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

United States District Court, E.D. New York

December 21, 2017

IQ DENTAL SUPPLY, INC., Plaintiff,
v.
HENRY SCHEIN, INC., PATTERSON COMPANIES, INC., BENCO DENTAL SUPPLY COMPANY, Defendants.

          MEMORANDUM DECISION AND ORDER

          Brian M. Cogan Judge

         IQ Dental Supply, Inc. (“IQ”) brings this suit against Henry Schein, Inc. (“Schein”), Patterson Companies, Inc. (“Patterson”), and Benco Dental Supply Company (“Benco”). IQ alleges that defendants - dental supply distributors - have engaged in an ongoing antitrust conspiracy by boycotting and attempting to destroy an online distribution platform run by a non-party, SourceOne Dental (“SourceOne”) through which IQ sells dental products to dentists. IQ alleges unreasonable restraint of trade under the Sherman Act and corresponding state laws, as well as state common law claims for tortious interference with prospective business relations, civil conspiracy, and aiding and abetting.

         The case is before me on defendants' motion to dismiss. For the reasons explained below, the motion is granted.

         BACKGROUND

         The facts described below are taken from plaintiff's pleadings and are presumed to be true for purposes of this motion.

         IQ is a nation-wide distributor of dental supplies and equipment. IQ buys products from manufacturers and stores them in warehouses prior to their resale. Defendants are major distributors of dental supplies that together account for 80-90% of the relevant market (Schein 41%, Patterson 34%, Benco 10%). Defendants sell directly to dentists. Defendants do so primarily through on-the-ground regional sales representatives. In the United States, dental supplies and equipment are a $10 billion market. On average, dental practices use 100 or more different types of dental supplies on a monthly basis. Because consumer dentists can “one-stop-shop” with distributors, the vast majority of dental supplies and equipment are sold by manufacturers to wholesale distributors for reasons of efficiency, which in turn resell those supplies and equipment to dental professionals.

         SourceOne, not a party to this suit, operates an “online distribution platform” through a series of e-commerce websites. Suppliers, such as IQ, sell dental supplies to dentists through those platforms. In addition to its own branded site, SourceOne operates state-specific websites in conjunction with state dental associations (“SDAs”). SourceOne does not supply or sell the products on its platforms; instead, it provides a mechanism for suppliers and dentists to interface. Suppliers who sell through SourceOne conduct transactions, fill orders, and ship the sold products directly to consumers. The suppliers then pay SourceOne a commission on each sale made through SourceOne's websites, and remit a commission to the SDAs for sales made on the state-specific sites. IQ claims that SourceOne offered dentists lower prices than those available through the traditional sales model employed by defendants.

         The first SDA SourceOne site launched was sponsored by the Texas Dental Association (the “TDA”) in October 2013, and was branded as “TDA Perks Supplies.” It was followed shortly thereafter by websites sponsored by the Arizona Dental Association (the “AZDA”) and the Nevada Dental Association.

         IQ alleges that defendants saw SourceOne as a threat to their long-standing market position. In response, IQ claims that defendants engaged in coordinated anticompetitive conduct to drive SourceOne from the market. This conduct allegedly took three forms: first, IQ alleges that defendants pressured dental product manufacturers not to sell to IQ or through the SourceOne websites. Second, IQ alleges that defendants coordinated and agreed to threaten and implement boycotts of SDAs that worked with SourceOne. Third, IQ alleges that defendants boycotted dentists who purchased dental supplies through SourceOne websites.

         As to the first prong of the conspiracy, IQ claims that defendants pressured manufacturers supplying distributors who sold through the SourceOne sites, with the ultimate aim of depriving SourceOne of products to list on its sites and consequently driving it out of business. Defendants, IQ alleges, could pressure the manufacturers by threatening them with the loss of their business if the manufacturers continued to sell to distributors who worked with SourceOne.

         Initially, two suppliers, DDS and Arnold, provided the bulk of the products available on the TDA and AZDA SourceOne websites. IQ alleges that because of the success of defendants' alleged anticompetitive efforts, by April 2014, manufacturers had stopped selling to DDS and Arnold, and SourceOne's websites had lost access to thousands of supplies, including at least 75% of their formerly top-selling products.

         For example, IQ alleges that DMG America, a dental manufacturer, withdrew permission for its products to be sold through SourceOne sites under pressure from Schein and Patterson. As a result of manufacturer withdrawals, and as defendants' allegedly intended, DDS and Arnold yielded to defendants' pressure and ended their relationships with SourceOne. IQ claims that a prospective replacement supplier, DHP Dental, told SourceOne that it was deterred from selling through SourceOne's websites after hearing about defendants' alleged boycott from dental manufacturers. In May 2014, after DDS and Arnold terminated their relationships with SourceOne, IQ signed a contract with SourceOne to offer dental supplies for sale to dentists through SourceOne's websites.

         In its complaint, IQ provides four examples of defendants' alleged direct pressure on manufacturers to boycott IQ:

• In 2011, representatives from a Danaher Corporation subsidiary manufacturer called IQ about an incident when IQ sold a product to a buyer, who then attempted to sell the product overseas. IQ suspected that Danaher was looking for a reason to pull out of doing business with IQ - which it eventually did - and that this happened due to pressure from Schein.
• In March 2015, a representative from Tuttnauer, a dental manufacturer, advised IQ that if IQ continued selling Tuttnauer products through the TDA Perks website, it would pull its product line from IQ. IQ alleges that this threat was made under pressure from Schein.
• At a November 2015 New York dental association trade show, IQ displayed products manufactured by Air Technique Imaging (“ATI”). A representative from ATI directed IQ to remove the display, because he was “getting grief” from representatives from two different companies, which IQ later identified as Schein and Patterson, who were unhappy that ATI had permitted IQ to distribute its products. As a result, IQ claims that it had to stop promoting ATI's products at its booth.
• In 2016, a manager from KaVo Kerr, a major dental products manufacturer, told IQ that a Patterson representative had asked him to pull his products from IQ because of IQ's sale of products through TDA Perks Supplies.

         IQ also alleges four occasions when manufacturers declined IQ's request to be a dealer for their product lines. One occurred in 2013; the rest in 2016. The complaint makes clear that at least three of these manufacturers had pre-existing distribution relationships. IQ alleges that each of these manufacturers declined IQ's proposals under pressure from one or more of defendants.

         Turning to IQ's allegations of defendants' boycotts of SDAs, IQ claims that defendants coordinated and agreed to threaten and implement boycotts of SDAs that worked with SourceOne by skipping those SDAs' respective trade shows. The aim of these alleged boycotts was to punish SDAs that had partnered with SourceOne and simultaneously dissuade other SDAs from doing so. Trade shows contribute a substantial portion of SDAs' income. Historically, all three defendants had attended such shows. IQ claims that the alleged boycotts deterred many SDAs from sponsoring their own SourceOne websites, which limited the platform's growth, and, in turn, stifled IQ's profits.

         IQ alleges that defendants specifically targeted trade shows in Texas and Arizona. IQ claims, for instance, that in October 2013, regional managers from Schein and Benco had a phone call, memorialized in an email, in which they discussed their shared interest in not attending the TDA trade show after the TDA launched its SourceOne affiliated site. The managers discussed reaching out to their counterpart at Patterson to get his support.

         As to the AZDA trade show, IQ points to a July 2014 email from a Benco to a Patterson employee, stating, “[w]e are of the same mindset. It would be gratifying to see every distributor with a local presence make a unified statement on the AZDA's ill-conceived idea” to work with SourceOne. In another email that same month, a Benco employee wrote to a manufacturer, “I have communicated with our competition at Schein and Patterson and we are all of the same mind that we will not be supporting a competitor's [AZDA's] meeting next year.” IQ also alleges that defendants pressured manufacturers to boycott the trade shows.

         IQ claims, for instance, that in March 2014 dental vendors reported that they were told by both Patterson and Schein to avoid TDA Perks, or risk Patterson and Schein “shelv[ing] their products nationwide.” IQ also points to a November 2013 email in which a Schein employee wrote to a colleague about speaking with Patterson and Benco, and not giving the TDA “a dime.” The other Schein employee responded writing, “I refuse to work with any manufacturer rep that sells through [SourceOne]. That's what every distributor should say. The manufacturers will get scared and pull out.” IQ alleges that Schein, Patterson, and Benco together “pressured dozens of manufacturers to pull out of the AZDA show.”

         IQ claims that as a result of this alleged conduct, other SDAs were deterred from working with SourceOne. For example, IQ states that at a July 2014 dental meeting in Chicago, the Ohio Dental Association's representative was enthusiastic about partnering with SourceOne. However, the representative subsequently informed SourceOne that Schein and Patterson had threatened to “take action against the Ohio Dental Association if it proceeded with a SourceOne website.” The partnership fizzled. According to IQ, the Virginia Dental Association, Colorado Dental Association, and Louisiana Dental Association all decided not to partner with SourceOne after considering the risk that doing so would jeopardize their relationships with defendants.

         On the other hand, the Nevada Dental Association did launch a SourceOne website, and IQ argues that it did so because it does not put on a trade show, and thus had less exposure to defendants' retaliatory pressure. IQ concedes that recently, SDAs in Florida and Georgia have launched SourceOne sites, but claims that defendants have already inflicted their intended damage.

         As the final prong of the conspiracy, IQ also alleges that defendants boycotted dentists who purchased dental supplies through SourceOne websites and from IQ by withholding essential maintenance services for those dentists' equipment.

         In addition to defendants' three alleged anticompetitive attacks on SourceOne described above, IQ also describes an allegedly long-standing campaign (since at least as early as 2005) among defendants to fix the prices in the dental products market, with the aim of maintaining supracompetitive margins. IQ alleges that defendants' margins - purportedly at 35% or higher - are well above what would obtain in a competitive market, and that defendants worked to exclude from the market distributors willing to sell manufacturers' products at a lower margin.

         To that end, IQ claims that when distributors willing to work at lower margins approached manufacturers to sell their products, the manufacturers reported that they had to decline to sell to them in the face of pressure from defendants. IQ alleges that absent coordinated conduct by all defendants, the price fixing would not have worked, as the manufacturers could simply have shifted their sales to another distributor.

         IQ's allegations on this point are based in large part on a June 2008 meeting between sales representatives of distributors Archer & White and Dynamic Dental, which were attempting to sell products at a lower margin but which were allegedly stymied by a defendant-driven manufacturer boycott, led by Schein and Burkhart Dental Supply Company. At that meeting, the Schein and Burkhart representatives allegedly “offered to end the group boycott of Archer & White and Dynamic Dental” if both “agreed to maintain margins on the sales of their dental products between 32% and 34%, the then-prevailing margin” allegedly maintained by defendants.

         In addition to this alleged anticompetitive conduct, IQ also claims that defendants engaged in a campaign to falsely disparage SourceOne and IQ and their products and services. IQ claims that defendants have misrepresented products sold by IQ as expired, counterfeit, altered, sold through unauthorized distribution channels, or otherwise unfit for their intended purpose. IQ claims that defendants made these comments to discourage dentists from buying from IQ.

         As discussed above, IQ describes that its relationship with SourceOne entails it conducting its transactions, filling received orders, and shipping sold products directly to the dentists, without SourceOne's involvement beyond listing the goods on its sites. IQ pays SourceOne a commission on each sale. Since May 2014, IQ has sold approximately 90% of products sold on SourceOne's sites. IQ claims that but for defendants' conduct, the SourceOne platform would have spread nationwide, and, in turn, IQ's sales through the platform's various sites would have increased exponentially.

         In 2015, SourceOne filed suit in this Court against Schein, Patterson, and Benco, alleging, inter alia, unlawful restraint of trade under the Sherman Act. SourceOne claimed that the three entered into a conspiracy to prevent its emergence as an effective competitor in the distribution and sale of dental supplies. Specifically, SourceOne alleged that Schein, Patterson, and Benco conspired to:

• boycott the TDA and AZDA after each association named SourceOne as an endorsed vendor of dental supplies;
• pressure other SDAs from entering similar agreements ...

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