Cases in which vertical restraints are challenged under Section 1 of the Sherman Act often require proof that the defendant has “market power”—the power “to force a purchaser to do something that he would not do in a competitive market,”[1] which usually takes the form of a seller’s ability “to raise price and restrict output.”[2] Additionally, injury to an individual competitor is insufficient; there must be a showing of injury to marketplace competition.[3] A recent decision issued by the Tenth Circuit Court of Appeals, Suture Express, Inc. v. Owens & Minor Distrib., Inc.,[4] focused on both of these requirements in considering a challenge by a medical products distributor against the “bundled” discount practices of two competitors, each of which was claimed to have market power in the same market. This is an unusual claim against distributors, who rarely have market power, but even more so when two competing distributors are claimed to have market power individually rather than as conspirators.

Background.

There are about 30 categories of medical-surgical (“med-surg”) products—consisting of thousands of single-use, disposable healthcare products used by hospitals. Since it went into business in 1998, the plaintiff, Suture Express, Inc. (“Suture Express”), has distributed products nationally in only two med-surg categories—sutures and endomechanical (“suture-endo”) products. It distributed its products nationally from only one warehouse, using independent carriers. Suture-endo products, however, did account for 10% of med-surg product sales. The two defendants, Owen & Minor Distribution, Inc. (“O&M”) and Cardinal Health, LLC (“Cardinal”), are national distributors of all med-surg product lines, including suture-endos—each from numerous warehouses. Medline Industries, Inc. (“Medline”) is the third national full-line distributor of such products. There also are a number of regional distributors, most carrying all lines of med-surg products.

During the relevant time period—2007 to 2012—Suture Express achieved an 8% to 10% share of suture-endo sales nationally, selling its products at lower prices than the two defendants, and providing better services. During the same period, O&M’s share increased from 40% to 42%, but Cardinal’s decreased from 30% to 26%. Signficantly, non-defendant Medline doubled its revenues in the overall med-surg market, although it sold one-third fewer suture-endo products than the plaintiff. The evidence indicated that some regional distributors increased their market shares in the overall med-surg market as well, but the record did not disclose the extent of their suture-endo sales.

The Bundling Claims.

After entering the suture-endo market in 1998, as previously noted, Suture Express grew its market share to 8-10% during the relevant time period. Cardinal and O&M responded to this growth by instituting bundling packages in their contracts with hospitals. Although the packages differed, the essential result was that a hospital would pay less (usually 1% less) for all of its other med-surg products if it also ordered its suture-endo products from them. The practice did not constitute tying arrangements because the purchase of suture-endo products was not required in order to purchase other med-surg products. The effect was that even though Suture Express charged less for its suture-endo than did either Cardinal and O&M, hospitals ended up paying more overall if they purchased suture-endo from Suture Express and all other med-surg products from their full line distributor (Cardinal or O&M) than if they just ordered everything from them. In sum, the suture-endo savings would not be worth the price of doing business with Suture Express, so it challenged the bundling arrangements as Sherman Act violations.

The Tenth Circuit’s Analysis.

  • Market Power.

Despite recognizing that the case involved bundled discounts, the Tenth Circuit applied tying analysis—perhaps because of the circuit split as to whether a bundling claim requires a showing of below-cost pricing.[5] Although the court did note a split in the circuits as to whether a showing of market power was required in a tying rule of reason case, the parties had agreed that such a showing was necessary in the instant case.

The Tenth Circuit concluded that the evidence failed to show that the defendants had market power: “neither could exclude competition in the tying product market [med-surg products] since there was evidence the opposite was occurring, with regional and national competitors growing and expanding.”)[6] Additionally, competition had not been excluded in the tied product market [suture-endo products] because Medline and some regional distributors were succeeding with their own bundling discount programs.[7] Moreover, the evidence showed that the defendants, either alone or together, did not have the ability to control prices, because the profit margins of each of them had been declining in the alleged tying med-surg market.[8]

The plaintiff argued that market power had been shown because up to 64% of customers had accepted the defendants’ bundled packages even though the plaintiff’s prices for suture-endo products were lower, and its service and products were superior. According to the the Tenth Circuit, there could have been other reasons for the high percentage of acceptance of the defendants' products, including in particular because many of the purchasers “simply preferred consolidating their purchases and having fewer distributors to deal with.”[9]

The court also rejected plaintiff’s expert’s contention that defendants’ practice resulted in below cost sales under a “discount attribution test” pursuant to which the full amount of the bundled discount is allocated to the competitive suture-endo products. According to the Tenth Circuit, such a test has only been adopted by courts to show coercion by a monopolist, and there was no proof that either defendant was a monopolist. [10]

Finally, the court rejected Suture Express’s contention that each defendant’s peak market share—38% for O&M and 31% for Cardinal—was sufficient to establish market power. According to the Tenth Circuit, market share alone does not establish market power, and did not “counteract the other market realities present here that point to increased competition and lower prices.”[11]

  • Injury to Competition.

Combining the market foreclosure rates during the applicable period of O&M (38-42%) and Cardinal (18-22%), plaintiff’s expert opined that defendants had restrained 56-64% of the suture-endo market from purchasing suture-endo products from the plaintiff, even though its prices were lower. The court responded that nearly half of the unrestrained purchasers dealt with Suture Express, indicating that it had not suffered “antitrust injury”—injury caused by the allegedly unlawful practice. Additionally, such facts as the growth of Medline and regional competitors, the growth in overall med-surg revenues, and the reduction in the defendants’ profit margins, demonstrated to the court that marketplace competition had not decreased as a result of the challenged practice. To the contrary, the evidence showed that the med-surg market had become more, not less, competitive, justifying dismissal of the suit.[12]

Conclusion.

This decision proves once again that facts rather than theories win antitrust cases. As the Tenth Circuit concluded: “A market in which competitors are growing and margins are shrinking” is inconsistent with a theory that a supplier, or in this instance, two suppliers, have market power or have injured marketplace competition. Claimed injury to an individual competitor who brings suit challenging a restrictive practice is insufficient to successfully establish an antitrust violation under the rule of reason when marketplace competition is thriving.