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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1997

## Text

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

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2048%3A2. Public record. Not legal advice.