Antitrust
Right to Sue
Monopoly
Indirect Purchasers
Conspiracy
Manufacturer/Distributor Conspiracy
Vertical Price-Fixing Only?
Distribution Agreement
Dismissal
Since the Supreme Court’s decision in Illinois Brick v. Illinois, 431 U.S. 720 (1977), only those buyers who purchased products directly from the antitrust violator have a claim against that party for treble damages. “Indirect purchasers” who paid too much for a product because cartel or monopoly overcharges were passed on to them by middlemen must take their lumps and hope that the market will eventually sort everything out. See, e.g., Sharif Pharm., Inc. v. Prime Therapeutics, LLC, Nos. 18-2725 and 18-3003, 2020 WL 881267 at *2 (7th Cir. Feb. 24, 2020). Matters are different, however, when a monopolist enters into a conspiracy with its distributors. In such cases, “the first buyer from a conspirator is the right party to sue.” Paper Sys. Inc. v. Nippon Paper Indus. Co., 281 F.3d 629, 631 (7th Cir. 2002).
The plaintiffs in this case (“the Providers”) are healthcare companies that purchased medical devices manufactured by Becton Dickinson & Company. Healthcare providers often do not purchase medical devices directly from the manufacturer; instead, they join a group purchasing organization, known in the trade as a GPO. The GPO negotiates prices with the manufacturer on behalf of its members. It then presents the terms to the provider, which has the opportunity to accept them or reject them. If the provider agrees to the terms, it chooses a distributor to deliver the product. The distributor then enters into contracts with the healthcare provider and the manufacturer. These contracts obligate the distributor to procure the products from the manufacturer and to sell them to the provider. The distribution contracts with the providers incorporate the price and other terms of the agreements that the GPO negotiated, plus a markup for the chosen distributor.
We present the facts in the light most favorable to the Providers without vouching for anything. Each of the Providers has purchased conventional syringes, safety syringes, and safety IV catheters from Becton. They allege that Becton charges supracompetitive prices for these products. It is able to do so, they assert, because it has monopoly power in the relevant nationwide market and is unlawfully maintaining that power through anticompetitive contract arrangements among itself, the GPOs, and the distributors.
Following industry practice, the Providers did not buy directly from Becton. They relied upon the GPO system described above, unaware of the distortions Becton had introduced. The distributors purchased the medical devices from Becton at the rates negotiated by the GPOs, and the Providers then purchased the devices from the distributors. Because they did not purchase directly from Becton, the Providers may pursue Becton itself only if they have properly alleged a conspiracy.
(…) One such limitation was announced in Illinois Brick, where the Court held that, in general, a downstream plaintiff cannot sue an alleged monopolist or cartel member on a theory that a middleman passed an anticompetitive overcharge on to her. Under Illinois Brick, only a purchaser who purchased goods directly from the monopolist (or cartel member) can claim damages. That purchaser is entitled to the full value of the damages stemming from the overcharge, even if it passed on some or all of the overcharge to downstream purchasers and consequently mitigated the damage it suffered. See Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). A plaintiff who asserts that it indirectly bore the brunt of an overcharge passed on by the direct purchaser has no claim.
Vertical integration can occur either by internalizing functions within one firm, as one sees in Reiter, or by contract. But contractual vertical integration presupposes independent firms. In that instance, as we explained in Toys “R” Us v. Fed. Trade Comm’n, 221 F.3d 928 (7th Cir. 2000), the manufacturer has an incentive to get the best deal it can from its distributors, both in terms of price and in terms of necessary services. Id. at 937. That will cause the manufacturer to sell its goods to whichever distributor will accomplish the distribution function as efficiently as possible. The manufacturer’s interests thus align with those of the consumer who buys from the distributor, not with those of the distributor.
This dynamic breaks down if 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. Rather than keeping both its prices (inclusive of distribution costs) as attractive as possible (i.e. as low as possible) for consumers, as one would expect in a competitive market, the manufacturer/distributor conspiracy has a way to extract supracompetitive profits from consumers. Or at least it can do so if it has enough market power. But market power is a separate element of a plaintiff’s claim. The only point here is that Illinois Brick is not a barrier to suit on behalf of a purchaser who dealt with a member of the conspiracy.
The fact that antitrust liability is joint and several reinforces the appropriateness of looking to the first sale outside the conspiracy. See Paper Systems, 281 F.3d at 632 (“Nothing in Illinois Brick displaces the rule of joint and several liability, under which each member of a conspiracy is liable for all damages caused by the conspiracy’s entire output.”).
The district court here recognized that Illinois Brick does not bar suits brought by direct purchasers from a conspiracy, but it thought nonetheless that the Providers’ suit could not go forward. It found that the existence of a conspiracy mattered only for cases of price fixing, as opposed to other forms of anticompetitive activity; as we noted, it thus saw no need to delve into the adequacy of the conspiracy allegations. In its view, cases outside of the arena of price fixing implicated the same considerations that led the Supreme Court to adopt the Illinois Brick rule in the first place. In particular, it 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.
We see nothing in either the Illinois Brick line of cases or the conspiracy line that supports this distinction.
The Supreme Court confirmed this in Apple Inc. v. Pepper, 139 S. Ct. 1514 (2019). There, consumers who had purchased “apps” from Apple’s “App Store” sued, arguing that Apple had monopolized the retail market for the sale of iPhone apps and had used its power to overcharge consumers. Apple argued that the critical question was “who sets the price,” id. at 1522, not who was the direct seller. It reasoned that because it did not set the retail price, it could not be sued under Illinois Brick, even though the consumers had purchased the apps directly from it. The Court rejected this argument, holding that Illinois Brick “established a bright-line rule where direct purchasers ... may sue antitrust violators from whom they purchased a good or service.” Id. While the details of Apple are different from the facts before us, the same rule applies. Apple confirms that Illinois Brick is a bright-line rule allocating the right to sue to direct purchasers alone, not a rule that requires analysis of competing policy justifications in each case. 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.
(…) A complaint that does not lay out a plausible case for relief will be dismissed. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).
(…) The district court thus erred in holding that the Illinois Brick rule bars the first purchasers outside of a conspiracy from suing under the antitrust laws except in cases where vertical price fixing is alleged. Provided that our plaintiffs have properly alleged a conspiracy, they may sue for whatever form of anticompetitive conduct they are able plausibly to allege.
The role of the distributors is critical to the Providers’ case. That is because the distributors are the entities from which the Providers purchased the products at issue. If the distributors were not part of the alleged conspiracy, then Providers’ case falls apart: no conspiracy, no direct purchaser status, no right to recover. The distributors would be the proper plaintiffs in such a situation and could sue Becton, as other distributors have done in other cases against Becton. See, e.g., In re Hypodermic Prods. Antitrust Litig., 484 F. App’x 669 (3d Cir. 2012).
In order to show an antitrust conspiracy, the Providers must prove that “the manufacturer and others had a conscious commitment to a common scheme designed to achieve an unlawful objective.” Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 768 (1984).
(…) These allegations, whether taken alone or together, do not suffice to describe a hub-and-spokes conspiracy. All the Providers have alleged is that the distributors buy and sell the devices in accordance with the terms of the contracts that the GPOs have negotiated. They have made no argument that the distributors played any role in setting the anticompetitive pricing or that there was any quid pro quo according to which Becton compensated them for participating in the alleged antitrust conspiracy. The fact that the distributors pay a fee to the GPOs for the latter’s role in negotiating the contracts is not anticompetitive conduct on its own; indeed, it is to be expected. Without an allegation that the distributors have participated in the conspiracy or knowingly engaged in parallel anticompetitive conduct, the Providers cannot sue the distributors under the antitrust laws.
(U.S. Court of Appeals for the Seventh Circuit, March 5, 2020, Marion Healthcare, LLC v. Becton Dickinson & Company, Docket No. 18-3735)
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