Howard Hess Dental Lab. v. Dentsply Intern., 04-1979.

Decision Date21 September 2005
Docket NumberNo. 04-1980.,No. 04-1979.,04-1979.,04-1980.
Citation424 F.3d 363
PartiesHOWARD HESS DENTAL LABORATORIES INCORPORATED; Philip Guttierez,<SMALL><SUP>*</SUP></SMALL>d/b/a Dentures Plus, on behalf of themselves and all other similarly situated, Appellants v. DENTSPLY INTERNATIONAL, INC. Jersey Dental Laboratories, f/k/a Howard Hess Dental Laboratories Incorporated; Philip Guttierez,<SMALL><SUP>*</SUP></SMALL>d/b/a Dentures Plus, on behalf of themselves and all others similarly situated, Appellants v. Dentsply International, Inc.; A. Leventhal & Sons, Inc.; Accubite Dental Lab, Inc.; Addium Dental Products; Arnold Dental Supply Company; Atlanta Dental Supply Company; Benco Dental Company; Burkhart Dental Supply Company; Darby Dental Laboratory Supply Co., Inc.; Dental Supplies and Equipment, Inc.; Edentaldirect.com, Inc., as successor to Crutcher Dental, Inc.; Hendon Dental Supply, Inc.; Henry Schein, Inc., and its affiliates including, without limitation, Zahn Dental Co., Inc.; Iowa Dental Supply Co.; Jahn Dental Supply Company; JB Dental Supply Co., Inc.; Johnson & Lund Co., Inc.; Kentucky Dental Supply Company, Inc. a/k/a KDSC Liquidation Corp.; Marcus Dental Supply Co; Midway Dental Supply Inc.; Mohawk Dental Co., Inc.; Nashville Dental, Inc.; Nowak Dental Supplies, Inc.; Patterson Dental Company, its subsidiaries, predecessors, successors, assigns, affiliates and related companies; Pearson Dental Supplies, Inc.; Ryker Dental of Kentucky, Inc.; Thompson Dental Company.
CourtU.S. Court of Appeals — Third Circuit

Thomas A. Dubbs, (Argued), Richard T. Joffe, Goodkind, Labaton, Rudoff & Sucharow, New York, NY, Pamela S. Tikellis, Robert J. Kriner, Jr., Chimicles & Tikellis, LLP, Wilmington, DE, for Appellants.

Margaret M. Zwisler, (Argued), Eric J. McCarthy, Charles R. Price, Latham & Watkins LLP, Washington, D.C., Richard A. Ripley, Bingham McCutchen LLP, Washington, D.C., Brian M. Addison, Dentsply International, Inc., York, PA, W. Harding Drane, Jr., Potter Anderson & Corroon LLP, Wilmington, DE, C. Scott Reese, Cooch & Taylor, Wilmington, DE, James J. Maron, Maron Marvel & Wilks, P.A., Wilmington, DE, for Appellees.

Before BARRY, AMBRO and GREENBERG, Circuit Judges.

AMBRO, Circuit Judge.

We consider consolidated appeals involving the same parties in two antitrust suits, Howard Hess Dental Laboratories, Inc. v. Dentsply Internationl, Inc. ("Hess") and Jersey Dental Laboratories v. Dentsply International, Inc. ("Jersey Dental").1 Plaintiffs are dental laboratories who have brought these antitrust class actions on behalf of themselves and a class of similarly situated labs. Defendant Dentsply International, Inc. ("Dentsply") markets artificial teeth used by the dental labs to make dentures. Plaintiffs allege, among other things, an exclusive-dealing conspiracy and a retail price-fixing conspiracy among Dentsply and its dealer-middlemen.

The District Court denied Plaintiffs standing to recover damages in both suits based primarily on Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), which held that indirect purchaser plaintiffs do not have statutory standing to recover damages for "passed-on" overcharges.2 We hold that Plaintiffs may not recover damages in Hess (a) under the "co-conspirator" exception to Illinois Brick, (b) under the "control" exception to Illinois Brick, (c) under a non-overcharge theory of damages, or (d) for "drop shipments." While Plaintiffs may not recover damages under either the control exception or a lost profits theory in Jersey Dental, they do have statutory standing under the co-conspirator exception to pursue an action for overcharge damages (including for drop shipped teeth) caused by the alleged retail price-fixing conspiracy, although not for the alleged exclusive-dealing conspiracy.

Background

Plaintiffs allege the following in one or both of the complaints.

(1) Manufacturers of artificial teeth need to distribute through dealers in order to compete effectively. Dealers are the primary source of distribution to dental labs, which use the teeth to produce dentures. Dentsply uses a network of authorized dealers.

(2) Plaintiffs have purchased Dentsply's teeth both indirectly through Dentsply's dealers and directly through "drop shipping." Drop shipping occurs when a dealer does not have certain teeth in stock or cannot fulfill a lab's order for some other reason and asks Dentsply to ship the teeth directly to a lab. When teeth are drop shipped, the dealer never has physical custody of them, but it does bill the lab for the teeth, collect payments from the lab, and pay Dentsply.

(3) Dentsply has foreclosed its competitors' access to dealers by explicitly agreeing with some dealers that they will not carry certain competing brands of teeth and by inducing other dealers not to carry those competing brands of teeth. Pursuant to its written policy called "Dealer Criterion Number 6," Dentsply threatens to terminate, and does terminate, dealers that add to their inventory teeth made by Dentsply's competitors. Thus, unless Dentsply's dealers were already selling another manufacturer's teeth before Dentsply imposed its exclusive-dealing policies, its dealers cannot sell other manufacturers' teeth unless they give up the opportunity to continue to sell Dentsply's teeth. No rational dealer would be likely to make such a switch because, given Dentsply's monopoly position (it has a 75-80% market share on a revenue basis), losing the ability to sell Dentsply's teeth would hurt a dealer more than gaining the ability to sell Dentsply's competitors' teeth would help a dealer. By explicitly agreeing with some dealers that they will not carry certain competing brands of teeth and by enacting Dealer Criterion Number 6, Dentsply has foreclosured its rivals' access to adequate channels of distribution, and competition has been restricted. This has caused Dentsply's market share to increase, the price of Dentsply's and other manufacturers' teeth to increase, and the availability of rival teeth to decrease.

(4) Furthermore, by agreement among Dentsply and its dealers, Dentsply sets the dealers' resale prices. It distributes a list of "suggested" prices for its dealers to charge dental labs. Before a dealer can charge a lower price, Dentsply must approve this "price deviation." Price deviations have been granted only when a lab has been buying, or is thinking of buying, a competitor's teeth because they are being sold for less than those of Dentsply. In those instances, Dentsply negotiates with the lab to allow it to buy teeth from the dealer at a price below Dentsply's suggested price. The dealer then agrees to the price negotiated by Dentsply.

(5) Dentsply's foreclosing of its competitors' access to dealers and setting of the dealers' resale prices have caused Plaintiffs to purchase Dentsply's teeth at artificially high prices and lose profits from unrealized sales of Dentsply's competitors' teeth.

Procedural History

In 1999, Plaintiffs filed the Hess suit against Dentsply alleging conspiracy to monopolize, attempt to monopolize, and maintenance of monopoly in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, and restraint of trade in violation of Section 3 of the Clayton Act, 15 U.S.C. § 14. Plaintiffs asked for both damages and an injunction. Dentsply moved for summary judgment, claiming that Plaintiffs lacked standing under Illinois Brick. The District Court granted Dentsply's motion on Plaintiffs' damages claims. The Court reasoned that: (1) a co-conspirator exception to Illinois Brick did not apply because Plaintiffs had not joined Dentsply's dealers as co-defendants; (2) the control exception to Illinois Brick did not apply because Dentsply does not own its dealers; (3) Plaintiffs could not recover on a non-overcharge theory of damages because they had not articulated any such theory; and (4) Plaintiffs could not recover for drop shipments because they had specifically alleged that they were not direct purchasers, and even if they had alleged they were direct purchasers, they were indirect purchasers of drop shipments.

In 2001, Plaintiffs filed the Jersey Dental suit, this time naming as Dentsply's co-defendants twenty-six of its then twenty-eight authorized dealers. Plaintiffs made substantially the same allegations as they did in Hess with one key addition: they claimed they were not only indirect purchasers but also direct purchasers. As in Hess, Plaintiffs asked for both damages and an injunction. Dentsply moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss the claims for damages, citing Illinois Brick. The District Court granted the motion. The Court reasoned that: (1) Plaintiffs could not recover under a co-conspirator exception to Illinois Brick because the suit still implicated Illinois Brick's policy concerns; (2) in Hess it had already rejected Plaintiffs' argument that they could recover under the control exception to Illinois Brick; (3) Plaintiffs could not recover damages for lost profits because their complaint sought only overcharge damages and because, as Plaintiffs were indirect purchasers, Illinois Brick would bar recovery of lost profits anyway; and (4) in Hess it had already rejected Plaintiffs' argument that they could recover for drop shipped teeth.

Plaintiffs then moved for leave to amend their complaint. Among the proposed additions to the complaint were allegations that "[t]he Dealer Defendants agree with Dentsply and and with each other" to abide by suggested retail prices and that "the prices at which the Dealer Defendants sell to dental laboratories are controlled by Dentsply and agreed to by the Dealer Defendants." The District Court denied leave to amend because the amended pleading would not withstand a motion to dismiss. It reasoned that: (1) the co-conspirator exception to Illinois Brick did not apply because the dealers could still sue Dentsply; (2) the control exception to Illinois Brick did not...

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