In Warren General Hospital v. Amgen,[1] the Third Circuit affirmed dismissal of a hospital’s claim that a pharmaceutical manufacturer illegally tied the sale of one type of drug to another.  The court held that the hospital lacked the “direct purchaser” status required for antitrust standing in a Sherman Act treble damage action despite the fact that the hospital contracted directly with the manufacturer for rebates.[2]  Amgen’s narrow view of the indirect purchaser rule reinforces the doctrine’s limitation on private enforcement of the federal antitrust laws.

Background

Plaintiff Warren General Hospital (the “hospital”) sought to represent a class composed of  hospitals, clinics and care centers that purchased blood-cell deficiency drugs manufactured by Amgen.[3]  The hospital alleged that Amgen possessed monopoly power in the market for white blood cell growth factor (WBCGF) drugs, but faced fierce competition in the market for red blood cell growth factor (RBCGF) drugs, where a competitor had a 70% share. [4]  Amgen allegedly tied the two products by offering rebates on the former based on quantities purchased of the latter. [5] The hospital alleged that “Amgen’s monopoly of the WBCGF market, combined with its rebate program, implicitly ‘forc[ed] Plaintiff and class members to make substantial purchases of Amgen’s more-expensive RBCGF drug, rather than the cheaper competing [drug it would have preferred to purchase elsewhere] ... in order to avoid losing money on ... purchases of Amgen’s ... WBCGF drugs.’”[6] 

Although the hospital claimed it purchased the drugs “directly from Amgen,” the district court and Third Circuit relied on the underlying contracts to conclude that the hospital actually purchased the drugs through a wholesaler.[7]  Indeed, the hospital placed its orders for the drugs with the wholesaler, paid “market price” to the wholesaler, and took physical possession of the drugs from the wholesaler.[8]  Amgen incentivized these purchases by providing rebates directly to the hospital.[9]  The district court concluded, and the Third Circuit agreed, despite these facts that the hospital was an “indirect purchaser” lacking antitrust standing to seek treble damages from Amgen.[10]

The Indirect Purchaser Rule

The Third Circuit’s Amgen holding relied on a trilogy of Supreme Court decisions – Hanover Shoe, Illinois Brick, and UtiliCorp  These decisions collectively limit the universe of purchasers “injured” by anticompetitive acts (and thus permitted to bring Sherman Act treble damage actions) to those who purchased directly from the defendant, even if they passed on the overcharges to downstream purchasers.    In Hanover Shoe, the Supreme Court rejected a manufacturer’s defense that a direct purchaser lacks standing if it passes its injury on to its customers.[11]  In Illinois Brick, the Supreme Court ruled that an indirect purchaser cannot sue a manufacturer on the grounds that an overcharge was passed on to him by the direct purchaser.[12]  The Court based its decision on statutory construction,[13] but rationalized three basic policy considerations:

  • the “serious risk of multiple liability for defendants” (i.e., liability to both direct and indirect purchasers for the same harm),[14]
  • the “evidentiary complexities and uncertainties” involved in ascertaining how much of the overcharge was “passed on” to the indirect purchasers (a notion the Court described as “[t]he principal basis for the decision in Hanover Shoe”),[15] and
  • the effective enforcement of antitrust law “by concentrating the full recovery for the overcharge in the direct purchasers ….”[16] 

Finally, in UtiliCorp, the Supreme Court declined to make an exception to the indirect purchaser rule where the direct purchasers “passed on” 100 percent of the overcharge, reasoning that it is still possible for a direct purchaser to be injured in such circumstances.[17]

The Third Circuit’ Amgen Decision

The hospital in Amgen argued that the indirect purchaser rule did not bar its suit because its “direct relationship” with Amgen gave it antitrust standing. Otherwise, according to the hospital,  the court would be “improperly exalt[ing] form over substance.”[18]  In support of its argument, the hospital pointed to several features of its relationship with Amgen:

  • “Amgen required [the hospital] to negotiate the purchase requirements,  rebates and, thus, net prices for [the drugs] directly with Amgen”;
  • “Amgen required [the hospital] to ‘only communicate directly’ with Amgen on the net costs and on any other issue regarding these drugs”;
  • “the contracts between [the hospital] and Amgen were negotiated at the hospital”;
  • “the contracts were serviced by an Amgen representative”;
  • “the costs and rebate amounts were set by Amgen”;
  • “the rebate opportunities for [the hospital] were not contingent on [the wholesaler’s] purchases”; and
  • “Amgen paid the rebates directly to [the hospital].”[19]

In the Third Circuit’s view, however, these facts did not make the hospital a direct purchaser because “[a]t best, they reveal that there were some direct interactions between Amgen and the hospital relating to the rebate program and the volume of Amgen drugs the hospital required.”[20]  Instead, the court concluded  that “the mechanics of the transactions between [the hospital], Amgen, and [the wholesaler] reveal [the hospital] to be an indirect purchaser of Amgen’s WBCGF and RBCGF drugs.”[21]  This court based its holding on four facts:

  • the hospital placed orders through a wholesaler, not directly with Amgen;
  • the wholesaler had a right to set the prices of the drugs to the hospital;
  • the hospital took physical delivery of the drugs from the wholesaler; and
  • the hospital paid the wholesaler directly.[22]

The hospital also argued that Illinois Brick should be interpreted to convey standing on the “first harmed” direct purchaser, and that it was such a purchaser because the wholesaler passed on the totality of Amgen’s overcharge (and was therefore not harmed by it).[23]  The Third Circuit rejected this argument, noting that Supreme Court direct purchaser jurisprudence “did not resolve what party was a direct purchaser by calculating exactly where the harm lay. In fact, [the Court seeks to] avoid linking direct purchaser status to injury calculations and determinations.”[24]

The court concluded: “The key question in an illegal tying claim is whether the plaintiff purchased the tied product from the antitrust defendant. In this case, the hospital simply did not.”[25]

The hospital also argued that Illinois Brick should be interpreted to convey standing on the “first harmed” direct purchaser, and that it was such a purchaser because the wholesaler passed on the totality of Amgen’s overcharge (and was therefore not harmed by it).[26]  The Third Circuit rejected this argument, noting that Supreme Court direct purchaser jurisprudence “did not resolve what party was a direct purchaser by calculating exactly where the harm lay. In fact, [the Court seeks to] avoid linking direct purchaser status to injury calculations and determinations.”[27]

To strengthen its ruling, the Third Circuit also concluded “that the three [Illinois Brick] policy rationales sustaining the direct purchaser rule [were] present in this case.”[28]  It declared that, even when a downstream purchaser bears the brunt of an overcharge, allowing suits by indirect purchasers can still present the problems of subjecting a defendant to multiple, inconsistent awards and “evidentiary complexities and uncertainties involved in ascertaining the portion of the overcharge that the direct purchasers had passed on to the various levels of indirect purchasers.”[29]  The court rationalized that even when 100 percent of an overcharge is passed on, direct purchasers can still be injured by a reduction in demand stemming from the overcharge.[30]  So in the end, the court used a bright line rule requiring a purchaser to be a truly direct purchaser, as opposed to a deeper examination of the manufacturer-middleman-retailer relationship that would “‘force courts to engage in complex factual inquiries’ that the direct purchaser rule was created to avoid.”[31]  

Conclusion

Without doubt, the indirect purchaser rule remains a strong limitation on standing in private antitrust suits.  The extent to which other circuits will follow the Third Circuit’s bright-line view of the rule is not clear.  The Third Circuit’s view does have substantial support in the Supreme Court’s direct purchaser jurisprudence, and other circuits have made similar holdings.[32]  On the other hand, an indirect purchaser rule that applies only because a plaintiff placed orders through,  received product from, and paid a middleman, may ignore the reality of many modern manufacturer/purchaser relationships.  Indeed, in Amgen, a crucial element in the hospital’s claim involved the fact that the final price paid by the plaintiff relied on rebates paid by the manufacturer directly to the plaintiff. According to the complaint,  those directly-paid rebates were the reason plaintiff alleged it was forced to purchase the tied product.

Manufacturers’ takeaways: at least in the Third Circuit, distributing through an independent wholesaler – even if dealing directly with retailers on rebates and incentives – probably affords some protection from federal antitrust liability to retailers.  Of course, you should consult counsel, particularly because it is not clear that other courts will follow Amgen.

Retailers’ takeaways: potential antitrust claims may be barred if purchases are made from a wholesaler, despite other direct dealing with the manufacturer.  Examination of the relationship between the wholesaler and manufacturer may prove fruitful; if it is possible to allege that the wholesaler is not independent, the claims will likely survive a motion to dismiss. 

A final note: The Amgen decision interpreted federal antitrust law – state antitrust law may vary.