Marion HealthCare, LLC et al v. Becton Dickinson & Company et al

Filing 117

ORDER GRANTING 83 Motion to Dismiss for Failure to State a Claim and Memorandum of Law in Support Thereof filed by Becton Dickinson & Company, 85 Motion to Dismiss for Failure to State a Claim and Memorandum in Support filed b y Henry Schein, Inc., McKesson Medical-Surgical, Inc., Owens & Minor Distribution, Inc., Cardinal Health, Inc.,and 84 Motion to Dismiss for Failure to State a Claim and Memorandum in Support filed by Vizient, Inc., Premier, Inc. The 52 Amended Complaint is DISMISSED with prejudice. The case CLOSED, and judgment will be entered accordingly. Signed by Judge Nancy J. Rosenstengel on 11/30/2018. (jmp2)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF ILLINOIS
)
)
)
)
)
)
)
Plaintiffs,
)
)
vs.
)
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BECTON, DICKINSON, AND
COMPANY; PREMIER, INC.; VIZIENT, )
)
INC.; CARDINAL HEALTH, INC.;
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OWENS & MINOR DISTRIBUTION,
)
INC.; MCKESSON MEDICAL)
SURGICAL INC.; HENRY SCHEIN,
)
INC.; and UNNAMED BECTON
DISTRIBUTOR CO-CONSPIRATORS, )
)
)
Defendants.
MARION DIAGNOSTIC CENTER,
LLC; MARION HEALTHCARE, LLC;
and ANDRON MEDICAL
ASSOCIATES, individually and on
behalf of all others similarly situated,

Case No. 18-CV-01059-NJR-RJD

MEMORANDUM AND ORDER
ROSENSTENGEL, District Judge:
Pending before the Court are three motions to dismiss (Docs. 83, 84, & 85) filed
by Defendants Becton, Dickinson, and Company (“Becton”); Premier, Inc. (“Premier”);
Vizient, Inc. (“Vizient”); Cardinal Health, Inc. (“Cardinal”); Owens & Minor
Distribution, Inc. (“Owens”); McKesson Medical-Surgical, Inc., (“McKesson”); and
Henry Schein, Inc. (“Schein”) (collectively “Defendants”). The Court heard arguments
from counsel on October 17, 2018, and took the motions under advisement (see Docs.
112, 116). For the reasons set forth below, the Court now grants the motions to dismiss
and dismisses the Amended Complaint (Doc. 52) with prejudice.
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FACTUAL & PROCEDURAL BACKGROUND
Plaintiffs Marion Diagnostic Center, LLC; Marion Healthcare, LLC; and Andron
Medical Associates (collectively “Plaintiffs”) are healthcare providers who assert that
Defendants are part of a conspiracy to charge inflated prices for medical supplies, in
violation of Section 1 of the Sherman Act, 15 U.S.C. § 1 (see Doc. 52). 1
Generally, when a healthcare provider wants to purchase medical supplies, it
becomes a member of a group purchasing organization (“GPO”) (Doc. 52, p. 2). GPOs
aggregate the purchasing power of healthcare providers and, ideally, negotiate
significant discounts with medical supply manufacturers on behalf of its members. 2
Once the GPO and the manufacturer agree on the terms of a sale, the GPO notifies the
healthcare provider of the proposed contract (Doc. 52, p. 2). The contract, referred to as
a “net dealer contract,” is not binding on the provider (Id. at p. 11). But if the provider
decides to move forward with the net dealer contract, it enters into a “distributor
agreement” with a medical supply distributor (Id. at p. 12). In that agreement, the
distributor agrees to purchase the medical supplies from the manufacturer and resell
them to the provider according to the terms of the net dealer contract, plus an
additional cost (Id.). The distributor also enters into a “dealer notification agreement”
with the manufacturer to sell the supplies under the terms of the net dealer contract

The Court has subject matter jurisdiction over this action under 28 U.S.C. §§ 1331 and 1337.
Those statutes grant district courts original jurisdiction over actions “arising under the
Constitution, laws, or treaties of the United States,” 28 U.S.C. § 1331, and over “any civil
action . . . arising under any Act of Congress regulating commerce or protecting trade and
commerce against restraints and monopolies.” 28 U.S.C. § 1337.
2 GPOs and the Commoditization of Medical Devices, DRG,
https://decisionresourcesgroup.com/drg-blog/medtech-perspectives/gpos-and-thecommoditization-of-medical-devices/ (last visited Nov. 29, 2018).
1

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(Id.).
According to the Amended Complaint, Plaintiffs have purchased hypodermic
products 3 from Becton, a medical supply manufacturer, through the process described
above (Id. at pp. 3-4). Premier and Vizient are GPOs involved in those transactions, and
Cardinal, Owens, Schein, and McKesson are Becton distributors (Id. at p. 4). Plaintiffs
allege Defendants are engaged in a conspiracy to prevent competition and restrain trade
by negotiating and enforcing net dealer contracts that employ penalty pricing rebate
provisions and sole or dual source provisions (Id. at pp. 11-13). 4 Plaintiffs also assert
Becton has engaged in other anticompetitive acts in aid of the conspiracy, including
deception, disparagement, patent infringement, and false advertising against one of its
competitors (Id. at pp. 13-15).
Defendants now move the Court to dismiss Plaintiffs’ Amended Complaint
under Federal Rule of Civil Procedure (“Rule”) 12(b)(6), arguing Plaintiffs do not have
antitrust standing to bring their claims (Doc. 83).
RULE 12(B)(6) MOTION TO DISMISS
The purpose of a Rule 12(b)(6) motion is to decide the adequacy of the complaint,

Specifically, the sales at issue here involve safety catheters, safety syringes, and conventional
syringes (Doc. 52, pp. 2-3).
4 Penalty pricing rebate provisions require a provider to purchase a certain volume of products
based on its Becton purchases from the year before (Doc. 52, pp. 11-12). For instance, a net
dealer contract may state that a provider must make purchases equal to at least 80% of its
purchases from the previous year (Id.). In return, the provider pays a lower cost per unit (Id.).
The provider realizes the cost-savings through an end-of-year rebate payment (Id. at p. 12). If
the provider does not meet the required amount of purchases, it must pay Becton’s highest
price for the products (Id.). Becton’s net dealer contracts also usually contain sole or dual source
provisions (Id. at p. 11). Sole source provisions require providers to purchase products only
from Becton while dual source provisions permit providers to purchase from only one other
approved non-Becton manufacturer (Id.). If the provider violates the source provision, it must
pay higher prices (Id.).
3

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not to determine the merits of the case or decide whether a plaintiff will ultimately
prevail. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). To survive a Rule
12(b)(6) motion to dismiss, a plaintiff only needs to allege enough facts to state a claim
for relief that is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007). A plaintiff need not plead detailed factual allegations, but must provide “more
than labels and conclusions, and a formulaic recitation of the elements.” Id. For
purposes of a motion to dismiss under Rule 12(b)(6), the Court must accept all wellpleaded facts as true and draw all possible inferences in favor of the plaintiff.
McReynolds v. Merrill Lynch & Co., Inc., 694 F.3d 873, 879 (7th Cir. 2012).
DISCUSSION
Section 1 of the Sherman Act prohibits any “contract, combination in the form of
trust or otherwise, or conspiracy, in restraint of trade or commerce among the several
States. . .” 15 U.S.C. § 1. Section 4 the Clayton Act grants private citizens standing to
enforce the Sherman Act. See 15 U.S.C. § 15(a) (“[A]ny person . . . injured in his business
or property by reason of anything forbidden in the antitrust laws . . . shall recover
threefold the damages by him sustained, and the cost of suit, including a reasonable
attorney’s fee.”). Although the Clayton Act broadly defines the class of persons who can
bring claims under the Sherman Act, the Supreme Court has set forth numerous
doctrines that limit the circumstances under which someone may recover from an
antitrust violator. Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469, 480 (7th Cir. 2002).
The “direct purchaser rule,” a doctrine announced in Illinois Brick Co. v. Illinois, 431 U.S.
720 (1977), forms the crux of Defendants’ motion to dismiss.

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In Illinois Brick, building owners brought antitrust claims against manufacturers
of concrete blocks, based on allegations of price-fixing. Id. at 726-27. The defendants
sold the blocks primarily to masonry contractors, who then submitted bids to general
contractors for construction projects. Id. at 726. The general contractors, in turn,
submitted bids to customers such as the plaintiffs. Id. The Supreme Court found the
plaintiffs lacked standing to bring their antitrust claims because they were not direct
purchasers of the blocks. Id. at 746-47. “The only way in which the antitrust violation
alleged could have injured [the plaintiffs] is if all or part of the overcharge was passed
on by the masonry and general contractors to [the plaintiffs], rather than being
absorbed at the first two levels of distribution.” Id. at 727. The Court explained that
allowing indirect purchasers to assert “pass-on arguments” would lead to
“uncertainties and difficulties” in tracing the economic adjustments made throughout
the chain of distribution and leave antitrust defendants susceptible to double recovery.
Id. at 731-32. “Permitting the use of pass-on theories under [§] 4 would transform trebledamages actions into massive efforts to apportion the recovery among all potential
plaintiffs that could have absorbed part of the overcharge from direct purchasers to
middlemen to ultimate consumers.” Id. at 737. Additionally, “potential plaintiffs at each
level in the distribution chain are in a position to assert conflicting claims to a common
fund the amount of the alleged overcharge by contending that the entire overcharge
was absorbed at that particular level in the chain.” Id.
The Seventh Circuit recognizes an exception to the direct purchaser rule in cases
involving conspiracies, Fontana Aviation, Inc. v. Cessna Aircraft Co., 617 F.2d 478 (7th Cir.

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1980); Paper Systems Inc. v. Nippon Paper Industries Co., Ltd., 281 F.3d 629 (7th Cir. 2002),
but here, the parties disagree as to what types of conspiracies qualify for the exception.
In Fontana, the plaintiff, Fontana, was a corporation that sold aviation aircrafts
and performed custom installations of avionics equipment. Fontana, 617 F.2d at 479.
Cessna, the defendant, manufactured aviation aircrafts and manufactured and sold its
own line of avionics. Id. Fontana was a Cessna dealer, but it purchased its Cessna
products from Aviation Activities, Inc., and not directly from Cessna. Id. Another
relevant party, Cessna Finance Corporation, provided financing for distributors,
dealers, and purchasers of Cessna products. Id. Fontana filed suit against Cessna,
alleging it conspired with Aviation Activities, Inc. and Cessna Finance Corporation to
unreasonably restrain trade via price-fixing and to monopolize the selling and
installation of avionics equipment in Cessna aircrafts, in violation of the Sherman Act.
Id. The trial court granted summary judgment in favor of Cessna, finding, in part, that
Illinois Brick precluded Fontana from bringing antitrust claims as an indirect purchaser.
Id. at 481. On appeal, the Seventh Circuit rejected this conclusion, stating, “[w]e are not
satisfied that the Illinois Brick rule directly applies in circumstances where the
manufacturer and the intermediary are both alleged to be co-conspirators in a common
illegal enterprise resulting in intended injury to the buyer.” Id. The Seventh Circuit also
distinguished the facts of Fontana from Illinois Brick, pointing out that Fontana was not
just an indirect purchaser of Cessna products; it was also a competitor alleging
competitive injury that destroyed its avionics business. Id. The Seventh Circuit
concluded that summary judgment was inappropriate and reversed and remanded the

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case to the trial court. Id. at 482.
The Seventh Circuit addressed Illinois Brick again in Paper Systems Inc. There,
paper distributors brought antitrust claims against several paper manufacturers, who
allegedly participated in a price-fixing conspiracy. Paper Systems, 281 F.3d at 631. Two of
the manufacturers sold directly to distributors, like the plaintiffs. Id. The Seventh
Circuit held that, even though the plaintiffs resold the paper to their own customers, the
plaintiffs were entitled to collect damages from the manufacturers because “[t]he first
buyer from a conspirator is the right party to sue.” Id. Two other manufacturers sold
exclusively to trading houses, who then resold to the plaintiffs. Id. The plaintiffs alleged
that the trading houses were part of the conspiracy. Id. The Seventh Circuit found the
plaintiffs could also recover damages in that instance because the plaintiffs were “the
first purchasers from outside the conspiracy.” Id. The Court went on to explain that
Illinois Brick did not bar the plaintiffs from recovering against the conspiracy because all
members of the conspiracy were jointly and severally liable for damages. Id. at 633.
Thus, multiple recovery was a non-issue, and “[t]he difficulty of tracing overcharges
through the chain of distribution therefore [was] unimportant.” Id.
Fontana and Paper Systems both employed the conspiracy exception in the context
of vertical price-fixing. Vertical price restraints are agreements involving actors at
different levels of a distribution chain to set either minimum or maximum prices.
WILLIAM B. RUBENSTEIN, 6 NEWBERG ON CLASS ACTIONS § 20:27 (5th ed. 2018). Applying
the conspiracy exception in these instances avoids the potential conundrums recognized
in Illinois Brick, namely, duplicative recovery and difficulties tracing overcharges.

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2 P. AREEDA, R. BLAIR, & H. HOVENKAMP, ANTITRUST LAW 369 (2d ed. 2004). That is
because, in practicality, there is only one true sale when the direct purchaser conspires
with the manufacturer to fix the price of the sale. Thus, “the consumer is the only party
who has paid any overcharge.” Id.
Here, Plaintiffs do not allege a price-fixing conspiracy. Rather, they argue
Defendants

use

exclusive-dealing

provisions,

penalty

provisions,

and

other

anticompetitive behavior to inflate prices. The parties disagree as to whether the
conspiracy exception applies only to vertical price-fixing conspiracies or whether it
encompasses other types of conspiracies as well.
Regardless of the semantics, Plaintiffs allege a conspiracy that implicates the
same concerns expressed in Illinois Brick. The direct purchasers, the distributors, are
passing on alleged overcharges already established in net dealer contracts they have no
hand in negotiating. According to the Amended Complaint, the distributor defendants
are not involved in determining the inflated prices. The distributors merely enforce the
terms of net dealer contracts and then subject Plaintiffs to additional costs the
distributors independently assess. 5 It would be infeasible to calculate with any certainty
which portion of overcharges the distributors absorb or ascertain which portion of the
distributors’ upcharges are due to market force, rather than overcharges. In other
words, unlike Paper Systems and Fontana, there is not, as a practical matter, a single
transaction between Becton, the distributors, and Plaintiffs.
Plaintiffs cite the portion of Paper Systems where the Seventh Circuit opined that
Notably, the contracts at issue here do not qualify for the “cost-plus” exception to the direct
purchaser rule because the distributor agreements do not contemplate a strict purchasing
requirement or pre-date the overcharge. Illinois Brick, 431 U.S. at 735-36.

5

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principles of joint and several liability rendered the difficulty of tracing overcharges
“unimportant.” Paper Systems, 281 F.3d 629 at 633. But Paper Systems involved a price
fixing conspiracy between the manufacturer and intermediary. Here, Plaintiffs allege
that the distributors act independently to increase already-inflated prices—a classic
“pass-on” theory prohibited by Illinois Brick. Apportioning overcharges in this case
would lead to the complexities Illinois Brick sought to avoid. As such, Plaintiffs’ claims
fall within the direct purchaser rule, and no exception applies.
CONCLUSION
Plaintiffs do not allege facts plausibly suggesting they have antitrust standing to
proceed under the Sherman Act. Accordingly, the Court GRANTS Defendants’ motions
to dismiss (Docs. 83, 84, & 85). The Amended Complaint (Doc. 52) is DISMISSED with
prejudice. The case is CLOSED, and judgment will be entered accordingly.
IT IS SO ORDERED.
DATED: November 30, 2018
____________________________
NANCY J. ROSENSTENGEL
United States District Judge

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