# Appendix — AmeriSource Corp. v. HJB, Inc.

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2044%3A2

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1998
- **Citation:** 523 U.S. 1040

## Text

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

4a

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

5a

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

6a

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

lla

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

14a

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 Plaint

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2044%3A2. Public record. Not legal advice.