By Robert B. Barnett Jr., J.D.
A combination of allegations of exclusive dealing arrangements and a refusal to deal with a competitor were sufficient to state plausible violations of Sec. 2 of the Sherman Act in the teeth aligner market.
A suit by dental practices alleging that Align Technology, Inc., violated the Sherman Act by taking steps to entrench its market power and stifle competition in the markets for teeth aligners and the scanners used to produce them survived a motion to dismiss because the complaint plausibly described anticompetitive conduct, a California federal district court has ruled. A combination of allegations of refusal to deal with Align’s primary competitor, which was against its short-term financial interests, and exclusive dealing arrangements, which effectively cut off competitors, were sufficient to constitute potential antitrust violations in both the teeth aligner and the dental scanner markets (Simon and Simon, PC v. Align Technology, Inc., April 8, 2021, Chhabria, V.).
Background. Align Technology pioneered teeth aligner technology with development of its Invisalign product for straightening teeth. Align also sells the iTero scanner, which dental practices use to make aligners for their patients. For years, Align experienced little competition, holding a roughly 90 percent market share of the aligners and an 80 percent market share of the scanners, even after its patents expired and others tried to enter the market. Currently, the only competitor in the scanner market is a company called 3Shape, which makes the "Trios" scanner. Simon and Simon, PC, a Chicago dental practice, and VIP Dental Spas, a Los Angeles and Beverly Hills dental practice, sued Align, alleging that Align’s efforts to consolidate its market power violated §2 of the Sherman Act and caused them to overpay for Invisalign and the scanners.
The complaint alleges the following potential antitrust actions: (1) Align designed its iTero scanner so that it could be used only to order Invisalign; (2) Align cancelled an interoperability arrangement with its competitor 3Shape, purportedly because 3Shape would not modify its scanner to order only Invisalign; (3) after termination of the arrangement, Align would not accept Invisalign orders generated by a Trios scanner; (4) when Align terminated the arrangement, it continued its arrangement with 3Shape outside the U.S. because Align lacked sufficient power in the other markets to force customers to use only iTero scanners; (5) Align launched the Fusion Program, under which Align would drop the scanner price by $10,000 in exchange for a commitment to ordering a minimum number of Invisalign aligners; (6) Align entered into multiyear contracts with two of the nation’s largest dental service organizations (DSOs), which required them to work exclusively with Align; and (7) Align changed its discount program, called Advantage Program, to require higher number of Invisalign orders to qualify for the discount. Align filed a motion to dismiss.
Antitrust. Section 2 requires that three elements be pleaded: (1) possession of monopoly power in the relevant market; (2) willful acquisition or maintenance of that power; and (3) causal antitrust injury. Align did not dispute the first element. The relevant market was acknowledged to be the market for scanners designed exclusively to produce scans for aligners.
Willful acquisition. "Willful acquisition or maintenance of monopoly power" is often equated with "anticompetitive conduct." The court concluded that (1) the termination of the interoperability agreement with 3Shape; (2) the Fusion Program offering scanner discounts; and (3) the DSO exclusivity contracts "combine to constitute a section 2 violation." In fact, the court added, the termination of the interoperability agreement "amounts to a section 2 violation on its own."
Interoperability agreements. Companies, of course, are not required to engage in joint ventures with their competitors. Antitrust conduct can arise, however, from the termination of an agreement already entered into. The termination of this interoperability agreement was problematic because Align, by terminating the agreement, was clearly sacrificing short-term benefits. Why did it do so? The complaint adequately asserted that the only "conceivable rationale or purpose" was anticompetitive, involving efforts to use its market power to push 3Shape out of the market. The fact that Align could conceivably come up with a rationale that was not anticompetitive was not determinative. For example, Align alleged that it cancelled the agreement because 3Shape sued it for patent infringement. (If so, the court asked, why was Align still doing business with 3Shape everywhere but in the U.S.?) Such theories might be determinative later, for example at the summary judgment stage, but not at the motion-to-dismiss stage. For purposes of surviving the motion to dismiss, the dental practices adequately asserted a plausible claim that cancellation of the interoperability agreement was done for anticompetitive reasons.
Exclusive dealing. The Advantage Program, the Fusion Program, and the DSO contracts were all alleged to be examples of illegal exclusive dealing arrangements. Section 2 gets implicated when a seller with monopoly power uses its exclusive dealing arrangements to prevent rivals from competing. To qualify, exclusive dealing arrangements must be "extreme" and the foreclosure of the market must be "substantial." Allegations involving the Advantage Program, the court said, failed to advance the antitrust theory. These short-term volume discounts were insufficient to qualify as extreme. The DSO contracts, on the other hand, raised genuine antitrust concerns. They were requirement contracts, which made it difficult for DSO members to contract outside of Align. The Fusion Program also raised antitrust concerns, because equally efficient aligner manufacturers would find it impossible to compete because they would have to offer below-cost aligner prices. Despite the concerns the court expressed, the exclusive dealing arrangements on their own were deemed to not constitute a valid §2 claim. The allegations, for example, were often somewhat vaguely alleged, particularly about foreclosures of market opportunities. Nevertheless, when alleged together with the other assertions, the exclusive dealing allegations were sufficient to survive the motion to dismiss.
Causal antitrust injury. The dental practices asserted that they suffered injury by paying overcharges when they purchased Invisalign and iTero at prices inflated by Align’s scheme. The fact that some purchases were made prior to the beginning of the scheme did not defeat the claim, because purchases were made throughout the period, including until the present day. Furthermore, because both dental practices owned iTero scanners during the period in question, it can be presumed that both practices ordered Invisalign during the alleged scheme. Even if one of the practices actually bought its scanner before scheme began, the other practice had alleged a valid claim for injury from its purchase of the scanner. Both dental practices, the court said, had standing to pursue antitrust claims because they adequately alleged antitrust injuries in both the aligner and the scanner markets.
The court, therefore, denied the motion to dismiss.
The case is No. 3:20-cv-03754-VC.
Attorneys: April D. Lambert (Radice Law Firm) for Simon and Simon, PC d\b\a City Smiles. David K. Lietz (Mason Lietz & Klinger LLP) for VIP Dental Spas. Thomas A. Counts (Paul Hastings LLP) for Align Technology, Inc.
Companies: Simon and Simon, PC; VIP Dental Spas; Align Technology, Inc.
MainStory: TopStory Antitrust GCNNews CaliforniaNews
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