Appendix — Abbott Laboratories v. HJB, Inc. (No. 97-1152)

No. 97- ( Supreme Court, U.S.

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927 1152 wwe

IN THE

Suprene Court of the United "States CLERK

OCTOBER TERM, 1997

>

IN RE: BRAND NAME PRESCRIPTION DRUGS

ANTITRUST LITIGATION,

ABBOTT LABORATORIES, et al.,

Petitioners,

—_—_V.—

HJB, INC., et al.,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SEVENTH CIRCUIT

APPENDIX TO PETITION

FOR A WRIT OF CERTIORARI

ALDO A. BADINI

Counsel of Record

ROBERT A. MILNE

DEWEY BALLANTINE LLP

1301 Avenue of the Americas

New York, New York 10019

(212) 259-8000

Attorneys for Ciba Geigy

Corporation and Sandoz

Pharmaceuticals Corporation

(Additional Petitioners And Counsel Are Listed

On The Signature Pages)

1998

TABLE OF APPENDICES

PAGE

Appendix A Opinion of the United States Court

of Appeals for the Seventh Circuit...... la

Appendix B- May 9, 1997 Order of the United

States Court of Appeals for the

OE IE oc wk bdvchcvnidscvecacss 30a

Appendix C Order of the United States Court

of Appeals for the Seventh Circuit

Granting Permission to Appeal ......... 33a

Appendix D May 16, 1996 Opinion of the

United States District Court for

the Northern District of Illinois......... 35a

Appendix E_ April 4, 1996 Opinion of the

United States District Court for

the Northern District of Illinois......... 45a

Appendix F_ April 10, 1995 Opinion of the

United States District Court for

the Northern District of Illinois......... 102a

Appendix G January 4, 1995 Opinion of the

United States District Court for

the Northern District of Illinois......... 110a

Appendix H October 18, 1994 Opinion of the

United States District Court for

the Northern District of Illinois......... ll6a

Appendix! Order of the United States Court of

Appeals for the Seventh Circuit

Denying Rehearing...................... l3la

PAGE

Appendix J United States Code Title 15,

Section 1 (Sherman Act) ................ 133a

Appendix K Parties to the Proceeding................ 134a

\

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 DRUGS

ANTITRUST LITIGATION

APPEALS OF ROBERT A. HUGGINS, 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.

WOOD, Circuit Judges.

POSNER, Chief Judge. We have consolidated for decision

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 pre-

trial proceedings. The consolidation covers hundreds of sep-

° The decision is being released in typescript.

NS

2a

arate cases (a number of them class actions) brought under

section | of the Sherman Act, 15 U.S.C. § 1, by retail phar-

macies against manufacturers and wholesalers of prescription

drugs. The pharmacies complain that the defendants have con-

spired among themselves to deny all pharmacies, including

chains and buying groups, discounts off the list price of

brand-name drugs that the manufacturers sell to the whole-

salers and that the wholesalers in turn resell to the pharma-

cies. 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 defen-

dants give steep discounts to favored classes of customers,

including hospitals, health maintenance organizations, nurs-

ing homes, and mail-order companies. The defendants main-

tain this differential pricing through a “chargeback” system.

Under that system, the manufacturer makes a contract with

the favored customer establishing a discounted price at which

the customer is entitled to buy from wholesalers; the whole-

saler sells to the favored customer at that price; and the man-

ufacturer 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 wholesaler for

some drug is $100 and the contractually agreed upon dis-

counted price for a favored customer is $75, the wholesaler

will pay the manufacturer $100 for the drug but resell it to the

favored customer ar $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 charge-

back system permits the wholesalers to buy cheap only when

they are reselling to someone whom the manufacturer wants

to be given a discount.

3a

The defendants’ differential pricing of their drugs is dis-

criminatory 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 cov-

ers 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 sys-

tem. The chargeback system prevents arbitrage. The whole-

saler 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 fed-

eral 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 coverage and does not require heavy enforce-

ment 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 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 compe-

tition must be weak or absent, because it has failed to force

price down to cost (including in “cost” a reasonable return on

investment). Since monopoly power can be created by col-

lusion among competing sellers, the existence of industry-

wide price discrimination is some evidence of collusion. But

it is not conclusive evidence, especially in an industry such as

4a

pharmaceuticals 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 dis-

criminate unilaterally. It might want to do so to take advan-

tage 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’ doctors 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 con-

sumers such as the pharmacies.

In the extensive pretrial proceedings that have been con-

ducted 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 make this refusal stick by

adopting the chargeback system in order to prevent arbitrage.

In other words, the claim is that pervasive price discrimina-

tion in the pharmaceutical market is the result not of indi-

vidual decisions by manufacturers who possess some

monopoly power but of an agreement to practice price dis-

crimination. The plaintiffs’ objection is not to the discrimi-

nation as such; although there is a Robinson-Patman claim in

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

objection is to having to pay high prices that, but for the

defendants’ 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 pre-

Sa

vent hospitals and other bulk purchasers with power to shift

demand among different manufacturers’ drugs from whip-

sawing 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-

maximizing unless a discriminatory price scheme cannot be

enforced at reasonable costs.

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 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 manu-

facturers, however, DuPont Merck Pharmaceutical Company.

The plaintiffs’ appeal from that ruling is one of the four

appeals before us. The judge also granted summary judgment

to the wholesaler defendants because he thought there was

insufficient evidence of their participation in the manufac-

turers’ conspiracy to warrant a trial. That is another ruling

appealed from. Another is the judge’s refusal to dismiss indi-

rect-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

purchasers (“direct purchasers”), composed of the wholesalers

and others who purchased drugs directly from the manufac-

turers, and not the second tier, composed of pharmacies that

purchased the manufacturers’ drugs from the wholesalers

(“indirect purchasers”), are permitted to bring a suit for over-

charges under the Sherman Act. In the last ruling that has

been appealed to us, the judge refused to remand a class

action that alleges violations not of the Sherman Act but of

6a

Alabama’s antitrust statute, which expressly authorizes suits

by indirect purchasers.

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

arate 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 rein-

stated the wholesalers as defendants, and if the plaintiffs went

on to obtain a judgment against the wholesalers and manu-

facturers, any indirect-purchaser defense would go by the

board, since the pharmacies would then be direct purchasers

from the conspirators. Fontana Aviation, Inc. v. Cessna Air-

craft, 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 Antitrust Litigation, 600 F.2d

1148, 1163 (Sth Cir. 1979) (requiring 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 lia-

bility, 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 con-

trolling 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 Pro-

cedure § 3930, pp. 426-27 (2d ed. 1996).

A brief review of the evolution of the indirect-purchaser

doctrine in the Supreme Court will point us toward a resolu-

tion of the issue. In Hanover Shoe, Inc. v. United Shoe

Machinery Corp., 392 U.S. 481 (1968), the defendant in a

Sherman Act suit, a manufacturer of machinery for making

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7a

shoes, defended on the ground that the plaintiff, a shoe man-

ufacturer that had bought the defendant’s machinery, had

passed on any monopoly overcharge to its own customers, the

wholesale purchasers 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 prod-

uct. The Supreme Court held, however, that an antitrust

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 pur-

chasers of the defendant’s product. Tracing a price hike

through successive resales is an example of what is called

“incidence analysis,” and is famously difficult.

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

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

tiers, the indirect purchasers from the antitrust 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 appor-

tionment of damages that the Court had rejected in the earlier

case.

Illinois Brick left unclear whether there might be excep-

tions for cases in which the amount of the overcharge that was

passed on to a lower tier of purchasers could be determined

simply and with mechanical precision. A plausible example,

we thought, would be a case in which the first tier of pur-

chasers consisted of public utilities thatas a consequence of

government regulation passed on any cost increase dollar for

dollar to their customers. /llinois 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 Jllinois Brick doc-

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

8a

and we duly overruled our Panhandle opinion. /llinois v. Pan-

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

Utilicorp implics that the only exceptions to the Jllinois Brick

doctrine are those stated in /llinois Brick itself—“where the

direct purchaser is owned or controlled by its customer,” 431

U.S. at 736 n. 16, or, we suppose, vice versa. The first excep-

tion (ownership) is conceded to be inapplicable here; the

wholesalers are not corporate affiliates of the manufacturers.

The second (control) is inapplicable as well. The manufac-

turers do not control the wholesalers through interlocking

directorates, minority stock ownership, 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 Hospital Ass'n v. Stewart Mechanical Enter-

prises, 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 noth-

ing more than “glorified warehouses” of the manufacturers. In

so ruling, the judge gave undue weight to the chargeback sys-

tem. The favored customers, the ones who had contracts with

the manufacturers though they took delivery from the whole-

salers, 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 dis-

counts, 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 Jilinois Brick bars. The only entities per-

mitted to complain about the manufacturers’ overcharging

the wholesalers are the wholesalers themselves, the direct

9a

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 set-

tled. 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 number of phar-

macies have tried to improve their bargaining position vis-a-

vis the drug manufacturers by forming 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 compensate the member for endangering the

cartel by granting 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,

428 (1990); FTC v. Indiana Federation of Dentists, 476 U.S

447, 458-59 (1986); Collins v. Associated Pathologists, Ltd.,

844 F.2d 473, 479 (7th Cir. 1988), the Jllinois 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 Products 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

10a

analysis that /ilinois 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. 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 manufacturers’ fed-

eral antitrust liability to the indirect purchasers, the federal

class actions should have been dismissed unless the whole-

salers 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

prescription-drug price-fixing suit brought in the Alabama

state courts. The first had been removed to federal district

court under the diversity jurisdiction and then transferred 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

manufacturers 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 Jilinois Brick bars in suits under the

Sherman Act. Ala. Code § 6-5-60(a). The defendants argued,

lla

and the district court agreed, that the suit is removable to fed-

eral 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 contro-

versy 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 damages sought by each member of the

class. Snyder v. Harris, 394 U.S. 332 (1969); Zahn v. Int'l

Paper Co., 414 U.S. 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 mem-

bers 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 jurisdictional

minimum amount. So the Fifth Circuit held in Jn re Abbott

Laboratories, 51 F.3d 524, 527-29 (Sth Cir. 1995), and we

signified our agreement with that holding in Stromberg 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 awful

lot of expensive drugs to run up a bill the overcharge 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, Jn re Amino Acid

Lysine Antitrust Litigation, 918 F. Supp. 1181, 1185-86 (N.D.

Ill. 1996), though these plaintiffs have not established that

they did mean to waive their right. ;

12a

Compensatory damages, which we have just seen are not

likely to exceed $50,000 for any of the named plaintiffs, 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 damages. 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 exis-

tence 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. Wellness 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 read-

ily be inferred. Yet the defendants presented 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 possi-

ble that at least one of 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 purchase

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 defen-

dants 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

damages (compensatory damages plus the penalty) per plain-

13a

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 statute, 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 undi-

vided 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 would have

an undivided interest in the larger, as in the original, estate.

Shields v. Thomas, 58 U.S. (17 How.) 3 (1855). Other exam-

ples 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 dis-

claimed 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 maximum 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.

l4a

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 aggregate 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 undi-

vided right in a 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 (Sth Cir. 1963).

A plaintiff's award of punitive damages is not limited 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 victims of the defendant’s mis-

conduct. Gilman v. BCH Securities, 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 Amer-

ica, Inc. v. Gore, 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 succeed; it

is unlikely to succeed to the point of converting entitlements

to punitive damages from individual to collective entitle-

ments.

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

15a

complaint seeks an injunction against the alleged conspiracy

as well as damages and the penalty, and the defendants argue

that it will cost them 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 Advertising

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” posi-

tion, 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 con-

troversy would be present if the injunction sought by the

plaintiffs would require some alteration in the defendant's

method of doing business that would cost the defendant at

least the statutory minimum 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

l6a

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 aggrega-

tion of class members’ separate claims that it will sometimes

be more difficult for a defendant desiring to remove a diver-

sity case to federal court to establish the minimum amount of

controversy 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 nonaggregation rule will be cir-

cumvented. E.g., Packard v. Provident Nat'l Bank, 994 F.2d

1039, 1050 (3d Cir. 1993). The concern is misplaced. What-

ever the form of relief sought, each plaintiff’s claim must be

held separate from each other plaintiff’s claim from both the

plaintiff’s and the defendant’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 ques-

tion 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 for-

mer. Each plaintiff has a right to be free from the indirect

effects of collusive pricing. Moreover, the grant of an injunc-

tion in favor of a single plaintiff would be unlikely to impose

a heavy cost on any of the defendants; each defendant could

17a

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 satisfied in an injunc-

tive case is by showing that the injunction 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 rea-

son 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

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

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 | of

the Sherman Act or section 7 of the Clayton Act or in monop-

olization cases under section 2 of the Sherman Act, but very

rarely in a price-fixing case, such as we have here.

The last way of satisfying the requirement of the minimum

amount in controversy in an injunction case, the way princi-

pally 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 injunction doesn’t require the defen-

dant to restructure its business or give up a lucrative lawful

business opportunity, but merely tells him to stop doing some-

thing 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

defendant, 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

18a

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 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

penalty entitlement.

The alternative basis on which the district court permitted

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 juris-

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

1986), even if the state court could not have exercised juris-

diction 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 pre-

empted) state law, especially since a defense of preemption is

normally not a basis for removal and is therefore decided by

19a

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 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 exam-

ple 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., Bartholet 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 dis-

miss the suit as frivolous; if the plaintiff countered by com-

ing 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 func-

tionally though not formally 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 con-

duct as the federal laws except insofar as the states’ power to

regulate economic activities in other states is limited by the

commerce and due process clauses of the federal Constitution.

See Herbert Hovenkamp, “State Antitrust in the Federal

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

nificant 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

20a

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 footnote 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 ‘artful[ly]’ casting their ‘essentially

federal law claims’ as state law claims.” Jd. at 397 n. 2. The

suit had been filed after the 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

recognized 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 con-

ceal 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 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 /ilinois 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 “art-

fully 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

2la

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

defendants 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 tem-

porarily 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 judg-

ment 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., 108 F.3d 576, 586 (Sth Cir. 1997); Ultra-

mar 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,

leaving 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 J/linois Brick (or any other fed-

eral) grounds. On the contrary, the district court thought /Ili-

nois 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 judg-

ment, terminating the underlying suit; the suit continues, only

as an individual action rather than as a class action.

22a

The plaintiffs may well be stretching the Alabama statute to

the breaking point in seeking damages for nonresident plain-

tiffs from nonresident defendants who sell primarily in other

states. If it were clear that the plaintiffs could get no signif-

icant 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 com-

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

attacked in the suit took piace in intrastate rather than inter-

state 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 com-

merce 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 com-

merce 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 interpreting 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 any-

where 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. Pre-

cision Instruments, Inc., 527 N.W.2d 596, 607 (Neb. 1995)

(citing cases). The reading is constitutionally permissible,

23a

Clay v. Sun Ins. Office, Ltd., 377 U.S. 179 (1964), and we are

given no reason to suppose 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 Constitution that

limit the extraterritorial powers of state government. 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 pharmacies

in Alabama, it is within the intended and permissible 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 uncharacteristically for its author, Justice, now Chief

Justice, Rehnquist) based on distrust of state courts, and,

especially since it appears only in a footnote, should be nar-

rowly construed in the interest of maintaining comity between

the federal government and the states and keeping federal

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 Ji/linois

Brick as to be frivolous, this would mean that it could not be

removed to federal court because federal courts lack juris-

diction over frivolous federal claims. It is quite true that a

case can be so utterly lacking in merit that the proper dispo-

sition of it is dismissal under Rule 12(b)(1) of the civil rules

(lack of subject-matter jurisdiction) 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

24a

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 con-

clude 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 indigestible 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 dis-

closes a number of instances in which officers of the defen-

dant wholesalers urge manufacturers to hold the line against

discounting to pharmacies and their buying groups, and

pledge to adhere to the chargeback system. The defendants

argue that each of these “smoking guns” is susceptible of an

innocent interpretation. But the 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 decisions

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,

25a

467-69 (1992); Reserve Supply Corp. v. Owens-Corning

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

porate 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 eso-

teric as a billion-dollar antitrust damages action. The whole-

salers 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 whole-

salers’ violation. The theory is that the wholesalers were the

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

idea that a cartel might “hire” 2 customer to help police the

cartel. See Elizabeth Granitz & Benjamin Klein, “Monopo-

lization by ‘Raising Rivals’ Costs’: The Standard Oil Case,”

39 J. Law & Econ. | (1996). The theory is especially plausi-

ble in the circumstances of the present case. (That doesn’t

mean it’s correct; that’s mot the issue.) Drug wholesalers

appear to be an endangered commercial species. Before the

chargeback system was adopted, the-manufacturers would

often sell directly to hospitals, EMOs, and other favored cus-

tomers, bypassing the wholesakrs, since by selling directly

they could monitor each custoner’s purchases and so try to

identify instances in which a customer was purchasing for

purposes of arbitrage rather tha for its own use. The phar-

macies were trying to get intothe act by forming buying

groups. Buying groups frequently act as their members’

wholesaler, buying directiy fron the manufacturer and thus

cutting out independent wholesilers: Desiring a piece of the

action with the favored customer, who were proliferating, the

wholesalers agreed to implement a chargeback system that

would shore up the manufacturers’ system of price discrim-

ination, an integral component o the price-fixing conspiracy.

26a

And desiring to discourage buying groups they joined with

the manufacturers to hold the line against granting any dis-

counts to such groups and so discourage their formation by

reducing the advantages of membership.

The picture that we have just sketched may not be true, but

there is enough evidence supporting it to preclude 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 conspire with them to fix the prices of

pharmaceutical drugs. It would make perfectly good sense,

and so the “smoking gun” evidence cannot be dismissed as

being obviously misunderstood, empty boasting, or idle cor-

porate gossip.

The wholesalers point to their wafer-thin profit margins.

The margins might be even thinner if the wholesalers had

refused to play their appointed role as agents of a manufac-

turers’ cartel—in fact they might be out of business. And

absence of monopoly profits is not inconsistent with

monopoly (collusive or single-firm), since firms may trans-

form 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 fac-

tual question of whether the wholesalers joined the conspir-

acy. 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 carte! slightly and obtaining

enormously increased volume at a slight sacrifice of unit

profit than by honoring the cartel price and suffering an ero-

sion 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 manufacturers—reluctant

accomplices, yet not the less liable for that, Albrecht v. Her-

ald Co., 390 U.S. 145, 150 n. 6 (1968); United States v.

lj

.

ere

27a

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 than principals—naturally

they would be restive. As for the wholesalers’ sponsorship of

buying groups, it did not begin until after this litigation com-

menced, 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 carte] and sue the supplier mem-

bers; 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’ conspiracy. 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 pharmaceuticals divi-

sion, DuPont Pharma. Upon its formation, 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 discounts to hospitals and other favored cus-

tomers 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 con-

ceded 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 adoption of

a single-price policy by terminating discounts is not the ter-

mination of the antitrust violation. The violation is not the

discrimination. The discrimination is 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

28a

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 elsewhere—

in DuPont Merck’s extraordinary but not improper argument

that it thumbed its nose at the manufacturers’ 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 competition

because doctors refuse to prescribe a generic or other sub-

stitute. The other four drugs are sufficiently comparable to

Coumaden in point of uniqueness, according 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 statute of limitations,

DuPont Pharma had a two-price policy and a chargeback sys-

tem to implement it, and it participated in the trade associa-

tion meetings in which, if the plaintiffs’ “smoking gun”

evidence is credited—as it must be, in the present posture of

the case—the conspiracy was hatched or nurtured. The with-

drawal of the 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 hav-

ing 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 conspir-

acy, DuPont Merck could not avoid liability even for the post-

1991 conduct of the conspiracy, a conspiracy in which it was

not (or so a jury might find) involved. A mere change of pol-

es

29a

icy, a mere cessation of involvement, is not effective with-

drawal from a conspiracy. 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

authorities 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 (Sth Cir.

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

The four rulings appealed from are thus

REVERSED.

30a

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

May 9, 1997

—~No. 94 C 897

Charles P. Kocoras, Judge.

IN RE: BRAND NAME PRESCRIPTION DRUGS

ANTITRUST LITIGATION

Nos. 96-2814, 96-2458, 96-2485 & 96-8096

Appeals from the United States District Court for the

Northern District of Illinois, Eastern Division.

By the Court:

The Court, on its own motion, consolidates appeal number

96-2814 with appeal numbers 96-8096, 96-2458 and 96-2485

for the purposes of briefing and disposition. The Court will

modify this order to substitute the case number for the inter-

locutory appeal when it is transferred from the court’s mis-

cellaneous docket. The parties-in-interest in appeal number

96-2814 shall file one consolidated main brief on or before

May 23, 1997, one consolidated response brief on or before

June 9, 1997, and one consolidated reply brief on or before

June 17, 1997. Briefing shall be limited to the following

issue:

3la

In a private action under Section 1 of the Sherman Act,

15 U.S.C. $1, and Section 4 of the Clayton Act, 15

U.S.C. § 15, whether the Illinois Brick doctrine bars

price-fixing damage claims of indirect purchaser-retail-

ers against manufacturers on the indirect purchaser-

retailers’ purchases from wholesalers, which are separate

companies neither owned by any manufacturer nor co-

conspirators of any manufacturer?

The parties-in-interest in appeal number 96-8096 shall file

one consolidated main brief on or before May 23, 1997, one

consolidated response brief on or before June 9, 1997, and

one consolidated reply brief on or before June 17, 1997.

Briefing shall be limited to the following issues:

Whether the Alabama antitrust statute’s penalty, codified

at Ala. Code § 6-5-60(a), may be aggregated to satisfy

the amount in controversy requirement of 28 U.S.C.

§ 1332(a)?; and, ae

Whether federal question jurisdiction exists in this case

under the artful pleading doctrine?

The appellants in appeal numbers 96-2458 and 96-2485

shall file one consolidated main brief on or before May 23,

1997. Appellees in appeal number 96-2458 and appellee in

appeal number 96-2485 are encouraged but not required to

file a consolidated brief, or separate briefs, on or before June

9, 1997. If separate briefs are filed counsel must ensure that

the briefs are not duplicative. Appellants in appeal numbers

96-2458 and 96-2485 shall file one consolidated reply brief

on or before June 17, 1997. ‘

- No extensions of time will be granted. All briefs must be

filed by 4:00 p.m. on the day that they are set to be filed and

must be served by hand or overnight delivery. Oral argument

in these consolidated appeals will be heard sometime during

the month of June if the Court determines that oral argument

is necessary.

Note:

Note:

32a

The parties are advised that Rule 26(c), Federal Rules of

Appellate Procedure, which allows for three additional days

after service by mail, shall not apply when the due dates of

briefs are specifically set by order of this court. All briefs are

due by the dates ordered.

New Circuit Rule 31(e) became effective January 1, 1997. The —

rule is as follows:

Digital Media. One copy of each brief must be filed on dig-

ital media. The disk must contain nothing more than the text

of the brief, and the label of the disk must include the case

name and docket number. One copy of the disk must be served

on each party separately represented by counsel. Filing and

service under this subsection are not required if counsel cer-

tifies that the text of the brief is not available on digital

media.

Attorneys filing briefs after January 1, 1997 must comply with the new

rule. Although any word processing format is allowed under the rule,

WordPerfect 5.1 or greater and/or a generic format such as ASCII is

preferred. Indicating on the label which brief is being filed, (i.e. appel-

lant’s brief, appellee’s brief, appellant’s reply brief, etc.) and what

word processing format the file is in is also preferred. Briefs tendered

by counsel after January 1, 1997 without a computer disk copy or cer-

tification that the text is not available on digital media may be rejected

by the clerk’s office.

33a

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

July 8, 1996

MDL 287

Before

Hon. RICHARD A. POSNER, Chief Judge

Hon. WILLIAM J. BAUER, Circuit Judge

Hon. MICHAEL S. KANNE, Circuit Judge

IN RE: BRAND NAME PRESCRIPTION DRUGS

ANTITRUST LITIGATION

No. 96-8018

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE

NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION.

CHARLES P. KOCORAS, JUDGE.

The following are before the court:

1. PETITION FOR PERMISSION TO APPEAL UNDER 28

U.S.C. § 1292(B), filed on May 28, 1996, by counsel.

34a

2. INDIVIDUAL PLAINTIFFS’ ANSWER TO DEFENDANTS’

PETITION FOR PERMISSION TO APPEAL UNDER 28

U.S.C. § 1292(B), filed on June 4, 1996, by counsel.

3. CLASS PLAINTIFFS’ ANSWER TO THE MANUFAC-

TURER DEFENDANTS’ PETITION FOR PERMISSION

TO APPEAL UNDER 28 U.S.C. § 1292(B), filed on

June 4, 1996, by counsel.

4. SUPPLEMENTAL ANSWER TO THE PETITION FOR PER-

MISSION TO APPEAL UNDER 28 U.S.C. § 1292(B),

filed on June 4, 1996, by counsel.

IT IS ORDERED that #1 is GRANTED. Once this court

receives notice from the district court that the docketing fee

has been paid, the appeal will be entered on the court’s gen-

eral docket pursuant to Federal Rule of Appellate Procedure

5(d).

To the extent that individual plaintiffs seek to dismiss any

appeal from the judgment in favor of the wholesalers, which

was certified pursuant to Rule 54(b), the request is DENIED

without prejudice as it cannot be presented to the court in

connection with its consideration of this § 1292(b) petition.

To the extent that certain individual plaintiffs seek amend-

ment of the certified question (see #4), the request is DENIED

as unnecessary. See, e.g., Edwardsville Nat’l Bank & Trust

Co. v. Marion Laboratories, Inc., 808 f.2d 648, 650 (7th Cir.

1987) (§ 1292(b) appeal brings up entire certified order for

review).

eee rer

35a

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

94 C 897

MDL 997

IN RE: BRAND NAME PRESCRIPTION DRUGS

ANTITRUST LITIGATION

This Document Relates to:

ALL CASES

MEMORANDUM OPINION

CHARLES P. Kocoras, District Judge:

On April 4, 1996, this court issued two Memorandum Opin-

ions in this massive multi-district litigation. In the first opin-

ion, the court denied all summary judgment motions by the

Manufacturer Defendants (regarding both the conspiracy alle-

gations and the indirect purchaser claims) and granted sum-

mary judgment in favor of the Wholesalers Defendants. In the

second opinion, the court rejected proposed partial settle-

ments between the Class Plaintiffs and several of the manu-

facturers (the “Settling Defendants”). Recognizing the impact

which such decisions carried as to the future course of the lit-

igation, the court, at a status hearing which followed the

issuance of the two opinions, expressed to the parties a will-

36a

ingness to entertain questions which might merit certification

for immediate interlocutory appeal. Presently before the court

are the products of the court’s inquiry.

For the reasons set forth below, the Manufacturer Defen-

dants’ motion for certification of interlocutory appeal with

regards to the indirect purchaser claims is granted pursuant to

28 U.S.C. 1292(b). The Wholesaler Defendants’ motion for

entry of final judgment pursuant to Rule 54(b) of the Federal

Rules of Civil Procedure is similarly granted. The defendants’

request to certify or reconsider our April 4, 1996 decision

rejecting the proposed partial settlements is denied.

A. Manufacturer Defendants’ Motion for Certification of

Interlocutory Appeal from Order Denying Motions for

Summary Judgment as to Indirect Purchaser Claims

In Illinois Brick v. Illinois, 431 U.S. 720 (1977), the

Supreme Court barred an “indirect purchaser” from seeking

damages for illegal overcharges passed on to it by interme-

diates who purchase directly from the manufacturers. JIlinois

Brick, 431 U.S. at 746. On April 4, 1996, following an exam-

ination of the immense record before it, this court revisited

the issue of //linois Brick and held that the control which the

manufacturers exercised over the wholesalers and any of its

“indirect purchaser” transactions effectively transformed

those transactions into one sale. Finding that the policies and

rationales behind the so-called “indirect purchaser rule” of

Illinois Brick were not implicated in the present case, the

court denied the Manufacturer Defendants’ motions for sum-

mary judgment on the indirect purchaser issue, holding that

the bar imposed by Jllinois Brick had no application to the

plaintiffs’ Sherman Act claims.

A significant feature of the instant cases involves denial of

certain discounts by manufacturers to members of the plain-

tiff class while the manufacturers directly negotiate these

same discounts with other customers of the wholesalers.

Because of the non-involvement of the wholesalers in the

negotiations and decisions to discount or not discount to cus-

37a

tomers of the wholesalers, the phrase “indirect purchaser” is

somewhat misleading. When a manufacturer makes a decision

which materially affects the price a customer will pay to the

wholesaler supplier and deals directly with that customer,

either by way of granting the discount or denying it, the man-

ufacturer intrudes itself in the sales transaction. Consequently,

one of the significant components of the sales transaction

between wholesaler and customer is decreed by the manu-

facturer, and there is nothing indirect about this aspect of the

sales/purchase transaction.

Pursuant to 28 U.S.C. § 1292(b), the Manufacturer Defen-

dants now seek to certify the Illinois Brick matter for inter-

locutory appeal. Specifically, the Manufacturer Defendants

seek certification of the following question:

In a private action under Section 1 of the Sherman Act,

15 U.S.C. §1, and Section 4 of the Clayton Act, 15

U.S.C. § 15, whether the Illinois Brick doctrine bars

price-fixing damage claims of indirect purchaser retail-

ers against manufacturers on the indirect purchaser-

retailers’ purchases from wholesalers, which are separate

companies neither owned by any manufacturer nor co-

conspirators of any manufacturer?

For the reasons set forth below, we grant the defendants’

motion and certify the posited question for interlocutory

appeal.

A district court possesses the authority to certify an order

for interlocutory appeal where that order invoives (1) a con-

trolling question of law as to which (2) there is a substantial

ground for difference of opinion, and (3) an immediate appeal

may materially advance the ultimate termination of the liti-

gation. 28 U.S.C. § 1292(b). The Manufacturer Defendants

maintain that the proper application of Illinois Brick concerns ~

each of these factors. We agree. .

Regarding the issue of whether a matter involves a con-

trolling question of law, the Seventh Circuit has acknowl-

edged that “a growing number of decisions have accepted the

38a

rule that a question is controlling, even though its decision

might not lead to reversal on appeal, if interlocutory reversal

might save time for the district court, and time and expense

for the litigants.” Johnson, 930 F.2d at 1206 (quoting 16

Charles A. Wright, Arthur R. Miller, Edward H. Cooper &

Eugene Gressman, Federal Practice and Procedure § 3930, at

pp. 159-60 (footnote omitted)). In light of this observation,

the Seventh Circuit has endorsed a flexible standard, stating

that “‘controlling’ means serious to the conduct of the liti-

gation, either practically or legally.” Johnson v. Burken, 930

F.2d 1202, 1206 (7th Cir. 1991) (quoting Katz v. Carte

Blanche Corp., 496 F.2d 747, 755 (3d Cir. 1974), cert. denied,

419 U.S. 885 (1974)).

Although the plaintiffs maintain that J/linois Brick is “just

a damage issue” such that it could be separated and would not

meaningfully affect the determination of liability at trial, the

plaintiffs oversimplify the significance of Illinois Brick.

As discussed more fully below, the applicability of Jllinois

Brick has a profound impact upon the scope of the plaintiffs’

Sherman Act claims. For purposes of § 1292(b), a question is

not uncontrolling merely because it does not dispose of a

case. In cases of this magnitude, “the proper measure of dam-

ages is always a controlling question of law.” Jn re Uranium

Antitrust Litigation, 556 F.Supp. 806, 808 (N.D.IIl. 1983).

The proper applicability of Jllinois Brick in this action is no

different.

We further believe that the indirect purchaser issue posed

by /llinois Brick is an issue as to which there is a substantial

ground for difference of opinion. In our April 4, 1996 opin-

ion, we stated that the degree of control exercised by the

manufacturers effectively transformed the transaction, i.e.,

from defendant to middleman to indirect purchaser, into one

sale. As such, the policy concerns of Jllinois Brick were not

implicated, and the rule barring indirect purchasers did not

apply.

In Illinois Brick, the Supreme Court expressly recognized

a “control” exception to the indirect purchaser rule. See /Ili-

39a

nois Brick, 431 U.S. at 736 n.16. The true scope of the excep-

tion’s application, however, has never been crystallized.

Where the direct purchaser is a subsidiary or is otherwise

owned by the alleged violator, the application of the control

exception is clear; and it is in this ownership scenario where

the control exception has been most often utilized. See, e.g.,

In re Sugar Indus. Antitrust Litig., 579 F.2d 13 (3d Cir. 1978).

In articulating the control exception to /llinois Brick, how-

ever, the Supreme Court indicated that the exception appiied

to situations where a direct purchaser is not only owned, but

“owned or controlled” by the alleged wrongdoer. /llinois

Brick, 431 U.S. at 736 n.16 (emphasis added). The Supreme

Court reasoned that where such ownership or control is exer-

cised, the policies behind //linois Brick are not implicated and

have no application.

We believe that the circumstances of the present case fully

embrace the spirit of the control exception articulated by the

Supreme Court. We are mindful, however, that this case is

unlike any other in which the courts have applied the control

exception and that the true scope of the control exception has

yet to be fully explored. For purposes of 28 U.S.C. 1292(b),

it is clear that a substantial ground for difference of opinion

exists concerning the applicability of /llinois Brick in the pre-

sent litigation. The first two requirements for certification

under section 1292(b) are thus easily satisfied.

The third requirement of section 1292(b), i.e., that imme-

diate appeal may materially advance the ultimate termination

of the litigation, is perhaps the most hotly contested, for an

interlocutory appeal of the indirect purchaser issue would not

result in the dismissal of any parties to the action, nor would

it fully dispose of any claims. The plaintiffs attest that

between ten and twenty percent of their purchases were made

directly from manufacturers. The viability of these direct

damages claims thus would not hinge upon the ultimate appli-

cability of Jllinois Brick. Likewise, no manufacturer would be

released from the action by virtue of a reversal on the indirect

purchaser issue. An antitrust defendant remains jointly and

40a

severally liable for the acts of its co-conspirators. See Jn re

Uranium Antitrust Litigation, 552 F.Supp. 518, 522 (N.D.IIl.

1982). Given the potential for liability as co-conspirators,

even as to those select manufacturers who conducted trans-

actions exclusively through the use of wholesalers, Sherman

Act claims would remain. A trial as to all of the defendants

would also be required on the plaintiffs’ asserted claims for

injunctive relief. See In re Beef Industry Antitrust Litigation,

600 F.2d 1148, 1167 (Sth Cir. 1979) (concluding that J/linois

Brick does not bar suits for injunctive relief by indirect pur-

chasers). An interlocutory appeal as to the indirect purchaser

issue thus would not obviate the necessity of a Sherman Act

trial.

Section 1292(b), however, does not require that an issue be

outcome determinative in order for an interlocutory appeal to

be proper. Rather, section 1292(b) requires only that an

immediate appeal may materially advance the ultimate ter-

mination of the litigation. 28 U.S.C. § 1292(b). Notwith-

standing the plaintiffs’ arguments to the contrary, a reversal

by the Seventh Circuit of the J/linois Brick issue would result

in a substantial savings of both judicial and party resources.

The magnitude of the plaintiffs’ damages claims would be

vastly diminished—estimates vary, but between eighty to

ninety percent of the plaintiff’s damages claims are directly

affected by the applicability of /llinois Brick. In addition, the

relevance and propriety of certain (often sensitive) informa-

tion, e.g., prescription drug sales by defendants not selling

directly to retailers, would be greatly influenced by the final

applicability of Jllinois Brick. d

Were appellate review of the indirect purchaser issue to be

deferred to the end of the litigation and the J/linois Brick

issue to be subsequently reversed, a strong possibility of

retrial on the Sherman Act claims would be needlessly cre-

ated. The Seventh Circuit has expressly recognized the desir-

ability of avoiding a trial that “could prove to be a useless

exercise.” In re Uranium Antitrust Litig., 617 F.2d 1248, 1262

(7th Cir. 1980). Given the enormity of the present litigation

4la

and the time, energy, and expense which a full trial will

entail, the elimination of the need for retrial is extremely

agreeable. An interlocutory determination as to the indirect

purchaser issue, along with a determination regarding the

proper role of the wholesalers in any conspiracy (see infra at

Section B), would obviate the necessity for relitigating any

portion of the Sherman Act claims. As such, we find that the

third requirement of section 1292(b) has been satisfied. The

ultimate termination of the litigation may certainly be

advanced by an immediate appeal on the indirect purchaser

question. !

Although the circumstances surrounding the certification

vary, it is significant that other courts, including the Seventh

Circuit, have recognized that questions concerning the appli-

cation of /llinois Brick are particularly suitable for review on

interlocutory appeal. See Illinois ex rel. Hartigan v. Pan-

handle Eastern Pipe Line Co., 852 F.2d 891, 892 (7th Cir.

1988) (en banc) (“Panhandle I’), cert. denied, 488 U.S. 986

(1988), overruled on other grounds, Illinois ex rel. Burris v.

Panhandle E. Pipe Line Co., 935 F.2d 1469 (7th Cir. 1991)

(“Panhandle IT’), cert. denied, 502 U.S. 1094 (1992); see also

In re Wyoming Tight Sands Antitrust Cases, 866 F.2d 1286

(10th Cir. 1989), aff’d sub nom, Kansas v. Utilicorp United

Inc., 497 U.S. 199 (1990); Link v. Mercedes-Benz of North

America, Inc., 788 F.2d 918 (3d Cir. 1986). Because we

In its earlier § 1292(b) ruling, see In re Brand Name Prescrip-

tion Antitrust Litigation, 878 F.Supp. 1078 (N.D.III. 1995), the court rea-

soned that, even in the event of reversal, immediate appeal would not

materially advance the ultimate termination of the litigation on the

ground that the Robinson-Patman Act damage claims would have to be

determined in the same proceeding, thus reducing the efficiencies that

could have been achieved by dismissal of the Sherman Act damage

claims on the plaintiffs’ purchases from wholesalers. However, this is no

longer the situation. Under Pretrial Order No. 5 and the court’s schedul-

ing orders, the Robinson-Patman Act claims have been deferred pending

resolution of the Sherman Act claims. As a result, simplification of the

Sherman Act claims would not only vastly reduce the complexity of trial

of those claims, but also, by doing so, hasten the adjudication of the now

separately tracked Robinson-Patman Act claims.

42a

believe that the indirect purchaser question in the present case

involves a controlling question of law as to which there is a

substantial ground for a difference of opinion and that an

immediate appeal may materially advance the ultimate ter-

mination of the litigation, the Manufacturer Defendants’

motion for interlocutory review pursuant to 28 U.S.C.

§ 1292(b) is granted.

B. Wholesaler Defendants Motion for Entry of

Final Judgment

On April 4, 1996, this court granted the Wholesaler Defen-

dants’ motions for summary judgment. The Wholesaler

Defendants now move for entry of final judgment pursuant

to Rule 54(b) of the Federal Rules of Civil Procedure.”

Although, customarily, a final judgment will not be entered by

a trial court on an adjudicated claim until the court has

resolved all of the issues between all of the parties, the

Federal Rules provide for considerable discretion as to such

matters. As recognized by the Supreme Court:

The liberalization of our practice to allow more issues

and parties to be joined in one action and to expand the

privilege of intervention by those not originally parties

has increased the danger of hardship and denial of justice

through delay if each issue must await the determination

of all issues as to all parties before a final judgment can

be had. In recognition of this difficulty, . . . Rule 54(b)

. . Was promulgated.

Bank of Lincolnwood v. Federal Leasing. Inc., 622 F.2d 944,

947 (7th Cir. 1980) (quoting Dickinson v. Petroleum Con-

version Corp., 338 U.S. 507, 511-12 (1950)).

Rule 54(b) of the Federal Rules of Civil Procedure provides

that, where certain requirements are satisfied, a district court

2 The Wholesaler Defendants include: AmeriSource Corporation,

Bergen Brunswig Corporation, Bindley Western Industries, Inc., Cardinal

Health, Inc., FoxMeyer Drug Company, McKesson Corporation, and

Whitmire Distribution Corporation.

43a -

possesses the power to render a final judgment as to a portion

of a lawsuit. The requirements of the rule are easily stated:

First, there must be an action involving multiple claims

for relief or multiple parties. Second, there must be a

final decision by the district court as to at least one claim

or the rights and liabilities of at least one of the parties.

Third, the district court must make “an express deter-

mination that there is no just reason for delay.” Finally,

the court must expressly direct the entry of judgment

(citations omitted).

Bank of Lincolnwood, 622:F.2d at 947; See Fed. R. Civ. P.

54(b).

In granting summary judgment in favor of the wholesalers,

the court noted that “[t]here is no evidence, direct or cir-

cumstantial, in the entirety of [the] massive record that the

wholesalers had any involvement in the decisions not to

afford discounts to the plaintiffs.” Memorandum Opinion at

47-48. Having so found, the wholesalers were dismissed from

the case, and the legal posture of the litigation was pro-

foundly altered.

Without entry of final judgment at the present time, the

specter of a second trial would loom should the decision on

the wholesalers’ summary judgment motion be reversed.

More significant, however, is the interplay between the ulti-

mate fate of the wholesalers and the court’s ruling on the

manufacturers’ /Ilinois Brick indirect purchaser motion for

summary judgment (the indirect purchaser issue has been

postured for interlocutory certification pursuant to 28 U.S.C.

§ 1292(b)). As explained above, final determination of the

Illinois Brick issue has potentially dramatic implications as

to the final contours of this action. Furthermore, any con-

sideration of the Jllinois Brick issue by the Seventh Circuit

would necessarily merit consideration of the wholesalers’ role

in the sale and distribution of brand name prescription drugs.

Because the status of the wholesalers is central to the //linois

Brick argument, principles of judicial economy and consis-

tency favor the consideration of the matters at the same time.

44a

We are mindful of the plaintiffs’ concerns as to the delay

which might be caused by an appcal. However, given the

enormous ramifications of the J/llinois Brick issue upon the

course of the trial and the role which the fate of the whole-

salers ultimately assumes in the determination of the /Ilinois

Brick issue, entry of final judgment for the Wholesaler Defen-

dants at the present time appears appropriate. Because we find

no just reason for delay, the Wholesaler Defendants’ motion

for entry of final judgment is granted.

C. Defendants’ Motion for Certification, or in the Alter-

native, Reconsideration of the Court’s April 4, 1996

Order Denying Approval of the Settlements

The defendants’ motion for certification or reconsideration

of the April 4, 1996 order denying approval of the proposed

partial settlements with the Class Plaintiffs was denied in

court on May 8, 1996. At that time, the court preliminarily

approved an amendment to the earlier settlement agreements

which purported to rectify the inequities which were cited in

the April 4, 1996 order. Given the existence of the new set-

tlement agreements and our continued belief that the rejection

of the initial settlements was not immediately appealable, we

denied the defendants’ motion for certification or reconsid-

eration in court. We adhere to that previous judgment.

CONCLUSION

For the reasons set forth above, the Manufacturer Defen-

dants’ motion for certification of interlocutory appeal with

regards to the indirect purchaser claims is granted. The

Wholesaler Defendants’ motion for entry of final judgment is

also granted. All other motions are denied.

/s/ CHARLES P. KOCORAS

Charles P. Kocoras

United States District Judge

Dated: May 16, 1996

ae

45a

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

94 C 897

MDL 997

IN RE: BRAND NAME PRESCRIPTION DRUGS

ANTITRUST LITIGATION

This Document Relates to:

ALL CASES

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 Manu-

facturer 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, com-

prise the plaintiffs of the various actions consolidated’ before

Hundreds of cases involving thousands of retail pharmacy plain-

tiffs alleging industry-wide antitrust violations have been filed through-

out the country. Approximately two years ago, these actions were

46a

us. Virtually all of the leading manufacturers and wholesalers

of brand name prescription drugs are the defendants in this

multi-district antitrust litigation. The plaintiffs have polarized

into two identifiable groups. On behalf of a nation-wide

class’, the “Class Plaintiffs” allege a price-fixing conspiracy,

in which the defendants agreed to eliminate price competition

and to keep prices of “Prescription Brand Name Drugs” arti-

ficially 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).

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 stabilizes the

prices paid for brand name prescription drugs by retail phar-

transferred to this Court by the Judicial Panel on Multidistrict Litigation

for coordinated or consolidated pretrial proceedings.

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-con-

spirators of any of the foregoing entities; affiliates, parents, and sub-

sidiaries of any of the foregoing entities; governmental entities; mail

order pharmacies; health maintenance organizations; hospitals; clinics;

and nursing homes.

3 As defined in 4 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.

————————

47a

macies. To accomplish this goal, the defendants have, inter

alia, refused to make available to community pharmacies var-

ious 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 contend,

established a cartel involving both pharmaceutical drug man-

ufacturers and drug wholesalers, including the 24 Manufac-

turer Defendants® and the 7 Wholesaler Defendants named in

this litigation. The purpose of the alleged cartel was to keep

the prices at which brand name prescription drugs were sold

to retail pharmacies at artificially high levels. Although it is

not clear exactly when this cartel was allegedly formed, the

plaintiffs claim that the agreements and understandings 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 market-

place 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 hospitals and other

traditional health care institutions for discounts off of the pub-

5 Managed care is a term that refers to Health Maintenance Orga-

nizations (“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 Lab-

oratories (“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 Company (“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”).

48a

lished wholesale price of drugs.’ The defendants’ discounting

practices allegedly began to proliferate in the 1970s with the

advent of non-traditional managed care organizations and

other re-sellers of drugs, such as mail order houses. Accord-

ing 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 Manufac-

turer 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, 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 con-

spiracy is premised upon the wholesalers’ purported agree-

ment to set up an industry-wide system to facilitate the

structure of differential pricing necessary to prevent dis-

counting 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 prevent-

ing “arbitrage” or “diversion”®.

Under the chargeback system, a discounted contract price

is negotiated by the manufacturer and the favored purchaser.

The “discounts” in issue in this litigation are discounts off of the

published wholesale price of the drug involved. Other discounting prac-

tices in the industry, such as discounts for cash or prompt payment, are

not implicated in this case.

“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.

49a

If the “discounted” prescription drugs are supplied out of a

wholesaler’s inventory, the wholesaler delivers the product to

the favored purchaser at the discounted price and then

“charges back” the manufacturer for the difference between

the price paid by the wholesaler 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 Defendants

encouraged a two-tier pricing system, under which the retail

pharmacy plaintiffs paid artificially high prices for brand

name drugs.

The Manufacturer and Wholesaler Defendants dispute 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 dis-

counting and pricing decisions were independently made and

that the manufacturers’ individual responses to both the man-

aged 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 institutional buyers, there

is an economically sound reason for the disparity. In support,

the defendants cite to the power of these groups to affect mar-

ket share. According to the defendants, most managed care

organizations have created “formularies,” i.e., restrictive lists

of drugs under which their physicians are directed to pre-

scribe. The defendants argue that managed care organizations

use formularies and the ability to control access to patient

populations to negotiate discounts or rebates from pharma-

ceutical manufacturers. See Defendants’ Joint 12(m) at 425,

37. Essentially, it is the Manufacturer Defendants’ position

that, by threatening to exclude the manufacturer’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 further argue that, unlike man-

50a

aged care, retail pharmacies simply do not possess the same

market power, or the same power over the prescribing deci-

sion, which managed care possesses.

With respect to the plaintiffs’ claims against the whole-

salers, the Wholesaler Defendants contend that their partici-

pation, as alleged by the plaintiffs, is completely 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 con-

spiracy to deny discounts to the plaintiffs, the wholesalers

maintain that their participation 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 Defendants ascribe to

managed care organizations, the plaintiffs 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’ Sherman

Act claims. First, each of the 24 named Manufacturer Defen-

dants® moves individually for summary judgment in its favor

based on the plaintiffs’ failure to meet its burden of proof.

Next, the 7 Wholesaler Defendants collectively move for

summary judgment. Finally, the Manufacturer Defendants col-

lectively move for judgment in their-favor on the plaintiffs’

indirect purchaser claims.

Each of these motions will be addressed below. Before pro-

ceeding, however, we first examine the legal principles from

which to judge a motion for summary judgment.

9

Due to the pending settlement agreement, Class Plaintiffs’ fil-

ings pertain only to the non-settling Manufacturer Defendants. The Indi-

vidual Plaintiffs, who are not party to any settlement agreement, address

the Sherman Act summary judgment motions of all of the Manufacturer

Defendants.

S5la

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 bur-

den of showing that no such issue of material fact exists. Pur-

suant to Rule 56(b), when a properly supported motion for

summary judgment 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 judg-

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

Although the general rule is that all reasonable inferences

are drawn in favor of the non-moving party, antitrust law lim-

its the extent to which permissible inferences from ambigu-

ous evidence may be drawn in a Section 1 Sherman Act case.

Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,

415 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). Specifically,

“conduct as consistent with permissible competition as with

illegal conspiracy does not, standing alone, support an infer-

ence of antitrust conspiracy.” Matsushita, 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 defen-

dant 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

52a

business activity that, standing alone, is consistent with law-

ful competition.

The United States Supreme Court has cautioned that “sum-

mary procedures should be used sparingly in complex

antitrust litigation where motive and intent play leading roles,

the proof is largely in the hands of the alleged conspirators,

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

Broadcasting, 368 U.S. 464, 473 (1962). 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 lan-

guage, Poller and its progeny simply stand for the proposition

that, if a claim under the antitrust laws has been adequately

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

intent and purpose should be resolved after discovery and

trial.” National Org. for Women v. Scheidler, 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 claims cannot 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 Sherman Act violation,

the plaintiffs must “present direct or circumstantial evidence

that reasonably tends to prove that the defendants had a con-

scious commitment to a common scheme designed to achieve

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

Corp., 465 U.S. 752, 764 (1984) (citations and internal quo-

tation marks omitted).

Where a plaintiff relies on circumstantial evidence, the

plaintiff “must show that the inference of conspiracy is rea-

sonable in light of the competing inference[ ] of independent

action.” Matsushita, 475 U.S. at 588. The Seventh Circuit sets

53a

forth the approach for evaluating the legal sufficiency of the

evidence in an antitrust conspiracy case as follows:

We first review the evidence of conspiracy submitted 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

compatible with the legitimate business activities of the

plaintiff as it is with illegal conspiracy. Finally, if we

determine that this analysis leaves the evidence of con-

spiracy ambiguous, we determine whether the plaintiff

can point to any evidence that tends to exclude the pos-

sibility that the defendants were pursuing their legitimate

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 Defendants,

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 Sherman 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 differential 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

54a

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 competition and to

keep prices of brand name prescription drugs artificially high

to retail pharmacies in violation of Section 1 of the Sherman

Act.

Section | of the Sherman Act prohibits the formation of any

“contract, combination. . . or conspiracy in restraint of trade

orcommerce. .. .” 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 Pro-

ductions, 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 behav-

ior for purposes of the antitrust laws and what kind of evi-

dence may be used to prove concerted action is addressed by

the Sherman Act itself, as well as the federal cases inter-

preting the Act. Not surprisingly, direct evidence of an agree-

ment to engage in anticompetitive 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 con-

spiracy is rarely susceptible to direct proof. Rather, proof of

concerted action is most often “a matter of inference, appre-

hended and proven circumstantially.” Trist v. Federal Savings

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

omitted). 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:

No formal agreement is necessary to constitute an unlaw-

ful conspiracy . . . . The essential combination or con-

spiracy in violation of the Sherman Act may be found in

a course of dealings or other circumstances as well as in

55a

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 under-

standing, or a meeting of minds in an unlawful arrange-

ment, 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 suffi-

cient to warrant a denial of the defendants’ summary judg-

ment motion.

The “direct” evidence to which both plaintiffs refer consists

primarily of incriminating statements and observations made

by various defendants and other members of the industry.

It includes evidence that competing manufacturers and com-

peting wholesalers held meetings, discussed 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” evi-

dence 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.

56a

A. Plaintiffs’ evidence of conspiracy against the Manufac-

turer Defendants

In support of their allegations that the Manufacturer Defen-

dants 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) interdependence

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, for-

mal communications among competitors—i.e. an opportunity

to conspire.

First, the plaintiffs argue that the defendants have engaged

in parallel, anticompetitive conduct which was manifested

in the form of industry wide price discrimination and a

coordinated refusal to discount to retail pharmacies. A central

element of the plaintiffs’ position is that the defendants

engaged in a two-tiered pricing system, 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 exis-

tence of the tiered system and the manufacturers’ general

approval of it. Regarding his participation in a series of Phar-

maceutical Manufacturers Association (“PMA”) meetings

concerning tiered or differential pricing, Landsidle testified

as follows:

Q: What were the points of views that were expressed?

A: People would express the point of view that, histor-

ically, the industry has offered different prices to

different classes of customers, we could do so. The

marketplace operated best if we did so, and that

should be done. Some people said, however, politi-

10 For a detailed discussion on industry-wide resale price main-

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

ee

OO

57a

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 practice of

having different prices was the appropriate practice.

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

Defendants respond by arguing that a “glaring” absence of

parallel behavior exists in their pricing practices. In contrast

to the plaintiffs’ assertions, the defendants state that manu-

facturers’ list prices were not parallel and were in fact set

competitively. As the defendants note, one of the Class Plain-

tiffs’ 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 discounting in the 1980s;

others started in the 1990s; and the size of the manufacturer

discounts varied widely by product and consumer. Accord-

ingly, it is the defendants’ position that their pricing practices

have been competitive.

However, conduct need not be point-for-point consistent to

be deemed parallel.'' The plaintiffs are not alleging that all

competition among the Manufacturer Defendants ceased.

Rather, the anti-competitive conduct in which the defendants

allegedly engaged was the uniform 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 pharma-

cies and retail buying groups. The plaintiffs’ concession that

11

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. Jd.; Market Force, 906 F.2d at 1170.

58a

discounting to managed care began at varying times and

occurred in varying degrees does not undermine their theory.

Central to the plaintiffs’ claims is the Manufacturer Defen-

dants’ allegedly collective agreement not to bid to community

pharmacies—chains and buying groups alike—seeking to par-

ticipate in discounting programs already offered to managed

care. According to the plaintiffs, the early 1980s saw the

advent of substantial discounting by pharmaceutical manu-

facturers to managed care entities. As these pricing practices

began to proliferate and to affect the marketplace, retail phar-

macies, both individually 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 discounts

to retail pharmacies, retail buying groups, or the retail “class

of trade.”'? For instance, on May 15, 1986, after receiving a

request for bid pricing from the Pharmacy 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 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.

12

See Class Plaintiffs’ Response to the Motion of the Wholesaler

Defendants for Summary Judgment and to the Legal Principles and Gen-

eral Background Facts Submitted by the Manufacturer Defendants (here-

inafter “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.

59a

The uniformity of the Manufacturer Defendants’ refusal to

deal with retail pharmacies as a class is striking. That the

defendants’ general refusal to even discuss discounting

with retail pharmacies was the result of collusion moreover

finds circumstantial support in\the record. Both the Class

Plaintiffs and the Independent Plaintiffs come forward with

certain statements and observations made by members of the

industry which cast in a suspicious light the defendants’ con-

duct. By way of example, we set forth some of the plaintiffs’

evidence.

Julius Sarnat, a former executive with wholesaler General

Drug Company, testified as his deposition that there were dis-

cussions and a “general agreement” among the Manufacturers

on the subject of selling to retail buying groups:

Q: You recall involving the drug manufacturers 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 acqui-

sition of their products.

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. 4

Sarnat Dep. at 89-90 (emphasis added).'*

13

Manufacturer Defendants argue that Sarnat’s testimony is not

direct evidence of a conspiracy not to offer discounts to retailers, for Sar-

nat is not talking about discounting to retail pharmacies but rather, about

manufacturers’ selling directly to retail pharmacies. The defendants fur-

ther attack the foundation of Sarnat’s observation, pointing out that when

asked, Sarnat could not remember exactly with whom he spoke.

60a

A series of documents involving Ciba-Geigy offers perhaps

even more compelling evidence that the defendants’ frequent

denials of retail pharmacists’ requests for discounts were the

result of concerted actions. On September 4, 1985, a Ciba-

Geigy memorandum noted the growth of retail pharmacy buy-

ing groups and their increasing requests for bids from drug

manufacturers and stated:

It would be hoped that all drug companies could 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 memo-

randum, one of the recipients the next day suggested that

steps be taken to assure that drug companies were “united” as

to the issue:

The attached information” is self-explanatory, and I pass

it on to you for two reasons. First, for your information;

secondly and more importantly, to ask if there is any-

thing we are doing or can do about this potentially dan-

gerous situation. /s the PMA taking steps to assure that

companies are united on this issue, and can we put pres-

sure 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 companies

would reject these offers.” Jd. The Manufacturer Defendants

attempt to minimize the significance of this exchange, stating

that the memoranda were never acted upon and further claim-

ing that upon concluding that these communications were

improper, the second memorandum was “tossed in the

garbage.” Nevertheless, this does not detract from the fact

that such communications were made and does not address the

14

The “attached information” consisted of two letters sent to phar-

macists in Mississippi and Kansas seeking participation in retail buying

groups formed to obtain contract pricing from manufacturers.

6la

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 Phar-

maceutical Council (“NPC”) meeting" reflect a discussion of

“therapeutic substitution” and “referred product list[s].” The

notion that manufacturers would even enter into discussions

with buyers concerning therapeutic substitution is moreover

referred to as a “disturbing trend.” Independent Plaintiffs’

Landgraf Exhibit 15 at NPC00849.

While these representative statements alone do not prove

the existence of an agreement violative of the Sherman Act,

taken together, they buttress the plaintiffs’ argument 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 Manufacturer

Defendants’ interest to engage in the alleged parallel 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 defen-

dants had something to gain by consciously engaging in

apparently anti-competitive parallel conduct is a critical com-

ponent to the plaintiffs’ conspiracy claim. To use the Indi-

vidual Plaintiffs’ choice of words, this entails a showing that

the conduct claimed to be parallel would be in each conspir-

ator’s interest only if all conspirators 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 Manufacturer

Defendants’ refusal to discount to the retail segment is clear:

to prevent the spread of the price competition that they were

experiencing in the managed care segment of the industry. As

15

In attendance at this meeting were representatives from many

named defendants, including: Eli Lilly, Abbott, Pfizer, Glaxo, Smith-

Kline, Searle, Marion Merrell Dow, Johnson & Johnson, Zeneca, Warner

Lambert, Rhone-Poulenc Rorer, Bristol Myers Squibb, Boehringer Ingel-

heim and Upjohn. See Independent Plaintiffs’ Landgraf Ex. 15 at

NPC00849.

62a

the Individual Plaintiffs describe the situation, the spread of

discounts to community pharmacies would have “significantly

eroded the manufacturers’ bloated profit margins.” See Indi-

vidual 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 Plaintiffs’

Ex. 27 at GL00911453 (pricing brochure notes that “the tra-

ditional retail class of trade” has been “subsidiz[ing]” dis-

counts to favored buyers).

As plaintiffs’ counsel articulated during oral argument,

back in the 1970s or 1980s, one manufacturer committed 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 manufacturers want to repeat that

“sin” by succumbing to the discount requests of the retail

pharmacies. Through a series of meetings, a continuous inter-

change of information, and an ultimate interchange of com-

mitment, 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 plain-

tiffs’ 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 Medco as an ally, then we might

reach sweetheart understandings which would be of

competitive advantage to us. Of course we do not want

to be perceived by our brethren on the PMA as black

sheep.

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.

63a

Class Plaintiffs’ Tab 312 at 1; Tab 313 at 290-96; 373-376.!”

Such evidence supports the plaintiffs’ notions of manufacturer

interdependence.

Finally, that the defendants had the opportunity to conspire

is unquestionable. The record is replete with evidence of sem-

inars 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 manufacturers. Furthermore, the defendants’

mutua! 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 oppor-

tunities for collaboration on competitive issues. Communi-

cations were made on such issues as advance manufacturer

notification of price increases, pricing options for manufac-

turers, and the administration of the chargeback system.

Regarding this last subject, a memorandum dated March 29,

1990 discusses 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 mem-

orandum and others as evidence of industry-wide collusion

and anti-competitive conduct.

17

The Manufacturer Defendants respond to this document by argu-

ing that the context involved a relationship between an advertising

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

64a

The plaintiffs cite to additional occasions on which large

numbers of manufacturers gathered to discuss common con-

cerns within the industry. These discussions frequently were

held under the auspices of other industry organizations or

conferences. Beginning in 1991, for example, the Inter-

national Business Communications/U.S.A. Conferences, Inc.

(“IBC”), started conducting seminars on pharmaceutical pric-

ing. Representatives of virtually every major pharmaceutical

manufacturer were in attendance to view sessions on such

topics as “Price Discounting to Major Purchasers,” “Phar-

maceutical Pricing Forces, Trends & Strategies,” and “Man-

aged 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

pharmaceutical pricing. Indeed, the record is replete with evi-

dence of similar meetings attended by virtually every manu-

facturer. Sensitive information was frequently on the agenda

at these meetings, hereby providing a forum for such infor-

mation to undergo a coordinated, industry wide exchange. At

the very least, both groups of plaintiffs have come forward

with evidence that the defendants engaged in frequent com-

munications with one another and that they had a general

mutual awareness of each other’s policies.

In responding to the plaintiffs’ evidence, the Manufacturer

Defendants effectively fragment and compartmentalize 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 compart-

mentalizing the various factual components and wiping

the slate clean after scrutiny of each. “. . . The charac-

ter and effect of a conspiracy are not to be judged by dis-

membering it and viewing its separate pans, 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

65a

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; meet-

ings and communications between and among the defendants

are innocent activity and do not in and of themselves prove a

conspiracy; and systematic exchanges of competitive infor-

mation and trade data do not amount to a conspiracy. While

each piece of the plaintiffs’ evidence, when looked at in iso-

lation, would not be sufficient to establish a conspiracy, when

the evidence 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 existence 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 business activities as it

is with illegal conspiracy.

We now turn to whether the Manufacturer Defendants 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 [defen-

dants] had no rational economic motive to conspire, and if

their conduct is consistent with other, equally plausible expla-

nations, the conduct does now give rise to an inference of

conspiracy.” Matsushita, 475 U.S. at 596-97."*

7 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. Jd. Rather, conduct that is

66a

Indeed, the defendants maintain that their conduct cannot

give rise to any such conspiratorial inference, and they set

forth several contentions to that effect. The defendants first

affirmatively contend that their pricing behavior was not “par-

allel” 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) (affirming summary judgment

where conduct of insurers alleged to have engaged in con-

spiracy 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 consid-

erably depending on the manufacturer, the drug, the dosage,

and the competitive circumstances involved. The policies of

manufacturer discounting to managed care may have been

uniform among these defendants, but such policies were

implemented at different times and to different degrees. Fur-

thermore, although the plaintiffs allege that the manufactur-

ers uniformly decline to give discounts to retailers, the

defendants profess that several manufacturers, in the exercise

of their individual business judgments, have offered discounts

or rebates on particular products to retailers or retailer buy-

ing groups.

The defendants argue that, even if we were to construe as

parallel conduct the manufacturers’ uniform discounting to

managed care and that unvarying refusal to consider the retail

pharmacies’ ability to similarly influence the market, the

plaintiffs still cannot establish that each of the manufacturer’s

pricing decisions was against its economic self-interest. Evi-

dence of parallel conduct which is a “plausible coincidence or

an expectable response to a common business” does not sup-

port an inference of conspiracy. Nichols Motorcycle Supply

Inc. v. Dunlop Tire Corp., No. 93 C 5578, 1995 WL 532265,

*27 (N.D.II1. Sept. 6, 1995) (quoting 6 P. Areeda, Antitrust

Law, § 1425 at 146).

as consistent with permissible competition as with illegal conspiracy does

not, without more, support an inference of conspiracy. Monsanto Co. v.

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

67a

The defendants maintain that the various pricing and dis-

counting decisions made by the defendants were based on a

variety of legitimate business concerns, including the chang-

ing posture of the health care industry and the economic

emergence of managed care. The granting of discounts to hos-

pitals and managed care organizations was purportedly jus-

tified by the manufacturers’ desire to avoid being denied

access to participating physicians and patients. The denial of

comparable discounts to retail pharmacies was similarly jus-

tified given the defendants’ belief that the retail pharmacies,

which did not utilize restrictive formularies, did not possess

the same ability to deny manufacturers access to certain

groups. The defendants argue that these circumstances, which

were common to all of the manufacturers, add to the “plau-

sible and justifiable alternative interpretation of [each defen-

dant’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 customers because, unlike managed care,

the retail customers did not have the power to affect market

share.

This contention by the defendants, that the retailers lack the

ability to affect market share, is vigorously disputed by the

plaintiffs and is pivotal to each party’s case. If, as a matter of

law, the manufacturers’ collective assertions are accurate,

then the defendants’ no-discounting policies truly reflect a

legitimate business concern. However, if the plaintiffs are

able to prove an ability to influence the market, then the

defendants’ uniform denials warrant scrutiny beyond that

afforded on summary judgment.

The defendants steadfastly maintain that retailers signifi-

cantly differ from managed care in their ability to affect mar-

ket share. Through its use of formularies and its ability to

control access to patient populations, managed care suc-

cessfully exerted economic pressure on the manufacturers in

order to negotiate discounts on previously undiscounted drugs

The ability of managed care to exclude the manufacturer’s

68a

products from their respective formularies absent manufac-

turer capitulation provided a powerful incentive. The defen-

dants 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 sig-

nificantly from managed care in this respect, the defendants

note that, in sharp contrast to their experiences 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 and cannot switch to alternative products as prices

increase. Except in cases where generic substitution is per-

mitted, it is the prescribing doctor, and not the retail phar-

macy, that determines the brand of drug to be prescribed. See

Defendants’ Joint 12(m) at 9 62.

The defendants set forth several explanations as to why

retailers have not effectively implemented their own formu-

laries or engaged in therapeutic switching in an effort to liken

themselves to managed care. Reasons cited include the “ques-

tionable” ethics of pharmacies attempting to influence physi-

cian prescribing habits, pharmacists’ 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 4 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 dis-

counts.

The plaintiffs, of course, vehemently dispute the defen-

dants’ 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 conspiracy and the correspond-

69a

ing 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 notwith-

standing, where pharmacist requests to switch prescriptions

have been made to physicians, the record indicates that phar-

macists have overall been very successful. A nationwide sur-

vey cited by the 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.

Experiments 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, possess

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 products. 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 qual-

ify 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

19. Towler thereafter began dispensing only Glaxo’s Ventolin,

but Glaxo refused to change its no-discount policy. Towler

Aff. 411.

After three months, Schering’s representative visited Towler

and wanted to know why Towler was dispensing so much

Ventolin when he had previously been dispensing Schering’s

Proventil. Towler Aff. II 17 11-12. Towler explained what he

was doing and, having demonstrated Towler’s ability to influ-

ence the market, requested a Schering discount. Schering’s

70a

representative and her supervisor informed Towler that Scher-

ing did not give discounts to independent pharmacists under

any circumstances. Towler Aff.II 99 13-14. At the urging of

Glaxo’s representative, Towler again began dispensing only

Ventolin. 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 q 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 917. Undaunted, Towler for the next two

months called that doctor and obtained her permission to

change all prescriptions written 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 Mz » 1992, Towler

had all Ventolin prescriptions switched to Proventil. Towler

Aff.I1 99 18-21. Despite this graphic proof of Towler’s abil-

ity to affect the market, neither manufacturer was willing to

reward Towler’s activity with any incentives.

The plaintiffs cite several other instances which indicate

not-only that the retail pharmacies had the ability to move

market share, but that the defendants were cognizant of this

fact. Indeed, the defendants acknowledge that the principal

way in which the Independent Physician’s Associatior

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

incentives for the community pharmacists that dispense pre-

scriptions. See Defendants’ Joint Brief at 13. Along these

lines, a study conducted by Glaxo concluded:

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

Tla

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

pharmacy. . . . 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 for-

mulary recommendations and have the prescription

changed. ...

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

added). American Home Products similarly acknowledged

such observations, noting that “In some cases an HMO expects

the pharmacist to enforce the formulary, contacting the physi-

cian 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 plain-

tiffs strongly disagree. In sum, the plaintiffs have demon-

strated 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 busi-

ness activities of the plaintiff as it is with an illegal con-

spiracy. Although the defendants maintain that their pricing

policies with regards to the retail pharmacies are lawfully

founded, the plaintiffs have sufficiently rebutted the defen-

dants’ “legitimate” assertions that retail pharmacies were

refused discounts due to their inability to move market share.

oo

72a

The record is replete with instances of collusive behavior,

paraliel conduct, uniformity of responses, mutual awareness

of each other’s policies and practices, and various incrimi-

nating 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 defen-

dants were pursuing their legitimate independent

interests.

Even assuming that the evidence of conspiracy could be

construed as ambiguous, the factors cited above by the plain-

tiffs tend to exclude the possibility that the defendants were

pursuing independent, legitimate interests. See Serfecz v.

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

of evidence that the retailers could move market share (in

some cases, better than the preferred customers), the defen-

dants uniformly persisted in their refusals to extend discounts

to this entire segment of the market. Portions of the record

belie the defendants’ contention 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

discussed above, the record suggests that, having succumbed

to the pressures of managed care, the manufacturers together

set out to impose artificially high prices on the retail cus-

tomers 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’ Sherman Act claims may appro-

priately proceed to trial. Accordingly, the Manufacturer

Defendants’ motion for summary judgment is denied.

gh a a a eee

73a

II. Manufacturer Defendants’ Individual Summary Judg-

ment Motions

Having determined that the record supports an interence of

conspiracy among the Manufacturer Defendants, we now

address the defendants’ individual motions for summary judg-

ment. As to the plaintiffs’ Sherman Act claims, each of the

twenty-four Manufacturer Defendants moves for judgment in

its favor.'? In support, each defendant presents evidence in an

effort to show that its pricing policy was the product of inde-

pendent 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 pharmacies. In order to

accomplish this goal, the plaintiffs maintain that manufac-

turers refused to make available to community pharmacies

various discounts, rebates, and other price-lowering mecha-

nisms that each of the Manufacturer 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 Antitrust Litigation,

1996 WL 51210 (N.D.IIl. Feb. 6, 1996). Upon its formation in

January 1991, DuPont Merck declared and thereafter

employed a Single Price Policy, charging the same undis-

counted prices for its brand name products to both managed

care and retail pharmacies. DuPont Merck’s adherence to such

a policy, which by its very nature was antithetical to the

“tiered” pricing policy at the heart of the alleged conspiracy,

19

As indicated above, on February 15, 1996, this court prelimi-

narily approved a settlement agreement between the Class Plaintiffs and

many of the Manufacturer Defendants. As between the Class Plaintiffs

and the settling defendants, no motions for summary judgment are here

considered. However, given that no settlement has been reached with the

Individual Plaintiffs, each of the Manufacturer Defendants’ motions for

summary judgment will be addressed.

74a

effectively distanced DuPont Merck from the plaintiffs’ alle-

gations. Although DuPont Merck participated in the charge-

back system and was privy to discussions and meetings with

the other manufacturers, DuPont Merck simply did not engage

in the alleged proscribed conduct, 1.e., DuPont Merck neither

engaged in discriminatory pricing, nor did it charge Plaintiffs

artificially high prices when compared to favored buyers.

Summary judgment in DuPont Merck’s favor was therefore

appropriate.

Unlike DuPont Merck, each of the remaining Manufacturer

Defendants has, during the relevant period, engaged in

the two-tiered pricing scheme about which the plaintiffs

complain. The extent to which each manufacturer has imple-

mented such a policy varies, as do the circumstances sur-

rounding such implementations. Not surprisingly, the

defendants seek to capitalize upon these variances in an effort

individually to distinguish themselves from other manufac-

turers and to distance themselves from any alleged conspir-

acy. Valiant efforts are made by each defendant to liken itself

to DuPont Merck. While several present compelling argu-

ments, none, however, is so strong as to warrant entry of sum-

mary judgment in its favor.

Although the Manufacturer Defendants suggest that the

plaintiffs must build an entirely separate case against each

defendant, this is not entirely true. Rather, in deciding a

motion for summary judgment, the court in a federal antitrust

case “should not view each piece of evidence in a vacuum”:

Seemingly innocent or ambiguous behavior can give rise

to a reasonable inference of conspiracy in light of the

background against which the behavior takes place. Evi-

dence can take on added meaning when viewed in con-

text with all the circumstances surrounding a dispute.

Thus, while we must carefully determine what inferences

reasonably may be drawn from each piece of evidence,

we must make this determination in light of all of the

evidence proffered by [the plaintiffs).

75a

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

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

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

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

dants attempt to exonerate themselves by compartmentalizing

their actions, these efforts must be construed within the

greater context of all of the evidence submitted.

Perhaps the most critical component of the defendants’ case

is the propriety of the manufacturers’ justification for refusals

to offer discounts to retail pharmacies in light of existing con-

tracts and discounts uniformly offered to managed care. The

defendants have steadfastly maintained that managed care

possesses an ability to move market share which the retail

pharmacies do not possess. To the extent that a manufacturer

reaches this conclusion independently, the asserted legitimacy

of such a belief becomes more credible.

To this end, manufacturers such as Boehringer Inhelheim,

Burroughs Wellcome, SmithKline Beecham, Upjohn, and

Warner-Lambert point to independent pricing studies which

suggest that discounts to retailers would not be profitable.

Numerous other manufacturers assert that their policies were

the result of unsuccessful attempts to offer certain discounts

to retailers.2° Defendants such as Burroughs Wellcome, Eli

Lilly, Hoffmann-La Roche, and Pfizer strive to distinguish

their pricing policies from the other defendants.*' Defendants

oad Among the Manufacturer Defendants making such an argument

are American Home Products, American Cyanamid, Bristol Myers

Squibb, Boehringer Inhelheim, Burroughs Wellcome, G.D. Searle, Glaxo,

Hoffmann-La Roche, Johnson & Johnson, Knoll Pharmaceuticals,

Hoechst Marion Roussel, Rhone-Poulenc Rorer, Sandoz, Schering

Plough, SmithKline Beecham, Upjohn, Warner-Lambert, and Zeneca.

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

are single source products, and as to these products, no discounts are

given to anyone. Eli Lilly maintains that it adhered to a single price pol-

icy until 1992. Pfizer asserts that it did not offer discounts to anyone on

single source drugs until 1992. Hoffman-La Roche notes that its primary

market is hospitals and institutional care, not the retailer pharmacies.

Other manufacturers make less convincing attempts to distinguish their

policies, but virtually everyone, including those cited, has to some extent

76a

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

either not present or were not involved during critical meet-

ings at which allegedly “conspiratorial conduct” occurred.

While such claims lend support to the notion that these

manufacturers’ decisions were independently founded, they

do not detract from the substantial evidence submitted by the

plaintiffs to the contrary. Indeed, with regards to the market

share issue, the plaintiffs point to numerous instances in the

record where manufacturers (including those named above)

have admitted that retail pharmacies can and do influence the

market. Several examples illustrate the point:

* In enumerating the market forces that Defendant

Abbott was “against” because they could negatively

affect Abbott’s market share and margins, Abbott

listed the power of retail pharmacists first. Lehn Ex.

No. 3, AB 70001155-56.

* When Defendant Knoll’s competitor, Searle, granted

retail pharmacists a 5%, one-time stocking allowance

on a competitive product, Knoll was forced to

respond immediately and “revise” its stocking ~

allowance to “match” that of Searle. Turturro Ex. N.

13, RP 912627-28.

* According to Defendant SmithKline Beecham,

“[rjetail pharmacies represent a large and important

market where we have an excellent opportunity to

significantly increase sales. Retail pharmacists can

influence the product dispensed, . . . . and they can

provide [the manufacturer] with valuable information

on physician prescribing habits.” Fish Ex. No. 23,

SK 200300496-99, SK 200301475-78.

* A January 1992 memorandum by Defendant Searle

recognized that “Chains can have a significant influ-

ence over dispensing Searle products. . . .” Heady

Ex No. 50, SE 49423-29.

engaged in two-tiered pricing, the chargeback system, and a refusal to

extend discounts to retail pharmacies.

ial alii

T7Ta

* After visiting with the Big B pharmacy chain, Defen-

dant Merck was “convinced that they have the deter-

mination, the financing, the ability to shift market

Share and the number of members which will justify

offering the PBM initiative to this organization.

. .” Senich Ex. No. 118, MR 7232-36.

* Defendant Pfizer provided a one-time rebate to

retailers for stocking the Pfizer product, MS Contin.

Pfizer noted that “dollar claims (for the rebates]

could be significant” and that the one-time promo-

tion accounted for “a jump in monthly sales of MS

Contin to this class of trade in September 1991.

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

* Defendant Eli Lilly has noted that “as we move into

the nineties, It seems apparent that the decisions on

prescription drugs are going to be very significantly

influenced by non-physicians.” The pharmacist was

first on Lilly’s list of such “influencers.” Gall Ex.

No. 14, LY 2181029-39.

The record is replete with similar response within the phar-

maceutical industry which warrant the conclusion that retail

pharmacies had the ability to influence the market and that

the manufacturers were conspicuously aware of that fact. To

varying degrees, virtually every manufacturer acknowledged

the power of the retailer, yet the retailer was given treatment

persistently less favorable than that afforded to managed care.

While the presence of particulars such as independent stud-

ies and failed rebate programs might be sufficient for abso-

lution absent other evidence of participation in a conspiracy,

such evidence, when combined with the presence of the two-

tiered pricing policies and the numerous exchanges which

transpired regarding sensitive industry issues, fails to rebut

the inference of manufacturer Participation in a conspiracy.

Similarly, the failure to amend all blameworthy industry func-

tions, taken alone, might be sufficient for manufacturer exon-

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

78a

evidence indicated throughout this opinion, entry of summary

judgment cannot be appropriate.

Although each manufacturer aspires to distinguish itself

from the next, several commonalties emerge from the record.

The record indicates, for example, participation by virtually

every manufacturer in industry meetings and seminars to dis-

cuss strategies that should be followed in setting prices for

brand name prescription drugs. Similarly, virtually every

manufacturer participated in surveys and inquiries conducted

by other defendants regarding pricing policies. Additional

common threads emerge. Every manufacturer, for example,

was directly involved with the implementation of a charge-

back system through which manufacturer discounts were

extended to favored purchasers. Every manufacturer further

participated in discussions and agreements pertaining to their

refusals to bid to retail buying groups and the maintenance of

differential pricing. Finally, with recent and limited excep-

tions, every manufacturer has refused to offer discounted pric-

ing to retail pharmacies and retail buying groups. As to this

last observation, evidence of the defendants’ un

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