Antitrust Law Daily Wrap Up, ANTITRUST—D. Kan.: Medical products distributors may have engaged in illegal tying and exclusive dealing by linking sutures and endomechanical products to sales of all medical and surgical products, (Aug 6, 2013)

By Tobias J. Gillett, J.D., LL.M.

A distributor of sutures and endomechanical (“endo”) products sufficiently alleged claims for illegal tying and exclusive dealing in violation of the Sherman Act, as well as claims under the Kansas Restraint of Trade Act (KRTA), against two distributors of medical and surgical products over contracts with acute care providers that allegedly required the providers to purchase 90% or more of their sutures and endo products from the distributors or face financial penalties or loss of discounts on all other medical and surgical products sold by the distributors, the federal district court in Topeka, Kansas has ruled (Suture Express, Inc. v. Cardinal Health 200, LLC, August 1, 2013, Rogers, R.). However, the distributor failed to allege claims for monopolization, attempted monopolization, conspiracy to restrain trade, and conspiracy to monopolize, according to the court.

Cardinal Health 200, LLC and Owens & Minor Distribution, Inc. (O&M) are distributors of medical and surgical single-use items (“med-surg” supplies) to acute care providers. O&M allegedly possesses 39% of the market, and Cardinal 33% of the market. Suture Express, Inc. distributes sutures and endo products, allegedly in greater variety than Cardinal and O&M, which focus on the most widely-used suture and endo products. Suture Express claims to be the only significant distributor of specialty sutures and endo products.

According to Suture Express’s complaint, in 2008, Cardinal and O&M began using their market power in the broader med-surg supplies market to coerce customers into withholding their business from Suture Express. Cardinal and O&M allegedly entered into contracts with acute care providers that required the providers to purchase 90% or more of their sutures and endo products from Cardinal or O&M or face a financial penalty on all med-surg products purchased that was so substantial that it effectively prevented the providers from dealing with Suture Express. The penalty was sometimes packaged as a discount program under which providers would receive a discounted distribution fee only if they purchased their sutures and endo products from Cardinal or O&M. The discount was allegedly sufficient to bring the price of the sutures and endo products below cost. The defendants’ “lock-step” practices were allegedly not in their individual economic interests.

Suture Express filed suit, asserting claims for illegal tying in violation of Section 1 of the Sherman Act, monopolization or attempted monopolization in violation of Section 2 of the Sherman Act, conspiracy to restrain trade in violation of Section 1 of the Sherman Act, conspiracy to monopolize in violation of Section 2 of the Sherman Act, exclusive dealing in violation of Section 3 of the Clayton Act, anti-competitive tying and bundling in violation of the KRTA, and unjust enrichment. Cardinal and O&M filed a motion to dismiss.

Illegal tying. The court found that Suture Express adequately stated a claim under the rule of reason that each defendant individually engaged in illegal tying contracts in violation of Section 1 of the Sherman Act. Although alleging injury to Suture Express itself would not be sufficient to demonstrate an injury to competition in general, the court found “plaintiff’s alleged position as the only significant specialty distributor of sutures and endo products as well as the alleged target of defendants’ tying activity” to be “a distinguishing factor,” particularly when considered in connection with allegations that Suture Express had lost “a significant number of existing and potential customers” that would have preferred to purchase sutures and endo products from Suture Express. The contracts allegedly deprived customers of Suture Express’s “more comprehensive product line, superior service and lower distribution fees.”

However, Suture Express fell short of stating a plausible tying claim under per se analysis, according to the court. Suture Express failed to adequately plead a horizontal conspiracy. Moreover, the contracts between the individual defendants and the acute care providers were vertical arrangements that were “less likely to be a per se violation.” Finally, the 39% and 33% market shares held by O&M and Cardinal were insufficient to establish market power.

The court rejected the defendants’ argument that Suture Express’s tying claim failed because the defendants permitted separate purchases of meg-surg supplies and sutures and endo products. The court noted that the Tenth Circuit had previously found a tying claim to be sufficiently stated when economic penalties “were used to induce persons to purchase a grave marker from the cemetery providing the grave plot instead of buying the market separately from a grave marker builder or dealer,” in Monument Builders v. American Cemetery Assn., 891 F. 2d 1473 (1989). Moreover, the court observed that Suture Express did not have to “allege a strict tie-in arrangement in which a purchaser is required to purchase two separate products together,” but rather merely that the defendants’ discounting had restrained trade in the market for sutures and endo products.

Suture Express also sufficiently alleged the defendants’ market power for its tying claims, in the court’s view. The court could infer the defendants’ market power from Suture Express’s allegations that the defendants’ conduct had caused it to lose customers, that the defendants had engaged in predatory pricing, that they had erected substantial barriers to entry, and that they had engaged in parallel pricing behavior. In addition, Suture Express’s “substantial position in the sutures and endo products market” did not prevent it from alleging an antitrust injury.

The court declined to find that Suture Express had failed to properly define the relevant market for its claims, even though it limited the market to acute care providers that purchase med-surg supplies, and did not include non-acute care providers. Although the inadequacy of a market definition may sometimes be determined on a motion to dismiss, the court noted that the question was generally one of fact, and the court could not conclude that Suture Express’s relevant market was “flawed on its face.” The court cited White and White, Inc. v. American Hospital Supply Corp., 540 F.Supp. 951 (W.D. Mich. 1982), in which the court found “that hospital demand for med-surg products differs from the demand requirements of other consumers,” and “that hospitals were considered a distinct customer class by the med-surg supply business,” as evidence that “an elaborate factual analysis” could be required to determine the proper relevant market.

Suture Express also sufficiently alleged an antitrust injury, according to the court, by alleging that the defendants’ tying arrangements reduced competition in the distribution of sutures and endo products, that they limited customers’ choice of sutures and endo products, and that they deprived customers of advantages.

Exclusive dealing. The court also found that Suture Express had sufficiently pled a claim for exclusive dealing in violation of Section 3 of the Clayton Act. The defendants’ sales of meg-surg products on the condition that the purchaser would not deal in Suture Express’s sutures and endo products could constitute exclusive dealing arrangements, even though the agreements permitted purchasers to buy some percentage of sutures and endo products from other distributors, because the Clayton Act was not limited to contracts that were “100% exclusive.” Although Suture Express did not allege names of purchasers that had used the challenged discount programs, the court found it could “reasonably infer” that the programs were used. The defendants’ contentions that the discounts were not coercive and could be pro-competitive were issues of fact that did not render the exclusive dealing claim implausible at the pleading stage. Finally, Suture Express’s allegation regarding the amount of market foreclosure did not warrant dismissal of the claim because its claim that the defendants had each foreclosed a percentage of the market equivalent to their market shares was not implausible.

Kansas Restraint of Trade Act. Suture Express also plausibly alleged that the defendants’ contracts violated the KRTA. The court initially concluded that Suture Express could state a claim even though it made only a “general citation” to the KRTA, because “the general rule appears to be that a complaint need not point to the appropriate statute or law in order to raise a claim for relief,” and could assert a claim “even if it points to no legal theory or even if it points to the wrong legal theory.” Moreover, Suture Express alleged contracts that plausibly fell within the scope of the KRTA and “constitute[d] more than mere unilateral pricing policy.” However, the court found that Suture Express did not adequately allege conspiratorial conduct, and therefore could not allege a conspiracy to violate the antitrust laws.

Conspiracy. The court concluded that Suture Express failed to adequately allege its claims for conspiracy to restrain trade and conspiracy to monopolize. The court observed that, although Suture Express had alleged that O&M had undertaken a program similar to Cardinal’s penalty program rather than challenging Cardinal’s program by offering med-surg products without a penalty for purchasing sutures and endo products from a different distributor, it had failed to “explain why it would be more lucrative for defendant O&M to challenge defendant Cardinal instead of taking the approach that O&M has allegedly taken.” Conscious parallelism was not inherently unlawful, and there was “no compelling logic” to support Suture Express’s contention that the defendants had acted against their interests.

Monopolization. Suture Express also failed to plead its claims for monopolization, attempted monopolization, and conspiracy to monopolize, according to the court. Although Suture Express alleged that the tying and discount programs and high capital costs raised high barriers to entry, and that the defendants’ below-cost pricing had caused Suture Express to lose customers, it did not allege facts that would support an inference that defendants’ conduct had “produced a dangerous probability of either defendant attaining monopoly power.” Moreover, the fact that each defendant had a substantial market share “undermine[d] a claim that either defendant possesses monopoly power or a dangerous potential to attain such power.”

Since the court had rejected Suture Express’s conspiracy claims, it declined to consider the aggregate market power of the defendants. The court noted that “most courts have rejected shared or joint monopoly arguments when analyzing § 2 claims.”

Statutes of limitations, laches. The court determined that Suture Express’s claims were not barred by the three-year statute of limitations for the state law claims or the four-year statute of limitations for the federal claims, or by the doctrine of laches. The court observed that the federal statute of limitations “is used by some courts as a guideline in considering laches.” Although the complaint alleged that the defendants initiated their alleged illegal activity in 2008, and Suture Express did not file its complaint until December 5, 2012, the allegations did not “demonstrate that defendants entered illegal tying, bundling or exclusive dealing contracts only prior to December 5, 2009, that is, more than three years prior to filing the original complaint.”

The case is No. 12-2760-RDR.

Attorneys: Charles W. German (Rouse Hendricks German May) for Suture Express, Inc. Jennifer B. Wieland (Berkowitz Oliver Williams Shaw & Eisenbrandt, LLP) for Owens & Minor Distribution, Inc. Michael Sennett (Jones Day) for Cardinal Health 200, LLC.

Companies: Suture Express, Inc.; Cardinal Health 200, LLC; Owens & Minor Distribution, Inc.

Cases: Antitrust KansasNews