HL HAYDEN CO. OF NY v. Siemens Medical Systems
| Decision Date | 09 October 1987 |
| Docket Number | No. 84 Civ. 0306 (GLG).,84 Civ. 0306 (GLG). |
| Citation | 672 F. Supp. 724 |
| Parties | H.L. HAYDEN CO. OF NEW YORK, INC., Schein Dental Equipment Corp., Plaintiffs, v. SIEMENS MEDICAL SYSTEMS, INC., Healthco, Inc., Patterson Dental Co., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Anderson, Russell, Kill & Olick, P.C., New York City, for plaintiffs; John E. Daniel, Peter B. Friedman, Lawrence Kill, Deborah A. Swindells, of counsel.
Kaye, Scholer, Fierman, Hayes & Handler, New York City, for Defendant Siemens Medical Systems, Inc.; Michael D. Blechman, Robert B. Bernstein, of counsel.
Wachtell, Lipton, Rosen & Katz, New York City, for defendant Healthco, Inc.; Paul E. Levine, of counsel.
Mayer, Brown & Platt, New York City, for defendant Patterson Dental Co.; Michael Mills, of counsel.
One of the phenomena of the last half of the Twentieth Century has been the extent to which economic battles have been waged in the courthouse rather than in the marketplace. On the basis of many thousands of pages of briefs, affidavits and exhibits, we are called upon to decide the motions and cross-motions for dismissal and/or summary judgment as to plaintiffs' nine causes of action and the defendants' nine counterclaims in this case which, at its core, is an antitrust action, but which includes a veritable potpourri of legal claims.
Plaintiffs H.L. Hayden Company of New York, Inc. ("Hayden") and Schein Dental Equipment Corp. ("Schein D.E.") commenced this action against defendants Siemens Medical Systems, Inc. ("Siemens"), Healthco International, Inc. ("Healthco"), and Patterson Dental Co. ("Patterson") for alleged violations of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, and the Robinson Patman Act, 15 U.S.C. § 13(a), (c), (e) and (f). We have jurisdiction pursuant to 15 U.S.C. §§ 4, 15, 22 and 26. Plaintiffs also assert pendent state claims of alleged Donnolly Act (N.Y. Gen. Bus. Law § 340) violations, interference with contractual and business relations, disparagement of business reputation, unfair competition, and prima facie tort.
Defendant Siemens has counterclaimed, alleging that plaintiffs have violated section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), sections 349, 350, 350-a, 368-d, and 393 of the General Business Law of the State of New York, and common law principles prohibiting unfair competition, and have tortiously interfered with contractual relations. Furthermore, defendant Siemens claims that plaintiffs have engaged in fraud and defamation to injure Siemens. Defendant Healthco has raised a single and novel unfair competition claim against plaintiffs for "free riding."
After two years of discovery, lengthy and frequent conferences, thousands of pages of pleadings, depositions, motions, orders, memoranda decisions, affidavits and exhibits, the parties move to dismiss or for summary judgment on the claims or counterclaims asserted against them. Maintaining some semblance of order and clarity in discussing our decisions in this case is a daunting task. Liberal use of headings and subheadings will make our assignment, and hopefully the reader's, easier.
Defendant Siemens is the American division of Siemens Aktiengesellschaft ("Siemens AG") of West Germany, with headquarters in Iselin, New Jersey. Siemens' principal product line in the United States is dental x-ray equipment. Its products are high quality and relatively high-priced, and Siemens fancies itself as the "Mercedes" of the dental x-ray equipment market. Although Siemens as a supplier is somewhat unique (to the extent that it truly may be the "Mercedes" of dental x-rays), the x-ray market itself is highly competitive and provides consumers with a wide range of product choices and prices.1
Siemens sells two types of dental x-ray equipment: (1) intraoral, which takes pictures of quadrants of the patient's mouth; and (2) panoramic, which shows the patient's entire mouth and jaw. Both types of dental x-ray equipment are complex, consisting of hundreds of integrated circuits and computer microchips designed to produce high quality images while exposing patients to the least possible amount of radiation. The equipment is subject to regulation under the Radiation Control for Health and Safety Act of 1968, 42 U.S.C. § 263b et seq., and regulations promulgated thereunder. There is no material dispute as to the fact that assembly, installation, calibration and servicing all affect the quality and possible safety of a dental x-ray.
Siemens originally marketed its dental x-ray through its own sales personnel. In 1975, in an effort to reduce costs, Siemens instituted a new "Marketing Program" under which it began to sell its products through a nationwide network of authorized, full-service dealers. "Full-service dealers" assemble, install, calibrate, and maintain dental x-ray equipment, visit dentists' offices to maintain personal contact with dentists and their staffs, and educate customers about the equipment and its value. Providing the full range of these services obviously adds to the dealers' costs of doing business. Since institution of its "Marketing Program," Siemens relies on its full-service dealers to interface directly with dentists and to promote Siemens' products. Under this plan, Siemens would honor warranties for its dental x-ray equipment only if the authorized retailer who sells the equipment also assembles, installs, calibrates and services that product.2
By 1982, there were 335 authorized Siemens dealer locations. Defendants Healthco and Patterson, the two largest national chains operating as full-service dealers of retail dental equipment, are also two of Siemens' largest suppliers. In the fiscal year 1982 (October 1981 through September 1982), Healthco represented roughly 30% of Siemens' sales to dealers and Patterson accounted for approximately 22%
Plaintiff Hayden is a dental equipment dealer, having its principal place of business in Great Neck, New York, and serving the metropolitan New York area. In 1979, Marvin Schein ("Schein") bought 50% of Hayden and, in 1980, he became its sole owner. Hayden, which sells various brands of dental equipment, had become a full-service dealer for Siemens in 1978. As such, Hayden not only sold Siemens' x-ray equipment, but it also assembled, installed, calibrated, and serviced that equipment and provided instructions on use to the dentists and dental staff.
After Schein bought Hayden, he founded Schein D.E. as a national mail order operation for the discount sale of dental equipment. Schein D.E., which also operates out of Great Neck, New York, sells most major brands of dental equipment. Through his control of Schein D.E. and Hayden, Schein began to sell Siemens' equipment by mail order.
As a mail order house, Schein D.E. has no sales force, service staff, or showroom. Although Schein D.E. does not assemble, install, calibrate or service the equipment it sells, it offers a toll-free number for dentists to use for their inquiries and also provides the names of independent service organizations in the dentist's area.3 Given its low overhead costs, Schein D.E. is able to extend discount rates to its customers. For example, Schein D.E. sold Siemens' products for between 20-25% less than authorized, full-service dealers.
In 1981, Schein invited dental equipment manufacturers and suppliers to provide marketing information to him for inclusion in the first edition of his mail order catalog. The Schein D.E. catalog is arranged alphabetically and includes photographs, a brief description of the product, and pricing information. Dentists call Schein D.E.'s toll-free number for additional information and assistance. Schein D.E. personnel explain the different features offered by different types of dental x-ray equipment and sometimes make recommendations to dentists.
Every name brand of dental equipment agreed to appear in Schein D.E.'s first catalog, which reached over 50,000 dentists in 1982. Siemens either expressly approved its inclusion in this catalog, or, once aware of its inclusion, cooperated with Schein D.E. For example, Siemens authorized its warehouse to drop-ship dental equipment directly to Schein D.E.'s customers, who were outside the New York area that Hayden covered, rather than to Hayden directly, even though Hayden was technically the customer. Furthermore, a split commission was authorized between the Siemens representative for Hayden, Lee Mergentime, and the Siemens representative in the area to which Schein D.E. had made the sale.
On April 25, 1983, David Vitt, Siemens' Vice President of the Dental Division in the United States, wrote all Siemens dealers, including Hayden, reaffirming Siemens' policy that only authorized dealers and their agents sell and install Siemens' equipment. The letter further expressed Siemens' overall marketing and technical concerns, noting in pertinent part:
You are and remain an authorized dealer for Siemens Dental Products because of your reputation as a full service dealer, capable of promoting, selling and installing Siemens Products, consistent with the quality associated with these Products and our trade name. Sales by you to third parties, including mail order houses, for redistribution are not allowed since Siemens has a legal obligation and a dedication to its good will to monitor sales and installation of its Products in a quality manner.
That same day, Vitt also wrote Schein and requested that he remove all Siemens products from the Schein D.E. catalog.
On May 3, 1983, Hayden expressed its willingness to comply with Siemens' policy. On August 4, however, Siemens sent Hayden a letter declaring that, due to repeated transgressions (even after its assurances to the contrary, it was discovered that Hayden had filled...
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