On Appeal from the United States District Court for the District of Delaware. (D.C. Civil Action Nos. 99-cv-00255 / 01-cv-00267). District Judge: Honorable Sue L. Robinson.
The opinion of the court was delivered by: Ambro, Circuit Judge
Before: BARRY, AMBRO and GREENBERG, Circuit Judges
We consider consolidated appeals involving the same parties in two antitrust suits, Howard Hess Dental Laboratories, Inc. v. Dentsply International, Inc. ("Hess") and Jersey Dental Laboratories v. Dentsply International, Inc. ("Jersey Dental").*fn1 Plaintiffs are dental laboratories who have brought these antitrust class actions on behalf of themselves and a class of similarly situated labs. Defendant Dentsply International, Inc. ("Dentsply") markets artificial teeth used by the dental labs to make dentures. Plaintiffs allege, among other things, an exclusive-dealing conspiracy and a retail price-fixing conspiracy among Dentsply and its dealer-middlemen.
The District Court denied Plaintiffs standing to recover damages in both suits based primarily on Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), which held that indirect purchaser plaintiffs do not have statutory standing to recover damages for "passed-on" overcharges.*fn2 We hold that Plaintiffs may not recover damages in Hess (a) under the "co-conspirator" exception to Illinois Brick, (b) under the "control" exception to Illinois Brick, (c) under a non-overcharge theory of damages, or (d) for "drop shipments." While Plaintiffs may not recover damages under either the control exception or a lost profits theory in Jersey Dental, they do have statutory standing under the co-conspirator exception to pursue an action for overcharge damages (including for drop shipped teeth) caused by the alleged retail price-fixing conspiracy, although not for the alleged exclusive-dealing conspiracy.
Plaintiffs allege the following in one or both of the complaints.
(1) Manufacturers of artificial teeth need to distribute through dealers in order to compete effectively. Dealers are the primary source of distribution to dental labs, which use the teeth to produce dentures. Dentsply uses a network of authorized dealers.
(2) Plaintiffs have purchased Dentsply's teeth both indirectly through Dentsply's dealers and directly through "drop shipping." Drop shipping occurs when a dealer does not have certain teeth in stock or cannot fulfill a lab's order for some other reason and asks Dentsply to ship the teeth directly to a lab. When teeth are drop shipped, the dealer never has physical custody of them, but it does bill the lab for the teeth, collect payments from the lab, and pay Dentsply.
(3) Dentsply has foreclosed its competitors' access to dealers by explicitly agreeing with some dealers that they will not carry certain competing brands of teeth and by inducing other dealers not to carry those competing brands of teeth. Pursuant to its written policy called "Dealer Criterion Number 6," Dentsply threatens to terminate, and does terminate, dealers that add to their inventory teeth made by Dentsply's competitors. Thus, unless Dentsply's dealers were already selling another manufacturer's teeth before Dentsply imposed its exclusive-dealing policies, its dealers cannot sell other manufacturers' teeth unless they give up the opportunity to continue to sell Dentsply's teeth. No rational dealer would be likely to make such a switch because, given Dentsply's monopoly position (it has a 75-80% market share on a revenue basis), losing the ability to sell Dentsply's teeth would hurt a dealer more than gaining the ability to sell Dentsply's competitors' teeth would help a dealer. By explicitly agreeing with some dealers that they will not carry certain competing brands of teeth and by enacting Dealer Criterion Number 6, Dentsply has foreclosured its rivals' access to adequate channels of distribution, and competition has been restricted. This has caused Dentsply's market share to increase, the price of Dentsply's and other manufacturers' teeth to increase, and the availability of rival teeth to decrease.
(4) Furthermore, by agreement among Dentsply and its dealers, Dentsply sets the dealers' resale prices. It distributes a list of "suggested" prices for its dealers to charge dental labs. Before a dealer can charge a lower price, Dentsply must approve this "price deviation." Price deviations have been granted only when a lab has been buying, or is thinking of buying, a competitor's teeth because they are being sold for less than those of Dentsply. In those instances, Dentsply negotiates with the lab to allow it to buy teeth from the dealer at a price below Dentsply's suggested price. The dealer then agrees to the price negotiated by Dentsply.
(5) Dentsply's foreclosing of its competitors' access to dealers and setting of the dealers' resale prices have caused Plaintiffs to purchase Dentsply's teeth at artificially high prices and lose profits from unrealized sales of Dentsply's competitors' teeth.
In 1999, Plaintiffs filed the Hess suit against Dentsply alleging conspiracy to monopolize, attempt to monopolize, and maintenance of monopoly in violation of Section 2 of the Sherman Act, 15 U.S.C. § 2, and restraint of trade in violation of Section 3 of the Clayton Act, 15 U.S.C. § 14. Plaintiffs asked for both damages and an injunction. Dentsply moved for summary judgment, claiming that Plaintiffs lacked standing under Illinois Brick. The District Court granted Dentsply's motion on Plaintiffs' damages claims. The Court reasoned that: (1) a co-conspirator exception to Illinois Brick did not apply because Plaintiffs had not joined Dentsply's dealers as co-defendants; (2) the control exception to Illinois Brick did not apply because Dentsply does not own its dealers; (3) Plaintiffs could not recover on a non-overcharge theory of damages because they had not articulated any such theory; and (4) Plaintiffs could not recover for drop shipments because they had specifically alleged that they were not direct purchasers, and even if they had alleged they were direct purchasers, they were indirect purchasers of drop shipments.
In 2001, Plaintiffs filed the Jersey Dental suit, this time naming as Dentsply's co-defendants twenty-six of its then twenty-eight authorized dealers. Plaintiffs made substantially the same allegations as they did in Hess with one key addition: they claimed they were not only indirect purchasers but also direct purchasers. As in Hess, Plaintiffs asked for both damages and an injunction. Dentsply moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss the claims for damages, citing Illinois Brick. The District Court granted the motion. The Court reasoned that: (1) Plaintiffs could not recover under a co-conspirator exception to Illinois Brick because the suit still implicated Illinois Brick's policy concerns; (2) in Hess it had already rejected Plaintiffs' argument that they could recover under the control exception to Illinois Brick; (3) Plaintiffs could not recover damages for lost profits because their complaint sought only overcharge damages and because, as Plaintiffs were indirect purchasers, Illinois Brick would bar recovery of lost profits anyway; and (4) in Hess it had already rejected Plaintiffs' argument that they could recover for drop shipped teeth.
Plaintiffs then moved for leave to amend their complaint. Among the proposed additions to the complaint were allegations that "[t]he Dealer Defendants agree wiith Dentsply and and with each other" to abide by suggested retail prices and that "the prices at which the Dealer Defendants sell to dental laboratories are controlled by Dentsply and agreed to by the Dealer Defendants." The District Court denied leave to amend because the amended pleading would not withstand a motion to dismiss.
It reasoned that: (1) the co-conspirator exception to Illinois Brick did not apply because the dealers could still sue Dentsply; (2) the control exception to Illinois Brick did not apply because the dealers were not subsidiaries of Dentsply; and (3) Illinois Brick barred recovery of lost profits damages because Plaintiffs were indirect purchasers.
Plaintiffs moved pursuant to 28 U.S.C. § 1292(b) for certification of appealability of the orders dismissing the damage claims in Hess and Jersey Dental and the order denying their motion for leave to amend in Jersey Dental. The District Court granted these motions and certified the following question:
Whether, under the circumstances here, application of Illinois Brick, 431 U.S. 720 (1977), McCarthy v. Recordex Service, Inc., 80 F.3d 842 (3d Cir. 1996), or other Third Circuit opinions dealing with Illinois Brick, prevents Plaintiffs from being able to recover damages against Dentsply International, Inc.
Plaintiffs then petitioned our Court for permission to appeal, pursuant to 28 U.S.C. § 1292(b), the three orders certified by the District Court. We granted the petition and consolidated the appeals. In a Section 1292(b) appeal, our review is not limited to the specific question certified by the District Court. We may "consider all grounds which might require a reversal of the order appealed from." Merican, Inc. v. Caterpillar Tractor Co., 713 F.2d 958, 962 n.7 (3d Cir. 1983). We "may address any issue fairly included within the certified order because it is the order that is appealable, and not the controlling question identified by the [D]istrict [C]court." Yamaha Motor Corp., U.S.A. v. Calhoun, 516 U.S. 199, 205 (1996) (emphasis in original) (internal quotation marks omitted).*fn3
As the Hess order partially granted Dentsply's motion for summary judgment, our review is de novo. Mass. Sch. of Law at Andover, Inc. v. ABA, 107 F.3d 1026, 1032 (3d Cir. 1997). The first Jersey Dental order granted Dentsply's motion to dismiss for failure to state a claim. Review of this order also merits de novo review. Worldcom, Inc. v. Graphnet, Inc., 343 F.3d 651, 653 (3d Cir. 2003). The second Jersey Dental order denied Plaintiffs' motion for leave to amend the complaint on the ground that "the proposed amended complaint would not survive a motion to dismiss under Fed. R. Civ. P. 12 (b)(6)." Dist. Ct. Mem. Ord. at 7 (Aug. 27, 2002). Where, as here, "the [D]istrict [C]court has based its decision to deny leave to amend on a legal conclusion that the amended pleading would not withstand a motion to dismiss, we review such a decision de novo." Ziegler v. IBP Hog Mkt., Inc., 249 F.3d 509, 518 (6th Cir. 2001). Thus we review all three orders de novo.
Illinois Brick lays many of the markers for our decision. In that case, the Supreme Court established the general rule that only direct purchasers from antitrust violators may recover damages in antitrust suits. The plaintiffs alleged that concrete block manufacturers conspired to fix the prices at which concrete blocks were sold to masonry contractors. They in turn "passed on" overcharges to the general contractors, who then passed them on to the plaintiffs, who had purchased buildings made from the concrete block. The plaintiffs, therefore, were "indirect purchasers" of concrete block, which "passe[d] through two separate levels in the chain of distribution before reaching" them. 431 U.S. at 726.
Before the Court was whether the indirect purchaser plaintiffs could use this pass-on theory to state a damages claim against the alleged antitrust violators upstream. It had previously held that an antitrust defendant could not argue that a plaintiff who had purchased a product directly from the defendant was not injured because it had passed on the illegal overcharge to its own customers. Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 494 (1968). To maintain consistency, the Court held in Illinois Brick that direct purchasers are the only parties "injured" in a manner that permits them to recover damages. 431 U.S. at 729, 735. The indirect purchaser plaintiffs were thus ineligible to recover damages for the passed-on overcharges.
The Court gave three policy reasons for its holding: (1) a risk of duplicative liability for defendants and potentially inconsistent adjudications could arise if courts permitted both direct and indirect purchasers to sue defendants for the same overcharge; (2) the evidentiary complexities and uncertainties involved in ascertaining the portion of the overcharge that the direct purchasers had passed on to the various levels of indirect purchasers would place too great a burden on the courts; and (3) permitting direct and indirect purchasers to sue only for the amount of the overcharge they themselves absorbed and did not pass on would cause inefficient enforcement of the antitrust laws by diluting the ultimate recovery and thus decreasing the direct purchasers' incentive to sue. Id. at 730-35 & n.11--12, 737 & n.18, 740-43 & nn.23, 27, 745.
I. May Plaintiffs Recover Damages in Hess?
a. May Plaintiffs Recover Damages in Hess Under a Co-Conspirator Exception to Illinois Brick?
Although the Hess complaint alleged that Dentsply's dealers conspired with Dentsply by agreeing to the exclusive-dealing arrangements, Plaintiffs did not name any of the dealers as co-defendants. We have rejected attempts to invoke a co-conspirator exception to Illinois Brick's bar on indirect purchaser standing when plaintiffs have not named the co-conspirators immediately upstream as defendants. See McCarthy v. Recordex Serv., Inc., 80 F.3d 842, 854 (3d Cir. 1996); Link v. Mercedes-Benz, 788 F.2d 918, 933 (3d Cir. 1986).
In Link, for example, Mercedes car owners sued Mercedes-Benz for allegedly requiring dealers to purchase parts exclusively from it. 788 F.2d at 929. Plaintiffs had purchased parts from the dealers, whom they named as co-conspirators but not as defendants. Plaintiffs claimed that Illinois Brick did not bar their vertical conspiracy claims because ...