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McCullough v. Zimmer

March 18, 2009

RICHARD H. MCCULLOUGH AND HOLLY A. MCCULLOUGH, PLAINTIFFS,
v.
ZIMMER, INC., ZIMMER HOLDINGS, INC., DUPUY ORTHOPEDICS, INC., SMITH AND NEPHEW, INC., BIOMET, INC., STRYKER ORTHOPEDICS, INC., AND STRYKER, INC., DEFENDANTS.



The opinion of the court was delivered by: Hon. Arthur J. Schwab

MEMORANDUM OPINION

I. INTRODUCTION

This case involves allegations of various violations of the antitrust laws, Racketeer Influenced and Corrupt Organizations Act ("RICO"), and state law claims of tortious interference with contract and civil conspiracy brought by Richard H. McCullough and Holly A. McCullough (collectively "Plaintiffs") against seven entities that manufacture and sell orthopedic devices. These entities include Zimmer, Inc., Zimmer Holdings, Inc., DuPuy Orthopedics, Inc., Smith and Newphew, Inc., Stryker Orthopedics, Inc., and Stryker, Inc. (collectively "Defendants").*fn1 Before this Court are Defendants' Renewed Motions to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on the grounds that Plaintiffs have failed to state a claim upon which relief may be granted. Doc. nos. 95-99. For the following reasons, Defendants' Motions to Dismiss are GRANTED.

II. FACTUAL BACKGROUND

From 1988 to the present, Plaintiffs have engaged in the sale, service, and manufacture of orthopedic products such as implants, sports medicine and trauma products, and other various surgical instruments and medical supplies. See Amended Complaint, doc. no. 88 at ¶ 14. According to Plaintiffs, their territory ranged from the western half of Pennsylvania to the eastern half of Ohio and West Virginia. Id. Plaintiffs allege that they are direct competitors with each Defendant. Id. at ¶ 17. Plaintiffs' business required the purchase of these items from a variety of manufacturers for demonstration purposes and direct sale to hospitals and physicians. Id. at ¶ 15. Plaintiffs also purchased instrument sets which they in turn rented out to hospitals for various surgical and other medical procedures. Id. at ¶ 16.

From 1988 to 1992, Plaintiffs, doing business as Intermedics-McCullough, allegedly sold, serviced, and manufactured medical supplies, although not exclusively, as an independent contractor for Sulzer-Medica, Inc. ("Sulzer"). Id. at ¶ 18. Sulzer manufactured replacement hip joints, knees, shoulder implants, and various other orthopedic products. Id. Outside of Sulzer, Plaintiffs claim they bought, sold, and serviced orthopedic, trauma, and sports medicine products by several other companies. Id. at ¶ 25.*fn2

The McCulloughs aver that contracts with these various companies provided for the exclusive right to sell and service each company's products in the western half of Pennsylvania and West Virginia. Id. at ¶ 19. They maintain that development of a customer base required close, ongoing relationships with hospitals and orthopedic surgeons who, in turn, encouraged the use of their products by orthopedic interns, residents, and fellows. Id. at ¶ 21. Plaintiffs' primary customers included the University of Pittsburgh Medical Center ("UPMC") Health system, West Penn Health system, Allegheny General Hospital, Butler Memorial Hospital, and various independent hospitals. Id. at ¶ 22.

From 1992 through 2001, the McCulloughs assigned their interests in Intermedics-McCullough to Cutting Edge Orthopedics, Inc. ("CEO"), a Pennsylvania corporation in which the McCulloughs own all shares of stock. Id. at ¶ 24. From 1992-1996, CEO's business allegedly grew to approximately five million dollars per year in sales while actively competing with all Defendants. Id. at ¶ 27. Plaintiffs then claim that after 1996, numerous physicians, hospitals, and health care systems in CEO's region declined to consider purchasing its products, giving exclusive consideration to Defendants' products, which in turn caused CEO to lose profits, market share, and product lines. Id. at ¶¶ 29-30.

According to Plaintiffs, during 2007, as a result of the disclosure of a criminal investigation conducted by the United States Department of Justice and the United States Department of Health, they discovered that Defendants engaged in allegedly illegal activities, including violations of the federal anti-kickback statute and the federal False Claims Act. Id. at ¶ 31. Plaintiffs contend that Defendants' purpose was to deprive them and other competitors in the orthopedic and surgical product industry the opportunity to compete and do business with physicians, hospitals, and other medical institutions. Further, subsequent to 2001, Defendants' activities allegedly denied Plaintiffs access to most of the orthopedic replacement product market in their territory. Id. at ¶ 32.

Defendants control ninety-five (95) percent of the hip, knee, and joint replacement product business in the United States. Id. at ¶ 33; see also United States Attorney, District of New Jersey Press Release, Feb. 27, 2007, available at http://www.usdoj.gov/usao/nj/press/files/ pdffiles/hips0927.rel.pdf. According to Plaintiffs, each Defendant paid illegal kickbacks and provided other forms of illegal payments to physicians, hospitals, health systems, and their related entities for the purpose of gaining exclusive access to the replacement hip, knee, and joint industry. Doc. no. 88 at ¶ 36.

The United States Department of Justice concluded that "[t]he financial inducements in the form of consulting agreements were entered into with hundreds of surgeons throughout the 2002-2006 time frame. The investigation revealed instances in which physicians did little to no work for the financial inducements but did agree to exclusively use the paying company's products." Id. at ¶ 39, quoting United States Attorney, District of New Jersey Press Release, Feb. 27, 2007, available at http://www.usdoj.gov/usao/nj/press/files/ pdffiles/hips0927.rel.pdf. As part of settling the investigation, each Defendant entered into a "Deferred Prosecution Agreement" with the United States Attorney for the District of New Jersey, agreed to monitor all payments to physicians, hospitals, and health institutions, and agreed to collectively pay a sum of three hundred eleven million dollars ($311,000,000) in fines. Doc. no. 88 at ¶ 41.

Plaintiffs set forth in detail the payments Defendants allegedly made both nationally and locally to physicians, hospitals, and other medical institutions. See id. at ¶¶ 44-50. Plaintiffs characterize Defendants' payments as illegal and made for the purpose of inducing these various physicians, hospitals, and medical institutions to use their products over those of the Plaintiff.

Id. at ¶ 51.*fn3

Plaintiffs aver that, starting in 1995, Plaintiffs thoroughly investigated why medical personnel and institutions stopped purchasing their products and services, yet Defendants actively concealed and refused to disclose the existence or extent of these allegedly illegal payments, referring to them as "consulting fees," "royalty payments," or "gifts" when necessary. Id. at ¶ 53. According to Plaintiffs, Defendant characterized the payments as such with the intent to deceive investigators such as the McCulloughs and other regulatory agencies. Id.

III. PROCEDURAL HISTORY

Plaintiffs commenced this action on March 8, 2008, with filing of their Complaint.

Doc. no. 1. Because Plaintiffs' case involves a claim under RICO, the Court, on November 12, 2008, ordered Plaintiffs to file a RICO case statement. Doc. no. 57. On November 14, 2008, each Defendant filed a Motion to Dismiss Plaintiffs' Complaint, as well as a joint Brief in Support of their motions. Doc. nos. 61, 63-64, 66-67, 69. On November 25, 2008, Plaintiffs filed their RICO Case Statement. Doc. no. 74. On December 1, 2008, Plaintiffs filed a Brief in Opposition to Defendants' Motions to Dismiss their Complaint. Doc. no. 75. Defendants filed their Joint Reply to Plaintiffs' Response on December 4, 2008. Doc. no. 77.

A case management conference was held on December 8, 2008. During this conference, the Court heard oral argument regarding Defendants' pending motions to dismiss Plaintiffs' original Complaint. Doc. nos. 61, 63, 64, 66, and 67. Upon consideration of the arguments, the Court granted these initial motions to dismiss, and gave Plaintiffs leave to amend their Complaint by January 5, 2009. See Case Management Order, doc. no. 78.

On January 5, 2009, Plaintiffs filed their Amended Complaint. Doc. no. 88. On January 20, 2009, each Defendant filed a Motion to Dismiss Plaintiffs' Amended Complaint, (doc. nos. 95-99), and a Joint Brief in Support of the each Motion to Dismiss. Doc. no. 100. On February 5, 2009, Plaintiffs filed their Brief in Opposition to Defendants' Motion to Dismiss. Doc. no. 103. On February 18, 2009, Defendants filed their Joint Reply to Plaintiffs' Response. Doc. no. 109. The issues have now been fully briefed and are ripe for disposition.

IV. LEGAL STANDARD

In light of the Supreme Court's decision in Bell Atlantic Corp. v. Twombly, 550 U.S.544 (2007), a complaint may be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) if it does not allege "enough facts to state a claim to relief that is plausible on its face." Phillips v. County of Allegheny, 515 F.3d 224, 234 (3d Cir. 2008)(quoting Twombly, 550 U.S. at 570). While Conley v. Gibson, 355 U.S. 41, 45-46 (1957), allowed dismissal of a claim only if "no set of facts" could support it, under Twombly, a claim for relief under Rule 12(b)(6) now "requires more than labels and conclusions" or "a formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555. In order to satisfy the requirement of Fed. R. Civ. P. 8(a)(2) that a plaintiff include a "short and plain statement of the claim showing that the pleader is entitled to relief," a plaintiff must aver sufficient factual allegations in order "to raise a right to relief above the speculative level." Ayers v. Osram Slyvania, Inc., Civil Action No. 07-1780, 2008 U.S. Dist. LEXIS 72644, at *6 (M.D. Pa. Sept. 24, 2008)(citing Twombly, 550 U.S. at 555).

In considering a Rule 12(b)(6) motion, a court accepts all of the plaintiff's allegations as true and construes all inferences in the light most favorable to the non-moving party. Umland v. Planco Fin. Servs., 542 F.3d 59, 64 (3d Cir. 2008)(citing Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006)). However, a court will not accept bald assertions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegations. See In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002); Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 n. 8 (3d Cir. 1997). A court is not required to consider legal conclusions; rather, it should determine whether the plaintiff should be permitted to offer evidence in support of the allegations. Maio v. Aetna, 221 F.3d 472, 482 (3d Cir. 2000). The failure-to-state-a-claim standard of Rule 12(b)(6) seeks to promote judicial economy by eliminating unwarranted discovery and factfinding. United States ex. rel. Repko v. Guthrie Clinic, P.C., 557 F.Supp.2d 522, 525 (M.D. Pa. 2008). Therefore, a plaintiff must put forth sufficient facts that, when taken as true, suggest the required elements of a particular legal theory. See Wilkerson v. New Media Tech. Charter Sch., Inc., 522 F.3d 315 (3d Cir. 2008) (citing Phillips, 515 F.3d at 224). Generally, this does not impose a heightened burden on the claimant above that already required by Rule 8, but instead calls for fair notice of the factual basis of a claim while "rais[ing] a reasonable expectation that discovery will reveal evidence of the necessary element." Weaver v. UPMC, Civil Action No. 08-411, 2008 U.S. Dist. LEXIS 57988, at * 7 (W.D. Pa. July 30, 2008)(citing Phillips, 515 F.3d at 234; and Twombly, 550 U.S.. at 555).

V. DISCUSSION

Defendants contend that Plaintiffs' claims under the Sherman Act, 15 U.S.C. § 1, and Robinson-Patman Act, 15 U.S.C. § 13, lack merit and that Plaintiffs lack antitrust standing because they are merely commissioned sales representatives rather than competitors or consumers. See doc. no. 100 at 3-10. Plaintiffs counter that the allegations in their Amended Complaint are sufficient to state a claim under both Section 1 of the Sherman Act and Section 2(c) of the Robinson-Patman Act. See doc. no. 103 at 7-14. Further, Plaintiffs argue extensively that, as they are direct competitors of each Defendant and also consumers of orthopedic and other medical supplies, they have suffered an antitrust injury and have standing to bring their antitrust claims. See id. at 14-27. As the standing issue may be dispositive, it will be discussed first.

A. Antitrust Standing

In the present case, Defendant contends that Plaintiffs were commissioned salespeople for larger distributors of medical supplies, and as such, lack standing to bring an antitrust suit because they have failed to allege an antitrust injury. Doc. no. 100 at 7. Specifically, Defendants argue that the McCulloughs lack standing because they are "neither a competitor nor a consumer in the relevant market" and instead are simply an "intermediary" through which a larger manufacturer distributes its product. Id. Plaintiffs counter that they were more than commission-based salespeople because their own companies bought products directly from the manufacturers and then sold them directly to hospitals and physicians and provided service for those same products. Doc. no. 103 at 17-20. For the following reasons, the Court agrees with Defendant that Plaintiffs lack standing because they are not the proper parties to bring this antitrust action and have not suffered an antitrust injury.

In Associated Gen. Contractors of Calif. v. Calif. State Council of Carpenters, 459 U.S. 519, 537-545 (1983), the Supreme Court outlined the five factors to consider when determining whether ...


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