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Distributors whose contracts are eliminated when a manufacturer decides to establish its own sales force and distribute on its own have no standing to bring an antitrust suit because they have not suffered any “antitrust injury,” a federal judge in Pennsylvania has ruled. The plaintiffs in the suit — Precision Surgical Inc., Northeast Medical Marketing LLC, Flanagan Instruments Inc., and DMA Med-Chem Corp. — are distributors of surgical products, including balloon dissectors and other items used in performing preperitoneal laparoscopic hernia-repair surgery. In 1999, U.S. Surgical Corp. cornered the market on such products by acquiring both Origin Medsystems Inc. and General Surgical Innovations, the only manufacturers of the items. Prior to the acquisitions, the plaintiff-distributors had exclusive distribution contracts with Origin. But in December 1999, U.S. Surgical established its own sales force and terminated the contracts. The distributors filed two lawsuits — an antitrust suit in federal court in Philadelphia accusing U.S. Surgical of violating Section 2 of the Sherman Act by monopolizing the market for distributing hernia-repair surgery products, and a breach of contract suit in California state court. In the antitrust suit, Precision Surgical v. Tyco, attorney Mitchell A. Kramer of Rydal, Pa., alleged that “the anticompetitive objective and effect of [the] decision to terminate the independent distributors of Origin products in order to deal directly with the ultimate purchasers … is to eliminate the distributors who have developed a relationship with the ultimate purchasers, in order to control all aspects of the distribution, sale and pricing of such products.” As a result, Kramer alleged, U.S. Surgical and its co-defendant, Tyco International Ltd., “now entirely control the manufacture and sale of such products in the United States.” But the defense team — attorneys John G. Harkins, Eleanor Morris Illoway and Gay Parks Rainville of Philadelphia’s Harkins Cunningham — argued that the distributors lacked standing to bring an antitrust suit. Senior U.S. District Judge Edmund V. Ludwig agreed, saying the Supreme Court established the concept of antitrust standing in the 1977 decision in Brunswick Corp. v. Pueblo Bowl-O-Mat, holding that an antitrust plaintiff must show an “injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Very recently, Ludwig said, the 3rd U.S. Circuit Court of Appeals expanded on the concept in Pace Electronics Inc. v. Canon Computer Systems by noting that the Supreme Court has looked for injury that “resembles any of the potential dangers” that led the courts to label the conduct violative of the antitrust laws in the first place. Ludwig found that the 2nd Circuit has rejected the theory that terminated distributors have Brunswick standing to challenge a manufacturer’s takeover of the distribution of its own products. In GKA Beverage Corp. v. Honickman, the 2nd Circuit upheld the dismissal of a suit brought by beverage distributors who were terminated when Seven-Up Brooklyn started a distribution network that employed its own drivers, leading to control of 62 percent of the soft-drink bottling market in the New York metropolitan area. The GKA plaintiffs argued that the move had eliminated competition in retail distribution between themselves and Seven-Up. The 2nd Circuit disagreed, saying “the so-called ‘distribution monopoly’ is derived entirely from [defendant's] share of the bottling market.” The alleged monopoly involved only the defendant’s own product, the court said, and “a vertically structured monopoly can take only one monopoly profit.” Ludwig agreed with that rationale, saying “vertical integration by the monopolist may deprive a former supplier or customer of a trading partner and thus cause injury-in-fact, particularly if that firm has made a significant specialized investment in dealing with the now-integrated monopolist. But this injury is no more an injury to competition when a monopolist integrates than when a competitor integrates.” Kramer argued that the distributors are the “direct purchasers” or “consumers” for whose benefit the antitrust laws were designed. And, he said, the price increase to end users — doctors and hospitals — as well as the reduced quality of customer service constitutes an antitrust injury to competition. Ludwig flatly rejected the claim, saying “in the context of antitrust jurisprudence, these are specious arguments.” Since the distributors resold Origin products to the “final purchasers,” Ludwig found that “any resulting increase in price or diminution of quality … would be an injury to those consumers, not an antitrust injury to [the distributors'] business or property.”

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