The Source Blog

On Thursday, February 5, a federal jury ordered Medtronic to pay $381.7 million to Applied Medical for antitrust violations, finding that Medtronic used its market power to illegally stifle competition through bundling and exclusive-dealing contract terms.

Parties to the Case

Both Medtronic and Applied Medical produce a surgical instrument called an advanced bipolar device (ABD), which uses electrical current to cut tissue and seal blood vessels during surgery.  Medtronic is the largest medical device supplier in the world.  Medtronic has a dominant market share in the ABD market while Applied Medical is a smaller firm that develops and manufactures products for minimally invasive and general surgery.

Applied Medical Claims Medtronic’s Contracts Violate the Sherman, Clayton, and Cartwright Acts

In February 2023, Applied Medical sued Medtronic, claiming Medtronic had “engaged in exclusionary unlawful bundling and exclusive dealing practices to suppress competition in the market for advanced bipolar vessel sealing devices.”

Applied Medical notes that Medtronic is responsible for over 70% of ABD sales.  Medtronic’s attorney argued that, while Medtronic has a substantial share of the ABD market, if other devices (including ultrasonics and robotics) are included, Medtronic's market share is actually much smaller.

Applied Medical claims Medtronic has contracts with Group Purchasing Organizations (GPOs - hospital alliances that work collectively to aggregate purchasing power) that state that Medtronic is to be the GPO’s only supplier of ABDs, and that hospitals would face significant financial penalties if they circumvent the GPO, preventing other suppliers from competing for the hospitals’ business. Applied Medical alleges that these contract terms violate Section 2 of the Sherman Act, which prevents businesses from maintaining market power through exclusionary conduct, as opposed to simply offering a better product, Section 3 of the Clayton Act, which prohibits selling a product on the condition that the buyer will not use or deal in the goods of a competitor when the effect "may be to substantially lessen competition or tend to create a monopoly”, and California’s Cartwright Act by functioning as de facto exclusive-dealing arrangements.

The suit also claims that Medtronic sells other surgical products with discounts that are conditional on hospitals also buying Medtronic’s ABDs – the hospitals lose the discounts on the other products if they buy ABDs from anyone else.  The bundling terms meant that potential competitors in the ABD market could not offer prices low enough to offset the entire bundled discount. Applied Medical alleges Medtronic’s conditioning of discounts on its ABD product on a hospital’s purchase of other surgical products violates Section 1 of the Sherman Act, which prohibits unreasonable restraints of trade, (such as unfairly pressuring hospitals to buy Medtronic’s ABDs even if they prefer a competitor’s ABDs).  Tying arrangements like the ones alleged in this lawsuit may violate Section 3 of the Clayton Act if a company uses its dominance in one market to force customers to buy products in another and the Cartwright Act.

Jury Finds for Applied Medical

After a ten-day trial, the jury deliberated for less than two hours before returning in favor of Applied Medical, finding that Medtronic used exclusive contracts and bundling contracts to prevent competition and illegally monopolize the market.

In addition to the money awarded, Applied Medical has stated that it intends to seek injunctive relief to prevent Medtronic from enforcing its hospital contract restrictions.

Medtronic stated that it was disappointed with the verdict and intended to appeal, adding that it believes its product sells well because it is superior to Applied Medical’s offering.

What the Case May Mean

Having monopoly-level market share isn't necessarily illegal if that share was acquired through offering better products, better business skills, and even good luck.  However, using anticompetitive, exclusionary, or predatory tactics to maintain that market power and prevent competition is illegal.  Medtronic insists their high market share for ABDs was simply due to having a superior product.  But if that were the case, as Medtronic argues, it raises questions about why Medtronic felt it was necessary to require healthcare systems to sign contracts that included bundling and exclusive dealing terms.  Medtronic's ABD should have been able to compete in a fair and open market if it was a superior product.  Applied Medical convinced the jury that Medtronic's business practices illegally suppressed competition, a misuse of its massive market share that prevented competitors from having a fair chance to compete in the ABD market.  In theory, the verdict in this case should help open the market for ABDs, lowering costs and encouraging product innovation.

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