Seventh Circuit Clarifies “Direct Purchaser” Rule

The U.S. Court of Appeals for the Seventh Circuit recently issued an important decision regarding who may sue to recover damages for purchasing goods at a higher price due to cartel or monopoly overcharges. The case, Marion Healthcare, LLC v. Becton Dickinson & Company, et al., explained some of the contours of the Supreme Court’s landmark Illinois Brick ruling. Under federal Illinois Brick law, only direct purchasers of goods subject to inflated prices can bring claims against alleged price fixers and seek treble damages. All others, e.g., those who purchase products from the direct purchasers, “must take their lumps and hope that the market will eventually sort everything out.” However, if a monopolist enters a conspiracy with its distributors, the first buyer from the distributor may then sue. While this case is merely at the motion to dismiss stage, thus no decision on the merits or the alleged conduct of the parties has been made, it serves as an important benchmark for applying Illinois Brick.

The Case

In a 3-0 decision, the Seventh Circuit held that the District Court had improperly applied Illinois Brick to the present case and remanded the case for further proceedings. The plaintiffs (health care companies that purchased medical devices) alleged that the defendants (a medical device manufacturer, a group purchasing organization (GPO) and a series of distributors) engaged in a conspiracy to hike up the price of catheters and syringes. While not reaching the merits of the plaintiffs’ case, the court made it clear that “the first buyer from a conspirator is the right party to sue.” Therefore, the District Court improperly held that the plaintiffs could not be a direct buyer when, in fact, the plaintiffs alleged they were the first purchasers from the alleged co-conspirators. Any holding to the contrary would allow upstream antitrust violators to render themselves immune simply by “conspiring with a middleman or distributor to pass on the inflated prices.”

However, the Seventh Circuit noted that as the plaintiffs had not properly pled the existence of any conspiracy between the GPO or the distributors, the case must be remanded to the District Court for further proceedings. Whether the plaintiffs will be able to successfully plead that the GPO and the distributors conspired not only with the manufacturer, but with each other, remains to be seen.

The Seventh Circuit also dismissed two concerns regarding the Illinois Brick doctrine being applied in this case. First, the Seventh Circuit dismissed the idea that Illinois Brick considered how difficult it would be to calculate which portion of the overcharge should be applied to the various parties for liability. The standard in Illinois Brick “focuses on the relationship between the seller and the purchaser, not the difficulty of assessing the overcharge.” This viewpoint was recently reinforced by the Supreme Court in Apple v. Pepper.

Second, the defendants argued that allowing the plaintiffs to plead conspiracy would circumvent the protections of Illinois Brick and allow a plaintiff to create a claim by “asserting in every case that the defendant and the middleman had formed a conspiracy together.” The Seventh Circuit gently reminded the defendants that a plaintiff would do so at their own peril, and the claim must still have “baseline plausibility.”

Impact

Marion Healthcare, LLC is another example of the continuing legal battles regarding the application of Illinois Brick and the growing concern of its inapplicability to a modern economy. While indirect purchasers may continue to struggle to recover under Illinois Brick, relying instead on state antitrust laws which permit them to recover under state statutes that implicitly or explicitly reject federal Illinois Brick reasoning, Marion Healthcare, LLC may present a slight softening of that standard.