Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: Partial summary judgment for hospitals in antitrust case against surgical robot manufacturer, (Aug 1, 2024)

By Martin A. Steinberg, J.D.

99.87% market share far exceeded amount deemed sufficient to establish monopoly power.

The federal district court in San Francisco granted partial summary judgment to several hospitals in an antitrust action against the manufacturer of surgical robots in an order that had been previously sealed. Larkin Community Hospital, Franciscan Alliance, Inc., and King County Public Hospital District No. 1 (dba Valley Medical Center) (together “Hospital Plaintiffs”) filed a class action against Intuitive Surgical, Inc. for creating schemes of tying, exclusive dealing, and monopolization in the market for servicing of its robots in violation of Sections 1 and 2 of the Sherman Act. In a separate order issued recently, the court vacated portions of the prior order granting Plaintiffs summary judgment as to the definition of a U.S. market for EndoWrist repair and replacement and Intuitive’s power in such a market (In Re: Da Vinci Surgical Robot Antitrust Litigation, No. 3:21-cv-03825-AMO (N.D. Cal.)).

Intuitive manufactures sophisticated medical devices used to perform surgery. Intuitive designs, manufactures, and sells minimally invasive surgical robots (MISR) known as da Vinci Surgical Systems (da Vinci). In 2000, Intuitive’s da Vinci became the first surgical robot approved by the FDA. In 2003, Intuitive acquired Computer Motion and phased out Computer Motion’s Zeus surgical robot, leaving the da Vinci as the only surgical robot capable of performing soft tissue surgery between a patient’s pelvis and neck with a meaningful market share in the U.S. Plaintiffs presented evidence from an expert that Intuitive has maintained a share of the surgical robot market that exceeds 99% for the past several years.

Intuitive also manufactures surgical instruments that work with the da Vinci system, called EndoWrists, which are surgical instruments attached to the da Vinci’s mechanical arms. Intuitive controls the frequency of EndoWrist instrument replacement by way of a built-in self-destruct mechanism it calls a “use counter.”

Hospital Plaintiffs are three entities that own da Vinci systems and seek to represent a putative class of other da Vinci purchasers. Larkin operates two hospitals in Florida and in 2017, it leased two da Vincis. Franciscan operates several hospitals in the Midwest. It previously owned several da Vinci Si systems, but it replaced them over time between 2015 and 2020 and currently operates only one da Vinci system. Valley currently owns two systems. Franciscan and Valley had long-term service contracts with Intuitive throughout the relevant period; Larkin had a service contract for part of the period.

Each purchaser or lessor of a da Vinci enters into a Sales, Licensing and Service Agreement (SLSA) or corresponding lease agreement with Intuitive. These contracts with hospitals and surgery centers have prohibited any repair or modification of EndoWrists, and the use of EndoWrists beyond the maximum number of uses mandated by Intuitive. If a da Vinci customer violates these provisions, the contract provides that Intuitive may cease servicing the robot, cancel its warranty, terminate the contract, and withhold the sale of instruments and replacement parts.

Independent repair companies (IRCs). Sometime around 2014, a company called Rebotix Repair, LLC (Rebotix) developed a computer chip called the “Interceptor” that could be inserted inside an Si EndoWrist to “intercept” the data in the instrument chip’s memory and circumvent the use counter to extend the useful life of an EndoWrist instrument. In 2018, Rebotix entered the U.S. market and licensed its repair technology to Restore Robotics LLC (Restore) to operate a U.S. EndoWrist service center. Established medical supply companies including Surgical Instrument Service Co. (SIS) and Medline also reached deals with Rebotix and Restore to provide EndoWrist repairs on a large scale. Medical facilities expressed interest and became repeat customers of the repair service. Restore and Rebotix offered cost savings of 40-50% off Intuitive’s list price for the repaired instruments, which hospitals and surgeons viewed as functionally equivalent to new EndoWrists.

Beginning in 2018, Intuitive sent cease-and-desist letters to Rebotix and Restore, and to medical facilities that used or even considered using repaired instruments. These cease-and-desist letters warned its customers that using repaired instruments was a material breach of their agreement that could result in the termination of service support for the robot, any warranties, and the agreement itself.

Complaint. Hospital Plaintiffs’ complaint asserted six antitrust causes of action against Intuitive. They claimed that Intuitive created schemes of tying, exclusive dealing, and monopolization in the market for servicing the da Vinci robots in violation of Sections 1 and 2 of the Sherman Act. They further alleged that Intuitive created schemes of tying, exclusive dealing, and monopolization in the EndoWrist repair and replacement aftermarket in violation of Section 1 and 2 of the Sherman Act.

Motions for summary judgment. Hospital Plaintiffs moved for summary adjudication on two sets of issues. They first asked for judgment that (1) surgical robots and EndoWrists occupy different markets, and (2) Intuitive enjoys monopoly power in both markets. Plaintiffs also sought judgment on the issue of antitrust injury.

Defendant argued that Plaintiffs cannot establish that Intuitive’s conduct proximately caused their antitrust injury. It further argued that its actions cannot be considered the source of Plaintiffs’ injury because (1) FDA regulations prohibited remanufacturing EndoWrists without Section 510(k) clearance; (2) these Plaintiffs had no interest in using remanufactured EndoWrists; and (3) to the extent Plaintiffs’ claims relate to X/Xi EndoWrists, no potential competitor has ever had the ability to re-set those devices. In addition to opposing Hospital Plaintiffs’ motion, Intuitive sought summary judgment on all of Plaintiffs’ antitrust claims.

Plaintiffs’ motion. First, the Hospital Plaintiffs were entitled to summary adjudication on the issue of whether the robots and EndoWrists occupied separate markets because there is no genuine issue of material fact that the da Vinci surgical robot and EndoWrists are separate products. The uncontroverted evidence showed that “when given a choice,” health care providers opted to purchase aftermarket EndoWrist services separately from the da Vinci, including from IRCs.

There was no dispute that EndoWrists were bought separately from and not in a fixed ratio with the da Vinci robot. Further, the Hospital Plaintiffs presented evidence to show: (1) When given a choice (and even despite threats and limitations from Intuitive), several health care providers opted to purchase aftermarket EndoWrist services from IRCs. (2) Several hospitals viewed repaired EndoWrists as functionally equivalent to new EndoWrists from Intuitive. (3) Many hospitals, including Plaintiff Franciscan and Hospital Corporation of America (HCA), one of the largest hospital chains in the nation, demonstrated interest in unbundled EndoWrist repair services but were deterred by Intuitive’s conduct. Intuitive also acknowledged in its SEC filings that its systems include the da Vinci robot while “instruments and accessories” include EndoWrists. The da Vinci robot is a single capital purchase, while EndoWrists are continually purchased over time.

Second, regarding the Da Vinci market definition, the court denied Plaintiffs’ motion because there exists a genuine dispute as to whether surgical robots constitute a distinct market that can be separated from laparoscopy and open surgery. To plead a relevant market for purposes of a Sherman Act claim, a plaintiff must allege both a geographic market and a product market. Neither party disputed that the relevant geographic market in this case is the United States. A product market consists of the product at issue and all economic substitutes for that product.

The Hospital Plaintiffs presented significant evidence to establish that surgical robots constituted a distinct product market because laparoscopic and open surgery, functional alternatives, are not economic substitutes for surgical robots. Intuitive acknowledged and even boasted that its surgical robots are in a market of their own. Intuitive, however, raised a genuine dispute of fact regarding market definition. Intuitive’s economic expert concluded that the relevant market must include at least laparoscopy surgery, particularly where laparoscopy remains the majority surgery of choice for many types of surgery. Furthermore, the conflict between the parties’ expert reports created a genuine issue of material fact as to the appropriate market definition.

Next, the court concluded that the Hospital Plaintiffs were entitled to judgment on the issues of monopoly power and market power in the market for EndoWrist repair and replacement. Intuitive’s overwhelming share of the market for EndoWrist repair and replacement weighed heavily towards findings of both monopoly and market power coupled with the absence of countervailing evidence or a meaningful counterargument from Intuitive supported this conclusion.

Intuitive failed to present any evidence contradicting the evidence presented by Hospital Plaintiffs that established the existence of a distinct market for EndoWrist instruments. Hospital Plaintiffs demonstrated that the field of competition for EndoWrist instruments was limited because EndoWrists are necessary to perform surgeries with the da Vinci and no other instruments work with the robot.

Intuitive’s market share in the EndoWrist repair and replacement market has been at least 99.87% since 2017, with IRC-repaired EndoWrists making up the miniscule remainder. A high rate of market share exceeding 65% is typically considered sufficient to establish monopoly power, and it far exceeded the share deemed sufficient to establish market power. Intuitive presented no conflicting evidence or argument that it maintained a lesser share of the EndoWrist repair and replacement market.

Moreover, Intuitive’s monopoly power has been protected by high entry barriers. Intuitive’s prohibitions on third-party EndoWrist repair effectively locked out competitors. Technological barriers also presented a significant hurdle, including because to repair EndoWrists for use beyond their preprogrammed use-counter limits, IRCs must be able to reset the counter chip. IRCs have made significant investments to perform such resets.

Significantly, Intuitive’s power in the EndoWrist repair and replacement market also has staying power – Intuitive has ensured that it will maintain its market share by prohibiting EndoWrist repair and mandating that customers purchase new replacement EndoWrists only from Intuitive. Intuitive maintains customer returns by threatening to discontinue their robot service, warranty, and future supply of instruments if the customers are found to use IRC-repaired EndoWrists.

Intuitive’s cross-motion. The court denied Intuitive’s motion for summary judgment on the entirety of the Hospital Plaintiffs’ antitrust claims. As to the challenge to antitrust standing, the court noted that because the FDA has not determined whether 510(k) clearance is necessary for IRCs’ aftermarket EndoWrist services, there is no regulatory bar to the Hospital Plaintiffs’ antitrust injury. The court further concluded that Intuitive, a private litigant, may not litigate the alleged FDCA violation through a standing challenge where the FDA has not itself found such a violation. The FDCA leaves no doubt that it is the Federal Government rather than private litigants who are authorized to file suit for noncompliance with the medical device provisions.

Next, Plaintiffs put forth enough to show antitrust standing. There is evidence from which a jury could conclude that Intuitive’s allegedly anticompetitive conduct was a material cause of the Hospital Plaintiffs’ injuries. Intuitive argued that the Hospital Plaintiffs did not suffer antitrust injury by the lack of access to EndoWrist repair services because none of the Plaintiffs would have utilized such repaired instruments.

The Hospital Plaintiffs, however, testified they were interested in utilizing repaired EndoWrists, but they had not sought to because of the contractual barriers imposed by Intuitive. Plaintiffs’ economic expert indicated that, absent Intuitive’s exclusionary restraints, Intuitive would have lowered EndoWrist prices and/or increased their artificially suppressed use limits for all customers to meet IRC competition. Importantly, Plaintiffs argued that they all had purchased EndoWrist instruments and thus participated in the relevant market.

The Hospital Plaintiffs thus presented sufficient evidence to preclude summary adjudication on the standing issue regarding the servicing of the da Vinci systems in favor of Intuitive. They presented evidence that at least one IRC, Restore, in fact provided some da Vinci maintenance services. There also existed at least some IRCs willing and capable of providing the service even without Intuitive’s proprietary technology and there existed demand for IRC da Vinci service. But Intuitive impeded da Vinci owners from obtaining IRC service by refusing to permit in-house repair and by issuing threats that owners risked “the cancelling of any warranties or cancelling of the service contract” if “somebody else does perform service.” But for Intuitive’s interference and servicing prohibitions, IRCs could have provided some level of service at discounted prices, which would have resulted in Intuitive competing on price.

Intuitive also sought a judgment on the merits of the Hospital Plaintiffs’ antitrust claims. Because the Hospital Plaintiffs’ claims were not premised on a per se violation of the antitrust laws, the rule of reason applied to each of their theories of antitrust liability. A procompetitive rationale is a non-pretextual claim that the defendant’s conduct was a form of competition on the merits because it involved, for example, greater efficiency or enhanced consumer appeal. It is not enough that conduct had the effect of reducing consumers’ choices or increasing prices to consumers.

Intuitive argued that the antitrust laws do not penalize a defendant that had a reasonable basis to conclude that its challenged actions were necessitated by concrete factual imperatives recognized as legitimate by the regulatory authority. Intuitive’s argument regarding its “reasonable bases” for anticompetitive conduct misstated what the rule of reason requires. To the extent Intuitive argued that its anticompetitive behavior arose from a good-faith attempt to ensure patient safety and compliance with FDA regulations, it has failed to provide a nonpretextual procompetitive rationale. Because Intuitive failed to identify any nonpretextual procompetitive justifications, the court did not reach the issue of whether the Hospital Plaintiffs could demonstrate the existence of less restrictive alternatives.

Motion for reconsideration. Intuitive requested that the court reconsider its rulings as to the issues of (1) the definition of a U.S. market for EndoWrist repair and replacement, (2) Intuitive’s power in such a market, and (3) separate products, asserting that the court’s conclusions on these issues directly conflicted with the Ninth Circuit’s decision in Epic Games, Inc. v. Apple, Inc., 67 F.4th 946 (9th Cir. 2023), cert. denied, 144 S. Ct. 681 (2024), and cert. denied, 144 S. Ct. 682 (2024). The Ninth Circuit clarified what is required to establish a separate, single-brand aftermarket in an antitrust case. An aftermarket exists as a separate relevant market only if, inter alia, the customer’s obligation to purchase aftermarket items from the same seller is not disclosed at the time of the original purchase. The Ninth Circuit issued that opinion eleven days after Intuitive filed its opposition to summary judgment and this court failed to adequately address the test set forth in that decision.

Neither party discussed whether the court could define an aftermarket where a foremarket had not first been defined. Because it was clear error to engage in that analysis, the court needed to vacate the portion of its March 31 Order that granted summary judgment to the Hospital Plaintiffs on the definition of the EndoWrist repair and replacement market and the subsequent assessment of Intuitive’s monopoly power in that market.

The court found Intuitive did not hold market power in the foremarket. Instead, the court expressly denied summary judgment for Plaintiffs on market definition and power as to the surgical robot foremarket, holding that disputed issues of fact remained for the jury to decide. Thus, if a single-brand aftermarket for EndoWrist instruments can be established at this stage, it must be accomplished through satisfaction of the Epic Games “lock-in” factors. The Hospital Plaintiffs cannot do so.

The first of the Epic Games “lock-in” factors to establish a single brand aftermarket is that that “the challenged aftermarket restrictions are ‘not generally known’ when consumers make their foremarket purchase.” Plaintiffs submitted no evidence and made no arguments suggesting that the challenged aftermarket restrictions on EndoWrist repair and replacement were not generally known to hospitals when they made their foremarket purchase of a da Vinci robot. Conversely, Intuitive presented evidence establishing that the challenged restrictions appeared in the da Vinci sales and lease contracts that the hospitals signed.

Finally, the court addressed Intuitive’s assertion that the court erred in granting summary judgment in favor of the Hospital Plaintiffs regarding surgical robots and the EndoWrist instruments occupying separate markets. The March 31 Order discussed at length how the evidence revealed how surgical robots and the instruments are purchased separately, not in a fixed ratio, and that consumers, “when given a choice, opt to purchase the goods from different firms, rather than a single firm.” Moreover, Intuitive failed to provide further authority demonstrating error in the court’s conclusion. Thus, the court left that portion of the March 31 Order intact.

The Case is No. 3:21-cv-03825-AMO.

Judge: Olguín, A.

Attorneys: Bonny E. Sweeney (Hausfeld LLP) for Larkin Community Hospital. Christopher J. Bateman (Cohen Milstein Sellers and Toll PLLC) for Franciscan Alliance Inc. Brian D. Clark (Lockridge Grindal Nauen P.L.L.P.) for Kaleida Health. Crystal Lohmann Parker (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Intuitive Surgical Inc.

Companies: Larkin Community Hospital; Franciscan Alliance Inc.; Kaleida Health; Intuitive Surgical Inc.

Cases: Antitrust CaliforniaNews GCNNews