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Allied Orthopedic Appliances Inc. v. Tyco Health Care Group LP

January 6, 2010

ALLIED ORTHOPEDIC APPLIANCES INC., ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY SITUATED; BROOKS MEMORIAL HOSPITAL INC.; DEBORAH HEART AND LUNG CENTER; NORTH BAY GENERAL HOSPITAL INC.; SOUTH JERSEY HOSPITAL INC., PLAINTIFFS-APPELLANTS,
v.
TYCO HEALTH CARE GROUP LP, A DELAWARE PARTNERSHIP; MALLINCKRODT INCORPORATED, A DELAWARE CORPORATION, DEFENDANTS-APPELLEES.
ALLIED ORTHOPEDIC APPLIANCES INC., ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF, AND NATCHITOCHES PARISH HOSPITAL SERVICE DISTRICT, PLAINTIFF-APPELLANT,
v.
TYCO HEALTH CARE GROUP LP, A DELAWARE PARTNERSHIP; MALLINCKRODT INCORPORATED, A DELAWARE CORPORATION, DEFENDANTS-APPELLEES.



Appeal from the United States District Court for the Central District of California Mariana R. Pfaelzer, District Judge, Presiding D.C. No. 2:05-cv-06419-MRP-AJW.

The opinion of the court was delivered by: Silverman, Circuit Judge

FOR PUBLICATION

OPINION

Argued and Submitted December 8, 2009 -- Pasadena, California.

Before: David R. Thompson and Barry G. Silverman, Circuit Judges, and Susan R. Bolton,*fn1 District Judge.

OPINION

Plaintiffs in this antitrust suit are a group of hospitals and other health care providers that purchased pulse oximetry sensors from Tyco Healthcare Group LP after November 2003. They allege that they overpaid for the sensors because Tyco used two kinds of marketing agreements to foreclose competition from generic sensor manufacturers in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. They also allege that by introducing OxiMax, a patented pulse oximetry system that is incompatible with generic sensors, Tyco unlawfully maintained its monopoly over the sensor market in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2.

The district court denied Plaintiffs' motion for class certification and later granted Tyco's motion for summary judgment on the Section 1 and 2 claims. We agree with the district court that Tyco's agreements do not violate Section 1; there is no evidence that they foreclosed competition in a substantial share of the sensor market. We also agree that there is no Section 2 violation; the undisputed evidence shows that the patented OxiMax design is an improvement over the previous design. Innovation does not violate the antitrust laws on its own, and there is no evidence that Tyco used its monopoly power to force customers to adopt its new product. Accordingly, we affirm the district court's judgment on the merits and have no need to reach the class certification issue.

BACKGROUND

The pulse oximetry products at issue in this litigation include sensors and monitors. Sensors attach to a patient's body. A monitor receives and interprets the signal from a sensor and then displays the patient's level of blood oxygenation. Stand-alone monitors measure only blood oxygenation. Multi-parameter monitors measure various patient diagnostics in addition to blood oxygenation. Monitors are more expensive than sensors on a unit basis, but the volume of sensor sales is much larger than the volume of monitor sales.

Tyco was an early entrant in the pulse oximetry market and was able to establish an installed base of monitors greatly exceeding that of its competitors. Its technology was initially protected by its "R-Cal" patent, which prevented competitors from selling sensors compatible with its installed base of monitors. Tyco anticipated that upon expiration of the R-Cal patent in November 2003, competitors would begin to produce generic sensors compatible with its installed base of monitors. It thus set about creating a new proprietary oximetry technology.

Tyco's plan matured into what became known as the "OxiMax Strategy." Tyco created a new patented sensor design that contained a writable memory chip. Moving the digital memory chip from the monitor to the sensor allowed Tyco to add new features to the OxiMax sensors, such as the ability to store the patient's oxygen saturation history in the sensor itself (the "sensor event reporting" feature) and the ability to inform a physician of possible causes of and solutions for signal interruption (the "sensor messaging" feature).

The digital memory chip also allowed Tyco to move essential calibration coefficients from the monitors into the sensors themselves. Because the new OxiMax monitors do not contain any calibration coefficients, they are incompatible with generic sensors. However, OxiMax monitors are compatible with new types of sensors that Tyco develops. Previously, when Tyco introduced a new sensor, customers either had to buy a new monitor or reprogram their entire installed base of stand-alone and multiparameter monitors with the appropriate calibration coefficients. With the OxiMax system, customers can adopt new types of sensors without affecting their installed base of monitors because the necessary coefficients are contained in the sensors themselves. This reduces costs for customers and frees sensor designers from having to use the predefined coefficients programmed into the installed base of monitors. Moving the calibration coefficients into the sensors therefore facilitates the development and introduction of new types of sensors.

For example, Tyco developed the Max-Fast Adhesive Forehead Sensor for use with the OxiMax system. According to Tyco, the Max-Fast sensor "has a more efficient and spectrally different [Light Emitting Diode]" than previous versions of the sensor. "Because the MAX-FAST sensor is calibrated specifically for use on the forehead, its calibration differs from the existing RCAL curve set," and consequently it can only be used with the new OxiMax system.

Tyco launched OxiMax in March 2002 and notified equipment manufacturers that all remaining R-Cal boards were being discontinued in February 2003. It used two kinds of marketing agreements to help sell the OxiMax system: "market-share discount" agreements and "sole-source agreements." Market-share discount agreements allowed customers, typically small hospitals or groups of small hospitals, to purchase Tyco's products at discounts off list prices if they committed to purchase some minimum percentage of their pulse oximetry product requirements from Tyco. The greater the percentage of the customer's requirements purchased from Tyco, the greater the discount Tyco gave. The agreements did not contractually obligate Tyco's customers to buy anything from Tyco. The only consequence of purchasing less than the agreed upon percentage of Tyco's products was loss of the negotiated discounts.

Sole-source agreements existed between Tyco and group purchasing organizations or "GPOs." GPOs are consortiums of healthcare providers that negotiate purchasing contracts with healthcare equipment vendors, like Tyco. Members of a GPO may purchase equipment from a vendor at negotiated prices. Under Tyco's sole-source agreements, a GPO agreed that it would not enter into a purchasing contract with any other vendor of pulse oximetry products, and Tyco in return offered a deeper discount. Like Tyco's market-share discount agreements, the sole-source agreements at issue here did not contractually obligate GPO members to purchase anything from Tyco.

After expiration of Tyco's R-Cal patent in November 2003, a number of companies, including Masimo and GE, began manufacturing generic R-Cal sensors. Masimo planned to price its generic sensors between $5.75 and $7.50 each. GE priced its sensors at $6.50. In contrast, the average price for Tyco's branded sensors was just over $10. By March of 2004, Tyco estimated that 44% of the installed base of stand-alone monitors and 24% of the installed base of multiparameter monitors used OxiMax technology. From 2002 to 2005, Tyco's share of stand-alone pulse oximetry monitor sales in the U.S. was between 62% and 64%. In 2006, its market share dropped to 35%. In October 2007, Masimo estimated that its share of new monitor sales in the U.S. was roughly 40% to 45%.

Plaintiffs brought this suit alleging that Tyco's introduction of OxiMax and its use of market-share discount and sole-source agreements violate Sections 1 and 2 of the Sherman Act, 15 U.S.C. ยงยง 1, 2. The district judge granted Tyco's motion for summary judgment on Plaintiffs' claims. The court held that Tyco's market-share discount agreements and sole-source agreements did not create an unreasonable restraint on trade under Section 1 because hospitals' commitments under the agreements were "voluntary and [could] be ended at any time, and hospitals [were] thus free to switch to more competitively priced generics." It further held that Tyco's introduction of OxiMax, both alone and in combination with its other business practices, was not unreasonably restrictive of competition under Section 2. The OxiMax design was a "superior ...


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