Opinion ID: 3051840
Heading Depth: 3
Heading Rank: 1

Heading: Precedent Controls the Outcome

Text: [4] Quite simply, we are bound by the sensible and straightforward rule set forth by Illinois Brick. Appellants argue this situation is distinguishable because Bamberg and J&J did have an independent contractual relationship. However, Supreme Court jurisprudence has been neither vague nor ambiguous in establishing the direct purchaser rule. The Supreme Court intended to make a bright line rule for identifying the proper plaintiff when an antitrust violation occurs in a multi-tiered distribution system. See Illinois Brick, 431 U.S. 4674 DELAWARE VALLEY v. JOHNSON & JOHNSON at 735-36. The Court has explicitly rejected attempts to create exceptions to that rule, even when the considerations in a particular market may undermine some of the reasoning used by the Illinois Brick Court. See UtiliCorp, 497 U.S. at 211. The undisputed truth is that Bamberg only indirectly purchased goods from J&J. [5] Under the direct purchaser rule, Bamberg lacks standing under § 4 of the Clayton Act to assert an antitrust violation against J&J. It is undisputed that O&M, as the distributor, was the immediate purchaser of sutures and endo products from J&J. O&M paid J&J directly for its inventory and took title in the products before selling them to Bamberg. Bamberg directly paid O&M, not J&J, for its orders. O&M is not an agent or subsidiary of J&J, but rather an independently owned and managed company. Following the clear rule set forth in Illinois Brick, Bamberg lacks standing because the hospital is not a direct purchaser of products from J&J. Although the price that Bamberg pays O&M is set, in part, by an agreement negotiated by a GPO on behalf of Bamberg, the hospital contracted separately with O&M for the actual sale and delivery of products. The final price paid by Bamberg included the list price negotiated by Premier, plus a markup fee charged by O&M. [6] The presence of a contractual relationship between Bamberg and J&J does not change the fact that Bamberg also had a contract with O&M, and it was that contract that ultimately effectuated the transfer of these goods. Furthermore, the plaintiffs are not merely seeking to invalidate an individual contract between a GPO and J&J rather they are attacking the pricing scheme employed by J&J in its negotiations with a wide range of health care providers. Appellants’ contention that we should myopically focus on the contract between Bamberg and J&J, without taking into consideration where the hospital actually bought its products, is therefore unavailing. DELAWARE VALLEY v. JOHNSON & JOHNSON 4675 B. We Decline To Adopt Appellants’ Reformulation of the Direct Purchaser Rule Appellants do not contend that Bamberg qualifies for any previously-recognized exception to the direct purchaser rule.1 Rather, they urge this court to adopt a new rule that they believe is better attuned to the business relationships between health care providers and manufacturers. They contend that this case presents a common arrangement whereby a GPO negotiates prices with manufacturers on behalf of hospitals, but then individual hospitals place orders through independent distributors. Appellants assert that the hospital, not the distributor, is the direct victim of the alleged antitrust violation. Under their reasoning, the hospital is therefore the proper plaintiff to enforce the antitrust laws because any injury to the distributor was, at most, derivative. Bamberg and J&J propose that a party should be deemed a “direct purchaser” when (1) the plaintiff contracted directly with the defendant, (2) its complaint challenges the lawfulness of that contract and (3) the alleged injury is that the defendant charged artificially high prices in its contract with plaintiff. Under this new formulation of the Illinois Brick rule, Bamberg would have standing to bring suit against J&J, despite the fact that it actually bought its products from O&M. Bamberg did have a contract with J&J and the hospital contests the validity of the price set in that contract. Appellants fail to persuade this court that there is anything extraordinary about the facts of this case warranting a deviation from the firmly established Illinois Brick rule. Appellants 1 The case law recognizes standing for an indirect purchaser if (1) there was a pre-existing cost-plus contract, see UtiliCorp, 497 U.S. at 217-18, or (2) the direct purchaser is owned or controlled by the indirect purchaser, Royal Printing Co., 621 F.2d at 326. Additionally, this court has held that an indirect purchaser may bring suit where he establishes a pricefixing conspiracy between the manufacturer and the middleman. See Arizona v. Shamrock Foods Co., 729 F.2d 1208, 1211 (9th Cir. 1984). Appellants here have made no such allegation. 4676 DELAWARE VALLEY v. JOHNSON & JOHNSON urge that we look to the substance of a plaintiff’s antitrust theory, and not just the formalities of the purchase transaction to determine if there is standing. The allegedly predatory behavior here occurred in the manufacturer’s dealings with the GPOs, who were representing the hospitals’ interests. Appellants may well be correct in positing that a hospital has a greater incentive than a distributor to bring an antitrust claim when the conduct complained of involves price negotiations with a GPO. The distributor is not a party to the initial negotiations that set the list price for its products. Such a distributor arguably has a smaller stake in contesting the price than a hospital whose representative was part of those negotiations and felt that the manufacturer was engaging in illegal behavior. [7] However, the Supreme Court has already rejected a similar argument. See UtiliCorp, 497 U.S. at 218. There, even though the middleman passed on 100 percent of the overcharge to consumers, the Supreme Court still held that the consumer was not a direct purchaser and only the middleman could bring an antitrust suit. Id. at 208-12, 218. In so doing, the Court closed the door on the theory that an end user who buys from an independent distributor rather than the manufacturer, should have standing because it may be the most efficient enforcer of antitrust laws. The Court ensured that the rule of Illinois Brick was straightforward so that it could be administered with “simplicity and certainty.” Id. at 218. Illinois Brick is not a policy holding, but rather a case of statutory construction. See California v. ARC America Corp., 490 U.S. 93, 102-03 (1989) (“As we made clear in Illinois Brick, the issue before the Court in both that case and in Hanover Shoe was strictly a question of statutory interpretation — what was the proper construction of § 4 of the Clayton Act.”). The Court’s firm rule does not provide us the leeway to make a policy determination on a case-by-case basis as to whether standing should be recognized when there are special business arrangements. See Illinois Brick, 431 U.S. at 744 (“We reject these attempts to carve out exceptions to the Hanover Shoe DELAWARE VALLEY v. JOHNSON & JOHNSON 4677 rule for particular types of markets.”). Accordingly, appellants’ policy arguments are unavailing. Even if we opted to strike out on a new path, we are not convinced that appellants’ rule would be a better mechanism for enforcing antitrust violations. Adopting their formulation of the direct purchaser rule would still present problems of multiple liability and force courts to engage in complex factual inquiries to determine how damages should be apportioned between parties. For instance, under their rule, both O&M and Bamberg could theoretically bring a claim against J&J for the same overcharge. This would subject J&J to the possibility of multiple liability and would require the courts to disentangle the proper recovery for each party in the distribution chain. These are precisely the concerns that troubled the Supreme Court in Illinois Brick. [8] Moreover, the distributor is not a completely irrelevant economic actor in this contractual framework. In theory, a demand curve exists for the bundle of goods and services that O&M sells. If the price of the goods is artificially inflated by the anti-competitive practices of J&J, that will affect the attractiveness of the distributor’s products in the marketplace. There is no reason to believe that market forces do not work on O&M and other distributors. The presence of another distributor as a plaintiff in this case, DVSS, shows that distributors are indeed affected by J&J’s allegedly predatory pricing scheme and do have incentives to bring suit against the manufacturer. This directly undermines Bamberg’s argument that hospitals should always have standing because distributors will not be efficient enforcers of antitrust law. There are clearly other motivated plaintiffs, distributors and hospitals alike, who unquestionably meet the direct purchaser requirement and can serve the role of private attorney general contemplated by § 4 of the Clayton Act. The direct purchaser rule is a clearly established tenet of antitrust law and this case falls within its mandate. 4678 DELAWARE VALLEY v. JOHNSON & JOHNSON C. In re Lorazepam Does Not Dictate a Different Result Appellants also attempt to find support for their position from a recent decision from the United States District Court for the District of Columbia. See In re Lorazepam & Clorazepate Antitrust Litig., 202 F.R.D. 12, 20 (D.D.C. 2001). The plaintiffs there included an individual hospital, a GPO, and a health maintenance organization that operated hospitals. Id. at 14-15. The plaintiffs sought class certification as “direct purchasers” of drugs from pharmaceutical manufacturers who allegedly engaged in price-fixing. Id. at 22. The defendants moved to dismiss on the grounds that the plaintiffs had “neither adequately defined the term ‘direct purchaser’ nor sufficiently explained how they and other putative class members ‘directly’ purchased the drugs from [the defendant].” Id. The defendants contended that “direct purchasers are unascertainable” in the pharmaceuticals market. Id. The district court disagreed, concluding that the plaintiffs had made a “sufficient showing of standing” to warrant class certification. Id. at 23. The district court noted, however, that plaintiffs “are members of the direct purchaser class ‘to the extent that they purchased directly from [the defendant] for their own account.’ ” Id. Those purchasers were billed directly by the defendant, and paid the defendant directly for their products. Id. The district court noted that “discerning direct purchasers vis-à-vis indirect purchasers in the pharmaceuticals industry is complex.” Id. But, the district court opted to approve class certification because it was wary that the complicated nature of this market would result in the “senseless point that no one may be sued for antitrust injury in the pharmaceuticals industry because it is too difficult to weed out the indirect purchasers.” Id. Furthermore, the Lorazepam court explicitly rejected the defendants’ argument that the district court should adopt a rule that would better serve the business interests at issue in that case. Id. at 19-20. The district court noted that “any DELAWARE VALLEY v. JOHNSON & JOHNSON 4679 exception to the Illinois Brick direct purchaser rule must be narrowly restricted to a situation in which complex market forces are stripped of their effect due to preexisting conditions, such as with a cost-plus contract, so that the pass-on is clearly discernable.” Id. at 19-20. The court refused to entertain policy arguments advocating for a new exception. Id. at 20. Similarly, we reject appellants’ attempt to craft a new rule that they suggest would be better suited to enforce antitrust laws in the modern healthcare industry. Lorazepam simply does not buttress appellants’ position — in fact, it undermines many of their arguments. Unlike this case, the Lorazepam suit was a class action. The district court certified the class of “putative direct purchasers” to allow the suit to go forward, but the court was careful to note that a direct purchaser was a plaintiff who “purchased directly from” the manufacturer. Id. at 23. Bamberg did not purchase its products directly from J&J. Rather, it was invoiced by, and sent payments directly to, O&M. In Lorazepam, the district court’s willingness to grant class certification so that litigation could proceed does not support a finding that this court should relax the direct purchaser rule when we have parties before us that clearly do satisfy the direct purchaser standard. The Lorazepam court itself never stated that a party who was shown not to be a direct purchaser could ultimately seek recovery. Instead, by saying that a party was a member of the class “to the extent” they were direct purchasers, the Lorazepam court endorsed the Illinois Brick rule. See id.