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Feds probe whether baby formula makers broke the law in bidding for state contracts

Federal regulators are investigating whether baby formula makers broke the law in bidding for state contracts. 

The Federal Trade Commission last year launched a probe into the baby formula crisis. As part of that investigation, the agency in January sent an information request to formula maker Abbott Laboratories, according to a document on the FTC's website.

In the request, known as a Civil Investigative Demand, the FTC asked for seven years' worth pricing strategies, sales reports and other information related to Abbott's "WIC bidding and sales, as well as information related to its non-WIC infant formula business," the document reads. WIC stands for Women, Infants and Children (WIC) programs, which is a food-aid program aimed at low-income pregnant women, new moms, children and infants.

Abbott, which makes Similac and which produces nearly half of the infant formula in the U.S., is one of just three formula manufacturers that have regularly bid to supply the product for state-run WIC programs, according to the U.S. Department of Agriculture

More than half the children born in the U.S. use WIC, which provides free formula to low-income moms and babies. States award contracts for the program every three to four years, with the business going to the lowest bidder, according to the FTC.

A WIC contract, which gives a formula maker the right to supply all baby formula for a state's WIC program, can create "lucrative spillover effects" for companies, the FTC said in online documents. This "may also create incentives to engage in collusive or coordinated market allocation, whereby incumbent WIC contract holders agree not to bid against each other so that they can continue enjoying dominant positions in non-WIC markets in their respective states," the agency wrote.

Among the details the FTC wants from Abbott are backup documents for each WIC bid the company submited; any correspondence between Abbott and its competitors; marketing plans, production plans and financial statements related to formula; external reports or statistics on formula sales and data sets related to WIC formula contract bids, all dating from January 2016 to the present, according to a petition from Abbott objecting to the scope of the probe.

Formula shortage probe

Abbott is also under investigation by the Justice Department and the Securities and Exchange Commission over factors that led to the shutdown of the company's Michigan factory, worsening a nationwide baby formula shortage last year.

In a January petition to the FTC, Abbott said the FTC's request was too broad and lacks a "factual basis," and that the FTC staff "have not identified any reason to believe that Abbott or any of its competitors have coordinated or colluded regarding any WIC contract."

The company told CBS News that it is "cooperating with the FTC's requests."

Nestlé, the maker of Gerber formula, also received an investigative letter from the FTC, according to the Wall Street Journal, which first reported on the FTC probe. It is unclear whether Reckitt Benckiser, the third major formula maker, received a similar demand. 

Neither Nestlé nor Reckitt replied to a request for comment from CBS News.

A 2015 study by the U.S. Department of Agriculture on the WIC program found that although just three companies competed for WIC baby formula contracts, the market remained "highly competitive." The USDA also found there were "large disparities" between the bid that won state contracts and the second-highest bid.

The patterns in the USDA's survey are "potentially indicative of non-competitive bidding for WIC formula contracts," the FTC said. 

The FTC has no role in regulating consumer safety or manufacturing issues affecting baby formula, but the agency "can take steps to address any anticompetitive, unfair, or deceptive acts or practices that have contributed to or are worsening this problem," Chair Lina Khan said in a statement last year asking for consumer input on the baby-formula shortage. 

"The FTC can also examine the infant formula industry to identify the factors that created such a fragile market, where a single disruption at a single plant can jeopardize supply," Khan added.

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