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FTC’s Baby Formula Inquiry Tees Up a Look at Tariffs, Subsidies

May 27, 2022, 9:30 AM

The US Federal Trade Commission’s study of competition questions around the nationwide baby formula shortage highlights the severity and reach of the crisis.

The commission has said it will review mergers and acquisitions in the market and whether “regulatory barriers” prevented any foreign companies from entering it, among other issues.

The move sets the commission up to collaborate with other agencies on potential actions. It can recommend fixes to the system of tariffs that prevent most baby formula imports to US. The FTC could also weigh in on any effect a US Department of Agriculture program designed to provide funding for nutrition and healthcare to low-income mothers has had on market concentration.

“A big part of the FTC is advocacy,” said D. Bruce Hoffman, a Cleary Gottlieb partner and former director of the FTC’s Bureau of Competition. “It doesn’t have power over federal agencies and state governments, but it can and does write and speak to those places. In this case, you have the White House Competition Council, and the FTC could also raise this there.”

Amid calls from elected officials to probe the crisis, the commission is seen as likely to focus on information-sharing and collaboration, rather than on any antitrust enforcement.

“The FTC comes under pressure from many directions to investigate situations like this,” Hoffman said. “Every time gas prices go up, people in Congress demand that they investigate. And with a big event like this, with serious consequences, it’s not surprising that the FTC is getting involved.”

The commission’s request for information comes after President Joe Biden launched the council with a July 2021 executive order requiring individual agencies to find ways to increase competition with an eye toward lowering food, drug, travel, and other costs for consumers. The inquiry is emblematic of the FTC’s push to make changes that directly affect the American public, said Lisl Dunlop, a partner at Axinn.

The FTC’s request for information, though, isn’t itself a sign that the agency is going to tackle competition issues in the market directly, Dunlop said.

“If it continues, they could learn something that causes them to bring an enforcement action,” she said. “But it’s very hard to look at the market and just say ‘This is concentrated, and that dynamic is causing these problems.’”

The FTC’s powers to fix any issue in the event of wrongdoing are limited as well, Hoffman said. The agency would have to investigate, bring their findings to court and litigate them through to a likely appeal, and then depend on injunctive relief in the end. The whole process could take years.

Hoffman also cautioned against assuming that the state of the market and its moderate level of concentration had an impact on the shortage.

“It’s easy to scapegoat things, but often there is zero causal connection,” he said.

The agency could also examine mergers it approved that may have contributed to the shortage, Hoffman said. Nestle’s 2012 acquisition of Pfizer Nutrition is the obvious candidate, although the decade-old deal may be too old for significant scrutiny, and it’s unclear whether it had any impact on market concentration, making a probe unlikely, Hoffman said.

The issue of competition among baby formula companies has also drawn attention on Capitol Hill.

“Longer term, we absolutely have to focus on consolidation in the food industry,” said Sen. Debbie Stabenow (D-Mich.), who chairs the Senate Agriculture, Nutrition and Forestry Committee. “We need more baby formula manufacturers competing in this space.”

Unintended Consequences

The current formula shortage may be tied to the high barrier to market entry, which hinders competition with the four companies that dominate 90% of the baby formula market, said Peter Carstensen, a professor of law emeritus at the University of Wisconsin-Madison Law School.

That concentration may be the byproduct of the USDA’s Special Supplemental Nutrition Program for Women, Infants, and Children, also know as WIC, which inadvertently distorted the market, allowing companies to charge different, inflated prices to non-WIC buyers, Carstensen said.

“No one really looked at this system until it blew up,” Carstensen said.

WIC succeeded in driving down prices for participants and states when it was made permanent in 1974. But the program’s sole-source contract system—under which a single company provides all the formula for the WIC program in the state for which it’s contracted—also made it harder for formula producers without a foothold in the WIC market to compete.

“The WIC program is a little bit different than the open formula market,” Stabenow said. “So we want to take a look at all that makes sure we can maintain the ability to negotiate the best price and have more competition and more manufacturers for baby formula.”

Studies show that companies with WIC contracts see a spike in their non-WIC market share, as stores in-state are more likely to stock their products.

The commission’s options are limited, said David S. Davis, a professor of economics at South Dakota State University who authored one study of the program. He said it’s unclear how central the FTC will be in finding solutions beyond fact-finding.

“They’ll put together a heck of a report, but I don’t know whether they can point to any corrections that can be made,” Davis said. “But more eyes, more heads thinking about the issue are always good.”

— With assistance from Maeve Sheehey

To contact the reporter on this story: Dan Papscun in Washington at dpapscun@bloombergindustry.com

To contact the editors responsible for this story: Keith Perine at kperine@bloomberglaw.com; Melissa B. Robinson at mrobinson@bloomberglaw.com