Tuesday, December 08, 2009

Exclusive Dealing Suit Proceeds to Trial

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A medical products company could have illegally foreclosed competition in the U.S. market for sharps containers in violation of federal antitrust law by offering purchasers discounts and rebates under market share contracts and by entering in exclusive contracts with group purchasing organizations (GPOs), the federal district court in Boston has ruled.

Summary judgment against the claims of the plaintiffs—a certified nationwide class of direct purchasers (2009-2 Trade Cases ¶76,746)—was denied, clearing the last hurdle to trial in the case. The trial was scheduled to begin on December 7.

Sharps containers are products or systems used to dispose of needle-inclusive biohazard products such as syringes and blood collection devices. The contracts at issue allegedly gave purchasers discounts if they purchased virtually all their needs from the company.

Market Share Discounts

Rejected was an argument by the company that the market share discounts could not have violated the Sherman Act because they were governed by predatory pricing case law, and predatory pricing could not be proven because the discounted prices were still above cost.

The case dealt with exclusionary dealing, not predatory pricing, the court noted. While above-cost market share discounts did not, on their own, constitute improper exclusionary dealing that violated the Sherman Act, the class' assertion of additional coercive factors could suffice to demonstrate illegal conduct.

The class pointed to obstacles, both contractual and practical, that allegedly prevented hospitals from terminating the contracts, the court observed. They contended that the lack of a termination clause in the contracts effectively forced customers to buy all their requirements from the company for an indefinite duration. They also presented evidence indicating that the company policed and bullied its customers to ensure satisfaction of their ex ante purchasing requirements.

In addition, the class offered proof that the at least some of the contracts applied not just to single products, but across a range of bundled items. Such programs could be exclusionary even whether the discounts were above cost, since even an equally efficient rival might find it impossible to compensate for lost discounts on products that it did not produce, the court explained.

The court concluded that summary judgment on the claim based on market share contracts was not warranted, given the class's showing of:

(1) Substantial foreclosure of the market,
(2) Above cost loyalty discounts,
(3) Indefinitely long affirmative exclusionary purchasing commitments,
(4) Bundling,
(5) Policing and enforcement of the contracts in order to prevent departure, and
(6) Anticompetitive motive
Exclusive GPO Pacts

The class's exclusive dealing claims based on the GPO contracts were similarly viable, the court decided. GPOs negotiate contracts between manufacturers/suppliers and their member hospitals. The exclusive pacts allegedly foreclosed competitors unfairly from the most efficient distribution channel for medical supplies, the GPO services market.

The plaintiffs' expert defined a relevant market based on evidence that rivals' alternatives for selling their products were not reasonably interchangeable. This demonstrated market foreclosure raised rivals' costs and created barriers to entry. This showing, along with evidence that GPOs exiting the sole source agreements would have to abandon their entire contracts—accepting lower administrative fees—and that the selection process by which GPOs chose sole source manufacturers was not competitive, sufficed to survive summary judgment, the court said.

Market Power

The court also held that the defending company could have possessed the substantial market or monopoly power required for a violation of Sec. 2 of the Sherman Act. The company's declining market share did not preclude a finding of market power. Given that the parties'
experts disagreed substantially as to whether the company's prices and profit margins did in fact fall during the relevant period, a genuine issue of material fact existed as to the company's market power, the court found.

The decision is Natchitoches Parish Hospital Service District v. Tyco International, Ltd., 1:05-CV-12024-PBS, November 20, 2009. It appears at 2009-2 Trade Cases ¶76,815.

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