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IQ Dental Supply, Inc. v. Henry Schein, Inc.

United States Court of Appeals, Second Circuit

May 10, 2019

IQ Dental Supply, Inc., Plaintiff-Appellant,
v.
Henry Schein, Inc., Patterson Companies, Inc., Benco Dental Supply Company, Defendants-Appellees.

          Appeal from the United States District Court for the Eastern District of New York. No. 17-cv-4834 - Brian M. Cogan, Judge.

         This case involves allegations that three large dental-supply distributors-Henry Schein, Inc., Patterson Companies, Inc., and Benco Dental Supply Company, Inc. ("the Defendants")-conspired to violate the antitrust laws by engineering the boycott of an online distribution portal, SourceOne, Inc. ("SourceOne"), and dental manufacturers and suppliers associated with SourceOne. The Plaintiff, IQ Dental Supply, Inc. ("IQ"), is a competitor dental-supply distributor that sold dental products through SourceOne's online portals. IQ sued the Defendants in the United States District Court for the Eastern District of New York alleging violations of federal and state antitrust laws and asserting common law tort claims. The district court (Cogan, Judge) dismissed IQ's antitrust claims for lack of antitrust standing and IQ's tort claims for failure to state a claim. IQ appeals that decision.

         We affirm the district court's dismissal of IQ's claim that it has antitrust standing to challenge the boycott of SourceOne and the state dental associations ("SDAs") that had partnered with SourceOne. As to IQ's claim that it has standing to challenge injury inflicted by the direct boycott of its business, however, we find that IQ's antitrust and tort claims may go forward on these direct boycott allegations only. Accordingly, we vacate in part the judgment of the district court and remand the case for further proceedings consistent with this opinion.

          Lawrence Fox, Duane Morris LLP, New York, NY (William B. Pollard, Amy C. Gross, Duane Morris LLP, New York, NY; J. Manly Parks, Robert M. Palumbos, Duane Morris LLP, Philadelphia, PA, on the brief), for Plaintiff-Appellant.

          Richard C. Godfrey, Kirkland & Ellis LLP, Chicago, IL (Barack S. Echols, Kirkland & Ellis LLP, Chicago, IL; Colin R. Kass, Adrian Fontecilla, Proskauer Rose LLP, Washington, DC; Bradley I. Ruskin, Proskauer Rose LLP, New York, NY, on the brief), for Defendant-Appellee Henry Schein, Inc.

          James J. Long, Scott M. Flaherty, Briggs and Morgan, P.A., Minneapolis, MN, for Defendant- Appellee Patterson Companies, Inc.

          Howard D. Scher, Thomas P. Manning, Samantha L. Southall, Buchanan Ingersoll & Rooney PC, Philadelphia, PA, for Defendant-Appellee Benco Dental Supply Company.

          Before: Walker, Jacobs, and Pooler, Circuit Judges.

          JOHN M. WALKER, JR., CIRCUIT JUDGE.

         This case involves allegations that three large dental-supply distributors-Henry Schein, Inc., Patterson Companies, Inc., and Benco Dental Supply Company, Inc. ("the Defendants")-conspired to violate the antitrust laws by engineering the boycott of an online distribution portal, SourceOne, Inc. ("SourceOne"), and of dental manufacturers and suppliers associated with SourceOne. The Plaintiff, IQ Dental Supply, Inc. ("IQ"), is a competitor dental-supply distributor that sold dental products through SourceOne's online portals. IQ sued the Defendants in the United States District Court for the Eastern District of New York alleging violations of federal and state antitrust laws and asserting common law tort claims. The district court (Cogan, Judge) dismissed IQ's antitrust claims for lack of antitrust standing and IQ's tort claims for failure to state a claim. IQ appeals that decision.

         We affirm the district court's dismissal of IQ's claim that it has antitrust standing to challenge the boycott of SourceOne and the state dental associations ("SDAs") that had partnered with SourceOne. As to IQ's claim that it has standing to challenge injury inflicted by the direct boycott of its business, however, we find that IQ's antitrust and tort claims may go forward on these direct boycott allegations only. Accordingly, we vacate in part the judgment of the district court and remand the case for further proceedings consistent with this opinion.

         BACKGROUND

         There are only a small number of dental-supply companies that distribute products to dental practices. Three of those companies, the Defendants, occupy approximately 80% of the dental-supply distribution market.[1] They purchase dental supplies and equipment from different manufacturers, and then sell the products to dental practices nationwide. This one-stop-shop model obviates the need for dental practices to purchase their dental equipment from each manufacturer.

         IQ is also a distributor of dental supplies, albeit one with considerably less market share than any of the Defendants. IQ entered the market in 2009. Beginning in 2014, IQ adopted a new distribution model. Instead of distributing dental supplies through the traditional method of deploying on-the-ground sales teams around the country (the model used by the Defendants) IQ distributed dental supplies through an online portal hosted by SourceOne.

         SourceOne's online portal is a website where dental practices can purchase their supplies. SourceOne itself does not sell any dental supplies through the website but serves as the platform through which dental-supply distributors, such as IQ, sell products to dental offices. The distributors that used SourceOne's portals pay SourceOne a commission for each sale made through the website. In 2013, SourceOne launched additional distribution websites in partnership with the SDAs in Texas, Arizona, and Nevada. These SDA-specific sites operated much like SourceOne's own portal, but each SDA had its own unique domain name. SourceOne remitted a portion of their commission to the SDA for each sale made through an SDA-specific website.

         IQ was not SourceOne's first distribution partner. Two other distributors-DDS Dental Supply and Arnold Dental Supply ("DDS and Arnold")-distributed products through SourceOne before IQ reached its agreement with SourceOne. But sometime around April 2014 both DDS and Arnold stopped selling through SourceOne because the Defendants pressured dental-supply manufacturers to stop supplying DDS and Arnold due to their arrangement with SourceOne. After losing DDS and Arnold as distribution partners, SourceOne tried to enlist a third distributor to supply dental products, but that distributor declined, allegedly because of the same anticompetitive behavior by the Defendants that had caused DDS and Arnold to withdraw.

         SourceOne's need for a distributor to supply its online portals opened the door for IQ. In May of 2014, IQ signed a contract to distribute through SourceOne-affiliated websites, and, since then, IQ has supplied 90% of the dental supplies sold through SourceOne's website and its affiliated SDA websites. But IQ soon encountered the same problem that DDS and Arnold had faced: pressure from the Defendants intended to disrupt SourceOne's online sales portals began to affect IQ's business.

         IQ alleged that the Defendants engaged in this campaign to force SourceOne out of business by conspiring to organize a boycott of: (1) SourceOne and SourceOne-affiliated SDA websites, (2) participating SDAs and SDA trade shows, and (3) IQ directly by pressuring the manufacturers to stop supplying IQ. It also alleged that the Defendants engaged in a price-fixing conspiracy, which is not part of this appeal. These unlawful boycotts allegedly frightened off dental manufacturers, SDAs, and dental practices from doing business with companies connected to SourceOne, and, as a result, ultimately dealing with IQ. These boycotts "severely limited and inhibited IQ's growth and sales, and has cost IQ many millions of dollars in lost profits." Appellant's Br. at 13.

         In August 2017, IQ sued the defendants in the Eastern District of New York, under the Sherman Act, 15 U.S.C. § 1, and corresponding state antitrust laws-the Donnelly Act, N.Y. Gen. Bus. Law §§ 340 et seq., and the New Jersey Antitrust Act, N.J. Stat. Ann. §§ 56:9-1 et seq. IQ also brought common-law claims for tortious interference with prospective business relations, civil conspiracy, and aiding and abetting.

         The district court granted the Defendants' motion to dismiss IQ's complaint. It determined that IQ failed to establish antitrust standing because it had neither alleged an antitrust injury, nor shown that it was an efficient enforcer of the antitrust laws. The remaining state law claims were dismissed for failure to state a claim. IQ now appeals that decision.

         DISCUSSION

         We review the district court's grant of a motion to dismiss de novo; we accept as true all factual claims and draw all reasonable inferences in IQ's favor. Gelboim v. Bank of Am. Corp., 823 F.3d 759, 769 (2d Cir. 2016). Questions of standing are also reviewed de novo. In re DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 688 (2d Cir. 2009).

         I. Antitrust Standing

         To survive the pleading stage, an antitrust plaintiff must demonstrate that it has "antitrust standing." See Daniel v. Am. Bd. of Emergency Med., 428 F.3d 408, 436-37 (2d Cir. 2005). Only antitrust standing is at issue here. The antitrust standing requirement reflects the judgment that "'Congress did not intend the antitrust laws to provide a remedy in damages for all injuries that might conceivably be traced to an antitrust violation.'" Id. (quoting Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters (AGC), 459 U.S. 519, 534 (1983)).

         To satisfy antitrust standing at the pleading stage a plaintiff must plausibly allege two things: (1) "that it suffered a 'special kind of antitrust injury, '" and (2) "that it is a suitable plaintiff to pursue the alleged antitrust violations and thus is an 'efficient enforcer' of the antitrust laws." Gatt Commc'ns, Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 76 (2d Cir. 2013) (internal quotation marks omitted) (quoting Port Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 121-22 (2d Cir. 2007)). We address both these antitrust-standing imperatives in turn.

         A. Antitrust Injury

         A plaintiff raising an antitrust claim must demonstrate antitrust injury to "'ensure[] that the harm claimed by the plaintiff corresponds to the rationale for finding a violation of the antitrust laws in the first place.'" Gatt, 711 F.3d at 76 (quoting Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 342 (1990)).

         Our jurisprudence culminating in Gatt Communications, Inc. v. PMC Associates, L.L.C. established a three-part test for determining whether the plaintiff has alleged an antitrust injury: (1) the court "must 'identify[] the practice complained of and the reasons such a practice is or might be anticompetitive, '" Id. (quoting Port Dock, 507 F.3d at 122); (2) the court must "identify the 'actual injury the plaintiff alleges' . . . [which] requires us to look to the ways in which the plaintiff claims it is in a 'worse position' as a consequence of the defendant's conduct," id. (quoting Port Dock, 507 F.3d at 122, and Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 486 (1977)); and (3) the court compares the "'anticompetitive effect of the specific practice at issue' ...


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