White and White, Inc. v. American Hosp. Supply Corp.

• Decision Date: 16 December 1983
• Docket Number: No. 82-1305,82-1305
• Citation: 723 F.2d 495
• Parties: 1984-1 Trade Cases 65,763 WHITE AND WHITE, INC., et al., Plaintiffs-Appellees, v. AMERICAN HOSPITAL SUPPLY CORP., Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 495

723 F.2d 495

1984-1 Trade Cases 65,763

WHITE AND WHITE, INC., et al., Plaintiffs-Appellees, v. AMERICAN HOSPITAL SUPPLY CORP., Defendant-Appellant.

No. 82-1305.

United States Court of Appeals, Sixth Circuit.

Argued May 3, 1983.

Decided Dec. 16, 1983.

W. Donald McSweeney, argued, Schiff, Hardin & Waite, Chicago, Ill., for defendant-appellant.

Lawrence G. Meyer, argued, Patton, Boggs & Blow, Washington, D.C., Garret G. Rasmussen, Robert D. Vanderlaan, Mohney, Goodrich & Titta, Grand Rapids, Mich., for plaintiffs-appellees.

Before MERRITT and KRUPANSKY, Circuit Judges, and HORTON, District Judge. ^*

KRUPANSKY, Circuit Judge.

This is an appeal by American Hospital Supply Corp. (AHSC), a national distributor of hospital supplies, from a district court decision which held that AHSC violated Sections 1 and 2 of the Sherman Act by entering into a purchasing agreement with a group of hospitals that offered the hospitals volume discounts and a price increase limit in return for a high volume of purchases by the group from AHSC's full range of hospital supply products. The suit was initiated by White and White, Inc. and other local distributors of surgical supplies who compete with AHSC in various individual cities.

The record in this case is voluminous. The trial consumed 80 trial days, required 43 witnesses, produced 800 exhibits and generated almost 15,000 pages of transcript. The district judge issued an opinion that covers 95 pages in the official reporter. 540 F.Supp. 951-1046 (W.D.Mich.1982). On appeal, the joint appendix extends through 11 printed volumes of 4935 pages. Nonetheless, despite this prodigious compilation, the essence of the matter is not factually complex.

In 1977, 29 major non-profit hospitals located in 22 states created the Voluntary Hospitals of America (VHA), an incorporated for-profit organization, to provide each individual hospital with management services, research and development, economies of scale in purchasing, and a political presence. The common purpose of the above objectives was to contain hospital costs, then rising by 17.3% per year, and to discourage or forestall federal or state regulators from imposing mandatory controls on hospital charges. The same impetus to contain costs has been responsible for the creation of 200 other hospital purchasing groups generally organized (1) regionally, (2) by common religious affiliation or (3) in proprietary chains, such as Humana, or Hospital Corp. of America. VHA is unique only in that it is based on the common status of the members as major non-profit hospitals and not upon the more common bonds cited hereinabove.

These recent affiliations by hospitals have altered the hospital supply distribution business. Historically, individual hospitals relied upon local distributors to supply their medical and surgical requirements from local warehouses. As purchasing affiliations were evolved, local suppliers could no longer serve the individual affiliates which were located beyond the local distribution area. Consequently, some manufacturers of frequently consumed supplies began to distribute directly, and nationwide vendor groups were formed. AHSC is the largest of only two national vendors and it offers a complete range of supplies distributed from regional warehouses.

In 1979, AHSC executed an agreement with VHA which is the focus of this suit. Unlike traditional group purchasing agreements which involve the purchase of a given amount of product for a stated group-discounted price, the present agreement permits an individual VHA hospital to negotiate the terms of its own purchases, if any, from AHSC. If, at the end of the year, the aggregate volume of all merchandise sold by AHSC to any and all VHA hospitals reaches a given level, a retroactive rebate is paid by AHSC. This rebate is activated when aggregated purchases by VHA hospitals total $2,000 of supplies per bed. At higher levels of sales per bed the 1% rebate is progressively escalated to a maximum of 6%. In 1979, VHA totaled 20,051 beds, requiring a total purchase from AHSC of $41,002,000 before the rebates became payable.

To implement this agreement, VHA and AHSC representatives visited each hospital to convince administrators that future rebates would offset any current price disadvantages. Moreover, VHA and AHSC officials planned to utilize "peer pressure" whereby hospitals purchasing in large volume from AHSC would induce the other VHA hospitals to assist in achieving the combined quotas. AHSC salesmen, in turn, were told to be "competitive" on price but to stress the greater benefits to be derived in the form of future discounts when the purchasing quotas were satisfied.

The district court initially concluded that the relevant product market was medical/surgical supplies, rather than all hospital supplies, and the relevant geographic markets were identified as each individual city wherein specific plaintiffs competed with the defendant. The court thereupon dismissed claims of exclusive dealing, group boycott, price fixing, illegal tying, and price discrimination. ¹ It determined, however, that the agreement was an attempt to monopolize and a conspiracy to illegally restrain trade under a "rule of reason" analysis, which focused on the difficulties of single item regional suppliers in competing with a full product-line national distributor.

The specific sections of the trial court's opinion concerning each issue here appealed, and a more amplified factual accounting, will be more fully related at each respective section of the substantive discussion. It should be stressed in this factual overview that the principal issue of this case is the anticompetitive effect, if any, of the agreement, and the essence of the lower court's decision is a belief that AHSC impermissibly used the "lure" of future rebates, which were computed on sales of all types of hospital supplies, to eliminate price competition in medical/surgical supplies.

The district judge devoted fully 20 published pages to market analysis, and the parties correspondingly consign lengthy sections of the appellate briefs to the issue. Essentially, AHSC, a national distributor of all types of hospital supplies, objects to the finding that the relevant geographic markets are the individual cities wherein each plaintiff operates, and the product market is the medical/surgical supply segment of the total hospital supply business. The appellants here vigorously contest the findings below in three areas: 1) the applicable standard of review to market determinations; 2) the propriety of the "submarket" analysis in the present case; 3) the actual findings.

Standard of Review

The propriety of reviewing a determination of the relevant market as a factual or legal conclusion is not clearly or uniformly resolved in the case law. However, the preponderance of authority holds that the determination of a relevant market is composed of the articulation of a legal test which is then applied to the factual circumstances of each case. See Borough of Lansdale v. Philadelphia Elec. Co., 692 F.2d 307 (3d Cir.1982); Associated Radio Services Co. v. Page Airways, Inc., 624 F.2d 1342 (5th Cir.1980), cert. denied, 450 U.S. 1030, 101 S.Ct. 1740, 68 L.Ed.2d 226 (1981); Telex Corp. v. I.B.M. Corp., 510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S. 802, 96 S.Ct. 8, 46 L.Ed.2d 244 (1975); Acme Precision Products, Inc. v. American Alloys Corp., 484 F.2d 1237 (8th Cir.1973); Case-Swayne Co. v. Sunkist Growers, Inc., 369 F.2d 449 (9th Cir.1966), rev'd. on other grounds, 389 U.S. 384, 88 S.Ct. 528, 19 L.Ed.2d 621 (1968). See also International Boxing Club v. United States, 358 U.S. 242, 251, 79 S.Ct. 245, 250, 3 L.Ed.2d 270 ("[W]e cannot conclude the district court was 'clearly erroneous' in [defining the market]"); Von Kalinowski, Antitrust Laws and Trade Regulation (1982) Sec. 8.02(b), note 42. But cf. United States v. Household Finance Corp., 602 F.2d 1255 (7th Cir.1979) cert. denied, 444 U.S. 1044, 100 S.Ct. 732, 62 L.Ed.2d 730 (1980). Accordingly, the district court's formulation of the market tests may be freely reviewed on appeal as a matter of law; the conclusion that the relevant markets herein are medical/surgical supplies sold within specific cities is a finding of fact and subject to the "clearly erroneous" rule. Fed.R.Civ.P. 52.

Market Analysis

Appellant AHSC argues that the trial court erred initially by not defining the relevant product and geographic markets before proceeding to consider potential submarkets, and further erred by utilizing an improper legal definition of a submarket. This issue reflects the confusion arising from the comparatively recent use of "submarket analysis" by courts. As Von Kalinowski has observed:

The concept of relevant submarkets does not, however, seem to add a new test in determining the relevant product market for purposes of Section 2. It merely provides several new factors, in addition to [the existing ones of] selling price, uses, and physical characteristics, which the court may use in determining interchangeability between different products.

Antitrust Laws and Trade Regulation, supra at Sec. 8.02. (Emphasis added). Stated differently, a submarket analysis incorporates, but does not replace, the standard market test. It merely adds new factors to that test so as to more precisely define the market affected by the defendant's actions. In United States v. Dairymen, Inc., 660 F.2d 192, 195 (6th Cir.1981) this Court underscored the point that a submarket is a market, ascertained by traditional market analysis, which includes additional, not wholly different considerations.

The district court in the case at bar, however, interpreted Dairymen as permitting a fact-finder to substitute the submarket "test" for the market "test" if the market test produced "ambiguous" results. 540 F.Supp. at 980, 982. Specifically, the district judge stated:

[T]he relevant product focus of this...