The US Court of Appeals for the Ninth Circuit held in Innovative Health, LLC v. Biosense Webster, Inc. that the plaintiffs adequately alleged a tying claim related to the sale of clinical support services for specialized catheters ( (9th Cir. Jan. 5, 2024)). The court reversed and remanded the case for further proceedings.
On January 5, 2024, the US Court of Appeals for the Ninth Circuit held in Innovative Health, LLC v. Biosense Webster, Inc. that the plaintiffs adequately alleged a tying claim related to the sale of clinical support services for specialized catheters ( (9th Cir. Jan. 5, 2024)).
Background
Biosense manufactures CARTO 3, a cardiac mapping system, and sells three specialized catheters to be used with CARTO 3. Biosense also supplies free clinical support services. Innovative sells reprocessed catheters compatible with CARTO 3, including those originally manufactured by Biosense, and does not offer support services.
In 2014, Biosense began offering support services only to hospitals that purchased catheters from Biosense. Accordingly, hospitals that purchased Innovative's catheters could not seek free support services from Biosense. Biosense officially adopted that policy in 2016. Innovative alleged that Biosense's policy was an illegal tie in violation of Sections 1 and 2 of the Sherman Act.
On the defendant's motion for summary judgment, the lower court held that the plaintiff failed to raise a genuine issue of material fact as to the tying claim. The court reasoned that the plaintiff failed to raise a genuine issue of material fact as to whether:
The support services and the catheter were two separate products.
There was a viable single-brand aftermarket for CARTO 3 support services.
Appellate Decision
In a split decision, the Ninth Circuit reversed and remanded the lower court's decision, finding that the plaintiff:
Raised a genuine issue of material fact as to whether there was a tie.
Raised a genuine issue of material fact as to the existence of an aftermarket.
Existence of a Tie
The court found that the plaintiff raised a genuine issue of material fact as to the existence of the tie. Noting that there was no question that support services were tied to the purchase of a catheter, the court focused on whether the plaintiff presented sufficient evidence to find that the two products were separate. The court reasoned that under the consumer demand test laid out in Eastman Kodak Co. v. Image Technical Services, Inc., the products will be found to be separate if both:
The court noted that under Kodak, the fact that the products have been sold separately in the past is sufficient to satisfy the consumer demand test.
The court found that the plaintiff's evidence of separate products was sufficient, including that clinical support services have in the past, and continue to be, sold separately, including evidence that:
The defendant's competitors in the catheter market provide their own support services.
Approximately 5% of hospitals provide their own support services for catheters bought separately, effectively purchasing two different products.
The court did not agree with the defendant that because they supply support services for free, there is no demand for the purchase of both products. The court stated that there is no rule that an antitrust market can never include a product that is not sold.
Aftermarket
The court found that the plaintiff raised genuine issue of material fact as to whether a single-brand aftermarket exists for support services. The court stated that to establish a single-brand aftermarket, the plaintiff must show that:
The challenged aftermarket restrictions are unknown to the customer when they make a foremarket purchase.
Customers are unable to determine accurate life-cycle pricing due to significant information costs.
There are significant switching costs.
Competition in the foremarket is insufficient to deter anticompetitive conduct in the aftermarket.
The court found that the lower court properly found the fact that customers purchased Biosense catheters even after the formal tying policy went into effect in 2016 was not evidence of market power, because those customers, as hospitals, are assumed to be sophisticated and aware of the policy. However, the court held that customers who bought the product before the tying policy was officially adopted:
Would not have known about the aftermarket restrictions related to support services.
Could not have made accurate life-cycle cost predictions for cardiac mapping.
Faced substantial switching costs, as cardiac mapping systems are expensive and hospitals and doctors develop familiarity with specific systems.
The court noted that for the fourth factor regarding competition in the foremarket, the plaintiff presented sufficient evidence that a sufficient number of customers (23%) were "locked-in" to the defendant's tying policy before the policy went into effect as compared to the number of customers that purchased the system after the policy was implemented. The court noted that, though the Ninth Circuit does not have a specific threshold for what constitutes a "high" number of locked-in customers, 23% is significant. The court found that the significant number of locked-in customers established the presence of an aftermarket.
Procompetitive Effects
The court was not swayed by the defendant's alleged procompetitive effects, including that:
The tie prevents free-riding.
The tie is necessary for quality and safety concerns.
The court reasoned that the defendant did not provide evidence of any problem with free-riding, and did not provide evidence as to why a free-riding problem justifies supracompetitive pricing. The court further reasoned that the defendant provided no evidence to support its contention that the tie is necessary for quality and safety concerns related to the plaintiff's products in particular.
Dissent
In a dissent, Judge Miller argued that the plaintiff did not adequately establish a single-brand aftermarket. Judge Miller reasoned that:
It is not clear whether customers that purchased CARTO 3 catheters before the 2016 policy went into effect are actually locked in.
The defendant presented evidence that its sales were not negatively impacted after the tying policy was implemented.
The plaintiff failed to show that the number of locked-in customers is substantial. Judge Miller stated that 23% is too small to allow the defendant to exploit the aftermarket, and raising its prices to supracompetitive levels would likely lead to the defendant losing a large share of non-locked-in customers.