Antitrust Law Daily Wrap Up, ANTITRUST—E.D. Pa.: Hospital’s claims against surgical products distributors cut back, (Jul 31, 2014)

By Linda O’Brien, J.D., LL.M.

The federal district court in Philadelphia has dismissed a hospital operator’s monopoly, conspiracy to monopolize and restraint trade claims against two sellers of distribution services for surgical products. However, at this early stage of the proceedings, the hospital’s bundling, exclusive dealing, and tying claims were not dismissed (Schuylkill Health System v. Cardinal Health 200, LLC, July 30, 2014, Sanchez, J.).

Cardinal Health 200, LLC and Owens & Minor Distribution, Inc. (O&M) are the largest sellers of distribution services for medical and surgical products to hospitals. Schuylkill Health System (SHS) operates two acute care hospitals and is a customer of Cardinal and O&M for the distribution of sutures and endomechanical products, two categories of medical-surgical products.

SHS filed a putative class action suit against Cardinal and O&M, alleging that the companies engaged in anticompetitive conduct that suppressed competition in the sutures and endomechanical market and caused customers, such as SHS, to be overcharged for products necessary to treat their patients. Specifically, SHS claimed that in 2008 the defendants imposed contractual terms to punish customers who purchased products from a competitor that included penalties exceeding the cost of the products. The penalties were packaged as discounts for customer who bundled their orders with the defendants. SHS’ complaint included claims for monopolization, bundling in restraint of trade, conspiracy to monopolize, conspiracy to restrain trade, exclusive dealing, and illegal tying. The defendants moved for dismissal.

Standing. The court found that SHS’s allegations of antitrust injury were sufficiently specific and plausible to establish both Article III and antitrust standing. SHS’s injury consisted on paying higher prices to purchase distribution services than it would have paid absent the defendants’ conduct. The defendants blocked competition from a significant portion of the market and customers paid more for distribution services that they would have in a competitive market, whether or not the customer’s own contract contained the penalty provisions.

Moreover, it was not dispositive that competition remained in the market. To establish an antitrust violation, it was not necessary that all competition be foreclosed from the market. Rather, the test was whether the challenged conduct barred a substantial number of rivals or severely limited the market’s scope, the court noted.

The court determined that SHS sufficiently alleged plausible claims for bundling in restraint of trade, exclusive dealing, and illegal tying at the pleading stage of the litigation.

Conspiracy. However, SHS’s claims of a conspiracy to monopolize and restrain trade were insufficient to show that the defendants formed an agreement, according to the court. SHS’s allegations regarding a motive to enter a conspiracy did not support a conspiracy claim even assuming the distribution services market was susceptible to collusion given high barriers to entry and large fixed costs of production. SHS’s contention that the defendants acted contrary to their interests also failed since their conduct could be explained by each independently choosing a similar strategy of rewarding customer loyalty with discounts. Furthermore, the fact that the defendants belonged to a trade association that hosted annual conferences did not transform their parallel conduct into a conspiracy. A mere opportunity to conspire did not plausibly suggest an illegal agreement without some allegations of a unity of purpose or common understanding, according to the court.

Monopoly. The court also found that SHS failed to sufficiently plead that the defendants possessed monopoly power or had a dangerous probability of achieving monopoly power. In rejecting SHS’s argument that it plausibly pleaded a conspiracy to monopolize, the court noted that the defendants’ combined market share alone was insufficient to indicate monopoly power. SHS failed to set forth any allegations regarding strength of competition, probable development of the industry, or elasticity of customer demand. Since SHS failed to plead any relevant factors other than conclusory assertions regarding high barriers to entry, the monopoly claim was dismissed.

The case is No. 12-7065.

Attorneys: Brent W. Landau (Hausfeld LLP) for Schuylkill Health System. Michael Sennett (Jones Day) for Cardinal Health 200, LLC. John S. Gibson (Crowell & Moring LLP), and Steven E. Bizar (Buchanan Ingersoll & Rooney PC) for Owens & Minor Distribution, Inc.

Companies: Schuylkill Health System; Cardinal Health 200, LLC; Owens & Minor Distribution, Inc.

Cases: Antitrust PennsylvaniaNews