Appendix — AmeriSource Corp. v. HJB, Inc.

la

In the

United States Court of Appeals

for the Seventh Circuit

Nos. 96-2814, 96-2458, 96-2485 & 97-2156

IN Re BRAND Name Prescription Drucs ANTITRUST LITIGATION

Appeats OF Rosert A. Hucains, et al.

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

MDL No. 997 - Charles P. Kocoras, Judge.

Argued June 25, 1997 - Decided August 15, 1997."

Before Posner, Chief Judge, and Bauer and Diane P.

Woon, Circuit Judges.

Posner, Chief Judge. We have consolidated for deci-

sion four appeals (in two of which we have jurisdiction

under 28 U.S.C. § 1292(b) and in the other two under 28

U.S.C. § 1291 and Fed. R. Civ. P. 54(b)) from rulings in a

huge price-fixing litigation that the Judicial Panel on

Multidistrict Litigation has consolidated in the Northern

District of Illinois for pretrial proceedings. The consolida-

tion covers hundreds of separate cases (a number of them

class actions) brought under section 1 of the Sherman

Act, 15 U.S.C. § 1, by retail pharmacies against manufac-

turers and wholesalers of prescription drugs. The phar-

macies complain that the defendants have conspired

among themselves to deny all pharmacies, including

* The decision is being released in typescript.

2a

chains and buying groups, discounts off the list price of

brand-name drugs that the manufacturers sell to the

wholesalers and that the wholesalers in turn resell to the

pharmacies. A brief sketch of the operation of the alleged

conspiracy will provide the essential background to

understanding the issues presented by these appeals.

While refusing to give pharmacies any discounts, the

defendants give steep discounts to favored classes of

customers, including hospitals, health maintenance orga-

nizations, nursing homes, and mail-order companies. The

defendants maintain this differential - pricing through a

“chargeback” system. Under that system, the manufac-

turer makes a contract with the favored customer estab-

lishing a discounted price at which the customer is

entitled to buy from wholesalers; the wholesaler sells to

the favored customer at that price; and the manufacturer

then reimburses the wholesaler for the difference

between the regular wholesale price and the discounted

price. So if the manufacturer’s regular price to the whole-

saler for some drug is $100 and the contractually agreed

upon discounted price for a favored customer is $75, the

wholesaler will pay the manufacturer $100 for the drug

but resell it to the favored customer at $75 and bill the

manufacturer $25. The plaintiffs claim that the Purpose of

the chargeback system is to make it difficult for the

favored customers to engage in arbitrage, that is, to buy

more than they need and resell the surplus to pharmacies

at a price between the discounted price that the favored

customers pay and the higher, undiscounted wholesale

price that nonfavored customers pay. The chargeback sys-

tem permits the wholesalers to buy cheap only when they

3a

are reselling to someone whom the manufacturer wants

to be given a discount.

The defendants’ differential pricing of their drugs is

discriminatory in the technical economic sense - it

involves charging different prices for the same goods, the

differences being unrelated to savings in the costs of

serving the favored customers. When the lower of two

discriminatory prices covers the seller’s cost, the higher

price must exceed that cost. This creates an incentive for

the favored purchasers to order more of the good than

they need for their own use and to sell the surplus to

disfavored customers at a price somewhere in between

the seller’s different prices. For example, an $80 resale by

a hospital or other favored customer that had bought at

$75 to a pharmacy that had bought at $100 would make

both parties to the resale better off; the hospital would

have a profit of $5 and the pharmacy would obtain a cost

savings of $20. This is arbitrage and would erode the two-

price system. The chargeback system prevents arbitrage;

the wholesaler who resold to a pharmacy at a significant

discount would incur a loss, since he would not be able to

charge back any part of the discount to the manufacturer.

Although a federal statute forbids hospitals and other

providers of health care to resell to other sellers the

pharmaceutical drugs that they buy, the statute does not

cover all the favored customers for such drugs. 21 U.S.C.

§ 353(c)(3). Anyway statutes are not always fully obeyed.

The chargeback system fills the gap in the statute’s cover-

age and does not require heavy enforcement costs.

The presence of price discrimination in the economic

sense is evidence of the presence of monopoly power -

the power to raise price above cost without losing so

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many sales as to make the price rise unsustainable. If the

lower price covers the seller’s cost, the higher price must

exceed it; so competition must be weak or absent, because

it has failed to force price down to cost (including in

“cost” a reasonable return on investment). Since monop-

oly power can be created by collusion among competing

sellers, the existence of industry-wide price discrimina-

tion is some evidence of collusion. But it is not conclusive

evidence, especially in an industry such as pharmaceuti-

cals many of the products of which are patented. The

sellers may be selling goods that although close substi-

tutes are not perfect substitutes, with the result that each

seller has some monopoly power and therefore can price

discriminate unilaterally. It might want to do so to take

advantage of the fact that some consumers are less able to

resist high prices than others. A fully developed record

might show, in accordance with contested evidence in the

record compiled to date, that a pharmacy has little choice

but to buy a wide range of competing drugs because it

cannot know in advance which drug its customers’ doc-

tors will prescribe. An HMO, however, can (within limits)

tell the doctors it employs what drugs to prescribe, and it

can use that power to extract price concessions from the

individual manufacturers, who naturally however do not

wish to extend the concessions to captive consumers such

as the pharmacies.

In the extensive pretrial proceedings that have Leen

conducted to date in this litigation, the plaintiffs have

presented evidence that the defendant manufacturers

agreed among themselves, and also with the defendant

wholesalers, to refuse discounts to pharmacies and to

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make this refusal stick by adopting the chargeback sys-

tem in order to prevent arbitrage. In other words, the

claim is that pervasive price discrimination in the phar-

maceutical market is the result not of individual decisions

by manufacturers who possess some monopoly power

but of an agreement to practice price discrimination. The

plaintiffs’ objection is not to the discrimination as such;

although there is a Robinson-Patman claim in the com-

plaint, it is not part of the appeal. The plaintiffs’ objection

is to having to pay high prices that, but for the defen-

dants’ alleged conspiracy, would be brought down by

competition.

One might have supposed that if the defendants were

going to collude on price, they would go the whole hog

and agree not to provide discounts to the hospitals and

other customers favored by the discriminatory system.

But the defendants’ cartel — if that is what it is - may not

be tight enough to prevent hospitals and other bulk pur-

chasers with power to shift demand among different

manufacturers’ drugs from whipsawing the members of

the cartel for discounts; or maybe these purchasers could

shift demand to manufacturers that are not members of

the cartel. If, for whatever reason, the elasticity of

demand for a cartel’s product differs among groups of

purchasers, a single cartel price will not be profit-maxi-

mizing unless a discriminatory price scheme cannot be

enforced at reasonable cost.

The manufacturers moved for summary judgment,

arguing that there wasn’t enough evidence of collusion to

warrant a trial. The district judge denied the motion. The

correctness of his ruling is not before us. And whether it

was correct or not, the reader should bear in mind that

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the manufacturers have not been found to have violated

the Sherman Act; the only determination is that there is

enough evidence of a violation to require that the case be

allowed to proceed to trial.

The judge granted summary judgment to one of the

manufacturers, however, DuPont Merck Pharmaceutical

Company. The plaintiffs’ appeal from that ruling is one of

the four appeals before us. The judge also granted sum-

mary judgment to the wholesaler defendants because he

thought there was insufficient evidence of their participa-

tion in the manufacturers’ conspiracy to warrant a trial.

That is another ruling appealed from. Another is the

judge’s refusal to dismiss indirect-purchaser claims by

pharmacies that paid overcharges as a consequence of the

alleged manufacturers’ conspiracy. The manufacturers

argued unsuccessfully that only the first tier of pur-

chasers (“direct purchasers”), composed of the whole-

salers and others who purchased drugs directly from the

manufacturers, and not the second tier, composed of

pharmacies that purchased the manufacturers’ drugs

from the wholesalers (“indirect purchasers”), are permit-

ted to bring a suit for overcharges under the Sherman

Act. In the last ruling that has been appealed to us, the

judge refused to remand a class action that alleges viola-

tions not of the Sherman Act but of Alabama’s antitrust

statute, which expressly authorizes suits by indirect pur-

chasers.

The indirect-purchaser issue (with which we begin) is

separate from the issue of the wholesalers’ participation

in the manufacturers’ alleged conspiracy. It is true that if

we reversed the judge’s ruling on the latter issue and so

-

7a

reinstated the wholesalers as defendants, and if the plain-

tiffs went on to obtain a judgment against the wholesalers

and manufacturers, any indirect-purchaser defense

would go by the board, since the pharmacies would then

be direct purchasers from the conspirators. Fontana Avia-

tion, Inc. v. Cessna Aircraft Co., 617 F.2d 478, 481 (7th Cir.

1980); Arizona v. Shamrock Foods Co., 729 F.2d 1208,

1212-13 (9th Cir. 1984); see also In re Beef Industry Anti-

trust Litigation, 600 F.2d 1148, 1163 (5th Cir. 1979) (requir-

ing that the direct sellers, here the wholesalers, be joined

as defendants — but that requirement is satisfied). But

even if we do reinstate the wholesalers as defendants, an

issue discussed later in this opinion, the plaintiffs may

fail at trial to establish their liability, in which event the

indirect-purchaser issue will be decisive. So, the issue

being fully briefed and argued in this court, we should

decide it; and the fact that it may in the end not prove

decisive does not show that the district judge and we

were wrong to certify his ruling on the issue under 28

U.S.C. § 1292(b) (interlocutory appeal of a ruling on a

controlling question) for an immediate appeal. Sokaogon

Gaming Enterprise Corp. v. Tushie-Montgomery Associates,

Inc., 86 F.3d 656, 658-59 (7th Cir. 1996); Johnson v. Burken,

930 F.2d 1202, 1205 (7th Cir. 1991); Katz v. Carte Blanche

Corp., 496 F.2d 747, 755 (3d Cir. 1974); 16 Charles Alan

Wright, Arthur R. Miller & Edward H. Cooper, Federal

Practice and Procedure § 3930, pp. 426-27 (2d ed. 1996).

A brief review of the evolution of the indirect-pur-

chaser doctrine in the Supreme Court will point us

toward a resolution of the issue. In Hanover Shoe, Inc. 0.

United Shoe Machinery Corp., 392 U.S. 481 (1968), the

defendant in a Sherman Act suit, a manufacturer of

8a

machinery for making shoes, defended on the ground

that the plaintiff, a shoe manufacturer that had bought

the defendant’s machinery, had passed on any monopoly

overcharge to its own customers, the wholesale pur-

chasers of its shoes, and hence had not been injured. A

firm hit with an increase in the cost of one of its inputs

will try so far as competition allows to pass that cost on

to its customers in the form of a higher price for its

product. The Supreme Court held, however, that an anti-

trust defendant would not be permitted to defend against

a damages suit on the ground that the plaintiff had

shifted the cost of the defendant's wrongdoing to the

plaintiff’s customers. Such a defense would complicate

antitrust enforcement by requiring an apportionment of

damages between different tiers of purchasers of the

defendant’s product. Tracing a price hike through succes-

sive resales is an example of what is called “incidence

analysis,” and is famously difficult.

The Court took the next step in Illinois Brick Co. v.

Illinois, 431 U.S. 720 (1977), and held that the second or

subsequent tiers, the indirect purchasers from the anti-

trust violators, couldn’t sue; only the first tier could. This

was a logical corollary of the rejection of the passing-on

defense in Hanover Shoe, since to determine the damages

suffered by subsequent tiers of purchasers would require

the very apportionment of damages that the Court had

rejected in the earlier case.

Illinois Brick left unclear whether there might be

exceptions for cases in which the amount of the over-

charge that was passed on to a lower tier of purchasers

could be determined simply and with mechanical preci-

sion. A plausible example, we thought, would be a case in

9a

~

which the first tier of purchasers consisted of public

utilities that as a consequence of government regulation

passed on any cost increase dollar for dollar to their

customers. Illinois v. Panhandle Eastern Pipe Line Co., 852

F.2d 891 (7th Cir. 1988) (en banc). Shortly afterward, in a

similar case, the Supreme Court held that such cases are

not within any exception to the Illinois Brick doctrine,

Kansas v. Utilicorp United, Inc., 497 U.S. 199 (1990), and we

duly overruled our Panhandle opinion. Illinois v. Panhandle

Eastern Pipe Line Co., 935 F.2d 1469 (7th Cir. 1991). Util-

icorp implies that the only exceptions to the Illinois Brick

doctrine are those stated in Illinois Brick itself - “where

the direct purchaser is owned or controlled by its cus-

tomer,” 431 U.S. at 736 n. 16 or, we suppose, vice versa.

The first exception (ownership) is conceded to be inappli-

cable here; the wholesalers are not corporate affiliates of

the manufacturers. The second (control) is inapplicable as

well. The manufacturers do not control the wholesalers

through interlocking directorates, minority stock owner-

ship, loan agreements that subject the wholesalers to the

manufacturers’ operating control, trust agreements, or

other modes of control separate from ownership of a

majority of the wholesalers’ common stock. Jewish Hospi-

tal Ass’n v. Stewart Mechanical Enterprises, Inc., 628 F.2d

971, 975 (6th Cir. 1980); cf. Gould v. Ruefenacht, 471 U.S.

701, 705 (1985).

The district judge held, however, primarily on the

basis of the chargeback system, that the wholesalers are

really nothing more than “glorified warehouses” of the

manufacturers. In so ruling, the judge gave undue weight

to the chargeback system. The favored customers, the

ones who had contracts with the manufacturers though

10a

they took delivery from the wholesalers, are not parties

to this litigation. They certainly are not complaining

about the system of discriminatory pricing. They were

not overcharged, and their right if any to recover over-

charges in a suit against the manufacturers is not in issue.

The plaintiffs are the disfavored customers. They did not

have contracts with the manufacturers, they did not

receive discounts, and the wholesalers did not receive

chargebacks on sales to them. The plaintiffs’ complaint is

that they were overcharged because the wholesalers

passed on to them the overcharge that the wholesalers

had to pay the manufacturers by virtue of the price-fixing

conspiracy. This is just the kind of complaint that Illinois

Brick bars. The only entities permitted to complain about

the manufacturers’ overcharging the wholesalers are the

wholesalers themselves, the direct purchasers, even if

every cent of the overcharge was promptly and fully

passed on to the pharmacies in the form of a higher

wholesale price.

Some wholesalers were plaintiffs in this litigation;

they settled. Had they not done so, and had the case

proceeded to trial and the pharmacies been permitted to

seek damages for the amount of the overcharge passed on

to them, the court would have had to apportion the

overcharge between the wholesalers and the pharmacies.

That’s just what the Supreme Court in Hanover Shoe,

illinois Brick, and Utilicorp told the federal courts not to

do.

We can imagine the present case reconfigured in a

way that might take it out of the orbit of these decisions;

it would not be a matter of carving a further exception. A

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number of pharmacies have tried to improve their bar-

gaining position vis-a-vis the drug manufacturers by for-

ming buying groups. The bigger a buyer is, the more

likely it is to be able to obtain a discount from a member

of a cartel, since the volume of its purchases may com-

pensate the member for endangering the cartel by grant-

ing a discount. George J. Stigler, “A Theory of Oligopoly,”

in Stigler, The Organization of Industry 39, 43-44 (1968).

That is one motive for forming a buying group. The

manufacturers have been steadfast in refusing to grant

discounts to such groups. If this refusal, taking as it does

the form of a refusal to enter into direct contractual

relations with certain retailers, such as the manufacturers

have with their favored customers, were successfully

challenged as a boycott, see FTC v. Superior Court Trial

Lawyers Ass'n, 493 U.S. 411 (1990); FTC v. Indiana Federa-

tion of Dentists, 476 U.S. 447, 458-59 (1986); Collins v.

Associated Pathologists, Ltd., 844 F.2d 473, 479 (7th Cir.

1988), the Illinois Brick rule, which is a rule concerning

overcharges, would fall away. The plaintiffs would be

permitted to prove up whatever damages they could

show had flowed from the boycott, Mid-West Paper Prod-

ucts Co. v. Continental Group, Inc., 596 F.2d 573, 585 n. 47

(3d Cir. 1979), provided they weren’t seeking to recover

overcharges, for that would entail the very incidence

analysis that Illinois Brick bars. Merican, Inc. v. Caterpillar

Tractor Co., 713 F.2d 958, 966-68 and n. 21 (3d Cir. 1983).

But that is precisely what they are seeking. The certified

class is of pharmacies that paid overcharges, and the

certification was based on the uniformity of the harm. It

would be more difficult to justify class treatment of a

boycott of buying groups. Compare White Industries, Inc.

12a

v. Cessna Aircraft Co., 845 F.2d 1497, 1502-03 (8th Cir.

1988), with Bogosian v. Gulf Oil Corp., 561 F.2d 434, 455 (3d

Cir. 1977). That may be why the plaintiffs have not cast

their case in the boycott mold. We need not decide

whether it is still open to them to do so in the district

court.

To conclude our discussion of the drug manufac-

turers’ federal antitrust liability to the indirect pur-

chasers, the federal class actions should have been

dismissed unless the wholesalers should not have been

dropped as defendants, an issue we take up later. The

Alabama class suit, which the district judge refused to

remand, also involves the indirect-purchaser question; so

let us turn to that suit. It was actually the second pre-

scription-drug price-fixing suit brought in the Alabama

state courts. The first had been removed to federal dis-

trict court under the diversity jurisdiction and then trans-

ferred by the multidistrict panel to the Northern District

of Illinois for consolidation with the other prescription-

drug price-fixing suits. The district court had denied a

motion to remand, so the suit remains in that court. Then

our Alabama suit was filed, and like the first suit it was

removed to federal district court and transferred to the

Northern District of Illinois. It is a class suit on behalf of

consumers in several states, not only Alabama, and it

names as defendants a large number of drug manufac-

turers none of which either is a citizen of Alabama or

sells exclusively to that state’s residents. The suit is

based, or at least purports to be based, on an Alabama

Statute that is modeled on the Sherman Act but that

contains a provision which expressly authorizes indirect-

purchaser claims - the very type of claim that Illinois

13a

Brick bars in suits under the Sherman Act. Ala. Code

§ 6-5-60(a). The defendants argued, and the district court

agreed, that the suit is removable to federal court under

both the diversity statute and, by virtue of the doctrine of

“artful pleading,” the federal-question statute as well. 28

U.S.C. §§ 1331, 1332.

There is complete diversity of citizenship among the

parties; the question, so far as the issue of diversity

jurisdiction is concerned, is only whether the minimum

amount in controversy required to maintain a diversity

suit in federal court ($50,000 at the time the suit was

filed) is present. The court cannot just add up the dam-

ages sought by each member of the class. Snyder v. Harris,

394 U.S. 332 (1969); Zahn v. Int’l Paper Co., 414 US. 291,

301 (1973); In re Corestates Trust Fee Litigation, 39 F.3d 61,

64 (3d Cir. 1994). At least one named plaintiff must satisfy

the jurisdictional minimum. If he does, the other named

plaintiffs and the unnamed class members can, by virtue

of the supplemental jurisdiction conferred on the federal

district courts by 28 U.S.C. § 1367, piggyback on that

plaintiff’s claim. That is, they remain plaintiffs, or

unnamed members of the class, as the case may be, even

though their own claims are for less than the jurisdic-

tional minimum amount. So the Fifth Circuit held in In re

Abbott Laboratories, 51 F.3d 524, 527-29 (5th Cir. 1995), and

we signified our agreement with that holding in Strom-

berg Metal Works, Inc. v. Press Mechanical, Inc., 77 F.3d 928,

930-33 (7th Cir. 1996), and repeat it today.

The plaintiffs in this case, however, because they did

not want their case removed to federal court, were careful

to plead that the damages sought by each did not exceed

$50,000. This is plausible - you would have to buy an

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awful lot of expensive drugs to run up a bill the over-

charge portion of which alone was more than that

amount. And plausible or not, a plaintiff can always stay

under the minimum amount in controversy by waiving

his right to more, In re Amino Acid Lysine Antitrust Litiga-

tion, 918 F.Supp. 1181, 1185-86 (N. D. Ill. 1996), though

these plaintiffs have not established that they did mean to

waive their right.

Compensatory damages, which we have just seen are

not likely to exceed $50,000 for any of the named plain-

tiffs, are not the only form of monetary relief sought,

however. The antitrust statute on which the Alabama

class action is based authorizes the court to award up to

$500 for each “instance of . . . injury or damages” as a

statutory penalty, in addition to any compensatory dam-

ages. Ala. Code § 6-5-60(a). But the defendants cannot

simply wave the statute in our faces. They have the

burden of establishing federal jurisdiction when they

seek to remove a case from state to federal court, and so

they must present evidence of federal jurisdiction once the

existence of that jurisdiction is fairly cast into doubt.

Chase v. Shop ‘N Save Warehouse Foods, Inc., 110 F.3d 424,

427 (7th Cir. 1997); Wellness Community-National v. Well-

ness House, 70 F.3d 46, 49 (7th Cir. 1995); Selcke v. New

England Ins. Co., 2 F.3d 790, 792 (7th Cir. 1993). It was cast

into doubt here by the complaint itself, which does not

allege stakes in excess of $50,000 or facts from which such

stakes can readily be inferred. Yet the defendants pre-

sented no evidence that, even with the statutory penalty

added to the compensatory damages sought, any of the

named plaintiffs is asking for more than $50,000. The

defendants point out that it is possible that at least one of

15a

the plaintiffs had more than $50,000 in damages and

penalties. A hundred purchases within the four-year

period covered by the complaint would carry a purchaser

over the threshold, even if the overcharge on each pur-

chase was tiny, because each purchase, constituting we

assume a separate “instance of . - . injury or damage,”

would entitle the purchaser to the $500 statutory penalty.

But the defendants put in no evidence that any of the

named plaintiffs in fact made this many purchases.

Instead they argue that under Alabama law the entire

statutory penalties awarded in a case are the indivisible

penalty for a defendant's misconduct and so are the

stakes in each of the plaintiffs’ claims. If this is correct,

and the plaintiffs have not waived a claim for total dam-

ages (compensatory damages plus the penalty) per plain-

tiff of more than $50,000, then the defendants had no

need to present any evidence on the jurisdictional issue.

In arguing their interpretation of the Alabama stat-

ute, with the support of Tapscott v. MS Dealer Service

Corp., 77 F.3d 1353, 1359 (11th Cir. 1996), and less directly

of Allen v. R & H Oil & Gas Co., 63 F.3d 1326, 1334 (Sth Cir.

1995), but in opposition to Gilman v. BHC Securities, Inc.,

104 F.3d 1418, 1428-31 (2d Cir. 1997), the defendants are

gesturing toward the Supreme Court’s statement in

Snyder v. Harris, supra, 394 U.S. at 355 that when “two or

more plaintiffs unite to enforce a single title or right in

which they have a common and undivided interest,” the

amount in controversy is the aggregate in which they

each have their undivided share. An example is an action

by the heirs of an intestate estate against the estate’s

administrator. A successful prosecution of the action

would result in making the estate larger, and each heir

16a

would have an undivided interest in the larger, as in the

original, estate. Shields v. Thomas, 58 U.S. (17 How.) 3, 15

L.Ed. 93 (1855). Other examples are set forth in Gilman v.

BHC Securities, Inc., supra, 104 F.3d at 1423.

This is not such a case. The penalty prescribed by the

Alabama statute is presumably per violation, that is, per

sale at an unlawful price; and it is awarded to the victim

of the particular violation, the direct or indirect buyer,

rather than to the victims of the price-fixing conspiracy as

a group or to a representative member of the group. If

one plaintiff disclaimed the penalty awarded him under

the statute, or settled with the defendant for an amount

that included no penalty, the penalty thus forsworn

would not go to another plaintiff; it would be subtracted

from the total amount of penalties assessed against the

defendant. Indeed, if the court had awarded the maxi-

mum penalty to each victim, it would be impossible for the

court to shift the disclaimed penalty to another of the

victims; to do so would pierce the ceiling. But we take it

that even if one victim had received $300 rather than

$500, the court would not give him another $200 if

another victim had disclaimed his own $300 penalty.

It is possible we suppose that the judge could fix

some amount that represented in his mind the proper

punishment for the defendant’s misconduct; divide that

amount by the number of plaintiffs; and if the result of

the division was greater than $500, cut down the aggre-

gate accordingly. But even if, in acting so, the judge

would be complying with the spirit as well as the letter of

the statute, the resulting fund would not be a piece of

property to which the plaintiffs had undivided rights.

None of the victims would have an undivided right in a

17a

common fund or res such that if one claimant fell out the

others’ shares would grow. Sellers v. O’Connell, 701 F.2d

575, 579 (6th Cir. 1983); Eagle Star Ins. Co. v. Maltes, 313

F.2d 778, 781 (5th Cir. 1963).

A plaintiff’s award of punitive damages is not lim-

ited by awards made to previous plaintiffs complaining

of the same act of the defendant. E.g., Allen v. R & H Oil &

Gas Co., supra, 63 F.3d at 1334; Dunn v. Hovic, 1 F.3d 1371,

1385-86 (3d Cir. 1993); Roginsky v. Richardson-Merrell, Inc.,

378 F.2d 832, 839-41 (2d Cir. 1967) (Friendly, J.). This rule

has been criticized (as by Judge Friendly in Roginsky), but

whether it is a good rule or a bad rule it shows that the

right to punitive damages is a right of the individual

plaintiff, rather than a collective entitlement of the vic-

tims of the defendant’s misconduct. Gilman v. BCH Securi-

ties, Inc., supra, 104 F.3d at 1428-31. The rule may have to

be qualified now that the Supreme Court has held that

excessive awards of punitive damages violate the due

process clause. BMW of North America, Inc. v. Gore, __

U.S. _, 116 S. Ct. 1589 (1996). For it could be argued that

a piling on of awards by different courts for the same act

might result in excessive punishment for that act. We

need not decide whether this argument would ever suc-

ceed; it is unlikely to succeed to the point of converting

entitlements to punitive damages from individual to col-

lective entitlements.

That the defendants have failed to show that the

plaintiffs are seeking more than $50,000 apiece against

each defendant cannot be the end of our analysis of

diversity jurisdiction. The complaint seeks an injunction

against the alleged conspiracy as well as damages and the

penalty, and the defendants argue that it will cost them

18a

more than $50,000 to comply with the injunction even

though the only plausible form of injunctive relief in a

case like this would be to order the defendants to stop

fixing prices. There are four ways in which a request for

an injunction might be thought to carry a case over the

amount in controversy threshold. The first way — plainly

one valid way, e.g., Hunt v. Washington State Apple Adver-

tising Comm’n, 432 U.S. 333, 347 (1977); Gould v. Artisoft,

Inc., 1 F.3d 544, 548 n. 4 (7th Cir. 1993); Justice v. Atchison,

Topeka & Santa Fe Ry., 927 F.2d 503, 505 (10th Cir. 1991);

Smith v. Washington, 593 F.2d 1097, 1099 (D.C. Cir. 1978),

and some courts think the only valid way, Kheel v. Port of

New York Authority, 457 F.2d 46, 49 (2d Cir. 1972); Bernard

v. Gerber Food Products Co., 938 F.Supp. 218, 220-22

(S.D.N.Y. 1996) — is if the value of the injunction to the

plaintiff exceeds the statutory minimum. So we could

look to the present value of the future cost savings that

each plaintiff anticipated from the cessation of each

defendant's price fixing. No effort to quantify this value

or array of values in even the roughest terms has been

made, however, so we put it to one side.

Although one of our cases adopts the “plaintiff only”

position, Freeman v. Sports Car Club of America, Inc., 51

F.3d 1358, 1362 (7th Cir. 1995), it overlooked a decision in

which we had squarely rejected that position in favor of

the “either viewpoint” (plaintiff’s or defendant’s)

approach, McCarty v. Amoco Pipeline Co., 595 F.2d 389 (7th

Cir. 1979). Looked at from the defendants’ standpoint, the

minimum amount in controversy would be present if the

injunction sought by the plaintiffs would require some

alteration in the defendant’s method of doing business

19a

that would cost the defendant at least the statutory mini-

mum amount. See, e.g., id. at 391. This ground is not

argued either. Often it will be equivalent to the previous

ground, the value of the injunction to the plaintiff. The

defendant would be willing to pay the plaintiff up to a

shade less than the cost that the injunction would impose

on the defendant to induce the plaintiff to abandon his

quest for injunctive relief. In that way the cost to the

defendant would be transmuted into an equivalent value

to the plaintiff. If, however, there are multiple plaintiffs,

actual or potential, the defendant will not be willing to

pay each one as much as he would if there were only one

possible plaintiff. It may seem paradoxical to defeat

removal in the multiplaintiff setting on this basis. But it is

implicit in the rule that forbids aggregation of class mem-

bers’ separate claims that it will sometimes be more diffi-

cult for a defendant desiring to remove a diversity case to

federal court to establish the minimum amount of contro-

versy in a multiplaintiff case than in a much smaller

single-plaintiff case. Compare a class action in which one

million class members each has a claim worth $1 with a

case in which a single plaintiff has a claim worth

$100,000. There is diversity jurisdiction in the second case

but not (because of the nonaggregation rule in class

actions, the rule of Snyder and Zahn) the first.

Concern has been expressed that if the cost to the

defendant may be used to establish the minimum amount

in controversy in an injunction case, it may be used for

this purpose in a damages case, and then the nonaggrega-

tion rule will be circumvented. E.g., Packard v. Provident

Nat'l Bank, 994 F.2d 1039, 1050 (3d Cir. 1993). The concern

is misplaced. Whatever the form of relief sought, each

20a

plaintiff’s claim must be held separate from each other

plaintiff’s claim from both the plaintiff’s and the defen-

dant’s standpoint. The defendant in such a case is

deemed to face multiple claims for injunctive relief, each

of which must be separately evaluated. Snow v. Ford

Motor Co., 561 F.2d 787, 790 (9th Cir. 1977). The question

then becomes, as with the penalty statute, whether each

plaintiff is asserting an individual right or, rather, a right

to an undivided interest in something. In this case it is

the former. Each plaintiff has a right to be free from the

indirect effects of collusive pricing. Moreover, the grant

of an injunction in favor of a single plaintiff would be

unlikely to impose a heavy cost on any of the defendants;

each defendant could continue in its own way of pricing

with respect to all other plaintiffs. The test, we repeat, is

the cost to each defendant of an injunction running in

favor of one plaintiff; otherwise the nonaggregation rule

would be violated.

Still another way in which the requirement of the

statutory minimum amount in controversy can be satis-

fied in an injunctive case is by showing that the injunc-

tion would force the defendant to forgo a benefit to him

that is worth more than the threshold amount specified in

the diversity statute, e.g., Grotzke v. Kurz, 887 F. Supp. 53

(D.R.I. 1995), as where the suit asks that the defendant be

enjoined from completing a lucrative transaction. That is

not argued here either. The reason may be that while an

injunction against price fixing might prevent a defendant

from engaging in lucrative unlawful transactions, it

would not deprive the defendant of a legally protected

interest. It would not be like the case in which the defen-

dant, in order to extirpate the effects of its unlawful act,

Se

POM TRE Bit 1 6 BS TE TEIN = wee

21a

is forced to restructure its operations at a cost that may

greatly exceed any profit it made from the act. Structural

relief is frequently decreed in merger cases under section

1 of the Sherman Act or section 7 of the Clayton Act or in

monopolization cases under section 2 of the Sherman Act,

but very rarely in a price-fixing case, such as we have

here.

The last wav of satisfying the requirement of the

minimum amount in controversy in an injunction case,

the way principally argued by the defendants, is that a

defendant’s clerical or ministerial costs of compliance

might carry a case across the threshold. Even if an injunc-

tion doesn’t require the defendant to restructure its busi-

ness or give up a lucrative lawful business opportunity,

but merely tells it to stop doing something illegal, such as

conspiring to fix prices, there will be lawful costs of

compliance. Just the cost of duplicating an injunction in a

case such as this and distributing the copies to all the

relevant personnel might exceed $50,000 for each defen-

dant, and, if so, this would argue for allowing removal to

federal court. The argument would be the same as before

- given the possibility of a settlement, a suit is worth as

much to the plaintiff in the form of an expected value of

settling it as it is costly to the defendant, at least in the

single-plaintiff case. But if the argument were accepted,

then every case, however trivial, against a large company

would cross the threshold, whether the threshold was

$50,000 or as it now is $75,000, even if the plaintiff were

asking for an injunction against disclosing his unlisted

telephone number. It would be an invitation to file state-

law nuisance suits in federal court. We needn't bite this

bullet. The defendants have made no effort to show that

22a

what is conceivable is also probable by quantifying the

internal cost of compliance to each of them and then

adding it to a plaintiff's compensatory damages and pen-

alty entitlement.

The alternative basis on which the district court per-

mitted the removal of the Alabama suit to the federal

district court was the “artful pleading” doctrine. The

doctrine is usually taken to mean that if federal law has

so far occupied a field of disputes as to extinguish any

basis in state law for seeking a resolution of the dispute, a

plaintiff cannot prevent removal by casting his claim as

one under state law - it must actually be a claim under

federal law because only federal law could supply a

ground for relief. Caterpillar Inc. v. Williams, 482 U.S. 386,

393-94 (1987); Avco Corp. v. Aero Lodge No. 735, 390 U.S.

557 (1968); Kaucky v. Southwest Airlines Co., 109 F.3d 349,

351 (7th Cir. 1997). And as such it can be removed to

federal court even if it is not within the diversity jurisdic-

tion, and, by virtue of 28 U.S.C. § 1441(e) (added in 1986),

even if the state court could not have exercised jurisdic-

tion over the case because it is a type of case that is

within the exclusive jurisdiction of the federal courts, as

well as being a case in which only federal law can supply

the rule of decision.

It may seem odd to allow removal and retention in

such cases, rather than to trust the state court to dismiss a

suit that is frivolous because it is based on nonexistent

(because preempted) state law, especially since a defense

of preemption is normally not a basis for removal and is

therefore decided by the state court. Metropolitan Life Ins.

Co. v. Taylor, 481 U.S. 58, 63 (1987); Franchise Tax Board v.

Laborers Vacation Trust, 463 U.S. 1, 24-27 (1983). The usual

ib Vaasa adeno z

23a

explanation is that if the suit must be based on federal

law because that is the only law that such a suit can be

based on (the standard example is a suit to enforce a

collective bargaining agreement, which can be litigated

only under federal law), the defendant is entitled to

remove and his entitlement should not be defeated by the

plaintiff’s evasive drafting of the complaint. E.g., Bartho-

let v. Reischauer A.G. (Ziirich), 953 F.2d 1073, 1075 (7th Cir.

1992). It’s true that the defendant should be able to defeat

this maneuver in state court by moving to dismiss the

suit as frivolous; if the plaintiff countered by coming out

of his state-law closet and acknowledging that he was

trying to plead a federal case, the defendant could then

remove. 28 U.S.C. § 1446(b). But should the defendant be

put to the bother? If as a matter of fact the plaintiff is

really intending to bring a federal suit though failing to

cite federal law, it can be argued that his intentions

should be taken as the reality and so the defendant

allowed to remove what is functionally though not for-

mally a federal suit.

The problem comes in setting limits to the doctrine.

There are countless cases in which a suit under state law

could be thought to be a federal suit in state clothing.

Antitrust law, for example, with an isolated exception,

Flood v. Kuhn, 407 U.S. 258, 284-85 (1972), is a field in

which Congress has not sought to replace state with

federal law. California v. ARC America Corp., 490 U.S. 93,

101-02 (1989). The states are free to enact their own

antitrust laws, reaching the same conduct as the federal

laws except insofar as the states’ power to regulate eco-

nomic activities in other states is limited by the commerce

and due process clauses of the federal Constitution. See

24a

Herbert Hovenkamp, “State Antitrust in the Federal

Scheme,” 58 Ind. L.J. 375 (1983). This is a potentially

significant qualification, as we shall see; but on the view

taken by the defendants in this case, any time an antitrust

plaintiff brings a suit in state court under a state antitrust

statute that contains substantive provisions similar to

that of a federal antitrust statute, the defendant can

remove on the ground that the plaintiff is trying to bring

a federal antitrust suit yet to insulate it from removal to a

federal court.

This surprising possibility gets a boost from a foot-

note in Federated Department Stores, Inc. v. Moitie, 452 U.S.

394 (1981). The plaintiffs in that case brought a class suit

in a state court under state fraud law and state unfair

competition law. The suit was removed to federal district

court, properly in the Supreme Court’s judgment because

the district court had found as a fact that the plaintiffs

“had attempted to avoid removal jurisdiction by ‘art-

ful{ly]’ casting their ‘essentially federal law claims’ as

state-law claims.” Id. at 397 n. 2. The suit had been filed

after thé district court had dismissed an earlier version,

explicitly premised on federal antitrust law, on the basis

of a federal defense that, like the “passing on” defense of

Illinois Brick, the plaintiffs hoped would not be recog-

nized by state law.

It is not easy to see why this is “artful pleading” in

some invidious, evasive sense. Once the federal defense

was held to block the plaintiffs’ federal antitrust claim,

their only hope was to proceed under state law. They had

little motive to conceal a federal claim in state clothing,

for their federal claim was dead. See In re Application of

County Collector, 96 F.3d 890, 897 (7th Cir. 1996). It is the

25a

same here. The only motive the plaintiffs in our Alabama

case could have for filing a case under the Alabama

statute was to avoid the federal passing-on defense of

Illinois Brick, a defense they could avoid only if they

pressed their claim exclusively under state law - and if

they did that the case would belong in state court

because, as we have seen, it is not within the diversity

jurisdiction and so is not removable to federal court on

that basis.

The Supreme Court went on to hold in Moitie that the

“artful pleaded” (hence federal) claims that had been

removed to federal court were barred by res judicata. The

suit had been refiled in state court after final judgment

had been entered against the plaintiffs in federal court.

We can now see how the refiling of these suits in state

court under state law could be thought “artful pleading”

in an invidious sense; and the Court did not say it was

artful pleading - only that it would not question the

district court’s finding that it was. The plaintiffs had been

trying to dodge a federal court’s judgment. The defen-

dants could have set up the judgment as res judicata in

the state court in which the suits were refiled. But if the

sole basis for filing a state suit is to get around, however

temporarily and hopelessly, a federal judgment, it can be

argued that the new “state law” suit is really the old

federal suit in-a transparent guise and that the federal

court ought to say so in order to get rid of it quickly and

thus protect the federal judgment against the possibility

that the state court might abet the plaintiff’s effort to get

around a dispositive defense or other fatal flaw in his

federal case. Doe v. Allied-Signal, Inc., 985 F.2d 908, 911-12

(7th Cir. 1993); Rivet v. Regions Bank of Louisiana, F.S.B.,

26a

108 F.3d 576, 586 (5th Cir. 1997); Ultramar America Ltd. v.

Dwelle, 900 F.2d 1412 (9th Cir. 1990). Furthermore, any

state claim in Moitie had been extinguished by the federal

judgment, by operation of the doctrine of merger. Recall

that the Court held the claim barred by res judicata. The

reason was that the claim could have been joined to the

plaintiffs’ federal claim and arose from the same cluster

of facts. In these circumstances, since it was not joined, it

merged into the federal judgment and disappeared, leav-

ing nothing on which to base a suit in state court.

There is no federal judgment here. Neither when the

Alabama suit was filed nor when the motion to remand

was filed was there any ruling by the district court, let

alone a judgment, barring the suit on Illinois Brick (or any

other federal) grounds. On the contrary, the district court

thought Illinois Brick not a bar to a federal antitrust suit

by indirect purchasers. It is true that the judge had

refused to certify the first Alabama suit removed to the

district court as a class action, but the denial of class

certification is not a final judgment, terminating the

underlying suit; the suit continues, only as an individual

action rather than as a class action.

The plaintiffs may well be stretching the Alabama

statute to the breaking point in seeking damages for

nonresident plaintiffs from nonresident defendants who

sell primarily in other states. If it were clear that the

plaintiffs could get no significant relief under Alabama

law, this would strengthen the inference that they were

merely recaptioning their federal suit as one under state

law. But it is not clear, even though the defendants are

able to cite Alabama cases which say that Alabama’s

antitrust statute is indeed limited to intrastate commerce

27a

and it is doubtful that any of the price-fixed sales

attacked in the suit took place in intrastate rather than

interstate commerce. The cases on which the defendants

rely, for example Georgia Fruit Exchange v. Turnipseed, 62

So. 542, 546 (Ala. 1913), date from a period in which,

interstate commerce being narrowly defined, see, e.g.

Hadley-Dean Plate Glass Co. v. Highland Glass Co., 143 Fed.

242, 244 (8th Cir. 1906), and federal power to regulate

such commerce being deemed exclusive, id.; United States

v. E.C. Knight Co., 156 U.S. 1, 11 (1895), a state statute

limited to intrastate commerce would have some, albeit a

strictly limited, scope and could not have a greater scope

no matter how much the state wanted it to. The cases

thus were not interpreting the statute; they were inter-

preting the Constitution as placing upper and lower

bounds on the reach of the statute, and the Constitution

has since been reinterpreted. If the statute is limited

today as it once was to commerce that is not within the

regulatory power of Congress under the commerce

clause, it is a dead letter because there are virtually no

sales, in Alabama or anywhere else in the United States,

that are intrastate in that sense. United States v. Lopez, 115

S.Ct. 1624, 1630 (1995); Wickard v. Filburn, 317 U.S. 111

(1942); United States v. Hicks, 106 F.3d 187, 189-90 (7th Cir.

1997). Other states read their antitrust statutes to reach

what is now understood to be interstate commerce. E.g.,

R.E. Spriggs v. Adolph Coors Co., 112 Cal. Rptr. 585 (1974);

Health Consultants, Inc. v. Precision Instruments, Inc., 527

N.W.2d 596, 607 (Neb. 1995) (citing cases). The reading is

constitutionally permissible, Clay v. Sun Ins. Office, Ltd.,

28a

377 U.S. 179 (1964), and we are given no reason to sup-

pose that Alabama would buck this trend and by doing so

kill its statute.

A state’s power to regulate interstate commerce is

limited, however, by the provisions of the federal Consti-

tution that limit the extraterritorial powers of state gov-

ernment. A state cannot regulate sales that take place

wholly outside it. K-S Pharmacies, Inc. v. American Home

Products Corp., 962 F.2d 728, 730 (7th Cir. 1992). State A

cannot use its antitrust law to make a seller in State B

charge a lower price to a buyer in C. Insofar as the

Alabama suit challenges sales from plants or offices in

other states to pharmacies in other states, it exceeds the

constitutional scope of the Alabama antitrust law. But

insofar as it challenges sales from other states to phar-

macies in Alabama, it is within the intended and permis-

sible scope of the statute, and, since there may well be a

nontrivial number of such sales, the suit has enough

potential merit as an Alabama antitrust suit to defeat the

“application of the “artful pleading” doctrine. The twist

that Moitie gave to the doctrine is (very uncharac-

teristically for its author, Justice, now Chief Justice, Rehn-

quist) based on distrust of state courts, and, especially

since it appears only in a footnote, should be narrowly

construed in the interest of maintaining comity between

the federal government and the states and keeping fed-

eral jurisdiction within the limits prescribed by Congress.

But the plaintiffs are wrong to argue that if their suit,

if reconceived as a federal suit, is so plainly barred by

Illinois Brick as to be frivolous, this would mean that it

could not be removed to federal court because federal

courts lack jurisdiction over frivolous federal claims. It is

29a

quite true that a case can be so utterly lacking in merit

thatthe proper disposition of it is dismissal under Rule

12(b)(1) of the civil rules (lack of subject-matter jurisdic-

tion) rather than under Rule 12(b)(6) (failure to state a

claim). See, e.g., Hagans v. Lavine, 415 U.S. 528, 536-37

(1974); Korzen v. Local Union 705, 75 F.3d 285, 289 (7th Cir.

1996). But it would be a considerable paradox if, the less

merit a claim had, the more opportunity the plaintiff

would have to restart the suit in another court. Moitie

bars plaintiffs in hopeless federal cases from staving off

the evil day of dismissal by shifting the case into a state

court that may be confused about or even indifferent to

the lack of merit of the case.

Although the issue must be considered a close one

because of persisting uncertainty about the estimation of

the amount in controversy in injunction cases and about

the scope of the doctrine of artful pleading after Moitie’s

footnote, we conclude that the motion to remand the

Alabama suit should have been granted, and we move on

to the question whether the wholesalers should have

been dropped as defendants. Pretrial discovery included

the taking of a thousand depositions and the production

of fifty million pages of documents, and from this indi-

gestible mass the plaintiffs have plucked a number of

tasty morsels to garnish their briefs. We shall not extend

this opinion with quotations. Suffice it to say that the

record discloses a number of instances in which officers

of the defendant wholesalers urge manufacturers to hold

the line against discounting to pharmacies and their buy-

ing groups, and pledge to adhere to the chargeback sys-

tem. The defendants argue that each of these “smoking

guns” is susceptible of an innocent interpretation. But the

30a -

issue before us is not whether the wholesalers were in

fact participants in the price-fixing conspiracy; it is

whether there is sufficient evidence of this to create a jury

issue. In deciding this question we must construe the

evidence as favorably to the plaintiffs as the record per-

mits, not as favorably to the defendants as it permits. The

defendants’ interpretations may be correct; they are not

inevitable.

But they argue, pointing to Matsushita and other deci-

sions by the Supreme Court and this court, that summary

judgment for a defendant is proper, even if there is some

evidence of an antitrust violation, if the plaintiff's theory

of violation makes no economic sense. Matsushita Electric

Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587

(1986); Eastman Kodak Co. v. Image Technical Services, Inc.,

504 U.S. 451, 467-69 (1992); Reserve Supply Corp. v. Owens-

Corning Fiberglas Corp., 971 F.2d 37, 49 (7th Cir. 1992);

Illinois Corporate Travel, Inc. v. American Airlines, Inc., 806

F.2d 722, 726 (7th Cir. 1986). This has to be the right rule,

given the potential for jury confusion in litigation as

enormous and esoteric as a billion-dollar antitrust dam-

ages action. The wholesalers argue that it would have

been contrary to their economic self-interest for them to

have joined a conspiracy that prevents them from selling

at discounted prices to the pharmacies. The lower the

price at which they sell to the pharmacies, the larger their

volume of sales, and if their markup is unaffected this

will translate into larger gross and probably net revenues.

But this misconceives the plaintiffs’ theory of the

wholesalers’ violation. The theory is that the wholesalers

were the manufacturers’ cats-paws. There is nothing new

about the idea that a cartel might “hire” a customer to

3la

help police the cartel. See Elizabeth Granitz & Benjamin

Klein, “Monopolization by ‘Raising Rivals’ Costs’: The

Standard Oi! Case,” 39 J.Law & Econ. 1 (1996). The theory

is especially plausible in the circumstances of the present

case. (That doesn’t mean it’s correct; that’s not the issue.)

Drug wholesalers appear to be an endangered commer-

cial species. Before the chargeback system was adopted,

the manufacturers would often sell directly to hospitals,

HMOs, and other favored customers, bypassing the

wholesalers, since by selling directly they could monitor

each customer’s purchases and so try to identify

instances in which a customer was purchasing for pur-

poses of arbitrage rather than for its own use. The phar-

macies were trying to get into the act by forming buying

groups. Buying groups frequently act as their members’

wholesaler, buying directly from the manufacturer and

thus cutting out independent wholesalers. Desiring a

piece of the action with the favored customers, who were

proliferating, the wholesalers agreed to implement a

chargeback system that would shore up the manufac-

turers’ system of price discrimination, an integral compo-

nent of the price-fixing conspiracy. And desiring to

discourage buying groups they joined with the manufac-

turers to hold the line against granting any discounts to

such groups and so discourage their formation by reduc-

ing the advantages of membership.

The picture that we have just sketched may not be

true, but there is enough evidence supporting it to pre-

clude summary judgment; and our main point for the

present is merely that the defendants are wrong to argue

that it would make no sense for the wholesalers to con-

spire with them to fix the prices of pharmaceutical drugs.

32a

It would make perfectly good sense, and so the “smoking

gun” evidence cannot be dismissed as being obviously

misunderstood, empty boasting, or idle corporate gossip.

The wholesalers point to their wafer-thin profit mar-

gins. The margins might be even thinner if the whole-

salers had refused to play their appointed role as agents

of a manufacturers’ cartel - in fact they might be out of

business. And absence of monopoly profits is not incon-

sistent with monopoly (collusive or single-firm), since

firms may transform monopoly profits into costs in their

efforts to engross a larger share of them. The wholesalers

point to instances in which they did engage in arbitrage,

sought permission to give discounts to pharmacies, and

even helped to organize buying groups of pharmacies.

This evidence does not erase the factual question of

whether the wholesalers joined the conspiracy. It is just

evidence to be weighed in the balance by the trier of fact.

There are inherent strains in a cartel. A member can do

better by undercutting the cartel slightly and obtaining

enormously increased volume at a slight sacrifice of unit

profit than by honoring the cartel price and suffering an

erosion of sales because of cheating by less scrupulous

members. George J. Stigler, “A Theory of Oligopoly,” in

Stigler, The Organization of Industry 39 (1968). That is why

cartels tend to collapse of their own weight. And if as the

plaintiffs argue the wholesalers were tools of the manu-

facturers — reluctant accomplices, yet not the less liable

for that, Albrecht v. Herald Co., 390 U.S. 145, 150 n. 6

(1968); United States v. Parke, Davis & Co., 362 U.S. 29, 45

(1960); MCM Partners, Inc. v. Andrews-Bartlett & Associates,

Inc., 62 F.3d 967, 973 (7th Cir. 1995); Isaksen v. Vermont

Castings, Inc., 825 F.2d 1158, 1163 (7th Cir. 1987), rather

33a

than principals - naturally they would be restive. As for

the wholesalers’ sponsorship of buying groups, it did not

begin until after this litigation commenced, and may be

strategic. And no significance can be attached to the fact

that some of the wholesalers sued the manufacturers.

Illinois Brick entitles them to do so. One virtue of the rule

of that case is that it creates an incentive for middlemen

to break out of a cartel and sue the supplier members; it

sows dishonor among thieves; they still may be thieves.

The last issue is whether the district judge was right

to carve DuPont Merck out of the manufacturers’ conspir-

acy. A joint venture of DuPont and Merck, DuPont Merck

was formed in 1991, two years after the beginning of the

alleged conspiracy (or at least the earliest date within the

statute of limitations), to take over DuPont’s phar-

maceuticals division, DuPont Pharma. Upon its forma-

tion, DuPont Merck announced that it was adopting a

“single price” policy for DuPont Pharma’s drugs, the

drugs involved in this suit; it was withdrawing its dis-

counts to hospitals and other favored customers and so

abandoning its participation in the chargeback system.

This démarche may seem irrelevant to whether DuPont

Merck should be dismissed from the case. It is conceded

to be the successor to DuPont Pharma, so that if DuPont

Pharma was violating the Sherman Act between 1989 and

1991, DuPont Merck is liable under standard principles of

successor liability even if it cleaned up its predecessor’s

act upon taking over. Chaveriat v. Williams Pipe Line Co.,

11 F.3d 1420, 1424-25 (7th Cir. 1993). Moreover, the adop-

tion of a single-price policy by terminating discounts is

not the termination of the antitrust violation. The viola-

tion is not the discrimination. The discrimination is

34a

merely evidence of the violation. A cartel so powerful

that it did not have to grant discounts to any customer

would not be exonerated from antitrust liability. All that

the withdrawal of discounts would do in such a case

would be to create an additional class of plaintiffs.

The significance of the single-price policy lies else-

where - in DuPont Merck’s extraordinary but not

improper argument that it thumbed its nose at the manu-

facturers’ cartel because it had sufficient monopoly

power on its own to obtain higher profits by a unilateral

pricing policy, namely that of giving no discounts to

anyone. The proprietary drugs at issue in this case that

DuPont Merck makes are only five in number and they

include the famous anticoagulant Coumaden, which

although its patent has expired is said to have no compe-

tition because doctors refuse to prescribe a generic or

other substitute. The other four drugs are sufficiently

comparable to Coumaden in point of uniqueness, accord-

ing to DuPont Merck’s submission, that it can make more

money selling them all without any discounts even

though it must lose some sales to the formerly favored

customers.

This is not an absurd argument; it may for all we

know be entirely sound; it is backed by evidence. But

there is enough contrary evidence to preclude summary

judgment. Before 1991, but within the period of the stat-

ute of limitations, DuPont Pharma had a two-price policy

and a chargeback system to implement it, and it partici-

pated in the trade association meetings in which, if the

plaintiffs’ “smoking gun” evidence is credited - as it

must be, in the present posture of the case — the conspir-

acy was hatched or nurtured. The withdrawal of the

35a

discounts is evidence that DuPont Merck believed that it

had enough unilateral monopoly power to go its own

way. But it is not conclusive evidence, and even if it were,

it would be consistent with DuPont Pharma’s not having

shared the belief. We said that DuPont Merck is liable for

its predecessor’s antitrust violations and here we add

that if DuPont Pharma is found to have participated in

the conspiracy, DuPont Merck could not avoid liability

even for the post-1991 conduct of the conspiracy, a con-

spiracy in which it was not (or so a jury might find)

involved. A mere change of policy, a mere cessation of

involvement, is not effective withdrawal from a conspir-

acy. To terminate one’s liability for the continuing illegal

acts of a conspiracy that one had joined, a withdrawing

member must either report the conspiracy to the authori-

ties or announce his withdrawal to his coconspirators.

United States v. United States Gypsum Co., 438 U.S. 422.

463-65 (1978); United States v. Patel, 879 F.2d 292, 294 (7th

Cir. 1989); United States v. Puma, 937 F.2d 151, 158 (5th Cir.

1991). So far as appears, DuPont Merck did neither.

The four rulings appealed from are thus

REVERSED.

36a

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

IN RE:

BRAND NAME PRESCRIPTION 94 C 897

DRUGS ANTITRUST LITIGATION

MDL 997

This Document Relates to:

ALL CASES

mee ee ee ee ee ee”

MEMORANDUM OPINION

CHARLES P. KOCORAS, District Judge:

This matter is before the Court on numerous motions

for summary judgment pursuant to Rule 56 of the Federal

Rules of Civil Procedure. For the reasons that follow, the

Manufacturer Defendants’ motions are denied. The

Wholesaler Defendants’ motions are granted.

BACKGROUND

Tens of thousands of retail pharmacies, ranging in

size from individual, small pharmacies to large, multi-

state chains, comprise the plaintiffs of the various actions

consolidated! before us. Virtually all of the leading

1 Hundreds of cases involving thousands of retail

pharmacy plaintiffs alleging industry-wide antitrust violations

have been filed throughout the country. Approximately two

years ago, these actions were transferred to this Court by the

Judicial Panel on Multidistrict Litigation for coordinated or

consolidated pretrial proceedings.

37a

manufacturers and wholesalers of brand name prescrip-

tion drugs are the defendants in this multi-district anti-

trust litigation. The plaintiffs have polarized into two

identifiable groups. On behalf of a nation-wide class2, the

“Class Plaintiffs” allege a price-fixing conspiracy, in

which the defendants agreed to eliminate price competi-

tion and to keep prices of “Prescription Brand Name

Drugs”® artificially high to retail pharmacies in violation

of Section 1 of the Sherman Act, 15 U.S.C. § 1. The other

group of plaintiffs consists of thousands of independent

pharmacies, drug store chains and grocery store chains

who have chosen to opt out of the class and pursue their

own individual claims. In addition to alleging Sherman

Act conspiracy violations, these opt out plaintiffs, known

collectively as the “Individual Plaintiffs”, assert price

discrimination claims pursuant to the Robinson-Patman

Act, 15 U.S.C. §§ 13(a), (d) and (f).4

2 The plaintiff class is defined as follows:

All persons and entities in the United States who, at any

time during the period from October 15, 1989, to the present,

purchase or purchased prescription brand name drugs directly

from any of the defendants. The class excludes defendants;

other manufacturers of prescription brand name drugs; other

wholesalers of prescription brand name drugs; co-conspirators

of any of the foregoing entities; affiliates, parents, and

subsidiaries of any of the foregoing entities; governmental

entities; mail order pharmacies; health maintenance

organizations; hospitals; clinics; and nursing homes.

3 As defined in { 3(h) of the Consolidated and Amended

Class Action Complaint, “Prescription Brand Name Drugs” are

“drugs that are sold under the brand name of the Manufacturer

rather than the drug’s generic name.”

4 The Individual Plaintiffs’ Robinson-Patman Act claims

are not subject to this motion.

38a

The gravamen of both groups of plaintiffs’ Sherman

Act claims is that the defendants have collusively created

and maintained a dual pricing system that raises or stabi-

lizes the prices paid for brand name prescription drugs

by retail pharmacies. To accomplish this goal, the defen-

dants have, inter alia, refused to make available to com-

munity pharmacies various discounts, rebates, and other

price-lowering mechanisms that each of the Manufacturer

Defendants has made available to “institutional” or

“managed care”> buyers.

Plaintiffs’ antitrust allegations arise out of series of

agreements and understandings which, plaintiffs con-

tend, established a cartel involving both pharmaceutical

drug manufacturers and drug wholesalers, including the

24 Manufacturer Defendants® and the 7 Wholesaler

Defendants named in this litigation. The purpose of the

5 Managed care is a term that refers to Health Maintenance

Organizations (“HMOs”), health insurers or managers of

employer health plans.

6 As a result of a settlement agreement which we

preliminarily approved on February 15, 1996 the Class

Plaintiffs’ action has been stayed as to the following settling

Manufacturer Defendants: Abbott Laboratories (“Abbott”);

American Cyanamid Company (“Cyanamid”); American Home

Products Corporation (“AHP”); Bristol-Myers Squibb Company

(“BMS”); Burroughs Wellcome Co. (“BW Co.”)(now merged into

Glaxo Wellcome Inc.); Ciba Geigy Corporation (“Ciba”); Eli

Lilly and compen (“Lilly”); Glaxo Inc. (“Glaxo”) (now merged

into Glaxo Wellcome Inc.); Knoll Pharmaceutical Company

(“Knoll”); Merck & Co., Inc. (“Merck”); Pfizer Inc. (“Pfizer”);

Schering-Plough Corporation (and Schering

Corporation)(“Schering”); SmithKline Beecham Corporation

(“SB”), Warner-Lambert Company (“W-L Co.”) and Zeneca Inc.

(“Zeneca”).

39a

alleged cartel was to keep the prices at which brand name

prescription drugs were sold to retail pharmacies at arti-

ficially high levels. Although it is not clear exactly when

this cartel was allegedly formed, the plaintiffs claim that

the agreements and uuderstandings at issue date back at

least as far as the early 1980s.

The emergence of the cartel was allegedly premised

upon certain changes in the health care environment and

marketplace in the 1970s. According to the plaintiffs, in

the early part of that decade, certain of the Manufacturer

Defendants responded to pressure from for-profit hospi-

tals and other traditional health care institutions for dis-

counts off of the published wholesale price of drugs.” The

defendants’ discounting practices allegedly began to pro-

liferate in the 1970s with the advent of non-traditional

managed care organizations and other re-sellers of drugs,

such as mail order houses. According to the plaintiffs,

despite their efforts to negotiate with the defendants,

retail pharmacies, both chain and independent alike, have

been denied similar discounts afforded to managed care

entities and mail order houses - the so-called “favored

purchasers.” Allegedly, as a matter of policy, the Manu-

facturer Defendants even refuse to discuss the issue of

discounts to retail pharmacies.

Based primarily on the Manufacturer Defendants’

refusal to discount to the retail sector of the industry, the

plaintiffs allege widespread Sherman Act violations,

? The “discounts” in issue in this litigation are discounts off

of the published wholesale price of the drug involved. Other

discounting practices in the industry, such as discounts for cash

or prompt payment, are not implicated in this case.

40a

arguing that the Manufacturer Defendants and the

Wholesaler Defendants, by foreclosing the plaintiffs’

access to discounts offered to favored purchasers, entered

into a unitary conspiracy to keep the prices paid by retail

pharmacies artificially high. The participation of the

Wholesaler Defendants in the alleged conspiracy is prem-

ised upon the wholesalers’ purported agreement to set up

an industry-wide system to facilitate the structure of

differential pricing necessary to prevent discounting to

retail pharmacies. According to the plaintiffs, this system

— known as the “chargeback system” - was developed

and maintained for the explicit purpose of preventing the

retail pharmacies from obtaining discounts, and for pre-

venting “arbitrage” or “diversion”®.

Under the chargeback system, a discounted contract

price is negotiated by the manufacturer and the favored

purchaser. If the “discounted” prescription drugs are sup-

plied out of a wholesaler’s inventory, the wholesaler

delivers the product to the favored purchaser at the dis-

counted price and then “charges back” the manufacturer

for the difference between the price paid by the whole-

saler and the lower price at which it was delivered.

According to the plaintiffs, this chargeback system is

integral to the success of the alleged conspiracy. The

plaintiffs further maintain that the Wholesaler Defen-

dants encouraged a two-tier pricing system, under which

8 “Arbitrage” refers to the simultaneous purchase in one

market and sale in another of a security or commodity in hope

of making a profit on price differences in the different markets.

“Diversion” refers to the turning aside or alteration of a natural

course or route.

4la

the retail pharmacy plaintiffs paid artificially high prices

for brand name drugs.

The Manufacturer and Wholesaler Defendants dis-

pute at length the plaintiffs’ allegations, arguing that

there exists no evidence of collusive or parallel conduct.

In support, the Manufacturer Defendants assert that each

manufacturer’s discounting and pricing decisions were

independently made and that the manufacturers’ individ-

ual responses to both the managed care entities and the

retail pharmacies’ respective requests for discounts have

not been uniform.

The Manufacturer Defendants further argue that to

the extent that the retail pharmacy plaintiffs are denied

discounts afforded to managed care and other institu-

tional buyers, there is an economically sound reason for

the disparity. In support, the defendants cite to the power

of these groups to affect market share. According to the

defendants, most managed care organizations have cre-

ated “formularies,” i-e., restrictive lists of drugs under

which their physicians are directed to prescribe. The

defendants argue that managed care organizations use

formularies and the ability to control access to patient

populations to negotiate discounts or rebates from phar-

maceutical manufacturers. See Defendants’ Joint 12(m) at

{ 25, 37. Essentially, it is the Manufacturer Defendants’

position that, by threatening to exclude the manufac-

turer’s products from their respective formularies unless

the manufacturer agrees to a discount or rebate, managed

care organizations possess the market power to negotiate

discounts from a drug manufacturer. The defendants fur-

ther argue that, unlike managed care, retail pharmacies

simply do not possess the same market power, or the

42a

same power over the prescribing decision, which man-

aged care possesses.

With respect to the plaintiffs’ claims against the

wholesalers, the Wholesaler Defendants contend that

their participation, as alleged by the plaintiffs, is com-

pletely implausible. According to the wholesalers, not

only has their conduct been innocent, but at times it has

been wholly antithetical to the alleged conspiracy. Even if

there existed a manufacturer conspiracy to deny discounts

to the plaintiffs, the wholesalers maintain that their par-

ticipation was completely unnecessary.

The plaintiffs contest the defendants’ positions in

their entirety. The plaintiffs not only take issue with the

degree of market power that the Manufacturer Defen-

dants ascribe to managed care organizations, the plain-

tiffs also dispute the Manufacturers’ claims that retail

pharmacies cannot affect market share.

Presently before us are numerous summary judgment

motions — twenty-six in all — attacking all plaintiffs’ Sher-

man Act claims. First, each of the 24 named Manufacturer

Defendants? moves individually for summary judgment

in its favor based on the plaintiffs’ failure to meet its

burden of proof. Next, the 7 Wholesaler Defendants col-

lectively move for summary judgment. Finally, the Manu-

facturer Defendants collectively move for judgment in

their favor on the plaintiffs’ indirect purchaser claims.

® Due to the pending settlement agreement, Class

Plaintiffs’ filings pertain only to the non-settling Manufacturer

Defendants. The Individual Plaintiffs, who are not party to any

settlement agreement, address the Sherman Act summary

judgment motions of all of the Manufacturer Defendants.

43a

Each of these motions will be addressed below.

Before proceeding, however, we first examine the legal

principles from which to judge a motion for summary

judgment.

LEGAL STANDARD

Summary judgment is appropriate if the pleadings,

answers to interrogatories, admissions, affidavits and

other materials show “that there is no genuine issue as to

any material fact and the moving party is entitled to

judgment as a matter of law.” Fed. R.Civ. P. 56(b). “Only

disputes over facts that might affect the outcome of the

suit under the governing law will properly preclude the

entry of summary judgment.” Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 248 (1986). The party seeking summary

judgment carries the initial burden of showing that no

such issue of material fact exists. Pursuant to Rule 56(b),

when a properly supported motion for summary judg-

ment is made, the adverse party must set forth specific

facts showing that there is a genuine issue as to any

material fact and that the moving party is not entitled to

judgment as a matter of law. Anderson, 477 U.S. at 250.

Although the general rule is that all reasonable infer-

ences are drawn in favor of the non-moving party, anti-

trust law limits the extent to which permissible inferences

from ambiguous evidence may be drawn in a-Section 1

Sherman Act case. Matsushita Elec. Indus. Co., Ltd. v.

Zenith Radio Corp., 475 U.S. 574, 588 (1986); Wigod v.

Chicago Mercantile Exchange, 981 F.2d 1510, 1514 (7th Cir.

1992); Valley Liquors, Inc. v. Renfield Importers, Ltd., 822

F.2d 656 (7th Cir. 1987), cert. denied, 484 U.S. 977 (1987).

44a

Specifically, “conduct as consistent with permissible com-

petition as with illegal conspiracy does not, standing

alone, support an inference of antitrust conspiracy.” Mat-

sushita, 475 U.S. at 588 (citing Monsanto Co. v. Spray-Rite

Service Corp., 465 U.S. 752, 764 (1984)). This, however,

does not mean that a defendant in an antitrust case may

prevail on summary judgment simply by enunciating any

economic theory supporting its behavior. Eastman Kodak

Co. v. Image Technical Servs., Inc., 504 U.S. 451, 468 (1992).

Rather, it simply means that the range of permissible

inferences is limited when a plaintiff asks a court to infer

a price-fixing conspiracy from normal business activity

that, standing alone, is consistent with lawful competi-

tion.

The United States Supreme Court has cautioned that

“summary procedures should be used sparingly in com-

plex antitrust litigation where motive and intent play

leading roles, the proof is largely in the hands of the

alleged conspirators, and hostile witnesses thicken the

plot.” Poller v. Columbia Broadcasting, 368 US. 464, 473

(1962). The Supreme Court's warning, however, does not

mandate the trial of cases where the cause of action

alleged is substantively deficient. Rather, as the Seventh

Circuit notes “despite its sweeping language, Poller and

its progeny simply stand for the proposition that, if a

claim under the antitrust laws has been adecuately set

forth . . . , the highly factual and subjective questions of

intent and purpose should be resolved after discovery

and trial.” National Org. for Women v. Scheidle:, 968 F.2d

612, 617 (7th Cir. 1992), rev'd on other grounds 114 S.Ct.

798 (1994) (citations and quotation marks omitted).

Where the record is clear that the antitrust clams cannot

45a

succeed, then judicial administration is better served by

disposition prior to trial. Wigod v. Chicago Mercantile

Exchange, 981 F.2d 1510 (7th Cir. 1992) (citing Collins v.

Associated Pathologists, Ltd., 844 F.2d 473, 475 (7th Cir.

1988), cert. denied, 488 U.S. 852 (1988), and Lupia v. Stella

D’Oro Biscuit Co., 586 F.2d 1163 (7th Cir. 1978), cert.

denied, 440 U.S. 982 (1979)).

As applied to a Section 1 Sherman Act claim, the

summary judgment standard has, over the years, evolved

and has taken on certain subtleties. To establish a Sher-

man Act violation, the plaintiffs must “present direct or

circumstantial evidence that reasonably tends to prove

that the defendants had a conscious commitment to a

common scheme designed to achieve an unlawful objec-

tive.” Monsanto Co. v. Spray-Rite Service Corp., 465 U.S.

752, 764 (1984) (citations and internal quotation marks

omitted). |

Where a plaintiff relies on circumstantial evidence,

the plaintiff “must show that the inference of conspiracy

is reasonable in light of the competing inference[ ] of

independent action.” Matsushita, 475 U.S. at 588. The

Seventh Circuit sets forth the approach for evaluating the

legal sufficiency of the evidence in an antitrust conspir-

acy case as follows:

We first review the evidence of conspiracy sub-

mitted by the plaintiff. Next, we examine

whether the defendants have offered evidence

that tends to show that the conduct which forms

the basis of the plaintiff's complaint is as com-

patible with the legitimate business activities of

the plaintiff as it is with illegal conspiracy.

Finally, if we determine that this analysis leaves

46a

the evidence of conspiracy ambiguous, we

determine whether the plaintiff can point to any

evidence that tends to exclude the possibility

that the defendants were pursuing their legiti-

mate independent interests.

Serfecz v. Jewel Food Stores, 67 F.3d 591, 599 (7th Cir. 1995)

(citing Market Force, Inc. v. Wauwatosa Realty Co., 906 F.2d

1167 (7th Cir. 1990)), cert. denied, __ S.Ct. __, 1996 WL

89245 (U.S. March 4, 1996).

With these principles in mind, we turn to the motions

before us.

DISCUSSION

I. The Legal Sufficiency of Plaintiffs’ Evidence of an

Overall Antitrust Conspiracy

The plaintiffs allege a “unitary” conspiracy among

the Manufacturer Defendants and the Wholesaler Defen-

dants, entered into for the purpose of fixing, raising,

maintaining, and stabilizing the prices of prescription

brand name drugs in violation of Section 1 of the Sher-

man Act. Central to the accomplishment of the objective

of the alleged conspiracy was the establishment of an

industry-wide system to facilitate a structure of differen-

tial pricing. Under this structure, the retail pharmacy

plaintiffs were placed in a class of trade with which the

Manufacturer Defendants would not, usually as a matter

of policy, entertain or negotiate requests for discounts off

of the published wholesale prices of the brand name

drugs involved. According to the plaintiffs, the purpose

and effect of the conspiracy was to eliminate price com-

petition and to keep prices of brand name prescription

47a

drugs artificially high to retail pharmacies in violation of

Section 1 of the Sherman Act.

Section 1 of the Sherman Act prohibits the formation

of any “contract, combination . . . or conspiracy in

restraint of trade or commerce ....” 15 U.S.C. § 1. A civil

plaintiff seeking recovery under Section 1 must allege

and ultimately prove: “(1) a contract, combination, or

conspiracy; (2) a resultant unreasonable restraint of trade

in the relevant market; and (3) an accompanying injury.”

Denny's Marina, Inc. v. Renfro Productions, Inc., 8 F.3d 1217,

1220 (7th Cir. 1993) (citations omitted). It is clear from all

of the parties’ submission that the first element — the

element of concerted action - is the main element in

dispute here.

What constitutes independent rather than collective

behavior for purposes of the antitrust laws and what kind

of evidence may be used to prove concerted action is

addressed by the Sherman Act itself, as well as the fed-

eral cases interpreting the Act. Not surprisingly, direct

evidence of an.agreement to engage in anti-competitive

conduct is not necessary to establish liability under the

Sherman Act. Contractor Utility Sales Co. v. Certain-Teed

Products Corp., 638 F.2d 1061, 1074 (7th Cir. 1981). This is

so because, by its nature, a conspiracy is rarely suscept-

ible to direct proof. Rather, proof of concerted action is

most often “a matter of inference, apprehended and

proven circumstantially.” Trist v. Federal Savings & Loan

Ass'n, 466 F.Supp. 578, 590 (E.D.Pa. 1979) (citations omit-

ted). As the Supreme Court has explained, concerted

action or a “unity of purpose” may be inferred from a

course of dealing or from other circumstantial evidence:

48a

No formal agreement is necessary to constitute

an unlawful conspiracy . . . . The essential com-

bination or conspiracy in violation of the Sher-

man Act may be found in a course of dealings or

other circumstances as well as in any exchange

of words. Where the circumstances are such as

to warrant a jury in finding that the conspirators

had a unity of purpose or a common design and

understanding, or a meeting of minds in an

unlawful arrangement, the conclusion that a

conspiracy is established is justified.

American Tobacco Co. v. United States, 328 U.S. 781, 809-10

(1946) (citations omitted).

Both the Class Plaintiffs and the Individual Plaintiffs

claim that they have direct and circumstantial evidence of

the alleged conspiracy. The Class Plaintiffs even boldly

assert that their “direct” evidence, standing alone, would

be sufficient to warrant a denial of the defendants’ sum-

mary judgment motion.

The “direct” evidence to which both plaintiffs refer

consists primarily of incriminating statements and obser-

vations made by various defendants and other members

of the industry. It includes evidence that competing man-

ufacturers and competing wholesalers held meetings, dis-

cussed pricing issues, and engaged in a pervasive

exchange of trade and pricing information. While this

evidence tends to show that various defendants engaged

in collusive, anti-competitive conduct, it is not “direct”

evidence of an agreement. Thus, although there is

“direct” evidence that various defendants engaged in

conduct consistent with the plaintiffs’ theory of the exis-

tence of a pricing cartel, there is no significant “direct”

49a

evidence of an exchange of commitment as alleged in the

plaintiffs’ complaints.

That is not to say, however, that the plaintiffs’ failure

to come forward with significant direct evidence of a

conspiracy is fatal to their case. On the contrary, as the

discussion that follows demonstrates, the plaintiffs have

come forward with ample circumstantial evidence to raise

a reasonable inference that the Manufacturer Defendants

engaged in collusive, anti-competitive conduct.

A. Plaintiffs’ evidence of conspiracy against the

Manufacturer Defendants

\ In support of their allegations that the Manufacturer

Defendants entered into an agreement to maintain prices

to the retail segment of the industry at artificially high

levels, the plaintiffs point to the following: (1) parallel

conduct among the Manufacturer Defendants; (2) interde-

pendence between and among the defendants; (3) the

existence of industry wide resale price maintenance - i.e.

the creation and maintenance of the chargeback system;!°

and (4) frequent, formal communications among competi-

tors — i.e. an opportunity to conspire.

First, the plaintiffs argue that the defendants have

engaged in parallel, anti-competitive conduct which was

manifested in the form of industry wide price discrimina-

tion and a coordinated refusal to discount to retail phar-

macies. A central element of the plaintiffs’ position is that

the defendants engaged in a two-tiered pricing system,

10 For a detailed discussion on industry-wide resale price

maintenance, a.k.a., the charge-back system, see infra at p. 51.

in tae i in ca. . > “a ieee ae o- a we.

ae 50a

ss

pursuant to which the retail segment was forced to pay

artificially high prices. That the defendants did engage in

a tiered pricing system is virtually undeniable. Indeed,

David Landsidle (“Landsidle”), a representative of

Defendant Abbott, described the existence of the tiered

system and the manufacturers’ general approval of it.

Regarding his participation in a series of Pharmaceutical

Manufacturers Association (“PMA”) meetings concerning

tiered or differential pricing, Landsidle testified as fol-

lows:

Q: What were the points of views that were

expressed?

A: People would express the point of view

that, historically, the industry has offered

different prices to different classes of cus-

tomers, we could do so. The marketplace

operated best if we did so, and that should

be done. Some people said, however, politi-

cally we're getting beat up on this issue. We

should do away with this practice and go to

a single pricing policy. So, kind of two sides

of the issue.

Q: What was the prevailing view?

A: The prevailing view was that the current prac-

tice of having different prices was the appropri-

ate practice.

Landsidle Dep. at 47-48 (emphasis added).

Defendants respond by arguing that a “glaring”

absence of parallel behavior exists in their pricing prac-

tices. In contrast to the plaintiffs’ assertions, the defen-

dants state that manufacturers’ list prices were not

en

5la

parallel and were in fact set competitively. As the defen-

dants note, one of the Class Plaintiffs’ experts even

acknowledged that he found no conspiracy to fix list

prices. See Lucas Deposition Transcript at 224 (Oct. 30,

1995). The defendants further argue that their discounts

to managed care were not parallel, as their discounting

practices varied in time and degree. According to the

Manufacturer Defendants, some defendants began dis-

counting in the 1980s; others started in the 1990s; and the

size of the manufacturer discounts varied widely by

product and consumer. Accordingly, it is the defendants’

position that their pricing practices have been competi-

tive.

However, conduct need not be point-for-point consis-

tent to be deemed parallel.!! The plaintiffs are not alleg-

ing that all competition among the Manufacturer

Defendants ceased. Rather, the anti-competitive conduct

in which the defendants allegedly engaged was the uni-

form decision not to discount to an entire segment of the

retail industry, i.e., an agreement not to undercut each

other by giving discounts to retail pharmacies and retail

buying groups. The plaintiffs’ concession that discount-

ing to managed care began at varying times and occurred

in varying degrees does not undermine their theory.

‘1 Of course, parallel conduct standing alone is not enough

to prove a conspiracy. Reserve Supply Co. v. Owens-Corning

Fiberglass Corp., 971 F.2d 37, 50-51 (7th Cir. 1992). Rather, proof

of a conspiracy requires parallel behavior plus additional facts

or circumstances that raise the inference of agreement. Id.;

Market Force, 906 F.2d at 1170.

52a

Central to the plaintiffs’ claims is the Manufacturer

Defendants’ allegedly collective agreement not to bid to

community pharmacies —.chains and buying groups alike

- seeking io participate in discounting programs already

offered to managed care. According to the plaintiffs, the

early 1980s saw the advent of substantial discounting by

pharmaceutical manufacturers to managed care entities.

As these pricing practices began to proliferate and to

affect the marketplace, retail pharmacies, both individu-

ally and in the form of buying groups, began to request

similar discounts. These requests were met with uniform

denials by the manufacturers.

As demonstrated in the plaintiffs’ respective briefs,

in almost every instance, each Manufacturer Defendant

responded that its company policy was not to give dis-

counts to retail pharmacies, retail buying groups, or the

retail “class of trade.”!2 For instance, on May 15, 1986,

after receiving a request for bid pricing from the Phar-

macy Buying Association (“PBA”), a retail buying group,

Glaxo sent a letter to the PBA stating: “Currently our

policy at Glaxo is not to bid to retail pharmacies or retail

pharmacy buying groups.” Independent Plaintiffs’ Ex. 16.

On May 16, 1986, William H. Rorer, Inc. (later to become

12 See Class Plaintiffs’ Response to the Motion of the

Wholesaler Defendants for Summary Judgment and to the Legal

Principles and General Background Facts Submitted by the

Manufacturer Defendants (hereinafter “Class Plaintiffs’

Consolidated Response”), at 45 n.29; and Individual Plaintiffs’

Memorandum in Opposition to Manufacturer Defendants’

Consolidated and Individual Motions for Summary Judgment

(hereinafter “Individual Plaintiffs’ Consolidated Response”), at

40.

53a

part of Defendant Rhone-Poulenc Rorer) sent a letter to

the same buying group stating: “At the present time,

William H. Rorer, Inc. does not participate in bids for

independent pharmacies.” Independent Plaintiffs’ Ex.

2-E. Similar letters followed from Defendant Ciba-Geigy

on May 21, 1986, Defendant Bristol-Myers on May 22,

1986 and others. See Independent Plaintiffs’ Ex. 2-C, and

2-D.

The uniformity of the Manufacturer Defendants’

refusal to deal with retail pharmacies as a class is strik-

ing. That the defendants’ general refusal to even discuss

discounting with retail pharmacies was the result of col-

lusion moreover finds circumstantial support in the

record. Both the Class Plaintiffs and the Independent

Piaintiffs come forward with certain statements and

observations made by members of the industry which

cast in a suspicious light the defendants’ conduct. By way

of example, we set forth some of the plaintiffs’ evidence.

Julius Sarnat, a former executive with wholesaler

General Drug Company, testified at his deposition that

there were discussions and a “general agreement” among

the Manufacturers on the subject of selling to retail buy-

ing groups:

Q: You recall involving the drug manufac-

turers in regard to their policy on dealing

with buying groups?

A: Well, we posed the question of what their

attitude was in terms of making sales to

these groups and acknowledging them as a

source of supply. And if so, what their

agenda would be in relation to the acquisi-

tion of their products.

54a

Q: And what information did you receive from

them in that regard?

A: Well, we found that mostly — they were all in

general agreement that they would not entertain

selling brand name pharmaceuticals to any of

these buying groups.

Sarnat Dep. at 89-90 (emphasis added).!3

A series of documents involving Ciba-Geigy offers

perhaps even more compelling evidence that the defen-

dants’ frequent denials of retail pharmacists’ requests for

discounts were the result of concerted actions. On Sep-

tember 4, 1985, a Ciba-Geigy memorandum noted the

growth of retail pharmacy buying groups and their

increasing requests for bids from drug manufacturers and

stated:

It would be hoped that all drug companies

would reject these offers. However, knowing the

bidding policy of several companies, I doubt

that the PMA will put forth a united front.

Class Plaintiffs’ Tab 207, at 2). In response to this mem-

orandum, one of the recipients the next day suggested

that steps be taken to assure that drug companies were

“united” as to the issue:

‘3 Manufacturer Defendants argue that Sarnat’s testimony

is not direct evidence of a conspiracy not to offer discounts to

retailers, for Sarnat is not talking about discounting to retail

pharmacies but rather, about manufacturers’ selling directly to

retail pharmacies. The defendants further attack the foundation

of Sarnat’s observation, pointing out that when asked, Sarnat

could not remember exactly with whom he spoke.

55a

The attached information'* is self-explanatory,

and I pass it on to you for two reasons. First, for

your information: secondly and more impor-

tantly, to ask if there is anything we are doing or

can do about this potentially dangerous situa-

tion. Is the PMA taking steps to assure that com-

panies are united on this issue, and can we put

pressure on them toward this end?

Class Plaintiffs’ Tab 207 at 1. The author of this memoran-

dum concludes: “It would be hoped that all drug corn-

panies would reject these offers.” Id. The Manufacturer

Defendants attempt to minimize the significance of this

exchange, stating that the memoranda were never acted

upon and further claiming that upon concluding that

these communications were improper, the second mem-

orandum was “tossed in the garbage.” Nevertheless, this

does not detract from the fact that such communications

were made and does not address the basis for the

author’s assumptions that the PMA could and would put

on a “united” front.

Finally, the minutes of a November 1990 National

Pharmaceutical Council (“NPC”) meeting?! reflect a

discussion of “therapeutic substitution” and “referred

14 The “attached information” consisted of two letters sent

to pharmacists in Mississippi and Kansas seeking participation

in retail buying groups formed to obtain contract pricing from

manufacturers.

1S In attendance at this meeting were representatives from

many named defendants, including: Eli Lilly, Abbott, Pfizer,

Glaxo, SmithKline, Searle, Marion Merrell Dow, Johnson &

Johnson, Zeneca, Warner Lambert, Rhone-Poulenc Rorer, Bristol

Myers Squibb, Boehringer Ingelheim and Upjohn. See

Independent Plaintiffs’ Landgraf Ex. 15 at NPC00849.

56a

product list[s].” The notion that manufacturers would

even enter into discussions with buyers concerning thera-

peutic substitution is moreover referred to as a “disturb-

ing trend.” Independent Plaintiffs’ Landgraf Exhibit 15 at

NPC00849.

While these representative statements alone do not

prove the existence of an agreement violative of the Sher-

man Act, taken together, they buttress the plaintiffs’ argu-

ment that the defendants’ seemingly uniform refusal to

deal with retail pharmacies was the result of conscious

behavior or collusion.

The plaintiffs next claim that it was in the Manufac-

turer Defendants’ interest to engage in the alleged paral-

lel conduct. While the Individual Plaintiffs discuss this

issue in terms of “interdependence,” the Class discusses

it in terms of “motive.” Nomenclature aside, establishing

that the defendants had something to gain by consciously

engaging in apparently anti-competitive parallel conduct

is a critical component to the plaintiffs’ conspiracy claim.

To use the Individual Plaintiffs’ choice of words, this

entails a showing that the conduct claimed to be parallel

would be in each conspirator’s interest only if all conspir-

ators acted alike. It would be against each conspirator’s

interest if a conspirator acted alone. See Reserve Supply,

971 F.2d at 50-51 & n.10.

According to the plaintiffs, the motive for the Manu-

facturer Defendants’ refusal to discount to the retail seg-

ment is clear: to prevent the spread of the price

competition that they were experiencing in the managed

care segment of the industry. As the Individual Plaintiffs

57a

describe the situation, the spread of discounts to commu-

nity pharmacies would have “significantly eroded the

manufacturers’ bloated profit margins.” See Individual

Plaintiffs’ Ex 1., Matox at CG00951178 (“we [will] raise

prices in the retail fee — for service to balance our low

profit return from the HMO sector”); Individual Plain-

tiffs’ Ex. 27 at GL00911453 (pricing brochure notes that

“the traditional retail class of trade” has been “subsi-

diz[ing]” discounts to favored buyers).

As plaintiffs’ counsel articulated during oral argu-

ment, back in the 1970s or 1980s, one manufacturer com-

mitted the “original sin” by succumbing to the pressures

to discount to managed care. Now, faced with similar

pressures by the retail segment, none of the manufac-

turers want to repeat that “sin” by succumbing to the

discount requests of the retail pharmacies. Through a

series of meetings, a continuous interchange of informa-

tion, and an ultimate interchange of commitment, the

defendants formed a cartel to prevent their discounting

from spreading to the retail segment and to make sure

that nobody strayed from this course. An internal mem-

orandum from Defendant Abbott's files buttresses the

plaintiffs’ theory, summarizing the situation as follows:

It seems to me that the PMA is kind of an OPEC

in this context!¢ — the first country that breaks

away from the cartel will reap the maximum

advantage (hence the long-term instability of

any cartel). Specifically, if we are perceived by

16 The context to which the author of the memorandum

refers is the issue of what would happen if discounting were to

spread to mail order companies like Medco.

58a

Medco as an ally, then we might reach sweet-

heart understandings which would be of com-

petitive advantage to us. Of course we do not

want to be perceived by our brethren on the

PMA as black sheep.

Class Plaintiffs’ Tab 312 at 1: Tab 313 at 290-96: 373-376.17

Such evidence supports the plaintiffs’ notions of manu-

facturer interdependence.

Finally, that the defendants had the opportunity to

conspire is unquestionable. The record is replete with

evidence of seminars and trade association meetings

which virtually every defendant attended at one time or

another and a coordinated exchange of pricing and other

competitive information shared among the manufac-

turers. Furthermore, the defendants’ mutual awareness of

each others’ policies is demonstrated by the defendants’

prolific use of data services, exchanges, and in their

united use and development of the chargeback system

discussed below.

The plaintiffs cite to numerous instances where the

PMA was used by the Manufacturer Defendants as a

“clearinghouse for the exchange of pricing and other

competitively sensitive information.” According to the

plaintiffs, PMA meetings, attended by the manufacturers,

provided incomparable opportunities for collaboration on

competitive issues. Communications were made on such

issues as advance manufacturer notification of price

increases, pricing options for manufacturers, and the

7 The Manufacturer Defendants respond to this document

by arguing that the context involved a relationship between an

advertising agency and Medco. See Pien Dep. at 289-96, 370-71.

ime 59a

administration of the chargeback system. Regarding this

last subject, a memorandum dated March 29, 1990 dis-

cusses American Cyanamid’s contacting of several other

pharmaceutical manufacturers to determine their prac-

tices regarding “upfront” deposit/credits to wholesalers.

The memorandum concludes: “George, there are still a

couple of companies I could not get on the phone in this

quick review, but it does appear that the industry is

holding comparatively firm and not giving up from deposits

....” Fritzky Ex. 5 (emphasis added) at AC001946. The

plaintiffs cite this memorandum and others as evidence

of industry-wide collusion and anti-competitive conduct.

The plaintiffs cite to additional occasions on which

large numbers of manufacturers gathered to discuss com-

mon concerns within the industry. These discussions fre-

quently were held under the auspices of other industry

organizations or conferences. Beginning in 1991, for

example, the International Business Communications/

U.S.A. Conferences, Inc. (“IBC”), started conducting sem-

inars on pharmaceutical pricing. Representatives of vir-

tually every major pharmaceutical manufacturer were in

attendance to view sessions on such topics as “Price

Discounting to Major Purchasers,” “Pharmaceutical Pric-

ing Forces, Trends & Strategies,” and “Managed Care and

the Pharmaceutical Industry: What Constitutes a Win-win

Relationship.” Each of the seminars purportedly entailed

group discussions on issues and concerns related to phar-

maceutical pricing. Indeed, the record is replete with

evidence of similar meetings attended by virtually every

manufacturer. Sensitive information was frequently on

the agenda at these meetings, thereby providing a forum

60a

for such information to undergo a coordinated, industry

wide exchange. At the very least, both groups of plain-

tiffs have come forward with evidence that the defen-

dants engaged in frequent communications with one

another and that they had a general mutual awareness of

each other’s policies.

In responding to the plaintiffs’ evidence, the Manu-

facturer Defendants effectively fragment and compart-

mentalize each piece of the plaintiffs’ evidence of

conspiracy, and ask us to look at each piece of evidence in

isolation apart from the other parts of the record. The

United States Supreme Court, however, has expressly

admonished against such an approach:

In [conspiracy anti-trust cases] plaintiffs should

be given the full benefit of their proof without

“tightly compartmentalizing the various factual

components and wiping the slate clean after

scrutiny of each. “. . . The character and effect of

a conspiracy are not to be judged by dismember-

ing it and viewing its separate parts, but only by

looking at it as a whole. United States v. Patten,

226 U.S. 525, 544 (1913) .. . ; and in a case like

the one before us, the duty of the jury was to

look at the whole picture and not merely at the

individual figures in it.”

Continental Ore Co. v. Union Carbide & Carbon Corp., 370

U.S. 690. 698-99 (1962) (quoting American Tobacco Co. v.

United States, 147 F.2d 93, 106 (6th Cir. 1946)). It is the

defendants’ argument that parallel conduct alone does

not amount to a conspiracy; isolated statements and

observations of industry members do not alone prove a

conspiracy; meetings and communications between and

among the defendants are innocent activity and do not in

6la

and of themselves prove a conspiracy; and systematic

exchanges of competitive information and trade data do

not amount to a conspiracy. While each piece of the

plaintiffs’ evidence, when looked at in isolation, would

not be sufficient to establish a conspiracy, when the evi-

dence is looked at as a whole and in the context of the

plaintiffs’ theory of its case, we believe that the evidence

is sufficient to raise a reasonable inference of the exis-

tence of a conspiracy among all of the Manufacturer

Defendants.

B. Whether the Manufacturer Defendants have

offered evidence tending to show that their

conduct is as compatible with legitimate busi-

ness activities as it is with illegal conspiracy.

We now turn to whether the Manufacturer Defen-

dants have presented a plausible, justifiable reason for

their conduct that is consistent with proper business

practice. It is at this point where the motivation of the

defendants becomes critical. Lack of motive bears on the

range of permissible conclusions that might be drawn

from ambiguous evidence: “if the [defendants, had no

rational economic motive to conspire, and if their conduct

is consistent with other, equally plausible explanations,

the conduct does not give rise to an inference of conspir-

acy.” Matsushita, 475 U.S. at 596-97.18

18 The Supreme Court cautions, however, that if defendants

did have a plausible reason to conspire, ambiguous conduct

alone does not suffice to create a triable issue of conspiracy. Id.

Rather, conduct that is as consistent with permissible

competition as with illegal conspiracy does not, without more,

62a

Indeed, the defendants maintain that their conduct

cannot give rise to any such conspiratorial inferences. and

they set forth several contentions to that effect. The

defendants first affirmatively contend that their pricing

behavior was not “parallel” and argue that the absence of

such parallel conduct alone mandates summary judgment

in defendants’ favor. See, e.g., Quality Auto Body, Inc. v.

Allstate Ins. Co., 660 F.2d 1195, 1200 (7th Cir. 1981) (affirm-

ing summary judgment where conduct of insurers alleged

to have engaged in conspiracy was not parallel), cert.

denied, 455 U.S. 1020 (1982). In an effort to refute the

presence of parallel conduct, the defendants stress that

industry pricing policies vary considerably depending on

the manufacturer, the drug, the dosage, and the competi-

tive circumstances involved. The policies of manufacturer

discounting to managed care may have been uniform

among these defendants, but such policies were imple-

mented at different times and to different degrees. Fur-

thermore, although the plaintiffs allege that the

manufacturers uniformly decline to give discounts to

retailers, the defendants profess that several manufac-

turers, in the exercise of their individual business judg-

ments, have offered discounts or rebates on particular

products to retailers or retailer buying groups.

The defendants argue that, even if we were to con-

strue as parallel conduct the manufacturers’ uniform dis-

counting to managed care and their unvarying refusal to

consider the retail pharmacies’ ability to similarly influ-

ence the market, the plaintiffs still cannot establish that

support an inference of conspiracy. Monsanto Co. v. Spray-Rite

Service Corp., 465 U.S. 752, 763-64 (1984).

63a

each of the manufacturer’s pricing decisions was against

its economic self-interest. Evidence of parallel conduct

which is a “plausible coincidence or an expectable

response to a common business” does not support an

inference of conspiracy. Nichols Motorcycle Supply Inc. v.

Dunlop Tire Corp., No. 93 C 5578, 1995 WL 532265, *27

(N.D.Ill. Sept. 6, 1995) (quoting 6 P. Areeda, Antitrust

Law, § 1425 at 146).

The defendants maintain that the various pricing and

discounting decisions made by the defendants were

based on a variety of legitimate business concerns,

including the changing posture of the health care indus-

try and the economic emergence of managed care. The

granting of discounts to hospitals and managed care

organizations was purportedly justified by the manufac-

turers’ desire to avoid being denied access to participat-

ing physicians and patients. The denial of comparable

discounts to retail pharmacies was similarly justified

given the defendants’ belief that the retail pharmacies,

which did not utilize restrictive formularies, did not pos-

sess the same ability to deny manufacturers access to

certain groups. The defendants argue that these circum-

stances, which were common to all of the manufacturers,

add to the “plausible and justifiable alternative inter-

pretation of [each defendant’s] conduct that rebuts the

alleged conspiracy.” Market Force Inc. v. Wauwatosa Realty

Co., 906 F.2d 1167, 1174 (7th Cir. 1990). According to the

defendants, discounts were not extended to retail cus-

tomers because, unlike managed care, the retail cus-

tomers did not have the power to affect market share.

64a

This contention by the defendants, that the retailers

lack the ability to affect market share, is vigorously dis-

puted by the plaintiffs and is pivotal to each party’s case.

If, as a matter of law, the manufacturers’ collective asser-

tions are accurate, then the defendants’ no-discounting

policies truly reflect a legitimate business concern. How-

ever, if the plaintiffs are able to prove an ability to influ-

ence the market, then the defendants’ uniform denials

warrant scrutiny beyond that afforded on summary judg-

ment.

The defendants steadfastly maintain that retailers

significantly differ from managed care in their ability to

affect market share. Through its use of formularies and its

ability to control access to patient populations, managed

care successfully exerted economic pressure on the manu-

facturers in order to negotiate discounts on previously

undiscounted drugs. The ability of managed care to

exclude the manufacturer’s products from their respec-

tive formularies absent manufacturer capitulation pro-

vided a powerful incentive. The defendants claim that,

unlike managed care, the retail pharmacies simply do not

possess that same market power, or the same power over

the prescribing decision. As such, discounts to the

retailers have been largely denied.

In support of their argument that the retailers differ

significantly from managed care in this respect, the

defendants note that, in sharp contrast to their experi-

ences with managed care, no retailer has noticeably

reduced its sales following a manufacturer’s refusal to

offer a discount. See Rodowskas Dep. Tr. at 486. The

defendants further maintain that retail pharmacies have

little influence over the drug prescribed by the doctor

65a

and cannot switch to alternative products as prices

increase. Except in cases where generic substitution is

permitted, it is the prescribing doctor, and not the retail

pharmacy, that determines the brand of drug to be pre-

scribed. See Defendants’ Joint 12(m) at ¥ 62.

The defendants set forth several explanations as to

why retailers have not effectively implemented their own

formularies or engaged in therapeutic switching in an

effort to liken themselves to managed care. Reasons cited

include the “questionable” ethics of pharmacies attempt-

ing to influence physician prescribing habits, pharma-

cists’ believing that they cannot in fact control the

doctors, pharmacists’ views that drug selections for the

general public should not be limited, and beliefs that

such changes would be too time-consuming or otherwise

impractical. See Defendants’ Joint 12(m) at { 66. In any

case, the defendants maintain that, by their very nature,

retail pharmacies lack the ability to affect market share -

at least to the degree necessary to warrant the offering of

discounts.

The plaintiffs, of course, vehemently dispute the

defendants’ assessment, arguing that to the extent that

the retail pharmacies have been less successful than the

favored buyers in, for example, switching prescriptions, it

is due to the higher prices paid as a result of the conspir-

acy and the corresponding lack of any economic incentive

to attempt to switch a higher-priced brand name drug to

a lower-priced one. See Plaintiffs’ 12(m) Response at § 62.

This observation notwithstanding, where pharmacist

requests to switch prescriptions have been made to physi-

cians, the record indicates that pharmacists have overall

been very successful. A nationwide survey cited by the

66a

plaintiffs indicates that 76.9% of physicians asked by a

pharmacist to switch prescriptions consented to do so. See

G. Muirhead, “R.Ph.s Playing Major Role in Therapeutic

Decisions,” Drug Topics, June 7, 1993 at 12-13. Experi-

ments on drug switching conducted in the field further

support the accuracy of such results and indicate that, at

least when an effort is made to affect market share, the

retailer may, contrary to the defendants’ contentions, pos-

sess considerable power.

The ability of even a single independent pharmacy to

move market share and the defendants’ unfailing refusal

to discount regardless was dramatically demonstrated in

an “experiment” by Plaintiff Towler Drug Company. In

1990, Mr. Towler began dispensing Schering’s Proventil in

preference to Glaxo’s Ventolin, two co-marketed prod-

ucts. Glaxo’s sales representative noticed the change in

sales and wanted to know why Towler was prescribing so

much Proventil and so little Ventolin. When Towler

explained that he was trying to qualify for a Schering

discount, the Glaxo representative told Towler that it was

Glaxo’s policy not to give any discounts to independent

pharmacists but asked him to demonstrate that he could

move market share to the Glaxo product. Towler Aff.II

1 9. Towler thereafter began dispensing only Glaxo’s

Ventolin, but Glaxo refused to change its no-discount

policy. Towler Aff. | 11.

After three months, Schering’s representative visited

Towler and wanted to know why Towler was dispensing

so much Ventolin when he had previously been dispens-

ing Schering’s Proventil. Towler Aff.II {] 11-12. Towler

explained what he was doing and, having demonstrated

Towler’s ability to influence the market, requested a

67a

Schering discount. Schering’s representative and her

supervisor informed Towler that Schering did not give

discounts to independent pharmacists under any circum-

stances. Towler Aff.II {J 13-14. At the urging of Glaxo’s

representative, Towler again began dispensing only Ven-

tolin. Ultimately, however, the Glaxo representative told

Towler that Glaxo still would adhere to its policy; Towler

could not have a discount because he was an independent

pharmacist. Towler Aff.II { 16.

In an effort to stop Towler’s switching of its product,

Glaxo said that it was going to insist that one of the

nearby doctors, Dr. Bennett, write all of her prescriptions

for the brand name Ventolin or else Glaxo would stop

giving her free samples. Towler Aff.II { 17. Undaunted,

Towler for the next two months called that doctor and

obtained her permission to change all prescriptions writ-

ten for Ventolin to Proventil. Then, to prove his point,

from January to March 1992, Towler had all prescriptions

written for Proventil switched to Ventolin; and finally,

from March 1992 to May 1992, Towler had all Ventolin

prescriptions switched to Proventil. Towler Aff.II

{1 18-21. Despite this graphic proof of Towler’s ability to

affect the market, neither manufacturer was willing to

reward Towler’s activity with any incentives.

The plaintiffs cite several other instances which indi-

cate not only that the retail pharmacies had the ability to

move market share, but that the defendants were cogni-

zant of this fact. Indeed, the defendants acknowledge that

the principal way in which the Independent Physician's

Association (“IPA”)-type HMO moves market share is to

create financial incentives for the community pharmacists

that dispense prescriptions. See Defendants’ Joint Brief at

68a

13. Along these lines, a study conducted by Glaxo con-

cluded:

Regardless of specialty and number of HMO

affiliations, physician awareness of formularies

is suggested to be low. Physicians who are

aware of formularies rarely comply with

them. . . . Physicians who are aware of the

formulary and report they consult it seldom

adhere to the formulary. . . . Increasingly, it

appears that the role of community pharmacists is

the focus of cost containment. This is evidenced by

the finding that what is prescribed by physicians is

often not what is being dispensed at the phar-

macy... . Not only are pharmacists more likely to be

aware of the formulary and the need to adhere to the

formulary guidelines, but they are also more likely to

question when the prescription is out of line with

formulary recommendations and have the prescrip-

tion changed... .

See Caprariello Ex. 22, at GL03276313, ‘15 & ‘19 (emphasis

added). American Home Products similarly acknowl-

edged such observations, noting that “In some cases an

HMO expects the pharmacist to enforce the formulary,

contacting the physician when he writes a non-formulary

drug and asking that it be switched. This can be a very

effective mechanism.” See Swartz Ex. 10, at 501285107

(emphasis added).

Such examples exemplify the plaintiffs’ contentions

that the degree of market power which the defendants

ascribe to managed care is often inflated. Furthermore, to

the extent that the defendants imply that managed care

organizations possess market power to a degree which

the retail pharmacies do not, and that this factor accounts

for differential pricing, the plaintiffs strongly disagree. In

69a

sum, the plaintiffs have demonstrated that, provided

with the proper incentives, the retail pharmacies can and

do have some ability to move market share. At the very

least, the plaintiffs’ evidence as to this point casts a cloud

upon the defendants’ arguments to the contrary.

Given this latter circumstance, the defendants have

failed to establish that the conduct.which forms the basis

of the plaintiffs’ complaint is as compatible with the

legitimate business activities of the plaintiff as it is with

an illegal conspiracy. Although the defendants maintain

that their pricing policies with regards to the retail phar-

macies are lawfully founded, the plaintiffs have suffi-

ciently rebutted the defendants’ “legitimate” assertions

that retail pharmacies were refused discounts due to their

inability to move market share. The record is replete with

instances of collusive behavior, parallel conduct, unifor-

mity of responses, mutual awareness of each other’s poli-

cies and practices, and various incriminating quotes on

the part of the defendants. While any one of these alone

would not be sufficient to send the plaintiffs’ case to a

jury, any combination of the above is sufficient.

C. Whether the plaintiffs have presented evidence

that tends to exclude the possibility that the

defendants were pursuing their legitimate inde-

pendent interests.

Even assuming that the evidence of conspiracy could

be construed as ambiguous, the factors cited above by the

plaintiffs tend to exclude the possibility that the defen-

dants were pursuing independent, legitimate interests.

See Serfecz v. Jewel Food Stores, 67 F.3d 591, 599 (7th Cir.

70a

1995). In spite of evidence that the retailers could move

market share (in some cases, better than the preferred

customers), the defendants uniformly persisted in their

refusals to extend discounts to this entire segment of the

market. Portions of the record belie the defendants’ con-

tention that the retailers were refused the benefits of

preferred customer status on account of the retailer’s

inability to influence the market. To the contrary, as dis-

cussed above, the record suggests that, having suc-

cumbed to the pressures of managed care, the

manufacturers together set out to impose artificially high

prices on the retail customers in order to retain their high

profit margins. To this end, the evidence tends to support

the plaintiffs’ theory.

Because we find that, based on the totality of the

record, an overall “inference of conspiracy is reasonable

in light of the competing inferences of independent

action,” Matsushita, 475 U.S. at 588, the plaintiffs’ Sher-

man Act claims may appropriately proceed to trial.

Accordingly, the Manufacturer Defendants’ motion for

summary judgment is denied.

II, Manufacturer Defendants’ Individual Summary

Judgment Motions

Having determined that the record supports an infer-

ence of conspiracy among the Manufacturer Defendants,

we now address the defendants’ individual motions for

summary judgment. As to the plaintiffs’ Sherman Act

claims, each of the twenty-four Manufacturer Defendants

7la

moves for judgment in its favor.!9 In support, each defen-

dant presents evidence in an effort to show that its pric-

ing policy was the product of independent judgment and

not due to any conspiracy participation.

As discussed at length above, at the heart of the

plaintiffs’ Sherman Act claims are allegations to the effect

that the defendants collusively created and maintained a

dual pricing system which raises or stabilizes the prices

paid for brand name prescription drugs by retail phar-

macies. In order to accomplish this goal, the plaintiffs

maintain that manufacturers refused to make available to

community pharmacies various discounts, rebates, and

other price-lowering mechanisms that each of the Manu-

facturer Defendants had made available to managed care

buyers.

On February 6, 1996, this court granted Defendant

DuPont Merck Pharmaceutical’s motion for summary

judgment. See In re Brand Name Prescription Drugs Anti-

trust Litigation, 1996 WL 51210 (N.D.Ill. Feb. 6, 1996).

Upon its formation in January 1991, DuPont Merck

declared and thereafter employed a Single Price Policy,

charging the same undiscounted prices for its brand

name products to both managed care and retail phar-

macies. DuPont Merck’s adherence to such a policy,

9 As indicated above, on February 15, 1996, this court

preliminarily approved a settlement agreement between the

Class Plaintiffs and many of the Manufacturer Defendants. As

between the Class Plaintiffs and the settling defendants, no

motions for summary judgment are here considered. However,

given that no settlement has been reached with the Individual

Plaintiffs, each of the Manufacturer Defendants’ motions for

summary judgment will be addressed.

72a

which by its very nature was antithetical to the “tiered”

pricing policy at the heart of the alleged conspiracy,

effectively distanced DuPont Merck from the plaintiffs’

allegations. Although DuPont Merck participated in the

chargeback system and was privy to discussions and

meetings with the other manufacturers, DuPont Merck

simply did not engage in the alleged proscribed conduct,

i.e., DuPont Merck neither engaged in discriminatory

pricing, nor did it charge Plaintiffs artificially high prices

when compared to favored buyers. Summary judgment in

DuPont Merck’s favor was therefore appropriate.

Unlike DuPont Merck, each of the remaining Manu-

facturer Defendants has, during the relevant period,

engaged in the two-tiered pricing scheme about which

the plaintiffs complain. The extent to which each manu-

facturer has implemented such a policy varies, as do the

circumstances surrounding such implementations. Not

surprisingly, the defendants seek to capitalize upon these

variances in an effort individually to distinguish them-

selves from other manufacturers and to distance them-

selves from any alleged conspiracy. Valiant efforts are

made by each defendant to liken itself to DuPont Merck.

While several present compelling arguments, none, how-

ever, is so strong as to warrant entry of summary judg-

ment in its favor.

Although the Manufacturer Defendants suggest that

the plaintiffs must build an entirely separate case against

each defendant, this is not entirely true. Rather, in decid-

ing a motion for summary judgment, the court in a fed-

eral antitrust case “should not view each piece of

evidence in a vacuum”:

73a

Seemingly innocent or ambiguous behavior can

give rise to a reasonable inference of conspiracy

in light of the background against which the

behavior takes place. Evidence can take on

added meaning when viewed in context with all

the circumstances surrounding a dispute. Thus,

while we must carefully determine what infer-

ences reasonably may be drawn from each piece

of evidence, we must make this determination

in light of all of the evidence proffered by [the

plaintiffs].

Apex Oil Co. v. DiMauro, 822 F.2d 246, 255 (2nd Cir. 1987)

(emphasis added), cert. denied, 484 U.S. 977 (1987); see also

Continental Ore Co. v. Union Carbide & Carbon Corp., 370

U.S. 690-698-99 (1962). Thus, to the extent that the defen-

dants attempt to exonerate themselves by compartmen-

talizing their actions, these efforts must be construed

within the greater context of all of the evidence submit-

ted.

Perhaps the most critical component of the defen-

dants’ case is the propriety of the manufacturers’ justi-

fication for refusals to offer discounts to retail pharmacies

in light of existing contracts and discounts uniformly

offered to managed care. The defendants have steadfastly

maintained that managed care possesses an ability to

move market share which the retail pharmacies do not

possess. To the extent that a manufacturer reaches this

conclusion independently, the asserted legitimacy of such

a belief becomes more credible.

¥o this end, manufacturers such as Boehringer Inhel-

heim, Burroughs Wellcome, SmithKline Beecham,

Upjohn, and Warner-Lambert point to independent pric-

ing studies which suggest that discounts to retailers

74a

would not be profitable. Numerous other manufacturers

assert that their policies were the result of unsuccessful

attempts to offer certain discounts to retailers.2° Defen-

dants such as Burroughs Wellcome, Eli Lilly, Hoffmann-

La Roche, and Pfizer strive to distinguish their pricing

policies from the other defendants.2! Defendants Abbott,

Eli Lilly, Forest, and Zeneca claim that they were either

not present or were not involved during critical meetings

at which allegedly “conspiratorial conduct” occurred.

While such claims lend support to the notion that

these manufacturers’ decisions were independently

founded, they do not detract from the substantial evi-

dence submitted by the plaintiffs to the contrary. Indeed,

with regards to the market share issue, the plaintiffs point

to numerous instances in the record where manufacturers

20 Among the Manufacturer Defendants making such an

argument are American Home Products, American Cyanamid,

Bristol Myers Squibb, Boehringer Inhelheim, Burroughs

Wellcome, G.D. Searle, Glaxo, Hoffmann-La Roche, Johnson &

Johnson, Knoll Pharmaceuticals, Hoechst Marion Roussel,

Rhone-Poulenc Rorer, Sandoz, Schering Plough, SmithKline

Beecham, Upjohn, Warner-Lambert, and Zeneca.

21 To this end, Burroughs Wellcome states that 50% of its

products are single source products, and as to these products,

no discounts are given to anyone. Eli Lilly maintains that it

adhered to a single price policy until 1992. Pfizer asserts that it

did not offer discounts to anyone on single source drugs until

1992. Hoffmann-La Roche notes that its primary market is

hospitals and institutional care, not the retailer pharmacies.

Other manufacturers make less convincing attempts to

distinguish their policies, but virtually everyone, including

those cited, has to some extent engaged in two-tiered pricing,

the chargeback system, and a refusal to extend discounts to

retail pharmacies.

*

75a

(including those named above) have admitted that retail

pharmacies can and do influence the market. Several

examples illustrate the point:

In enumerating the market forces that Defen-

dant Abbott was “against” because they

could negatively affect Abbott’s market share

and margins, Abbott listed the power of

retail pharmacists first. Lehn Ex. No. 3, AB

70001155-56.

When Defendant Knoll’s competitor, Searle,

granted retail pharmacists a 5%, one-time

stocking allowance on a competitive product,

Knoll was forced to respond immediately

and “revise” its stocking allowance to

“match” that of Searle. Turturro Ex. N. 13, KP

912627-28.

According to Defendant SmithKline

Beecham, “[rjetail pharmacies represent a

large and important market where we have

an excellent opportunity to significantly

increase sales. Retail pharmacists can influ-

ence the product dispensed, . . . and they can

provide [the manufacturer] with valuable

information on physician prescribing habits.”

Fish Ex. No. 23, SK 200300496-99, SK

200301475-78.

A January 1992 memorandum by Defendant

Searle recognized that “Chains can have a

significant influence over dispensing Searle

products. ...” Heady Ex No. 50, SE 49423-29.

After visiting with the Big B pharmacy chain,

Defendant Merck was “convinced that they

have the determination, the financing, the

ability to shift market share and the number

of members which will justify offering the

76a

”

PBM initiative to this organization . . .

Senich Ex. No. 118, MR 7232-36.

* Defendant Pfizer provided a one-time rebate

to retailers for stocking the Pfizer product,

MS Contin. Pfizer noted that “dollar claims

[for the rebates] could be significant” and

that the one-time promotion accounted for “a

jump in monthly sales of MS Contin to this

class of trade in September 1991... . ”

Sackler Ex. No. 5, PF 000618-21.

* Defendant Eli Lilly has noted that “as we

move into the nineties, it seems apparent that

the decisions on prescription drugs are going

to be very significantly influenced by non-

physicians.” The pharmacist was first on

Lilly’s list of such “influencers.” Gall Ex. No.

14, LY 2181029-39.

The record is replete with similar reports within the

pharmaceutical industry which warrant the conclusion

that retail pharmacies had the ability to influence the

market and that the manufacturers were conspicuously

aware of that fact. To varying degrees, virtually every

manufacturer acknowledged the power of the retailer, yet

the retailer was given treatment persistently less favor-

able than that afforded to managed care.

While the presence of particulars such as indepen-

dent studies and failed rebate programs might be suffi-

cient for absolution absent other evidence of participation

in a conspiracy, such evidence, when combined with the

presence of the two-tiered pricing policies and the

numerous exchanges which transpired regarding sensi-

tive industry issues, fails to rebut the inference of manu-

facturer participation in a conspiracy. Similarly, the

77a

failure to attend all blameworthy industry functions,

taken alone, might be sufficient for manufacturer exon-

eration. However, when viewed in light of all of the other

evidence indicated throughout this opinion, entry of

summary judgment cannot be appropriate.

Although each manufacturer aspires to distinguish

itself from the next, several commonalities emerge from

the record. The record indicates, for example, participa-

tion by virtually every manufacturer in industry meetings

and seminars to discuss strategies that should be fol-

lowed in setting prices for brand name prescription

drugs. Similarly, virtually every manufacturer Partici-

pated in surveys and inquiries conducted by other defen-

dants regarding pricing policies. Additional common

threads emerge. Every manufacturer, for example, was

directly involved with the implementation of a

chargeback system through which manufacturer dis-

counts were extended to favored purchasers. Every man-

ufacturer further participated in discussions and

agreements pertaining to their refusals to bid to retail

buying groups ‘and the maintenance of differential pric-

ing. Finally, with recent and limited exceptions, every

manufacturer has refused to offer discounted pricing to

retail pharmacies and retail buying groups. As to this last

observation, evidence of the defendants’ uniformity of

conduct can be summarized by a May 25, 1990 letter from

the President of Schering Laboratories, declining to offer

discount pricing to a community pharmacy. The letter

explained, “we limit our bidding to institutions with

closed populations, such as staff model HMO’s; hospitals,

non-profit clinics serving indigent patients; non-profit

charitable organizations, and Federal, State, County and

78a

City institutions. This practice is employed by virtually all of

our competitors.” Kogan Ex. 20 (emphasis added).

_When cast amidst all of the existing evidence, the

individual differences in policy and practice among the

manufacturers diminish markedly in significance. Indi-

vidual differences notwithstanding, unlike DuPont

Merck, each of the remaining defendants utilize (albeit to

varying degrees) a two-tiered pricing policy which main-

tains prices to the retail segment of the market, and, with

limited exceptions, each manufacturer has refrained from

discounting to that segment. Each manufacturer, more-

over, has had ample opportunity to conspire and has

engaged in conduct and adopted policies consistent with

conspiratorial participation. Thus, while several of the

defendants present compelling arguments to the contrary,

the record nonetheless supports an inference that each of

the Manufacturer Defendants engaged in conduct from

which the existence of a conspiracy and membership

therein may be fashioned.

As we have previously recognized, “summary pro-

cedures [are to] be used sparingly in complex antitrust

litigation where motive and intent play leading roles, the

proof is largely in the hands of the alleged conspirators,

and hostile witnesses thicken the plot.” Poller v. Columbia

Broadcasting, 368 U.S. 464, 473 (1962). Acknowledging the

wisdom of this principle, we conclude that the culpability

of each Manufacturer Defendant is more appropriately

left to the jury. Because the record finds substantial sup-

port for each manufacturer’s participation in the alleged

conspiracy, the twenty-four individual motions for sum-

mary judgment are denied.

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79a

III. Wholesaler Defendants’ Motions for Summary

Judgment

The essence of the Sherman Act claims brought by

the plaintiffs is a “conspiracy to keep the prices paid by

retail pharmacies artificially high by denying discounts to

retail pharmacies on brand name pharmaceutical prod-

ucts.” Managed care health care organizations are able to

buy brand name prescription drugs at discounted prices.

The Wholesaler Defendants are charged with member-

ship in the conspiracy and, accordingly, are alleged to be

in full agreement with the manufacturers in unlawfully

discriminating against the retail pharmacies.

Under well-settled principles of conspiracy law, in

order to establish that the wholesalers are as fully

answerable at law for their conduct as the manufacturers,

the evidence must show that they “had a conscious com-

mitment to a common scheme designed to achieve that

unlawful objective.” Monsanto Co. v. Spray-Rite Serv. Corp.,

465 U.S. 752, 764 (1984). To sustain the charge of conspir-

acy to keep prices artificially high by denying discounts

to the plaintiffs, the plaintiffs must prove the existence of

the conspiracy and a participatory link with the Whole-

saler Defendants. A defendant's mere knowledge of,

approval of, association with, or presence at a conspiracy

is insufficient to establish the participation element.

United States v. Durrive, 902 F.2d 1221, 1224 (7th Cir. 1990).

Although Durrive is a criminal case, the holding that an

individual defendant's participation in an established

conspiracy must be supported by substantial evidence in

order to be sustained applies to civil cases as well.

80a

There is no evidence, direct or circumstantial, in the

entirety of this massive record that the wholesalers had

any involvement in the decisions not to afford discounts

to the plaintiffs. And this void in the evidence exists,

irrespective of whether the decision not to give discounts

was made collectively by the manufacturing defendants

pursuant to the charged conspiracy, or whether these

were a series of independent, albeit similar, policies made

for innocent business reasons unique to each manufac-

turer. The wholesalers were not consulted about the no-

discount policies prior to or during their implementation,

and no evidence exists that the wholesalers’ position was

considered by or carried any weight with the manufac-

turers. On the precise question of the no-discount con-

spiracy charge and the conscious commitment to achieve

the unlawful objective, the evidence is conspicuously

absent as to the wholesalers. In truth, the wholesalers had

nothing to do with the no-discount policies.

Indeed, the more compelling evidence is that the

wholesalers decried the very no-discount pricing policies

which the plaintiffs allege is the essence of the charged

conspiracy. The retail pharmacies constituted the most

important customers of the wholesalers in terms of sales.

As the former’s unhappiness with differential pricing

increased, so did the wholesalers. As early as 1985, the

National Wholesale Druggist Association (“NWDA”)

issued a position statement criticizing differential pricing

if such pricing did not take into account actual mar-

ketplace functions. The wholesalers advised the manufac-

turers that “as a result of the differential pricing system

retail pharmacies could not compete on a level playing

PRPS RS a Mir an ore gi seh mes ae

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8la

field.” Wholesaler Defendants Rule 12 (N) Stmt. GJ 18 at

40.

As reflected in the wholesaler defendants’ reply

memorandum at pages 33-35, the following items are

disclosed by the record in the references noted:

1. in 1986, Bud Albers, a wholesaler and ex-

Chairman of the NWDA, began publishing

position papers that were sent to manufac-

turers, among others, complaining about

preferential pricing and advocating legisla-

tive reform to protect independently owned

and operated enterprises;

2. in a March 1986 meeting of the NWDA

Board, the NWDA adopted a position state-

ment that criticized preferential pricing as

the root cause for illegal diversion;

3. the NWDA, at various times, told the manu-

facturers that differential pricing put pres-

sure on independent pharmacies and

threatened their survival;

4. at a 1989 NWDA regional meeting, whole-

salers told manufacturers that a one price

policy to all levels of trade would eliminate

most pricing problems and recommended

that the free enterprise system determine

profit margins.

The record contains many other references similar in

nature about the wholesalers’ consistent opposition to the

two-tiered pricing policy. This conduct is antithetical to

membership in the charged conspiracy. Even assuming an

agreement by manufacturers, this evidence reflects non-

agreement by the wholesalers. Expressed opposition to the

manufacturers’ two-tiered pricing policies serves to

82a

defeat membership by the wholesalers in the conspiracy

charged.

The substance of the wholesalers’ position, as

reflected through NWDA, is perhaps best captured dur-

ing President Clinton’s hearings and proposals involving

the health care industry in general. In connection with the

proposed Health Security Act, the NWDA reaffirmed its

opposition to two-tiered pricing and explained that it had

a long-standing policy that the pricing and promotion of

products should be based on a true functional difference

among customers and not on an artificial class of trade.

Colbath Reply Aff. Exh. O at MCK AB 01609. The reason

offered for this position was to enhance the community

pharmacy’s ability to compete. These pharmacies were

the wholesalers’ major customer segment. Id. at MCK AB

01610.

The plaintiffs ignore the fact that the wholesalers had

nothing whatsoever to do with the adoption of the “no

discount to retail pharmacies” policies practiced by the

manufacturers, ignore wholesaler opposition to those pol-

icies, and concentrate instead on the wholesalers’ partici-

pation in the chargeback system. As described previously,

purchasers of brand-name prescription drugs by man-

aged care operators and others were able to obtain dis-

counts from the manufacturers on certain drug

purchases. In so doing, these favored groups negotiated

the discounts directly with the manufacturers. Whole-

salers are not involved in the manufacturer’s decision

whether to extend discounts to any particular customer,

the products to be discounted, or the prices the manufac-

turer extends to such customers. Although some cus-

tomers purchase directly from the manufacturer, the use

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83a

of wholesalers in the distribution chain is the common

method employed in the movement of these drugs.

When the wholesaler is used, the terms under which

the wholesaler provides inventory and delivery service,

variously referred to as the wholesaler’s service charge,

upcharge, delivery charge or some similar term, are

determined by the customer and wholesaler without par-

ticipation by any manufacturer. The wholesaler generally

sells to the customers all of its products in exactly the

same way, including those subject to the manufacturers’

discount. The price terms are the wholesaler acquisition

cost plus the service charge negotiated between the cus-

tomer and wholesaler.

Although some negotiated discounts are not handled

through chargebacks, most are. Some involve a rebate

directly from the manufacturer to the customer with no

involvement by the wholesaler. Chargebacks are gener-

ally preferred by customers because they allow for the

payment of the discount price immediately rather than

wait for a rebate to be paid. Under the chargeback system

the wholesaler charges back to the manufacturer the dif-

ference between the price the manufacturer and customer

negotiated and the price paid by the wholesaler. The

effect of the chargeback system is that the wholesaler

finances the amount of the discount for a certain period

of time. The benefit to the customer is that only the net

amount of the cost of the goods is paid (price of goods to

wholesaler plus service charge minus discount). The ben-

efit to the manufacturer is the assumption by the whole-

saler of the burden in administering the discount and the

temporary cost of financing it.

84a

The reasons the wholesalers participate in the

chargeback system are both documented and obvious. See

Wholesaler Defendants Rule 12(M) Stmt. { 20 at 14. They

include:

1. failure on the part of the wholesaler to par-

ticipate in chargebacks presents the substan-

tial risk of losing a significant amount of

business, including all business represented

by sales to contract buyers that are not han-

dled through chargebacks;

2. participation in the chargeback system offers

a wholesaler the opportunity to increase its

business;

3. failure to participate in chargebacks may

result in the manufacturer dealing directly

with the contract customer for all purposes

(and not merely the negotiation of the dis-

count); and

4. loss of business to a competing wholesaler

not adverse to the chargeback system.

This Court has repeatedly held that the chargeback

system, standing alone, is not illegal. Even the class

plaintiffs concede that holding. What the plaintiffs do

contend, however, is that the chargeback agreements

were a “component of defendants’ unlawful price-fixing

scheme.”

We need look no further than the affidavits and testi-

mony of class plaintiffs experts to see what “component”

of the price-fixing conspiracy the chargeback allegedly

represented. Dean Wesly A. Magat, in discussing the

collusive agreement to deny discounts to the retailers,

testified that this collusive agreement revolved around

NER MAR BM MR BR. riai255. Yi.

85a

the chargeback system, of which the wholesalers are an

integral part. Magat Dep. 420. He testified that the

chargeback system enables the manufacturers to sell their

products at different prices to different buyers and avoid

arbitrage, which would undercut the profitability of that

practice. Id. at 420, lines 11-15. The “avoidance of arbi-

trage” is the “key element” of the chargeback system and

permitted the implementation of differential pricing.

Professor Jeffrey M. Perloff shared Dean Magat’s

view. Professor Perloff opined that the maintenance of the

alleged conspiracy required the prevention of arbitrage or

diversion. Perloff Aff. ¥ 7. According to Professor Perloff,

participation of the wholesalers was necessary because

the manufacturers could not otherwise prevent or curtail

arbitrage (selling of pharmaceuticals by the favored

buyers back to wholesalers who would then sell the arbi-

traged goods to retailers at discounted prices). Perloff

Aff. Ps 7, 8, 10, 11; Magat Dep. 442 & 443. According to

Professor Perloff, preventing diversion was critical to the

alleged conspiracy of denying discounts to retail phar-

macies; it was so integral to the conspiracy that there

could be no conspiracy without it.

These contentions by both Dean Magat and Professor

Perloff manifest ignorance of one of the most fundamen-

tal characteristics of the brand name prescription drug

industry in the United States. Accordingly, their opinions

are rendered virtually worthless. Indeed, the class plain-

tiffs recent retention of Professor Perloff and the request

of him to prepare a report on the wholesalers’ participa-

tion in the cartel after another expert refused to write

such a report lends credence to the notion that his opin-

ion was contrived. The idea of a carefully developed

86a

position based on full and relevant information, reached

after appropriate analysis and tested by acceptable crite-

ria, the hallmark for the admissibility of expert testimony,

is lacking here.

The opinions by Professor Perloff and Dean Magat

that wholesalers refrained from engaging in diversion or

arbitrage because they were members of the conspiracy

spawned by the manufacturers are absurd. The Prescrip-

tion Drug Marketing Act of 1987 (PDMA) prohibits, sub-

ject to exceptions not relevant here, resales of

prescription drugs by health care entities, hospitals and

charitable organizations. It was not some secret agree-

ment with the manufacturers which precluded the whole-

salers from acts of diversion and arbitrage, rather it was

their compliance with federal law. Conforming one’s con-

duct to the requirements of the law has never been,

heretofore, confused with secret and illegal agreements

evidencing anti-trust violations.

The plaintiffs and their experts also ignore another

fundamental precept of health care law. In Abbott Labora-

tories v. Portland Retail Druggists Ass’n, Inc., 425 U.S. 1

(1976), the Supreme Court held that discounted pricing of

pharmaceutical products sold to non-profit hospitals

could violate the Robinson-Patman Act unless the prod-

ucts were for the hospital’s “own use.” One way for the

manufacturer to assure the “own use” safeguard was to

receive a certification of “own use” from the hospital. The

plaintiffs’ conspiracy theory would not only require the

defendants to violate the PDMA but also to violate con-

tractual provisions, certifying “own use” by hospitals,

with accompanying complicity by wholesalers in the

resale of the pharmaceuticals purchased at a discount.

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87a

Not surprisingly, no evidence is cited to support those

opinions. Frankly, none exists.

Notwithstanding their stated acceptance of the prin-

ciple that it takes more than mere participation by the

wholesalers in the chargeback system in order to support

status as co-conspirators, the plaintiffs merely give lip

service to that holding. Based on their legal submissions,

it is clear that chargebacks remain the centerpiece of the

plaintiffs’ case against the wholesalers. Professor Perloff

is relied on heavily for the claimed correlation between

the chargeback system and membership in the charged

conspiracy by the wholesalers. He opines that because

most sales to both retail pharmacies and favored groups

were through wholesalers and because the wholesalers

were at the center of the chargeback system, the whole-

salers had to have been aware of the differential treat-

ment accorded retail pharmacies and the favored group

of purchasers. The wholesalers had to have “known that

the manufacturers generally offered discounts only to

certain favored groups of buyers and did not offer such

discounts to retail pharmacies.” Perloff Aff. { 4.

These promulgations do not aid the plaintiffs. As

pointed out earlier, it is not illegal for the wholesalers to

participate in the chargeback system. Additionally, it is

improper to equate knowledge of another’s practice with

knowing participation in an illegal conspiracy. Professor

Perloff’s opinions ignore substantial evidence with

respect to the chargeback system and the wholesalers’

involvement therein.

The wholesalers’ knowledge of the manufacturers’

two-tiered pricing system and their participation in the

88a

chargeback system does not equate to knowledge that the

pricing system was the product of an illegal conspiracy.

Material relied upon by plaintiffs’ own experts confirms

that differential pricing of pharmaceutical products can

result from competitive pressures. In opposition to the

wholesaler defendants’ previous summary judgment

motion (see Colbath Aff. Exh. C), class plaintiffs’ submit-

ted an affidavit from Prof. Morton Kamien which

attached materials he relied upon in formulating his opin-

ion. Prof. Lucas testified that he read and relied upon the

Minnesota Prescription Drug Study. Lucas Aff. { II.1, List

of Materials Reviewed, p. 11.

By relying upon Prof. Lucas’ work, Prof. Perloff also

embraces Prof. Kamien’s earlier affidavit and the Minne-

sota Prescription Drug Study. The report is dated April

1994 and was prepared by a division of the Minnesota

Department of Health. These materials included a report

entitled: “Prescription Drug Study: A Report to the Min-

nesota Legislature on the Prescription Drug Market”

(hereinafter the “Minnesota Prescription Drug Study).

After reviewing the use of formularies by institutional

pharmacies, the Minnesota Drug Prescription Study con-

cludes:

All types of pharmacies can move volume, but

retail groups have little or no power to offer

market share to manufacturers because they

must stock drugs for several different third-

party payers, all with different formularies.

Hospital buying groups and managed care for-

mularies can provide market share to manufac-

turers and shift all non-formulary drugs to those

89a

in the formulary. Formularies are what distin-

guishes third-party payer and hospital phar-

macy bargaining positions from retail pharmacy

buying group.

In addition to their prevention of diversion and arbi-

trage arguments, the plaintiffs offer another reason why

the wholesalers joined the manufacturer conspiracy.

Plaintiffs claim that the manufacturers rewarded whole-

salers for their participation in the charged conspiracy by

facilitating speculative buying programs by wholesalers.

Speculative buying is the practice of buying programs

based on, and in advance of, anticipated price increases.

There are a number of weaknesses in this theory.

First, there is no evidence correlating the buying pro-

grams to the charged conspiracy. Second, the evidence

establishes that these buying programs are common and

found in many industries. Third, the plaintiffs engage in

the very practice they condemn, and are frequently the

beneficiaries of the wholesalers’ acumen when price

increases later ensue. Finally, there is clear and uncon-

tradicted evidence that the manufacturers frequently took

steps to discourage these practices altogether. The plain-

tiffs’ attempt to label these buying practices as a reward

to wholesalers for their contributions to an illegal con-

spiracy is entirely fanciful.

The plaintiffs raise certain other matters such as the

sale of information as evidence of wholesaler complicity

in the manufacturers’ conspiracy. None of these items

merits discussion. They are all without the probative

value needed to sustain the premise. These other matters

are normal business practices, engaged in by many, and

90a

as consistent with innocence as with guilt, usually more

SO.

Class plaintiffs also contend that the expert opinions

offer an independent basis for denying the wholesalers’

motion for summary judgment. Even assuming admis-

sibility in evidence of all of the opinions of their experts

(many of which are not), the plaintiffs are wrong.

As previously discussed, Professor Perloff testified

that the inclusion of the wholesalers in the putative cartel

was necessary to prevent arbitrage —- the resale of dis-

counted product to retail pharmacies. Perloff Aff. {¥ 5, 7

8, 10, 11 (Colbath Reply Aff. Exh. B). So critical was the

prevention of arbitrage (and thus, inclusion of the whole-

salers), that Prof. Perloff believed that the cartel could not

exist in its absence. Perloff Aff. { 5; Perloff Dep.

79:17-81:14, 158:11-24.

Professor Perloff apparently had never read the

PDMA, which, as plaintiffs concede, criminalized resale of

prescription drugs by “health care entities.” Additionally,

in some cases contractual restrictions imposed by manu-

facturers with no wholesaler involvement restricted resale

to the manufacturers’ ‘other contract buyers. In sum, the

lack of arbitrage found so suspect by Prof Perloff (indeed a

“key” element to his opinion that the wholesalers con-

spired. Perloff Dep. 101:22-102:4) cannot be explained by

the presence of wholesalers in the distribution system. See

Perloff Dep. 158:13-24, and discussion of Sec. II. F. supra.

Dean Magat’s testimony is equally deficient.

Dr. Lucas, the Nobel Laureate economist, confirmed

the complete breakdown of plaintiffs’ theory of whole-

saler conspiracy:

9la

Under your theory of conspiracy . . . if [a

wholesaler] stopped conspiring as you’ve

hypothesized the conspiracy, what would it

do differently than it’s doing now?

A. I’m not sure.

Q. Would it do anything differently?

A. I don’t know.

Lucas Dep. (10/31) 41:14-23. Dr. Lucas’ testimony reflects

the failure of plaintiffs’ proof. When asked if he could

distinguish between conspiring and non-conspiring

wholesalers, Dr. Lucas answered: “No.” Id. at 43:12-21.

Dr. Lucas adds nothing to the case against the whole-

salers.

The plaintiffs state that the wholesalers joined the

conspiracy and did so out of greed. Survival may be the

more accurate description for their involvement in the

chargeback system. While the plaintiffs use words and

phrases such as “windfall,” “huge profits,” and “dra-

matic” to describe wholesaler profit levels, the evidence

is at odds with such adjectives. According to the 1994

Minnesota Prescription Drug Study, the net operating

margins of drug wholesalers have remained at almost

identical low levels since at least 1975, while their operat-

ing expenses have decreased five-fold:

Year 1975 1980 1985 1990 1992

Operating

Expenses 11.0% 8.5 6.2 4.4 2.3

Profit Margin 2.0% 2.6 2.4 2.4 2.3

Thus, the Minnesota Study also makes it clear that whole-

salers have passed along to their customers the fruits of

92a

their efforts to wring increased efficiencies out of the

drug distribution industry.

An analysis conducted under the auspices of the

NWDA confirms wholesalers’ profit levels. This study

indicates that wholesalers’ average net profit (after tax) in

1988 was 1.13%, with an operating margin of 2.35%; this

is in sharp contrast to the alleged average manufacturers’

1988 operating margin of more than 22%. Moreover,

wholesalers’ average return on assets (after tax) in 1988

was 4.67%; the analysis, stating the obvious, notes that

“[t]his is not an acceptable return on investment.” In

contrast, retail pharmacies’ return on assets in 1988 was

6.6%, and manufacturers’ average return exceeded 28%.

See Wholesale Drugs Magazine; NWDA Breakthrough: A

Future by Design at 10-12 (Colbath Reply Aff. Exh. T).

Plaintiffs’ insinuation that the wholesalers’ “enjoy-

ment” of these profit levels was the inducement or pay-

off for collusive behavior, or that these profit levels rise to

“windfall” proportions, is belied by objective and uncon-

troverted evidence. Wholesaler margins are flatly incon-

sistent with a conclusion of antitrust conspiracy.

What the evidence more truly reflects is the whole-

salers’ desire to continue its historical role in the distribu-

tion chain. There were expressed fears of a mere

warehousing function for their members. Recognition of

the economic power of the manufacturers is apparent

throughout this record, as is the wholesalers’ grudging

accession to some of the manufacturers’ practices. The

chargeback system was but one example. Participation in

that system costs the wholesalers money. But when a

manufacturer deals directly with a wholesaler’s customer

Tac

Tas

93a

with respect to the price the customer will pay to that

wholesaler, fears of a further reduced role in the distribu-

tion chain are apparent. The retail pharmacies were the

wholesalers best customers and, when they were

unhappy, the wholesalers shared their unhappiness.

The record clearly establishes the wholesalers’ dislike

and disapproval of the two tiered pricing system, the

very essence of the plaintiffs’ conspiracy charge. Partici-

pation in the chargeback system is far more an example

of the pressures facing the wholesalers than evidence that

they jumped on the manufacturers’ illegal price-fixing

bandwagon. The independence wholesalers enjoyed in

establishing prices and terms in the sale of their goods to

their customers has been eroded because of the contracts

entered into by the manufacturers and those very cus-

tomers. The role the pharmaceutical manufactures occu-

pied in the healthcare industry, along with their economic

power and the importance of their marketing decisions,

more compellingly explains the chargeback system rather

than theories of wholesaler complicity.

This view has actually been foretold in this case.

Plaintiffs’ counsel were apparently willing to dismiss

claims against the wholesalers for no money whatsoever.

See Affidavit of J. Thomas Rosch {1 3, 4 (submitted as

Exhibit B to Memorandum in Opposition to Class Plain-

tiffs’ Motion to Declare Defendants’ Judgment Sharing

Agreement Unlawful) (Colbath Reply Aff. Exh. U). The

principal desire appears to have been in obtaining an

assignment from the wholesalers of such antitrust claims

as the wholesalers may have had against the manufac-

turers. It is doubtful that a plaintiff who has a viable

cause of action against an anti-trust violator would give

94a

up that cause of action for no money. A plaintiff who

accuses another of being a conspirator would generally

not seek an assignment of their claims against a co-

conspirator. A plaintiff would also not include the whole-

salers as members of the plaintiff class, as several of the

attorneys representing class plaintiffs apparently once

did in this case. Among the numerous complaints pres-

ently before the Court, it is telling that the wholesalers

are defendants only in the class case.

The status of the wholesalers as proper defendants

has been previously raised in this case. The defendants

claimed that the whol

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