Ways & Means, Inc. v. Ivac Corp.

• Decision Date: 18 June 1979
• Docket Number: No. C-76-2017 WHO.,C-76-2017 WHO.
• Citation: 506 F. Supp. 697
• Court: U.S. District Court — Northern District of California
• Parties: WAYS & MEANS, INC., a corporation, and Labcon, Inc., a corporation, Plaintiffs, v. IVAC CORPORATION, a corporation, Defendant.

506 F. Supp. 697

WAYS & MEANS, INC., a corporation, and Labcon, Inc., a corporation, Plaintiffs, v. IVAC CORPORATION, a corporation, Defendant.

No. C-76-2017 WHO.

United States District Court, N. D. California.

June 18, 1979.

Jerrold N. Offstein, John H. Boone, Boone, Schatzel, Hamrick & Knudsen, San Francisco, Cal., for plaintiffs.

Richard J. Archer, Sullivan, Jones & Archer, San Francisco, Cal., MacDonald, Halsted & Laybourne, Los Angeles, Cal., for defendant.

OPINION

ORRICK, District Judge.

This case tests the propriety of certain marketing devices employed in a relatively new area of the health care industry by defendant, IVAC Corporation ("IVAC"), a Delaware corporation based in San Diego, California, which manufactures and sells electronic thermometers. These instruments, described in more detail below, record human temperatures through use of a temperature-sensitive probe sheathed in a disposable plastic probe cover. Since 1971, IVAC has marketed its thermometer through a program by which hospitals essentially lease, for a monthly fee, a complete temperature-taking system, including thermometers, probe covers, and all other necessary accessories. Throughout the period from 1971 to the present, defendant's thermometers have also been available for purchase or lease outside the program.

Plaintiff Ways & Means, Inc. ("Ways and Means"), a California corporation, manufactures probe covers compatible with IVAC's thermometers, and competes with IVAC in the sale thereof. These products are marketed through plaintiff Labcon, Inc. ("Labcon"), a wholly-owned subsidiary of Ways & Means. In this action, plaintiffs contend that IVAC's marketing program constitutes an unlawful tying arrangement in violation of the Clayton Act, 15 U.S.C. § 14,¹ and that through its use, IVAC has restrained trade and attempted to monopolize the market for probe covers, all in violation of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2.² The matter is presently before the Court on cross-motions for summary judgment. For the reasons hereinafter set forth, the Court, finding there to exist no genuine issue as to any fact material to the disposition of this case, enters judgment for the defendant.

I.

IVAC first developed its electronic thermometer in 1969. This product is a small, portable unit which utilizes battery-powered subminiature electronic components to provide a digital temperature display. The thermometer is attached by a flexible cord to a temperature-sensitive probe which is enclosed in a plastic probe cover. The disposable plastic probe cover eliminates the need for sterilization between uses, since a separate probe cover is used for each temperature taken. IVAC has obtained a variety of patents on these products.

IVAC began to sell its product in 1970. Initially, a traditional marketing approach was utilized: thermometers were sold outright to hospitals, which paid one price for each thermometer, and separate prices for probe covers and other accessories necessary to operate the system.³ According to IVAC, this approach met with several objections from hospital administrators, who feared that the units would rapidly become obsolete through new development, who voiced concerns over the ability of nurses to operate the thermometers, and whose capital budgets could not easily accomodate the purchase of such expensive equipment.

In response to these problems, IVAC introduced, in 1971, a new marketing approach called the "Temperature System Program," or "TSP." Under TSP, IVAC provided hospitals with an entire temperature-taking system, including thermometers, probe covers, other accessories, in-service training for hospital personnel, and maintenance. Users agreed to purchase 15,000 probe covers for each thermometer provided, and were billed on a monthly basis. The system was available for one or two-year periods and, for a premium rate, a thirty-day cancellation option was included. Such a program eased the fears of obsolescence, facilitated the introduction of the devices into hospital routine, and, because probe covers were purchased with operating funds, avoided the need for capital outlays in the acquisition of the thermometers.

The TSP program was apparently successful, and has remained in use since its introduction. But although the TSP has been the principal vehicle through which IVAC has marketed electronic thermometers and probe covers, it has never been the exclusive means of acquiring either product. Electronic thermometers have also been available for purchase or lease throughout the period in question. Indeed, plaintiffs concede that defendant has never refused to sell thermometers outside the TSP program.⁴ And it is clear that since 1971, a substantial percentage — perhaps 25% — of defendant's sales of thermometers have been through the direct sale of units to hospitals, outside the TSP program.⁵ Moreover, a small but not insignificant number of units have been leased during the period, apart from TSP.⁶

The complaint was filed on September 20, 1976, alleging in essence that defendant's TSP program constituted a tying arrangement in violation of the Sherman and Clayton Acts, and that defendant had sought to monopolize the probe cover market through utilization of this arrangement. 15 U.S.C. §§ 1, 2, 14. In March, 1978, cross-motions for summary judgment were made. Plaintiffs asserted that, as a matter of law, the undisputed facts disclosed the existence of an unlawful tying arrangement. Defendant urged three grounds for its motion: (1) that because the thermometers and probe covers are separately available to customers, the TSP program cannot be held to be a tying arrangement, Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958); (2) that there exists a "crucial relationship" between the thermometers and the probe covers which justifies their sale as a package, United States v. Jerrold Electronics Corp., 187 F.Supp. 545 (E.D.Pa.1960); and (3) that plaintiffs failed to produce any evidence from which to infer that they had been injured by the TSP program. These motions were denied on April 21, 1978.

In November, 1978, immediately prior to trial, plaintiffs moved for a ruling on the admissibility of a "damage study" which purported to document the damages they had suffered. At that time, the cross-motions for summary judgment were renewed, and oral argument was heard. The Court found the damage study to be inadmissible for the reasons stated below. Further, having reconsidered its earlier rulings on the cross-motions for summary judgment, the Court now finds summary judgment appropriate based upon the first and third grounds asserted by the defendant, which are discussed seriatim.⁷

II.

A.

The Supreme Court has condemned illegal tying arrangements as per se violations of the antitrust laws. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969) (hereinafter cited as Fortner I); Northern Pacific Ry. Co. v. United States, supra. In Northern Pacific and subsequent cases, three elements necessary to constitute an unlawful tie-in have been articulated. First, there must in fact exist a tying scheme by which purchasers are required to buy one commodity or service in order to obtain a second, distinct commodity or service. Second, the seller must possess sufficient economic power in the tying product to enable him to impose significant restrictions in the market for the tied product. Third, a not insubstantial amount of interstate commerce in the tied product must be affected. Northern Pacific Ry. Co. v. United States, supra, 356 U.S. at 5-7, 78 S.Ct. at 518-519. Moore v. Jas. H. Matthews & Co., 550 F.2d 1207, 1212 (9th Cir. 1977). The law views such arrangements harshly, for their operation may force buyers to forego more desirable alternatives in the tied product, thus foreclosing significant portions of the market in the tied product from competing suppliers. Fortner I, supra, 394 U.S. at 498-99, 89 S.Ct. at 1256-1257; United States v. Loew's Inc., 371 U.S. 38, 45, 83 S.Ct. 97, 102, 9 L.Ed.2d 11 (1962).

Plaintiff's reliance upon the defendant's TSP program as an express, contractual tying arrangement cannot succeed, for defendant's overall marketing program does not possess the first element outlined above. In Northern Pacific, the Court noted:

"Of course where the buyer is free to take either product by itself there is no tying problem even though the seller may also offer the two items as a unit at a single price." Id. 356 U.S. at 6, n.4, 78 S.Ct. at 518, n.4.

This proviso merely restates the obvious: if the desirable, tying product is truly available without the condition that other products be purchased with it, its alternative sale as part of a package cannot logically be a device to force the purchase of the "tied" products. Recognizing this, courts continue to require that, in order to succeed upon such a claim, a plaintiff must first demonstrate the actual existence of a tying arrangement. Moore v. Jas. H. Matthews & Co., supra, 550 F.2d at 1216; Sargent-Welch Scientific Co. v. Ventron Corp., 567 F.2d 701, 708 (7th Cir. 1978), cert. denied, 439 U.S. 822, 99 S.Ct. 87, 58 L.Ed.2d 113 (1978); Heatransfer Corp. v. Volkswagenwerk A.G., 553 F.2d 964 (5th Cir. 1977), cert. denied, 434 U.S. 1087, 98 S.Ct. 1282, 55 L.Ed.2d 792 (1978).

In the instant case, it is clear that defendant offered its electronic thermometers for sale or lease outside the TSP program. By undisputed facts set forth in the parties' Joint Pretrial Statement, plaintiffs have conceded that IVAC has always been willing to sell its thermometers whether or not the customer also purchased probe covers. See n.4, supra. The same admission was made in answers to defendant's interrogatories. In addition, plaintiffs' pleadings and affidavits themselves document the instances in which outright sales and leases of thermometers have taken...