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Hale v. Stryker Orthopaedics

February 9, 2009

RE: HALE ET AL.
v.
STRYKER ORTHOPAEDICS ET AL.



The opinion of the court was delivered by: William J. Martini Judge

LETTER OPINION

Dear Counsel:

This matter comes before the Court on the motions to dismiss filed by: (1) Defendants Stryker Orthopaedics, Stryker Corporation and Stryker Sales Corporation and (2) Defendant Smith & Nephew, Inc. There was no oral argument. Fed. R. Civ. P. 78. For the reasons stated below, Defendants' motions to dismiss are GRANTED.

I. BACKGROUND

Defendants are corporations involved in the manufacture of knee and hip replacement products. Stryker Corporation is a Michigan corporation, which has its principal place of business in Michigan. Complaint*fn1 ¶ 14. Stryker Orthopaedics is a New Jersey-based division of Stryker Corporation, and Stryker Sales Corporation is a Michigan-based subsidiary.*fn2 Compl. ¶¶ 13, 15. Smith & Nephew is a Delaware corporation with its principal place of business in Tennessee. Compl. ¶ 19.

Plaintiffs are three Iowa residents -- Lyle Hale, Cliff Reublin, and Stephen Wilcox -- who brought this action after receiving joint implants manufactured by Defendants Stryker and Smith & Nephew. Compl. ¶¶ 10-12. Plaintiffs each received knee implants,*fn3 for which they tendered a coinsurance payment to their health insurers.

This action stems from the findings of a criminal investigation led by the United States Department of Justice into the hip and knee replacement industry. Specifically, this federal investigation examined whether financial inducements were paid to surgeons by joint manufacturers in violation of federal anti-kickback and false claim statutes. Compl. ¶31. As a result of this investigation, Smith & Nephew entered into a Deferred Prosecution Agreement, and consented to federal monitoring for eighteen months.Compl. ¶¶2, 30. In addition, both Stryker and Smith & Nephew have entered into five-year Corporate Integrity Agreements, whereby they are required to implement additional reforms and submit to monitoring by the United States Department of Health & Human Services. Compl. ¶ 3.

Following this federal investigation, Plaintiffs filed the instant action, bringing Racketeering Influenced and Corrupt Organization ("RICO") Act, unjust enrichment, and state consumer fraud claims against Defendants. Plaintiffs claim that the coinsurance payments they tendered for their knee replacement surgeries were artificially inflated due to a collusive kickback scheme executed by Defendants. Compl. ¶¶ 39-41. As part of this kickback scheme, Defendants purportedly entered into "phony consulting agreements" with orthopedic surgeons, which were meant to buy surgeon loyalty and inflate sales of Defendants' artificial hip and knee implant devices. Compl. ¶¶ 1, 33. These payments to surgeons allegedly inflated the prices charged for the joint implants. Compl. ¶ 40-41. In turn, these increased knee and hip implant prices were passed on to hospitals and the insurance entities, including Medicare, that covered patients who received the joint implants. Id. Then, Medicare or the other insurance entities allegedly passed on the increased joint cost to Plaintiffs in the form of an elevated coinsurance payment. Id.

Defendant Stryker filed the instant motion to dismiss on August 15, 2008, and Defendant Smith & Nephew filed its own motion to dismiss on October 6, 2008. Plaintiffs filed a combined response in opposition to Defendants' motions to dismiss on October 20, 2008.

II. DISCUSSION

In this action, Plaintiffs assert four claims against both Defendants: (1) a civil RICO violation, under 18 U.S.C. § 1962(c); (2) a civil RICO conspiracy violation under 18 U.S.C. § 1962(d); (3) a violation of state consumer protection laws; and (4) unjust enrichment. Each claim will be addressed in turn.

A. Motion to Dismiss Standard

In evaluating a Rule 12(b)(6) motion to dismiss for failure to state a claim, a court may consider only the complaint, exhibits attached to the complaint, matters of public record, and undisputedly authentic documents if the plaintiff's claims are based upon those documents. See Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir.1993). All allegations in the complaint must be taken as true and viewed in the light most favorable to the plaintiff. See Warth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975); Trump Hotels & Casino Resorts, Inc., v. Mirage Resorts Inc., 140 F.3d 478, 483 (3d Cir.1998). If, after viewing the allegations in the complaint in the light most favorable to the plaintiff, it appears that no relief could be granted "under any set of facts that could be proved consistent with the allegations," a court may dismiss a complaint for failure to state a claim. Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).

Although a complaint need not contain detailed factual allegations, "the 'grounds' of his 'entitlement to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007). Thus, the factual allegations must be sufficient to raise a plaintiff's right to relief above a speculative level. See id. at 1964-65; see also Umland v. PLANCO Fin. Serv., Inc., 542 F.3d 59, 64 (3d Cir. 2008). Furthermore, although a court must view the allegations as true in a motion to dismiss, it is "not compelled to accept unwarranted inferences, unsupported conclusions or legal conclusions disguised as factual allegations." Baraka v. McGreevey, 481 F.3d 187, 211 (3d Cir.2007).

B. Counts One and Two: RICO Claims Under Sections 1962(c),(d)

Plaintiffs assert Defendants artificially inflated the amount that Plaintiffs paid for their knee and hip*fn4 replacement surgeries by orchestrating an illegal kickback scheme aimed at driving demand for those devices through illicit payments to doctors. Plaintiffs claim that this purported scheme was conducted in violation of 18 U.S.C. § 1962(c),(d).

1. Standing

As a threshold matter, Defendants assert that Plaintiffs do not have standing to assert RICO claims in this action because they are not "direct purchasers" of the replacement joints manufactured by Defendants. This so-called "direct purchaser" rule is a standing doctrine employed most famously in Illinois Brick Co. v. Illinois, 431 U.S. 720, 744, 97 S.Ct. 2061, 2073-74, 52 L.Ed.2d 707 (1977), to bar Illinois, an indirect purchaser of concrete blocks, from bringing an antitrust claim against the concrete block manufacturers. Rejecting the argument that Illinois -- two levels down the distribution chain from the manufacturers -- should be allowed to recover the fraction of the overcharge "passed on" to them, the Supreme Court noted:

Permitting the use of pass-on theories ... essentially would transform treble-damages actions into massive efforts to apportion the recovery among all potential plaintiffs that could have absorbed part of the overcharge from direct purchasers to middlemen to ultimate consumers. However appealing this attempt to allocate the overcharge might seem in theory, it would add whole ...


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