Eighth Circuit bungles bundled discounts: the court avoids resolving bundled discounts.

Author:Cullmann, Melissa A.
Position:Case note
 
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Southeast Missouri Hospital v. C.R. Bard, Inc., 642 F.3d 608 (8th Cir. 2011)

  1. INTRODUCTION

    From fast-food value meals to buy one get one free deals at the grocery store, bundled discounts are in virtually every market. (1) Bundled discounts encompass several different discounts, (2) but the most common understanding of bundled discounts occurs when multiple products are sold together for less than the total price of the products sold individually. (3) Bundled discounts can provide a variety of efficiencies for sellers and can broaden the relationship between the buyer and seller. (4) Buyers also receive benefits by reducing transaction costs and increasing their purchasing power. (5) For example, if a retail store offers shampoo and conditioner for a discount, it induces the buyer to purchase both products and take advantage of the discount. The buyer gets the benefit of the discount and the seller sells two products rather than just one.

    The question pending before many courts is the legality of these discounts. Most scholars agree that many bundled discounts are beneficial and procompetitive, but some are not. (6) The issue before many courts and hotly debated among antitrust scholars is choosing the proper test to separate the good bundled discounts from the bad.

    In Southeast Missouri Hospital v. C.R. Bard, Inc., the Eighth Circuit passed on an opportunity to choose a bundled discount test and instead focused on the proper market for the products at issue. (7) This Note first explores the bundled discounts and contracts at issue in the instant decision. It then provides a detailed explanation of bundled discounts and the various tests proposed for them, as well as an explanation of the Eighth Circuit's precedent concerning bundled discounts. The Note concludes by analyzing the instant decision and discussing why the court should have addressed bundled discounts in its opinion and the consequences of its failure to do so.

  2. FACTS AND HOLDING

    Saint Francis Medical Center (St. Francis) brought a class action suit against C.R. Bard (Bard) and other defendants for violating "sections 1 and 2 of the Sherman Act, section 3 of the Clayton Act, and Missouri antitrust laws." (8) Saint Francis claimed that certain conduct by Bard constituted an unreasonable restraint of trade, an unlawful monopoly, and illegal exclusive dealing. (9) St. Francis sought relief under sections four and sixteen of the Clayton Act and under Missouri law. (10)

    St. Francis is a hospital in Cape Girardeau, Missouri. (11) The hospital is a member of two Group Purchasing Organizations. (12) A Group Purchasing Organization (GPO) negotiates contracts with suppliers for hospitals. (13) Membership in the GPO is voluntary and members may belong to more than one GPO or switch among various GPOs. (14) A GPO negotiates contracts with suppliers, but does not actually buy the supplies--the hospital buys directly from the supplier. (15) Hospitals that are members of GPOs are not mandated to purchase supplies through GPO contracts; they may purchase "off-contract." (16)

    Bard sells catheters and other medical supplies. (17) It is the leading United States manufacturer of Foley catheters and has a large share of the market for intermittent catheters. (18) "Saint Francis purchase[d] Bard catheters through a GPO." (19) Bard's contract through St. Francis' GPO was a sole-source contract; Bard was the only supplier on the GPO's price list and the only seller that was negotiated by the GPO. (20) Bard's contracts with the GPOs usually involved tiered pricing, where a hospital gets a share-based discount when it purchases "higher percentages of supplies from Bard." (21) Hospitals can also get a bundled discount when it buys other Bard supplies along with catheters. (22) St. Francis alleged that Bard used its considerable market power to inflate prices and restrained competition through "sole-source [contracts], share-based discounts, and bundled discounts." (23)

    St. Francis claimed that Bard's contracts with GPOs were unreasonable restraints of trade under section 1 of the Sherman Act. (24) St. Francis argued the contracts were unreasonable restraints of trade because they required hospitals to purchase a specified percentage of supplies from Bard to receive discounts. (25) St. Francis also claimed the contracts were unreasonable restraints of trade because they included loyalty discounts and rebates for purchasing Bard products or penalties for purchasing products from other vendors. (26) The complaint alleged that Bard had and maintained monopoly power because of this conduct. (27) St. Francis asserted that Bard raised barriers to entry and proposed pricing structures that excluded competition, including technologically superior products made by competitors. (28) St. Francis also alleged that Bard, to maintain its monopoly, violated section 3 of the Clayton Act by making exclusive agreements with hospitals prohibiting them from purchasing supplies from Bard's competitors. (29) St. Francis believed that although Bard's contracts were not technically exclusionary, the effect of the terms of the contract made them exclusionary. (30) St. Francis argued that the discounted prices were too attractive; a hospital could not afford to go to a competitor with a smaller discount. (31)

    In response, Bard first argued that it did not possess the required monopoly power, a prerequisite to liability. (32) In addition, it claimed that St. Francis did not define the proper antitrust market. (33) Bard further contended that St. Francis failed to establish market foreclosure and an antitrust injury, and insisted that its contracts and discount programs were not anticompetitive. (34)

    The Eastern District of Missouri granted summary judgment to Bard. (35) For St. Francis' claim that Bard violated section 1 of the Sherman Act, the hospital needed to satisfy the rule of reason standard that asks '"whether the contract unreasonably restrains trade in a relevant product or geographic market'" and also establish anticompetitive effects from the restraint. (36) The court found that St. Francis failed to define the relevant product market because it wrongly tried to include in the definitions of the product markets GPOs, which were the devices by which Bard allegedly used to restrain trade. (37) The market definitions also incorrectly differentiated between Foley and intermittent catheters when evidence showed that the products were reasonably interchangeable and the market depended more on whether the catheter is latex or silicone. (38) According to the court, St. Francis also failed to prove the restraint was anticompetitive. (39) St. Francis did not present evidence of actual adverse effects on the competition, nor did it prove that Bard had market power. (40) Bard's actions all had a "legitimate business purpose." (41) The court concluded that St. Francis failed to establish an antitrust injury from Bard's discounts or tiered-pricing programs. (42)

    St. Francis' second claim, arising under section 2 of the Sherman Act for attempted monopoly, was also rejected by the district court. (43) St. Francis did not establish that Bard had specific intent to destroy competition or that Bard's practices were anticompetitive. (44) St. Francis cited various barriers to entry imposed by Bard, but the district court determined that it was the GPOs, not Bard, that were creating barriers to entry. (45) As for St. Francis' claims that Bard engaged in predatory pricing, the district judge determined that Bard's prices were not below average variable cost; thus, they could not be predatory. (46) In addition, the court found that St. Francis failed to present evidence that customers were unwilling to purchase products from various categories to receive the discounts. (47) Further, there was evidence that customers could purchase catheters without having to purchase other products. (48) Because of these two factors, the court concluded that customers were not injured by Bard's discounts. (49) St. Francis' third claim under section 3 of the Clayton Act was denied for the same reasons. (50) Because of St. Francis' failure to establish a relevant product market or anticompetitive practices by Bard, the district court granted Bard summary judgment. (51)

    The Eighth Circuit Court of Appeals initially issued an opinion in August 2010, but in October 2010, it was vacated. (52) In the first opinion, the court affirmed the district court's granting of summary judgment to Bard. (53) The opinion focused on unfair pricing claims, including predatory pricing and bundled discounts. (54) The court did not explicitly adopt the discount attribution test for bundled discounts, but it analyzed and rejected St. Francis' claim that Bard's discounts were predatory using the test. (55) Other factors were also considered in determining that Bard's actions were legal including that hospitals were not required to purchase 100 percent of their supplies from Bard, that participation in the GPO programs was voluntary, and that the primary reason hospitals purchased from Bard was because the physicians preferred Bard products. (56) The court concluded that St. Francis did not suffer any injury because of the contracts. (57) In the instant decision, the Eighth Circuit again affirmed the trial court's grant of summary judgment to Bard but for a different reasoning. (58) The court applied the Concord Boat Corporation v. Brunswick decision and found that St. Francis failed to define a relevant market and submarket and therefore failed to establish an antitrust claim. (59)

  3. LEGAL BACKGROUND

    This section will explain bundled discounts and then discuss various tests proposed to analyze bundled discounts. These tests include the discount attribution test, the anticompetitive foreclosure test, and the equally efficient competitor test as well as tests applied in Europe. This section then concludes by discussing the Eighth Circuit's...

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