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Class Alleges Price-Fixing of Contact Lenses

SAN FRANCISCO (CN) - Disposable contact lens makers and eye doctors conspired to set minimum resale prices to stifle competition from the Internet and big-box stores, users claim in a federal antitrust class action.

Named plaintiffs John Machikawa, Bernadette Goodfellow and Georgina Lepe sued contact lens manufacturers Cooper Vision, Inc., Alcon Laboratories, Inc., Bausch + Lomb, Johnson & Johnson Vision Care, Inc. and wholesaler ABB Optical Group in San Francisco Federal Court on Tuesday.

The putative class action - for violations of state and federal antitrust laws - claims that the manufacturers conspired with each other, ABB Optical and optometrists and ophthalmologists who sell disposable contact lenses to eliminate competition from big-box retailers and the Internet.

According to the complaint, the defendants did this by imposing minimum resale prices on the lenses - which makes it nearly impossible for discount retailers like Wal-Mart and Costco to lower prices.

The move stemmed from the defendants' terror over how the rise of discount retailers and the Internet have changed the way Americans buy their contact lenses - and how they have affected profits, the plaintiffs say.

"The manufacturer defendants, ABB and the eye-care professionals all share an interest in increasing the retail price of contact lenses and limiting competition from big box stores, buying clubs and Internet-based retailers," the complaint states. "The manufacturer defendants have also expressed concern about the deep discounts offered by online retailers, because they saw price-bargaining power shifting away from manufacturers towards big buyers.

"These concerns were reportedly exacerbated after Luxottica, the world's largest glasses and sunglasses manufacturer, agreed to purchase 1-800 Contacts in 2014. ABB, which is the largest distributor of contact lenses in the United States and which services more than two-thirds of eye-care professionals, shares the manufacturer defendants' goal of increasing retail prices. Eye-care professionals, which have traditionally sold contact lenses at prices much higher than those offered by big box stores, buying clubs and Internet-based retailers, similarly sought to limit such price competition," the plaintiffs add.

Competition in the contact lens business has long been distorted by eye doctors who - unlike doctors who only prescribe drugs but don't sell them - both prescribe and sell lenses. When an eye-care professional writes a prescription for disposable lenses, he also locks the patient into a particular brand for the length of the prescription, the plaintiffs say.

"The power to prescribe makes eye-care professionals the gatekeepers of the disposable contact lens market," the complaint states. "Eye-care professionals have the power and the economic incentive to prescribe lenses that provide them the largest profit margins. Contact lens manufacturers understand these incentives all too well. Eye-care professionals will refuse to prescribe a manufacturer's lenses if their profit margins are undercut by more efficient retailers such as mail order and internet companies, or big box stores.

"As a result, contact lens manufacturers have always done what they can to insulate eye-care professionals from price competition. The economic purpose of the unilateral pricing policies is to insulate eye-care professionals from price competition from more efficient distributors," the plaintiffs add.

Before the unilateral pricing policies took effect in 2013, retailers were free to set their own prices for contacts. The manufacturers now prohibit retailers from selling certain product lines below the prices they mandate, according to the plaintiffs.

"This draconian change in the pricing model would not have occurred in the absence of a conspiracy among the defendants," the complaint states. "Contact lenses are the only prescription medical device sold in the United States pursuant to a unilateral pricing policy." [Emphasis in complaint.]

Alcon was the first manufacturer to roll out a minimum pricing structure, eventually expanding it to four contact lens lines. Bauch + Lomb followed suit with one line last year, while Johnson & Johnson fixed minimum prices on eight of its lines in mid-2014.

At a hearing on the scheme before the U.S. Senate Subcommittee on Antitrust, Competition Policy and Consumer Rights in July 2014, witnesses estimated that the agreements encompass 40 percent of the domestic contact lens market - a figure that will rise to 80 percent by the end of 2015, the plaintiffs say.

For its part, Johnson & Johnson testified that the pricing agreements will actually help consumers: it said it lowered its prices after the scheme halted discounts.

"By instituting uniform pricing, lowering our prices and making the process by which we make those prices available, we believe we can better compete in contact lens market," Millicent Knight, an official with Johnson & Johnson testified.

The company controls 47.1 percent of the contact lens market, which is dominated by its Acuvue brand.

According to the plaintiffs, the pricing scheme is history repeated. More than 20 years ago, the manufacturers and eye doctors conspired to stifle the supply of contact lenses to mail-order houses. That move led to antitrust lawsuits from 32 states and consumer groups, which were eventually settled and the practice ended, the complaint states.

More recently, both Germany and China have fined manufacturers for minimum-price fixing. CIBA - Alcon's predecessor - paid the German government $12 million to settle cartel claims, while Johnson & Johnson and Bausch + Lomb paid a combined $1.17 for violating China's anti-monopoly laws, the plaintiffs claim.

"Minimum resale price management policies represent merely the latest effort by the manufacturer defendants and independent eye-care professionals to ensure that discounting of contact lenses does not occur. The victims, as in 1996, are the tens of millions of consumers who use contact lenses," the plaintiffs say.

They are suing for violations of the federal Sherman Antitrust Act, California's Cartwright Act and unfair competition laws, and Maryland antitrust and consumer-protection laws.

In addition to class certification, the plaintiffs seek damages and restitution and a ban on the price-fixing policies.

They are represented by Michael Lehmann, Bonny Sweeney and Christopher Lebsock of the San Francisco firm Hausfeld LLP.

Alcon is a division of Novartis International AG, headquartered in Switzerland. Bausch + Lomb is owned by Canada-based Valeant Pharmaceuticals. Neither parent company is named as a defendant in the suit.

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