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Suture Express, Inc. v. Owens & Minor Distribution, Inc.

United States Court of Appeals, Tenth Circuit

March 14, 2017

SUTURE EXPRESS, INC., Plaintiff - Appellant,
v.
OWENS & MINOR DISTRIBUTION, INC.; CARDINAL HEALTH 200, LLC, Defendants-Appellees. JOSEPH P. BAUER; WILLIAM S. CHOI; JOSHUA P. DAVIS; JOHN B. KIRKWOOD; IOANNIS LIANOS; BARRY NALEBUFF; IVAN REIDEL, Amici Curiae.

         APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS (D.C. No. 2:12-CV-02760-DDC)

          Sanford I. Weisburst (Stephen R. Neuwirth, David M. Cooper, and Yelena Konanova of Quinn, Emanuel, Urquhart & Sullivan, LLP, New York, New York; Daniel M. Abuhoff, Michael Schaper, and Erica S. Weisgerber of Debevoise & Plimpton, L.L.P., New York, New York; Sean Delphey of Quinn, Emanuel, Urquhart & Sullivan, L.L.P., Washington, D.C., with him on the briefs), New York, New York, for Plaintiff - Appellant.

          Paula W. Render and Shari Ross Lahlou (Michael Sennett and Eric P. Berlin of Jones Day, Chicago, Illinois; Michelle K. Fischer of Jones Day, Cleveland, Ohio, and Clifton S. Elgarten and Luke van Houwelingen of Crowell & Moring, LLP, Washington, D.C., with them on the brief), for Defendants - Appellees.

          David A. Balto, Bradley A. Wasser, and Matthew C. Lane of Law Offices of David A. Balto, Washington, D.C., for Amici Curiae.

          Before KELLY, LUCERO, and MURPHY, Circuit Judges.

          KELLY, Circuit Judge.

         Plaintiff-Appellant Suture Express, Inc. appeals from the district court's entry of summary judgment in favor of Cardinal Health 200, LLC ("Cardinal") and Owens & Minor Distribution, Inc. ("O&M") under Section 1 of the Sherman Antitrust Act, Section 3 of the Clayton Act, and the Kansas Restraint of Trade Act ("KRTA"). See Suture Express, Inc. v. Owens & Minor Distrib., Inc., No. 12-2760-DDC-KGS, 2016 WL 1377342 (D. Kan. Apr. 7, 2016). Finding jurisdiction under 28 U.S.C. § 1291, we affirm.

         Background[1]

         A. The Business

         Suture Express, Cardinal, and O&M compete in the medical-and-surgical ("med-surg") supply and distribution market. Cardinal and O&M, along with one other company not part of this lawsuit, Medline Industries, Inc. ("Medline"), are national broadline distributors, meaning they contract with hospitals and other acute healthcare providers to distribute a full line of med-surg products. This includes about 30 categories, ranging from custom surgical kits, bedpans, and hospital gowns to IV sets and solutions, gloves, and needles and syringes. In total, Cardinal distributes more than 300, 000 individual med-surg products, while O&M distributes more than 220, 000. 7 J.A. 1380; 10 J.A. 1723 n.2. Many of these med-surg products are heavy or bulky, so Cardinal and O&M use a network of regional distribution centers to store the inventory and then use trucks to make deliveries to the hospitals. Cardinal operates 48 such distribution centers; O&M, 43.

         In 1998, Suture Express entered the med-surg market. Instead of competing as another broadline distributor, however, Suture Express specialized in supplying only one category of med-surg: sutures. In 2002, it also began distributing endomechanical supplies, which are used for minimally invasive or laproscopic surgeries. These two product categories, together known as "suture-endo, " differ from other med-surg in that they are typically smaller and lighter. A box of sutures, for example, is smaller than a box of Kleenex tissues and weighs not much more than the empty box. Suture-endo products also have a high-dollar value relative to their size and weight, and there exists a broader variety of these products than of any other single category of med-surg.

         Because of these distinctive characteristics of suture-endo, Suture Express utilized a different distribution model. Instead of using regional warehouses and delivering products by truck, Suture Express stocked all its inventory in a single warehouse in Lenexa, Kansas, and then contracted with FedEx to provide overnight delivery to ordering hospitals. By specializing in suture-endo, and by using this new distribution model, Suture Express was often able to have on hand a broader variety of suture-endo than did the broadline distributors - who, after all, had many more product categories to keep stocked across many more warehouses.

         This specialization also allowed Suture Express to achieve very high fill rates. A fill rate is the percentage of "filled" orders by a distributor on a timely basis. If a distributor timely ships nine of the ten items a customer orders, the fill rate for that order is 90%. Fill rates are important to hospitals because they can directly affect when services can be provided: if the suture-endo the hospital ordered yesterday did not come in today as expected, a surgeon might have to delay a surgery. Suture Express has maintained a fill rate higher than 99%, which is often higher than the rates achieved by O&M and Cardinal for the same product categories. See 6 J.A. 1127-29. B. The Market

         For purposes of this case, the relevant market is limited to the national distribution of med-surg products to acute care providers. Suture Express, 2016 WL 1377342, at *4. That market is divided into two broad categories: (1) suture-endo, which comprises roughly 10% of the overall med-surg market; and (2) "other-med-surg, " which includes everything else - the other 90%. This division is somewhat artificial because no acute care provider needs only suture-endo but not other-med-surg - or vice versa - but it is helpful since Suture Express mainly provides one category but not the other. 7 J.A. 1294.

         According to Suture Express's expert witness, Professor Einer Elhauge, the suture-endo market has grown over time, expanding from about $1.97 billion in distribution revenues in 2007 to roughly $2.36 billion in 2012. During that same time period, Suture Express was able to capture between 8% and 10% of the market. 23 J.A. 3069; 2 J.A. 352. In comparison, during these six years, Cardinal's share of the suture-endo market declined from 30% to 26%, and O&M's share grew from 40% to 42%. 2 J.A. 352.

         In the other-med-surg market, Cardinal and O&M together accounted for the majority of sales to acute care providers. Id. at 353. Between 2007 and 2012, Cardinal's share of other-med-surg sales decreased from 31% to 27%, while O&M's share grew from 33% to 38%. Id.

         Broadly speaking, the rest of the med-surg distribution market was generally controlled by (a) Medline, the third national broadline distributor, and (b) regional distributors, such as Seneca Medical, MMS, Inc., and the Claflin Company. These companies are not parties to the case, and their specific shares of the acute provider market are not clear. Their presence, however, is not insignificant. Medline, for instance, doubled the amount of its revenue coming from total med-surg sales between 2008 and 2012. In that last year, the company's total med-surg revenues approximated roughly half of O&M's and about two-thirds of Cardinal's.[2] See 11 J.A. 1998, 2021. Likewise, its total suture-endo sales equated to nearly two-thirds of Suture Express's, and to roughly a quarter of Cardinal's and 15% of O&M's suture-endo sales to acute care providers. See id. at 1998; 23 J.A. 3069.

         Some of the regional distributors have also grown their market shares - though, again, it is not clear from the record by how much or what percentage of the relevant markets they control. Seneca Medical, for example, distributes about 90, 000 different products across 12 states, has grown by about 50% in the last half-decade, and controls about 15% of the med-surg market in its region. 8 J.A. 1416-24; see Suture Express, 2016 WL 1377342, at *10. Cardinal, O&M, and Suture Express have all won and lost contracts against Medline and certain regional distributors.

         There are approximately 4800 acute care providers that are consumers in the med-surg market. 1 J.A. 48. They have three main choices in how they purchase medical supplies. First, they can contract directly with med-surg manufacturers and perform distribution functions themselves. Second, they can contract with distributors, allowing the hospital to place one or two main orders instead of many separate orders across manufacturers. Third, the hospitals and hospital systems can group together to consolidate purchasing power to negotiate favorable contracts with one or more distributors or manufacturers. Of course, these three options are not mutually exclusive.

         Most med-surg distributors use a "cost-plus markup" fee arrangement, by which the customer is charged the cost of the product plus a negotiated fixed percentage distribution fee. There can also be additional costs, and certain rebates, depending on the nature of the customer's contract with the distributor(s) and/or manufacturer(s). Suture Express, for instance, typically charges a $7 per day per location freight fee on top of its cost-plus markup.

         Between 2007 and 2012, average markups decreased for Cardinal, O&M, and Suture Express, as well as for some of the regional distributors. This was true both in the other-med-surg and the suture-endo markets, though markups in the other-med-surg market were higher throughout the time period, even through the more substantial decline in that market. 2 J.A. 332. Within the suture-endo market specifically, Cardinal's and O&M's markups were always higher than Suture Express's - though, again, all declined somewhat between 2007 and 2012. Id. at 361. Finally, overall profit margins for O&M and Cardinal have also declined since 2008. 11 J.A. 2023-24.

         C. The Bundling Package

         After Suture Express entered the suture-endo market and steadily grew its market share, Cardinal and O&M responded by instituting bundling packages in their contracts. Though these packages took different forms, the overarching result was that the customer would pay more (usually one percent more) for its other-med-surg orders unless it also ordered its suture-endo through the same distributor. For instance, some Cardinal contracts required the customer to purchase all its suture-endo from Cardinal or face markups on its other-med-surg orders; other contracts required the customer to purchase a certain percentage (e.g., 95%) of all its med-surg from Cardinal or pay price markups. O&M instituted similar packages, making the price of other-med-surg increase if the customer did not also buy its suture-endo through O&M.[3] However, in at least some of the contracts, if the hospital purchased its suture-endo directly from the manufacturer, no penalty would be charged; such purchases were exempted from the percentage requirement. See 6 J.A. 956; 5 J.A. 830.

         Whether viewed as a bundling discount (as Cardinal and O&M officially describe it) or as a penalty (as Suture Express and some internal communications at Cardinal and O&M call it), the effect was that customers ended up paying more overall if they ordered suture-endo through Suture Express and other-med-surg through Cardinal / O&M than if they just ordered everything through their broadline distributor - even though Suture Express charged less for its suture-endo than did Cardinal or O&M. For instance, before the bundling terms were put into effect, one hospital would typically buy about $750, 000 worth of suture-endo per year and about $7, 000, 000 of other-med-surg. Buying the former from Suture Express and the latter from Cardinal would save the hospital about $18, 750. But with the bundling term added, Cardinal would increase the hospital's other-med-surg markup by one percent if it did not also buy its suture-endo from Cardinal. Since this would translate into a $70, 000 increase on the hospital's other-med-surg, the $18, 000 in suture-endo savings would not be worth the price of doing business with Suture Express. 24 J.A. 3301; 18 J.A. 2615-16; 2 J.A. 400 n.234.

         D. Suture Express's Claim and the Opinion Below

         Suture Express sued Cardinal and O&M, alleging that their bundling arrangements constituted an illegal tying practice in violation of federal and state antitrust laws. On cross motions for summary judgment, the district court granted summary judgment for Cardinal and O&M. Suture Express, 2016 WL 1377342, at *36. The court held that Suture Express's federal claims failed as a matter of law because it could not establish that either Cardinal or O&M individually possessed sufficient market power in the other-med-surg market that would permit it to restrain trade in the suture-endo market. Id. at *25. Even were this not the case, however, the court also held that (a) Suture Express could not establish antitrust injury because it had not shown that competition itself had been harmed, id. at *26-28, and (b) Cardinal and O&M cited sufficient procompetitive justifications for the bundling arrangement to overcome any harm caused by any anticompetitive ...


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