In HDC Medical, Inc., v. Minntech Corporation, 2007 U.S. App. Lexis 1618, __ F.3d __ (8th Cir.), the Eighth Circuit held that HDC had failed to demonstrate that a price difference between two products justified a finding that they were separate products.  Central to the court’s decision was HDC’s failure to present evidence that single-use and multiple-use dialyzers constituted a separate market or that Minntech’s actions were anticompetitive.

Dialyzers are used in dialysis to clear waste products from the body.  Minntech and HDC manufactured competing multiple-use dialyzer machines and disinfectants, known as reprocessing agents, that are used to clean the machines after each use. Minntech had a large share of the multiple-use dialyzer machine market and a corresponding share of the disinfectant market.  In addition to multiple-use dialyzers, companies could also use single-use dialyzers, although these cost approximately 23% more per use than a multiple-use dialyzer.

After the expiration of Minntech’s patents covering its disinfectant, HDC introduced a competing disinfectant, which cost 35% less than Minntech’s product, and captured approximately 11% of the disinfectant market. Minntech then changed its warranty provisions, so that the use of another company’s disinfectant would void the warranty. Minntech also changed the design of the uptake valve, which made the use of HDC’s disinfectant more difficult.  Finally, Minntech altered the barcode reader and the corresponding software on its machine in a way which complicated the reading of the barcode on HDC’s disinfectant, thereby increasing the record-keeping burden on users of HDC’s disinfectant. HDC brought suit, alleging that Minntech had attempted to monopolize the market for multiple-use dialyzer reprocessing agents by tying the warranty of the machine to the use of Minntech’s disinfectant and by altering the design of the machines.

The district court had granted Minntech’s motion for summary judgment, finding that 1) Minntech had not compelled its customers to use its disinfectant as a condition of using its machine, 2) use of Minntech’s disinfectant was not the only viable economic option, and 3) even if HDC had tied the sale of the disinfectant to the use of the machine, HDC did not have sufficient market power in the dialyzer market to give a dangerous probability of success. HDC Medical, Inc. v. Minntech Corporation, 411 F.Supp.2d 1096, 1100-1105 (D.Minn. 2006).  HDC appealed the district court’s decision, arguing that the district court had erred in its market definition, as it had included single-use dialyzers in the same relevant product market as multiple-use dialyzers in its determination that Minntech did not have sufficient market power.  HDC argued that multiple-use dialyzers were not in the same product market as single-use dialyzers, because the price of a single-use dialyzer exceeded the price per use of a multiple-use dialyzer.  If the market were defined as multiple-use dialyzers, then Minntech would have approximately 74% and 95% of the market.

The Court of Appeals affirmed the district court’s grant of summary judgment, finding that the facts in this case did not warrant a finding of a separate product market. Defining the contours of the product market in this case by the cross-elasticity of demand, the Court noted that HDC did not challenge the district court’s finding that single and multiple-use dialyzers have identical uses.  The Court, however, rejected HDC’s argument that in this case, the price differences per use between multiple and single-use dialyzers warranted a finding that they were separate products.

Citing the Supreme Court’s decision in United States v. Continental Can, 378 U.S. 441, 455 (1964), the Court first held that price differentials could only rarely be the basis of differentiating products, although it could be a relevant factor in certain cases. Although HDC argued that both United States v. Aluminum Co. of America, 377 U.S. 271 (1964) and United States v. Archer-Daniels-Midland Co., 866 F.2d 242, 246 (8th Cir. 1988) supported differentiating between single and multiple-use dialyzers on the basis of price, the Court found that those cases were distinguishable.

In ALCOA, the Supreme Court had found that insulated aluminum and insulated copper cable as used in overhead distribution were separate product markets, despite having similar uses.  The Eighth Circuit, however, distinguished this ALCOA decision from the dialyzer situation, because price had only been one of the factors the Court had used in making its determination.  The Supreme Court had also found that aluminum and copper also had separate customers, as copper tended to be used in larger applications where the brittleness of aluminum made it impractical.

In Archer-Daniels-Midland, the Eighth Circuit had found that the price difference between sugar and high fructose corn syrup indicated that the two products were separate despite identical uses. However, the Court distinguished Archer-Daniels-Midland on the grounds that while in Archer-Daniels-Midland the price difference had been caused by government subsidies, in this case there were no artificial constraints on the prices of single-use dialyzers that warranted differentiating them.  "HDC offered no evidence, other than a substantial price differential, to support the conclusion that single-use dialyzers are a distinct product market from multi-use dialyzers.  Accordingly, we must affirm the district court’s grant of summary judgment on HDC’s monopolization claim."  Playing a large role in the Court’s analysis was testimony from HDC and Minntech executives that their respective companies had lost business to single-use dialyzers.

The Court also rejected HDC’s attempted monopolization claims.  The Court rejected HDC’s claim that Minntech had attempted to exclude HDC from the market by threatening to cancel the warranty of any purchaser of a Minntech product who used HDC’s disinfectant, because Minntech had offered to certify any disinfectant as being compatible so long as the other producer paid for the tests.  In addition, Minntech had argued that it had a legitimate business reason for the restraint, as it needed to ensure that the materials used in the machine would not break it.  The Court held that HDC did not refute this reason, and therefore that the restraint was not anticompetitive.  "’Anticompetitive conduct is conduct without legitimate business purpose that makes sense only because it eliminates competition.’ . . . ‘When a valid business reason exists for the conduct alleged to be predatory or anti-competitive, that conduct cannot support the inference of a [Sherman Act] violation.’"  (internal citations omitted).

The Court then held that Minntech’s other conduct also had legitimate business justifications. Minntech argued that it had altered the uptake valve used for the disinfectant to ensure proper dilution and had changed the barcode reader to make it easier for Minntech’s customers to use it.  Although HDC argued that both of these modifications were aimed at excluding Minntech’s customers from using HDC’s disinfectant, the court found that HDC had failed to offer evidence that Minntech’s business justifications were false, and therefore the conduct was not anticompetitive.

The opinion has a number of interesting factors.  The Court affirms the grant of summary judgment, despite the inquiry being fact intensive, which would normally militate against summary judgment.  For example, the district court’s opinion noted that single-use dialyzers had significant advantages over multiple-use dialyzers, such as eliminating the need for sterilization and record keeping, which could justify a finding of a separate market.  Thus, the courts find an absence of an issue of material fact despite citing evidence that could potentially go both ways.

In addition, the opinion emphasizes the importance of refuting a defendants business justifications once they have been made.  In little over a page of analysis regarding the attempted monopolization claims, the Court mentions HBC’s failure to refute the legitimate business justifications 5 times.  However, the district court’s opinion did not frame the issue as a failure to offer evidence rebutting a legitimate business justification, but rather that Minntech’s actions did not foreclose the market, because the warranty was not important to customers.  Interestingly, the district court’s decision does not use either of the words "justification" or "explanation," while the Court of Appeals decision mentions those words 7 and 2 times, respectfully, in just the portion dealing with attempted monopolization claim.  Therefore, the Court of Appeals’ decision appears to be based on a different rationale than the district court’s decision.

Authored By:  Christopher Bowen

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