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The Federal Trade Commission (FTC) recently sued pesticide manufacturers Syngenta and Corteva for allegedly paying their distributors not to carry cheaper generic pesticides. The FTC says this scheme raised input prices for farmers and unfairly shut out competitors. “By paying off distributors to block generic producers from the market, these giants have deprived farmers of cheaper and more innovative options,” said FTC Chair Lina Khan. A bipartisan coalition of 10 state attorneys general joined the agency’s complaint.

Pesticide corporations are not the only businesses to use loyalty payments, exclusionary rebates, and other pay-to-block tactics to lock up markets and stifle new competitors. These schemes exist at all levels of the food supply chain and the broader economy. The FTC’s suit could have broader implications for aggrieved customers and competitors seeking to challenge exclusionary payments by dominant corporations.

“I think that this is one of the most, if not the most, interesting and important enforcement actions taken by this new FTC,” says David Seligman, executive director of Towards Justice, a non-profit legal organization that represents workers.

According to the FTC, Syngenta and Corteva sought to maintain their monopolies over certain fungicides, herbicides, and insecticides by paying distributors to carry fewer competing generic products. When a pesticide manufacturer discovers a new pesticide, it can secure a patent to prevent any other competitor from selling the new pesticide for 20 years. When these patents expire, generic companies often begin selling the once patented formulas and active ingredients at a lower price than the original brand.

But in this case, pesticide manufacturers allegedly blocked new competition from generic manufacturers by working with distributors to cut off their access to markets. Just a few agrichemical distributors serve traditional farm retail outlets, representing 90% or more of all U.S. pesticide sales. Syngenta and Corteva allegedly offered to pay these distributors “loyalty” payments if the distributors agreed to limit their purchases of competing generic products. The FTC claims that in order to safely secure loyalty payments, some distributors avoided carrying generics at all.  

This scheme cut off generic competitors’ access to the mainstream outlets where most farmers buy crop protection. By avoiding competition with generics, Syngenta and Corteva could maintain uncompetitively high prices, the FTC’s complaint says. An FTC official told Reuters that farmers have paid roughly 20% more for select pesticides than they should have due to this scheme, which adds up to many millions annually, according to the complaint.

Major pesticide distributors rely on loyalty payments as a part of their business model, the FTC claims. “Distributors profit more from accepting [Syngenta and Corteva’s] exclusion payments than they would from distributing lower-priced generic products in substantial volumes,” the complaint reads. “The loss of these payments can have severe financial consequences for distributors.”

A spokesperson for Corteva said that there’s no basis for the FTC’s charges and that “Corteva’s customer marketing programs are fully compliant with the antitrust laws and are, in fact, pro-competitive programs that benefit both channel partners and farmers.” A spokesperson for Syngenta similarly said in a statement that “these discounts are part of a voluntary and industry-standard program that has been in place for decades at Syngenta and other crop protection companies.”

Exclusionary rebates and loyalty programs are commonplace across the crop input industry, as well as the broader food system and economy. Major food manufacturers use them to lock in large swaths of all sales with cafeteria contractors and major grocery chains. And just like pesticide distributors, many food retailers have come to rely on these monopoly payments as part of their business model. The top three cafeteria contractors, for instance, may derive as much as 50% of their net profits from loyalty rebates.

To date, many corporations have been able to avoid antitrust liability for pay-to-block schemes under the defendant-friendly rule of reason standard, which raises the burden of proof for government and private plaintiffs and requires them to show that loyalty payments harmed consumers. One study found that, since 1977, courts have dismissed 90% of antitrust cases in the first stage of a rule of reason analysis for failing to show “significant anticompetitive effect.”

Seligman also noted that there’s a gray area between a legal volume-based discount and an exclusionary payment. It can be illegal for dominant corporations to condition loyalty payments on receiving a high percentage of all purchases (i.e., a manufacturer only gives a distributor 15% cash back if the distributor buys 80% or more of their worm killers from that manufacturer). However, companies can structure rebates in ways that effectively require customers to buy all or most of their goods from them without explicitly tying loyalty rebates to a portion of all their sales. For instance, manufacturers can tie rebates to a large minimum sales goal. The FTC’s complaint redacts most of the details about the mechanics of Corteva and Syngenta’s loyalty programs.

Federal antitrust enforcers have challenged various forms of exclusive dealing over the past decade, but Seligman says this case is exciting because it uses an underenforced section of the Clayton Act. “I am not aware of many other cases in which the FTC or DOJ have brought an enforcement action under Section 3 of the Clayton Act, which I think is a really powerful tool when it comes to exclusive dealing in the sale of commodities,” he said. Enforcing Section 3’s ban on exclusive dealing is not as common, in part, because some courts have said that the Sherman Act covers any Section 3 claims. Seligman also said that the framework of this case could influence litigation against exclusive dealing in labor markets and employer tactics that limit worker mobility.

That said, given the continued prevalence of exclusive dealing and enforcers’ mixed results in successfully challenging it to date, enforcement alone may not be enough to deter this anticompetitive practice. The FTC could go further by banning this conduct economy-wide. The FTC has the authority to issue a rule saying exclusive dealing by dominant firms is an unfair method of competition and per se illegal, neutralizing the corporate-friendly rule of reason analysis. A coalition of 36 agriculture, environmental, and labor advocacy groups have joined a 2020 petition written by the Open Markets Institute requesting that the FTC make such a rule.