Aaron M. Sheanin
Robins Kaplan LLP
Back in the last days before stay-at-home orders—when news of the novel coronavirus had not been so consuming—the United States Court of Appeals for the Seventh Circuit issued its decision in Marion Healthcare, LLC v. Becton Dickinson & Co., 952 F.3d 832 (7th Cir. 2020). There, the Court clarified that the “conspiracy exception” to Illinois Brick applies to all manner of anticompetitive conduct, not merely simple vertical price-fixing.
In Marion Healthcare, healthcare providers (“Providers”) purchased conventional syringes, safety syringes, and safety IV catheters manufactured by Becton Dickinson (“Becton”) through group purchasing organizations (“GPOs”). Id. at 837. The GPOs negotiated prices with Becton, and a distributor delivered the medical devices to the Providers. Id. The Providers sued Becton, the GPOs, and the distributors on a “hub-and-spoke” conspiracy theory, alleging that they charged supracompetitive prices because Becton was able to maintain monopoly power in the relevant nationwide market thorough anticompetitive contract arrangements with its alleged co-conspirators. Id. at 836-37.
The Providers alleged the following types of anticompetitive acts. First, Becton paid millions of dollars in annual administrative fees to the GPOs to ensure that their contracts with the Providers included certain terms, such as penalty pricing for Providers that did not buy specified amounts of medical devices from Becton. Second, the distributor agreements supported the unfair terms of the GPO contracts. Third, Becton’s distributor agreements included concealed commitments to pay the GPOs based on the volume of Becton’s medical devices that the distributors sold. In other words, Becton paid distributors for greater sales volumes, and in turn, the distributors agreed to promote Becton’s products over competing medical devices. According to the Providers, these contracts inhibited arms’-length negotiations, enabling Becton to charge supracompetitive prices for its products. Id. at 837.
The Providers did not allege that they purchased medical devices directly from Becton, nor did they assert claims for price-fixing. And that is where the Providers’ claims collapsed before the district court. Id. Although the district court recognized that Illinois Brick v. Illinois, 431 U.S. 720 (1977), does not preclude lawsuits where plaintiffs purchase price-fixed products from a conspirator, it concluded that the Illinois Brick inquiry itself turned on the allegations of price-fixing. Id. Absent allegations of price-fixing, the district court concluded that it would be too difficult to calculate the portion of the overcharge the distributor passed-on or absorbed, which was one of the Supreme Court’s considerations in adopting the Illinois Brick rule. Id. Because the complaint did not allege price-fixing, the district court dismissed the Providers’ claims under Illinois Brick, despite their allegations that they purchased the medical devices from the distributor conspirators. Id. at 840.
Illinois Brick Focuses on the Relationship Between the Seller and Direct Purchaser, Not the Alleged Anticompetitive Conduct
The Seventh Circuit reversed, concluding that the district court “erred in holding that the Illinois Brick rule bars the first purchasers outside of a conspiracy from suing under the antitrust laws except in cases where vertical price fixing is alleged.” Id. at 841. The Court explained that, “[t]he central point of Illinois Brick is to allocate the right to recover to one and only one entity in the market,” without regard to whether the alleged antitrust violation is price-fixing, exclusive dealing, or any other type of unlawful anticompetitive conduct. Id. at 840. Any difficulty in calculating damages in the case would not be enhanced by the complexities of tracing what portion of the overcharge was passed downstream from the Providers. Id.
According to the Seventh Circuit, Illinois Brick precludes a downstream purchaser from suing an alleged monopolist or cartel member for anticompetitive overcharges passed-on to that purchaser by an intermediary. Id. at 838. Rather, only a direct purchaser can sue for damages. Id. To avoid difficulties in analyzing price and output decisions, and ensure effective enforcement of the antitrust laws, Illinois Brick entitles a direct purchaser to recover the full value of damages, irrespective of whether the direct purchaser passed on any portion of the overcharge downstream. Id.
The Supreme Court recently confirmed in Apple Inc. v. Pepper, ___ U.S. ___, 139 S. Ct. 1514, 203 L.Ed.2d 802 (2019), that “[t]he relevant inquiry in determining the applicability of Illinois Brick focuses on the relationship between the seller and the purchaser, not the difficult of assessing the overcharge.” Marion Healthcare, 952 F.3d at 840. But the question then is, who is the seller and who is the direct purchaser?
According to the Seventh Circuit, “Illinois Brick is not a barrier to suit on behalf of a purchaser who dealt with a member of the conspiracy.” Id. at 839. Thus, the conspiracy “exception” to Illinois Brick “is not so much a real exception as it is a way of determining which firm, or group of firms collectively, should be considered to be the relevant seller (and from that, identifying which one is the direct purchaser) for purposes of the rule.” Id. “[I]t is better to think of the right to sue co-conspirators not as an exception to Illinois Brick, but instead as a rule inhering in Illinois Brick that allocates the right to collect 100% of the damages to the first non-conspirator in the supply chain.” Id. at 840 (citing Papers Sys. Inc. v. Nippon Paper Indus. Co., 281 F.3d 629, 631–32 (7th Cir. 2002)). This reasoning is consistent with the Ninth Circuit’s understanding of the co-conspirator exception. See In re National Football League’s Sunday Ticket Antitrust Litig., 933 F.3d 1136, 1157 (9th Cir. 2019) (“NFL Sunday Ticket”) (“[T]he ‘co-conspirator exception is not really an exception at all,’ but rather describes a situation in which Illinois Brick is simply not applicable.”) (quoting In re ATM Antitrust Fee Litigation, 686 F.3d 741, 750 (9th Cir. 2012)).
The Seventh Circuit concluded that the Providers were direct purchasers from alleged conspirators—the distributors—and therefore could sue for any form of anticompetitive conduct they could plausibly allege. Id. Marion Healthcare’s holding that the conspiracy exception to Illinois Brick extends beyond alleged price-fixing conspiracies adds to a circuit split on the issue. Compare, e.g., NFL Sunday Ticket, 933 F.3d at 1158 (“[I]f the direct purchaser conspires to limit the output that will ultimately be available to the plaintiffs, then the plaintiffs are directly impacted by the output limitation and have standing to sue.”), with Dickson v. Microsoft Corp., 309 F.3d 193, 215 (4th Cir. 2002) (“[W]e interpret these cases as standing for the more narrow proposition that Illinois Brick is inapplicable to a particular type of conspiracy—price-fixing conspiracies.”).
The Providers’ Conspiracy Allegations Were Insufficient
But had the Providers plausibly alleged a conspiracy? No. Their theory was of a “hub-and-spoke conspiracy” in which Becton was the central coordinating party at the hub, and the participants along the rim—the GPUs and distributors—recognized they were part of the greater coordinated arrangement. Id. at 842. However, the Providers failed to allege that the distributors not only coordinated with Becton, but also were assured that all other distributors were adhering to the anticompetitive agreement. Id. Specifically, the complaint did not allege that the distributors “engaged in parallel conduct,” “coordinated their actions to engage in illegal activity,” “played any role in setting the anticompetitive pricing,” or took part in “any quid pro quo according to which Becton compensated them for participating in the alleged antitrust conspiracy.” Id. at 842-43. Because the Providers failed to allege the distributors participated in the conspiracy or knowingly engaged in parallel anticompetitive conduct, the Seventh Circuit concluded that Illinois Brick barred their claims. Id. at 843. Nonetheless, the Court remanded to allow the Providers to plead the participation of the distributors in the conspiracy. Id.
Following the Supreme Court’s Pepper decision, Marion Healthcare continues to view Illinois Brick as a bright-line rule that focuses on the relationship between the direct purchaser and the conspirator. The right to sue for damages depends on the direct purchaser relationship and, as the Seventh Circuit concludes, encompasses all manner of anticompetitive conduct, not merely price-fixing. Whether the Supreme Court will address the circuit split on the latter issue any time soon remains to be seen.