Upate January 2010: The Ninth Circuit has again ruled in favor of Tyco in a putative class action filed by Applied Orthopedic Appliances alleging that Tyco had sought to monpolize the medical device market. The appellate court affirmed summary judgment in favor of Tyco.
In Masimo Corp. v. Tyco Health Care Group LP et al., Ninth Circuit Court of Appeals vacated a jury’s finding of liability as to Tyco Health Care Group LP’s bundling agreements, giving Tyco another boost in its battle with Masimo Corp. over alleged market manipulation of pulse oximetry products. The Court held that because Masimo hadn’t alleged anti-competitive tying or pricing, Tyco’s bundled discounts could not, as a matter of law, violate Section 2 of the Sherman Act. The Ninth Circuit also shot down Masimo’s argument that it was entitled to a new trial to prove that Tyco’s bundling practices failed the discount attribution test established in Cascade Health Solutions v. PeaceHealth - that the only bundled discounts condemned as exclusionary are those that would exclude an equally efficient producer of the competitive products. The Court held that 1) application of the discount attribution test may be inappropriate “outside the bundled pricing context, for example in tying or exclusive dealing cases,” and 2) even if the jury could have concluded that certain bundling contracts were exclusive dealing arrangements, the evidence in the trial record concerning the pervasiveness and effects of Tyco’s varied bundling arrangements was insufficient to support a finding that the arrangements foreclosed competition in a substantial share of the relevant market.
One Comment
I just want to clarify a couple of points with respect to the 9th Circuit’s ruling in the Masimo case against Tyco/Covidien. Some may erroneously walk away from your post or analysis of the recent 9th Circuit rulings in the antitrust cases against Tyco as Tyco having received a clean bill of health under our antitrust laws. That is simply inaccurate.
In deed, the 9th Circuit Court of Appeals’ October 28, 2009 decision in Masimo Corp. v. Tyco HealthCare Group, clearly held that certain practices engaged in by Tyco in the oximeter market violated the antitrust laws, specifically, Section 2 of the Sherman Act. Indeed, the accrued judgment that Tyco is going to be liable to pay in that case, after trebling and interest (and before even the award of attorneys’ fees) is almost $60 Million.
This antitrust case, brought by Tyco competitor, Masimo addresses the legality of exclusionary contracts and loyalty discount programs. The decision affirmed the jury verdicts in Masimo’s favor and preserved the distinction between rules applying to pricing conduct, on the one hand, and exclusive dealing-type conduct (which Masimo had argued and the 9th Circuit upheld), on the other.
Significantly, the case represents the first time a court of appeals has found that above-cost market share discount contracts can violate the antitrust laws, hardly a clean bill of health to Tyco.
Similar to the class-action case, the facts concerned the market for pulse oximetry equipment—noninvasive devices that measure oxygen saturation levels in the blood. Masimo entered the market after developing new and superior technology providing accurate readings in the presence of patient movement or low pulse. (Not directly related to the antitrust case, but still relevant, Masimo also won significant patent infringement claims against Tyco). Longtime dominant manufacturer Tyco (now named Covidien), threatened by Masimo’s superior new technology, entered into a series of overlapping contracts with hospital group purchasing organizations and individual hospitals that provided the hospitals favorable pricing in return for contractual commitments to purchase almost all of their pulse oximetry equipment from Tyco.
The jury found Tyco liable under the federal antitrust laws and awarded Masimo $140 million in damages before automatic trebling. However, District Judge Pfaelzer ruled in posttrial motions that only two of Tyco’s challenged practices could provide the basis for antitrust liability. After a retrial of damages to the court, Judge Pfaelzer reduced the damage award to $14.5 million before trebling.
Both sides appealed to the 9th Circuit. Tyco argued that it did nothing but offer discounted prices to hospitals, all of which were legal because they were above cost. Masimo argued the case was not about price competition at all, but the inability of a new entrant to compete against a monopolist’s contracts, locking up hospitals representing as much as 75 percent of the market.
In the end, the Ninth Circuit’s decision found that Tyco’s sole source group purchasing organization agreements and market share commitment agreements with hospitals violated the Sherman and Clayton Acts and affirmed the district court’s judgment on all issues. Moreover, nothing in the recently issued Allied Orthopedic case holding changes this holding of liability.