Schuylkill Health Sys. v. Cardinal Health 200, LLC, CIVIL ACTION No. 12-7065

SCHUYLKILL HEALTH SYSTEM,on behalf of itself and all others similarly situated v. CARDINAL HEALTH 200, LLC, et al.

CIVIL ACTION No. 12-7065

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

July 30, 2014

MEMORANDUM

Juan R. Sánchez, J.

Plaintiff Schuylkill Health System (SHS) brings this putative antitrust class action against Defendants Cardinal Health 200, LLC (Cardinal) and Owens & Minor Distribution, Inc. (O&M), alleging violations of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 & 2, and § 3 of the Clayton Act, 15 U.S.C. § 14.¹ Defendants have filed a motion to dismiss challenging SHS's standing and asserting SHS has failed to state a claim upon which relief may be granted. For the reasons set forth below, this motion will be granted in part and denied in part.

BACKGROUND

SHS is a nonprofit corporation that operates two acute care hospitals in Pottsville, Pennsylvania. Defendants are the nation's largest sellers of distribution services for medical and surgical (med-surg) products to hospitals and other acute care providers. There are thirty main categories of med-surg products, two of which are sutures and endomechanical products (endo orendo products).² SHS is a customer of Defendants for the distribution of sutures and endo products. According to the Amended Complaint, within the market for all med-surg products, including sutures and endo products, O&M has a market share of 39% and Cardinal has a market share of 33%, for a total of 72% between the two companies. SHS alleges, based on information and belief, that Defendants have similar market shares within the sutures and endo distribution services market. Am Compl. ¶ 17.

SHS claim Defendants engaged in unlawful, anticompetitive conduct that stifled competition in the sutures and endo distribution market, causing all of Defendants' hospital and acute care provider customers, including SHS, to be overcharged for products necessary to treat their patients. SHS asserts there are very few suture and endo product or med-surg product distributors operating in the United States, and other than Defendants, distributors of sutures and endo products are relegated to a small share of the market in large part because of Defendants' anticompetitive conduct. As an example, Suture Express (SE), a national med-surg distributor which sells only sutures and endo products, has been prevented from competing effectively, and SHS has been injured as a result. SHS alleges that from 1998 to 2008, SE experienced significant growth in revenues and profitability in the suture and endo distribution services market because it could offer superior service, lower distribution prices, and faster delivery since it focused only on sutures and endo products. SHS claims that beginning in 2008, and in response to SE's success, Defendants imposed contractual terms designed to punish customers who purchased sutures and endo products from SE by charging steep penalty prices on twenty-eight other product lines that SE did not sell. If an acute care provider bought more than 10% of itsrequirements for sutures and endo from a competitor of Defendants, it was forced to pay a distribution services penalty on all of the med-surg products in its order, or "bundle," with the Defendants. Because the aggregate penalty exceeded the cost for sutures and endo products, a rival, such as SE, with a less diverse product line could not price its products so as to offset the penalty, even if the rival gave away the products for free. According to SHS, this penalty is packaged as a "discount program."³ As a result, SE has been foreclosed from a significant portion of the sutures and endo product distribution market, and all of Defendants' customers—whether or not their own contracts with the Defendants provided for such penalties—pay more for sutures and endo products than they would have paid in a market featuring competition from SE.

SHS also asserts Defendants have agreed to not compete with each other in the sutures and endo distribution services market. They employed their penalty schemes in unison, and these schemes are strikingly similar and functionally identical. In addition, Defendants are both members of the Health Industry Distributors Association (HIDA), a trade association representing medical product distributors. Every year HIDA hosts a number of annual conferences, including the Streamlining Healthcare Conference (f/k/a MedSurg Conference and Expo). SHS asserts representatives from both Defendants attend this conference every year, providing opportunities for Defendants to conspire.

SHS's Amended Complaint contains six counts: monopolization of the sutures and endo product market, in violation of 15 U.S.C. § 2 (Count One); anticompetitive agreements/bundling in restraint of trade, in violation of 15 U.S.C. § 1 (Count Two); conspiracy to restrain trade, inviolation of 15 U.S.C. § 1 (Count Three); conspiracy to monopolize, in violation of 15 U.S.C. § 2 (Count Four); exclusive dealing, in violation of 15 U.S.C. § 14 (Count Five); and illegal tying of suture and endo distribution services, in violation of 15 U.S.C. § 1 (Count Six).⁴

On September 26, 2013, this Court denied Defendants' motion to transfer venue to the District of Kansas, the venue of an earlier-filed action against Defendants. On December 13, 2013, Defendants filed a joint motion to dismiss SHS's Amended Complaint for lack of standing and failure to state a claim upon which relief may be granted.

DISCUSSION

A. PLEADING STANDARDS

Under Federal Rule of Civil Procedure 12(b)(6), a court may dismiss a complaint when it does not "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Because of the burdens discovery imposes on defendants in antitrust cases, a complaint's "[f]actual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555. The court "must accept all of the complaint's well-pleaded facts as true, but may disregard any legal conclusions." Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009); see also Papasan v. Allain, 478 U.S.265, 286 (1986) ("Although for the purposes of this motion to dismiss we must take all the factual allegations in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual allegation."). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Gelman v. State Farm Mut. Auto. Ins. Co., 583 F.3d 187, 190 (3d Cir. 2009) (quoting Iqbal, 556 U.S. at 678).

In order to establish an actionable antitrust violation, a plaintiff must plead a basis for both Article III and antitrust standing. Article III of the United States Constitution confines the federal courts to the adjudication of actual cases and controversies. To establish Article III standing, a plaintiff must allege "(1) an injury that is (2) 'fairly traceable to the defendant's allegedly unlawful conduct' and that is (3) 'likely to be redressed by the requested relief.'" Lujan v. Defenders of Wildlife, 504 U.S. 555, 590 (1992) (quoting Allen v. Wright, 468 U.S. 737, 751 (1984)). With regard to injury, "[a] legally and judicially cognizable injury-in-fact must be distinct and palpable, not abstract or conjectural or hypothetical." Danvers Motor Co., Inc. v. Ford Motor Co., 432 F.3d 286, 291 (3d Cir. 2005) (citation and internal quotation marks omitted). Injury-in-fact has no specific formula, but "economic injury is one of its paradigmatic forms." Id.

To properly plead antitrust standing, the plaintiff must show "more than injury causally linked to an illegal presence in the market." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977). Perhaps most importantly, the injury must be "of the type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Id. Other factors a court should consider when determining antitrust standing include (1) "the causal connection between the antitrust violation and the harm to the plaintiff and the intent bythe defendant to cause that harm"; (2) "the directness of the injury"; (3) "the existence of more direct victims of the alleged antitrust violations"; and (4) "the potential for duplicative recovery or complex apportionment of damages." In re Lower Lake Erie Iron Ore Antitrust Litig., 998 F.2d 1144, 1165 (3d Cir. 1993) (citing Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 545 (1983)).

B. STANDING

SHS brings its claims under three separate statutes, all of which prohibit anticompetitive conduct. Section 1 of the Sherman Act prohibits "(e)very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce." 15 U.S.C. § 1. Section 2 of the Sherman Act makes it a felony for any person to "monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations." Id. § 2. Finally, § 3 of the Clayton Act makes it unlawful for any person "to lease or make a sale or contract for sale of goods . . . or fix a price charged . . . on the condition, agreement, or understanding that the lessee or purchaser thereof shall not use or deal in the goods . . . of a competitor or competitors of the lessor or seller, where the effect of such . . . condition, agreement, or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce." Id. § 14. Section 15 of the Sherman Act provides a private right of action to any person injured in his business or property by reason of any anything forbidden in the antitrust...