Antitrust Law Daily Indirect purchaser claims not barred in exclusive dealing action against medical supply manufacturer
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Friday, March 6, 2020

Indirect purchaser claims not barred in exclusive dealing action against medical supply manufacturer

By Nicole D. Prysby, J.D.

Although Illinois Brick did not bar the providers’ claims, they failed to adequately allege a conspiracy.

Indirect purchasers of medical supplies were not barred from suit under Illinois Brick, because they were the first purchasers outside the alleged conspiracy, the U.S. Court Appeals in Chicago has ruled. Healthcare providers purchased medical devices through a distributor, which negotiated prices with the manufacturer. The providers alleged that the manufacturer and multiple distributors conspired through contractual arrangements, under which the manufacturer paid distributors for selling more of its products, and in return the distributors agree to promote the manufacturer’s products above the products of competitors. The district court’s dismissal of the claims, reasoning that as indirect purchasers, the providers’ claims were barred by Illinois Brick was error, according to the Seventh Circuit. The appellate court went on to find that the providers failed to adequately allege a conspiracy that included the distributors. Because the district court’s ruling depended so heavily on an error of law relating to Illinois Brick, it was vacated and remanded for further proceedings (Marion HealthCare, LLC v. Becton Dickinson & Co., March 5, 2020, Wood, D.).

Healthcare providers often do not purchase medical devices directly from the manufacturer; instead, they join a Group Purchasing Organization (GPO), which negotiates prices with the manufacturer on behalf of its members. After provider Marion Diagnostics Center, LLC purchased hypodermic products from Becton, Dickinson, and Company, it filed suit alleging that Becton, along with several defendant GPOs and defendant distributors were parties to a conspiracy to prevent competition and restrain trade through use of contracts that employed penalty pricing rebate provisions and sole or dual source provisions. The providers filed suit for violations of the Sherman Act. The district court dismissed the claims, holding that, as indirect purchasers, the medical care providers lacked standing to bring an antitrust action against the medical supply distributors and suppliers, under the Illinois Brick direct purchaser rule. The providers appealed. The Department of Justice’s Antitrust Division filed an amicus curiae brief in the appeal, arguing that Illinois Brickdoes not preclude a damages suit by plaintiffs who purchased products directly from an antitrust conspirator.

The Seventh Circuit held that the district court misapplied Illinois Brick. The providers alleged that Becton bribed the GPOs through administrative fees, instead of dealing with them at arms’ length. They also alleged that the distributor agreements propped up the unfair terms of the contracts that the GPOs negotiate and Becton pays distributors for selling more of its products, and in return, the distributors agree to promote Becton products above the products of competitors. This network of contracts allows Becton to charge prices well above those of its competitors.

Because the distributors are alleged to be members of the conspiracy and the providers dealt directly with the distributors, Illinois Brick does not bar the claims, the appellate court decided. The providers were the first purchasers from outside the alleged conspiracy and dealt directly with the conspiracy. A contrary rule that looked behind the conspiracy to the role each member played would render upstream antitrust violators effectively immune from suit through the simple expedient of conspiring with a distributor to pass on the inflated prices. The district court thought that 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. But the relevant inquiry in determining the applicability of Illinois Brick focuses on the relationship between the seller and the purchaser, not the difficulty of assessing the overcharge, the Seventh Circuit reasoned.

The relationship between the buyer and the seller, rather than the nature of the alleged anticompetitive conduct, governs whether the buyer may sue under the antitrust laws. The court rejected Becton’s argument that treating the conspiracy as the relevant entity in cases involving anticompetitive conduct other than price fixing would swallow the Illinois Brick rule entirely; a plaintiff is not entitled to resort to frivolous accusations of conspiracy to evade the Illinois Brick rule; the allegation must still reach the level of baseline plausibility.

However, the providers failed to adequately allege a conspiracy involving the distributors, the court held. They alleged that Becton and the distributors were members of a "hub-and-spokes conspiracy" but failed to allege a "rim" connecting the various horizontal agreements. In other words, that the distributors, in addition to coordinating with Becton, would not have attempted to inflate prices without assurance that each distributor was abiding by the agreement and behaving in the same way. The providers alleged only that the distributors enforce the terms of the contracts that the GPOs negotiated. The complaint said nothing about any involvement that the distributors may have in inflating the prices, or whether they coordinate among each other or with Becton or the GPOs as part of the conspiracy. Without an allegation that the distributors have participated in the conspiracy or knowingly engaged in parallel anticompetitive conduct, the providers could not sue the distributors under the antitrust laws, the court held. And because they failed to allege a conspiracy including the distributors, Illinois Brick did bar their claims. However, the Seventh Circuit found that the providers could not have foreseen the district court’s Illinois Brick error. Therefore, the providers were allowed an opportunity to file an amended complaint, provided that they believe they can adequately plead that the distributors were part of the putative conspiracy.

This case is No. 18-3735.

Attorneys: Robert Stephen Berry (Berry Law PLLC) for Marion Healthcare, LLC., Marion Diagnostic Center, LLC. and Andron Medical Associates. Richard P. Cassetta (Bryan Cave Leighton Paisner LLP) for Becton Dickinson & Co. Terrence J. Dee (McDermott Will & Emery LLP) for Premier, Inc. Bruce A. Blefeld (Reed Smith LLP) for Vizient, Inc. Michelle Fischer (Jones Day) for Cardinal Health, Inc. Jordan Lee Ludwig (Crowell & Moring LLP) for Owens & Minor, Inc. Barack Echols (Kirkland & Ellis LLP) for Henry Schein, Inc. Michael T. Brody (Jenner & Block LLP) for McKesson Medical-Surgical, Inc.

Companies: Marion Healthcare, LLC; Marion Diagnostic Center, LLC; Andron Medical Associates; Becton Dickinson & Co.; Premier, Inc.; Vizient, Inc.; Cardinal Health, Inc.; Owens & Minor, Inc.; Henry Schein, Inc.; McKesson Medical-Surgical, Inc.

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