The Seventh Circuit Explains the “Co-Conspiracy Exception” to the Illinois Brick Rule in Healthcare Antitrust Lawsuit

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Author: Jarod Bona

Antitrust law evolves in such a way that opinions from federal appellate courts are always interesting in how they affect the doctrine. But there are a select few judges who earn even closer attention when they write an antitrust opinion. Judge Diane P. Wood of the United States Court of Appeals for the Seventh Circuit is one of those judges.

Update: Judge Amy Coney Barrett is also part of the Seventh Circuit panel for this decision, along with Judge Michael Stephen Kanne.

In Marion Healthcare, LLC v. Becton Dickinson & Company, the Seventh Circuit, through Judge Wood’s opinion, effectively articulates the co-conspiracy exception to the Illinois Brick rule. The opinion is significant not because it marks a departure in the prevailing law, but because it explains it so well. This is an example of an opinion that courts and attorneys will likely cite in the future when this issue comes up.

So I thought it would be helpful to tell you about it.

Indirect Purchasers and Illinois Brick

You might need a little bit of background first. The indirect-purchaser rule—derived from a Supreme Court decision known as Illinois Brick—prohibits indirect-purchaser plaintiffs from using for damages under federal antitrust law. This typically arises in a class action, but the doctrine isn’t limited to class cases.

We discuss the indirect-purchaser rule in more detail in a two-part article:

  1. Indirect Purchaser Lawsuits, Illinois Brick and Apple v. Pepper (Part 1): This article describes the background and basics of the indirect-purchaser prohibition.
  2. Apple v. Pepper, Indirect Purchaser Antitrust Class Actions, and the Future of Illinois Brick (Part 2): This article describes the Supreme Court’s recent Apple v. Pepper decision and what it means for the future of Illinois Brick and the indirect-purchaser rule.

If you haven’t already read those two articles, go read them and come back. We will wait for you.

Marion Healthcare, LLC v. Becton Dickinson & Company

Healthcare markets are complicated, distorted, and a little bit confusing. The government plays a major role, which distorts markets. In addition, there are so many layers of entities that participate in every aspect of healthcare that the markets aren’t always easy to unpack. And, of course, insurance companies pay much of the costs, but the decisions on spending are a combination of patients, insurance companies, doctors, governments and healthcare facilities, among others.

In this case, plaintiffs are healthcare companies that purchased medical devises from Becton Dickson & Company. But they don’t purchase them directly from Becton. Instead, they and other purchases rely on a GPO to negotiate prices with Becton (and other manufacturers). Once the GPO and manufacturer reach an agreement, the company that needs the supplies can accept or reject it. If they accept it, they actually purchase the product through a distributor (pursuant to the GPO-negotiated contract), who then enters contracts with both the purchaser (the healthcare provider) and the supplier (in this case, Becton).

You might anticipate at this point that figuring out whether the plaintiff is a direct purchaser could get confusing.

In this case, plaintiffs alleged that Becton (the supplier), the GPOs (that negotiated the deal), and the distributors were all part of the conspiracy, engaging in a variety of anticompetitive conduct, including exclusive dealing.

The district court dismissed the case, holding that the conspiracy rule (more on that below) didn’t apply because the case didn’t involve simple vertical price-fixing.

The Seventh Circuit held that the district court erred.

The Co-Conspirator Exception to Illinois Brick

For the Court to apply Illinois Brick, it must determine which entity is the seller and which entity is the direct purchaser. As you might recall, the Supreme Court grappled with this in Apple v. Pepper.

In this case, plaintiffs alleged that all of the other relevant parties were part of the conspiracy—the supplier, the GPOs and the distributors. If a plaintiff purchases directly from a member of the single conspiracy that is responsible for the anticompetitive conduct, it is a direct purchaser under the co-conspirator exception to Illinois Brick.

Judge Wood explained that it “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 (and from that, identifying which one is the direct purchaser) for purposes of the rule.” (slip p. 7). She further observed that the “fact that antitrust liability is joint and several reinforces the appropriateness of looking to the first sale outside the conspiracy.” (slip p. 8).

Importantly, a “contrary rule that looked behind the conspiracy to the role each member played would render upstream antitrust violators effectively immune from suit through the simple expedient of conspiring with a middleman or distributor to pass on the inflated prices.” (slip p. 8).

The Seventh Circuit then addressed and quickly dismissed the district court’s conclusion that the co-conspirator exception to Illinois Brick only applies to price-fixing cases: “We see nothing in either the Illinois Brick line of cases or the conspiracy line that supports this distinction. The central point of Illinois Brick is to allocate the right to recover to one and only one entity in the market.” (slip p. 9). And that is not difficult to do here, or in other instances where a plaintiff contracts with a participant in the conspiracy.

And to the extent the district court was concerned about the difficulty of assessing the overcharge in non-price-fixing cases, it was off base. Referencing the Supreme Court’s recent decision in Apple v. Pepper, the Seventh Circuit explained that the “relevant inquiry in determining the applicability of Illinois Brick focuses on the relationship between the seller and the purchaser, not the difficulty of assessing the overcharge.” (Our analysis of Apple v. Pepper is here). (slip p. 10).

Judge Wood added her view of what the Supreme Court did in Apple v. Pepper: “Apple confirms that Illinois Brick is a bright-line rule allocating the right to sue to direct purchasers alone, not a rule that requires analysis of competing policy justifications in each case. The relationship between the buyer and the seller, rather than the nature of the alleged anticompetitive conduct, governs whether the buyer may sue under the antitrust laws.” (slip p. 10).

The Seventh Circuit’s conclusion about the co-conspirator exception to Illinois Brick was not the end of the matter, however, as the court also concluded that plaintiffs failed to adequately allege that each of the relevant parties were part of the conspiracy. That, of course, is important for the co-conspirator exception. The Court, however, gave plaintiffs a chance to amend their complaint.

Image by mcmurryjulie from Pixabay

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