Marion Diagnostic Ctr., LLC v. Becton Dickinson & Co.

29 F.4th 337

MARION DIAGNOSTIC CENTER, LLC and Marion Healthcare, LLC, Plaintiffs-Appellants,

v.BECTON DICKINSON & CO., Cardinal Health, Inc., and McKesson Medical-Surgical, Inc., Defendants-Appellees.

No. 21-1513

United States Court of Appeals, Seventh Circuit.

Argued November 12, 2021

Decided March 18, 2022

Justin M. Ellis, Steven Francis Molo, Attorneys, Molo Lamken LLP, New York, NY, Allison Mileo Gorsuch, Attorney, Molo Lamken LLP, Chicago, IL, Robert Stephen Berry, Attorney, Berry Law PLLC, Washington, DC, for Plaintiffs-Appellants.

Robert A. Atkins, William B. Michael, Jacqueline P. Rubin, Attorneys, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, Richard P. Cassetta, Attorney, Bryan Cave Leighton Paisner LLP, St. Louis, MO, for Defendant-Appellee Becton Dickinson & Company.

Michelle Fischer, Patricia Ochman, Attorneys, Jones Day, Cleveland, OH, for Defendant-Appellee Cardinal Health, Incorporated.

Michael T. Brody, Gabriel Gillett, Attorneys, Jenner & Block LLP, Chicago, IL, David Singer, Richard Lee Stone, Attorneys, Jenner & Block LLP, Los Angeles, CA, for Defendant-Appellee McKesson Medical-Surgical, Inc.

Before Sykes, Chief Judge, and Ripple and St. Eve, Circuit Judges.

St. Eve, Circuit Judge.

A putative class of medical providers brought this suit alleging a conspiracy to drive up the prices of conventional syringes, safety syringes, and safety IV catheters ("the Products"). The Providers' First Amended Complaint ("FAC") alleged a hub-and-spokes conspiracy between manufacturer Becton, Dickinson & Co. ("BD"), group purchasing organizations, and four distributors of the Products in violation of the Sherman Act, 15 U.S.C. § 1. The district court dismissed the FAC for failure to state a claim. When we first considered this case on appeal, we agreed: the Providers' failure to allege that the distributors coordinated with each other in furtherance of the conspiracy doomed their claims on the merits. Marion Healthcare, LLC v. Becton Dickinson & Co. (Marion I ), 952 F.3d 832, 842–43 (7th Cir. 2020). Nonetheless, we vacated and remanded so the Providers could amend their complaint one more time.

In their Second Amended Complaint ("SAC"), the Providers abandoned their horizontal conspiracy allegations and now allege two vertical conspiracies: (1) between BD and McKesson Medical-Surgical, Inc. ("McKesson"), and (2) between BD and Cardinal Health, Inc. ("Cardinal").¹ The district court once again dismissed the SAC for failure to state a claim. The court also concluded that because the named plaintiffs do not purchase the Products directly from Cardinal, they lack "antitrust standing" to sue Cardinal under Illinois Brick Co. v. Illinois , 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). As explained below, we affirm.

I. Background

A. Allegations in the SAC

Marion Diagnostic Center, LLC and Marion Healthcare, LLC are small healthcare providers in Marion, Illinois. Like many such providers, they join group purchasing organizations ("GPOs"), which negotiate contracts on behalf of their members for medical products. These GPO-manufacturer contracts are known as "Net Dealer Contracts." GPOs present the terms of the Net Dealer Contracts to providers, who can either accept the terms or attempt to negotiate directly with a manufacturer. If a provider accepts the terms of a Net Dealer Contract, the provider then enters a "Distribution Agreement" with a distributor.² Under this scenario, a provider purchases medical products directly from a distributor, who charges the prices agreed to in the Net Dealer Contract plus a markup for the distributor's services.

BD is the leading national manufacturer of the three products at issue: BD controls 60% of the market for conventional syringes, 60% of the market for safety syringes, and 55% of the market for safety IV catheters. According to the Providers, these products are commodities, meaning that they are effectively interchangeable with competitors' products. Nonetheless, BD charges significantly higher prices than its competitors: 11% more for conventional syringes, 36% more for safety syringes, and 37% more for safety IV catheters.

Cardinal and McKesson are two of the largest distributors of the Products. The distribution market entails warehousing, processing orders, marketing, and tech support. Notably, the Providers have not alleged that either Cardinal or McKesson has market power in the distribution market, which includes at least four major players. The Providers also concede that they do not purchase BD products from Cardinal. They allege only that they have purchased the Products from McKesson. Complicating matters further, the Distributors make "Dealer Notification Agreements" with BD, in which the Distributors agree to distribute BD's Products in accordance with the Net Dealer Contracts.

Plaintiffs allege that BD is engaged in two vertical conspiracies to restrain trade in the relevant product markets. Specifically, they allege that BD has a quid pro quo with Cardinal and McKesson. First, the Net Dealer Contracts lock providers into long-term contracts for BD products through sole-source or dual-source provisions, "penalty pricing" rebate provisions, and bundling. Second, Cardinal and McKesson enforce those contracts, monitor providers' compliance, and supply BD with purchasing information, going above and beyond the terms of the Distributors' contractual obligations to BD. Third, Cardinal and McKesson coerce providers into buying only BD products through alleged misrepresentations about the quality or availability of competitors' products, even when doing so is inconsistent with their own self-interest. Cardinal, for example, allegedly promotes BD's products over its competing in-house brand, Covidien. Fourth, BD rewards these Distributors with various incentives.

The Providers allege that BD has engaged in other anticompetitive acts in furtherance of the conspiracies. Namely, BD has made false claims about its own products while disparaging the products of its rival, Retractable, and BD has been found liable for infringing Retractable's patents. Additionally, BD has entered exclusionary contracts with large healthcare providers (outside the GPO system) that bundle the three products at issue with other BD products. These allegations appeared in the FAC, which this court previously held failed to state a claim. Marion I , 952 F.3d at 842–43.

According to the Providers, all of this conduct amounts to antitrust injury by allowing BD to inflate the prices of the Products above competitive levels. The SAC further alleges that the conspiracies harm innovation in the relevant product markets by deterring potential entrants, thereby reducing product quality and safety.

B. Dismissal of the FAC

In the FAC, the Providers alleged a hub-and-spokes conspiracy between BD, Cardinal, McKesson, two other distributors, and two GPOs in violation of the Sherman Act, 15 U.S.C. § 1.³ The district court dismissed the FAC based on a misapplication of Illinois Brick Co. v. Illinois , 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). In Illinois Brick , the Supreme Court held that a direct purchaser from an alleged monopolist or cartel member is the proper party to bring suit; by contrast, indirect purchasers further down the supply chain may not bring suit, even if they pay higher prices as a result of an upstream defendant's anticompetitive conduct. Id. at 728–29, 97 S.Ct. 2061.⁴

This court has recognized a conspiracy "exception" to Illinois Brick , in which plaintiffs who purchase from one member of an antitrust conspiracy may bring suit against any member of the conspiracy. See Paper Sys., Inc. v. Nippon Paper Indus., Co. , 281 F.3d 629, 631–32 (7th Cir. 2002).⁵ In Paper Systems , paper distributors sued five manufacturers of thermal facsimile paper, alleging that the manufacturers had engaged in a horizontal price-fixing conspiracy among themselves, as well as vertical conspiracies with two trading firms (middlemen). The plaintiffs purchased directly from two of the manufacturers and indirectly from two other manufacturers via the trading firm defendants, so there was no question that the plaintiffs could sue those defendants. A fifth manufacturer, Nippon Paper, sold its product to distributors who were not alleged to be part of the conspiracy. The court explained that, even though the plaintiffs did not purchase directly from Nippon, they could sue Nippon under Illinois Brick because Nippon was allegedly part of the same conspiracy as the four other manufacturers and two trading firms. Paper Systems ' interpretation of Illinois Brick reinforces the principle that antitrust liability is joint and several, meaning that each member of a conspiracy may be held liable for all of the damages caused by the conspiracy. Id.

Returning to the FAC in this case, the district court incorrectly believed that the conspirator "exception" to the direct-purchaser rule was limited to price-fixing conspiracies. See Marion Diagnostic Ctr., LLC v. Becton, Dickinson, & Co. , No. 18-CV-01059-NJR-RJD, 2018 WL 6266751, at *4 (S.D. Ill. Nov. 30, 2018). The FAC alleged that a web of contracts allowed BD to charge supracompetitive prices, not that BD conspired with the distributors and GPOs to fix prices for the Products. Because Plaintiffs were not alleging a traditional price-fixing conspiracy, and because "[a]pportioning overcharges in this case would lead to the complexities Illinois Brick sought to avoid," the district court concluded that they were not direct purchasers and therefore could not bring suit against BD. Id.

C. Marion I

On appeal, this court clarified that the conspiracy "exception" to Illinois Brick is not limited to price-fixing conspiracies. See Marion I , 952 F.3d at 839. We explained that "it is better to think of the right to sue co-conspirators not as an exception to Illinois Brick , but instead as a rule inhering in Illinois Brick that allocates the right to collect 100% of the...