Seventh Circuit Resuscitates Medical Supply Suit, Ruling Plaintiffs Have Standing Under Illinois Brick
03/17/2020On March 5, 2020, the U.S. Court of Appeals for the Seventh Circuit vacated and remanded the Southern District of Illinois’ dismissal of a suit brought by healthcare providers against entities in the distribution chain for medical devices they purchased. Marion Healthcare, LLC v. Becton Dickinson & Co., 18-3735 (7th Cir. Mar. 5, 2020). Judge Diane P. Wood, writing for a unanimous panel, ruled that the district court erred in deciding that plaintiffs lacked antitrust standing to bring conspiracy claims under Section 1 of the Sherman Act.
Plaintiff-appellants are healthcare providers that purchased medical products manufactured by defendant Becton Dickinson & Company (“Becton”). Relying on common industry practice, the providers engaged group purchasing organizations (“GPOs”) to negotiate the terms of their contracts with Becton, as well as distributors to procure the products from Becton and deliver them to plaintiffs at the GPO-negotiated prices. Defendant-appellees are Becton (the manufacturer), the GPOs that negotiated these contracts on behalf of plaintiff members, and the distributors that transacted with Becton and plaintiffs to supply the products.
Plaintiffs allege that Becton, the GPOs, and the distributors engaged in a conspiracy to sell Becton products at supracompetitive prices. Specifically, plaintiffs allege that Becton has monopoly power in the relevant nationwide market for catheters and syringes. They allege that Becton bribed the GPOs with millions of dollars in “so-called administrative fees” to include anticompetitive terms in contracts with the plaintiff providers, such as penalty pricing for providers that did not purchase a certain volume of products from Becton. Plaintiffs also allege that agreements between Becton and the distributors included hidden commitments to pay the GPOs based on the volume of Becton products they sold. Additionally, plaintiffs allege that Becton paid distributors to sell more of its products in return for their agreement to promote those products over its competitors’ products.
The district ruled that, as downstream purchasers, plaintiffs did not have antitrust standing to sue under the direct purchaser rule established by the Supreme Court in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). The trial court recognized, pursuant to Seventh Circuit precedent in Paper Sys. Inc. v. Nippon Paper Indus. Co., 281 F.3d 629 (7th Cir. 2002), that an exception applies in cases involving conspiracies such that “the first buyer from a conspirator is the right party to sue.” However, the trial court held this exception applied only in the specific context of a price-fixing conspiracy where that buyer was entitled to the full amount of the overcharge. In cases involving other kinds of anticompetitive activity like the conduct alleged by the healthcare providers, the court reasoned it would be “too difficult to calculate which portion of the overcharge the distributor had absorbed or to ascertain how much of the distributor’s profits came from fair pricing rather than anticompetitive overcharges.”
The Seventh Circuit disagreed, finding that the district court erred in its application of this exception to Illinois Brick. According to Judge Wood, “[t]he central point of Illinois Brick is to allocate the right to recover to one and only one entity in the market[,]” and the difficulty of calculating damages should not bar that entity from recovery. With respect to the conspiracy exception, “the critical point . . . is that the consumer was the first direct purchaser from the cartel member,” which occurs when there is “a conspiracy between the manufacturer and the distributor and the point of that conspiracy is to support supracompetitive prices for the ultimate consumer.” In this case, the group of healthcare providers qualified as the first direct purchasers of products from a manufacturer/distributor conspiracy, and the fact that the alleged conspiracy involved exclusive dealing arrangements, bribes, and kickbacks—as opposed to price-fixing—did not factor into the relevant analysis.
The Seventh Circuit proceeded to analyze whether plaintiffs adequately alleged a hub-and-spokes conspiracy among defendants. To successfully claim such a conspiracy, the providers were required allege that each participant, including the GPOs and distributors, “recognized that it was part of the greater arrangement [with Becton as the hub], and it coordinated or otherwise carried out its duties as part of the broader group.” According to the Court, plaintiffs’ complaint did not accomplish this because there were no claims that the distributors played a role in inflating product prices, engaged in parallel anticompetitive conduct, or coordinated with each other and with Becton and the GPOs. Plaintiffs merely claimed that the distributors “enforce[d]” the anticompetitive terms of the contracts negotiated by Becton and the GPOs, which was not enough to show their conscious involvement in the alleged conspiracy.
However, because the lower court’s dismissal relied exclusively on a “categorical rejection of Illinois Brick for the type of anticompetitive activity [plaintiffs] were alleging,” the Court concluded that plaintiffs should be granted an opportunity to file an amended complaint. Having established that the healthcare providers had standing as proper antitrust plaintiffs, the Seventh Circuit vacated the judgment and remanded to the district court for further proceedings.