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Seventh Circuit Decision Addresses the Co-Conspirator “Exception” to Illinois Brick

Related Lawyers: Jeanette Bayoumi
Related Practice Areas: Antitrust / Competition
Authors: By Jeanette Bayoumi*

Introduction

In its recent decision in Marion Healthcare, LLC v. Becton Dickinson & Co., the Seventh Circuit added to the discussion among circuit courts as to whether and when a consumer who purchases from a distributor may hold a manufacturer liable for overcharges resulting from a conspiracy between the manufacturer and the distributor.[1] This scenario has often been referred to as the “co-conspirator exception” to Illinois Brick, and is based on the seminal Illinois Brick Co. v. Illinois decision, in which the Supreme Court held that an indirect purchaser generally does not have antitrust standing to recover damages under Section 4 of the Clayton Act in a case involving the “passing on” of damages suffered by a direct purchaser.[2] While the lower courts that have addressed the “co-conspirator exception” have held that the first purchaser outside of the conspiracy has standing to sue, some of the courts insist that this scenario is not properly dubbed an “exception,” but rather that the co-conspirator situation simply refers to a set of facts to which the Illinois Brick rule does not apply.

In view of the semantic distinction among courts as to whether the “co-conspirator exception” actually is an “exception” to Illinois Brick or simply instances when the Illinois Brick rule does not apply, it will be referred to throughout as the “co-conspirator rule.”

In Becton Dickinson, the plaintiffs – healthcare providers – brought suit alleging that Becton (a manufacturer of medical devices), certain group purchasing organizations, known in the trade as GPOs, and a number of distributors (collectively “defendants”) conspired to engage in a multitude of anticompetitive measures, including supracompetitive pricing and exclusive-dealing. A unanimous Seventh Circuit panel, in an opinion written by Chief Judge Diane Wood, concluded that while the Seventh Circuit has recognized the co-conspirator rule, the district court erred in its reading and analysis of Illinois Brick, and thus failed to adequately address the conspiratorial scenario presented by the plaintiffs’ complaint. The Seventh Circuit vacated and remanded the case, declaring that although plaintiffs had failed to plausibly plead a conspiracy, they should have a chance to amend their complaint.

The Seventh Circuit’s ruling in Becton Dickinson is very timely because a certiorari Petition recently has been filed with the Supreme Court asking it to address the Illinois Brick “co-conspirator” view of the Ninth Circuit in National Football League v. Ninth Inning Inc.[3]

The Illinois Brick Rule

To understand both the Illinois Brick and co-conspirator rules, it is noteworthy to explore the Supreme Court’s earlier decision in Hanover Shoe.[4] There, the plaintiff, Hanover Shoe, alleged that United Shoe had unlawfully monopolized the shoe machinery industry, and in furtherance thereof refused to sell equipment to Hanover Shoe, instead requiring Hanover Shoe to lease the equipment and pay higher rental fees.[5] United Shoe contended that Hanover Shoe was not injured because it “passed on” the overcharge to its shoe customers.[6] The Supreme Court rejected this argument in part because it feared that a passing-on defense would allow wrongdoers to “retain the fruits of their illegality.”[7]

Nearly a decade later, the Supreme Court was again confronted with a “pass on” issue in Illinois Brick, but this time raised offensively by a plaintiff seeking the passing-on of damages obtained by its supplier. Turning to its decision in Hanover Shoe, the Court pointed out that allowing the offensive use of a pass-on argument but not defensive use would create a “serious risk of multiple liability for defendants.”[8] This is largely because allowing both a direct and indirect purchaser to recover all or part of an overcharge allegedly “passed on” to the indirect customer would cause damages allocation and duplication issues.[9] Accordingly, the Court established the Illinois Brick rule: only a purchaser who bought goods or services directly from a monopolist or cartel member generally may file suit and seek treble damages for overcharges under Section 4 of the Clayton Act.[10]

The Co-Conspirator Rule

While the circuit courts have recognized the co-conspirator rule, the characterization differs. When confronted with the question of whether an indirect purchaser may sue for damages if the direct purchaser participated in a conspiracy with the original violator, the Third and Ninth Circuits[11] have characterized their decision as within the “co-conspirator exception” to Illinois Brick. Other circuits take the view that the co-conspirator rule is not an “exception” to the Illinois Brick rule, but rather an instance in which the application of Illinois Brick is not appropriate.[12]

The Seventh Circuit Corrects the District Court’s Reading of Illinois Brick

In Becton Dickinson, the healthcare provider plaintiffs alleged that according to industry practice, they joined two GPOs [JB1] that, intra alia, negotiated prices with the manufacturer, Becton, on behalf of its healthcare provider members. The GPOs then presented the terms to its provider members, who could either accept or reject the terms. After the members accepted the terms of the negotiated price, distributors were chosen to deliver the products. The distributors then entered into contracts with both the provider plaintiffs and Becton to deliver the products to the GPOs’ provider members.[13]

The provider plaintiffs alleged in their complaint that Becton has monopoly power in the relevant market, and was maintaining that power in part through conspiratorial contract arrangements with the GPOs and the distributors. According to the complaint, Becton used this conspiracy to carry out its anticompetitive scheme, in particular by charging supracompetitive prices.

Becton moved to dismiss, arguing that the Illinois Brick rule precluded the case because, according to its view, the plaintiffs were indirect purchasers without standing under the Sherman Act. The district court agreed and granted Becton’s motion to dismiss, finding that the Illinois Brick rule applied on these facts. Further, the district court found that the co-conspirator rule was inapplicable because the case did not involve vertical price-fixing.

On appeal, the Seventh Circuit determined the district court erred in its findings because the district court’s ruling “depended so heavily on an error of law relating to Illinois Brick.” As such, the Seventh Circuit decided to vacate and remand the district court’s decision.[14] Additionally, the Seventh Circuit concluded that the providers failed to adequately allege the necessary conspiracy.

In its analysis, the Seventh Circuit first explained the proper application of the Illinois Brick rule. Judge Wood pointed out that the query behind Illinois Brick ultimately rests on identifying the correct entities representing the buyer and the seller.[15] Most significantly, when there is a conspiracy between a manufacturer and a distributor pursuant to which the conspirators aim to overcharge the distributor’s customers, Illinois Brick “is not a barrier to suit on behalf of a purchaser who dealt with a member of the conspiracy.”[16]

Recognizing the co-conspirator rule, the Seventh Circuit corrected any misconception that this term should be referred to as an “exception.” Rather, Judge Wood explained, “[i]t is not so much a real exception as it is a way of determining which firm, or group of firms collectively, should be considered to be the relevant seller.”[17] The court added that the fact that antitrust liability is joint and several supports looking to the first sale outside of the conspiracy.[18] Any contrary rule could render antitrust violators immune from suit by simply conspiring with a middleman to pass on inflated prices. Thus, the court concluded, the Illinois Brick rule encompasses the right of the first non-conspirator in the supply chain to collect 100% of the damages.[19]

The Seventh Circuit declared that the district court had misapplied the Illinois Brick rule, incorrectly finding that the existence of a conspiracy mattered only when analyzing vertical price-fixing cases. Otherwise, the district court thought it would be too difficult to calculate which portion of the overcharge would be attributed to the distributors and which to their customers.

Correcting this misunderstanding, the Seventh Circuit underscored that the query behind the Illinois Brick rule focuses on the relationship between the seller and the purchaser and not on whether an overcharge may be properly calculated. The Seventh Circuit noted that the Supreme Court supported this rationale in its recent decision in Apple v. Pepper. In that case, consumers who had purchased “apps” through Apple’s “App Store” sued Apple, arguing that Apple had monopolized the retail market for the sale of iPhone apps, and had used its market power to overcharge consumers.[20] Apple’s argument in defense focused on the query of “who sets the price” instead of who was the direct seller. Apple contended that because it did not set the retail price of the apps, the Illinois Brick rule barred suit even though consumers purchased apps directly from its App Store. Rejecting this argument, the Supreme Court held that Illinois Brick “established a bright-line rule where direct purchasers … may sue antitrust violators from whom they purchased a good or service.”[21] In sum, the Seventh Circuit concluded that Apple “confirmed” that Illinois Brick is a “bright-line rule,” the focus of which is the relationship between the buyer and the seller, and not the nature of the alleged anticompetitive conduct.[22]

Becton also had argued that when a manufacturer and a distributor have agreed to resell a product at a supracompetitive price, there is no Illinois Brick “pass on” because the indirect purchaser is the first party to have paid the overcharge. But, Judge Wood pointed out, this argument actually “reinforces the conclusion” that the plaintiffs have the right to sue on the facts presented. Accordingly, the district court had erred in holding that the Illinois Brick rule bars first purchasers outside of a conspiracy from bringing suit under Section 4 of the Clayton Act, except in vertical price-fixing cases.

The Seventh Circuit Nonetheless Concluded that the Plaintiffs Failed to Adequately Allege a Conspiracy

The question of whether plaintiffs had adequately alleged a conspiracy was next addressed. Because plaintiffs had claimed there had been a “hub-and-spoke” conspiracy, they had to allege that the distributors both coordinated with Becton (the “hub”), and that the distributors “would not have attempted to inflate prices without assurances that each distributor was abiding by the agreement and behaving in the same way” (the “rim” connecting the horizontal competitors).[23] But the plaintiffs’ complaint failed to accomplish this. Despite these flaws, however, the Seventh Circuit determined that the plaintiffs should be allowed to amend their complaint. “What the providers could not have foreseen was the district court’s categorical rejection of Illinois Brick for the type of anticompetitive activity they were alleging—a rejection that did not depend on any additional detail about the structure of the conspiracy,” said the Seventh Circuit.

Final Considerations

It is noteworthy that in relying on Apple v. Pepper, Judge Wood, as did Justice Kavanaugh, referred to the Illinois Brick rule as a “bright-line rule.” However, neither Justice Kavanaugh nor Judge Wood referred to the Supreme Court’s decision in Associated General Contractors v. California State Council of Carpenters (“AGC”), issued six years after Illinois Brick,[24] which established the current standard for antitrust standing. AGC considers five factors, including the remoteness of the plaintiff, and thus reveals that Illinois Brick is not a “bright-line rule” but is only one of five factors for standing under Section 4 of the Clayton Act. The five AGC factors are: (i) whether the alleged injury is the type that the antitrust statute was intended to forestall; [25] (ii) the directness or indirectness of the asserted injury;[26] (iii) the extent to which the plaintiff’s asserted damages are speculative;[27] (iv) the potential for duplicative recovery or complex apportionment of damages;[28] and (v) the existence of more direct victims of the alleged conspiracy.[29]

Footnotes

[1] Marion Healthcare, LLC v. Becton Dickinson & Co., No. 18-3735, 2020 WL 1059951, at *1 (7th Cir. Mar. 5, 2020).

[2] Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). Section 4 of the Clayton Act states that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor” and is entitled to treble damages. 15 U.S.C. § 15.

[3] See National Football League, et al. v. Ninth Inning, Inc., et al., No. 19M107, 140 S. Ct. 1291 (Mar. 9, 2020) (motion for leave to file petition for writ of certiorari).

[4] Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968).

[5] Id. at 487-88.

[6] Id. at 491.

[7] Id. at 494.

[8] Illinois Brick Co., 431 U.S. 720 at 730. 

[9] Id.

[10] See id.; 15 U.S.C. § 15.

[11] See Howard Hess Dental Labs. Inc. v. Dentsply Intern., Inc., 424 F.3d 363, 380-81 (3d Cir. 2005); In re ATM Fee Antitrust Litig., 686 F.3d 741, 749-751 (9th Cir. 2012). Two other circuits have recognized the co-conspirator exception, but determined not to consider it because the claim had not been made in the complaint. See Jewish Hospital Ass’n of Louisville, Ky., Inc. v. Stewart Mechanical Enter., Inc., 628 F.2d 971, 977 (6th Cir. 1980); In re Beef Indus. Antitrust Litig., 600 F.2d 1148, 1161-63 (5th Cir. 1979).

[12] See e.g., In re Nat’l Football League’s Sunday Ticket Antitrust Litig., 933 F.3d 1136, 1157 (9th Cir. 2019) (“[T]he ‘co-conspirator exception is not really an exception at all,’ but rather describes a situation in which Illinois Brick is simply not applicable.”); Insulate SB, Inc. v. Advanced Fishing Sys., Inc., 797 F.3d 538 (8th Cir. 2015) (Illinois Brick did not bar plaintiffs’ suit); Dickson v. Microsoft Corp., 309 F.3d 193, 215 (4th Cir. 2002) (“Illinois Brick is inapplicable to a particular type of conspiracy—price fixing conspiracies”); Paper Sys. Inc. v. Nippon Paper Indus. Co., Ltd., 281 F.3d 629, 631-32 (7th Cir. 2002) (“The right to sue middlemen that joined the conspiracy is sometimes referred to as a co-conspirator ‘exception’ to Illinois Brick, but it would be better to recognize that Hanover Shoe and Illinois Brick allocate to the first non-conspirator in the distribution chain the right to collect 100% of the damages”);.Lowell v. Am. Cyanamid Co., 177 F.3d 1228, 1229 (11th Cir. 1999) (“Illinois Brick has no application in this case.”).

[13] Becton Dickinson, 2020 WL 1059951, at *1.

[14] Id.

[15] Id. at *3.

[16] Id.

[17] Id.

[18] Id. at *4 (citing Paper Sys. Inc. v. Nippon Paper Indus. Co., 281 F.3d 629 (7th Cir. 2002) (Easterbrook, J.).

[19] Id.

[20] Apple Inc. v. Pepper, 129 S. Ct. 1514 (2019).

[21] Id. at 1522.

[22] Becton Dickinson, 2020 WL 1059951, at *5.

[23] Id. at *6.

[24] 459 U.S. 519 (1983).

[25] Id. at 537.

[26] Id. at 540.

[27] Id. at 542.

[28] Id. at 545.

[29] Id. Indeed, it might not be improper to consider the Illinois Brick rule to be an exception to the statement in Section 4 that “any person” injured by a violation has standing.

*Jeanette Bayoumi is an associate in the New York office. 

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