription universe, and argued alternatively that loss of this business adversely affected other sales since it reduced the frequency of pharmacy visits.” Despite opposition by pharmacists to mail-order sales, they have participated in NYSEPP plans that had such provisions both before and after PAID I.”

31. Another source of pharmacy opposition to the NYSEPP costcutting initiative was the prospect that the same approach might be used in Medicaid or other New York State plans, especially EPIC (Elderly Prescription Insurance Council), New York's prescription plan for the elderly.”

68 Rx's 97B, 312C. The state's experience both before and after the adoption of the various PAID formulae was that about 10% of all prescriptions were filled through the mail. Feinberg 379-83, Kavanaugh 611; CX's 1718A, 1763D; RX's 95D, 97B.

® Kelley 1618, Rosenberg 1757-58, 1768-69; CX's 16Z-11, 242-19, 2199Z-235.

70 Feinberg 362, Kavanaugh 623-24. The addition of a mail-order component to the NYSEPP plan underwritten by Blue Cross/Blue Shield had not caused any retailer defections. CX's 1373, 2180, 2267Z-164, 2268P, Q. Feinberg 500-04, Rosenberg 1769, 1802; CX's 2Z-113, Z-123, Z-124, Z-138, Z-139, 3Z-51, Z-52, 5Z-56, Z-57, Z-60-Z-63, 20Z-10, Z-12, Z-23, Z-36, 2-109, Z-137, Z-173, 24Z-21-Z-24, 492, 681A, 733B, 2070Z-67, Z-68, 2193Z-14, Z-15, 2194Z-40, 2199Z-157, Z-158, Z-235, 2204Z-15, 2250Z-38-Z-41. PETERSON DRUG COMPANY 515 492 Initial Decision 32. All in all, there was little in PAID I that the pharmacists liked except for the concept of a generic drug incentive” and a provision for rapid claim reimbursement by the administrator.” 33. The arguments made by the pharmacists did not persuade the state to relax its cost-containment initiative, and on March 7, 1986, OER awarded the NYSEPP contract in the form of PAID I to the PAID-Equitable team.”

C. July 1 And The Pressure On The State 34. On March 26, 1986, OER informed CPA that effective July 1, 1986, PAID I would go into effect.” With this starting date in mind, PAID began soliciting pharmacies on May 5, 1986. A formal solicitation was used since this was a new plan, some pharmacy Opposition was anticipated, and state officials had to be certain that there were a sufficient number of drugstores on line by the July 1 starting date to service the huge number of NYSEPP members whose ” Generic drug programs are designed to reward pharmacists for steering customers to generics as substitutes for the more expensive but doctor-prescribed branded items whose patents have expired. A generic drug component was supported by the pharmacists. Feinberg 385, Kavanaugh 613, Hartnett 973-74; CX's 2Z-5, 2-39, Z-44, Z-46, 11Z-39, 20Z-32-Z-34, 2194Z-15, 21992-14, Z-15, 2261Z-24, Z-25, 2262Z-71, Z-72; RX's 9SL-N. Under PAID I, pharmacies were to be paid 25% of the difference between the costs of the generic and brand name drugs, with a minimum reimbursement of 75 cents. The co-pay was reduced from $2 for branded to $1 for generics. Feinberg 384-85, Kavanaugh 611-13; CX's 1084B, C, 1974B. Even with respect to the generic component, the pharmacists were dissatisfied with PAID I. They thought they should receive the generic incentive on all refills and not merely the initial prescription since they had converted the consumer to the use of the substitute. Rosenberg 1816-17; CX 812. Incentives aside, the pharmacists knew that generics were generally more profitable for them than branded drugs. CX's 16Z-9, 18Z-25, Z-26, 2061Z-172, 2196Z-11-Z-13, 2200Z-238, 2201Z-42, Z-43, 2207M, N, X-Z-2, 2267Z-19. ® CX's 1084C, 1185P, 2254Z-16, Z-11; RX's 107"I", 122B, 254Z-26. ™ Kavanaugh 597-600, Hartnett 880; CX's 1563A-D. ’> Feinberg 394-95; CX's 380B, C.

Initial Decision LIS F.T.C.

non-deferable prescriptions had to be filled.” Moreover, the use of a solicitation procedure was necessary in order to determine which discount off AWP in the sliding scale formula was to apply.” 35. Despite the organized pharmacy community's opposition to PAID I, and notwithstanding some uncertainty about having an adequate number of drugstores on line by July 1, the early favorable response of several chains to the solicitation (Findings 36 to 40) eased the pressure of the July 1 starting date as both state and PAID officials believed that countervailing competitive pressures would soon force others to sign up.”

36. On May 13, 1986, the Peterson drug store in Akron, New York, informed PAID that it would participate in PAID I.” 37. On May 15, PAID was told by Kinney that it intended to participate in PAID I.”

38. On May 16, Fay's submitted a notice of its intention to participate in PAID I.”

39. Carls signed up for PAID I on May 22.” 76 Feinberg 391-92, Kavanaugh 603-04, 622, 695, Hartnett 858, 920-21; CX’s 2261Z-55, Z-56; RX's 1, 106B, C, 107A-C 257Z-7-Z-16, Z-25, Z-26, Z-126. While some pharmacy opposition had manifested itself prior to the solicitation, the state did not anticipate that participation would be any different from the level achieved under the existing plan administered by BCWNY. Feinberg 394. An indication of what would constitute an adequate panel can be seen from the performance standard in the state's second RFP. If the winning administrator did not have on line 80% of the pharmacies in each New York county, it was subject to financial penalties. Feinberg 390-92, 391, 520, Kavanaugh 602-03; CX's 2257Z-12, Z-13, Z-24, Z-25, 2260N-P, 2261Z-31-Z-33, 2262X; RX's 254Z-55, 260Z-116. After the state changed the reimbursement rate (see Finding 82), PAID was still certain that an adequate panel would participate and it did not seek to renegotiate the penalty clause. Feinberg 392; CX's 2257Z-25, Z-26, 2260Z-39-Z- 41; RX's 257Z-12, Z-126, Z-127.

7 CX's 2257Z-154, 2258Z-12, Z-13; RX's 260Z-7, Z-8. 78 Kavanaugh 623, 626-28; RX's 254Z-117, Z-118. ? CX 711.

8 CX 491, 81 CX 368B.

82 CX 1147H.

PETERSON DRUG COMPANY 517 492 Initial Decision 40. By the end of May, about half of all New York chains had enrolled in PAID I,® and just prior to June 10, approximately 40% of the some 3800 pharmacies in the state had signed up. 41. The significance of this early trend toward participation was made apparent by the tone of a May 27 meeting between OER and the pharmacy community as represented by CPA (Zimmerman), Rite Aid (Krahulec), Peterson (Rosenberg), Fay's, and Kinney. The state officials said that they would not retreat from PAID I, citing in support of their position the encouraging level of participation already achieved and the incongruity of a protest led by firms, some of which had already signed up.** The pharmacists left the May 27 meeting with the impression that not only was the state determined to go forward with PAID I, but that similar reduced-rate formulas for other state-sponsored plans were in the offing if PAID I survived. D. July I And The Pressure On The Pharmacists 42. The intransigence of the state, as shown during the May 27 meeting, must have confirmed for the alleged conspirators the significance of any early signs of participation. Given the size of NYSEPP as well as the pattern of consumer purchases of prescriptions -- consumers tend to return to the same pharmacy for all prescriptions, and they purchase their non-prescription items at the same pharmacy where their prescriptions are being filled -- the 8? CX's 1989C, D, 2260Z-1. See also CX's 1180, 1305A, B, 1306, 2094, 22587Z-29.

8* CX's 1079A-C, 2251Z-116, Z-111; RX 259Z-2H. ° Feinberg 401-03, Rosenberg 1112-14; CX's 2Z-92, Z-102, 10M, 14Z-25, 16Z-44-Z-46, 20Z-161, Z-162, Z-164, Z-165, 2069Z-136, Z-137, 2070Z-59, 2257Z- 52. Because the pharmacies were enrolling at the rate of 100 to 200 a day, state officials expected that participation would reach the level achieved under the Blue Cross-administered NYSEPP. Feinberg 394, 533, Kavanaugh 617-18. The state officials may also have been heartened by-PAID's own first-hand but limited experience with discounts off AWP, which showed that plans based on such formulas had no difficulty in obtaining an adequate panel of pharmacists. Feinberg 392, Kavanaugh 615; CX's 2260J, K, R, S, Y-Z-1, 2262Z-103, Z-104, Z-111-Z-115; RX's 257"0", 258"0"-Q, Z-111-Z-119, 260P.

8° CX's 2Z-91, Z-92, Z-105, 5Z-11, Z-18, 733A, B, 2069Z-138. Initial Decision 115 F.T.C.

pharmacists and the state knew that if New York went forward with the plan on July 1, it would have been perilous for any firm to stay out of PAID I (assuming its competitors were in) for fear of loss of not only the substantial NYSEPP prescription business itself ("back-end business” which includes prescription refills), but also the loss of the front-end (health, cosmetic and other non-prescription) patronage of some 500,000 NYSEPP members.®” Moreover, the prospects for departicipation must not have appeared especially sanguine since pharmacists generally believed that it was in their own self-interest to enroll in high volume third party plans despite low reimbursement rates. (Findings 43 to 51, and 85 to 88.) 43. The direction of the pharmacy business is toward the use of third party plans.** By 1986, these plans accounted for close to 44% of Peterson's prescription business and about 47% of Rite Aid's New York prescription volume.”

44. The correlation between prescription and nonprescription business and the relation of both to third party plans was such that Genovese automatically accepted all of these plans except for socalled capitation arrangements.” It was Genovese's aim to fill every prescription it could because it operated on a rule-of-thumb that each prescription generated $15 to $20 in front-end sales.”! NYSEPP, which was second only to Medicaid as a source of Genovese's prescription business, accounted for $7.2 million of that *” Feinberg 511-12, Kavanaugh 623, 627, 628, 703, Rosenberg 1805-06, 1885- 87; CX's 2Z-121, Z-122, 6Z-47, Z-84, 16Y-Z-2, 160M, 1127D, 1685H, 2070Z-52- Z-54, Z-88, 2252Z-65(1), Z-66, 2254Q,R, 2260Z-23, Z-24, Z-39, 2261Z-43, 88 Painter 1406; CX's 160N, 1127B, 2061Z-224: RX's 11B, 325C. *° CX's 16R, 24Z-13, Z-14, 683A-C, 699A-C. The Peterson percentage is especially impressive given Rosenberg's general distaste for all third party plans. Rosenberg 1712-13; CX 2070Z-53. Third party plans accounted for between 30% to 40% of the prescription business of Brooks, Carls, CVS, Fay's, and Genovese. CX's 62-83, 11Z-1, 2061Z-224, 2248H, 2250"0", P, 2252Z-22, Z-33. For Kinney, third party plans offered a significant potential for sales growth. CX's 2061Z-224. °° CX's 2247Z-42, Z-43, Z-46, Z-47, 2248F, 2249Z-7, 2297R. Capitation plans pay the pharmacy a fixed amount per patient each month regardless of the number of prescriptions filled. CX's 2247Z-42, Z-43, Z-46, Z-47. *! CX's 2247S, T 2248], 2249, Z-7, Z-19, PETERSON DRUG COMPANY 519 492 Initial Decision chain's sales revenues, and in the words of one Genovese official: You5 1 3 1 2 2 681 708 58 25 96.371902 ares 1 3 1 2 3 754 698 136 45 96.445015 talking5 1 3 1 2 4 905 698 108 36 96.360260 about5 1 3 1 2 5 1027 696 84 41 96.360260 $7.25 1 3 1 2 6 1126 698 141 36 96.729248 millions 1 3 1 2 7 1282 710 19 25 95.791138 a5 1 3 1 2 8 1316 710 84 35 95.791138 years 1 3 1 2 9 1413 699 86 36 96.684608 with5 1 3 1 2 10 1513 707 138 39 96.725479 respects 1 3 1 2 11 1666 707 36 30 97.013298 to5 1 3 1 2 12 1717 701 69 36 96.975716 this5 1 3 1 2 13 1801 701 94 46 96.928337 plan.4 1 3 1 3 0 561 752 1335 50 -1 5 1 3 1 3 1 561 755 59 35 96.000366 No5 1 3 1 3 2 634 766 79 35 96.000366 ways 1 3 1 3 3 728 767 66 24 95.757553 cans 1 3 1 3 4 808 767 72 34 96.849815 you5 1 3 1 3 5 895 756 93 35 96.530823 walks 1 3 1 3 6 1003 767 101 35 96.726547 away5 1 3 1 3 7 1119 756 95 36 96.470261 from5 1 3 1 3 8 1228 758 59 35 93.262718 7.25 1 3 1 3 9 1301 752 203 42 14.922867 million.”* Thus it was inconceivable that Genovese would be the only pharmacy in its area not participating in a plan that had far fewer members than NYSEPP.” Genovese further conceded that prior to attending the June 10 Phar-4 1 3 1 7 0 559 987 1335 48 -1 5 1 3 1 7 1 559 997 103 35 96.881111 macy5 1 3 1 7 2 677 987 98 46 94.502502 Day rally (See Findings 58, 59), it had assumed that it would be participating in PAID I.™ 45. Brooks made a calculation that was similar to Genovese's -for each prescription dollar spent, a customer spent another on non-prescription items.” A company official said that the effect on Brooks would be devastating” if it stayed out of PAID I while its competitors participated; reflecting, undoubtedly, the fact that in areas where state employees were concentrated, NYSEPP accounted for about half of Brooks’ third party business, and in other areas between 15% and 20%.”’ This view of the significance of third party plans even carried over to those perceived as having unfavorable ingredient reimbursement rates. As one Brooks official put it: Well, you have got to look at competition. I mean, this is the whole key in this. If my competitor across the street is in the plan, I may be forced by market conditions to go into it, even though I dislike it and under normal conditions would not go into it.”

” CX 2249Z-28; see also CX's 1056A, B, 1057, 2249Z-21. The importance of NYSEPP to Genovese can be seen in the effect of even a short delay in its acceptance of the plan. After the demise of PAID I and before it accepted PAID II, Genovese could measure the loss of prescription patronage in the hundreds of customers. CX's 2249Z-67, Z-78, Z-79, Z-250. 3 CX 2249Z-20.

4 CX 2249Z-46.

°° CX's 2252Z-6, Z-7, 2254Q, R.

°° CX 2252Z-71; see also CX 2252Z-66.

*” CX's 2252Z-33, Z-34. The areas included Albany where Brooks was a major factor. CX's 2252Z-1, Z-2.

8 CK's 2252Z-3, Z-4.

Initial Decision 115 F.T.C.

46. Because prescriptions generated front-end sales, Fay's participated in third party plans even when it knew that the plans would not cover its variable costs. This policy was adopted in order to increase store traffic and spread costs.”” Given the size of NYSEPP, any decision by Fay's not to participate was expected to have an especially adverse effect in Albany and other key markets of this firm.'° Thus Fay's originally informed PAID that though it was opposed to the less than full AWP formula, it would have to participate in NYSEPP because of the number of consumers at stake.’°! 47. The position of Carls was uncomplicated. Third party plans, even unprofitable third party plans, brought customers into its store and if their principal competitors (Fay's and Rite Aid) had signed up for PAID I, Carls would have done the same for fear that the same customers would walk out for good.” NYSEPP was second only to Medicaid in size and importance for Carls,’ and it was inconceivable that this chain would not have participated in a program of this size.“ Apart from PAID I, Carls had never declined to participate in any third party plan.'™ 48. NYSEPP was vital to CVS. This chain filled 4 million prescriptions in New York State in 1985, almost one million of which were for state employees.’ Moreover, CVS market research had revealed that the average prescription customer spent 40% more on X's 11Z-19-Z-21, 2060Z-23, Z061Z-157-Z-159, 2062Z-3, Z-6-Z-13, Z-136-Z-142, 2069Z-17, Z-18. The only third party plan which Fay's had turned down was a capitation plan. CX's 11Z-26, Z-27, 2062Z-14, Z-15 and see Note 90, supra.

100 CX's 8Z-17, 11Z-21, Z-30, Z-58, Z-80, Z-81, Z-99, Z-100, 2062Z- 4-Z-6, Z-113, Z-114, 2203Z-28, Z-30, 2322A-C. See also Kavanaugh 627. 101 CX 2259Z-40.

102 CX's 2206Z-9, 2250X, Z-6, Z-82-Z-85, Z-96, Z-97, 2251Z-13, Z-18, Z-29, Z-95-Z-98.

103 OX's 2250Z-17-Z-19, Z-24-Z-26, 2251Z-34, Z-36, Z-37, 2291. 104 OX's 2251Z-53, Z-54.

105 CX 2206Z-15.

106 CX's 5Z-67, 6Z-82, Z-83, Z-86, Z-81, 7Z-32, 7-45, Z-46, Z-105. PETERSON DRUG COMPANY 521 492 Initial Decision front-end merchandise than a non-prescription customer and visited the store more than twice as often.’ Accordingly, CVS knew that if it did not participate in PAID I and its competitors did, this would have a serious direct impact on its market share." Apart from PAID I, CVS had never declined to participate in any third party plan.’ 49. Because of the trend toward third party plans, Kinney viewed participation in these arrangements as contributing significantly toward increasing prescription sales, a goal it had set not only for the drug volume itself, but also for the direct impact of prescription sales on its nonprescription business.'!° For all practical purposes Kinney participated in all third party plans,’”’ and the sheer size of NYSEPP -- only Medicaid was larger -- dictated that Kinney had to participate in this plan.!!”

50. As late as June 12, and in the midst of the activities in opposition to PAID I, Rosenberg told his stores that Peterson's refusal to participate was contingent on its competitors doing the same. Rosenberg signed the PAID I forms and kept them in his office ready to be submitted if his competitors participated in the plan. Rosenberg knew that any chain participating in PAID I would have a competitive advantage over nonparticipants.'? The pattern of consumer loyalty described in Finding 42 meant that Peterson would have had 107 CX's 160K, M, U.

°8 CX's 6Z-44-Z-47. NYSEPP had a special significance for CVS because Albany, where many state employees are located, was its largest market. CX's 2Z-168, SP, 6Z-2, Z-3, 7U, V. In 1986, CVS accounted for almost 35% of the Albany market, and CVS, Fay's, and Rite Aid together controlled about 60% of pharmacy sales in that area. CX's 6Z-2, Z-3. 1 CX 2191Z-137.

1°5 1 7 2 1 2 682 2372 78 30 69.671585 CX's5 1 7 2 1 3 778 2373 73 36 92.411270 12Q,5 1 7 2 1 4 865 2373 34 34 92.114014 R,5 1 7 2 1 5 913 2373 169 36 87.369453 2063Z-46,5 1 7 2 1 6 1095 2375 87 29 76.729523 Z-47.3 1 7 3 0 0 627 2434 390 48 -1 4 1 7 3 1 0 627 2434 390 48 -1 5 1 7 3 1 1 627 2434 36 21 22.267303 1! ©X's 128, 2064P, R.

?5 1 7 4 1 2 680 2522 78 29 0.000000 X's5 1 7 4 1 3 776 2522 104 35 88.462708 13Z-2,5 1 7 4 1 4 892 2524 67 33 89.804909 Z-3,5 1 7 4 1 5 973 2524 87 34 90.219223 Z-15,5 1 7 4 1 6 1073 2525 87 34 90.953979 Z-75,5 1 7 4 1 7 1173 2525 87 35 82.672089 Z-76,5 1 7 4 1 8 1279 2527 123 33 87.861450 14Z-23,5 1 7 4 1 9 1416 2527 88 30 96.903572 2290.2 1 8 0 0 0 546 2584 1338 252 -1 3 1 8 1 0 0 546 2584 1338 252 -1 4 1 8 1 1 0 625 2584 1259 54 -1 5 1 8 1 1 1 625 2584 38 21 24.566719 !?5 1 8 1 1 2 676 2597 171 39 95.078773 Rosenberg5 1 8 1 1 3 862 2599 136 34 93.599411 1805-06,5 1 8 1 1 4 1014 2599 137 35 93.599411 1885-87;5 1 8 1 1 5 1163 2600 54 29 96.121674 CX5 1 8 1 1 6 1229 2600 96 31 95.778923 681A.5 1 8 1 1 7 1346 2602 54 29 95.029823 Sees 1 8 1 1 8 1410 2602 65 30 93.305717 also5 1 8 1 1 9 1486 2602 76 30 87.243660 CX's5 1 8 1 1 10 1574 2604 165 34 86.132545 2070Z-62,5 1 8 1 1 11 1750 2605 76 30 92.296326 Z-635 1 8 1 1 12 1838 2605 46 30 96.974152 fora 1 8 1 2 0 547 2646 1336 46 -1 5 1 8 1 2 1 547 2646 146 30 97.018158 evidences 1 8 1 2 2 707 2647 36 30 93.296494 of5 1 8 1 2 3 753 2647 197 40 91.192551 Rosenberg's5 1 8 1 2 4 965 2650 215 37 95.949425 apprehension5 1 8 1 2 5 1195 2650 60 30 96.933189 that5 1 8 1 2 6 1268 2651 48 29 96.729233 thes 1 8 1 2 7 1330 2652 94 38 96.394447 majors 1 8 1 2 8 1437 2653 102 30 96.830986 chains5 1 8 1 2 9 1554 2653 93 39 96.918533 might5 1 8 1 2 10 1660 2659 44 33 96.918533 try5 1 8 1 2 11 1718 2659 30 24 96.452393 to5 1 8 1 2 12 1764 2655 88 29 94.684494 steal a march on their competition," and Rosenberg 1770, 1852, CX's 16Z-74, Z-82, 2070Z-88, Z-89 for his anxiety about possible loss of business in college and prison towns where state employees represented a significant part of the work force. Initial Decision 115 F.T.C.

to sign up for PAID I if its main competitors participated notwithstanding Rosenberg's distaste for regressive5 1 3 1 2 6 1562 687 231 45 87.907021 percentage plans.'” According to Rosenberg, before the prospect of PAID I arose, we4 1 3 1 4 0 642 801 1331 44 -1 5 1 3 1 4 1 642 802 194 43 95.841805 [Peterson]5 1 3 1 4 2 852 801 70 36 96.017998 had5 1 3 1 4 3 937 812 109 25 96.017998 never5 1 3 1 4 4 1059 801 92 36 95.617836 been5 1 3 1 4 5 1165 801 37 36 95.617836 in5 1 3 1 4 6 1207 797 19 53 96.616943 a5 1 3 1 4 7 1252 801 166 37 96.559464 situations 1 3 1 4 8 1433 802 72 36 96.936813 likes 1 3 1 4 9 1520 802 68 37 96.779694 this5 1 3 1 4 10 1603 803 125 36 96.744415 before5 1 3 1 4 11 1743 803 119 36 96.114876 where5 1 3 1 4 12 1876 803 97 36 96.774742 there4 1 3 1 5 0 639 856 1220 52 -1 5 1 3 1 5 1 639 872 74 25 96.952057 was5 1 3 1 5 2 729 872 19 24 96.363739 a5 1 3 1 5 3 762 860 172 46 96.363739 potential5 1 3 1 5 4 949 861 73 36 96.548538 that5 1 3 1 5 5 1036 871 55 25 96.792610 we5 1 3 1 5 6 1106 872 83 35 96.921799 may5 1 3 1 5 7 1204 861 44 36 93.271416 be5 1 3 1 5 8 1263 861 335 46 91.911674 non-participators5 1 3 1 5 9 1613 862 36 35 88.885498 in5 1 3 1 5 10 1664 873 20 24 88.885498 a5 1 3 1 5 11 1697 856 162 52 20.003517 plan.'”° 51. Even Rite Aid, which had threatened the state at an early stage of the PAID I initiative with nonparticipation, and whose Krahulec was instrumental in putting together the combined front of nonparticipation described in Findings 53 to 81, did not rule out participating should its competitors enroll,'’® Rite Aid filled 5,000 prescriptions a week under NYSEPP, and an outright decision not to participate would have adversely affected the bottom line profitability of this huge chain.’’? Rite Aid, of course, realized that fewer 45 1 5 1 1 2 764 1600 173 38 96.394524 Rosenberg5 1 5 1 1 3 953 1599 140 36 96.655785 1885-87;5 1 5 1 1 4 1106 1609 51 20 94.164078 sees 1 5 1 1 5 1169 1599 67 31 96.730865 also5 1 5 1 1 6 1248 1599 173 39 96.994743 Rosenberg5 1 5 1 1 7 1438 1599 85 35 96.957008 1742,5 1 5 1 1 8 1540 1600 86 35 95.191818 1744,5 1 5 1 1 9 1643 1599 141 36 93.297287 1805-06;5 1 5 1 1 10 1798 1599 78 31 88.394363 CX's5 1 5 1 1 11 1894 1599 74 36 92.683487 16Y,4 1 5 1 2 0 634 1650 348 36 -1 5 1 5 1 2 1 634 1652 67 34 90.937782 Z-1,5 1 5 1 2 2 713 1651 68 34 90.937782 Z-2,5 1 5 1 2 3 794 1650 88 35 92.107147 Z-79,5 1 5 1 2 4 895 1650 87 30 89.680405 Z-80.2 1 6 0 0 0 634 1712 1335 196 -1 3 1 6 1 0 0 634 1712 1335 196 -1 4 1 6 1 1 0 711 1712 1258 49 -1 5 1 6 1 1 1 711 1712 40 22 45.912140 us5 1 6 1 1 2 773 1724 175 37 95.907486 Rosenberg5 1 6 1 1 3 972 1723 84 30 89.112755 1901.5 1 6 1 1 4 1094 1724 56 28 96.592445 Sees 1 6 1 1 5 1168 1723 67 29 93.300591 also5 1 6 1 1 6 1255 1723 76 29 82.872543 CX's5 1 6 1 1 7 1351 1723 168 29 92.001556 2070Z-54.5 1 6 1 1 8 1557 1724 62 28 96.846916 Thes 1 6 1 1 9 1638 1724 175 28 96.066460 correlation5 1 6 1 1 10 1833 1724 136 28 96.066460 between4 1 6 1 2 0 634 1773 1334 39 -1 5 1 6 1 2 1 634 1773 149 30 96.310692 front-ends 1 6 1 2 2 795 1774 56 29 96.589279 ands 1 6 1 2 3 864 1773 147 30 96.214035 back-ends 1 6 1 2 4 1022 1773 136 30 96.823944 business5 1 6 1 2 5 1171 1773 152 29 96.648796 described5 1 6 1 2 6 1336 1773 28 29 96.659897 in5 1 6 1 2 7 1376 1773 124 38 96.416992 Findings 1 6 1 2 8 1512 1773 39 29 96.994606 425 1 6 1 2 9 1564 1782 60 21 96.532806 was5 1 6 1 2 10 1636 1773 160 39 96.375641 especially5 1 6 1 2 11 1810 1773 158 38 96.572853 important4 1 6 1 3 0 634 1821 1333 38 -1 5 1 6 1 3 1 634 1827 30 24 96.749794 to5 1 6 1 3 2 681 1823 140 28 96.320251 Peterson5 1 6 1 3 3 838 1822 129 29 96.829880 because5 1 6 1 3 4 983 1821 36 30 96.876434 of5 1 6 1 3 5 1032 1822 61 29 96.686066 that5 1 6 1 3 6 1109 1821 110 29 93.256638 chain's5 1 6 1 3 7 1236 1821 80 38 81.264084 large5 1 6 1 3 8 1327 1821 105 29 81.264084 “Love5 1 6 1 3 9 1449 1821 35 29 96.639244 of5 1 6 1 3 10 1498 1822 83 29 75.058502 Pete”5 1 6 1 3 11 1600 1821 55 38 96.142365 gifts 1 6 1 3 12 1671 1822 208 37 96.386589 departments.5 1 6 1 3 13 1912 1822 55 29 96.652603 See4 1 6 1 4 0 634 1869 275 39 -1 5 1 6 1 4 1 634 1870 174 38 96.713249 Rosenberg5 1 6 1 4 2 824 1869 85 30 96.230606 1713.2 1 7 0 0 0 632 1931 1336 582 -1 3 1 7 1 0 0 632 1931 1336 582 -1 4 1 7 1 1 0 710 1931 1257 50 -1 5 1 7 1 1 1 710 1931 40 22 42.616314 65 1 7 1 1 2 763 1943 31 29 80.654648 Tn5 1 7 1 1 3 806 1943 66 38 94.249702 July5 1 7 1 1 4 889 1942 73 30 96.835175 19855 1 7 1 1 5 976 1942 57 30 96.921837 ands 1 7 1 1 6 1045 1942 87 39 96.009003 again5 1 7 1 1 7 1144 1951 38 21 96.925468 on5 1 7 1 1 8 1193 1942 73 38 96.657242 May5 1 7 1 1 9 1279 1942 48 34 96.951309 27,5 1 7 1 1 10 1345 1941 85 35 96.923958 1986,5 1 7 1 1 11 1443 1942 66 30 95.493057 Rite5 1 7 1 1 12 1522 1942 59 30 95.493057 Aids 1 7 1 1 13 1594 1942 61 30 96.809959 told5 1 7 1 1 14 1669 1942 79 30 96.072632 OER5 1 7 1 1 15 1761 1942 59 30 94.957260 that5 1 7 1 1 16 1834 1942 20 30 94.957260 it5 1 7 1 1 17 1867 1942 100 30 96.784264 would4 1 7 1 2 0 633 1992 1333 40 -1 5 1 7 1 2 1 633 1998 51 25 96.451248 not5 1 7 1 2 2 699 1992 174 40 96.920715 participates 1 7 1 2 3 888 1992 29 30 96.984077 in5 1 7 1 2 4 933 2001 56 30 96.984077 any5 1 7 1 2 5 1005 1992 68 39 96.387199 plans 1 7 1 2 6 1088 1992 61 30 96.672485 that5 1 7 1 2 7 1163 1992 175 30 96.638702 discounted5 1 7 1 2 8 1353 1992 48 30 96.600601 thes 1 7 1 2 9 1417 1992 54 30 93.303238 full5 1 7 1 2 10 1486 1992 90 29 92.182198 AWP5 1 7 1 2 11 1589 1998 69 24 95.999817 rate.5 1 7 1 2 12 1687 1993 175 37 96.735741 Rosenberg5 1 7 1 2 13 1881 1992 85 34 96.109818 1756,4 1 7 1 3 0 637 2040 1330 36 -1 5 1 7 1 3 1 637 2042 87 34 89.718552 1759;5 1 7 1 3 2 740 2042 79 29 89.718552 CX's5 1 7 1 3 3 834 2041 107 34 89.747742 2Z-95,5 1 7 1 3 4 955 2041 109 34 92.526306 Z-174,5 1 7 1 3 5 1078 2040 170 34 91.537315 2257Z-55;5 1 7 1 3 6 1264 2041 76 29 81.461731 RX's5 1 7 1 3 7 1355 2041 18 33 93.306152 1,5 1 7 1 3 8 1389 2041 149 33 88.945145 257Z-47;5 1 7 1 3 9 1552 2041 52 29 96.370064 but5 1 7 1 3 10 1617 2050 51 20 96.370064 sees 1 7 1 3 11 1681 2041 55 29 96.488159 CX5 1 7 1 3 12 1752 2041 58 29 95.520042 8125 1 7 1 3 13 1825 2040 30 30 96.879021 in5 1 7 1 3 14 1869 2040 98 30 96.971313 which4 1 7 1 4 0 634 2088 1333 39 -1 5 1 7 1 4 1 634 2090 148 29 91.767311 Krahulec5 1 7 1 4 2 797 2089 63 30 96.269020 said5 1 7 1 4 3 874 2098 39 21 96.920242 on5 1 7 1 4 4 926 2089 73 38 95.800446 May5 1 7 1 4 5 1013 2088 49 35 96.837212 20,5 1 7 1 4 6 1080 2088 86 35 96.230614 1986,5 1 7 1 4 7 1182 2088 60 30 93.054718 we may alternately decide to participate” as he contemplates combined5 1 7 1 5 3 1044 2136 170 40 94.905426 responses to PAID I. See also CX's 23Z-47-42(2), 70C, 2261W, 2323C, D, for evidence that in fact Rite Aid participated in third party plans with reimbursement rates lower than PAID I; indeed, at the very time that Rite Aid made the July 1985 statement it was being reimbursed at AWP-12% in the NYSEPP areas administered by BCWNY. For this very reason, the May 27, 1986, statement did not convince Rosenberg of Rite Aid's commitment to nonparticipation since he knew that the Rite Aid was participating in the BCWNY - administered NYSEPP plan. Rosenberg 1756.

75 1 8 1 1 2 764 2549 78 29 69.469231 EX's5 1 8 1 1 3 859 2548 124 34 85.282768 19Z-40,5 1 8 1 1 4 997 2548 129 33 88.166145 20Z-11,5 1 8 1 1 5 1138 2548 88 33 90.418312 Z-12,5 1 8 1 1 6 1239 2548 108 33 92.210556 Z-147,5 1 8 1 1 7 1360 2548 128 33 89.494217 22Z-64,5 1 8 1 1 8 1503 2548 221 33 89.303047 23Z-49-Z-51,5 1 8 1 1 9 1737 2547 128 33 92.684296 24Z-20,5 1 8 1 1 10 1879 2547 88 34 92.124969 Z-79,4 1 8 1 2 0 631 2597 1337 38 -1 5 1 8 1 2 1 631 2599 87 30 92.530243 Z-80.5 1 8 1 2 2 740 2599 77 30 96.102821 Notes 1 8 1 2 3 829 2599 59 29 96.848335 that5 1 8 1 2 4 898 2607 76 21 93.819084 even5 1 8 1 2 5 985 2607 16 20 93.819084 a5 1 8 1 2 6 1013 2598 80 30 96.617569 short5 1 8 1 2 7 1103 2598 86 37 96.882408 delays 1 8 1 2 8 1200 2598 38 37 97.019661 by5 1 8 1 2 9 1251 2597 65 29 96.776451 Rite5 1 8 1 2 10 1327 2597 58 29 95.558548 Aids 1 8 1 2 11 1397 2597 30 29 95.558548 in5 1 8 1 2 12 1438 2597 153 38 96.455971 accepting5 1 8 1 2 13 1603 2597 92 29 96.151375 PAID5 1 8 1 2 14 1707 2597 34 34 81.889618 II,5 1 8 1 2 15 1753 2597 48 29 96.691887 thes 1 8 1 2 16 1813 2606 155 20 96.738297 successor4 1 8 1 3 0 632 2646 1335 37 -1 5 1 8 1 3 1 632 2653 30 24 96.185905 to5 1 8 1 3 2 682 2648 94 29 96.074753 PAID5 1 8 1 3 3 796 2647 21 34 96.074753 I,5 1 8 1 3 4 838 2652 98 24 96.180466 meant5 1 8 1 3 5 955 2647 60 29 96.180466 that5 1 8 1 3 6 1033 2647 49 29 96.804565 thes 1 8 1 3 7 1101 2646 86 29 96.333237 chains 1 8 1 3 8 1207 2655 61 20 96.440781 was5 1 8 1 3 9 1289 2646 56 29 96.384377 hit hard" by the loss of business. CX 19Z-141. See also CX's 22Z-108, Z-111, Z-145-Z-147, 23Z-92, 2196Z-158, 2201Z-71, Z-73. As indicated in CX 868H third party plans had played a key role in the growth of Rite Aid's prescription business. PETERSON DRUG COMPANY 523 492 Initial Decision customers would be lost if its competitors, too, were not participating in any particular third party plan.’ 52. The risk to the alleged conspirators if PAID I was not defeated by July 1 is shown by a June 16 Supermarkets General internal memorandum outlining the prospects for the pharmacy departments of its Pathmark stores should its competitors decide not to participate. Because a boycotts 1 3 2 5 6 1285 990 115 25 96.735741 seems5 1 3 2 5 7 1420 986 35 29 96.849304 to5 1 3 2 5 8 1473 980 45 35 96.772766 be5 1 3 2 5 9 1537 980 217 46 96.646873 developing5 1 3 2 5 10 1774 991 131 35 96.411011 among4 1 3 2 6 0 570 1036 1335 48 -1 5 1 3 2 6 1 570 1036 106 35 96.458115 chains 1 3 2 6 2 692 1036 243 47 93.465408 pharmacies Supermarkets General saw an opportunity to be exploited as it planned to advertise that the Pathmark stores would be accepting PAID I.’ A similar strategy would have been followed by Fay's had it decided to participate while others remained on the sidelines.'*° E. The Zimmerman/Krahulec Invitation And The Pharmacists' Response 53. Confronted by the prospect that New York was determined to go forward with the July 1 starting date so long as an adequate array of pharmacists seemed likely, Zimmerman of CPA and Krahulec of Rite Aid sent out clear messages to the alleged conspirators that there must be no participation. The contents, the settings, and the means used for sending these messages -- i.e., by exhortations during meetings of the alleged conspirators, by adoption of a Dear4 1 5 1 8 0 562 1965 1334 50 -1 5 1 5 1 8 1 562 1965 142 36 96.204124 Valued5 1 5 1 8 2 738 1966 207 36 91.768280 Customer device for keeping the patronage of state employees while the alleged conspirators did not participate, in response to inquiries from one pharmacist about the intentions of others, by widely circulated memos calling directly and indirectly for nonparticipation -- signaled that joint action was contemplated and invited. (Findings 54 to 81.) 118 OX's 247-79, Z-80.

19 CX 1311. See also CX's 1307, 1309, 1313. 2° X's 2062Z-44, Z-45. See also CX's 24Z-45, Z-46, Z-88, Z-89 for Rite Aid's use of this strategy in 1970 to take business away from competitors who were boycotting Medicaid.

Initial Decision 115 F.T.C.

54. Zimmerman knew that if PAID I were to be defeated, it was essential that the pressure of the July 1 deadline be maintained.'” As early as April 11, 1986, in a memo circulated to Members5 1 3 1 3 12 1854 743 43 36 96.475624 of5 1 3 1 3 13 1911 744 58 35 97.015884 thea 1 3 1 4 0 635 799 1334 48 -1 5 1 3 1 4 1 635 799 115 35 96.455566 Chains 1 3 1 4 2 764 800 194 45 96.827446 Pharmacy5 1 3 1 4 3 973 799 228 35 96.441383 Associations 1 3 1 4 4 1216 800 42 35 96.604393 of5 1 3 1 4 5 1269 800 90 35 96.825348 News 1 3 1 4 6 1375 800 99 35 96.533493 Yorks 1 3 1 4 7 1489 800 114 36 95.680885 State (by its terms each member was apprised that all the others had received the same message) he signaled the Pharmacists that the key to their success lay in the vulnerability of the state to nonparticipation -- While this formula [an alternative to PAID I] may be difficult to obtain at this late date, state officials are concerned that participation in this program by pharmacists will be threatened if economic considerations are not adequately addressed.!” 55. Early on, Zimmerman also began to play a slightly different variation on the nonparticipation theme. He told Krahulec and other CPA members that if they signed up for PAID I, he would have difficulty lobbying against any attempt by the state to incorporate a reduced rate reimbursement formula in its insurance program for the elderly.’ 56. As for Krahulec, he reflected on the prospect of combined4 1 5 2 2 0 629 1695 1335 45 -1 5 1 5 2 2 1 629 1695 207 45 93.344002 responses as he reported on May 20, 1986, to Rite Aid officials that I5 1 5 2 3 2 678 1752 92 35 96.970802 have5 1 5 2 3 3 785 1752 142 45 96.198502 already5 1 5 2 3 4 943 1752 91 34 96.198502 been5 1 5 2 3 5 1049 1752 179 34 96.643280 informed5 1 5 2 3 6 1242 1752 72 34 96.643280 that5 1 5 2 3 7 1329 1752 58 34 96.771233 thes 1 5 2 3 8 1402 1752 239 45 96.492744 independents 1 5 2 3 9 1655 1752 234 45 96.518768 pharmacists5 1 5 2 3 10 1906 1762 57 24 96.966057 area 1 5 2 4 0 629 1809 1335 45 -1 5 1 5 2 4 1 629 1810 196 44 96.038834 extremely5 1 5 2 4 2 855 1815 103 39 95.660728 upset5 1 5 2 4 3 988 1809 85 35 95.660728 with5 1 5 2 4 4 1103 1820 107 34 96.584114 many5 1 5 2 4 5 1240 1815 139 39 96.851448 aspects5 1 5 2 4 6 1410 1809 43 34 96.020256 of5 1 5 2 4 7 1478 1809 68 34 95.991241 this5 1 5 2 4 8 1577 1819 166 35 96.281029 programs 1 5 2 4 9 1773 1809 68 34 95.538620 ands 1 5 2 4 10 1872 1809 92 34 95.538620 have4 1 5 2 5 0 629 1860 478 52 -1 5 1 5 2 5 1 629 1868 205 34 96.654755 threatened5 1 5 2 5 2 850 1878 19 24 95.890427 a5 1 5 2 5 3 883 1860 224 52 0.000000 boycott. 57. Consistent with his May 20 contemplation of combined4 1 5 3 2 0 628 1982 1335 47 -1 5 1 5 3 2 1 628 1983 211 46 94.293938 responses and the receipt of a report respecting the prospects of a boycott, over the next few weeks Krahulec assumed the role he was 121 X's 27-121, Z-122.

122 CX 732B.

3 CX's 2Z-113, Z-123, Z-124. Krahulec had similar concerns about the linkage of the two programs. CX's 20Z-10, Z-11, Z-23. While Zimmerman communicated his thoughts on the anti-PAID I campaign to all CPA members, there can be little question that Krahulec was his main confidant and principal co-strategist. See CX's 2Z-123, Z-238, Z-239, 20Z-23, 21Z-34, Z-35. 124 CX 812. Krahulec based his statement on Zimmerman's report that an official of PSSNY (Pharmaceutical Society of the State of New York, the state-wide association of independent pharmacists and umbrella organization for affiliated county associations, CX's 20P, Q, 2243R, S, 2246Z-18, Z-19) had told him that county associations were threatening a boycott. CX's 20Z-139-Z-141. PETERSON DRUG COMPANY 525 492 Initial Decision to play throughout the anti-PAID I campaign -- an aggressive seeker, a convenient depository, and an eager transmitter of information and advice about nonparticipation.’*° 58. The Zimmerman/Krahulec effort to achieve a solid front of nonparticipation intensified as the July 1, 1986, deadline approached. At a June 10 Pharmacy5 1 3 2 3 6 1071 923 98 45 95.487511 Day rally in Albany, Zimmerman again warned the alleged conspirators that the defeat of PAID I, and the effort to keep similar terms out of the state's plan for the elderly, would be jeopardized if any members participated.'*° A similar message was conveyed in more pointed terms to individual firms. Thus having learned that Carls had signed up to participate in PAID I, Zimmerman cautioned officials of that firm on June 10 or thereabouts that an effective lobbying effort could not be sustained if Carls remained in the plan.'”’ 59. For his part, Krahulec weighed in at the Pharmacy5 1 3 3 1 11 1787 1449 99 45 94.644760 Day rally with a crucial embellishment on the nonparticipation theme. He discussed with Rosenberg the use of a Dear5 1 3 3 3 9 1513 1565 140 35 96.827278 Valued5 1 3 3 3 10 1676 1565 208 35 95.445244 Customer letter, a billing stratagem designed to keep the patronage of state employees while a pharmacy was not participating in PAID I. Rosenberg responded with a request for a copy of the letter.’*> A representative of Genovese spoke with Krahulec to the same effect 9 CX's 12Z-29-Z-31, Z-77, Z-78, 14Z-79-Z-84, 488E, 2066Z-34-Z-36, Z-42 (Krahulec initiates a telephone conference call to Kinney and Genovese in order to determine if these chains intend to participate in PAID I. Kinney tells Krahulec and Genovese that it will not participate), 202-66, Z-67, Z-139-Z-141 (Krahulec passes on to Genovese, Zimmerman's report of the boycott being planned by the Westchester and Long Island pharmacists), 20Z-161 (Krahulec learns that Fay's has enrolled in PAID I), 20Z-101, Z-117, Z-118, Z-227, Z-229 (Zimmerman informs Krahulec that chains which had previously signed with PAID I, have canceled), and see Findings 59 and 13-81 for Krahulec's use of Dear5 1 5 1 9 11 1466 2327 117 29 96.109680 Valued5 1 5 1 9 12 1597 2327 172 30 93.988808 Customer letters and a lawyer's memo as the means for imparting and receiving participation signals. See also CX's 142-17, Z-78 and Findings 42-52 and 75 for evidence of the mutual interdependence of these firms and the competitive consequences of any uncertainty about each other's intentions respecting participation in a third party plan. 126 CX's 27-123, Z-124, Z-138, Z-139, 2199Z-102, Z-103, 2249Z-119. 127 OX's 2206Z-15-Z-17.

128 Rosenberg 1807-08, 1836, 1898-99; CX's 16Z-98, Z-99, Z-102, Z-103, 2070Z-65, Z-75, Z-76.

Initial Decision 115 F.T.C.

on or about June 10.'” There is also evidence that at the June 10 rally, Krahulec did not confine himself to one-on-one conversations about the Dear5 1 3 1 3 4 959 746 138 36 96.714249 Valued5 1 3 1 3 5 1111 746 203 36 94.013969 Customer letter. Kelley, a former Washington-based chain drugstore association lobbyist who attended the June 10 meeting, testified that a reimbursement procedure for nonparticipating pharmacists was the topic of a general discussion.’° This proffer by Krahulec of the Dear5 1 3 1 7 7 1318 982 140 35 96.642326 Valued5 1 3 1 7 8 1476 982 206 36 96.236076 Customer letter, and the requests for the letter that followed, meant that Rite Aid, the largest New York chain, was effectively assured that it need not sign up for PAID I in order to protect its own substantial interest in public employee business.'*' It also meant that Rite Aid, which shared its information with other firms that may have been wavering, had received a clear signal of nonparticipation; for as Krahulec put it, the use of the Dear5 1 3 1 14 5 970 1388 139 34 96.343788 Valued5 1 3 1 14 6 1123 1388 207 34 84.032204 Customer letter was synonymous with a decision not to participate.” At the same time, Krahulec's promotion 129 CX 2194Z-150, Z-151.

130 Kelley 1635-36. At one point, Kelley said that he heard such a discussion (Tr. 1635), and based upon my observation of his demeanor, as well as my review of his testimony for internal inconsistency, I find that his earlier and later attempts (Tr. 1635-36) to hedge on this point are not credible. This discussion about nonparticipation occurred at the 9:15 a.m. meeting on June 10, which Rosenberg attended. Kelley 1634-35. The Pharmacy5 1 6 1 6 6 1423 1920 82 37 89.140549 Day”5 1 6 1 6 7 1528 1919 73 38 96.476845 rally5 1 6 1 6 8 1622 1928 61 20 96.327896 was5 1 6 1 6 9 1706 1920 128 37 96.327896 actually5 1 6 1 6 10 1857 1920 113 28 96.845535 several4 1 6 1 7 0 637 1967 1333 38 -1 5 1 6 1 7 1 637 1968 157 37 96.521896 meetings.5 1 6 1 7 2 829 1968 40 28 96.792381 At5 1 6 1 7 3 886 1967 70 30 93.190163 9:155 1 6 1 7 4 976 1976 76 25 92.361794 a.m.,5 1 6 1 7 5 1071 1967 49 29 96.617783 thes 1 6 1 7 6 1138 1967 76 30 96.618446 CPA5 1 6 1 7 7 1233 1967 146 29 95.672600 members5 1 6 1 7 8 1399 1967 165 38 96.542603 (including5 1 6 1 7 9 1582 1967 196 38 96.734085 Rosenberg),5 1 6 1 7 10 1798 1972 60 24 96.311790 met5 1 6 1 7 11 1875 1967 29 29 96.954529 in5 1 6 1 7 12 1923 1968 47 28 96.905899 thea 1 6 1 8 0 636 2016 1334 38 -1 5 1 6 1 8 1 636 2016 157 30 96.607353 basements 1 6 1 8 2 811 2016 36 29 96.484467 of5 1 6 1 8 3 863 2016 142 38 96.301987 Albany's5 1 6 1 8 4 1025 2016 171 38 96.340019 University5 1 6 1 8 5 1216 2016 86 29 93.135384 Club.5 1 6 1 8 6 1342 2016 77 29 74.255394 CX's5 1 6 1 8 7 1443 2016 124 33 86.187180 14Z-39,5 1 6 1 8 8 1587 2016 87 33 91.655518 Z-40,5 1 6 1 8 9 1699 2016 124 34 84.441483 16Z-55,5 1 6 1 8 10 1844 2016 126 34 89.372139 725J,K,4 1 6 1 9 0 637 2064 1332 38 -1 5 1 6 1 9 1 637 2064 189 31 91.381622 2069Z-165-5 1 6 1 9 2 836 2064 106 34 91.228401 Z-167,5 1 6 1 9 3 954 2064 164 30 90.521355 2203Z-75.5 1 6 1 9 4 1141 2064 143 29 92.938797 Krahulec5 1 6 1 9 5 1296 2064 90 38 96.880310 spoke5 1 6 1 9 6 1398 2069 27 24 96.981628 at5 1 6 1 9 7 1435 2064 55 29 96.981628 this5 1 6 1 9 8 1501 2064 78 38 96.993118 early5 1 6 1 9 9 1591 2064 134 38 96.732430 meeting.5 1 6 1 9 10 1738 2064 55 30 92.295433 CX5 1 6 1 9 11 1804 2064 165 30 81.612534 2203Z-77.4 1 6 1 10 0 636 2112 1338 39 -1 5 1 6 1 10 1 636 2114 87 29 96.833435 Later5 1 6 1 10 2 740 2113 60 30 96.214272 that5 1 6 1 10 3 818 2113 66 38 96.991226 day,5 1 6 1 10 4 904 2113 48 30 96.872551 thes 1 6 1 10 5 970 2112 77 30 96.621887 CPA5 1 6 1 10 6 1066 2112 200 39 96.621887 memberships 1 6 1 10 7 1284 2112 56 30 96.509613 ands 1 6 1 10 8 1359 2113 146 29 96.630310 members5 1 6 1 10 9 1524 2112 35 30 93.284225 of5 1 6 1 10 10 1575 2112 134 34 91.766083 PSSNY,5 1 6 1 10 11 1728 2113 48 29 96.996277 thes 1 6 1 10 12 1795 2121 127 30 96.770393 sponsors 1 6 1 10 13 1939 2112 35 30 96.718704 of4 1 6 1 11 0 638 2160 1332 39 -1 5 1 6 1 11 1 638 2162 173 37 76.000313 Pharmacy Day,” rallied in a hearing room of the Legislative Office Building where still additional appeals for nonparticipation were made. CX's 2244Z-153-Z-155, 2278A, B. PAID I was also the subject of a June 10 luncheon conversation involving Rosenberg, Owens of Kinney, and Zurek of Carls. CX's 14Z-50, Z-51, Z-127-Z-129, 2206Z-75, 2250Z-131.

'3! Krahulec routinely passed along information about participation in PAID I to the Rite Aid officials who had ultimate responsibility for deciding whether to enroll in the plan. CX's 18Q, 20Z-127, Z-145, Z-242, 2204Z-49. And despite Krahulec's public pronouncements of nonparticipation, Rite Aid kept in reserve the alternative of participation should its competitors waiver. See Note 116, supra. '? CX's 2194Z-157, Z-158 and see Findings 57, 59, 73-81 for evidence that Krahulec played the role of purveyor of information about participation throughout the anti-PAID I campaign.

PETERSON DRUG COMPANY 527 492 Initial Decision of the Dear5 1 3 1 1 4 818 626 140 36 96.499374 Valued5 1 3 1 1 5 972 626 205 35 94.888145 Customer approach must have been reassuring to a competitor like Rosenberg who left the Pharmacy5 1 3 1 2 10 1692 680 99 45 95.748123 Day rally with the understanding that Rite Aid itself would not be participating.'* It is also apparent that the other alleged conspirators left Albany on June 10 similarly reassured. (Findings 60 and 61.) 60. Two days after the Pharmacy5 1 3 2 1 7 1303 916 96 45 95.653709 Day rally, Charles Owens, the Kinney representative at the June 10 meeting, told his company officials -- I spent Tuesday, June 10th, in Albany with our chain group.... All chains in our group and many independents have taken the position that we will not participate in the plan as it is structured now.'** According to Owens, the basis for his report was the statements of chain representatives who declared on June 10 that they would not participate in PAID I.’* 61. The exact date is not clear, but sometime between June 10 meeting and June 13, Zurek of Carls reported to his company that no5 1 5 2 3 2 645 1644 69 24 96.943756 ones 1 5 2 3 3 730 1634 92 34 80.737747 else”5 1 5 2 3 4 840 1644 73 24 96.897308 was5 1 5 2 3 5 928 1632 248 46 96.771515 participating5 1 5 2 3 6 1192 1632 35 35 96.633186 in5 1 5 2 3 7 1242 1633 113 34 93.157074 PAID5 1 5 2 3 8 1371 1625 70 43 50.226334 I.'°°3 1 5 3 0 0 561 1689 1335 340 -1 4 1 5 3 1 0 637 1689 1259 48 -1 5 1 5 3 1 1 637 1691 58 35 96.452499 62.5 1 5 3 1 2 715 1691 184 46 96.300217 Although5 1 5 3 1 3 917 1691 209 45 96.098297 Rosenberg5 1 5 3 1 4 1144 1701 102 24 96.894585 came5 1 5 3 1 5 1264 1701 100 35 96.704323 away5 1 5 3 1 6 1382 1690 93 35 94.916710 from5 1 5 3 1 7 1492 1690 58 35 94.916710 thes 1 5 3 1 8 1567 1690 89 35 96.616341 June5 1 5 3 1 9 1678 1689 43 36 94.987358 105 1 5 3 1 10 1738 1689 158 46 94.987358 meeting4 1 5 3 2 0 562 1748 1333 47 -1 5 1 5 3 2 1 562 1749 85 36 96.764191 with5 1 5 3 2 2 661 1749 58 36 97.011848 thes 1 5 3 2 3 733 1749 207 46 96.741905 perceptions 1 5 3 2 4 955 1749 72 35 96.204628 that5 1 5 3 2 5 1041 1749 59 35 96.780052 thes 1 5 3 2 6 1114 1748 193 36 96.813240 combined5 1 5 3 2 7 1322 1749 94 34 96.775909 fronts 1 5 3 2 8 1430 1748 42 35 93.291939 of5 1 5 3 2 9 1484 1748 322 46 91.802055 nonparticipation5 1 5 3 2 10 1821 1758 74 24 96.436386 was4 1 5 3 3 0 562 1806 1333 47 -1 5 1 5 3 3 1 562 1814 62 29 96.981728 not5 1 5 3 3 2 642 1808 88 35 96.343697 rocks 1 5 3 3 3 751 1807 104 41 96.500290 solid,5 1 5 3 3 4 875 1807 45 35 96.357224 he5 1 5 3 3 5 938 1806 216 47 96.728149 recognized5 1 5 3 3 6 1173 1806 72 36 96.728607 that5 1 5 3 3 7 1264 1806 58 36 96.830070 thes 1 5 3 3 8 1341 1806 233 47 96.210655 pharmacists5 1 5 3 3 9 1594 1806 90 36 96.523079 needs 1 5 3 3 10 1705 1806 85 46 95.765732 only5 1 5 3 3 11 1810 1806 85 35 96.342880 hold4 1 5 3 4 0 562 1864 1331 48 -1 5 1 5 3 4 1 562 1866 160 46 96.883820 together5 1 5 3 4 2 735 1866 56 36 96.188629 for5 1 5 3 4 3 803 1866 58 36 96.784004 thes 1 5 3 4 4 875 1866 71 35 96.812675 few5 1 5 3 4 5 961 1866 118 35 96.726295 weeks5 1 5 3 4 6 1095 1865 196 46 96.530312 remaining5 1 5 3 4 7 1305 1865 122 35 96.720512 before5 1 5 3 4 8 1442 1865 57 35 97.016319 thes 1 5 3 4 9 1513 1865 79 46 97.005875 July5 1 5 3 4 10 1612 1866 13 34 95.690025 15 1 5 3 4 11 1645 1864 144 47 96.814232 starting5 1 5 3 4 12 1804 1865 89 35 96.807594 date.4 1 5 3 5 0 562 1923 1333 47 -1 5 1 5 3 5 1 562 1925 38 34 96.147125 In5 1 5 3 5 2 626 1935 20 24 96.147125 a5 1 5 3 5 3 670 1925 91 34 96.226555 June5 1 5 3 5 4 791 1924 42 35 96.793503 125 1 5 3 5 5 857 1929 118 41 96.681274 reports 1 5 3 5 6 999 1930 35 29 96.061134 to5 1 5 3 5 7 1060 1923 58 36 96.889458 thes 1 5 3 5 8 1143 1924 168 35 96.627213 Peterson5 1 5 3 5 9 1337 1929 123 34 96.816902 stores,5 1 5 3 5 10 1486 1923 209 46 96.124054 Rosenberg5 1 5 3 5 11 1720 1933 91 36 96.863503 gave5 1 5 3 5 12 1837 1923 58 35 96.930305 thea 1 5 3 6 0 561 1981 831 48 -1 5 1 5 3 6 1 561 1983 191 46 96.330193 following5 1 5 3 6 2 767 1989 152 30 96.779655 accounts 1 5 3 6 3 934 1982 41 36 96.611343 of5 1 5 3 6 4 987 1983 57 35 96.973358 thes 1 5 3 6 5 1058 1983 90 35 96.989021 June5 1 5 3 6 6 1168 1982 42 36 96.756905 105 1 5 3 6 7 1225 1981 167 47 96.756905 meeting:2 1 6 0 0 0 561 2094 1336 330 -1 3 1 6 1 0 0 561 2094 1334 136 -1 4 1 6 1 1 0 635 2094 1260 40 -1 5 1 6 1 1 1 635 2097 95 29 95.997498 There5 1 6 1 1 2 743 2106 78 20 95.997498 were5 1 6 1 1 3 834 2096 244 38 96.472580 representatives5 1 6 1 1 4 1091 2095 77 30 96.843765 from5 1 6 1 1 5 1182 2104 89 29 95.752182 many5 1 6 1 1 6 1284 2095 102 30 93.274452 chains5 1 6 1 1 7 1399 2112 25 5 93.220955 --5 1 6 1 1 8 1437 2095 66 29 96.512283 Rite5 1 6 1 1 9 1516 2094 69 34 93.292503 Aid,5 1 6 1 1 10 1599 2095 85 38 93.220299 Fays,5 1 6 1 1 11 1699 2094 94 34 96.139732 Carls,5 1 6 1 1 12 1807 2094 88 34 96.691536 CVS,4 1 6 1 2 0 562 2142 1333 40 -1 5 1 6 1 2 1 562 2145 172 34 96.349495 Genovese,5 1 6 1 2 2 748 2145 116 29 96.577431 Brooks5 1 6 1 2 3 878 2145 57 29 96.577431 ands 1 6 1 2 4 948 2145 140 29 96.772659 Peterson5 1 6 1 2 5 1100 2144 108 38 96.089241 Drugs.5 1 6 1 2 6 1232 2143 71 30 96.779144 This5 1 6 1 2 7 1316 2143 69 39 96.932327 plans 1 6 1 2 8 1398 2142 97 31 96.770599 which5 1 6 1 2 9 1509 2143 137 30 96.740334 discounts 1 6 1 2 10 1659 2143 48 30 93.166153 thes 1 6 1 2 11 1720 2142 90 30 91.841560 AWP5 1 6 1 2 12 1826 2142 69 30 96.951813 12%4 1 6 1 3 0 561 2190 1301 40 -1 5 1 6 1 3 1 561 2193 47 30 96.986649 for5 1 6 1 3 2 620 2193 102 30 96.713303 chains5 1 6 1 3 3 736 2193 25 30 96.898285 is5 1 6 1 3 4 775 2202 33 21 96.898285 so5 1 6 1 3 5 821 2202 127 20 96.656586 onerous5 1 6 1 3 6 961 2193 57 29 96.838974 ands 1 6 1 3 7 1030 2192 193 38 97.010239 threatening,5 1 6 1 3 8 1237 2192 60 29 96.998413 that5 1 6 1 3 9 1309 2192 48 29 96.987518 thes 1 6 1 3 10 1369 2191 94 39 96.378952 majors 1 6 1 3 11 1474 2191 103 30 96.645515 chains5 1 6 1 3 12 1591 2200 47 21 96.633934 ares 1 6 1 3 13 1651 2200 38 29 96.951042 up5 1 6 1 3 14 1702 2190 30 30 93.306168 in5 1 6 1 3 15 1745 2199 117 21 74.289780 arms....3 1 6 2 0 0 562 2239 1335 185 -1 4 1 6 2 1 0 635 2239 1260 41 -1 5 1 6 2 1 1 635 2242 45 29 96.611183 To5 1 6 2 1 2 698 2250 50 30 96.546654 my5 1 6 2 1 3 765 2241 188 39 96.527176 knowledge,5 1 6 2 1 4 973 2250 76 20 96.639198 none5 1 6 2 1 5 1067 2241 35 29 96.841194 of5 1 6 2 1 6 1117 2241 48 29 96.395744 thes 1 6 2 1 7 1178 2241 101 29 96.961937 above5 1 6 2 1 8 1296 2240 101 29 96.569969 chains5 1 6 2 1 9 1415 2240 75 29 96.401527 have5 1 6 2 1 10 1509 2240 105 38 96.187523 signed5 1 6 2 1 11 1631 2249 39 29 96.874390 up5 1 6 2 1 12 1687 2239 47 30 96.480354 for5 1 6 2 1 13 1750 2239 49 30 96.748634 thes 1 6 2 1 14 1816 2239 79 38 96.900284 plan,4 1 6 2 2 0 562 2287 1335 39 -1 5 1 6 2 2 1 562 2290 147 33 96.612274 however,5 1 6 2 2 2 721 2289 93 30 96.521660 morals 1 6 2 2 3 826 2289 89 30 96.984772 fibers5 1 6 2 2 4 927 2289 35 29 96.589111 of5 1 6 2 2 5 970 2289 73 29 96.724594 theirs 1 6 2 2 6 1053 2293 151 33 96.897743 corporate5 1 6 2 2 7 1216 2288 168 29 96.659401 executives5 1 6 2 2 8 1396 2287 59 30 96.681664 will5 1 6 2 2 9 1467 2288 36 29 96.842422 be5 1 6 2 2 10 1516 2287 96 38 96.913788 sorely5 1 6 2 2 11 1624 2287 92 30 96.068687 tested5 1 6 2 2 12 1729 2287 28 29 96.068687 in5 1 6 2 2 13 1768 2287 48 29 96.528702 thes 1 6 2 2 14 1828 2292 69 24 96.872543 next4 1 6 2 3 0 562 2334 1334 42 -1 5 1 6 2 3 1 562 2337 58 31 96.869850 few5 1 6 2 3 2 633 2338 108 30 96.040024 weeks.5 1 6 2 3 3 765 2338 11 30 93.938751 I5 1 6 2 3 4 788 2338 75 30 96.299774 have5 1 6 2 3 5 875 2343 50 25 96.586456 not5 1 6 2 3 6 937 2342 63 25 96.586456 sents 1 6 2 3 7 1012 2337 28 30 96.698174 in5 1 6 2 3 8 1053 2346 56 30 96.811150 any5 1 6 2 3 9 1122 2337 103 38 96.766258 signed5 1 6 2 3 10 1237 2341 144 25 96.791618 contracts5 1 6 2 3 11 1393 2344 31 22 96.265305 as5 1 6 2 3 12 1436 2341 57 33 96.265305 yet,5 1 6 2 3 13 1507 2335 56 30 96.455681 ands 1 6 2 3 14 1575 2336 11 29 96.455681 I5 1 6 2 3 15 1598 2344 54 21 96.924271 cans 1 6 2 3 16 1665 2343 100 22 96.979256 assures 1 6 2 3 17 1777 2343 46 22 96.570267 we5 1 6 2 3 18 1835 2334 61 30 96.570267 will4 1 6 2 4 0 562 2383 1334 41 -1 5 1 6 2 4 1 562 2392 50 24 96.851463 not5 1 6 2 4 2 623 2387 37 29 97.001259 be5 1 6 2 4 3 672 2387 48 29 96.608368 thes 1 6 2 4 4 732 2386 71 30 96.526939 first.5 1 6 2 4 5 828 2387 23 29 84.264694 It5 1 6 2 4 6 862 2386 25 30 84.264694 is5 1 6 2 4 7 899 2395 50 29 96.072922 my5 1 6 2 4 8 961 2385 142 31 96.208641 intentions 1 6 2 4 9 1115 2391 30 24 96.208641 to5 1 6 2 4 10 1157 2385 76 30 96.526535 have5 1 6 2 4 11 1246 2385 38 29 91.878616 all5 1 6 2 4 12 1297 2385 48 29 96.755722 thes 1 6 2 4 13 1357 2389 145 25 96.656395 contracts5 1 6 2 4 14 1516 2384 104 38 96.684380 signed5 1 6 2 4 15 1633 2384 58 29 96.762192 ands 1 6 2 4 16 1703 2384 69 29 96.979103 held5 1 6 2 4 17 1784 2383 69 30 96.717484 here5 1 6 2 4 18 1867 2383 29 30 96.623558 in2 1 7 0 0 0 560 2531 594 9 -1 3 1 7 1 0 0 560 2531 594 9 -1 4 1 7 1 1 0 560 2531 594 9 -1 5 1 7 1 1 1 560 2531 594 9 95.000000 2 1 8 0 0 0 638 2560 594 117 -1 3 1 8 1 0 0 638 2560 594 117 -1 4 1 8 1 1 0 638 2560 594 50 -1 5 1 8 1 1 1 638 2560 39 21 94.903130 1335 1 8 1 1 2 693 2572 174 38 95.511353 Rosenberg5 1 8 1 1 3 883 2571 141 34 95.232224 1901-03;5 1 8 1 1 4 1038 2571 54 29 93.152222 CX5 1 8 1 1 5 1109 2570 123 30 87.036415 16Z-99.4 1 8 1 2 0 638 2635 192 42 -1 5 1 8 1 2 1 638 2635 40 21 86.468140 1345 1 8 1 2 2 693 2647 54 30 89.867378 CX5 1 8 1 2 3 760 2647 70 30 87.995064 492.2 1 9 0 0 0 637 2710 946 112 -1 3 1 9 1 0 0 637 2710 946 112 -1 4 1 9 1 1 0 637 2710 946 45 -1 5 1 9 1 1 1 637 2710 40 22 93.384354 1355 1 9 1 1 2 693 2722 77 30 15.786469 CK's5 1 9 1 1 3 787 2721 125 34 45.247498 147-64,5 1 9 1 1 4 925 2721 86 30 90.396065 Z-69.5 1 9 1 1 5 1035 2721 56 29 96.747940 Sees 1 9 1 1 6 1103 2721 66 29 93.105804 also5 1 9 1 1 7 1183 2720 77 29 90.952774 CX's5 1 9 1 1 8 1277 2719 123 34 0.000000 142-59,5 1 9 1 1 9 1414 2719 169 30 90.446709 2066Z-33.4 1 9 1 2 0 637 2776 544 46 -1 5 1 9 1 2 1 637 2776 41 22 91.878990 1365 1 9 1 2 2 691 2788 77 30 71.016846 CX's5 1 9 1 2 3 792 2788 168 34 91.017845 2206Z-21,5 1 9 1 2 4 973 2788 88 34 92.250290 Z-22,5 1 9 1 2 5 1074 2788 107 29 89.803345 Z-111. Initial Decision 115 F.T.C.

the office, unless we are forced to commit ourselves to the program because other chains give way.

...90 far the O.E.R. has stonewalled the situation, but we believe that if they do not get the signed contracts within the next few weeks, something will crack open....237 63. Rosenberg denied that he ever discussed Peterson's participation or nonparticipation with the alleged conspirators. According to his recollection, these subjects never came up on June 10.'** As shown in Finding 58, however, there is convincing evidence that Zimmerman spent June 10 urging the CPA members, including Peterson, to adopt a unified position on participation. Contemporaneous or nearly contemporaneous accounts of what occurred on June 10 strongly support the conclusion that Zimmerman's efforts bore fruit. (Findings 60 and 61.) There is also evidence that in response to Zimmerman's exhortations there were explicit avowals of nonparticipation by some firms.'*” While there is no proof that Rosenberg made such a public pledge, his denial that the subject even came up is contradicted by CX 681A (See Finding 62). According to Rosenberg, this June 12 report to his stores merely reflected what he surmised from the large turnout of important and unhappy drugstore executives.'“° But the plain language of the document itself indicates not only that he heard some discussion on June 10 respecting participation, but that what he heard related to a common scheme ("...we [emphasis added] believe that if they do not get the signed contracts within the next few weeks, something will crack open"). Rosenberg 137 CX 681A. According to Rosenberg, the report reflected information obtained on June 10. Rosenberg 1798; CX's 2070Z-64, Z-65. See also Rosenberg 1803 and CX's 2070Z-62, Z-63, for additional evidence that Rosenberg had doubts about the long-range willingness of the major chains to deny themselves the competitive benefits to be derived from participation in NYSEPP. In general, chains and independents distrust each other and both are skeptical about the other's motives. CX's 2261Z-39-Z-41.

138 Rosenberg 1780-86, 1868-69; CX's 16Z-57, Z-58, Z-65, Z-75, Z-76, Z-71-Z-79, Z-86.

139 see CX's 14Z-40-Z-44, Z-59, Z-61, Z-64, Z-65, Z-69, 2066Z-27, Z-28, Z-33. See also CX's 3Z-29-Z-33, Z-48, Z-49 for evidence that nonparticipation was also discussed at CPA meetings prior to June 10. 140 Rosenberg 1787, 1802-03; CX's 16Z-17, Z-78, 2070Z-62. PETERSON DRUG COMPANY 529 492 Initial Decision himself conceded that prior to June 10 he had made no firm decision as to whether he would participate;'*' yet, as disclosed in CX 681A, only two days later he was prepared to commit his stores to nonparticipation so long as the other chains stayed out. In addition, there is no dispute that at the Pharmacy5 1 3 1 5 9 1450 862 98 45 77.161705 Day”5 1 3 1 5 10 1572 862 89 45 96.350990 rally5 1 3 1 5 11 1685 861 42 36 96.526596 of5 1 3 1 5 12 1745 862 90 35 96.477486 June5 1 3 1 5 13 1863 861 43 35 96.637856 104 1 3 1 6 0 571 918 1332 50 -1 5 1 3 1 6 1 571 922 210 46 96.733368 Rosenberg5 1 3 1 6 2 803 921 187 36 96.446075 discussed5 1 3 1 6 3 1012 920 85 37 93.292877 with5 1 3 1 6 4 1119 920 177 36 92.565063 Krahulec5 1 3 1 6 5 1318 920 59 35 96.754211 thes 1 3 1 6 6 1400 920 113 35 96.814781 Dear Valued Customer"

letter, an exchange that effectively told Rite Aid that Peterson would not be participating.” Moreover, Rosenberg's categorical denial that nonparticipation was discussed on June 10, or for that matter at any other time, must be weighed against the following testimony: Q. Did you ever have conversations with any persons outside of Peterson's about what the effect of not participating by the firms would be on the terms of the plan? A. Probably, but I don't remember specifically with whom. Q. Why do you say probably? A. Because being a pharmacist, I met with other pharmacists. Everybody was outraged by the plan. And it's common knowledge if you do not have people to participate in a plan, you don't have a plan.’ 64. Within days of the June 10 rally, the alleged conspirators took steps (Findings 65 to 69) which were unprecedented but fully consonant with the Zimmerman exhortation for departicipation (Finding 58), with the Krahulec advice on how not to participate (Finding 59), and with the perception of the pharmacists (Findings 60 to 62) that a combined front of nonparticipation had been put together in Albany.

65. On June 12, Kinney withdrew from PAID I.'“ Kinney admitted outright that this decision was based on information obtained at the June 1 Pharmacy5 1 5 2 3 7 1240 2228 98 46 96.628677 Day meeting.’ 66. Fay's, too, withdrew from PAID I on June 12.' 141 Rosenberg 1882; CX 2070Z-60.

2 Rosenberg 1898-99 and Findings 59, 75.

483 CX 16Z-81 (Rosenberg Deposition).

4 CX 1749.

145 CX's 14Z-74, 488C.

46 CX 1740.

Initial Decision 115 F.T.C.

67. On June 13, Carls withdrew from PAID I.!”’ 68. By June 17, Rosenberg could confidently report to his Board of Directors that At5 1 3 2 2 5 1048 739 68 36 96.314529 this5 1 3 2 2 6 1130 740 101 45 96.894722 points 1 3 2 2 7 1244 740 46 36 96.894722 all5 1 3 2 2 8 1306 740 113 45 96.889259 majors 1 3 2 2 9 1433 740 123 37 96.889259 chains5 1 3 2 2 10 1571 741 92 36 96.837753 have5 1 3 2 2 11 1676 742 145 35 96.582657 refused5 1 3 2 2 12 1835 748 37 30 96.582657 to5 1 3 2 2 13 1888 743 79 45 96.777374 signa 1 3 2 3 0 636 791 640 52 -1 5 1 3 2 3 1 636 797 126 43 96.713287 [PAID5 1 3 2 3 2 762 787 20 60 95.814034 I5 1 3 2 3 3 806 797 249 46 93.300423 participation5 1 3 2 3 4 1069 791 207 50 0.000000 forms].'® 69. On June 18, Rosenberg first learned that Peterson's Akron store had signed up, and he immediately canceled its participation in PAID I.”

70. Respondent Peterson went to great lengths in its attempt to establish that its departicipation of the Akron store was somehow different from what Kinney, Fay's, and Carls had done. But these differences relate to how a decision may have been made to participate, not departicipate. To begin with, respondent makes much ado about whether the Akron store had exceeded its authority by participating in the first place. What the record shows is that as a matter of corporate policy, Peterson delegated to each pharmacistmanager discretion in running all aspects of the day-to-day affairs of the 18 pharmacies. Nevertheless, the corporate headquarters kept control since it retained the supervisory reins and determined how much discretion was to be delegated to the affiliates. Under this allocation of authority, during the time period relevant to this proceeding, the pharmacists had been given control over the purchase of pharmaceutical goods, hiring and firing of employees, and broad discretion as to how best to promote the store. Moreover, each store had its own separate contract with third party administrators; submitted its own claims to these administrators; and was paid directly for those claims by the administrators. This contrasts with the method used by major chains, which ordinarily sign one contract for all of their stores and submit the claims collectively with payment going directly to the headquarters of the chain.’*° In actual practice, however, the lines of demarcation between Peterson's putative broad grant of individual store autonomy and the authority retained by the 147 CX 2005.

148 CX 679A.

14° Rosenberg 1831-33; CX's 16Z-88, 1119, 2070Z-72. 150 Rosenberg 1708-10, 1717-24; CX's 15K, L, 16K, Z-23, Z-24, 716B, 2070Z-73, Z-74, 2268Z-208, Z-212.

PETERSON DRUG COMPANY 531 492 Initial Decision Oakfield headquarters were obscure. This is illustrated by respondent's insistence that Rosenberg, acting in his capacity as supervisor of pharmacy operations, was solely responsible for negotiating the contracts with the major pharmaceutical suppliers and third party plan administrators.’*' That this claim is inconsistent with respondent's assertion that the stores were to be treated as individual entities under third party plans and were to control purchases as well as making general policy, is shown by the very fact that Akron accepted PAID I without first consulting Rosenberg.’ But irrespective of whether the Akron store may or may not have exceeded its authority in signing a PAID I participation form, respondent's argument misses the point that the issue here is not how Akron's participation came about, but rather the circumstances surrounding Rosenberg's abrupt and unprecedented decision to departicipate. (As it happens, Rosenberg's explanation for the withdrawal of the Akron store is virtually identical with the explanation given by Carls: the sudden revelation 'S) Rosenberg 1717-21, 1724.

82 Cory, the Akron store manager who had been with Peterson since 1958 and had been signing third party contracts for 20 years, was “confused” by the allocation of authority between him and Rosenberg. CX's 15H, M-Q. One source of this confusion may be found in Rosenberg's own account of his authority which indicates an ambivalent role rather than a hard-and-fast rule ("I took it upon myself to pay somewhat greater attention to third-party prescription programs, which were becoming more prevalent" (Rosenberg 1720)) and It5 1 5 2 7 8 1398 2216 59 20 96.977859 was5 1 5 2 7 9 1470 2212 50 24 96.860268 not5 1 5 2 7 10 1531 2216 16 20 95.595100 a5 1 5 2 7 11 1559 2208 70 28 95.595100 hard5 1 5 2 7 12 1642 2208 56 28 96.114372 ands 1 5 2 7 13 1711 2207 57 29 96.114372 fast5 1 5 2 7 14 1780 2208 75 28 78.663521 rule CX 2070Z-73 (Rosenberg Deposition)). Even with respect to the Akron5 1 5 2 8 11 1701 2256 154 34 78.481743 Incident,”4 1 5 2 9 0 523 2303 1334 39 -1 5 1 5 2 9 1 523 2303 161 38 96.425560 according5 1 5 2 9 2 698 2308 30 24 93.252838 to5 1 5 2 9 3 742 2304 196 37 83.084564 Rosenberg's5 1 5 2 9 4 952 2303 118 29 96.956551 versions 1 5 2 9 5 1084 2308 26 24 96.895950 at5 1 5 2 9 6 1124 2303 73 34 96.985542 trial,5 1 5 2 9 7 1211 2304 36 28 96.730904 he5 1 5 2 9 8 1261 2304 109 38 96.373390 simply5 1 5 2 9 9 1384 2304 60 29 97.001518 told5 1 5 2 9 10 1458 2304 47 28 97.009422 thes 1 5 2 9 11 1520 2309 77 24 96.587082 stores 1 5 2 9 12 1610 2313 141 29 96.582870 managers 1 5 2 9 13 1762 2304 61 29 96.913208 that5 1 5 2 9 14 1836 2304 21 29 96.985588 it4 1 5 2 10 0 523 2352 1332 38 -1 5 1 5 2 10 1 523 2352 99 29 96.726517 would5 1 5 2 10 2 633 2352 76 29 96.535965 have5 1 5 2 10 3 719 2352 75 29 96.334045 been5 1 5 2 10 4 808 2352 91 29 94.796150 best" to have sent the contract to headquarters. Rosenberg 1832. In further support of this shaky rationalization for departicipation, Rosenberg testified that Cory was not authorized to sign the contract because he was not an officer of Akron at that time. Rosenberg 1832. But Cory, who had been an officer at one time (CX's 15M, N, 2070Z-74), and both as an officer and as an ex-officer apparently enrolled Akron in third party plans without stirring up any great fuss (See CX's 16Z-36, Z-37), had never been told by Rosenberg -- that is, prior to the PAID I incident -- that he no longer had this authority. CX's 15P, Q. Against this background, it is understandable why Rosenberg's policy respecting limitations on the manager's authority had made no lasting impression on Cory. CX 15Z-22. Initial Decision 115 F.T.C.

that the person who signed the participation form was unauthorized to do so.'*) 71. Respondent also argues that its withdrawal of the Akron store should be considered as simply an extension of its long-standing policy of resisting to the last possible moment all third party plans offering reimbursement at a rate of less than full AWP.'™ In support of this argument, respondent attaches special significance to the contract negotiated with BCWNY during the period 1983-86 for both BCWNY's community (i.e., non-NYSEPP) and NYSEPP members. The signing of this agreement followed 2 1/2 years of haggling and threats of law suits between Peterson and BCWNY over reimbursement rates and respondent's status as a chain.’* If it were classified as a chain, BCWNY would reimburse at a rate of AWP minus 12%. If Peterson were not a chain, the reimbursement rate would be a sliding scale between AWP minus 1% to AWP minus 9%. Peterson finally accepted a compromise rate of AWP minus 3% to minus 11%.'°° This incident tells us nothing about the existence of a scheme to defeat PAID I, and stands simply as additional proof that notwithstanding Peterson's hostility to any third party plan (and especially those premised on a reduction from AWP), it must for competitive reasons eventually accept these plans.'*” 153 CX Z005. Conspicuously missing from Peterson's explanation of the Akron store's mistake is any attempt to account for the ready acceptance of the PAID I formula by Cory, its experienced store manager. CX's 15H, M, N, 2070Z-73, Z-74. Equally odd, is Carls' explanation that it discovered its mistake in late May, but only decided to act on it after the June 10 rally. See CX 2250Z-86. As in the case of Peterson's Cory, the unauthorized Carls' employee had apparently enrolled in other third party plans with no sudden withdrawals upon the discovery of this technical glitch. CX's 2206Z-121, Z-122, 2250Z-80. 154 Rosenberg 1732-42.

'SS These negotiations followed BCWNY's attempt to eliminate the problems inherent in reimbursement premised on actual acquisition cost. See Finding 17. 156 Wutz 1007-09, 1016, 1038-63, Rosenberg 1732-42, 1912; RX's 23A-35B. BCWNY estimated that Peterson's average reimbursement rate was AWP minus 5.3%. RX 30C.

157 See Findings 42, 43, 50 and Wutz 1074, Rosenberg 1886, 1910; CX's 2070Z-45, 2267Z-124, Z-125, 2268Z-41.

PETERSON DRUG COMPANY 533 492 Initial Decision 72. With the exception of one capitation plan (See Note 90), none of the alleged conspirators had ever before withdrawn from a third party plan after they had already enrolled.'*® New York State and the PAID administrators had never before experienced the phenomenon of pharmacies signing up to participate in a plan and then withdrawing a short time later.’ Even one of the alleged conspirators acknowledged that such withdrawals were unprecedented.’ 73. The Zimmerman/Krahulec campaign for a solid front of nonparticipation did not end with the June 10 Pharmacy5 1 3 2 2 10 1647 1156 109 45 82.938164 Day,”5 1 3 2 2 11 1771 1166 39 25 96.574646 or5 1 3 2 2 12 1822 1156 57 35 96.366425 thea 1 3 2 3 0 544 1214 1332 46 -1 5 1 3 2 3 1 544 1214 298 46 92.643204 departicipation5 1 3 2 3 2 857 1214 42 34 93.296478 of5 1 3 2 3 3 910 1214 111 46 90.581497 Fay's,5 1 3 2 3 4 1038 1214 154 46 96.118874 Kinney,5 1 3 2 3 5 1208 1214 113 42 96.906883 Carls,5 1 3 2 3 6 1338 1214 68 35 96.763947 ands 1 3 2 3 7 1421 1215 169 35 96.601662 Peterson5 1 3 2 3 8 1605 1215 73 35 96.973206 that5 1 3 2 3 9 1692 1214 184 36 96.297409 followed.4 1 3 2 4 0 544 1271 1333 49 -1 5 1 3 2 4 1 544 1271 150 46 95.845612 Picking5 1 3 2 4 2 715 1283 47 35 95.845612 up5 1 3 2 4 3 783 1283 46 25 92.681961 on5 1 3 2 4 4 852 1272 205 36 89.618912 Krahulec's5 1 3 2 4 5 1081 1272 212 47 96.277313 Pharmacy Day" invitation, the alleged conspirators made certain that they were all using the same chosen instrument of nonparticipation -- the Rite Aid Dear5 1 3 2 6 9 1737 1392 139 34 96.733261 Valued4 1 3 2 7 0 543 1446 1331 48 -1 5 1 3 2 7 1 543 1446 209 36 88.173340 Customer letter first revealed by Krahulec on Pharmacy5 1 3 2 7 9 1764 1449 110 45 95.629120 Day. (Findings 74 to 78.) 74. The text of the Rite Aid prototype read as follows: Dear Valued Customer:

Your prescription drug benefit was changed. According to a notification we received, it is now underwritten by Equitable Insurance and administered by Paid Prescriptions. This change has not altered the value we place on servicing your prescription needs and we would like to continue doing so. Although we have met and expressed our concerns to the people responsible for your health care, no change was made. This necessitates a change in the procedures for billing. Our Rite Aid pharmacist will complete a billing form for you to obtain reimbursement. Upon mailing the billing form to your union office (Emphasis in original), you will be reimbursed for your expenses. 8 CX's 11Z-26, Z-27, 488G, 725D, 2063Z-86, Z-87, 2203Z-121, 2206Z-15, Z-125, 2247"0", 2250Z-22, 2297R.

159 Feinberg 416-17; CX's 2258Z-84, Z-85, Z-102, Z-103, 2259 Z-55, Z-56, Z-91, Z-127-Z-129, 2260Z-19, Z-20, 2262Z-146, Z-147, 2267Z-114, Z-115; RX 259Z-28. In addition to the alleged conspirators, departicipation letters were submitted by Wegmans and several other chains. CX's 2097, 2255Z-87. Wegmans discussed participation and departicipation with Fay's (CX's 2092A, 2255Z-63-Z- 65, Z-72, Z-73) but the plans of this chain were not forwarded to Krahulec since Wegman's is5 1 8 2 7 3 772 2731 51 24 96.429710 not5 1 8 2 7 4 843 2735 8 20 96.124489 a5 1 8 2 7 5 864 2726 133 29 96.124489 members 1 8 2 7 6 1008 2726 35 29 96.516632 of5 1 8 2 7 7 1053 2727 47 28 96.954735 thes 1 8 2 7 8 1113 2726 119 38 84.923302 group. CX 20Z-227. See also CX 2255K. 100 CX 2203Z-121.

Initial Decision 115 F.T.C.

Governor Mario M. Cuomo may be contacted at State Capitol, Albany, NY 12247 (518) 455-2800; and, Thomas F. Hartnett, Director, Governors Office of Employee Relations, State of New York, Agency Building #2, Albany, NY 12223, (518) 474-6988.

We agree this is cumbersome. Please let your officials know you want this changed. If assistance is required, please do not hesitate to let us know. 75. The common adoption of the Dear5 1 5 1 1 8 1513 989 140 37 96.405251 Valued5 1 5 1 1 9 1666 989 207 37 92.642326 Customer letter is convincing proof that the alleged conspirators have reached a cozy understanding about nonparticipation for otherwise its use makes no economic sense whatsoever. (Rosenberg's assumption that the other chains would be using the Dear5 1 5 1 5 7 1330 1224 140 36 96.136414 Valued5 1 5 1 5 8 1489 1223 207 37 86.852356 Customer letters simply because they would not want to turn customers away,'” is but a small part of the story.) By the terms of PAID I, if a NYSEPP member had a prescription filled at a participating pharmacy, the consumer merely paid a small co-pay fee. If, however, the same prescription were to be filled at a nonparticipating pharmacy, the member would have to pay up front the store's regular retail price, and eventually would only be reimbursed for the amount that the pharmacy would have received had it participated -- that is, the wholesale price as appropriately reduced from AWP under the PAID I formula.’® It was so unlikely that NYSEPP members would have accepted such a disparity in the cost of their drugs that CVS, Fay's, and Rite Aid recognized that they would have lost business if they adopted such a device while their competitors participated in PAID I.'“ As for respondent's contention that the consumer advice contained in the Dear5 1 5 1 19 9 1620 2036 140 36 96.775139 Valued5 1 5 1 19 10 1776 2036 208 36 95.914505 Customer letter was readily available in the state's own consumer information pamphlet, this, too, is way off the mark. The Dear5 1 5 1 21 11 1734 2153 142 36 93.221832 Valued5 1 5 1 21 12 1895 2153 90 35 92.811951 Cus-4 1 5 1 22 0 652 2211 1334 47 -1 5 1 5 1 22 1 652 2216 131 36 92.011520 tomer letter was a devious marketing strategy which promised NYSEPP members you5 1 5 1 23 4 1153 2271 74 36 78.582764 will5 1 5 1 23 5 1243 2271 45 36 96.978882 be5 1 5 1 23 6 1303 2271 220 35 96.628357 reimbursed5 1 5 1 23 7 1537 2270 58 35 96.405670 for5 1 5 1 23 8 1609 2280 89 37 96.310600 yours 1 5 1 23 9 1712 2268 196 48 94.472900 expenses but artfully concealed the unfavorable terms of that reimbursement. The New York pamphlet, on the other hand, correctly informed these consumers that if they used any nonparticipating pharmacy they 11 CX 816B.

162 EX's 16Z-101, Z-102.

163 ¥ avanaugh 631-33; CX 681A; RX 295C.

164 CK's 23Z-88, 24Z-79, 2187Z-3, Z-4, 2189Z-72, 2203Z-143, Z-144. PETERSON DRUG COMPANY 535 492 Initial Decision would receive the reimbursement amount due to the pharmacy had the pharmacy been a participant. It was for this reason that the state's pamphlet concluded, This5 1 3 1 3 4 1095 759 196 44 96.222054 procedures 1 3 1 3 5 1308 770 122 24 96.618858 means5 1 3 1 3 6 1449 760 72 34 96.618858 that5 1 3 1 3 7 1537 761 104 34 96.755997 when5 1 3 1 3 8 1659 771 71 35 96.390678 you5 1 3 1 3 9 1748 761 92 35 96.678696 have5 1 3 1 3 10 1858 772 19 24 96.798264 a4 1 3 1 4 0 542 811 1335 52 -1 5 1 3 1 4 1 542 813 135 41 96.985092 choice,5 1 3 1 4 2 690 825 71 35 96.985092 you5 1 3 1 4 3 774 815 127 34 96.878387 should5 1 3 1 4 4 913 826 62 24 95.273643 uses 1 3 1 4 5 988 826 19 24 94.896301 a5 1 3 1 4 6 1018 815 242 46 93.305840 participating5 1 3 1 4 7 1272 811 262 51 73.761528 pharmacy’®, hardly the advice contained in the Dear5 1 3 1 5 5 1001 874 140 35 96.768112 Valued5 1 3 1 5 6 1156 874 208 36 95.825798 Customer gimmick of the nonparticipating alleged conspirators. Rosenberg, of course, knew that a NYSEPP member who filled a prescription at a nonparticipating Peterson store would only be reimbursed in part, but his version of the Dear5 1 3 1 9 3 761 1106 140 34 96.491707 Valued5 1 3 1 9 4 926 1106 207 35 96.281471 Customer letter makes no such disclosure.'® Furthermore, since Peterson's prescription volume was not growing, and competition had already forced price reductions,!” it is implausible that Rosenberg would have adopted the Dear5 1 3 1 12 9 1730 1285 140 36 96.710411 Valued4 1 3 1 13 0 536 1336 1333 44 -1 5 1 3 1 13 1 536 1336 206 36 93.330482 Customer scheme unless he was certain that Peterson would not be confronted by the threat of even more serious price competition in the form of participating drugstores offering to fill NYSEPP prescriptions at no cost except for the small co-pay fee. What's more, the theory behind the Dear5 1 3 1 17 5 1084 1572 140 35 96.439468 Valued5 1 3 1 17 6 1244 1572 207 36 96.401184 Customer device was that the NYSEPP members who were forced to seek reimbursement on their own would be so inconvenienced -- to say nothing of their out-of-pocket losses -- that they would complain to the state and demand a change in the program.’ Again, it is inconceivable that the alleged conspirators would risk incurring the ire (and possible irreparable loss) of these valuable prescription customers unless they were certain that no competitors would be offering the hassle-free, 55 1 5 1 1 2 669 2157 55 30 91.337921 CX5 1 5 1 1 3 736 2158 189 30 89.325699 2245Z-198.4 1 5 1 2 0 604 2220 750 52 -1 5 1 5 1 2 1 604 2220 40 22 9.236664 ‘6°5 1 5 1 2 2 668 2232 149 39 94.678146 Compares 1 5 1 2 3 829 2234 173 38 96.968971 Rosenberg5 1 5 1 2 4 1019 2235 75 30 96.937828 18985 1 5 1 2 5 1108 2235 70 29 96.721039 with5 1 5 1 2 6 1191 2236 55 29 92.579132 CX5 1 5 1 2 7 1258 2237 96 29 92.579132 727B.2 1 6 0 0 0 525 2295 1335 151 -1 3 1 6 1 0 0 525 2295 1335 151 -1 4 1 6 1 1 0 604 2295 1255 57 -1 5 1 6 1 1 1 604 2295 38 22 14.065384 '®”5 1 6 1 1 2 665 2307 78 31 78.219208 CX's5 1 6 1 1 3 755 2308 254 35 85.346382 2070Z-35,Z-54.5 1 6 1 1 4 1031 2310 55 29 95.577873 Sees 1 6 1 1 5 1098 2310 65 29 95.577873 also5 1 6 1 1 6 1176 2311 170 38 96.830582 Rosenberg5 1 6 1 1 7 1363 2312 83 33 96.484474 1710,5 1 6 1 1 8 1464 2313 126 29 96.815331 1742-435 1 6 1 1 9 1603 2313 46 29 97.009224 for5 1 6 1 1 10 1660 2315 199 37 95.754379 respondent's4 1 6 1 2 0 526 2357 1334 44 -1 5 1 6 1 2 1 526 2357 282 39 96.290482 acknowledgments 1 6 1 2 2 824 2359 60 30 96.988976 that5 1 6 1 2 3 901 2359 34 30 96.967079 its5 1 6 1 2 4 952 2360 194 38 96.796028 prescriptions 1 6 1 2 5 1162 2361 96 37 96.919121 prices5 1 6 1 2 6 1276 2367 77 24 96.730614 must5 1 6 1 2 7 1369 2362 37 29 96.940567 be5 1 6 1 2 8 1423 2361 29 31 96.992203 in5 1 6 1 2 9 1468 2362 49 30 97.002998 thes 1 6 1 2 10 1533 2363 133 38 96.584145 ballpark5 1 6 1 2 11 1683 2364 29 29 96.933578 in5 1 6 1 2 12 1729 2364 85 29 96.246628 orders 1 6 1 2 13 1831 2369 29 25 96.246628 to4 1 6 1 3 0 525 2406 507 40 -1 5 1 6 1 3 1 525 2406 92 30 96.970642 retains 1 6 1 3 2 630 2416 75 21 96.787727 even5 1 6 1 3 3 718 2407 36 30 96.919571 its5 1 6 1 3 4 768 2408 78 38 96.903214 loyal5 1 6 1 3 5 859 2413 173 25 96.406631 customers.2 1 7 0 0 0 602 2467 1255 48 -1 3 1 7 1 0 0 602 2467 1255 48 -1 4 1 7 1 1 0 602 2467 1255 48 -1 5 1 7 1 1 1 602 2467 39 23 96.526443 1685 1 7 1 1 2 664 2482 93 29 96.509315 There5 1 7 1 1 3 770 2482 24 29 96.043198 is5 1 7 1 1 4 807 2491 38 20 95.298706 no5 1 7 1 1 5 857 2482 141 30 95.298706 evidences 1 7 1 1 6 1010 2482 29 30 96.800240 in5 1 7 1 1 7 1051 2483 48 29 96.903419 thes 1 7 1 1 8 1111 2484 101 28 96.369682 records 1 7 1 1 9 1225 2484 58 29 95.602852 that5 1 7 1 1 10 1296 2485 84 28 96.542938 when5 1 7 1 1 11 1394 2485 46 29 96.102272 thes 1 7 1 1 12 1455 2485 92 29 96.102272 Dear Valued Customer"

letters were adopted that the alleged conspirators knew or could have anticipated that once the program started the state would relent and for the first month or two hold their employees harmless by reimbursing them for the full amount spent even though they used a nonparticipating pharmacy. See Kavanaugh 632 and CX's 2249Z-139-Z-142.

' Kelley 1635-36. See also Hartnett 937; CX's 5Z-75, Z-76. Initial Decision 115 F.T.C.

and largely cost-free drugs that would have been available from PAID I participants.

76. On or about June 12, 1986, Krahulec sent Rosenberg a copy of the Dear5 1 3 2 2 4 916 809 139 36 96.608566 Valued5 1 3 2 2 5 1069 809 208 36 91.713455 Customer letter, and later that month they had a telephone conversation about how it was supposed to work.!” In anticipation of its use on July 1, Rite Aid itself put the Dear5 1 3 2 4 14 1856 928 142 36 96.791588 Valued4 1 3 2 5 0 662 980 1336 52 -1 5 1 3 2 5 1 662 986 207 36 89.435226 Customer device in place in its own stores on June 19.'”! On June 24, Rosenberg dispatched to the Peterson stores a Dear5 1 3 2 6 10 1855 1045 143 35 96.315788 Valued4 1 3 2 7 0 661 1103 1335 46 -1 5 1 3 2 7 1 661 1103 210 35 95.525261 Customer letter modeled after Krahulec's prototype. In a memorandum accompanying the letter, Rosenberg instructed the Peterson stores, first, to collect the regular cash price from the NYSEPP members, and then to tell these customers that they should seek reimbursement from PAID. Consistent with the evidence that the Dear5 1 3 2 12 2 785 1393 139 35 96.506660 Valued5 1 3 2 12 3 938 1393 204 35 94.774048 Customer device would not have been adopted unless there was an understanding that a solid front of nonparticipation had been put together (Finding 75), Rosenberg reassured his drugstores that they would not be alone. He wrote, It5 1 3 2 15 10 1641 1568 30 36 96.184570 is5 1 3 2 15 11 1709 1579 9 25 96.377708 a5 1 3 2 15 12 1743 1568 252 36 96.344559 cumbersome4 1 3 2 16 0 659 1627 1335 47 -1 5 1 3 2 16 1 659 1628 208 46 96.719971 procedure,5 1 3 2 16 2 889 1628 62 35 96.585220 but5 1 3 2 16 3 971 1627 30 36 96.988266 is5 1 3 2 16 4 1023 1627 206 45 95.949966 essentially5 1 3 2 16 5 1251 1627 94 35 96.297485 what5 1 3 2 16 6 1365 1627 58 35 96.297485 thes 1 3 2 16 7 1443 1627 115 45 96.986885 majors 1 3 2 16 8 1577 1627 123 35 96.349586 chains5 1 3 2 16 9 1722 1627 74 35 96.633293 will5 1 3 2 16 10 1817 1627 45 35 96.408516 be5 1 3 2 16 11 1884 1627 110 45 96.879623 doing4 1 3 2 17 0 659 1686 1335 45 -1 5 1 3 2 17 1 659 1698 105 24 96.706535 comes 1 3 2 17 2 791 1686 81 45 96.251076 July5 1 3 2 17 3 901 1686 22 41 93.548553 1,5 1 3 2 17 4 958 1686 91 36 95.969933 19865 1 3 2 17 5 1078 1686 31 35 95.969933 if5 1 3 2 17 6 1133 1686 97 35 96.489777 there5 1 3 2 17 7 1258 1686 30 35 96.494225 is5 1 3 2 17 8 1317 1697 47 24 96.218231 no5 1 3 2 17 9 1393 1686 126 45 96.577583 signed5 1 3 2 17 10 1547 1686 188 34 61.445202 contract. The same memorandum also observed that as of June 24, Rite5 1 3 2 18 10 1678 1743 82 40 96.632462 Aid,5 1 3 2 18 11 1774 1743 103 40 93.247955 CVS,5 1 3 2 18 12 1891 1743 101 45 92.791618 Fays,4 1 3 2 19 0 659 1800 1335 46 -1 5 1 3 2 19 1 659 1803 120 39 87.551193 Carl's,5 1 3 2 19 2 793 1803 202 39 93.302498 Genovese,5 1 3 2 19 3 1010 1801 195 41 91.587318 Pathmark,5 1 3 2 19 4 1219 1801 212 45 89.519211 Wegman's,5 1 3 2 19 5 1447 1801 151 45 96.515488 Kinney,5 1 3 2 19 6 1614 1801 68 35 96.554558 ands 1 3 2 19 7 1694 1800 195 36 81.511292 Peterson's5 1 3 2 19 8 1902 1801 92 34 96.631470 have4 1 3 2 20 0 658 1852 665 53 -1 5 1 3 2 20 1 658 1866 61 30 96.898102 not5 1 3 2 20 2 735 1860 126 45 97.005806 signed5 1 3 2 20 3 876 1870 47 35 96.369049 up5 1 3 2 20 4 938 1859 57 35 96.369049 for5 1 3 2 20 5 1008 1859 58 35 93.300964 thes 1 3 2 20 6 1081 1852 242 53 79.181511 program.!” 77. On June 25, 1986, CVS informed its store that the chain would not be participating in PAID I and a customer letter was on the way.!73 ™ Rosenberg 1836, 1898-1901; CX's 16Z-99, Z-102, Z-103, 725L, 2070Z-75, Z-76, Z-96, Z-97, 2194Z-144-Z-147, Z-157, Z-158, 2204Z-36, Z-37. 171 CX 818. On the same day or the next, Kinney, Rite Aid, and Genovese held a conference call during which the question of participation in Paid I was discussed. CX 12Z-29-Z-31. During this conference call there was a discussion of how to bill customers if a drugstore did not participate. CX 488E. '2 CX 727A. See also Rosenberg 1835-36, 1897-1901, CX's 727B, 2070Z-75. The Dear5 1 6 1 2 3 858 2590 117 30 96.153519 Valued5 1 6 1 2 4 997 2590 172 29 93.320656 Customer letter was placed on the pharmacy counter of Peterson's Akron store for distribution to its customers (CX's 2265Z-3, Z-14); in addition, there is evidence that state employees were informed that Peterson would not accept the NYSEPP plastic card. CX 2265Z-19-Z-23, Z-33. 173 OX's 122-124B.

PETERSON DRUG COMPANY 537 492 Initial Decision 78. On June 23, 1986, Kinney informed its drugstores not to accept PAID I cards on July I. They were instructed to fill prescriptions of state employees for the usual cash amount only and then to give these NYSEPP members receipts so5 1 3 1 4 7 1372 804 83 44 96.653809 they5 1 3 1 4 8 1470 814 65 25 96.856140 cans 1 3 1 4 9 1551 803 130 36 96.843918 collects 1 3 1 4 10 1696 803 94 35 96.792915 from5 1 3 1 4 11 1805 803 57 36 96.007050 thea 1 3 1 5 0 528 855 1333 52 -1 5 1 3 1 5 1 528 855 202 42 33.330826 carrier.’”* On June 26, Kinney further instructed its stores to use an attached Dear5 1 3 1 6 3 829 920 138 35 96.573021 Valued5 1 3 1 6 4 981 920 205 35 72.083206 Customer letter that was identical to the Rite Aid prototype.’ On or about the same time, similar instructions were transmitted to Genovese, CVS, and Brooks stores.'”° 79. With the July 1 starting date of PAID I just a few days off, Krahulec and Zimmerman added still another wrinkle to their campaign for a solid front of nonparticipation. CPA retained a law firm which prepared the following memorandum: POINTS TO CONSIDER IN CONNECTION WITH A POSSIBLE PHARMACY PROTEST OF OER PLAN 1]. A short (lasting no more than a week) protest in which pharmacies individually and voluntarily decline to enroll in the OER plan as a means of expressing their disapproval of the plan.

2. The sole purpose of the protest to be to send a clear message to the Governor, the Legislature, and the public that the OER plan is unfair to pharmacies and therefore also unfair to state employees.

3. OK to discuss purpose and nature of protest with independent pharmacies’ trade association and ask them to discuss it with their members; also OK, either through trade association or directly (by letter or phone call), to invite independent pharmacies to voluntarily and individually protest the OER plan (in the same or a different manner).

4. No pressure on any pharmacy to make the protest (or take any other action) and no retaliation against anyone who chooses not to protest. 5. OK to announce protest to customers; OK -- indeed desirable -- to explain why OER plan is unfair: dispensing fee too low, mail order not safe for patients, AWP minus percentage cuts too deep, etc.

6. Announcement should say that many stores and the CDANYS and independents have been meeting with OER and legislators, trying to see the Governor, held the Albany rally, etc., and that the protest is to underscore and emphasize the same issues as presented at those meetings, etc. M4 CX 494, >5 1 12 1 1 2 658 2641 76 29 30.309464 CX's5 1 12 1 1 3 748 2641 98 34 90.289482 495A,5 1 12 1 1 4 860 2641 34 29 90.289482 B.2 1 13 0 0 0 516 2683 1334 144 -1 3 1 13 1 0 0 516 2683 1334 144 -1 4 1 13 1 1 0 595 2683 1240 46 -1 5 1 13 1 1 1 595 2683 39 21 0.000000 7° X's 122, 123, 124A, 1221, 1222, 2308, 2309, 2310. Carls' Dear5 1 13 1 1 13 1720 2696 115 29 96.958488 Valued4 1 13 1 2 0 517 2741 1333 39 -1 5 1 13 1 2 1 517 2741 173 30 93.396011 Customer letter is dated July 1 (CX 2273) but the date of its preparation and transmittal to the drugstores is not clear. See, e.g., CX 2206Z-132. Initial Decision 115 F.T.C, 7: Protest should be widely publicized, for example with a press release which calls on Governor and Legislature not to allow pharmacies to be treated so unfairly.

8. OK to state in press release that, given the onerous terms of the OER plan, many pharmacies declined to participate in the plan quite apart from the protest, and presumably would not participate in the plan even after the protest ended.

9. Announcement and press release should emphasize that pharmacies acted individually and voluntarily to protest OER plan.!”’ 80. CPA's law firm sent the memo to Krahulec on June 26 with the notation, Feels 1 5 1 2 4 1078 1185 75 36 96.563675 free5 1 5 1 2 5 1176 1192 36 29 96.820000 to5 1 5 1 2 6 1235 1185 168 36 96.107796 circulates 1 5 1 2 7 1426 1186 69 35 96.826866 this5 1 5 1 2 8 1519 1186 100 36 96.262230 letters 1 5 1 2 9 1641 1187 68 35 96.262230 ands 1 5 1 2 10 1734 1187 216 35 96.456589 attachments 1 5 1 2 11 1972 1193 36 29 96.925911 to4 1 5 1 3 0 673 1237 1336 55 -1 5 1 5 1 3 1 673 1255 142 36 96.123474 anyone5 1 5 1 3 2 831 1255 72 35 93.142212 you5 1 5 1 3 3 919 1237 168 43 52.870178 wish.’”* Every member of CPA eventually was sent a copy, and Krahulec admitted that prior to July 1, he discussed the memorandum with several CPA members.'’” The lawyer who wrote the memo was prepared to repeat its message of a nonparticipation protest at a June 27 Lake Placid convention'®° attended by Rosenberg and the other alleged conspirators.'®! 81. While the lawyer's memo speaks of individual and voluntary action, the actual use to which it was put was just the opposite. NT OX’ 2204Z-232, Z-233 [Emphasis in original]; see also CX’s 20Z-136, 21J-L, Z-37, Z-38, 2204Z-64, Z-65, Z-231, 2263M, Z-23 for Krahulec’s role in the preparation of the lawyer’s memo. Krahulec, an attorney and pharmacist (CX 20"I"), gingerly avoided the use of the word “boycott” while probing in this “sensitive” area. CX’s 20Z-135, Z-136. The reference to “CDANYS” (presumably Chain Drugstores Association of New York State) probably should have read “CPA” for Chain Pharmacy Association. The confusion undoubtedly traces to the law firm’s long-standing representation of the National Association of Chain Drugstores (NACDS) and its only recent retention by CPA. See CX 2263L 85 1 8 1 1 2 808 2256 56 30 82.218246 CX5 1 8 1 1 3 877 2256 189 30 80.982841 2204Z-230.3 1 8 2 0 0 669 2298 1335 194 -1 4 1 8 2 1 0 746 2298 1258 50 -1 5 1 8 2 1 1 746 2298 39 22 72.727058 15 1 8 2 1 2 806 2310 78 31 72.176300 CX's5 1 8 2 1 3 896 2310 77 37 90.027664 21Q,5 1 8 2 1 4 985 2310 86 34 90.462074 Z-95,5 1 8 2 1 5 1084 2310 86 34 90.462074 Z-96,5 1 8 2 1 6 1183 2310 166 34 82.565308 2204Z-42,5 1 8 2 1 7 1362 2310 86 34 91.730469 Z-70,5 1 8 2 1 8 1460 2310 106 30 91.750824 Z-230.5 1 8 2 1 9 1590 2310 194 38 83.857079 Rosenberg's5 1 8 2 1 10 1796 2310 90 29 94.866844 claims 1 8 2 1 11 1897 2310 59 29 94.866844 that5 1 8 2 1 12 1967 2310 37 29 95.518318 he4 1 8 2 2 0 669 2355 1334 37 -1 5 1 8 2 2 1 669 2366 90 21 96.897049 never5 1 8 2 2 2 772 2356 138 30 96.592445 received5 1 8 2 2 3 923 2357 48 29 96.120255 thes 1 8 2 2 4 984 2357 161 29 93.293488 documents 1 8 2 2 5 1158 2356 91 36 90.558662 (CX's5 1 8 2 2 6 1267 2355 144 35 91.296577 16Z-108,5 1 8 2 2 7 1425 2356 112 36 91.938629 Z-109)5 1 8 2 2 8 1550 2364 62 22 96.879173 was5 1 8 2 2 9 1626 2361 50 25 96.844643 not5 1 8 2 2 10 1690 2355 170 31 96.292526 reconciled5 1 8 2 2 11 1873 2355 71 30 96.869743 with5 1 8 2 2 12 1957 2355 46 30 96.362190 his4 1 8 2 3 0 669 2403 1334 40 -1 5 1 8 2 3 1 669 2405 164 30 96.701981 admissions 1 8 2 3 2 850 2405 61 30 96.142715 that5 1 8 2 3 3 927 2405 37 29 96.284248 he5 1 8 2 3 4 980 2413 62 21 96.544426 was5 1 8 2 3 5 1059 2413 40 21 95.878319 on5 1 8 2 3 6 1115 2404 48 30 95.878319 thes 1 8 2 3 7 1180 2404 77 30 96.585373 CPA5 1 8 2 3 8 1274 2404 123 39 92.820168 mailings 1 8 2 3 9 1414 2404 49 30 96.714554 lists 1 8 2 3 10 1479 2404 56 30 96.806808 ands 1 8 2 3 11 1552 2404 146 39 96.837074 regularly5 1 8 2 3 12 1715 2404 139 30 96.291504 received5 1 8 2 3 13 1870 2404 39 30 95.666039 all5 1 8 2 3 14 1926 2403 77 31 96.851196 CPA4 1 8 2 4 0 669 2453 1022 39 -1 5 1 8 2 4 1 669 2454 148 38 96.552170 mailings.5 1 8 2 4 2 841 2454 174 38 96.131149 Rosenberg5 1 8 2 4 3 1031 2453 87 35 93.285301 1749;5 1 8 2 4 4 1132 2453 78 30 65.727722 CX's5 1 8 2 4 5 1226 2453 124 35 83.676498 16Z-12,5 1 8 2 4 6 1363 2453 88 35 92.654907 Z-13,5 1 8 2 4 7 1463 2453 108 35 91.805527 Z-124,5 1 8 2 4 8 1584 2453 107 30 90.248497 Z-125.3 1 8 3 0 0 668 2496 1335 237 -1 4 1 8 3 1 0 745 2496 1243 50 -1 5 1 8 3 1 1 745 2496 40 22 77.398552 1805 1 8 3 1 2 791 2509 78 30 81.894974 CX's5 1 8 3 1 3 882 2508 126 34 83.704201 21Z-37,5 1 8 3 1 4 1021 2508 85 30 92.626541 Z-38.5 1 8 3 1 5 1129 2508 63 29 96.957771 Thes 1 8 3 1 6 1204 2508 80 29 96.609718 Lakes 1 8 3 1 7 1297 2507 99 30 96.609718 Placid5 1 8 3 1 8 1409 2508 130 38 96.624557 meetings 1 8 3 1 9 1552 2516 61 21 96.685707 was5 1 8 3 1 10 1626 2508 48 29 95.645309 thes 1 8 3 1 11 1687 2508 107 29 96.253304 annual5 1 8 3 1 12 1807 2507 181 30 96.791016 convention4 1 8 3 2 0 668 2553 1335 39 -1 5 1 8 3 2 1 668 2554 36 30 93.045288 of5 1 8 3 2 2 727 2554 126 30 92.253700 PSSNY5 1 8 3 2 3 880 2554 103 30 96.343224 whose5 1 8 3 2 4 1009 2559 122 33 96.057693 supports 1 8 3 2 5 1156 2554 30 29 96.256592 in5 1 8 3 2 6 1213 2554 48 29 96.256592 thes 1 8 3 2 7 1287 2554 77 29 96.730240 forms 1 8 3 2 8 1390 2554 36 29 96.711975 of5 1 8 3 2 9 1449 2563 16 20 96.571167 a5 1 8 3 2 10 1492 2554 166 29 96.245712 state-wide5 1 8 3 2 11 1686 2553 176 39 89.372391 stoppage" by the independents was being sought by Zimmerman and Krahulec. CX’'s 20Z-263, 21Z-6, Z-1, Z-22, Z-23, 2154B, 2204Z-96, 2244Z-49, Z-242, Z-257, 2246Z-146-Z- 149, Z-155.

181 CX's 2070Z-79, 2263Z-5-Z-29, Z-52. By the time the lawyer repeated his message on June 27, PAID I had been withdrawn. Feinberg 435-37. PETERSON DRUG COMPANY 539 492 Initial Decision Krahulec forwarded the memo to Adams Drugs (parent of Brooks) on June 26 with a covering letter in which he reported that the chains were indicating their displeasure with PAID I by refusing to sign up for the plan. Krahulec then told Brooks that thes 1 3 1 4 10 1482 801 234 46 16.038628 pharmacists’5 1 3 1 4 11 1730 802 143 45 96.557571 remedy4 1 3 1 5 0 539 852 684 42 -1 5 1 3 1 5 1 539 859 30 35 94.326729 is5 1 3 1 5 2 584 865 36 29 94.326729 to5 1 3 1 5 3 635 859 120 35 96.830536 refuses 1 3 1 5 4 769 866 37 28 96.939735 to5 1 3 1 5 5 820 859 81 35 96.939735 takes 1 3 1 5 6 916 860 58 34 93.282074 thes 1 3 1 5 7 988 852 235 42 27.474396 contract.'*” F. The State Capitulates 82. With the departicipation of the early enrollees, with those still participating intimating that their commitment was soft, and without the major chains on board as a leverage for encouraging participation by their competitors, New York caved in on June 26 and abandoned PAID I.'* PAID II, the successor plan, set the reimbursement rate at full AWP for independents and AWP minus 5% for chains.'** After some initial uncertainty, and after first checking with each other about their plans, all the major chains finally accepted PAID II by July 4.'® 8?5 1 7 1 1 2 671 1797 78 29 55.197201 CX's5 1 7 1 1 3 763 1797 262 33 85.828819 20Z-317-Z-324;5 1 7 1 1 4 1039 1807 50 20 96.505402 sees 1 7 1 1 5 1102 1798 66 29 93.211945 also5 1 7 1 1 6 1181 1798 78 29 89.113823 CX's5 1 7 1 1 7 1273 1798 260 34 82.853127 20Z-269-Z-271,5 1 7 1 1 8 1547 1799 168 29 74.609390 2204Z-69.3 1 7 2 0 0 529 1839 1339 479 -1 4 1 7 2 1 0 609 1839 1241 51 -1 5 1 7 2 1 1 609 1839 38 21 0.000000 835 1 7 2 1 2 655 1851 142 39 94.705765 Feinberg5 1 7 2 1 3 809 1851 122 34 95.333649 410-26,5 1 7 2 1 4 944 1851 69 34 96.123283 429,5 1 7 2 1 5 1024 1852 123 34 96.123283 451-52,5 1 7 2 1 6 1159 1852 122 29 96.664177 468-69.5 1 7 2 1 7 1306 1853 181 37 96.805527 Kavanaugh5 1 7 2 1 8 1501 1853 67 34 96.919685 618,5 1 7 2 1 9 1581 1853 123 34 96.107788 630-31,5 1 7 2 1 10 1718 1854 132 29 95.969788 Hartnett4 1 7 2 2 0 532 1896 1332 36 -1 5 1 7 2 2 1 532 1896 67 34 96.457809 828,5 1 7 2 2 2 613 1896 120 35 96.457809 847-49,5 1 7 2 2 3 745 1897 122 34 96.501160 929-32,5 1 7 2 2 4 879 1897 122 34 92.790527 980-81;5 1 7 2 2 5 1013 1897 76 30 84.888374 CX's5 1 7 2 2 6 1105 1897 174 35 71.322693 1685G-I", 2261Z-43, 2262Z-180, Z-181; RX's 254Z-92, Z-117, Z-118. To succeed, PAID I did not need all of the some 4,000 New York pharmacies. The crucial consideration was the availability of pharmacies in areas where state employees were concentrated. Kavanaugh 617. In addition to its own reports of departicipation and the rumors of a less than steadfast commitment by those still enrolled, the state received letters from NYSEPP members forwarding reports of impending departicipation. CX's 1684, 1692B, 1695B, C, 17008, D, 1703B, 1802B, 1803G, 2055B-E; RX's 254Z-68, Z-69, Z-96, Z-97. See also Hartnett 982.

184 Feinberg 431-32, 456; CX 1675A; RX 117A. 185 CX's 2066Z-42, 2247Z-48, 2270A-D; RX-312A. As could be expected, first in line for PAID II were the independents since they ended up with full AWP. Rosenberg 1845; CX's 16Z-119, Z-121, 2070Z-83, Z-84, 2257Z-128. Once the independents (and firms like Peterson classified as a series of independents under NYSEPP) accepted PAID II (see Rosenberg 1845; CX 16Z-119), the chains fell into line (CX's 16Z-121-Z-123, 19Z-172, 24Z-85-Z-87, 2070Z-82-Z-84, 2201Z-61, 2253Z-27, Z-28, 2254Z-89, Z-90), although several (Brooks, CVS, Duane Reed, Fay's, Genovese, Kinney, Carls, and Rite Aid) had contemplated a legal challenge to the two-tier reimbursement schedule retained in PAID II. CX 181A. Initial Decision 115 F.T.C.

83. The cost to the state of the retreat from PAID I has been estimated at approximately $7 million.'® G. The Reasonableness Of PAID I 84. Both sides made extravagant claims about the inherent reasonableness or unreasonableness of the PAID I rates of reimbursement. To respondent, it was a5 1 5 1 3 7 1417 1046 114 30 93.131912 rotten5 1 5 1 3 8 1547 1034 161 52 43.091560 plan.'®’ In complaint counsel's view, since PAID I was at least as profitable or even more profitable than other plans that had been accepted (however reluctantly) by respondent and the other alleged conspirators, its rejection is overwhelming proof of concerted action taken contrary to individual self-interest. There is warrant in the record for several factual findings which may lie between the positions of both advocates. (Findings 85 to 88.) 85. New York State was not alone in advancing the notion of reductions from AWP as a cost-containment policy but relatively few third party plans had broken away from the full AWP formula.'** Those plans which had used reductions from AWP had experienced no dearth of providers. To illustrate, Rite Aid, Fay's, Carls, Genovese, Kinney, and CVS had participated in the BCWNYadministered NYSEPP (i.e., the pre-PAID I program) at a rate of reimbursement that was the same as PAID I.” As for Peterson, it eventually accepted a BCWNY-NYSEPP rate that was comparable to the rate it would have received under PAID I.'” 86. Theoretically, a pharmacy firm may go through the exercise of weighing various considerations in evaluating third party plans such as the importance of the plan in a particular locality and its contribution to over-all profits.'*’ As far as this record will allow, 186 Feinberg 456-58; CX 1675A.

187 CX 16Z-80.

188 Hartnett 914, Painter 1427-28; CX's 732A, 1633C, 1760D, 2262Z-198; RX 107G.

189 Kavanaugh 696; CX 70C.

190 cee Findings 29, 71.

191g ee Rosenberg 1741-42; CX's 6Z-6, Z-24, 2251Z-18, 2252Z-2, Z-9, Z-10, 2254Z-15.

PETERSON DRUG COMPANY 541 492 Initial Decision however, none of the alleged conspirators made such a detailed evaluation of PAID I.’ The absence of these studies may be explained by the universal availability of discounts off AWP (See Finding 15) and the facts recited in Findings 42 to 52, which establish that such review is largely unnecessary because of the importance attached to third party plans and the correlation between front-end and back-end business. These considerations mean that even low profit plans are usually accepted, and almost irrespective of profit no firm can afford to stay out of any third party plan if its competitors participate.

87. Any claim that PAID I was destined to fail from the start flies in the face of what actually happened. The plan got off to a good start when Kinney, Carls, Fay's, Peterson's Akron store and many others agreed to participate.'”

88. Complaint counsel put on an elaborate demonstration of the profitability of the PAID I plan as compared to other third party plans in which Peterson, Brooks, Carls, CVS, Fay's, Genovese, Kinney, and Rite Aid had participated. Fairly summarized, this evidence shows that the alleged conspirators participated in few reduced-rate third party plans, but that each had enrolled in at least one (including NYSEPP as administered by BCWNY) that resulted in gross margin percentages (gross margin divided by total reimbursement) equal to or less than those projected under PAID I.'* More germane to this case is the uncontroverted proof that drugstores ordinarily do not reject third party plans irrespective of the modest profit levels involved, and that if their competitors had participated, Peterson and '? Rosenberg 1812; CX's 5Z-50, 6Z-25, Z-106, 7Z-41, 13Z-1, Z-2, Z-37, 16X, 19Z-39, Z-40, 2070Z-18, Z-52, Z-53, 2189Z-136, 2206Z-118, Z-119, 2207Z-18, Z-19, 2254Z-25. Note, however, that CVS had reached the general conclusion that PAID I would have been profitable (CX 6Z-37), Genovese had no basis for believing it would not be (CX's 2249Z-34, Z-35), and Rite Aid assumed that participation in plans paying AWP minus 12% had been profitable (CX 23Z-19). 13 See Findings 35-40.

'% Painter 1089, 1093-1100, 1163, 1300, 1347, 1352-53, 1384-85, 1397-98, 1412-16, 1423-31; CX’s 2317A-2319, 2321, 2323A-2327, 2331, 2334-2336. The gross margin of a third party plan is total reimbursement received (sum of the ingredient reimbursement plus dispensing fee) less the cost of the drugs dispensed. Painter 1096.

Initial Decision 115 F.T.C.

the other alleged conspirators definitely would have participated, notwithstanding their obvious preference for higher rather than lower profit margins.’ H. Noerr-Pennington 89. Throughout the period 1985 to mid-1986, the alleged conspirators and other pharmacists were engaged in a vigorous campaign of lobbying to defeat the state's cost-containment initiative as embodied in PAID I. These lobbying activities reach a crescendo at the Pharmacy5 1 5 1 5 4 1013 1220 99 46 96.404076 Day rally in Albany on June 10, 1986. And both before and after Pharmacy5 1 5 1 6 5 1249 1281 100 46 94.726387 Day there were meetings with state legislators, petitions to the Governor, and the development of a favorable press image for the pharmacists’ cause.!% While the lobbying was successful in generating political pressure,'” there is no credible evidence that this is what caused the state to cave in on PAID I. All the persuasive evidence is to the contrary. OER and the other NYSEPP administrators anticipated that the pharmacists would marshal support in Albany. But there were countervailing pressures to be considered -- for state officials knew that every increase in payments to the prescription plan must of necessity mean that funds were taken from some other program, which in turn would produce its own political heat. The highest-ranking state official directly involved with NYSEPP testified unequivocally that PAID I was not withdrawn in reaction to the pharmacists’ political clout, but rather because state officials believed that they were the victims of a 195 See Findings 42-51.

°°5 1 7 2 1 2 790 2459 174 40 95.872810 Rosenberg5 1 7 2 1 3 983 2461 141 36 93.259850 1787-91;5 1 7 2 1 4 1140 2463 78 30 87.206902 CX's5 1 7 2 1 5 1234 2464 127 34 90.573364 2Z-125,5 1 7 2 1 6 1376 2465 108 35 92.326210 Z-141,5 1 7 2 1 7 1500 2467 107 35 91.384407 Z-142,5 1 7 2 1 8 1623 2468 108 35 91.849823 Z-155,5 1 7 2 1 9 1752 2470 124 35 83.295082 16Z-55,5 1 7 2 1 10 1891 2471 88 35 91.445145 Z-56,4 1 7 2 2 0 644 2503 1336 51 -1 5 1 7 2 2 1 644 2503 87 35 91.963387 Z-60,5 1 7 2 2 2 746 2505 89 34 91.864906 Z-61;5 1 7 2 2 3 850 2506 78 30 89.567528 RX's5 1 7 2 2 4 947 2507 135 35 92.278206 149A-C,5 1 7 2 2 5 1102 2508 169 35 92.563240 165-171A,5 1 7 2 2 6 1290 2510 198 32 90.797203 185A-187A.5 1 7 2 2 7 1516 2513 68 38 93.305557 Any5 1 7 2 2 8 1598 2515 204 39 91.324753 post-hearings 1 7 2 2 9 1816 2517 90 29 96.938240 claims 1 7 2 2 10 1920 2518 60 30 94.798347 that4 1 7 2 3 0 643 2553 1335 50 -1 5 1 7 2 3 1 643 2553 67 29 96.191391 Rite5 1 7 2 3 2 725 2554 84 30 88.445297 Aid's5 1 7 2 3 3 825 2554 94 30 96.920509 Dear Valued Customer" contrivance described in Findings 59, 73-78 was part of this lobbying effort would be contrary to the record. Rosenberg testified: I5 1 7 2 5 3 841 2652 89 30 95.893051 didn't5 1 7 2 5 4 941 2653 72 29 97.000397 sends 1 7 2 5 5 1024 2654 48 29 96.917030 thes 1 7 2 5 6 1083 2654 82 30 96.736809 letters 1 7 2 5 7 1175 2660 50 24 94.978851 outs 1 7 2 5 8 1236 2656 132 39 96.642876 thinking5 1 7 2 5 9 1380 2658 35 28 95.144211 of5 1 7 2 5 10 1423 2658 21 29 95.144211 it5 1 7 2 5 11 1455 2667 30 20 92.267708 as5 1 7 2 5 12 1498 2668 16 20 92.267708 a5 1 7 2 5 13 1525 2659 142 39 96.998634 lobbying5 1 7 2 5 14 1678 2661 114 31 93.478210 effort. Rosenberg 1897, Feinberg 433-34, 553, Kavanaugh 625, Hartnett 943-51; RX's 133E, F, 134E-G, 309F-"I".

PETERSON DRUG COMPANY 543 492 Initial Decision pharmacy boycott, and irrespective of their beliefs, in fact there were an insufficient number of drugstores on line by July 1.’ Ill. DISCUSSION A major and rapidly escalating expense facing New York State is the cost of the prescription drug component of its employee-retiree health insurance plan. In order to meet this problem, the state, in conjunction with its health plan insurer (Equitable Life Assurance) and the plan's administrator (PAID Prescription, Inc.), announces that as of July 1, 1986, pharmacies will be reimbursed for prescription ingredients at a rate representing a sharp reduction from what the state plan has paid in the past. Since it is well-known that pharmaceuticals are purchased by practically all drugstores at steep discounts from the published Average Wholesale Price (AWP), New York proposes in effect that a portion of the discount be transferred to the State in the form of a reimbursement rate for ingredients of AWP minus 12% for chains and AWP minus 2% to minus 8% (depending on the pharmacy's prescription volume) for independents. This is the so-called PAID I plan, which is at the heart of this case. The state's proposal outrages the pharmacists who view the plan as an especially arbitrary attack on their profit margins. Led by CPA, their trade association, and Rite Aid, the largest chain in New York, the pharmacists organize an aggressive campaign to defeat PAID I. During the course of the campaign, and as the deadline for its implementation approaches, New York is suddenly confronted with a severe erosion in the number of pharmacies willing to participate in the plan. Because of this pressure, the state knuckles under to the pharmacists' demands, and retreats to PAID II, which eliminates most of the discounts off AWP as the basis for reimbursement. With the defeat of PAID I and the pharmacists’ acceptance of PAID I], the prescription component of the New York's health insurance plan goes '98 Hartnett 801-02, 807-11, 828, 830-31, 851-52, 897-98, 969, 978-80; see also Feinberg 415-17, 427-34, 452-54, 553-54. The cause of the state's retreat from PAID I -- an inadequate array of pharmacists -- was in accord with the expectations of Rosenberg who believed that the plan would be changed if not enough providers signed up. Rosenberg 1801; CX 16Z-80. See also CX 16Z-97, Z-98. Initial Decision 115 F.T.C.

forward but with a substantially scaled-back cost-containment initiative.

The complaint herein raises the issue of whether there was an agreement or understanding among the pharmacies, including respondent Peterson, which amounted to a combination or conspiracy to boycott New York State in order to defeat PAID I.’” In addressing this issue, one cannot be oblivious to the obvious: conspirators rarely put their agreements or understandings into writing, and at trial there is bound to be a denial that any explicit oral assurances were given. With these observations in mind, the issue here, as in most conspiracy cases, is whether an inference of an illegal agreement or understanding may fairly be drawn from the conduct of the alleged conspirators. Norfolk Monument v. Woodlawn, 394 U.S. 700, 703-04 (1969); United States v. Paramount Pictures 334 U.S. 131, 142 (1948); American Tobacco Co. v. United States, 328 U.S. 781, 809-10 (1946).

An examination of the context of the state-pharmacists conflict shows that with the announcement of PAID I substantial uncertainties arose for both buyer and sellers. On the buyer's side of this market confrontation, New York State was facing the prospect that with the arrival of July 1, it would have to cope with a serious personnel problem if an insufficient number of pharmacies were not in place to service the non-deferrable prescription needs of its employees and retirees. As it happens, the state could have reasonably anticipated that the interdependence of the pharmacists' decision-making would have lead to an adequate array of pharmacies once several chains had dedicated their acceptance of PAID I soon after the plan was announced. Or to put it somewhat differently, the perceived need of drugstores to participate in third party plans in order to advance or 99 The complaint charges that the alleged combination or conspiracy constitutes an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act. 15 U.S.C. 45(a)(1) (1988). Unfair methods of competition within the meaning of Section 5 have been held to include the combinations and conspiracies which are among the restraints of trade that violate Section 1 of the Sherman Act. FTC v. Cement Institute, 333 U.S. 683, 694 (1948). At no point in this proceeding have complaint counsel contended that an allegation of combination or conspiracy brought under a Section 5 complaint is different from an identical Sherman 1 civil charge.

PETERSON DRUG COMPANY 545 492 Initial Decision protect their own economic self-interest would ordinarily have given the state enough participants to get the plan off the ground. From the pharmacists’ perspective, there was apprehension that the pressure on the state of the July 1 deadline would be dissipated if they did not maintain a solid front of nonparticipation. There is no dispute that given the well-established pattern followed by consumers in having their prescriptions filled (i.e., consumers tend to return to the same pharmacy for all their drugs, and usually purchase their nonprescription items at the same drugstore where their prescriptions are being filled), Peterson and the other alleged conspirators knew that if their major competitors participated, and New York went forward with the plan, it would have been perilous for any firm to have stayed out of PAID I for fear of permanent loss of not only the substantial NYSEPP business itself, but perhaps even more important, the loss of the lucrative front-end (i.e., nonprescription) patronage of some 500,000 consumers. Finally, the pharmacists were concerned that the survival of PAID I might serve as a precedent for any future attempts to reduce prescription reimbursement rates in other state-sponsored health plans.

The antitrust laws are neutral on the merits of these conflicting tensions, and there is no bar to a vigorous campaign aimed at stopping PAID I that took the form of petitioning or lobbying. But neither the Sherman Act nor the Federal Trade Commission Act will tolerate a resolution of this kind of market confrontation by the contrivance of an agreement or understanding to withhold services. I infer just such an agreement or understanding aimed at PAID I from the following:

1. Zimmerman of CPA, Krahulec of Rite Aid, and the other conspirators, including Peterson, knew that if PAID I were to be defeated, the pharmacists had to keep the pressure on the state of the July 1 starting date. This could only be done if a solid front of nonparticipation was maintained. The conspirators were well aware, as explained earlier, that should this objective not be achieved before July 1, the defeat of PAID I would be unlikely since (a) no drugstore (chain or independent) could afford to stay out of the plan if its competitors participated, and (b) in the independent pursuit of their own self-interest, pharmacies tend toward participation in third party Initial Decision 115 F.T.C.

plans, even so-called low-reimbursement third party plans which may adversely affect their prescription profits. 2. Zimmerman and Krahulec conveyed to the conspirators the message that a solid front of nonparticipation prior to July 1 must be achieved in order to defeat PAID I. The contents, the settings, and the instruments used for this communication -- i.e., during a June 10 meeting of the CPA membership, in the proffer of a Dear5 1 3 2 5 12 1854 980 141 35 96.353287 Valued4 1 3 2 6 0 660 1036 1334 48 -1 5 1 3 2 6 1 660 1036 203 36 77.556747 Customer letter, by widely circulated memoranda discussing nonparticipation, and through a lawyer's paper calling fora short protest in the form of nonparticipation -- signaled that common action was contemplated and was being solicited.

3. The Zimmerman-Krahulec invitation for nonparticipation before July 1 was acknowledged and tacitly accepted when the conspirators, including Peterson, adopted the Dear5 1 3 3 3 7 1852 1387 140 35 96.637604 Valued4 1 3 3 4 0 658 1445 1334 46 -1 5 1 3 3 4 1 658 1446 202 35 82.607742 Customer letter, a tricky and cumbersome billing stratagem designed to retain state employee business while not participating in PAID I. Minimally, each request for the letter effectively told Rite Aid that it had an assurance that the inquiring firm would not join PAID I, or if it had already signed up that it would take steps to departicipate. As the depository of these assurances, Rite Aid could then convey to any chain reliable information about the intent of its competitors, an important consideration in a market characterized by interdependent decision-making. In addition, once Rite Aid received requests for the Dear5 1 3 3 13 2 793 1969 141 34 96.390831 Valued5 1 3 3 13 3 955 1968 208 35 89.753487 Customer letter, this meant that the state's largest chain was itself assured that it need not sign up for PAID I in order to protect its own substantial interest in public employee business. 4. The main objective of the conspirators was a short-term combination that would hold together until July 1 and thereby not unduly test the underlying distrust the pharmacists may have harbored against each other. But the Dear5 1 3 4 4 8 1513 2316 139 36 96.407898 Valued5 1 3 4 4 9 1666 2316 207 36 70.490082 Customer letter also constituted the conspirators’ alternative strategy for maintaining the pressure should New York decide to go forward with PAID I after July 1. Since this gimmick would not have worked in markets where there were participating pharmacists, its common adoption clearly contemplated that direct competitors would not be participating while they jointly used a slippery promise of full reimbursement in an effort to retain the patronage of state workers.

PETERSON DRUG COMPANY 547 492 Initial Decision 5. That the solicitations from Zimmerman and Krahulec were accepted and thereafter were effective in putting a boycott in place is further shown by the sudden and unprecedented withdrawal of several conspirators -- again including Peterson -- from PAID I after first indicating in one form or another that they would participate. These withdrawals came after Zimmerman exhorted the CPA members not to participate, after Krahulec extolled the virtues of his Dear5 1 3 1 8 2 651 1029 139 36 96.641144 Valued5 1 3 1 8 3 802 1029 205 36 86.961464 Customer letter, and after the conspirators left Albany on June 10 with the impression that a combined front of nonparticipation had been put together.

The pattern of conduct described above comes within the invitation-acceptance rubric of Interstate Circuit v. United States, 306 U.S. 208 (1939). Interstate, a first-run film exhibitor, demanded on pain of nonrenewal of license agreements that film distributors set a minimum evening admission charge of twenty-five cents for firstrun film exhibitors and prohibit outright the subsequent showing of the same films as part of a double feature. Interstate's threat was contained in copies of a single letter that named all eight distributors as addressees. There was no evidence of any direct agreement among the distributors. In due course, however, each distributor acceded to Interstate's demands in several key localities. On these facts, the Supreme Court concluded:

It was enough that, knowing that concerted action was contemplated and invited, the distributors gave their adherence to the scheme and participated in it. Each distributor was advised that the others were asked to participate; each knew that cooperation was essential to successful operation of the plan. They knew that the plan, if carried out, would result in a restraint of commerce .. . and knowing it, all participated in the plan”

On the way to this conclusion, the Supreme Court stressed several factors: (1) an invitation for joint action which created a mutual awareness of the plan; (2) parallel acceptance; (3) deviation from previous business practice; and (4) the interdependence of the decisions. On the last point the Court said: 200 306 U.S. 208 at 226-27.

Initial Decision 115 F.T.C.

Each was aware that all were in active competition and that without substantially unanimous action with respect to the restrictions for any given territory there was risk of a substantial loss of the business and good will of the subsequent-run and independent exhibitors, but that with it there was the prospect of increased profits. There was, therefore, strong motive for concerted action. There was risk, too, that without agreement diversity of action would follow.72! The Interstate rationale was followed in United States v. Foley, 598 F.2d. 1323 (4th Cir. 1979), cert denied, 444 U.S. 1043 (1980), where an inference of conspiracy was allowed on facts similar to the instant case. Foley, a Washington area real estate broker, invited his competitors to dinner and announced that he did not care what his guests were going to do, he was about to raise his commission rate from 6% to 7%. Testimony as to what followed the host's announcement was in conflict but apparently there was a general discussion of the subject, some firms may have expressly indicated their agreement with Foley, while others at least gave that impression. After the dinner, the 7% rate began to appear, and those who stayed at 6% were reminded that no firm could maintain the 7% rate unless all held the line. Citing to the Interstate principle of invitation and acceptance, the Fourth Circuit found on these facts ample5 1 4 1 14 10 1780 1727 174 34 96.633530 evidences 1 4 1 14 11 1974 1732 36 29 96.802948 to4 1 4 1 15 0 676 1786 951 50 -1 5 1 4 1 15 1 676 1790 128 46 96.510704 permits 1 4 1 15 2 819 1790 58 35 96.799187 thes 1 4 1 15 3 892 1789 140 45 96.385521 findings 1 4 1 15 4 1048 1788 42 36 96.647392 of5 1 4 1 15 5 1102 1799 19 24 96.159828 a5 1 4 1 15 6 1135 1787 241 46 96.159828 conspiracy. Jd. at 1331.

Each element of Interstate as expounded in Foley is present in this case: invitations from Zimmerman and Krahulec, acceptance by the alleged conspirators, deviation from past business behavior, and a context in which no firm would have made a decision not to participate unless it was convinced that its competitors would do the same.

It is of no moment that Peterson may not have participated from the outset in all phases of this conspiracy. American Medical Assoc. et al., 94 FTC 701, 1000 n.38, affd, 638 F.2d 443 (2d Cir. 1980), aff'd by an equally divided Court, 455 U.S. 676 (1982). While the record indicates that the opening gambits -- the notion of sending out an invitation to form a solid front of nonparticipation prior to and after July 1 -- originated with Zimmerman of CPA and Krahulec of Rite Aid, and that these two carried the brunt of the work, Peterson was no innocent bystander patiently waiting in the wings for the 201 Tq. at 222.

PETERSON DRUG COMPANY 549 492 Initial Decision larger chains to take action. Rosenberg of Peterson sought out Krahulec, and in effect acknowledged his acceptance of an Interstate invitation to boycott by (1) asking for the Dear5 1 3 1 3 10 1505 737 141 34 96.305878 Valued5 1 3 1 3 11 1662 737 208 34 93.831573 Customer letter, Krahulec's method for retaining state employee business while simultaneously putting into place a boycott of New York's PAID I plan, and (2) canceling the already-filed participation notice of his Akron store.

Notwithstanding the continued viability of Interstate and its progeny, it is axiomatic that cases involving the invitation/acceptance concept must now pass muster under Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.5. 574 (1986).2 What the court said in Matsushita is that the permissible range of inferences from ambiguous evidence (especially if the motive to conspire is questionable) is limited by two considerations: “conduct as consistent with permissible competition as with illegal conspiracy does not, standing alone, support an inference of conspiracy" and there must be evidence that5 1 3 2 10 3 853 1551 101 36 96.723038 tends5 1 3 2 10 4 982 1557 35 30 96.933884 to5 1 3 2 10 5 1045 1551 151 36 96.753517 excludes 1 3 2 10 6 1224 1551 57 36 96.433846 thes 1 3 2 10 7 1308 1551 204 47 96.926979 possibility5 1 3 2 10 8 1540 1553 71 34 96.947617 that5 1 3 2 10 9 1638 1553 58 35 96.354057 thes 1 3 2 10 10 1724 1553 140 46 96.354057 alleged4 1 3 2 11 0 530 1608 1335 50 -1 5 1 3 2 11 1 530 1608 240 46 96.116661 conspirators5 1 3 2 11 2 787 1609 102 35 96.480225 acted5 1 3 2 11 3 904 1608 309 48 80.139282 independently. /d., at 588. While this language may bring a summary dismissal to a conspiracy case grounded solely on uniform or even parallel conduct, it does not mean that an inference of conspiracy is no longer proper merely because a respondent is able to concoct some far-fetched scenario of independent action. Again in the language of Matsushita, the issue is whether thes 1 3 2 17 4 865 1958 181 35 96.676186 inferences 1 3 2 17 5 1070 1958 42 35 96.555916 of5 1 3 2 17 6 1131 1959 212 46 96.569939 conspiracy5 1 3 2 17 7 1366 1959 30 36 96.569939 is5 1 3 2 17 8 1420 1960 209 35 96.435776 reasonable5 1 3 2 17 9 1652 1960 36 35 96.631416 in5 1 3 2 17 10 1712 1960 89 46 96.941818 lights 1 3 2 17 11 1824 1960 42 36 96.903046 of4 1 3 2 18 0 527 2016 1334 47 -1 5 1 3 2 18 1 527 2016 209 46 96.022926 competing5 1 3 2 18 2 759 2016 231 36 87.616280 inferences. Jbid. As respondent would have it, this competing5 1 3 2 19 2 762 2073 195 37 86.936859 inference”5 1 3 2 19 3 971 2074 137 36 96.852165 derives5 1 3 2 19 4 1120 2074 93 36 96.930458 from5 1 3 2 19 5 1224 2075 57 36 96.930458 thes 1 3 2 19 6 1292 2075 219 47 96.749283 propositions 1 3 2 19 7 1523 2076 71 36 96.746040 that5 1 3 2 19 8 1606 2076 97 36 96.746040 since5 1 3 2 19 9 1715 2076 146 47 96.723366 nothing4 1 3 2 20 0 527 2133 1332 48 -1 5 1 3 2 20 1 527 2142 74 25 96.747589 was5 1 3 2 20 2 622 2138 36 30 96.803192 to5 1 3 2 20 3 678 2133 45 35 96.487106 be5 1 3 2 20 4 742 2133 129 46 96.082085 gained5 1 3 2 20 5 891 2133 94 36 96.082085 from5 1 3 2 20 6 1004 2144 44 25 96.321724 an5 1 3 2 20 7 1067 2133 96 47 96.321724 early5 1 3 2 20 8 1183 2133 162 37 96.558456 decisions 1 3 2 20 9 1365 2141 35 29 96.357399 to5 1 3 2 20 10 1419 2134 208 47 96.296516 participates 1 3 2 20 11 1646 2135 36 35 96.296516 in5 1 3 2 20 12 1702 2136 113 34 96.661469 PAID5 1 3 2 20 13 1834 2136 25 40 96.647339 I,4 1 3 2 21 0 526 2191 1334 39 -1 5 1 3 2 21 1 526 2191 171 36 96.607857 Peterson5 1 3 2 21 2 715 2191 37 36 96.563690 in5 1 3 2 21 3 769 2191 43 36 96.860542 its5 1 3 2 21 4 832 2202 82 25 96.191032 owns 1 3 2 21 5 931 2192 232 36 96.475563 self-interests 1 3 2 21 6 1180 2192 60 36 96.913292 did5 1 3 2 21 7 1258 2203 46 25 96.231201 no5 1 3 2 21 8 1323 2204 98 24 96.211411 more5 1 3 2 21 9 1438 2193 82 36 96.211411 than5 1 3 2 21 10 1538 2193 80 36 96.572304 takes 1 3 2 21 11 1636 2194 58 36 96.649918 thes 1 3 2 21 12 1711 2194 149 36 96.649918 rational4 1 3 2 22 0 526 2249 1334 49 -1 5 1 3 2 22 1 526 2249 241 47 96.653381 independents 1 3 2 22 2 797 2261 127 24 96.518440 courses 1 3 2 22 3 954 2250 43 36 96.463287 of5 1 3 2 22 4 1023 2250 167 46 96.600113 awaiting5 1 3 2 22 5 1221 2251 59 35 96.508904 thes 1 3 2 22 6 1310 2258 167 29 96.387413 outcomes 1 3 2 22 7 1507 2252 42 35 95.734482 of5 1 3 2 22 8 1576 2253 58 34 96.608162 thes 1 3 2 22 9 1664 2252 196 46 96.764061 legitimate4 1 3 2 23 0 526 2307 1334 49 -1 5 1 3 2 23 1 526 2307 175 46 96.463547 lobbying5 1 3 2 23 2 723 2308 188 46 96.654778 campaigns 1 3 2 23 3 933 2308 118 36 96.833107 which5 1 3 2 23 4 1072 2319 73 25 96.932388 was5 1 3 2 23 5 1167 2309 112 35 96.910187 under5 1 3 2 23 6 1299 2320 89 35 93.196678 way.5 1 3 2 23 7 1408 2310 106 41 60.331379 ,.This5 1 3 2 23 8 1537 2317 184 39 96.402718 arguments 1 3 2 23 9 1741 2310 119 46 96.841599 nicely4 1 3 2 24 0 526 2359 1334 55 -1 5 1 3 2 24 1 526 2367 190 35 96.732277 overlooks5 1 3 2 24 2 733 2367 135 35 96.984909 several5 1 3 2 24 3 882 2367 128 46 96.407387 points.5 1 3 2 24 4 1038 2367 53 36 96.680283 To5 1 3 2 24 5 1105 2367 106 46 96.597977 begins 1 3 2 24 6 1226 2367 96 42 96.999504 with,5 1 3 2 24 7 1337 2359 120 54 96.998596 plenty5 1 3 2 24 8 1472 2379 72 24 96.780167 was5 1 3 2 24 9 1560 2375 35 28 96.437332 to5 1 3 2 24 10 1609 2369 45 35 96.437332 be5 1 3 2 24 11 1669 2369 129 45 96.669411 gained5 1 3 2 24 12 1813 2369 47 45 96.818756 by4 1 3 2 25 0 526 2424 1332 49 -1 5 1 3 2 25 1 526 2436 20 24 95.293472 a5 1 3 2 25 2 560 2424 95 46 95.293472 joints 1 3 2 25 3 674 2424 163 37 96.595177 decisions 1 3 2 25 4 857 2425 95 46 96.789719 prior5 1 3 2 25 5 971 2431 35 30 96.986366 to5 1 3 2 25 6 1026 2425 80 46 96.654961 July5 1 3 2 25 7 1131 2426 13 35 94.952599 15 1 3 2 25 8 1168 2432 62 29 96.823074 not5 1 3 2 25 9 1249 2431 36 30 96.827034 to5 1 3 2 25 10 1305 2426 216 46 96.817230 participate.5 1 3 2 25 11 1561 2427 38 34 96.694595 In5 1 3 2 25 12 1619 2427 69 35 96.893768 this5 1 3 2 25 13 1708 2433 150 40 96.333054 respect,4 1 3 2 26 0 526 2483 1332 47 -1 5 1 3 2 26 1 526 2483 123 35 96.849442 unlike5 1 3 2 26 2 665 2484 228 40 96.834824 Matsushita,5 1 3 2 26 3 911 2485 97 34 96.607803 there5 1 3 2 26 4 1025 2485 30 34 96.999489 is5 1 3 2 26 5 1073 2495 47 24 97.000374 no5 1 3 2 26 6 1137 2485 164 45 95.430084 questions 1 3 2 26 7 1320 2485 82 34 96.650375 here5 1 3 2 26 8 1419 2485 42 35 96.634865 of5 1 3 2 26 9 1474 2485 136 35 96.746986 motives 1 3 2 26 10 1627 2491 35 29 96.979141 to5 1 3 2 26 11 1680 2485 178 45 96.390015 conspire;4 1 3 2 27 0 528 2542 1330 46 -1 5 1 3 2 27 1 528 2542 173 34 69.639992 motive" simply being another way of saying that before an agreement can be inferred, it must be demonstrated that joint activity 202 Wilk v. American Medical Assn (Wilk II), 895 F. 2d 352, 312 (7th Cir. 1990), cert. denied, 111 S. Ct. 513 (1990). Initial Decision 115 F.T.C.

would be economically effective for otherwise there would be no point in putting together a combination. All the conspirators, including respondent, wanted to defeat the state's cost-cutting and competition-inducing initiative embodied in PAID J, and there can be no real dispute that the most effective way of doing so would be for the pharmacies to cancel already filed notices of participation or to withhold new notices of participation before July 1, and thereby force the state to increase the reimbursement rate. In contrast, the conspiratorial conduct alleged in Matsushita -- an agreement to maintain high prices in Japan in order to subsidize predatory low prices in the United States -- was not only lacking the essential ingredient of motive (i.e., because of the speculation surrounding the effectiveness of predatory pricing), but the Supreme Court was also apprehensive about the anticompetitive side effects of an alleged conspiracy based mainly on evidence of rebates and price-cutting. Second, Peterson did not sit idly by waiting for July 1. It took the unusual step of canceling a previously filed notice of participation after receiving the Zimmerman/Krahulec invitations to joint action and then indicating Peterson's acceptance by requesting the Dear4 1 3 2 5 0 665 1723 1335 41 -1 5 1 3 2 5 1 665 1726 142 35 96.346039 Valued5 1 3 2 5 2 832 1725 208 36 95.826904 Customer letter. Moreover, this conduct occurred in a setting in which it was not in Peterson's self-interest to departicipate or not sign up additional stores unless it was convinced that its competitors would do the same.

Third, the Dear5 1 3 3 1 4 1072 1956 139 36 96.603394 Valued5 1 3 3 1 5 1226 1956 204 35 66.452545 Customer letter was not only a mechanism for signaling that a solid front of nonparticipation had been put together prior to July 1, but its common adoption contemplated that the conspiracy would continue as nonparticipating competitors put into place this device for use after July 1 as a way of keeping the prescription business of state workers.

Fourth, on the facts of this record it is implausible that a bloc of pharmacists would have departicipated or not participated in the absence of a tacit agreement. The well-established pattern in the industry is that drug stores usually sign up for third party plans and even if a particular pharmacy may disapprove of a discounted reimbursement formula it cannot allow participating competitors to garner crucial front-end business. In sharp contrast to this norm, New York State was suddenly confronted with the unexpected -pharmacies did not sign up and those that had, departicipated after an PETERSON DRUG COMPANY 551 492 Initial Decision association meeting. This highly suspicious conduct, in the context of an intensely interdependent market and the existence of a strong motive to conspire, at least puts one on the alert for any combination-facilitating contrivances. In point of fact, no elaborate mechanism was required: all that was needed was dn exchange of signals respecting nonparticipation as the way to maintain the pressure of the July 1 starting date. These signals were provided by the Zimmerman exhortation to joint action and by Krahulec's hawking of the Dear5 1 3 1 9 5 995 1082 140 35 96.667747 Valued5 1 3 1 9 6 1153 1082 207 36 96.160599 Customer letter. That these signals fulfilled their intended roles is shown by the unprecedented withdrawals from PAID I and the contemporaneous accounts of the June 10 meeting which reveal that the conspirators left Albany with the belief that their competitors would not be participating. It is this sequence of events which places the conduct of the pharmacists squarely back within the four corners of Interstate. In sum, Matsushita does not say that an inference of conspiracy, reasonably drawn from the record facts, is somehow held in suspense while an endless search proceeds for a rational non-conspiratorial business explanation. Nor does Matsushita require that such an inference yield to strained arguments about the plausibility of possible independent decision making.” As it happens, both sides to this litigation vastly overloaded the record by their interpretation of Matsushita as inviting a sort of speculative gamesmanship as to what may or may not have happened in the absence of an agreement. Thus Peterson's alternative scenario -- essentially, a recitation of an incident, unchallenged in the complaint, of its delay in accepting another reduced-rate third party plan -- begs the question as to whether there was an implicit understanding directed at the early demise of PAID I. By the same token, since there is compelling evidence respecting Peterson's actual intent to participate in PAID I had its competitors done so, little was added to the record by the elaborate comparisons to other third party plans which so engaged complaint counsel.

70° See, e.g., City of Long Beach v. Standard Oil Co. of California, 872 F. 2d 1401, 1407 (9th Cir. 1989), amended, 866 F. 2d 246 (1989), cert. denied, 110 S. Ct. 1126 (1990).

Initial Decision 115 F.T.C.

As for respondent's argument that the other, legal activities engaged in by Peterson and the other conspirators somehow immunizes the illegal agreement, the Supreme Court has held that Noerr- Pennington protection applies only to petitioning, and this limited immunity is not transferrable to a commercial boycott not-withstanding the fact that both lawful lobbying and unlawful boycotting may have been directed at the same goal.” In other words, an implicit agreement to withhold services in order to obtain an economic advantage does not become petitioning by reason of the fact that the agreement was consummated during a campaign which clearly included lobbying aspects. FTC v. Superior Court Trial Lawyers Assn, 110 S.Ct. 768, 776-78 (1990); Allied Tube & Conduit Corp. v. Indian Head Inc., 486 U.S. 492, 503-04 (1988). Superior Court Trial Lawyers Assn is particularly germane given the similarity in the legal tactics (lobbying, demonstrations, and publicity) used by both pharmacists and the lawyers for the indigent as part of their public campaigns to put pressure on the government.” But just as the lawyer's explicit agreement to boycott was isolated from these protected activities and quickly disposed of by the Supreme Court, I see no reason for reaching a different result here merely because the pharmacists’ agreement to boycott happens to be implicit yet properly inferred from the record. In the same vein, an illegal boycott does not become legal lobbying by the simple expedient of saying that the lobbying would not have been credible unless the conspirators found some way of putting together a solid front of nonparticipation. Under Noerr-Pennington, lobbying means petitioning in its various forms; 204 The doctrine is found in Eastern R. Conf. v. Noerr Motors, 365 U.S. 127 (1961) (a publicity campaign by railroads aimed at securing legislation harmful to the trucking industry did not violate the Sherman Act); and United Mine Workers of America v. Pennington, 381 U.S. 657 (1965) (lobbying campaign by the union and large coal operators intended to persuade the Secretary of Labor to establish wage rates that would impact adversely on small mines did not violate the Sherman Act). The constitutional basis of Noerr-Pennington, i.e., the right of citizens to exercise free speech and inform the government, was affirmed in California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1912). 205 See Superior Court Trial Lawyers Assoc. et. al., 101 FTC 510, 534-543 (1984) (ALJ opinion).

PETERSON DRUG COMPANY 553 492 Initial Decision it does not encompass an agreement to withhold services in order to make the petitioning effective.

Having found that there was an implicit agreement or understanding to boycott, there can be no issue of actual effects on price or the reasonableness of New York's PAID I proposal. An agreement to boycott is a naked restraint on price and output and thus constitutes a per se violation of the Sherman Act and the Federal Trade Commission Act. FTC v. Superior Court Trial Lawyers Assn, 110 S.Ct. 768, 774-75 (1990); United States v. General Motors, 384 U.S. 127, 145-48 (1966); Klor's v. Broadway-Hale Stores, 359 U.S. 207, 212 (1959).

Finally, the order herein goes beyond what the Commission has accepted in related consent decrees in that it prohibits respondent from soliciting any information from its competitors about their intentions respecting participation in third party plans. This is a permissible extension in a fully litigated case in which it has been demonstrated that such relief is appropriate fencing-in and reasonably related to the practices proven on the record. FTC v. National Lead Co, 352 U.S. 419 (1957); FTC v. Ruberoid Co., 343 U.S. 470 (1952); Siegel Co. v. FTC, 327 U.S. 608 (1946). What has not been demonstrated is the need for, or for that matter the feasibility of, the expansive order advocated by complaint counsel. As complaint counsel would have it, respondent would be prevented from attending meetings it expects5 1 3 3 13 4 928 1967 39 24 96.910683 or5 1 3 3 13 5 977 1956 209 46 96.618950 reasonably5 1 3 3 13 6 1198 1956 106 36 96.726265 could5 1 3 3 13 7 1316 1957 142 45 96.213409 expect might relate to some discussion about participation in third party plans. Going one step further, under complaint counsel's proposed order even if respondent could not have anticipated that any hanky-panky would come up at a meeting, it nevertheless would be liable if some competitor took to the floor and happened to discuss participation. The antitrust laws of the United States do not require that the prudent businessman, on pain of incurring civil penalties, read tea leaves, or keep his fingers crossed about what his competitors may say. IV. CONCLUSIONS 1. The Federal Trade Commission has jurisdiction over the subject matter of this proceeding and over respondent Peterson. Initial Decision 115 F.T.C.

2. The acts and practices charged in the complaint took place in commerce and affected commerce within the meaning of the Federal Trade Commission Act.

3. Respondent Peterson joined in and participated in a conspiracy to boycott New York State's Employee Prescription Program for the purpose of increasing the reimbursement paid to pharmacies under the program.

4. The conduct of respondent Peterson described above constitutes an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act.

Accordingly, the following order will be issued: ORDER For purposes of the order, the following definitions shall apply: A. Peterson means Peterson Drug Company of North Chili, New York, Inc., its directors, officers, agents, employees, divisions, subsidiaries, successors and assigns;

B. Thirds 1 6 2 1 3 936 1843 105 37 96.678307 party5 1 6 2 1 4 1051 1836 131 44 95.188660 payer means any person or entity that provides a program or plan pursuant to which such a person or entity agrees to pay for prescriptions dispensed by pharmacies to individuals described in such plan or program as eligible for such coverage ("covered persons"), and includes, but is not limited to, health insurance companies; prepaid hospital, medical, or other health service plans, such as Blue Cross and Blue Shield plans; health maintenance organizations; preferred provider organizations; prescription service administrative organizations; and health benefit programs for government employees, retirees or dependents; C. Participation5 1 6 3 1 3 1108 2416 223 45 87.818474 agreement means any existing or proposed agreement, oral or written, in which a third-party payer agrees to reimburse a pharmacy for the dispensing of prescription drugs to covered persons, and the pharmacy agrees to accept such payment from the third-party payer for such prescriptions dispensed during the term of the agreement;

PETERSON DRUG COMPANY 555 492 Initial Decision D. Pharmacy5 1 3 1 1 3 901 624 106 46 94.720123 firm means any partnership, sole proprietorship or corporation, including all of its subsidiaries, affiliates, divisions and joint ventures, that owns, controls or operates one or more pharmacies, including the directors, officers, employees, and agents of such partnership, sole proprietorship or corporation as well as the directors, officers, employees, and agents of such partnership's, sole proprietorship's or corporation's subsidiaries, affiliates, divisions and joint ventures, but excludes any partnership, sole proprietorship or corporation, including all of its subsidiaries, affiliates, divisions and joint ventures, which own, are owned by, control or are under common control with Peterson. The words subsidiary, affiliate, and joints 1 3 1 12 3 734 1265 162 36 96.152473 venture refer to any firm in which there is partial (10% or more) or total ownership or control between corporations. II.

It is ordered, That Peterson, directly, indirectly or through any corporate or other device, in or in connection with its activities in or affecting commerce, as commerce is defined in Section 4 of the Federal Trade Commission Act, shall forthwith cease and desist from:

A. Agreeing or combining, attempting to agree or combine, or taking any action in furtherance of any agreement or combination, advocating an agreement, or organizing or cooperating with any pharmacy firm(s) to (1) boycott, refuse to enter into, withdraw from, or not participate in, any participation agreement or (2) threaten to boycott, threaten to refuse to enter into, threaten to withdraw from, or threaten not to participate in, any participation agreement; B. For a period of ten (10) years after the date this order becomes final, stating or communicating in any way to any pharmacy firm the intention or decision of Peterson with respect to entering into, refusing to enter into, threatening to refuse to enter into, participating in, threatening to withdraw from, or withdrawing from any existing or proposed participation agreement into which Peterson and the other pharmacy firm have entered, could enter or are considering entering; C. For a period of eight (8) years after the date this order becomes final, advising any pharmacy firm with respect to entering into, Initial Decision 115 F.T.C.

refusing to enter into, participating in, or withdrawing from any existing or proposed participation agreement into which Peterson and the other pharmacy firm have entered, could ‘enter or are considering entering;

D. For a period of ten (10) years after the date this order becomes final, communicating in any way to or soliciting from any pharmacy firm any information concerning any pharmacy firm's intention or decision with respect to entering into, threatening to refuse to enter into, refusing to enter into, participating in, threatening to withdraw from, or withdrawing from any existing or proposed participation agreement.

Provided that, nothing in this order shall prevent Peterson from: (1) Exercising rights permitted under the First Amendment to the United States Constitution to petition any federal or state government executive agency or legislative body concerning legislation, rules or procedures, or to participate in any federal or state administrative or judicial proceeding;

(2) Subcontracting, preparing joint bids, or otherwise jointly undertaking with pharmacy firms to provide prescription drug services under a participation agreement if requested to do so in writing by the third party payer;

(3) Communicating to the public truthful, nondeceptive statements concerning any existing or proposed participation agreement. Il.

It is further ordered, That Peterson:

A. Provide a copy of this order within thirty (30) days after the date of this order becomes final to each officer, director, employee pharmacist, and each employee whose responsibilities include recommending or deciding whether to enter into any participation agreement, and each employee who regularly attends meetings on Peterson's behalf that include representatives of other pharmacies; and B. For a period of five (5) years after the date this order becomes final, provide each new director and each employee who enters a PETERSON DRUG COMPANY 557 492 Order position described in paragraph A a copy of the order within ten (10) days of the date the employee or director assumes the new position. IV.

It is further ordered, That Peterson:

A. File a verified, written report with the Commission within ninety (90) days after the date this order becomes final, and annually thereafter for five (5) years on the anniversary of the date this order becomes final, and at such other times as the Commission may, by written notice to Peterson require, setting forth in detail the manner and form in which it has complied and is complying with this order, B. For a period of five (5) years after the date this order becomes final, maintain and make available to Commission staff for inspection and copying upon reasonable notice all documents generated by Peterson or that come into Peterson's possession, custody, or control regardless of source, that embody, discuss or refer to the decision or upon which Peterson relies in deciding whether to enter into any participation agreement in which Peterson participates, has participated, or has considered participating; and C. Notify the Commission at least thirty (30) days prior to any proposed change in Peterson such as, assignment or sale resulting in the emergence of a successor corporation or association, change of name, change of address, dissolution, the creation, sale or dissolution of a subsidiary, or any other change that may affect compliance with this order.

ORDER GRANTING MOTION TO WITHDRAW APPEAL AND ADOPTING INITIAL DECISION On June 7, 1991, respondent Peterson Drug Company of North Chili, New York, Inc. ("Peterson") filed a timely Notice of Intention to Appeal from the Initial Decision rendered in this matter by Order 115 F.T.C.

Administrative Law Judge Morton Needleman.! Peterson thereafter sought, and was granted, an extension of time until August 6, 1991 to perfect its appeal by filing an appeal brief. Rather than filing an appeal brief on the appointed day, Peterson filed a Motion to Withdraw Notice of Intention to Appeal. Motion to Withdraw Notice of Intention to Appeal, Dkt. No. 9227, {3 (Aug. 6, 1991). In its Motion, Peterson stated that, while [nJothing5 1 3 2 4 10 1891 977 37 36 96.882355 in5 1 3 2 4 11 1945 978 70 36 96.942802 this4 1 3 2 5 0 678 1022 1340 58 -1 5 1 3 2 5 1 678 1022 137 36 93.067589 motions 1 3 2 5 2 830 1051 6 7 88.338203 .5 1 3 2 5 3 854 1052 6 7 72.452393 .5 1 3 2 5 4 883 1052 1 7 72.452393 .5 1 3 2 5 5 899 1023 128 38 92.968597 should5 1 3 2 5 6 1040 1025 45 36 96.956406 be5 1 3 2 5 7 1098 1028 189 36 96.987755 construed5 1 3 2 5 8 1300 1039 38 25 96.931946 as5 1 3 2 5 9 1353 1040 43 25 96.931946 an5 1 3 2 5 10 1410 1031 196 36 92.789795 admissions 1 3 2 5 11 1621 1061 6 7 85.906578 .5 1 3 2 5 12 1645 1061 5 7 85.906578 .5 1 3 2 5 13 1668 1061 5 7 89.879021 .5 1 3 2 5 14 1690 1039 35 30 96.676559 to5 1 3 2 5 15 1739 1043 69 37 95.355331 any5 1 3 2 5 16 1821 1035 140 45 95.355331 portions 1 3 2 5 17 1975 1037 43 35 96.984344 of4 1 3 2 6 0 677 1080 1336 55 -1 5 1 3 2 6 1 677 1080 57 36 96.689148 thes 1 3 2 6 2 748 1081 115 36 96.897499 Initials 1 3 2 6 3 875 1082 201 43 92.710114 Decision, it consents to the entry of the order contained in the Initial Decision. The Motion notes as well that complaint counsel in this matter has been informed of Peterson's decision and does not oppose it.

Under Section 3.51(a) of the Commission's Rules of Practice, 16 CFR 3.51(a) (1991), the Initial Decision becomes the decision of the Commission 30 days after it is served on the parties, or 30 days after the filing of a timely notice of appeal, whichever is later, unless the appeal is perfected by the filing of an appeal brief.’ Because Peterson was granted an extension of time within which to perfect its appeal, more than 30 days have elapsed since the notice of intention to appeal was filed. Rule 3.51(a) does not expressly address this situation, and the Commission has therefore determined to clarify the date on which the Initial Decision becomes the decision of the Commission. The Commission has determined that Rule 3.51(a) should not apply retroactively under the circumstances which obtain here.’ Rather, the Commission has determined that the case ' The Commission's complaint in this matter, issued on April 19, 1989, named six corporations and one individual as respondents. During the subsequent course of the proceeding the other respondents entered into consent agreements, leaving Peterson as the only respondent subject to the Initial Decision. * This result can also be forestalled if the Commission places the matter on its docket for review sua sponte, or issues an order which otherwise stays the effective date of the Initial Decision.

> To accord Rule 3.51(a) retroactive effect in this matter would create the curious situation in which the Initial Decision would have become the decision of the Commission on July 8, 1991, although that result could not have been known until Peterson abandoned its appeal by filing its Motion on August 6. The task of determining when compliance obligations arose would be problematic, to say the least.

PETERSON DRUG COMPANY 559 492 Order should not be placed in its own docket for review, and that the Initial Decision should become effective as the decision of the Commission upon service of this order to all concerned. The precedential significance of all or any part of this decision in future Commission proceedings will depend entirely on the persuasive weight the Commission determines that it should bear in such proceedings.‘ Therefore, It is ordered, That respondent's Motion to Withdraw Notice of Appeal be, and it hereby is, granted; and It is further ordered, That the Initial Decision of the Administrative Law Judge in this matter, and the order therein, shall become the decision and order of the Commission effective upon completion of service of this order upon the parties. 4 Cf. BASF Wyandotte Corp., 100 FTC 261, 430 (1982). Complaint 115 F.T.C.