Marion HealthCare, LLC. v. Becton Dickinson & Company

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 18-3735

MARION HEALTHCARE, LLC, et al.,

Plaintiffs-Appellants,

v.

BECTON DICKINSON & COMPANY, et al.,

Defendants-Appellees.

____________________

Appeal from the United States District Court for the

Southern District of Illinois.

No. 3:18-cv-01059-NJR-RJD — Nancy J. Rosenstengel, Chief Judge.

____________________

ARGUED SEPTEMBER 27, 2019 — DECIDED MARCH 5, 2020

____________________

Before WOOD, Chief Judge, and KANNE and BARRETT, Circuit

Judges.

WOOD, Chief Judge. Since the Supreme Court’s decision in

Illinois Brick v. Illinois, 431 U.S. 720 (1977), only those buyers

who purchased products directly from the antitrust violator

have a claim against that party for treble damages. “Indirect

purchasers” who paid too much for a product because cartel

or monopoly overcharges were passed on to them by middle-

men must take their lumps and hope that the market will

2 No. 18-3735

eventually sort everything out. See, e.g., Sharif Pharm., Inc. v.

Prime Therapeutics, LLC, Nos. 18-2725 and 18-3003, 2020 WL

881267 at *2 (7th Cir. Feb. 24, 2020). Matters are different, how-

ever, when a monopolist enters into a conspiracy with its dis-

tributors. In such cases, “the first buyer from a conspirator is

the right party to sue.” Paper Sys. Inc. v. Nippon Paper Indus.

Co., 281 F.3d 629, 631 (7th Cir. 2002).

The plaintiffs in this case (“the Providers”) are healthcare

companies that purchased medical devices manufactured by

Becton Dickinson & Company. Healthcare providers often do

not purchase medical devices directly from the manufacturer;

instead, they join a group purchasing organization, known in

the trade as a GPO. The GPO negotiates prices with the man-

ufacturer on behalf of its members. It then presents the terms

to the provider, which has the opportunity to accept them or

reject them. If the provider agrees to the terms, it chooses a

distributor to deliver the product. The distributor then enters

into contracts with the healthcare provider and the manufac-

turer. These contracts obligate the distributor to procure the

products from the manufacturer and to sell them to the pro-

vider. The distribution contracts with the providers incorpo-

rate the price and other terms of the agreements that the GPO

negotiated, plus a markup for the chosen distributor.

Our Providers purchased medical devices in the manner

just described. A GPO negotiated with Becton on the Provid-

ers’ behalf, and a distributor delivered the devices. Had Bec-

ton acted alone, selling its products to an independent distrib-

utor, which then sold them to a healthcare provider, no one

doubts that the Illinois Brick rule would bar the provider from

suing Becton for any alleged monopoly overcharges. But

these transactions were more complex. The Providers allege

No. 18-3735 3

that Becton, the GPOs, and the distributors (to whom we refer

collectively as Becton unless the context requires otherwise)

joined forces in a conspiracy and engaged in a variety of anti-

competitive measures, including exclusive-dealing and pen-

alty provisions. Becton moved to dismiss, arguing that the Il-

linois Brick rule barred the case despite the Providers’ allega-

tions of conspiracy.

The district court agreed with Becton that the Illinois Brick

rule applied on these facts and that dismissal was therefore

required. It found the conspiracy rule inapplicable not be-

cause of any failure to plead conspiracy adequately, but be-

cause this case did not involve simple vertical price-fixing.

This, we conclude, was in error. At the same time, we con-

clude that as of now the Providers have failed adequately to

allege the necessary conspiracy with the distributors, and per-

haps with the GPOs. Because the district court’s ruling de-

pended so heavily on an error of law relating to Illinois Brick,

we have decided to vacate the court’s decision and remand

for further proceedings.

I

We present the facts in the light most favorable to the Pro-

viders without vouching for anything. Each of the Providers

has purchased conventional syringes, safety syringes, and

safety IV catheters from Becton. They allege that Becton

charges supracompetitive prices for these products. It is able

to do so, they assert, because it has monopoly power in the

relevant nationwide market and is unlawfully maintaining

that power through anticompetitive contract arrangements

among itself, the GPOs, and the distributors.

4 No. 18-3735

In order to accomplish its goals, Becton took several steps.

The first addressed its relationship to the GPOs. Although the

GPOs are supposed to negotiate at arms’ length, with their

members’ best interests in mind, Becton ensured that their

loyalty would run to Becton, by bribing them with millions of

dollars annually in so-called administrative fees to include

anticompetitive terms in the contract. These terms include

penalty pricing for healthcare providers who fail to purchase

a certain amount of their devices from Becton. Second, the

Providers allege that the distributor agreements prop up the

unfair terms of the contracts that the GPOs negotiate. Third,

they allege that the agreements between Becton and the dis-

tributors include hidden commitments to make payments to

the GPOs based on the volume of Becton products sold under

the contracts. Becton pays distributors for selling more of its

products, and in return, the distributors agree to promote Bec-

ton products above the products of competitors. The Provid-

ers allege that this network of contracts allows Becton to

charge prices well above those of its competitors.

Following industry practice, the Providers did not buy di-

rectly from Becton. They relied upon the GPO system de-

scribed above, unaware of the distortions Becton had intro-

duced. The distributors purchased the medical devices from

Becton at the rates negotiated by the GPOs, and the Providers

then purchased the devices from the distributors. Because

they did not purchase directly from Becton, the Providers

may pursue Becton itself only if they have properly alleged a

conspiracy.

II

Section 4 of the Clayton Act states that “any person who

shall be injured in his business or property by reason of

No. 18-3735 5

anything forbidden in the antitrust laws may sue therefor,”

and is entitled to treble damages for the violation. 15 U.S.C.

§ 15. In this instance, however, the words “any person” can-

not be taken literally. Instead, the Supreme Court has read

them in the context of the statute as a whole and has inferred

that certain limitations exist. One such limitation was an-

nounced in Illinois Brick, where the Court held that, in general,

a downstream plaintiff cannot sue an alleged monopolist or

cartel member on a theory that a middleman passed an anti-

competitive overcharge on to her. Under Illinois Brick, only a

purchaser who purchased goods directly from the monopolist

(or cartel member) can claim damages. That purchaser is en-

titled to the full value of the damages stemming from the

overcharge, even if it passed on some or all of the overcharge

to downstream purchasers and consequently mitigated the

damage it suffered. See Hanover Shoe, Inc. v. United Shoe Ma-

chinery Corp., 392 U.S. 481 (1968). A plaintiff who asserts that

it indirectly bore the brunt of an overcharge passed on by the

direct purchaser has no claim.

The Supreme Court based its decision in Illinois Brick on

several rationales. First, the Court concluded that “whatever

rule is to be adopted regarding pass-on in antitrust damages

actions, it must apply equally to plaintiffs and defendants.”

431 U.S. at 728. It did so in part because it feared that an asym-

metrical rule that prohibited a pass-on defense but permitted

offensive use of passing-on “would create a serious risk of

multiple liability for defendants.” Id. at 730. Moreover, the

Court suspected that the difficulties in analyzing price and

output decisions would be prohibitive. Id. at 731–32. The di-

rect purchaser is not necessarily free to pass on the full

amount of a monopoly overcharge; its range of action will be

constrained by the elasticity of demand in the downstream

6 No. 18-3735

market. Furthermore, the Court believed that enforcement of

the antitrust laws would be better served “by concentrating

the full recovery for the overcharge in the direct purchasers

… .” Id. at 735.

Although Illinois Brick rejected “attempts to carve out ex-

ceptions … for particular types of markets,” id. at 744, it did

carry forward the limited carve-out that Hanover Shoe had rec-

ognized for “a pre-existing cost-plus contract.” Id. at 736. Even

that exception, however, has been interpreted narrowly, as

the Court demonstrated when it found that a public utility’s

prices, by law passed on to final consumers, did not qualify.

See Kansas v. UtiliCorp United, Inc., 497 U.S. 199 (1990). The

present case, however, does not depend on that exception or

any other deviation from the general rule, as we will see.

Even the strictest application of the Illinois Brick rule re-

quires the court to identify which entity is the seller and

which the direct purchaser. The case of Reiter v. Sonotone

Corp., 442 U.S. 330 (1979), illustrates this point. In that case,

Sonotone was vertically integrated, and so it sold its hearing

aids directly to final consumers. One such consumer brought

a class action against five companies, alleging illegal price-fix-

ing and other antitrust violations. The defendants argued that

the Clayton Act’s requirement of injury in one’s “business or

property” did not encompass consumer harm, but the Court

rejected that narrow reading, finding instead that the term

“property” “comprehends anything of material value owned

or possessed,” id. at 338, and thus easily covered the con-

sumer’s loss of money. But the critical point here is that the

consumer was the first direct purchaser from the cartel mem-

ber, and so her suit was not barred by the recently announced

Illinois Brick rule.

No. 18-3735 7

Vertical integration can occur either by internalizing func-

tions within one firm, as one sees in Reiter, or by contract. But

contractual vertical integration presupposes independent

firms. In that instance, as we explained in Toys “R” Us v. Fed.

Trade Comm’n, 221 F.3d 928 (7th Cir. 2000), the manufacturer

has an incentive to get the best deal it can from its distributors,

both in terms of price and in terms of necessary services. Id. at

937. That will cause the manufacturer to sell its goods to

whichever distributor will accomplish the distribution func-

tion as efficiently as possible. The manufacturer’s interests

thus align with those of the consumer who buys from the dis-

tributor, not with those of the distributor.

This dynamic breaks down if there is a conspiracy be-

tween the manufacturer and the distributor and the point of

that conspiracy is to support supracompetitive prices for the

ultimate consumer. Rather than keeping both its prices (inclu-

sive of distribution costs) as attractive as possible (i.e. as low

as possible) for consumers, as one would expect in a compet-

itive market, the manufacturer/distributor conspiracy has a

way to extract supracompetitive profits from consumers. Or

at least it can do so if it has enough market power. But market

power is a separate element of a plaintiff’s claim. The only

point here is that Illinois Brick is not a barrier to suit on behalf

of a purchaser who dealt with a member of the conspiracy.

This is what we mean when we speak of a conspiracy “ex-

ception” to the Illinois Brick rule. It is not so much a real ex-

ception 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 pur-

chaser) for purposes of the rule. We recognized this point in

Paper Systems, 281 F.3d at 629. In that case, paper distributors

8 No. 18-3735

sued paper manufacturers that had allegedly conspired to fix

prices. The distributors had purchased some of the products

through trading houses that allegedly had participated in the

conspiracy. We found that the distributors had a claim under

the antitrust laws, because they were “the first purchasers

from outside the conspiracy.” Id. at 631. They faced no Illinois

Brick bar, because they dealt directly with the conspiracy and

were thus entitled to the full amount of its overcharge. Id. at

633. See also Fontana Aviation, Inc. v. Cessna Aircraft Co., 617

F.2d 478, 481 (7th Cir. 1980) (“We are not satisfied that the Il-

linois Brick rule directly applies in circumstances where the

manufacturer and the intermediary are both alleged to be co-

conspirators in a common illegal enterprise resulting in in-

tended injury to the buyer.”); In re Brand Name Prescription

Drugs Antitrust Litig., 123 F.3d 599, 604–05 (7th Cir. 1997).

The fact that antitrust liability is joint and several rein-

forces the appropriateness of looking to the first sale outside

the conspiracy. See Paper Systems, 281 F.3d at 632 (“Nothing

in Illinois Brick displaces the rule of joint and several liability,

under which each member of a conspiracy is liable for all

damages caused by the conspiracy’s entire output.”). That is

why we said in Paper Systems that it 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 allo-

cates the right to collect 100% of the damages to the first non-

conspirator in the supply chain. Id. at 631–32. A contrary rule

that looked behind the conspiracy to the role each member

played would render upstream antitrust violators effectively

immune from suit through the simple expedient of conspiring

with a middleman or distributor to pass on the inflated prices.

Other circuits to consider the issue have come to the same

conclusion. See Insulate SB, Inc. v. Advanced Finishing Sys., Inc.,

No. 18-3735 9

797 F.3d 538 (8th Cir. 2015); Lowell v. Am. Cyanamid Co., 177

F.3d 1228 (11th Cir. 1999); Arizona v. Shamrock Foods Co., 729

F.2d 1208 (9th Cir. 1984).

The district court here recognized that Illinois Brick does

not bar suits brought by direct purchasers from a conspiracy,

but it thought nonetheless that the Providers’ suit could not

go forward. It found that the existence of a conspiracy mat-

tered only for cases of price fixing, as opposed to other forms

of anticompetitive activity; as we noted, it thus saw no need

to delve into the adequacy of the conspiracy allegations. In its

view, cases outside of the arena of price fixing implicated the

same considerations that led the Supreme Court to adopt the

Illinois Brick rule in the first place. In particular, it thought that

it would be too difficult to calculate which portion of the over-

charge the distributor had absorbed or to ascertain how much

of the distributor’s profits came from fair pricing rather than

anticompetitive overcharges.

We see nothing in either the Illinois Brick line of cases or

the conspiracy line that supports this distinction. The central

point of Illinois Brick is to allocate the right to recover to one

and only one entity in the market. It is just as easy to do that

in the present case, where that entity is the Provider group

and the mechanisms that the conspiracy uses to push up

prices include exclusive dealing arrangements and bribes or

kickbacks, as it is if the entity is the same Provider group but

the anticompetitive activity is a more direct agreement to raise

prices. Whatever difficulties there may be in calculating dam-

ages in a case such as this one, they are not enhanced by the

complex downstream tracing that the Court rejected in both

Illinois Brick and UtiliCorp. Indeed, UtiliCorp reinforced the

need for one simple rule, when the Court stated that it would

10 No. 18-3735

be “an unwarranted and counterproductive exercise to liti-

gate a series of exceptions” to the Illinois Brick rule in cases

where “economic assumptions underlying” the rule “might

be disproved.” 497 U.S. at 217.

The relevant inquiry in determining the applicability of Il-

linois Brick focuses on the relationship between the seller and

the purchaser, not the difficulty of assessing the overcharge.

The Supreme Court confirmed this in Apple Inc. v. Pepper, 139

S. Ct. 1514 (2019). There, consumers who had purchased

“apps” from Apple’s “App Store” sued, arguing that Apple

had monopolized the retail market for the sale of iPhone apps

and had used its power to overcharge consumers. Apple ar-

gued that the critical question was “who sets the price,” id. at

1522, not who was the direct seller. It reasoned that because it

did not set the retail price, it could not be sued under Illinois

Brick, even though the consumers had purchased the apps di-

rectly from it. The Court rejected this argument, holding that

Illinois Brick “established a bright-line rule where direct pur-

chasers … may sue antitrust violators from whom they pur-

chased a good or service.” Id. While the details of Apple are

different from the facts before us, the same rule applies. Apple

confirms that Illinois Brick is a bright-line rule allocating the

right to sue to direct purchasers alone, not a rule that requires

analysis of competing policy justifications in each case. The

relationship between the buyer and the seller, rather than the

nature of the alleged anticompetitive conduct, governs

whether the buyer may sue under the antitrust laws.

Becton has other arguments, however. It contends that

when a manufacturer and a distributor have agreed to resell

a product at a specific, anticompetitive price, there is no Illi-

nois Brick “pass on,” because the indirect purchaser is the first

No. 18-3735 11

party to have paid the overcharge. This eliminates the Illinois

Brick concerns about tracing passed-on overcharges. But that

says nothing about allocating the right to sue. If anything, it

reinforces the conclusion that the Providers hold that right on

these facts.

Becton also claims that treating the conspiracy as the rele-

vant entity in cases involving anticompetitive conduct other

than price fixing would swallow the Illinois Brick rule entirely.

It argues that allowing the conspiracy exception in cases such

as this one would permit plaintiffs to circumvent Illinois Brick

by asserting in every case that the defendant and the middle-

man had formed a conspiracy together. But plaintiffs would

do so at their peril: Federal Rule of Civil Procedure 11, 28

U.S.C. § 1927 (counsel’s liability for costs incurred from vexa-

tious and unreasonable conduct), and the court’s inherent au-

thority all protect against such abuses. Furthermore, a com-

plaint that does not lay out a plausible case for relief will be

dismissed. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544

(2007). A plaintiff is not entitled to resort to frivolous accusa-

tions of conspiracy to evade the Illinois Brick rule; the allega-

tion must still reach the level of baseline plausibility.

We recognized in Paper Systems that a different problem

might arise in some cases: “[p]erhaps if a conspirator defects

and sues its former comrade, that snitch would come to own

the right to damages.” 281 F.3d at 632. Until that happens,

however, we held that the plaintiffs “are entitled to collect

damages from both the manufacturers and their intermediar-

ies if conspiracy and overcharges can be established.” Id.

Nothing in this case even hints at a distributor who defected

and then sued, and so we have no need to explore this possi-

bility further.

12 No. 18-3735

The district court thus 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 ver-

tical price fixing is alleged. Provided that our plaintiffs have

properly alleged a conspiracy, they may sue for whatever

form of anticompetitive conduct they are able plausibly to al-

lege.

III

The mere fact that the Providers are proper antitrust plain-

tiffs from the Illinois Brick standpoint does not resolve the

question whether they have adequately alleged a conspiracy.

We turn therefore to that question, beginning with their accu-

sation that Becton conspired with its distributors.

The role of the distributors is critical to the Providers’ case.

That is because the distributors are the entities from which the

Providers purchased the products at issue. If the distributors

were not part of the alleged conspiracy, then Providers’ case

falls apart: no conspiracy, no direct purchaser status, no right

to recover. The distributors would be the proper plaintiffs in

such a situation and could sue Becton, as other distributors

have done in other cases against Becton. See, e.g., In re Hypo-

dermic Prods. Antitrust Litig., 484 F. App’x 669 (3d Cir. 2012).

In order to show an antitrust conspiracy, the Providers

must prove that “the manufacturer and others had a con-

scious commitment to a common scheme designed to achieve

an unlawful objective.” Monsanto Co. v. Spray-Rite Service

Corp., 465 U.S. 752, 768 (1984). In a case such as this one, where

the plaintiffs allege that participants in a market at different

levels of the distribution chain entered into a conspiracy, the

plaintiffs must show that similarly situated members of the

No. 18-3735 13

conspiracy coordinated not only with the manufacturer, but

also with each other. If the plaintiffs do not adequately allege

this type of coordination, they have made, at best, an allega-

tion of a number of different conspiracies, not of a single con-

spiracy.

The Providers allege that Becton and the distributors were

members of a “hub-and-spokes conspiracy.” This type of con-

spiracy requires a plaintiff to allege both that there was a cen-

tral coordinating party (the “hub”), and that each participant

(along the “rim”) recognized that it was part of the greater

arrangement, and it coordinated or otherwise carried out its

duties as part of the broader group. In other words, a “hub-

and-spokes conspiracy” requires a “rim” connecting the vari-

ous horizontal agreements. See, e.g., In re Musical Instruments

& Equip. Antitrust Litig., 798 F.3d 1186, 1192 (9th Cir. 2015). As

applied to our case, the Providers must allege that the distrib-

utors, in addition to coordinating with Becton, would not

have attempted to inflate prices without assurance that each

distributor was abiding by the agreement and behaving in the

same way.

The complaint before us does not accomplish this. The

Providers allege only that the distributors “enforce” the terms

of the contracts that the GPOs negotiated and then assess the

Providers an additional fee for the distributors’ services. The

complaint has nothing to say about any involvement that the

distributors may have in inflating the prices, or whether they

coordinate among each other or with Becton or the GPOs as

part of the conspiracy. The Providers ask us instead to find

that the distributors are members of the conspiracy because

they buy and sell the devices according to the terms of con-

tracts that the GPOs allegedly negotiated in a crooked

14 No. 18-3735

fashion. But this allegation is insufficient to find a conspiracy

between the distributors and Becton.

The Providers argue that we should not demand such di-

rect evidence, and that there is enough here to infer an agree-

ment among the distributors. They rely heavily upon Toys “R”

Us, 221 F.3d 928, but that case does not support their position.

We held in Toys “R” Us that in certain circumstances, an

agreement between horizontally situated market participants

can be inferred for the purpose of an antitrust conspiracy,

even in the absence of an express agreement. In that case, Toys

“R” Us had sent letters to major toy manufacturers, indicating

that it would not carry the manufacturers’ toys unless the

manufacturers agreed to withhold certain highly desirable

toys from warehouse clubs. The FTC found that it would not

have made economic sense for any individual manufacturer

to capitulate to these demands, unless it knew that its com-

petitors would also play along. Id. at 935. That finding, we

concluded, was supported by substantial evidence. It was

thus permissible to infer that even if the manufacturers did

not expressly agree to join a conspiracy with one another, they

had functionally joined the conspiracy because they were as-

sured that their competitors would all follow the same anti-

competitive strategy.

Here, by contrast, the Providers have not alleged that the

distributors engaged in parallel conduct, much less that they

coordinated their actions to engage in illegal activity. In their

complaint, the Providers list three activities they say the dis-

tributors have undertaken “in furtherance of the conspiracy.”

First, the distributors agree to distribute Becton’s products

pursuant to anticompetitive contractual terms. Second, the

distributors enforce Becton’s penalty pricing system, which

No. 18-3735 15

penalizes the healthcare providers if they switch to a different

manufacturer. Third, the distributors make payments to the

GPOs based on the volume of sales under the contracts.

These allegations, whether taken alone or together, do not

suffice to describe a hub-and-spokes conspiracy. All the Pro-

viders have alleged is that the distributors buy and sell the

devices in accordance with the terms of the contracts that the

GPOs have negotiated. They have made no argument that the

distributors played any role in setting the anticompetitive

pricing or that there was any quid pro quo according to which

Becton compensated them for participating in the alleged an-

titrust conspiracy. The fact that the distributors pay a fee to

the GPOs for the latter’s role in negotiating the contracts is not

anticompetitive conduct on its own; indeed, it is to be ex-

pected. Without an allegation that the distributors have par-

ticipated in the conspiracy or knowingly engaged in parallel

anticompetitive conduct, the Providers cannot sue the distrib-

utors under the antitrust laws.

As the complaint now stands, the Providers have not

shown that the distributors made a conscious commitment to

participate in an illegal scheme. Without any allegation that

the distributors coordinated with Becton to profit from the an-

ticompetitive scheme, their case is barred under Illinois Brick.

In a last-gasp effort, the Providers argue that they should

be given a chance to amend their complaint, given the legally

flawed and relatively unexplored reason that underlay the

district court’s ruling. The United States, appearing as amicus

curiae, agrees that the district court’s Illinois Brick analysis was

incorrect and supports vacating the district court’s judgment

and remanding for further proceedings. The distributors con-

tend in response that the Providers have waived the

16 No. 18-3735

opportunity to amend their complaint, because they did not

focus on Illinois Brick’s application to conspiracies in their

opening brief. But the opening brief did cite Paper Systems, it

did discuss the rule that direct purchasers from antitrust con-

spiracies are entitled to sue under Illinois Brick, and it stressed

the conspirators’ joint and several liability. This is more than

enough to avoid waiver in this court. The district court, too,

extensively discussed what it called a conspiracy exception,

and so there was no waiver at that level either.

What the Providers could not have foreseen was the dis-

trict court’s categorical rejection of Illinois Brick for the type of

anticompetitive activity they were alleging—a rejection that

did not depend on any additional detail about the structure

of the conspiracy. Now that we have straightened out the Illi-

nois Brick side of things, we conclude that the Providers

should have an opportunity to file an amended complaint,

provided that they believe they can adequately plead that the

distributors were part of the putative conspiracy. Any such

amended complaint should also plausibly indicate (if possi-

ble) how, if at all, the GPOs might be liable.

IV

We VACATE the judgment of the district court and REMAND

for further proceedings in accordance with this opinion.