On March 31, 2008, a federal district court in Ohio granted summary judgment after finding insufficient evidence to support a claim that Respironics, Inc., a manufacturer of positive airway pressure devices ("PAPs") and masks used to treat obstructive sleep apnea ("OSA"), entered into exclusive deals with sleep labs and durable medical equipment suppliers ("DMEs") to prescribe Respironics’ products to the exclusion of others.  Invacare Corp. v. Respironics, Inc., No. 1:04 CV 1580 (N.D. Ohio 3-31-2008). 

Plaintiff, a manufacturer and competitor in the sleep mask and PAP markets, initially sued Respironics in August 2004 on the following claims: 1) monopolization; 2) attempted monopolization; 3) restraint of trade in violation of Section 1 of the Sherman Act; 4) price discrimination; 5) violations of Ohio’s Valentine Act; and 6) unfair competition.  After an earlier round of partial summary judgment, the only claims remaining before the court were plaintiff’s restraint of trade claims under both the Sherman Act and Ohio’s Valentine Act.  A restraint of trade claim under Ohio’s Valentine Act is subject to the same analysis as a restraint of trade claim under the Sherman Act.  Richter Concrete Corp. v. Hilltop Basic Res., 547 F.Supp. 893, 920 (S.D. Ohio. 1981). 

Plaintiff alleged that Respironics and sleep labs entered into agreements whereby Respironics agreed to sell its products to the sleep labs at predatorily low prices in exchange for the sleep labs’ prescribing Respironics’ products to the exclusion of others’.  The court recognized that plaintiff alleged a vertical restraint of trade because it involved agreements among actors at different levels of market structure to restrain trade.  The "rule of reason" applies to allegations of vertical restraints.  Care Heating & Cooling, Inc. v. Am. Std., Inc., 427 F.3d 1008, 1013 (6th Cir. 2005).  Under a rule of reason analysis, plaintiff first had to show the existence of an agreement.

Existence of Agreements with Sleep Labs

Plaintiff did not offer any direct evidence of exclusive agreements with sleep labs, thus plaintiff instead relied on circumstantial evidence to establish such agreements.  To survive a motion for summary judgment, plaintiff needed to present evidence that would tend to exclude the possibility that Respironics and the sleep labs acted independently.

Plaintiff pointed out that Respironics gave away an estimated 591,254 free masks to sleep labs from 2000 to 2004, under a "Mask Maintenance Program," at a cost of approximately $1.5 million.  Respironics’ sales training materials further indicated that the goal in giving away the masks was to obtain brand-specific prescriptions for its masks and PAPs, and to keep customers from seeking competitive alternatives.  The court found that this evidence merely demonstrated permissible internal company goals and did not, by itself, indicate a conspiracy with sleep labs.  The court also disagreed with plaintiff’s argument that Respironics’ practice of giving away free masks was against Respironics’ economic self-interest because Respironics could have achieved the same results by selling their masks to the labs.  Evidence that some sleep labs received free masks from multiple companies and that plaintiff itself had admitted to providing either free or below-cost masks to sleep labs tended to show that Respironics’ practice was consistent with its economic self-interest.

Plaintiff also challenged other practices such as Respironics’ providing preprinted prescription pads to sleep labs which made it easy for a physician to check a box for Respironics rather than writing out a prescription for a competitor and Respironics’ practice of providing certain sleep labs with resources and tools to help them identify new patients.  As with the free sleep mask program, the court again found that plaintiff had not provided evidence to create a genuine issue of material fact as to whether the programs evidenced exclusive agreements between Respironics and sleep labs to prescribe only Respironics-brand products.

Foreclosure/Anticompetitive Effects

Although the court could have ended its analysis at plaintiff’s failure to prove the first prong of its claim, the court further explained "for the sake of completeness" that even assuming for the sake of argument that plaintiff could have proven the existence of exclusive agreements between Respironics and sleep labs for Respironics-brand prescriptions, plaintiff nonetheless failed to show that those agreements had an adverse effect on competition, as required by the second prong of the rule of reason analysis. 

The court subsequently explained various reasons why plaintiff failed to show anticompetitive effects in the relevant market.  First the court found insufficient evidence to show that Respironics "foreclosed competitors from gaining a foothold in the market" given that a number of companies compete in the OSA field and that two companies other than Respironics enjoy significant shares of the market.  Second, the court found that the percentage of sleep labs receiving Respironics’ resources and tools to identify new patients was only between 3.25% and 4.88% and much too small to show foreclosure.  Finally, the court found that the survey on which plaintiff relied to show anticompetitive effects was flawed.

Existence of Agreements with DMEs

Plaintiff also argued that there was evidence of agreements between Respironics and DMEs and/or outlets that restrained trade by locking in business and foreclosing competitors.  Plaintiff submitted direct evidence of two agreements: one in which a provider promised to purchase 100% of its sleep disorder products from Respironics, and another agreement in which a provider promised to purchase 90%.  Both agreements rewarded the provider with a 4% rebate on Respironics’ products.  The court, however, found that this claim bared little resemblance to the claim plaintiff pled in its complaint, which alleged a bundling practice that forced outlets to purchase Respironics’ PAPs in order to purchase the masks at an economically viable price.  Therefore, the court found that the claim plaintiff pursued on summary judgment was not properly pled.

The court went further and stated that even if the claim was properly pled, plaintiff had not presented sufficient evidence to demonstrate foreclosure or other anticompetitive effects.  Plaintiff presented evidence of only two isolated agreements between Respironics and DMEs or outlets and Respironics further presented evidence that these agreements involved at most 100 to 125 DMEs out of 3,000 to 5,000 providers or 2% to 4.17% of the relevant market.  The court found this percentage too small to show any anticompetitive effects on the relevant market.

Authored By:

John S. Whittaker