On January 6, 2010 the Ninth Circuit affirmed a grant of summary judgment to Tyco Healthcare in a case where the plaintiffs challenged various Tyco business practices such as market-share discounts and sole-source agreements. See Allied Orthopedic Appliances, Inc. v. Tyco Health Care Group L.P., Nos. 08-56314 & 08-56315, 2010 WL 22693 (9th Cir. Jan. 6, 2010). The court distinguished the case from an earlier decision in late 2009 which had upheld a jury verdict finding that some of these same practices by Tyco had violated the antitrust laws.
In Allied Orthopedics Appliances, the plaintiffs alleged that Tyco unlawfully constrained competition by offering market-share discounts and sole-source agreements on purchases of its pulse oximetry sensors. The plaintiff claimed that Tyco granted discounts conditioned on the customer committing to make a certain percentage of its purchases from Tyco, and that Tyco granted significant discounts to Group Purchasing Organizations (GPOs) in return for sole-source commitments. The plaintiffs also alleged a Section 2 monopolization claim that Tyco improperly introduced a new pulse oximetry system that was not compatible with older sensors in order to stifle competition from sellers of competitive sensors based on the old design. The court rejected each of these claims.
In rejecting plaintiffs’ Section 1 claims, the court asserted that the market-share and sole-source agreements did not prevent customers from purchasing sensors from manufacturers of competing sensors. Such agreements can only be unlawful if they “‘foreclose competition in a substantial share of the line of commerce affected.’” Allied Orthopedic, 2010 WL 22693, at *4 (quoting Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1162 (9th Cir. 1997)). Because customers were not contractually obligated under either type of agreement to purchase anything, and compatible less expensive generic sensors were available, the court found that the agreements did not have the effect of foreclosing competition. The court noted that both types of agreements could be terminated on relatively short notice, thus minimizing their competitive impact.
The court similarly rejected plaintiffs’ Section 2 monopolization claim based on Tyco’s introduction of a new product. The court found that the new system provided a benefit to consumers and that Tyco had engaged in no anticompetitive conduct in introducing it.
Interestingly, the Ninth Circuit had reached a different result with regard to the market-share discounts and sole-source agreements at issue in Masimo Corp. v. Tyco Health Care Group, L.P., Nos. 07-55960 & 07-56017, 2009 WL 3451752 (9th Cir. Oct. 28, 2009). In that case, the Ninth Circuit affirmed a jury verdict against Tyco concerning its market-share discounts and sole-source agreements. The court in Masimo also affirmed judgment as a matter of law (JMOL) in favor of Tyco on the bundled discount claims.
The panel in Allied Orthopedic Appliances acknowledged Masimo in a footnote and distinguished the two cases on the basis that two factors present in Masimo that could have contributed to a foreclosure effect in that case were absent in Allied Orthopedic Appliances. First, in the time period at issue in Masimo, the patent on Tyoo’s older type of sensor was still in effect. According to the court, this meant that owners of Tyco’s older system of monitors arguably had no choice but to purchase a significant number of sensors from Tyco to work with the existing monitors. In contrast, in Allied Orthopedic Appliances, customers could shift their purchases to “generic” sensors manufactured by others and were thus less dependent on Tyco. Second, in Masimo the solesource agreements at issue obligated GPO members to purchase a set percentage of their pulse oximetry requirements from Tyco, whereas in Allied Orthopedic Appliances GPO members could avoid purchasing from Tyco by purchasing outside of the GPO. The Ninth Circuit concluded that these two factors made the potential foreclosure effect sufficient to support a jury verdict for the plaintiff in Masimo, but not in Allied Orthopedic Appliances.
These two decisions illustrate the importance of careful counseling in the area of bundled discounts, market share discounts, and similar practices. The legality of such practices typically turns on the competitive circumstances in the market and the real-world impact of such practices on the alternatives available to customers. These and other types of discounts can often be procompetitive and result in lower prices for customers and consumers, but they must be undertaken with caution, especially by firms with high market shares that could be alleged to have “market power”.