By Robert B. Barnett Jr., J.D.
A dental supplies distributor’s restraint of trade suit against three other dental supplies distributors for leveraging their market power to destroy the online distribution platform through which the distributor distributed its dental supplies was dismissed because the distributor lacked antitrust standing, a New York federal district court has ruled. Although the distributor, IQ Dental Supply, was able to adequately plead anticompetitive conduct, it was not able to establish a sufficient antitrust injury, in light of the fact that it benefited financially from the other distributors’ allegedly anticompetitive conduct. Furthermore, even if IQ had an antitrust injury, it still lacked antitrust standing because numerous other parties, including the owner of the online distribution platform, would have been more appropriate plaintiffs to assert the antitrust violations (IQ Dental Supply, Inc. v. Henry Schein, Inc., December 21, 2017, Cogan, B.).
Background. IQ Dental Supply is a nationwide dental supplies and equipment distributor in the $10 billion U.S. market for dental supplies. It entered into a contact with SourceOne to sell IQ’s products through SourceOne’s online platforms, which are state-specific websites operated in conjunction with state dental associations (SDAs). Thus, each SDA would operate a SourceOne-owned website in its state. Because the traditional profit margin on dental supplies was about 35%, the websites were able to offer dental supplies at prices below those typically offered by other dental suppliers, which distributed dental supplies the old-fashioned way, by having sales representatives sell directly to dental practices. About 90% of IQ’s revenue was earned through the SDA websites.
Henry Schein, Inc., Patterson Companies, Inc., and Benco Dental Supply Company controlled about 85% of the market for dental supplies, with Schein controlling 41% and Patterson controlling 34% of the market. Schein, Patterson, and Benco distributed their dental supplies through more traditional channels. IQ came to believe that the three companies exerted their market power to destroy the online market and protect their market share, for example, by threatening to sit out trade shows, where SDAs earned a significant portion of their annual revenue. They also allegedly threatened other manufacturers not to provide products to the websites, they allegedly threatened other distributors not to use the online market, and they allegedly threatened dental practices not to buy from the online market. The approach apparently worked, with several SDA websites closing down after being pressured, and numerous manufacturers, distributors, and dentists refusing to do business with the online market.
IQ filed suit in Brooklyn federal court against Schein, Patterson, and Benco, alleging unreasonable restraint of trade under Section 1 of the Sherman Act (as well as the corresponding antitrust laws of New York and New Jersey) and three state law-based tort claims for tortious interference with prospective business relations, civil conspiracy, and aiding and abetting. The complaint also included allegations that the three companies conspired to fix prices on dental supplies. Schein, Patterson, and Benco filed a motion to dismiss.
Antitrust standing. The Second Circuit has distilled the U.S. Supreme Court’s antitrust standing analysis as set forth in Associated Gen. Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 529, 103 S.Ct. 897, 904 (1983) into two factors: (1) whether the plaintiff suffered a special kind of antitrust injury and (2) whether this plaintiff was a suitable plaintiff ("efficient enforcer") of the alleged antitrust violations (Gatt Commc’ns, Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 76 (2d Cir. 2013)). The New York federal court determined that IQ failed both requirements.
Special injury. Without a doubt, IQ had sufficiently alleged antitrust conduct. It had not, however, sufficiently established that it was injured by that conduct. According to IQ’s complaint, it was able to sign the contract with SourceOne only after Schein, Patterson, and Benco intimidated other distributors from working with SourceOne. Thus, ironically, IQ actually benefited from, rather than was harmed by, the alleged restraint of trade that it sought to stop. In fact, 90% of IQ’s revenue was made possible only by the opening created by the alleged restraint of trade. Also, on a related note, IQ lacked standing to assert the additional claims for price fixing because it was a competitor rather than a purchaser of dental supplies. Thus, if prices went up as a result of the alleged conspiracy, IQ benefited.
Efficient enforcer. The court went on to say that, even if IQ suffered an antitrust injury, it was not an "efficient enforcer" of the antitrust laws. In fact, IQ failed to satisfy three of the four criteria. Yes, it asserted an injury, but the injury it suffered was derivative of the injuries ascribed to SourceOne’s websites. As a result, IQ was remotely situated relative to the party allegedly engaging in anticompetitive conduct. IQ did assert one direct injury: the pressure that the three companies brought to bear on manufacturers that sold dental supplies to IQ. Thus, it satisfied the first requirement—direct injury—only as to that one claim. It failed, however, the other three requirements. The second factor is the existence of an identifiable class of persons whose self-interest would motivate them to vindicate the public interest. Not every victim needs to be compensated under antitrust laws if other, better situated parties can be expected to sue the same defendants. In this case, SourceOne was the most obvious party (in fact, SourceOne did sue, in litigation pending before this same court). Furthermore, the SDAs, the manufacturers, the dentists, and the other distributors that cleared the way for IQ to do business with SourceOne are all potentially better plaintiffs than IQ. The third factor is the speculativeness of the alleged injury. IQ’s damages depended on lost business opportunities, a theory the court called, in rejecting the argument, "far too attenuated, resting on a series of tenuous and conjectural decisions" by numerous parties. The fourth factor is the difficulty of identifying damages and apportioning them to avoid duplicative recoveries. All of the various parties, the court said, are in a position to assert conflicting claims to a common fund, if one existed. Calculation of which entity is entitled to which portion of the fund would be a difficult undertaking. As a result, for all of those reasons, IQ lacked antitrust standing.
State antitrust claims. Because the federal antitrust claim was dismissed, the New York and New Jersey antitrust claims, based on state laws that were modelled on the Sherman Act, were also dismissed.
State law claims. The court first concluded that the law of New York, rather than the law of New Jersey, was the appropriate choice of law to determine the three state law tort claims. As for tortious interference, the law requires that the defendant interfere with the business relationship directly. Because the alleged conduct targeted prospective relations, IQ must plead that the three companies engaged in criminal or tortious behavior. The complaint, however, never stated any underlying criminal or tortious conduct on which to base the tortious interference claim. Also, the claimed injury was too remote from the alleged anticompetitive conduct, as previously discussed. Thus, IQ could not establish proximate cause because there was no direct interference. And, finally, allowing the tortious interference claim to survive the motion to dismiss would upset well-settled antitrust jurisprudence. Those that lack antitrust standing cannot be allowed to circumvent the threshold requirement simply by pleading a parallel state tort claim. As for the remaining two state law claims—civil conspiracy and aiding and abetting—they were also dismissed because they were derivative of the tortious interference claim.
The court, therefore, dismissed the complaint in its entirety, dismissing the antitrust claims for lack of antitrust standing and the three state law claims for failing to state a claim.
The case is No. 17-cv-4834 (BMC).
Attorneys: Amy Christine Gross (Duane Morris LLP) for IQ Dental Supply, Inc. Colin Kass (Proskauer Rose LLP) for Henry Schein, Inc. James J. Long (Briggs and Morgan, PA) for Patterson Companies, Inc. Howard D. Scher (Buchanan Ingersoll & Rooney PC) for Benco Dental Supply Co.
Companies: IQ Dental Supply, Inc.; Henry Schein, Inc.; Patterson Companies, Inc.; Benco Dental Supply Co.
MainStory: TopStory Antitrust NewYorkNews
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