Third Circuit Denies Federal Antitrust Standing to Hospitals Purchasing Products Through Distributors Despite Contract Between Manufacturer and Hospitals’ Group Purchasing Organization

In In re Hypodermic Products Antitrust Litigation, the Third Circuit once again denied federal antitrust standing to a class of hospitals seeking damages from the manufacturer of hypodermic products because the hospitals paid for and took possession of such products from intermediate distributors and negotiated their final price with the distributors.

The sole issue in Hypodermic Products was whether a class of hospitals or a class of distributors were direct purchasers of hypodermic products from the manufacturer, Becton Dickinson & Co., and therefore had standing to assert federal antitrust claims against Becton. Under Illinois Brick Co. v. Illinois and later decisions of the United States Supreme Court, only parties who purchase products or services directly from the party accused of violating federal antitrust statutes have standing to sue for damages under such statutes. Thus, only one of the two classes of plaintiffs — the hospitals or the distributors — could assert federal antitrust claims against Becton.

The hospitals used a group purchasing organization (“GPO”) to negotiate collectively on their behalf with Becton for the sale of hypodermic products. The GPO and Becton then entered an agreement setting the net price at which Becton would sell the products to third-party distributors. Importantly, the agreement between the GPO and Becton did not set the price at which the distributors would re-sell the products to the hospitals, and the distributors could negotiate the final price at which it sold the products to the hospitals.

The distributors would then order products from Becton, which would ship the products to and invoice the distributors, who would pay the invoiced amounts to Becton. The hospitals, for their part, would place purchase orders with and pay the distributors, who would then ship the products to the hospitals. During this distribution process, even though possession of the products passed from the distributor to the hospital, title would revert back to Becton upon dispatching the products and would then pass directly from Becton to the hospital once the delivery was completed.

Following its earlier decision in Warren General Hospital v. Amgen Inc., which denied direct-purchaser standing to a hospital in a similar factual situation, the Hypodermic Products Court found that the distributors were direct purchasers with standing and the hospitals were indirect purchasers without standing. The Third Circuit based this finding on the following characteristics of Becton’s distribution system: 1) the hospitals placed orders with the distributors, not Becton, 2) the distributors negotiated the final sales price separately with the hospitals, 3) the distributors shipped the products directly to the hospitals, and 4) the hospitals paid the distributors, not Becton, for the products they received.

Hypodermic Products serves as a reminder that, even when a manufacturer negotiates directly with a consumer’s representative and title passes directly from the manufacturer to the consumer, the manufacturer may still enjoy an Illinois Brick defense to a federal antitrust action brought by the consumer if there are intermediaries in the distribution process who negotiate the consumer’s final price and take possession of the product during the distribution process. Thus, a defendant in a civil federal antitrust matter should carefully examine the distribution chain at issue and consider whether any such intermediaries exist.