Richard McCullough v. Zimmer, Inc.

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 09-2105
____________
RICHARD H. MCCULLOUGH;
HOLLY A. MCCULLOUGH,
Appellants
v.
ZIMMER, INC.; ZIMMER HOLDINGS, INC.;
STRYKER ORTHOPEDICS, INC; STRYKER, INC;
ZIMMER-RANDALL ASSOCIATES, INC.
____________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. No. 08-01123)
District Judge: Honorable Arthur J. Schwab
____________
Submitted Under Third Circuit LAR 34.1(a)
May 19, 2010
Before: FUENTES, HARDIMAN and NYGAARD, Circuit Judges.
(Filed:June 1, 2010)
____________
OPINION OF THE COURT
____________
HARDIMAN, Circuit Judge.
Richard and Holly McCullough, husband and wife, sued five of the nation’s largest
manufacturers of orthopedic devices, alleging violations of federal and state law. The
McCulloughs appeal from an order of the District Court dismissing their amended
complaint for failure to state a claim. We will affirm, largely for the reasons articulated
by the District Court in its thorough opinion.
I.
Because we write for the parties, we recount only the essential facts.
A.
Defendants Zimmer, Inc., Depuy Orthopaedics, Inc., Biomet, Inc., Smith &
Nephew, Inc., and Stryker Orthopedics, Inc. are competing manufacturers of surgical
orthopedic devices that together account for approximately 95% of the United States
market in such products. In 2007, a Department of Justice investigation revealed that
from at least 2002 until 2006, each defendant individually paid kickbacks and bribes to
orthopedic surgeons to induce them to use its products. Although the companies engaged
in similar schemes, the investigation did not suggest that they had colluded or otherwise
coordinated their illicit conduct. Defendants avoided criminal liability by agreeing to
implement new corporate compliance procedures and to submit to federal monitoring.
Four of the companies also agreed to pay a total of $311 million in fines.
2
The McCulloughs averred that they competed directly with Defendants beginning
in 1988. The source of this competition, according to the McCulloughs, was the fact that
they possessed exclusive contracts with Defendants’ competitors, including Sulzer-
Medica, Inc. (Sulzer), to demonstrate, distribute, and service surgical orthopedic devices
in western Pennsylvania, eastern Ohio, and West Virginia. The McCulloughs alleged that
the bribes and kickbacks paid by Defendants harmed their business and eventually
excluded them from the surgical orthopedic device market in their sales territory in
violation of the federal antitrust laws. Specifically, they alleged that Defendants violated
§ 1 of the Sherman Act, 15 U.S.C. § 1, and § 2(a) of the Robinson-Patman Act, 15 U.S.C.
§ 13(a), which gave them a private right of action under § 4 of the Clayton Act, 15 U.S.C.
§ 15(a). The McCulloughs also alleged that Defendants violated the civil aspect of the
Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962, 1964.
Finally, their complaint included several Pennsylvania state law claims.
B.
After its initial review of the complaint, the District Court ordered the
McCulloughs to amplify their RICO allegations by filing a detailed “RICO case
statement.” Defendants subsequently filed a motion to dismiss pursuant to Federal Rule
of Civil Procedure 12(b)(6) for failure to state a claim. After hearing oral argument, the
District Court granted Defendants’ motion but allowed the McCulloughs leave to amend
their complaint. In doing so, the District Court candidly explained that the McCulloughs
3
had not adequately alleged standing under either the Clayton Act or RICO. The District
Court also explained that the complaint was deficient in regard to the existence of a RICO
enterprise.1
Following the District Court’s initial decision, the McCulloughs filed an amended
complaint. Defendants filed a second motion to dismiss under Rule 12(b)(6), which the
District Court again granted. The District Court held the McCulloughs lacked standing
because they had not suffered a cognizable antitrust injury attributable to Defendants’
alleged conduct. The District Court also held that the relevant factors identified by the
Supreme Court in Associated General Contractors of California v. California State
Council of Carpenters, 459 U.S. 519, 537-545 (1983), militated against finding antitrust
standing on these facts.2
1
After the District Court dismissed the McCulloughs’ initial complaint, defendants
Depuy Orthopaedics, Inc., Biomet, Inc., and Smith & Nephew, Inc. settled with the
McCulloughs. Only Zimmer, Inc., Stryker Orthopedics, Inc. and their associated entities
remain as defendants.
2
We have described these factors as:
(1) the causal connection between the antitrust violation and the harm to the
plaintiff and the intent by the defendant to cause that harm, with neither
factor alone conferring standing; (2) whether the plaintiff's alleged injury is
of the type for which the antitrust laws were intended to provide redress; (3)
the directness of the injury, which addresses the concerns that liberal
application of standing principles might produce speculative claims; (4) the
existence of more direct victims of the alleged antitrust violations; and (5)
the potential for duplicative recovery or complex apportionment of
damages.
In re Lower Lake Erie Iron Ore Antitrust Litig., 998 F.2d 1144, 1165-66 (3d Cir. 1993)
4
The District Court also identified numerous problems with the substance of the
McCulloughs’ antitrust allegations. Explaining that the “essence of a Section 1 claim
[under the Sherman Act] is the existence of an agreement[,]” the District Court observed
that the McCulloughs “have not alleged that Defendants acted in concert.” The District
Court further found that the McCulloughs not only failed to plead any “anticompetitive
effects on the relevant market[,]” as the Sherman Act requires, but also neglected to
define the relevant market properly in the first instance. The District Court also dismissed
the McCulloughs’ Robinson-Patman Act claim, finding that although the couple argued
they had properly pled a commercial bribery claim under Section 2(c), their amended
complaint alleged only illegal price discrimination under Section 2(a).
The McCulloughs’ RICO allegations were deficient as well. The District Court
held the McCulloughs failed to allege the existence of a RICO enterprise with sufficient
specificity because neither their amended complaint nor their RICO case statement
explained how Defendants “are organized into a cohesive unit involved in group action.”
Furthermore, the McCulloughs did not aver that the supposed enterprise existed
independent of the alleged racketeering activity.
After dismissing all federal claims, the District Court declined supplemental
jurisdiction over the couple’s remaining state law claims. This appeal followed.3
(citing Associated Gen., 459 U.S. at 545).
3
The District Court had jurisdiction over the antitrust and RICO claims pursuant to
28 U.S.C. § 1331 and supplemental jurisdiction over the state law claims under 28 U.S.C.
5
II.
The McCulloughs claim the District Court erred in various respects when it
dismissed their antitrust and RICO claims. We review de novo the District Court’s
dismissal of plaintiffs’ amended complaint for failure to state a claim pursuant to Rule
12(b)(6). Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008).
A.
The doctrine of antitrust standing ensures that a “plaintiff is a proper party to bring
a private antitrust action.” Gulfstream III Associates, Inc. v. Gulfstream Aerospace Corp.,
995 F.2d 425, 429 (3d Cir. 1993) (quoting Associated Gen., 459 U.S. at 535 n.31)
(internal quotation marks omitted). Because it is a threshold requirement to bring suit
under the Clayton Act, see City of Pittsburgh v. W. Penn Power Co., 147 F.3d 256, 264-
65 (3d Cir. 1998), we turn first to the McCulloughs’ contention that the District Court
erred when it held they lacked standing to pursue their antitrust claims.
As we did in City of Pittsburgh, see 147 F.3d at 265, the District Court first
considered whether the McCulloughs had alleged an “antitrust injury” that was causally
connected to Defendants’ alleged anticompetitive conduct. In doing so, the District Court
§ 1367. We have appellate jurisdiction under 28 U.S.C. § 1291. The McCulloughs argue
that the District Court erred by dismissing their state law claims because it also had
diversity jurisdiction. They are mistaken. Diversity jurisdiction “under 28 U.S.C. § 1332. . . requires complete diversity of the parties; that is, no plaintiff can be a citizen of the
same state as any of the defendants.” Grand Union Supermarkets v. H.E. Lockhart
Mgmt., 316 F.3d 408, 410 (3d Cir. 2003). The amended complaint, however, alleges that
the McCulloughs and Zimmer-Randall Associates, Inc. are both Pennsylvania residents.
6
recognized that typically, a “plaintiff who is neither a competitor nor a consumer in the
relevant market does not suffer antitrust injury” and therefore lacks standing to bring suit
under the antitrust laws. Schuylkill Energy Res., Inc. v. Pa. Power & Light Co., 113 F.3d
405, 415 (3d Cir. 1997) (quoting Vinci v. Waste Mgmt., Inc., 80 F.3d 1372, 1376 (9th Cir.
1996)).
The McCulloughs argue that because they sometimes purchased products from
competitors of Defendants for demonstration and resale purposes, they were both
competitors and consumers in the relevant market. We agree with the District Court,
however, that the balance of their allegations established the couple only as commission-
based sales representatives who did business with competitors and consumers in the
market for surgical orthopedic devices, not as competitors or consumers themselves. As
mere intermediaries in the supply chain, the McCulloughs suffered no cognizable antitrust
injury as a result of Defendants’ alleged anticompetitive conduct. See Barton & Pittinos,
Inc. v. Smithkline Beecham Corp., 118 F.3d 178, 184 (3d Cir. 1997); Gregory Mktg.
Corp. v. Wakefern Food Corp., 787 F.2d 92, 95-97 (3d Cir. 1986).4
4
The McCulloughs claim standing based merely upon the alleged link between
their lost profits, sales, and market share and Defendants’ illegal conduct. They also
contend Defendants’ antitrust violations were intended to drive businesses like theirs
from the market. We have emphasized that “neither causation in this but-for sense nor an
allegation of improper motive is sufficient to ‘enable any complaint to withstand a motion
to dismiss.’” Gregory Mktg., 787 F.2d at 95 (quoting Associated Gen., 459 U.S. at 537).
7
The McCulloughs also cite several cases holding that plaintiffs who were neither
competitors nor consumers in the relevant market nonetheless had antitrust standing
because their injuries were “inextricably intertwined” with alleged antitrust violations.
See, e.g., Carpet Group Int’l v. Oriental Rug Imp. Ass’n, 227 F.3d 62, 77 (3d Cir. 2000).
In those cases, however, the harm suffered by the plaintiff was typically an “integral” or
otherwise “necessary step in effecting the ends of the alleged” anticompetitive conduct.
Blue Shield of Virginia v. McCready, 457 U.S. 465, 479 (1982). Thus, in Steamfitters
Local Union No. 420 Welfare Fund v. Phillip Morris, Inc., we rejected a claim by several
union healthcare funds that they had standing to bring antitrust claims against tobacco
companies for withholding safer products from the market, which included workers
covered by the funds. 171 F.3d 912, 923 (3d Cir. 1999). Though the funds were
tangentially harmed by the scheme because the workers’ healthcare costs were higher
over time, their injuries were not inextricably intertwined with the antitrust violations
because “the tobacco companies . . . could have achieved their alleged aims without the
existence of the Funds or the relationship between the Funds and smokers.” Id.So too here, where the injury suffered by the McCulloughs was not an integral
aspect of Defendants’ alleged scheme. Rather, as the District Court recognized, any harm
to the couple’s business was a byproduct of the illegal kickbacks and bribes paid by
Defendants to numerous doctors and hospitals. Accordingly, we agree with the District
8
Court that the McCulloughs’ injury was not so inextricably intertwined with Defendants’
anticompetitive conduct that they had standing to bring an antitrust claim.
Finally, the McCulloughs contend that they had antitrust standing because two of
the five Associated General factors supported such a finding. Specifically, the couple
argues that there are no more direct victims of Defendants’ anticompetitive conduct and
that their suit raises little risk of complex apportionment of damages or duplicative
recovery. See Associated Gen., 459 U.S. at 543-45.
We have made it abundantly clear, however, that a cognizable antitrust injury is a
necessary precursor to antitrust standing, regardless of whether other Associated General
factors support such a finding. See Barton & Pittinos, 118 F.3d at 184 n.9 (“Because
[plaintiff] fails the antitrust injury requirement, it would lack standing even if the other
[Associated General] factors favored it.”). Indeed, we have directed district courts to
consider the threshold issue of antitrust injury at the outset, because “[i]f antitrust injury is
not found, further inquiry is unnecessary.” City of Pittsburgh, 147 F.3d at 265.
As noted above, the McCulloughs failed to plead a redressable antitrust injury
because they were neither competitors nor consumers in the pertinent market. Nor was
any harm to their business inextricably intertwined with Defendants’ alleged conduct.
9
Because they have failed to allege antitrust injury ab initio, the remaining Associated
General factors are irrelevant.5
For these reasons, we will affirm the District Court’s finding that the McCulloughs
lacked standing to sue under the Clayton Act for Defendants’ alleged violations of the
Sherman and Robinson-Patman Acts.6
5
Furthermore, as the District Court found, the Associated General factors cited by
the McCulloughs offer them no real support. The manufacturers who competed directly
with Defendants and lost market share as a result of their alleged anticompetitive
conduct— such as Sulzer—undoubtedly suffered harm that was more direct than the
couple’s lost commissions. Moreover, allowing both Defendants’ competitors and those
competitors’ salespeople to bring separate antitrust claims would present a substantial risk
of duplicative recovery and require an unduly complex apportionment of damages.
6
Even if they had established antitrust standing, the McCulloughs’ antitrust claims
would fail on the merits. Although the “essence” of a claim under § 1 of the Sherman Act
“is the existence of an agreement[,]” Gordon v. Lewiston Hosp., 423 F.3d 184, 207 (3d
Cir. 2005) (citations omitted), the McCulloughs have alleged no facts suggesting that
Defendants agreed to act in concert. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
565 n.10. (2007) (explaining that a complaint which “mentioned no specific time, place,
or person involved in the alleged conspiracies” was deficient because it did not allege
who “supposedly agreed, or when and where the illicit agreement took place”). Nor have
the McCulloughs defined the relevant market with any reference to the rule of reasonable
interchangeability or cross-elasticity of demand, as a § 1 claim requires. See Queen City
Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430, 436 (3d Cir. 1997). Finally, though the
couple argue on appeal that they pled a commercial bribery claim under Section 2(c) of
the Robinson-Patman Act, their amended complaint actually alleged illegal price
discrimination under Section 2(a), a claim they have now abandoned. We thus agree with
the District Court that the amended complaint would fall well short of stating a plausible
claim for relief on the merits even if the McCulloughs had standing to bring a private
antitrust action under the Clayton Act.
10
B.
The McCulloughs next claim the District Court erred in dismissing their RICO
claims. We agree with the District Court, however, that the McCulloughs’ amended
complaint failed to allege certain essential elements of a RICO cause of action.7
The McCulloughs acknowledge that they must plead the existence of an
“enterprise” to state a claim under § 1962(c) of RICO. An “enterprise is an entity, . . . a
group of persons associated together for a common purpose of engaging in a course of
conduct.” United States v. Turkette, 452 U.S. 576, 583 (1981). Instead of claiming that
Defendants qualify as an enterprise, the McCulloughs argue that the surgeons, hospital
administrators, and other entities that allegedly received bribes and kickbacks from
Defendants are the relevant enterprise for RICO purposes. Because Defendants
“participate[d] . . . in the conduct of [this] enterprise’s affairs through a pattern of
7
The McCulloughs’ lack of standing to bring an antitrust action likewise prevents
them from pursuing their RICO claims. The Supreme Court has extended much of the
Associated General analysis for antitrust standing to RICO cases. See Holmes v. Sec.
Investor Prot. Corp., 503 U.S. 258, 267-70 (1992); Steamfitters, 171 F.3d at 932. A
plaintiff lacks standing to sue under RICO where, as here, he suffers injury that is only
indirectly related to a defendant’s alleged misconduct. See Holmes, 503 U.S. at 268-69;
Steamfitters, 171 F.3d at 932-33. Accordingly, even if the McCulloughs had properly
alleged the essential elements of a RICO claim, they would lack standing to sue under
RICO for the same reasons they lack standing to sue under the Clayton Act. See
Steamfitters, 171 F.3d at 932 (“[M]uch, (if not all) of what we have said . . . in our
discussion of antitrust standing applies to the [plaintiff’s] RICO claims.”). Although the
District Court did not consider whether the McCulloughs had standing to bring a RICO
claim, we may affirm for any reason supported by the record. Donahue v. Gavin, 280
F.3d 371, 372 n.2 (3d Cir. 2002).
11
racketeering activity”—i.e., regularly paying bribes—the McCulloughs seek to hold them
liable under § 1962(c).
To prove the existence of a RICO enterprise, a plaintiff must show: “(1) that the
enterprise is an ongoing organization with some sort of framework for making or carrying
out decisions; (2) that the various associates function as a continuing unit; and (3) that the
enterprise be separate and apart from the pattern of activity in which it engages.” United
States v. Irizarry, 341 F.3d 273 (3d Cir, 2003) (quoting United States v. Riccobene, 709
F.2d 214, 222 (3d Cir. 1983)). Simply listing a string of individuals or entities that
engaged in illegal conduct, without more, is insufficient to allege the existence of a RICO
enterprise. See Richmond v. Nationwide Cassel, L.P., 52 F.3d 640, 646 (7th Cir. 1995).8
Here, the McCulloughs’ RICO allegations suggest at most that numerous surgeons
throughout their sales territory regularly and individually received illegal payments from
8
The McCulloughs cite Seville Industrial Machinery Corp. v. Southmost
Machinery Corp., where we held that the plaintiff need not affirmatively plead the three
essential attributes of a RICO enterprise as long as it alleged that an enterprise existed.
742 F.2d 786, 790 (3d Cir. 1984). We doubt that the conclusory allegation of enterprise
that we accepted in Seville would pass muster under the pleading requirements articulated
by the Supreme Court in Twombly, 550 U.S. at 555-63, and Ashcroft v. Iqbal, 129 S.Ct.
1937, 1949-50 (2009). Under today’s pleading standards, the “formulaic recitation of the
elements of a” RICO claim that we allowed in Seville likely would be insufficient to
“state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 555, 570.
Moreover, the alleged RICO enterprise in Seville involved two existing corporate entities,
see 742 F.2d at 788, which indicated that the putative organization was ongoing and had
both a decisionmaking hierarchy and an existence separate and apart from any illegal
activity. Here, by contrast, the McCulloughs implausibly allege that competing doctors in
three different states qualify as an enterprise.
12
Defendants. However, nothing in their amended complaint or RICO case statement
plausibly suggests that these doctors combined as a unit with any semblance of an
organizational framework or common purpose. Nor have they alleged facts that would
support an inference that this alleged enterprise had any structure or existence separate
and apart from Defendants’ alleged criminal conduct. To the contrary, the McCulloughs’
allegations indicate that the doctors and hospitals who supposedly comprised the RICO
enterprise in fact competed against one another in the market for surgical orthopedic
services. Accordingly, we agree with the District Court that the McCulloughs’ amended
complaint failed to state a claim under § 1962(c) of RICO.9
III.
Anticipating the possibility that we might agree with the District Court, the
McCulloughs ask us to remand their case to allow additional amendments. We decline
this invitation because the McCulloughs’ failure to remedy the significant legal and
factual deficiencies that plague their allegations—especially after receiving detailed
guidance from the District Court—convinces us that any further amendments would be
futile. See Foman v. Davis, 371 U.S. 178, 182 (1962) (explaining that “repeated failure to
cure deficiencies by amendments previously allowed” supports a denial of leave to
amend). Accordingly, we will affirm the District Court’s judgment in all respects.
9
The McCulloughs also contend that they properly alleged a RICO conspiracy in
violation of § 1962(d). Because their conspiracy claim under § 1962(d) is predicated
solely on Defendants’ alleged violation of § 1962(c), it likewise fails.
13