Allied Orthopedic Appliances I v. Tyco Health Care Group Lp

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
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.; No. 08-56314
SOUTH JERSEY HOSPITAL INC.,
Plaintiffs-Appellants,  D.C. No.
2:05-cv-06419-
v. MRP-AJW
TYCO HEALTH CARE GROUP LP, a
Delaware partnership;
MALLINCKRODT INCORPORATED, a
Delaware corporation,
Defendants-Appellees.

395
396 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
ALLIED ORTHOPEDIC APPLIANCES 
INC., on behalf of itself and all
others similarly situated,
Plaintiff,
and
No. 08-56315
NATCHITOCHES PARISH HOSPITAL
D.C. No.
SERVICE DISTRICT,
Plaintiff-Appellant,  2:05-cv-06419-
MRP-AJW
v.
OPINION
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
Argued and Submitted
December 8, 2009—Pasadena, California
Filed January 6, 2010
Before: David R. Thompson and Barry G. Silverman,
Circuit Judges, and Susan R. Bolton,* District Judge.
Opinion by Judge Silverman
*The Honorable Susan R. Bolton, United States District Judge for the
District of Arizona, sitting by designation.
400 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
COUNSEL
Herbet E. Milstein, Cohen Milstein Sellers & Toll PLLC,
Washington, DC; and Bruce E. Gerstein and Joseph Opper,
Garwin Gerstein & Fisher LLP, New York, New York, for the
plaintiffs-appellants.
Theodore B. Olson, Christopher D. Dusseault, and Margaret
A. Farrand, Gibson Dunn & Crutcher LLP, Los Angeles, Cal-
ifornia, for the defendants-appellees.
OPINION
SILVERMAN, Circuit Judge:
Plaintiffs in this antitrust suit are a group of hospitals and
other health care providers that purchased pulse oximetry sen-
sors 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 competi-
tion 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 main-
tained 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 certifi-
cation 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 Sec-
tion 2 violation; the undisputed evidence shows that the pat-
ented OxiMax design is an improvement over the previous
design. Innovation does not violate the antitrust laws on its
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 401
own, and there is no evidence that Tyco used its monopoly
power to force customers to adopt its new product. Accord-
ingly, 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 sen-
sor 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 pro-
duce 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 “Oxi-
Max 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 sig-
nal interruption (the “sensor messaging” feature).
402 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
The digital memory chip also allowed Tyco to move essen-
tial calibration coefficients from the monitors into the sensors
themselves. Because the new OxiMax monitors do not con-
tain 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 Fore-
head Sensor for use with the OxiMax system. According to
Tyco, the Max-Fast sensor “has a more efficient and spec-
trally different [Light Emitting Diode]” than previous ver-
sions 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 equip-
ment 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 agree-
ments.” Market-share discount agreements allowed custom-
ers, 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
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 403
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
404 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
Act, 15 U.S.C. §§ 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 compet-
itively priced generics.” It further held that Tyco’s introduc-
tion of OxiMax, both alone and in combination with its other
business practices, was not unreasonably restrictive of compe-
tition under Section 2. The OxiMax design was a “superior
and more sophisticated offering than the previous generation
R-Cal system” and Tyco “did nothing to force OxiMax moni-
tors on its customers.” Plaintiffs timely appealed the district
court’s final judgment. We affirm.
DISCUSSION
We have jurisdiction pursuant to 28 U.S.C. § 1291. A dis-
trict court order granting summary judgment is reviewed de
novo. See Padfield v. AIG Life Ins. Co., 290 F.3d 1121, 1124
(9th Cir. 2002). Summary judgment is proper if the record,
viewed in the light most favorable to the non-moving party,
shows “that there is no genuine issue as to any material fact
and that the moving party is entitled to judgment as a matter
of law.” Fed. R. Civ. P. 56(c); see also Universal Health
Servs., Inc. v. Thompson, 363 F.3d 1013, 1019 (9th Cir.
2004).
I. Tyco’s Market-Share Discount and Sole-Source
Agreements Did Not Violate Section 1 of the Sherman
Act
Section 1 of the Sherman Act, 15 U.S.C. § 1, prohibits
“[e]very contract, combination . . . or conspiracy, in restraint
of trade or commerce among the several States.” Plaintiffs
premise their Section 1 claim on just one theory of liability:
exclusive dealing. As the district court noted, Plaintiffs do not
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 405
include Tyco’s introduction of OxiMax within their Section 1
claim. They have not advanced any legal theory that Tyco
used its marketing agreements to tie its sensor sales to sales
of its OxiMax monitors.
[1] Exclusive dealing involves an agreement between a
vendor and a buyer that prevents the buyer from purchasing
a given good from any other vendor. There are “well-
recognized economic benefits to exclusive dealing arrange-
ments, including the enhancement of interbrand competition.”
Omega Envtl., Inc. v. Gilbarco, Inc., 127 F.3d 1157, 1162
(9th Cir. 1997). Consequently, “an exclusive-dealing arrange-
ment does not constitute a per se violation of section 1.” Twin
City Sportservice, Inc. v. Charles O. Finley & Co., Inc., 676
F.2d 1291, 1303-04 (9th Cir. 1982). Under the antitrust rule
of reason, an exclusive dealing arrangement violates Section
1 only if its effect is to “foreclose competition in a substantial
share of the line of commerce affected.” Omega, 127 F.3d at
1162 (quoting Tampa Elec. Co. v. Nashville Coal Co., 365
U.S. 320, 327 (1961)).1
It is significant that the market-share discount and sole-
source agreements in this case did not contractually obligate
Tyco’s customers to purchase anything from Tyco. Rather,
the agreements provided only for substantial discounts to cus-
tomers that actually purchased a high percentage of their sen-
1
Omega and Tampa involved alleged violations of Section 3 of the
Clayton Act, 15 U.S.C. § 14, which also prohibits exclusive dealing
arrangements. Our circuit has held that “a greater showing of anticompeti-
tive effect is required to establish a Sherman Act violation than a section
three Clayton Act violation in exclusive-dealing cases.” Twin City, 676
F.2d at 1304 n. 9. Accordingly, although a Clayton Act violation may be
found where an agreement has the probable effect of foreclosing competi-
tion, Omega, 127 F.3d at 1162, in a case under Section 1 of the Sherman
Act, the plaintiff must prove that the exclusive dealing arrangement actu-
ally foreclosed competition, McGlinchy v. Shell Chemical Co., 845 F.2d
802, 811 (9th Cir. 1988) (“To establish a section 1 violation under the
Sherman Act, a plaintiff must demonstrate . . . [that the agreement] actu-
ally causes injury to competition.”).
406 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
sor requirements from Tyco. Plaintiffs’ expert, Professor H.E.
Frech III, nevertheless testified that Tyco’s agreements fore-
closed a substantial share of the U.S. sensor market by provid-
ing “an incentive as opposed to a requirement for
exclusivity.”
[2] As the district court correctly observed, Frech’s expert
report ignored a key fact: R-Cal compatible generic sensors
that cost less than Tyco’s sensors entered the market upon the
expiration of the R-Cal patent. Frech’s opinion did not take
that into account. He never explained why price-sensitive hos-
pitals would adhere to Tyco’s market-share agreements when
they could purchase less expensive generic sensors instead.
He postulated that if a hospital chose to purchase a competi-
tor’s monitor, that hospital could lose Tyco’s discounts on the
sensors it continued to need for its installed base of Tyco
monitors. Nonetheless, even such a hospital could simply
begin to purchase less expensive generic sensors for its
remaining Tyco monitors. We thus agree with the district
court that on the facts of this case, something more than the
discount itself is necessary to prove that Tyco’s market-share
discount agreements forced customers to purchase its sensors
rather than generics.
[3] Any customer subject to one of Tyco’s market-share
discount agreements could choose at anytime to forego the
discount offered by Tyco and purchase from a generic com-
petitor. The “easy terminability” of an exclusive dealing
arrangement “negate[s] substantially [its] potential to fore-
close competition.” Omega, 127 F.3d at 1163-64 (citing
Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 394-
95 (7th Cir.1984), and other cases); see also XI PHILIP E.
AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW, ¶ 1807a at
129 (2d ed. 2000) (“Discounts conditioned on exclusivity in
relatively short-term contracts are rarely problematic.”). The
market-share discount agreements at issue here did not fore-
close Tyco’s customers from competition because “a compet-
ing manufacturer need[ed] only offer a better product or a
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 407
better deal to acquire their [business].” Omega, 127 F.3d at
1164.
[4] The sole-source agreements did not foreclose competi-
tion for the same reason. At any time, a GPO member could
simply forego the negotiated discounts with Tyco and pur-
chase less expensive generics instead. Tyco’s sole-source
agreement with HealthTrust is somewhat more problematic
than the others because it prevented its members from belong-
ing to any other GPO. This meant that HealthTrust members
that decided to purchase pulse oximetry products from ven-
dors other than Tyco could not access discounts by joining
other GPOs. There is no evidence, however, that HealthTrust
members were unable to access less expensive generic senors
through other means. “If competitors can reach the ultimate
consumers of the product by employing existing or potential
alternative channels of distribution, it is unclear whether such
restrictions foreclose from competition any part of the rele-
vant market.” Id. at 1163.2
[5] Plaintiffs did not present evidence that Tyco’s market-
share and sole-source contracts foreclosed competition in a
substantial share of the market for pulse oximetry sensors.
Vendors of generic sensors remained able to compete for
Tyco’s customers by offering their products at better prices.
The agreements therefore did not constitute unreasonable
restraints on trade under Section 1.
2
In a previous antitrust suit against Tyco, we affirmed the same district
court’s holding that the trial evidence supported the jury’s finding that
Tyco’s market-share discount and sole-source agreements violated Sec-
tions 1 and 2 of the Sherman Act. Masimo Corp. v. Tyco Health Care
Group, No. 07-55960, 2009 WL 3451725, 2009 U.S. App. LEXIS 23765
(9th Cir. Oct. 28, 2009). As the district court correctly ruled, Masimo is
distinguishable from this case. The R-Cal patent was still in effect during
the time period at issue in Masimo, so owners of Tyco’s R-Cal monitors
had no choice but to purchase Tyco’s sensors for use with those monitors.
Furthermore, the sole-source agreements in that case contractually obli-
gated GPO members to purchase a set percentage of their pulse oximetry
requirements from Tyco.
408 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
II. Tyco’s Introduction of OxiMax Did Not Violate Section
2 of the Sherman Act
“There are three essential elements to a successful claim of
Section 2 monopolization: (a) the possession of monopoly
power in the relevant market; (b) the willful acquisition or
maintenance of that power; and (c) causal ‘antitrust’ injury.”
Cal. Computer Prods., Inc. v. Int’l Bus. Mach. Corp., 613
F.2d 727, 735 (9th Cir. 1979) (“CalComp”). For purposes of
Tyco’s motion and this appeal, the parties agree that Tyco is
a monopolist in the U.S. pulse oximetry sensor market. The
focus of the dispute is whether Tyco unlawfully maintained
its monopoly power in that market by introducing OxiMax.
Plaintiffs contend that Tyco maintained its monopoly by (1)
designing its new patent-protected OxiMax senors to be com-
patible with its new OxiMax monitors and the installed base
of R-Cal monitors, but designing its new OxiMax monitors to
be incompatible with the old R-Cal sensors; and (2) allegedly
forcing customers and OEMs to adopt the new OxiMax moni-
tors by discontinuing its R-Cal monitors and implementing
other exclusionary business practices. Plaintiffs argue that the
district court erred in rejecting these arguments because it did
not balance the benefits of Tyco’s alleged product improve-
ment against its anticompetitive effects. They further argue
that the district court impermissibly decided disputed issues of
material fact regarding the sufficiency of Tyco’s innovation
and the competitive effect of its overall OxiMax strategy. We
agree with the district court.
A. Product Improvement Alone Does Not Violate
Section 2
[6] “Section 2 of the Sherman Act proscribes ‘monopoliza-
tion’; it does not render unlawful all monopolies.” Foremost
Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 543 (9th
Cir. 1983). “A monopolist, no less than any other competitor,
is permitted and indeed encouraged to compete aggressively
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 409
on the merits, and any success it may achieve solely through
‘the process of invention and innovation’ is necessarily toler-
ated by the antitrust laws.” Id. at 544-45 (quoting Berkey
Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 281 (2d Cir.
1979)). Accordingly, “[a]s a general rule, courts are properly
very skeptical about claims that competition has been harmed
by a dominant firm’s product design changes.” United States
v. Microsoft Corp., 253 F.3d 34, 65 (D.C. Cir. 2001).
[7] However, changes in product design are not immune
from antitrust scrutiny and in certain cases may constitute an
unlawful means of maintaining a monopoly under Section 2.
Foremost, 703 F.2d at 545. For example, in United States v.
Microsoft, the plaintiffs showed that Microsoft harmed com-
petition by integrating its Web browser, Internet Explorer,
into the Windows 98 operating system. 253 F.3d at 65-66.
Microsoft provided no “procompetitive justification,” id. at
59, for having integrated Internet Explorer into Windows.
Having failed to show “that its conduct serve[d] a purpose
other than protecting its operating system monopoly,” the
D.C. Circuit held that Microsoft had violated Section 2 of the
Sherman Act. Id. at 66-67.
[8] In contrast, a design change that improves a product by
providing a new benefit to consumers does not violate Section
2 absent some associated anticompetitive conduct. See Cal-
Comp, 613 F.2d at 735-36 (holding that a design change must
not be “unreasonably restrictive of competition”). In Cal-
Comp, a manufacturer of peripheral computer devices argued
that “IBM made design changes on certain of its CPUs, disk
drives and controllers of no technological advantage and
solely for the purpose of frustrating competition” from periph-
eral device manufacturers. Id. at 739. However, there was
uncontroverted evidence that IBM’s changes allowed it to
reduce manufacturing costs and prices to the consumer and
also improved performance of the product. Id. at 744. We thus
held:
410 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
IBM, assuming it was a monopolist, had the right to
redesign its products to make them more attractive to
buyers whether by reason of lower manufacturing
cost and price or improved performance. It was
under no duty to help CalComp or other peripheral
equipment manufacturers survive or expand. IBM
need not have provided its rivals with disk products
to examine and copy, nor have constricted its prod-
uct development so as to facilitate sales of rival
products. The reasonableness of IBM’s conduct in
this regard did not present a jury issue.
Id. (citation omitted).
Following CalComp, we decided Foremost Pro Color, Inc.
v. Eastman Kodak Co., 703 F.2d 534 (9th Cir. 1983). Kodak,
a monopolist in photographic film and amateur still cameras,
had introduced a new line of smaller cameras and related film
products. Id. at 537. The new film could not be processed
with previously used photographic paper and chemicals, so
photofinishers had to buy all new paper and chemicals from
Kodak. One such photofinisher, Foremost, brought suit alleg-
ing that Kodak had introduced its new system to maintain its
monopoly in violation of Section 2. Id.
Foremost made no allegation that Kodak’s new film was
not an improvement over previous films. Rather, it simply
alleged that Kodak had unlawfully maintained its monopoly
by “continually researching and developing new photographic
products . . . that are incompatible with then existing photo-
graphic products and photofinishing equipment” and then
introducing those products “in such a manner that [Foremost]
was required to purchase new paper, chemistry and photofin-
ishing equipment.” Id. at 543 (alteration in original).
We held that such an allegation does not state a claim for
relief under Section 2. It was “of no legal import” that Fore-
most had characterized Kodak’s activities “as a form of tech-
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 411
nological predation” because a monopolist has “the right to
redesign its products to make them more attractive to buyers.”
Id. at 545 (citing CalComp, 613 F.2d at 744). We acknowl-
edged, however, that introduction of a new and improved
product design could constitute a violation of Section 2 where
“some associated conduct . . . supplies the violation.” Id.
(quoting Berkey Photo, 603 F.2d at 286 n.30). Specifically,
we held that to state a claim for relief under Section 2,
product introduction must be alleged to involve
some associated conduct which constitutes an anti-
competitive abuse or leverage of monopoly power,
or a predatory or exclusionary means of attempting
to monopolize the relevant market, rather than
aggressive competition on the merits.
Id. at 545-46.
[9] CalComp and Foremost therefore stand for the uncon-
troversial proposition that product improvement by itself does
not violate Section 2, even if it is performed by a monopolist
and harms competitors as a result. See IIIB AREEDA &
HOVENKAMP ¶ 776a at 285-86 (3d ed. 2006) (“At the very
least, as all courts recognize, product improvement without
more is protected and beyond antitrust challenge.”). There is
no violation of Section 2 unless plaintiff proves that some
conduct of the monopolist associated with its introduction of
a new and improved product design “constitutes an anticom-
petitive abuse or leverage of monopoly power, or a predatory
or exclusionary means of attempting to monopolize the rele-
vant market.” Foremost, 703 F.2d at 545-46.
There is no room in this analysis for balancing the benefits
or worth of a product improvement against its anticompetitive
effects. If a monopolist’s design change is an improvement,
it is “necessarily tolerated by the antitrust laws,” id. at 545,
unless the monopolist abuses or leverages its monopoly power
in some other way when introducing the product. To hold oth-
412 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
erwise “would be contrary to the very purpose of the antitrust
laws, which is, after all, to foster and ensure competition on
the merits.” Id. at 544. “Antitrust scholars have long recog-
nized the undesirability of having courts oversee product
design, and any dampening of technological innovation would
be at cross-purposes with antitrust law.” United States v.
Microsoft Corp., 147 F.3d 935, 948 (D.C. Cir. 1998).
To weigh the benefits of an improved product design
against the resulting injuries to competitors is not just unwise,
it is unadministrable. There are no criteria that courts can use
to calculate the “right” amount of innovation, which would
maximize social gains and minimize competitive injury. A
seemingly minor technological improvement today can lead
to much greater advances in the future. The balancing test
proposed by plaintiffs would therefore require courts to weigh
as-yet-unknown benefits against current competitive injuries.
Our precedents and the precedents we have relied upon
strongly counsel against such a test. See CalComp, 613 F.2d
at 744; Foremost, 703 F.2d at 545-46; Berkey Photo, 603 F.2d
at 286-87. Although one federal court of appeals has nomi-
nally included a balancing component in its test, it has not yet
attempted to apply it. See United States v. Microsoft Corp.,
253 F.3d 34, 59, 66-67 (D.C. Cir. 2001) (including balancing
as the last step of its test but not applying that step, either
because the defendant had provided no justification for its
product change or because the plaintiff had not rebutted the
justification provided). Absent some form of coercive conduct
by the monopolist, the ultimate worth of a genuine product
improvement can be adequately judged only by the market
itself. Berkey Photo, 603 F.2d at 287.
B. Undisputed Evidence that OxiMax Was an
Improvement
[10] In this case, it is undisputed that by placing a digital
memory chip in the sensor and moving the calibration coeffi-
cients from the monitor to the sensor, Tyco made its new Oxi-
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 413
Max system incompatible with generic sensors and harmed
generic sensor manufacturers. We must therefore decide
whether there remains a genuine issue that the OxiMax sensor
design provided some new benefit to consumers and thus con-
stituted an improvement.
[11] First, the United States Patent and Trademark Office
found the OxiMax sensor design to be sufficiently innovative
over the prior art to deserve a patent, and there is no allega-
tion, much less proof, that the patent is invalid. Although, as
the district court properly noted, there is not a per se rule bar-
ring Section 2 liability on patented product innovation, the
existence of a patent on a new product design is some evi-
dence that the change is an improvement over previous
designs. After all, “the proper amount of gains to innovation
are left to Congress, who has the authority to vary the terms
of patent protections, the point in time from which the protec-
tions run, or the scope of patentable innovations.” IIIB
AREEDA & HOVENKAMP ¶ 777d at 311.
[12] Second, it is undisputed that Tyco’s new sensor design
allows it to introduce new types of sensors without requiring
its customers to purchase new monitors or reprogram their
installed base of monitors. This added flexibility promotes the
introduction of new types of sensors, such as Max-Fast, and
reduces costs for consumers of pulse oximetry equipment. It
also allows new functions, such as sensor event reporting and
sensor messaging, to be included in the sensors themselves.
Plaintiffs have provided evidence that Max-Fast is no more
accurate than previous forehead sensors and that physicians
have not found the sensor event reporting or messaging fea-
tures very useful. But even if Tyco has not yet been able to
successfully utilize the new flexibility provided by the Oxi-
Max platform, that in no way contradicts that the platform
facilitates the introduction of new types of sensors and sensor
functions and will reduce costs for consumers in the long run.
Tyco’s internal documents show that from the very earliest
stages of its development of OxiMax, it aimed to produce a
414 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
new technology that both served as “a new, flexible platform
for future oximetry innovation” and added customer value by
improving performance. To ensure that the new feature set
enabled by OxiMax would help to differentiate its new sen-
sors from generics, Tyco surveyed clinicians and initially
received positive feedback. Plaintiffs focus on statements
showing that Tyco hoped its new technology would constitute
a barrier to entry for generic sensor manufacturers. However,
even legitimate product improvement can have the effect of
harming or even destroying competitors. Statements of an
innovator’s intent to harm a competitor through genuine prod-
uct improvement are insufficient by themselves to create a
jury question under Section 2. Cf. Oahu Gas Serv., Inc. v.
Pac. Res., Inc., 838 F.2d 360, 368-69 (9th Cir. 1998) (“Where
a monopolist’s refusal to aid a competitor is based partially on
a desire to restrict competition, we determine antitrust liability
by asking whether there was a legitimate business justification
for the monopolist’s conduct.”).
Likewise, Plaintiffs mistakenly focus on documents show-
ing that, sometime in 2001, Tyco began to realize that the sen-
sor messaging and sensor event reporting features were less
valuable than it initially believed and worried that the market
would perceive its new technology as nothing more than a
way to lock out generics. These documents do not create a
genuine issue of material fact about whether OxiMax repre-
sented an improvement over previous sensor designs. Since
technological innovation “is accompanied by tremendous
uncertainty as to cost, technical success, and eventual market
success . . . ex post realizations are rarely a useful indicator
of ex ante expectations.” IIIB AREEDA & HOVENKAMP ¶ 775c
at 284. Evidence of an innovator’s initial intent may be help-
ful to the extent that it shows that the innovator knew all
along that the new design was no better than the old design,
and thus introduced the design solely to eliminate competi-
tion. But the documents here show that Tyco initially believed
that clinicians would value the new feature set. Moreover, the
documents show that Tyco continued to believe that the flexi-
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 415
bility of the new OxiMax platform would appeal to consum-
ers at the point that it introduced OxiMax.
[13] In sum, Plaintiffs have presented no evidence to refute
that the patented OxiMax sensor design facilitates the intro-
duction of new types of sensors with added capabilities at less
cost to consumers. The district court properly concluded that
Plaintiffs had not created a genuine issue of material fact on
whether OxiMax was a genuine improvement.
C. Tyco Did Not Use Its Market Power to Force
Adoption of OxiMax
Although it is undisputed that the OxiMax sensor design is
an improvement over previous designs, Tyco may still have
violated Section 2 if any of its other conduct “constitutes an
anticompetitive abuse or leverage of monopoly power, or a
predatory or exclusionary means of attempting to monopolize
the relevant market.” Foremost, 703 F.2d at 545-46.
[14] Plaintiffs argue that Tyco forced consumers to adopt
OxiMax by discontinuing the older R-Cal technology. A
monopolist’s discontinuation of its old technology may vio-
late Section 2 if it effectively forces consumers to adopt its
new technology. Berkey Photo, 603 F.2d at 287 n.39. Here,
however, there was uncontroverted evidence that Masimo was
effectively competing for pulse oximetry monitor sales during
the relevant time period. By 2006, Tyco’s share of new moni-
tor sales in the U.S. had dropped to 35%, and by 2007, Masi-
mo’s share had grown to 40% to 45%. Masimo and GE were
also selling generic sensors compatible with Tyco’s R-Cal
monitors, and Masimo was able to make its own proprietary
sensors compatible with Tyco’s R-Cal monitors by employing
a simple cable. Given all these alternatives, Tyco did not force
consumers to purchase its OxiMax monitors simply by dis-
continuing its support of the R-Cal technology.
[15] Plaintiffs’ argument that Tyco could have made its
monitors compatible with the old sensors also fails. Our pre-
416 ALLIED ORTHOPEDIC v. TYCO HEALTH CARE
cedents make clear that a monopolist has no duty to help its
competitors survive or expand when introducing an improved
product design. Foremost, 703 F.2d at 545 (citing CalComp,
613 F.2d at 744, and other cases). The evidence shows that
the OxiMax monitors’ incompatibility with R-Cal sensors was
the necessary consequence of moving the calibration coeffi-
cients from the monitor into the sensor. Thus, the product
improvement at issue in this case, not some associated con-
duct by Tyco, caused the incompatibility.
As already discussed, Tyco’s market-share discount and
sole-source agreements did not force consumers to purchase
Tyco’s pulse oximetry products. Further, Tyco’s use of an
equipment financing program to induce hospitals to adopt its
new OxiMax monitors was upheld by the jury in the Masimo
case, and Plaintiffs do not argue here that it independently
violates the antitrust laws. Plaintiffs’ only remaining argu-
ment, that Tyco exploited hospitals’ desire to standardize on
a single brand of sensors, says nothing about why the hospi-
tals chose to adopt OxiMax sensors over competing sensors
in the first place.
[16] In sum, Plaintiffs have provided no evidence that Tyco
used its monopoly power to force consumers of pulse
oximetry products to adopt its new OxiMax technology.
Absent evidence of such compulsion, the only rational infer-
ence that can be drawn from some consumers’ adoption of
OxiMax is that they regarded it to be a superior product.
Berkey, 603 F.2d at 287. The district court therefore properly
concluded that Plaintiffs had failed to create a genuine issue
of material fact regarding Tyco’s introduction of OxiMax and
properly granted summary judgment on the Section 2 claim.
CONCLUSION
[17] Plaintiffs have presented no evidence to refute Tyco’s
evidence that its OxiMax sensor design facilitates the intro-
duction of new types of sensors with added capabilities at less
ALLIED ORTHOPEDIC v. TYCO HEALTH CARE 417
cost to consumers. Nor have Plaintiffs presented any evidence
that Tyco used its monopoly power to coerce adoption of Oxi-
Max. Tyco’s market-share discount agreements and sole-
source agreements did not prevent consumers from choosing
to purchase the less expensive generic sensors that existed in
the market. The district court therefore properly granted Tyco
summary judgment on the claims under Sections 1 and 2 of
the Sherman Act.
AFFIRMED.