A class action antitrust Complaint passed the new, stricter "plausibility" pleading standard the Supreme Court established earlier this summer in Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955; (No. 05-1126) 2007 U.S. LEXIS 5901 (2007). In re Hypodermic Products Antitrust Litigation, No. 05-CV-1602 (JLL/CCC) (D. N.J. June 29, 2007). In three separate, unpublished opinions, a New Jersey district court overruled defendant medical device manufacturer Becton Dickinson & Company (Becton)’s motion to dismiss Section 1, Sherman Act and Section 3, Clayton Act claims because the three Complaints provided plausible grounds to infer that Becton and group purchasing organizations (GPOs) entered into unreasonably anticompetitive agreements.
Healthcare organizations, pharmacies and wholesalers sued Becton separately. This piece focuses on the court’s decision rejecting Becton’s motion to dismiss plaintiff healthcare organization, Medstar Health Inc. and its subsidiaries’ class action amended Complaint. Plaintiffs’ Complaint states causes of action for exclusive dealing and exclusionary practices in violation of Section 1 of the Sherman Act and Section 3 of the Clayton Act; unlawful maintenance of monopoly power and attempted monopolization in violation of Section 2 of the Sherman Act; state antitrust law violations; and unjust enrichment. The Complaint alleges that that Becton has been a leading U.S. hypodermic syringe manufacturer since the 1950’s and that Becton has a dominant share in four relevant product markets collectively called the disposable hypodermic product market. The Complaint contends that Becton entered into anticompetitive arrangements with GPOs, which serve as negotiating agents for hospitals, where Becton would pay a GPO million dollar cash payments and offer "equity positions" with the expectation that the GPO "would favor Becton’s products, regardless of price, over those of Becton’s competitors". Kickbacks like these were illegal until 1986, when Congress amended the Social Security Act’s "anti-kickback" provisions to create exceptions for vendors’ payments to GPOs. For example, in 1999, the Complaint alleges, Becton awarded one GPO, Novation, with a $1 million payment and high administration fees for a four year "sole-source" contract, whereby Becton would be the only vendor approved by Novation to sell disposable hypodermic products to Novation members. In 1998, the Complaint also alleges, Becton and another GPO, Premier, entered into a 7.5 year sole-source contract. Further, the Complaint alleges that when Becton faced competition in the 1970’s from Terumo, a Japanese corporation, Becton engaged in a program called "Block Terumo". The program entailed "the use of an aggressive strategy" including "bundled pricing and contracting strategies and other similar exclusionary and predatory tactics". Becton allegedly used similar strategies to limit competition from another competitor, Retractable Technologies, in the late 1990s. The Complaint alleges that Becton’s agreements and practices foreclosed competition and thus caused purchasers of Becton’s disposable hypodermic products to pay higher prices.
Standard for Review
Becton’s motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure contended the Complaint is deficient in alleging unlawful exclusionary conduct, anticompetitive effects, the relevant markets, antitrust injury, and standing. The Court addressed the standing issue in a separate opinion. Before considering each ground for dismissal, the court set out the applicable standard of review. The court first observed that in the Third Circuit, antitrust Complaints should be liberally construed, citing Commonwealth of Pa. ex rel. Zimmerman v. PepsiCo, Inc., 836 F.2d 173, 179 (3d Cir. 1988). The court then referred to Twombly, where the Supreme Court held that to avoid dismissal, an antitrust Complaint need not provide detailed factual allegations but must plead "enough facts to state a claim to relief that is plausible on its face." 127 S. Ct. at 1964, 1974. The court followed Twombly and found that the Complaint’s Section 1 and Section 3 causes of action alleged facts that provided plausible grounds to infer that Becton and certain GPOs and manufacturers had entered into anticompetitive, illegal agreements.
Unlawful Exclusionary Conduct
The court set out the elements to the Complaint’s’ first count against Becton, unlawful exclusive dealing in violation of Section 1 of the Sherman Act and Section 3 of the Clayton Act. Section 1 requires: (1) concerted action by defendants; (2) that produced anti-competitive effects with the relevant market; (3) that the concerted action was illegal; and (4) that the plaintiff was inured as a proximate result of the concerted action. The crucial question, the court noted, is whether the challenged anticompetitive conduct arises from independent decision or from an agreement, tacit or express. Twombly, 127 S.Ct at 1964. Recovery under Section 3 of the Clayton Act generally requires, the court said, (1) an exclusive dealing arrangement; and (2) the probable effect of exclusion must be to substantially lessen competition in the market". Citing Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961). In analyzing the sufficiency of these claims, the court applied Twombly which requires that a Complaint allege "enough facts to state a claim to relief that is plausible on its face." The court held the Complaint satisfied this standard.
The court first pointed out the Complaint’s allegations about Becton’s kickbacks to Premier and Novation and Becton’s four and 7.5 year exclusive dealing contracts with these GPOs. The Complaint also cites a February 1997 article that reports that as a result of a deal between Becton and Premier, Premier would receive warrants for Becton stock, so that the more Premier purchased from Becton, the more Premier’s warrants would be worth. The Complaint additionally alleges that Becton entered into agreements with GPOs, certain hospitals and other customers which included exclusivity clauses and bundled financial incentives. If a member desired to purchase disposable hypodermic products from another manufacturer, the Complaint alleges, the class member risked losing numerous financial incentives. These agreements foreclosed competition in a substantial portion of the market, the Complaint alleges. Finally, the Complaint alleges antitrust injury in contending that plaintiffs were injured by Becton’s exclusive arrangements to the extent they were forced to pay higher prices for disposable hypodermic products than they would have paid in the absence of the agreements. The court thus concluded that the Complaint satisfied Twombly because it alleged enough facts to raise a reasonable expectation that discovery will lead to evidence of illegal agreement.
Becton also argued, unsuccessfully, that plaintiffs’ action should be dismissed because the Complaint contains no particularized allegations about competition in any specific market. Becton cited no legal authority, the court pointed out, that indicated that such particularized allegations are a pleading requirement. To the contrary, the court said, "Federal Rule of Procedure 8(a)(2) requires only a short and plaint statement of the claim showing that the pleader is entitled to relief in order to give the defendant fair notice of what the … claim is and the grounds upon which it rests", quoting Twombly, 127 S.Ct. at 1964 (citations omitted). In any event, the court continued, the Complaint provides examples of the types of exclusionary practices Becton utilized. Unlike in Twombly, where the Complaint sought to demonstrate anticompetitive agreements based on parallel conduct through inference, the Complaint in this instance alleges specific anticompetitive agreements between Becton and certain manufacturers (and GPOs). This gives Becton, the court found, sufficient notice of the particular grounds of plaintiffs’ claims, particularly given the fact that plaintiffs have not yet had the benefit of discovery. For additional support, the court quoted Hosp. Bldg. Co. v. Trs. of Rex Hosp., 425 U.S. 738, 745-57 (1976), where the Supreme Court said that "dismissals prior to giving the plaintiff ample opportunity for discovery should be granted very sparingly."
Becton also argued for dismissal on the basis that plaintiffs improperly defined the relevant market. The court rejected this argument too, finding that the determination of a relevant product market is a highly factual one best allocated to the trier of fact.
Twombly‘s plausibility standard for pleading Section 1 and Section 3 violations will be satisfied when a Complaint alleges anticompetitive agreements with enough specificity to give the defendant adequate notice of the basis of plaintiff’s claims. Here, this was achieved with allegations that identified with particularity the parties, duration, specific contents, and the effects of alleged anticompetitive agreements. Quoting Twombly, the court added that a Complaint must allege enough facts to create a reasonable expectation that discovery will reveal evidence of illegal agreement. The Complaint’s allegations satisfied the Twombly plausibility standard since they raised a reasonable expectation that discovery will reveal evidence of an illegal agreement.