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Suture Express, Inc. v. Cardinal Health 200, LLC

United States District Court, Tenth Circuit

August 5, 2013

SUTURE EXPRESS, INC., Plaintiff,
v.
CARDINAL HEALTH 200, LLC, and OWENS & MINOR DISTRIBUTION, INC., Defendants.

MEMORANDUM AND ORDER

RICHARD D. ROGERS, District Judge.

This is an antitrust action raising federal and state law claims. This case is before the court upon the motions to dismiss for failure to state a claim (Doc. Nos. 23 and 27) filed by defendant Owens & Minor Distribution, Inc. and defendant Cardinal Health 200, LLC.[1] Thus, the question for the court is whether plausible antitrust law violations and state law claims are described in plaintiff's first amended complaint. The court finds that: the first amended complaint does not allege per se antitrust violations or monopolization violations; plaintiff's claims of conspiratorial agreement are not specifically supported by factual allegations; and plaintiff's unjust enrichment claim does not properly allege a benefit conferred by plaintiff upon defendant. The court further finds that plaintiff's claims that defendants, acting individually, violated § 1 of the Sherman Act and § 3 of the Clayton Act are plausible under rule of reason analysis and that analogous claims under K.S.A. 50-112 should also survive.[2]

I. PLAINTIFF'S FIRST AMENDED COMPLAINT (Doc. No. 19).

Plaintiff alleges federal and state antitrust law violations and makes a claim of unjust enrichment relating to the distribution and sale of "med-surg" supplies to acute care providers. "Med-surg" supplies are medical and surgical single-use items such as sutures, needles, syringes, gloves, surgical instruments and catheters. There are thirty product categories in the "med-surg basket" commonly sold to acute care providers. Plaintiff alleges that defendants Owens & Minor Distribution, Inc. ("O&M") and Cardinal Health 200, LLC ("Cardinal") are broad-based distributors who purchase and distribute the full gamut of products in the med-surg basket. The complaint alleges that there are approximately 4, 800 acute care providers that commonly purchase med-surg supplies through group purchasing organizations, regional purchasing cooperatives or other multi-hospital systems. Defendant O&M is alleged to have 39% of this market. Defendant Cardinal is alleged to have 33% of this market.

Plaintiff has limited its business to a portion of the med-surg basket - the sale and distribution of sutures and endomechanical products. Endomechanical ("endo") products are devices used in minimally invasive surgeries, like laparoscopic surgery. Sutures and endo products are alleged to make up 10% of med-surg supplies distributed in the United States to acute care providers. Plaintiff asserts that it provides a greater variety of suture and endo products than the more broad-based distributors who concentrate on so-called "core" products, which are the most popular or widely-used sutures and endo products. Plaintiff alleges that it is the only significant distributor of specialty or non-core sutures and endo products. For this and other reasons, plaintiff contends that its business thrived from the beginning in 1998 through 2008. Plaintiff alleges that it distributes to approximately 900 of the nation's 4, 800 acute care providers and that it offers both core and non-core sutures and endo products.

Plaintiff states that in 2008 defendants attempted to leverage their power in the distribution of a fuller array of med-surg products to coerce customers from buying plaintiff's sutures and endo products. Plaintiff asserts that contracts were constructed which unlawfully tied the sale of sutures and endo products to the sale of other products in the med-surg basket. Under these contracts if an acute care provider did not purchase 90% or more of its sutures and endo products from a defendant, then it would pay a penalty on the entire med-surg basket purchased from that defendant. The penalty was allegedly so substantial that it effectively prevented acute care providers from dealing with plaintiff, thus foreclosing the opportunity for acute care providers to enjoy plaintiff's alleged superior service, lower distribution fees and comprehensive product selection. According to plaintiff, this penalty was also packaged as a "discount program" where providers were not eligible for a discounted distribution fee if they did not purchase their sutures and endo products from a defendant. Plaintiff further contends that the amount of the "discount" was such as to bring the price of defendants' sutures and endo products below cost and, thus, constituted predatory pricing which enhanced defendants' market power, raised barriers to entry and impeded the ability of plaintiff to compete.

Plaintiff asserts that defendants' exclusionary practices are strikingly similar and that the "lock-step implementation of nearly identical penalty programs defies each [defendant's] economic interests." Doc. No. 19, ¶ 52.

Plaintiff contends that in order to avoid paying extra for the med-surg products hospitals needed as part of the med-surg basket, acute care providers declined to purchase sutures and endo products from plaintiff and instead purchased them from defendants. Plaintiff alleges that its business has been injured and that consumers have been injured in the following manner: less consumer choice among competing suture and endo product distributors; increased costs and reduced service; reduced access and barriers to entry to the sutures and endo products distribution market; chilled innovation within the med-surg supplies distribution market; and loss of competition among distributors to the acute care market.

Seven counts are listed in the complaint: a violation of § 1 of the Sherman Act alleging illegal tying (Count 1); a violation of § 2 of the Sherman Act alleging unlawful monopolization or attempted monopolization of the markets for the domestic distribution of sutures and endo products to acute care providers (Count 2); a violation of § 1 of the Sherman Act alleging conspiracy to restrain trade (Count 3); a violation of § 2 of the Sherman Act alleging conspiracy to monopolize (Count 4); a violation of § 3 of the Clayton Act alleging exclusive dealing (Count 5); a violation of K.S.A. 50-101 et. seq. alleging anti-competitive tying and bundling (Count 6); and unjust enrichment (Count 7).

II. STANDARDS GOVERNING DEFENDANTS' MOTIONS TO DISMISS

FED.R.CIV.P. 8(a) requires that a complaint contain a "short and plain statement of the claim showing that the pleader is entitled to relief." The Supreme Court has stated that a complaint must provide a defendant with "fair notice" of the claims against it and the grounds for relief. See Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555 (2007). Pursuant to FED.R.CIV.P. 12(b)(6), a court may dismiss a complaint when it does not contain enough facts to state a claim to relief that is plausible on its face. Id. at 570. "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009). "The plausibility standard is not akin to a probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id . (quoting Twombly , 550 U.S. at 556). "While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level." Twombly , 550 U.S. at 555 (internal citations and parentheticals omitted). The Court observed in Twombly that, "proceeding to antitrust discovery can be expensive." Id. at 558 (applying the pleading standard to Sherman Act claims). Thus, a court should "insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed.'" Id . (quoting Associated Gen. Contractors of Cal., Inc. v. Carpenters , 459 U.S. 519, 528 n.17 (1983)).

In considering a motion to dismiss, a court must accept all of the plaintiff's allegations as true and construe them in the light most favorable to the plaintiff. Smith v. United States , 561 F.3d 1090, 1098 (10th Cir. 2009) cert. denied, 548 U.S. 1148 (2010). In addition, a court may consider documents attached to the complaint or incorporated by reference. Id.

III. COUNT ONE AND GLOBAL DEFENSES.

In this section of the court's order, the court shall address defendants' arguments against Count One and some of the arguments defendants have asserted broadly against all of the counts in the first amended complaint. The court shall address defendants' statute of limitations arguments in a separate section of this opinion.

Count One alleges that each defendant individually engaged in illegal tying contracts in violation of § 1 of the Sherman Act. Section 1 of the Sherman Act prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States." 15 U.S.C. § 1. Any "restraint of trade" is not prohibited by § 1 of the Sherman Act, only "unreasonable restraints of trade." Law v. NCAA , 134 F.3d 1010, 1016 (10th Cir.) cert. denied, 525 U.S. 822 (1998).

"Generally, a tying arrangement, is illegal under § 1 of the Sherman Act if it can be shown that: (1) two separate products or services are involved; (2) the sale or agreement to sell one product or service is conditioned on the purchase of another; (3) the seller has sufficient economic power in the tying product market to enable it to restrain trade in the tied product market; and (4) a not insubstantial amount of interstate commerce in the tied product is affected." Sports Racing Services, Inc. v. Sports Car Club of America, Inc. , 131 F.3d 874, 886 (10th Cir. 1997).

Whether an alleged restraint of trade is unreasonable depends upon a "rule of reason" or a "per se" analysis. A "rule of reason" analysis, the most commonly used method, requires weighing all of the circumstances of a case to decide whether a restrictive practice imposes an unreasonable restraint on competition. Gregory v. Fort Bridger Rendezvous Ass'n , 448 F.3d 1195, 1203 (10th Cir. 2006) (citing Diaz v. Farley , 215 F.3d 1175, 1182 (10th Cir. 2000)). Some types of anticompetitive conduct, however, have been considered in some situations to be "per se" unreasonable because their effects on competition lack any redeeming virtue and so are presumed to be unreasonable and therefore illegal. Id.

A. Per se analysis.

Count One does not state a plausible Sherman Act violation under per se analysis. The Tenth Circuit has stated that: "A tie-in constitutes a per se section 1 violation if the seller has appreciable economic power in the tying product market and if the arrangement affects a substantial volume of commerce in the tied product market." Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal and Professional Publications, Inc. , 63 F.3d 1540, 1546 (10th Cir. 1995) cert. denied, 516 U.S. 1044 (1996). The Tenth Circuit has also observed, that: "Per se violations are restricted to those restraints that would always or almost always tend to restrict competition and decrease output. This concern is greatest when actual competitors enter agreements because cooperation among would-be competitors will deprive the market place of the independent centers of decisionmaking that competition assumes and demands, and risks anti-competitive effects. Vertical arrangements, on the other hand, do not generally give rise to the same concerns and often have pro-competitive effects." Campfield v. State Farm Mutual Automobile Ins. Co. , 532 F.3d 1111, 1119 (10th Cir. 2008) (interior quotations and citations omitted).

The first amended complaint fails to state a per se tying claim for the following reasons. First, as discussed later in this decision, the court finds that any horizontal conspiracy allegations are insufficiently pled. Second, contracts between an individual defendant and a purchaser of med-surg supplies are vertical arrangements, and therefore less likely to be a per se violation. Third, the alleged market power of each individual defendant is insufficient for the defendant to be held liable in a per se tying case. See Jefferson Parish Hosp. Dist. No. 2 v. Hyde , 466 U.S. 2, 26-29 (1984) (30% market share absent other factors is insufficient to establish market power for a per se tying claim); Times-Picayune Publishing Co. v. United States , 345 U.S. 594, 611-13 (1953) (40% of sales insufficient for per se unlawful tying particularly when that share does not greatly exceed the share of any other competitor). Plaintiff alleges no factors in the first amended complaint from which the court could infer that discovery would produce evidence to support a per se tying claim.

B. Rule of reason analysis

To properly allege a tying claim which satisfies the rule of reason analysis, a plaintiff must allege facts showing that the contract or agreement in question had a substantially adverse effect on competition in general. See Gregory , 448 F.3d at 1205 (quoting Law , 134 F.3d at 1019 for the proposition that plaintiff bears the initial burden of showing that an agreement had a substantially adverse effect on competition); see also, George Haug Co. Inc. v. Rolls Royce Motor Cars Inc., 148 F.3d 136, 139 (2d Cir. 1998). While there is much case authority for the proposition that injury to a plaintiff does not suffice to show an adverse effect on competition in general, plaintiff's alleged position as "the only significant specialty distributor of sutures and endo products" (Doc. No. 19, ¶ 50) as well as the alleged target of defendants' tying activity is a distinguishing factor, particularly when it is asserted that plaintiff has "lost a significant number of existing and potential customers" (¶ 8) and (at ¶ 56) that "numerous hospitals and other acute care providers that would prefer to purchase sutures and endo products from [plaintiff] are prohibited from doing so." See Apani Southwest, Inc. v. Coca-Cola Enterprises , 128 F.Supp.2d 988, 997 (N.D.Tex. 2001) (alleged injury to plaintiff may be sufficient to allege substantial injury to competition); see also, Spanish Broadcasting System of Fla., Inc. v. Clear Channel Communications, Inc. , 376 F.3d 1065, 1072-73 (11th Cir. 2004) (acknowledging that under some circumstances damage to a critical competitor may also damage competition in general). In addition, plaintiff alleges that the tying activity deprives numerous purchasers' access to a more comprehensive product line, superior service and lower distribution fees.

C. Other arguments

1. Strict tie-ins versus ...


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