On April 30, 2008, the Ninth Circuit Court of Appeals ruled that Bamberg County Memorial Hospital and Nursing Center ("Bamberg") lacked standing to pursue its antitrust claims against Johnson & Johnson, Inc. ("J & J").  See Delaware Valley Surgical Supply, Inc. v. Johnson & Johnson, 2008 U.S. App. LEXIS 9308 (9th Cir. Apr. 8, 2-008).  Specifically, because Bamberg purchased products through a J&J approved distributor, Bamberg was not a “direct purchaser” with standing to bring an antitrust claim against J&J, even though a contract existed between Bamberg and J&J setting the product prices.

The appeal arose from a dispute between Bamberg and another group of plaintiffs, Delaware Valley Surgical Supply Company, Inc. ("DVSSC") and Niagara Falls Memorial Medical Center ("Niagara") about who has “standing” as a “direct purchaser” to recover for alleged antitrust law violations by J&J.  All of the plaintiffs alleged that J& J violated the antitrust laws by leveraging its monopoly power in the sutures market to create a monopoly in the market for endomechanical products.  Plaintiffs also asserted antitrust claims relating to J&J’s contractual "market share purchase requirements," under which J&J conditioned discounts and rebates upon a buyer purchasing the bulk of its products from J & J.  Plaintiffs claimed that these practices resulted in artificially inflated prices, violated Sections One and Two of the Sherman Act, and asserted a claim for an unlawful exclusive dealing arrangement under Section Three of the Clayton Act.

DVSSC and Niagara purchased products directly from J&J.  By contrast, Bamberg was a member of a group purchasing organization ("GPO") that negotiated agreements with suppliers like J & J.  Ultimately, Bamberg entered into an agreement directly with J & J to obtain the GPO pricing, and pursuant to which Bamberg was permitted to obtain the products directly from J & J, or through a distributor.  Bamberg chose the latter, and obtained its products through a distributor.  Thus, unlike DVSSC and Niagara which pushed products directly from J&J and its subsidiaries, Bamberg paid a distributor that shipped the products to J&J.

DVSS brought a motion in the district court to dismiss Bamberg’s claims on the grounds that, because Bamberg did not obtain its products directly from J & J, it lacked standing to pursue antitrust claims based on the United States Supreme Court’s decision in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). The district court agreed, and Bamberg appealed.

Applying the bright-line direct purchaser rule established by Illinois Brick and its progeny, the Ninth Circuit Court of Appeals ruled that Bamberg lacked standing to pursue an antitrust claim under a direct purchaser theory.  In Illinois Brick, the United States Supreme Court rejected a defensive “passing on” theory in which a defendant argues that the plaintiff suffered no injury because it passed on any overcharges to its customers.  And, in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968), the Supreme Court rejected an offensive use of  a pass on theory, in which indirect purchasers allege that they are injured because overcharges were passed on to them.

The court of appeals emphasized that the bright-line rule left it with no choice but to affirm the district court’s decision to dismiss Bamberg’s claims.  Thus, notwithstanding the fact that Bamberg did have a contract with J&J for the purchase of products, because Bamberg made its purchases through a distributor and not directly from J&J, Bamberg simply was not a direct purchaser with standing to assert claims for violations of the antitrust laws.  Rather, the third-party distributor was the direct purchaser.

Bamberg also argued that the court should adopt a new exception to the direct purchaser rule that recognizes the common arrangement whereby a GPO negotiates prices with manufacturers on behalf of hospitals, but then individual hospitals place orders through independent distributors. Bamberg asserted that, because of these relationships, the hospital, not the distributor, is the direct victim of the alleged antitrust violation, and therefore the hospital is the proper plaintiff.  The court declined to create any such exception, finding that there was nothing "extraordinary " about the facts of the case to warrant a deviation from the firmly established direct purchaser rule .

Authored by:

Daniel L. Brown

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