June 10, 2011

Eighth Circuit Again Affirms Dismissal of Hospital's Antitrust Class Action Against Catheter Supplier

In Southeast Missouri Hospital v. C.R. Bard, Inc., No. 09-3325 (8th Cir. June 8, 2011), the Eighth Circuit Court of Appeals affirmed—for the second time—the dismissal of appellant St. Francis Medical Center's (St. Francis) class action, accusing appellee C.R. Bard, Inc. (Bard) of abusing its position in the catheter market in contracting with group-purchasing organizations (GPOs) and inflating catheter prices for hospitals in violation of Sections 1 and 2 of the Sherman Act. In doing so, the Eighth Circuit has affirmed that it will generally look to market-based competition to act as a constraint on single-firm pricing conduct such as market-share discounts and bundled product discounts.

Like most other U.S. hospitals, St. Francis is a member of a GPO, which allows it to purchase medical supplies at discounted prices from suppliers like Bard under the terms of GPO-negotiated contracts. GPO membership is voluntary and nonexclusive: hospitals can and do switch between GPOs and can belong to more than one GPO. Although members are not required to purchase through their GPO contracts, hospitals save an average of 10 to 15 percent on their medical-device purchases by doing so.

St. Francis purchased Foley catheters—that is, catheters used to drain a patient's bladder over extended periods of time (as opposed to intermittent catheters intended for one-time use)—from Bard through a GPO contract. Bard is the leading U.S. supplier of Foley catheters and was responsible for over 80 percent of Foley sales to hospitals from 2003 to 2008. To give hospitals incentives to purchase from Bard, some of Bard's GPO contracts are sole-source contracts such that Bard is the only catheter supplier on the GPO's price list; use tiered pricing so that the hospitals purchasing higher percentages of supplies from Bard receive larger discounts; and offer bundled discounts for related products. According to St. Francis, even though no hospital is required to purchase catheters from Bard, "Bard's GPO contracts are de facto exclusionary because the discount prices are so attractive that hospitals cannot afford to forgo them."

The same three-judge panel of Judges Duane Benton, Diana E. Murphy, and C. Arlen Beam had previously upheld the district court's dismissal in Southeast Missouri Hospital v. C.R. Bard, Inc., 616 F.3d 888 (8th Cir. 2010) in August 2010. That opinion rejected St. Francis's challenges to bundled rebates due to the absence of below-cost pricing and to the sole-source and tiered-pricing terms because the hospital was "free to walk away" from the contract , but was later vacated (see related article). On rehearing and in a decision issued by Judge Benton, the Court again affirmed summary judgment, stating that "St. Francis's challenge to the share-based discounts is precluded by this court's decision in Concord Boat [Corp. v. Brunswick Corp., 207 F.3d 1039 (8th Cir. 2000)]." The Court rejected St. Francis's attempts to distinguish Bard's discounts from those offered by the engine supplier in Concord Boat because the centerpiece of both suppliers' contracts involved share-based discounts.

Under Concord Boat, the threshold requirement for a plaintiff's antitrust claims is determining the relevant market. At issue in this case was the relevant product market. St. Francis argued for two relevant product submarkets: (1) one for the sale of Foley catheters under GPO contracts to hospitals, and (2) the other for the sale of intermittent catheters under GPO contracts to hospitals. But in applying the Brown Shoe Co. v. United States, 370 U.S. 294 (1962), test for determining the existence of a submarket, the Court found that St. Francis only satisfied one of the five Brown Shoe indicia, and that it had failed to identify any relevant product submarkets. Thus, the Court affirmed the district court's grant of summary judgment in favor of Bard.

Although the Court's original August 2010 opinion was unanimous, Judge Beam dissented from this second opinion because he found that St. Francis had presented sufficient evidence to raise a genuine issue of material fact as to whether the alleged submarkets constituted relevant product markets.

Unlike the initial August 2010 decision that has since been vacated, the Eighth Circuit's decision on rehearing does not offer a definitive rule for evaluating the legality of bundled discounts. The decision does, however, find Bard's contracting practices to be lawful under Concord Boat. As a result, challenges to bundled discounts face steep hurdles in the Eighth Circuit, absent long-term contracts or other distinguishing circumstances.

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