Dentsply Decision: Restorative Dental Surgery from the Third Circuit, by Warren Grimes

FTC:WATCH, March 14, 2005 Reprinted with permission

The aai column

United States v. Dentsply Int'l: restorative antitrust dentistry from the Third Circuit

by Warren Grimes*

At first bite, there is nothing remarkable about Dentsply. The court applied Section 2 of the Sherman Act to the exclusionary conduct of a defendant enjoying a 75- 80 percent market share, 15 times larger than its closest competitor. Dentsply International makes prefabricated artificial teeth and sells them primarily through a dealership network. Its dealers resell to dental laboratories that make the dentures supplied to dentists. In Dentsply, the Third Circuit reversed a lower court decision and held that Dentsply violated Section 2 when it required its dealers not to purchase artificial teeth from rival producers.

A couple of decades ago, this decision would have been tantamount to a painless extraction of a loose baby tooth. Today, against the backdrop of increasing tolerance of dominant firm behavior, the appellate court's vindication of traditional Section 2 case law is more difficult restorative dentistry. A year ago, Justice Scalia wrote for the Supreme Court in Verizon Communications v. Trinko that “the mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free market system” because monopoly prices attract “business acumen” and provide an incentive for “innovation and economic growth.” This Ode to Monopoly could have put real bite into Dentsply's defense.

Dentsply convinced the district court that the ban on dealer purchases from Dentsply rivals did not contravene the Sherman Act, in part because rivals could bypass dealers and sell directly to dental laboratories. In reversing and imposing liability on Dentsply, the court of appeals reinvigorates Section 2 law and offers a number of noteworthy analytical points.

• The court of appeals ignored Verizon's broad brush picture of innovative, efficient, and unfairly oppressed monopolists and instead focused on hard evidence in this case. The court stressed that “Legal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law” (quoting Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 457, 466-67 (1992)). The court found no credible procompetitive rationale for Dentsply's exclusionary conduct.

• The court does a detailed analysis of the gatekeeper power of the dealers and uses this analysis to counter the district court's decision that direct sales to dental labs (bypassing the dealers) were a meaningful distribution alternative for Dentsply rivals. The dealers performed an important efficiency-enhancing role for dental labs. A lab could purchase all needed dental supplies, not only artificial teeth but other supplies as well, through one-stop shopping at the dealer. A Dentsply rival seeking to sell directly to a lab would confront the lab's preference for maintaining a single account with a dealer who may offer a volume discount.

• The court pays homage to buyer choice as a legitimate goal of antitrust, reasoning that Dentsply's exclusive dealing denied dental labs the opportunity of effi- ciently choosing among rival producers' artificial teeth through one-stop dealer orders.

• The decision gives further momentum to the DC Circuit's Microsoft opinion and its substantiation of a “monopoly maintenance” claim. Monopoly maintenance has become the theory of choice for plaintiffs bringing Section 2 claims.

• The Supreme Court's decision in Verizon sparked calls for a “profit sacrifice” test that would be the exclusive measure to determine the legality of a dominant firm's exclusionary conduct. The Third Circuit did not employ this test. Indeed, it appears that Dentsply's requirement that dealers buy only its teeth, however anticompetitive, resulted in sustaining or increasing, but not decreasing, Dentsply profits. Dentsply is a strong example of harmful exclusionary conduct that would escape liability if the profit sacrifice test were the sole basis for finding liability.

Are there shadows cast by this decision? The current antitrust climate gave rise to a district judge's ruling in Dentsply's favor and forced the Antitrust Division and the Third Circuit to work hard to get to a result that would have been a cakewalk a few decades ago. It is significant also that the Justice Department felt compelled to abandon its Section 1 claim. This leaves open the question of how to deal with harmful exclusionary conduct in markets with insufficient concentration to allow the invocation of Section 2. For example, if rivals engage in parallel exclusionary conduct such as tie-ins and exclusive dealing, the effect of these practices may be very similar to exclusion practiced by a monopolist, yet could be attacked, if at all, only under Section 1. Whatever uncertainties remain, Dentsply is restorative.

The decision is strong vindication of Section 2's applicability to genuinely anticompetitive exclusionary conduct.

--— *Warren Grimes, Professor of Law at Southwestern Law School, is a Senior Fellow of the AAI