Thursday, May 01, 2008

Ninth Circuit Reaffirms Direct Purchaser Rule, Denies Hospital’s Antitrust Standing

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The U.S. Court of Appeals in San Francisco yesterday refused to create an exception to the direct purchaser rule of Illinois Brick Co. v. Illinois (U.S. Sup. Ct. 1977), 431 U.S. 720, 1977-1 Trade Cases ¶61,460, which generally bars recovery by indirect purchasers in federal antitrust cases.

The court ruled that the plaintiff-appellant—Bamberg County Memorial Hospital & Nursing Center—lacked standing under the doctrine, because it only indirectly purchased from defendant Johnson & Johnson.

Bamberg, which had had a contractual relationship with Johnson & Johnson (J&J), sued the medical supplies manufacturer for impermissibly leveraging its monopoly power in sutures to create a monopoly in the endomechanical products market.

Another hospital and a distributor of medical devices also sued J&J for antitrust violations. The three separate cases had been consolidated by the district court in Santa Ana, California.

Despite Bamberg’s contract with J&J, the hospital ultimately purchased J&J’s sutures (used to close wounds) and endomechanical products (used primarily for minimally invasive laparoscopic surgery) through a separate contract with a third-party distributor. The distributor was the immediate purchaser of sutures and endos from J&J.

Hospital’s Contractual Relationships

Bamberg was a member of a group purchasing organization (GPO), which negotiated agreements with J&J on the hospital’s behalf. Those agreements set the pricing options for the relevant products. Bamberg then executed its own contracts with J&J pursuant to the terms of the GPO agreements.

While the contracts allowed the hospital to order products either directly from J&J or from an authorized distributor, the hospital chose the latter option and selected a distributor that was not owned or otherwise controlled by the manufacturer. The contract with the distributor specified the terms of purchase for the J&J sutures and endos. Thus, the hospital's contract with J&J did not result in the procurement of any goods directly from the manufacturer, the court explained.

The hospital did not pay J&J directly for any goods, and J&J did not ship any goods directly to the hospital. Rather, Bamberg paid the distributor directly for its orders (at a price equal to the price negotiated under the GPO agreement with the manufacturer, plus the distributor’s markup), and the distributor delivered the products to the hospital.

Proposed Exception

That the distributor arguably had a smaller stake in contesting the price did not justify carving out an exception to the direct purchaser rule for a plaintiff who (1) contracted directly with the defendant; (2) challenged the lawfulness of that contract; and (3) was charged artificially high prices by the defendant in its contract.

The court noted that such an exception would still present problems of multiple liability and force courts to engage in complex factual inquiries to determine how damages should be apportioned between parties. Moreover, there were clearly other motivated plaintiffs, distributors and hospitals alike, who unquestionably met the direct purchaser requirement and could serve the role of private attorney general contemplated by Sec. 4 of the Clayton Act.

The April 30, 2008, decision in Delaware Valley Surgical Supply Company, Inc., et al v. Johnson & Johnson, will appear in CCH Trade Cases.

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