Delaware Valley Surgical v. Johnson & Johnson

Decision Date30 April 2008
Docket NumberNo. 08-55105.,08-55105.
Citation523 F.3d 1116
PartiesDELAWARE VALLEY SURGICAL SUPPLY INC.; Niagara Falls Memorial Medical Center, Plaintiffs-Appellees, Bamberg County Memorial Hospital & Nursing Center, Plaintiff-Appellant, v. JOHNSON & JOHNSON; Johnson & Johnson Health Care Systems Inc.; Ethicon Inc.; Ethicon Endo Surgery Inc., Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

David M. Schiffman, Sidley Austin LLP, Chicago, IL, for defendant-appellant.

Russell T. Burke, Nexsen Pruet, LLC, Columbia, SC, for plaintiff-appellant.

Daniel Berger, Eric L. Cramer, Peter Kohn, and Keith J. Verrier, Berger & Montague, P.C., Philadelphia, PA; Gretchen M. Nelson, Kreindler & Kreindler LLP, Los Angeles, CA, for the plaintiff-appellee.

Appeal from the United States District Court for the Central District of California; James V. Selna, District Judge, Presiding. D.C. No. CV-05-08809-JVS.

Before: ALFRED T. GOODWIN, HARRY PREGERSON, and D.W. NELSON, Circuit Judges.

D.W. NELSON, Senior Circuit Judge:

This appeal stems from a disagreement between two different groups of plaintiffs about who has standing as a "direct purchaser" to bring a claim under federal antitrust laws. One group consists of Delaware Valley Surgical Supply Company, Inc., ("DVSS") and Niagara Falls Memorial Medical Center ("Niagara"). They are both entities that bought medical supplies directly from Johnson & Johnson and its subsidiaries ("J & J"). The other plaintiff is Bamberg County Memorial Hospital & Nursing Center ("Bamberg"), a hospital that had a contract with J & J setting a list price for the purchase of medical supplies, but that ultimately purchased its J & J products through a separate contract with a third-party distributor.

DVSS, Niagara, and Bamberg all brought independent antitrust claims against J & J. The district court consolidated the three cases. Before reaching the merits of the underlying antitrust claims, the district court ruled that Bamberg lacked standing to assert its claim against J & J. The district court reasoned that because Bamberg bought its supply through a distributor and not from J & J, it was not a "direct purchaser." Bamberg and J & J both contest that decision through this interlocutory appeal. We affirm the order of the district court, and hold that Bamberg lacks standing to pursue an antitrust claim under a direct purchaser theory.

FACTUAL AND PROCEDURAL BACKGROUND

Three plaintiffs brought antitrust actions against J & J arising from the manufacturer's contracts with hospitals and their group purchasing organizations ("GPOs"). This litigation involves two categories of products: sutures used to close wounds and endomechanical products ("endos") used primarily for minimally invasive laparoscopic surgery. The plaintiffs are: (1) Bamberg, a hospital; (2) Niagara, a hospital; and (3) DVSS, a distributor of medical devices.

I. The Underlying Antitrust Claims

In December 2005 and January 2006, Bamberg, DVSS, and Niagara independently filed suit against J & J, claiming they were direct purchasers of J & J's endomechanical products. Their complaints allege that J & J's conduct is an unreasonable restraint of trade in violation of § 1 of the Sherman Act, 15 U.S.C. § 1, and an unlawful exclusive dealing in violation of § 3 of the Clayton Act, 15 U.S.C. § 14. The plaintiffs further allege that J & J monopolized or attempted to monopolize the relevant markets in violation of § 2 of the Sherman Act, 15 U.S.C. § 2.

More specifically, the plaintiffs assert that J & J impermissibly leveraged its monopoly power in sutures to create a monopoly in the endos market. They contest J & J's "market share purchase requirements," under which J & J enters into contractual arrangements that condition discounts and rebates on a buyer purchasing the bulk of its products from the company. This scheme, plaintiffs suggest, was coercive and resulted in artificially inflated prices. Plaintiffs also object to the bundled discounts offered to hospitals that purchase both sutures and endos from J & J. They allege that these bundled discounts are exclusionary because of J & J's dominance in the sutures market.

II. Bamberg's Contracts with J & J and the Distributor

Bamberg is a member of "Premier," a GPO which negotiated agreements with J & J on Bamberg's behalf. Those agreements set the pricing options for sutures and endo products. Bamberg then executed its own contracts with J & J pursuant to the terms of the Premier agreements. Those contracts noted that Bamberg would order products either directly from J & J or from an authorized distributor of J & J's products. Bamberg chose the latter option and selected as its distributor Owens & Minor ("O & M"). Bamberg entered into a separate contract with O & M, which specified the terms of purchase for J & J products. Accordingly, Bamberg's contract with J & J did not result in the procurement of any goods directly from J & J. Bamberg did not pay J & J directly for any goods, and J & J did not ship any goods directly to Bamberg.

The distributor, O & M, is not owned or otherwise controlled by J & J. O & M's distributorship agreement with J & J specified that if products were sold to a J & J contract customer, the distributor would pay the manufacturer the set price that was negotiated between J & J and the GPO. In turn, Bamberg's contract with O & M permitted the distributor to charge a markup percentage. Accordingly, the final contract price paid by Bamberg was equal to the price negotiated under the Premier agreement with J & J, plus O & M's markup. Indisputably, Bamberg paid O & M directly for its orders, and O & M delivered the products to Bamberg.

III. Proceedings Below

After this contractual scheme was laid out before the district court, DVSS moved for partial summary judgment. It argued that Bamberg did not have standing to seek damages because it was not a "direct purchaser" of J & J's products, as required by Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). J & J and Bamberg moved for a determination that Bamberg does have standing as a "direct purchaser" because the complaint challenges the legality of Bamberg's own contracts with J & J.

The district court entered an order denying the motions filed by J & J and Bamberg, and granting DVSS's motion for partial summary judgment. The court held that Bamberg is not a "direct purchaser" from J & J because it bought its products from an independent distributor, and therefore the hospital lacks standing to sue for antitrust damages. In the district court's view, Bamberg's independent contract with J & J did "not change the fact that O & M is the direct purchaser here." In re Endosurgical Products Direct Purchasher Antitrust Litig., No. CV-05-8809-JVS (C.D.Cal. Aug. 2, 2007). This interlocutory appeal followed.

JURISDICTION

The federal courts have jurisdiction to consider questions alleging the violation of federal laws pursuant to 28 U.S.C. § 1331. We have jurisdiction over this interlocutory appeal pursuant to 28 U.S.C. § 1292(b).

STANDARD OF REVIEW

"Standing is a question of law reviewed de novo." Stewart v. Thorpe Holding Co. Profit Sharing Plan, 207 F.3d 1143, 1148 (9th Cir.2000). We also review de novo a district court's decision to grant summary judgment. Id. We must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Lopez v. Smith, 203 F.3d 1122, 1131 (9th Cir.2000) (en banc).

DISCUSSION
I. The Direct Purchaser Rule

Section 4 of the Clayton Act broadly authorizes that "any person who shall be injured" by a violation of the antitrust laws may seek treble damages from the offending party. 15 U.S.C. § 15(a). The Supreme Court has interpreted that section narrowly, thereby constraining the class of parties that have statutory standing to recover damages through antitrust suits. See Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977); Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968). In particular, the Supreme Court has given considerable attention to the question of who may assert a claim when a middleman, for example a distributor or a wholesaler, sits between an end user and a manufacturer.

The first major case to consider the scope of § 4 was Hanover Shoe, 392 U.S. 481, 88 S.Ct. 2224. There, Hanover alleged that United had monopolized the shoe manufacturing industry in violation of § 2 of the Sherman Act. Id. at 483, 88 S.Ct. 2224. The plaintiff sought treble damages for overcharges paid in leasing certain machinery from United. Id. at 483-84, 88 S.Ct. 2224. United defended itself using a "passing-on" theory, arguing that Hanover had passed on the overcharge to its customers and therefore had suffered no injury. Id. at 487-88, 88 S.Ct. 2224. The Court rejected the pass-on defense for two reasons. First, it reasoned that establishing the amount of overcharge shifted to indirect purchasers "would normally prove insurmountable." Id. at 493, 88 S.Ct. 2224. Second, it concluded that a pass-on defense would reduce the overall effectiveness of antitrust actions by diminishing the recovery available to any potential plaintiff. Id. at 494, 88 S.Ct. 2224. Accordingly, the Court held that a party could not defend an antitrust suit brought by a middleman by showing that the actual injury caused by the overcharge was suffered by the end user. Id.

In Illinois Brick, the Supreme Court extended the Hanover principle to foreclose the offensive use of a pass-on theory. 431 U.S. at 728, 97 S.Ct. 2061 (holding that indirect purchasers may not recover in an antitrust suit by proving that an overcharge was passed on to them through the distribution chain). There, the State of Illinois sued concrete block manufacturers...

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