August 20, 2010

Eighth Circuit Issues Decision on Bundling and Exclusive Dealing

The Eighth Circuit has issued a significant antitrust decision addressing bundled rebates and the law surrounding exclusionary contracts. In Southeast Missouri Hospital v. C.R. Bard, Inc. (No. 09-3325, Aug. 17, 2010), the Eighth Circuit affirmed the district court's grant of summary judgment dismissing a hospital's claims that a medical device company's contracts with group purchasing organizations (GPO) violate Sections 1 and 2 of the Sherman Act.

The plaintiff hospital purchased a variety of medical supplies manufactured by the defendant under a GPO contract. The plaintiff challenged several aspects of the defendant's contract with the GPO: 1) a "sole source" provision that established the defendant's catheters as the only catheters available to the hospital under the GPO contract; 2) tiered pricing that granted discounts to hospitals purchasing a substantial percentage of certain products from the defendant; and 3) bundled rebates that offered discounts to hospitals purchasing multiple product lines from the defendant.

Two important principles from the decision may have general application beyond the domain of medical-device purchases and GPO contracts.

First, in rejecting the challenge to bundled rebates, the Eighth Circuit applied the test articulated by the Ninth Circuit Court of Appeals in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008). Under PeaceHealth, a court sums the discounts offered across product lines and "attributes the entire discount on all products in the package to the product for which exclusion is claimed." Id. at 328-29. The discount is deemed per se lawful unless the attributed discount results in the defendant pricing the product below cost.

Southeast Missouri Hospital also held that the attribution test should not be applied where competitors sell the full package of bundled products. Additionally, the Eighth Circuit clarified that the full discount must be attributed solely to the product that is alleged to have exclusionary impact, in this case catheters. Applying these principles, the Eighth Circuit affirmed dismissal because the plaintiff failed to show that the defendant's discounts resulted in below-cost pricing of catheters.

Second, the Eighth Circuit rejected the plaintiff's challenge to the sole-source and tiered-pricing provisions because the plaintiff was "free to walk away" from the contract. In particular, hospitals are free to negotiate purchase contracts with the defendant directly or to purchase generic products. This decision continues the Eighth Circuit's approval of exclusionary contracts absent evidence that plaintiffs are unable to escape the contract.

This decision continues a series of recent appellate decisions generally approving of bundled discounts and similar rebate schemes. By explicitly adopting the Ninth Circuit Court of Appeals' analysis in PeaceHealth, it also attempts to bring some doctrinal uniformity to this area of the law.

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