Schor, Gary v. Abbott Laboratories

In the
United States Court of Appeals
For the Seventh Circuit
____________

No. 05-3344
GARY SCHOR,
Plaintiff-Appellant,
v.

ABBOTT LABORATORIES,
Defendant-Appellee.
____________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 05 C 1592—Robert W. Gettleman, Judge.
____________
ARGUED MAY 1, 2006—DECIDED JULY 26, 2006
____________

Before EASTERBROOK, MANION, and SYKES, Circuit
Judges.
EASTERBROOK, Circuit Judge. People infected by the
human immunodeficiency virus (HIV), a retrovirus that
causes the acquired immune deficiency syndrome (AIDS),
can slow the progress of the disease by taking protease
inhibitors, which hamper HIV’s ability to copy itself into
additional cells. Abbott Laboratories holds a patent on
Norvir® (ritonavir), one such drug. When used in doses high
enough to work as a stand-alone protease inhibitor, how-
ever, Norvir causes serious side effects. It serves better as
a booster for other protease inhibitors, causing them to last
longer in the bloodstream. Norvir has this effect because it
inhibits Cytochrome P450-3A4, an enzyme in the liver that
2 No. 05-3344

normally metabolizes away protease inhibitors. For exam-
ple, a standard dose of Fortovase® (saquinavir) is 1,200 mg
three times a day; when combined with Norvir, however,
Fortovase is effective in doses of 800 mg twice a day. Abbott
offers its own combination under the brand name Kaletra®,
which includes ritonavir plus the protease inhibitor
lopinavir. Abbott’s patents (Nos. 5,886,036 and 6,037,157)
cover ritonavir taken alone and in combination with any
other protease inhibitor.
Gary Schor, who proposes to represent a class of everyone
who uses protease inhibitors, contends that Abbott charges
too much for Norvir alone and too little for the Norvir
component of Kaletra. (Stated otherwise, Schor’s contention
is that Kaletra sells for less than a cocktail made by
combining Abbott’s Norvir with a protease inhibitor from
some other supplier.) According to Schor’s complaint, the
disparity between the unduly high price of Norvir and the
unduly low price of Kaletra is designed to monopolize the
market in protease inhibitors, in violation of §2 of the
Sherman Act, 15 U.S.C. §2. Schor calls the strategy “mo-
nopoly leveraging”: Abbott is trying to use its patent to
obtain a monopoly of all protease inhibitors by inducing
HIV patients to buy Kaletra, which will lead other vendors
to drop out of the market. Once rivals’ products have been
vanquished, Abbott will be able to jack up the price of
Kaletra as well as Norvir. The district court dismissed the
complaint under Fed. R. Civ. P. 12(b)(6), however, after
concluding that it does not state a claim on which relief may
be granted. 378 F. Supp. 2d 850 (N.D. Ill. 2005). The court
concluded that “monopoly leveraging” does not violate the
antitrust laws unless it takes a particular form, such as a
tie-in sale or refusal to deal.
Schor’s complaint does not allege any of the normal
exclusionary practices—tie-in sales (or another form of
bundling), group boycotts, exclusive dealing and selective
refusal to deal, or predatory pricing. Abbott sells ritonavir
as part of Kaletra, but this is not a tie-in because ritonavir
No. 05-3344 3

is available separately as Norvir. Abbott will sell to anyone
willing to pay its price: there is no refusal to deal. The price
of Norvir cannot violate the Sherman Act: a patent holder
is entitled to charge whatever the traffic will bear. This is
true of both Norvir’s price, see Brunswick Corp. v. Riegel
Textile Corp., 752 F.2d 261, 265 (7th Cir. 1984), and of a
claim that the patent holder has engaged in price discrimi-
nation by cutting ritonavir’s price to people who buy it
(through Kaletra) in combination with lopinavir. See In re
Brand Name Prescription Drugs Antitrust Litigation, 186
F.3d 781 (7th Cir. 1999); Zenith Laboratories, Inc. v. Carter-
Wallace, Inc., 530 F.2d 508, 513 n.9 (3d Cir. 1976). And
antitrust law does not require monopolists to cooperate with
rivals by selling them products that would help the rivals to
compete. See Verizon Communications Inc. v. Law Offices
of Curtis V. Trinko, LLP, 540 U.S. 398 (2004). Cooperation
is a problem in antitrust, not one of its obligations.
The (relatively) lower price of ritonavir in Kaletra
summons up thoughts of the price-squeeze claim in United
States v. Aluminum Co. of America, 148 F.2d 416, 436-38
(2d Cir. 1945) (L. Hand, J.), which held that Alcoa vio-
lated the Sherman Act by selling processed aluminum
sheets for less than the price it charged for the raw alumi-
num required to make them. That necessarily excluded all
rivalry in the sheet-metal market. Schor’s claim is no more
than a faint echo of Alcoa, however, because Kaletra sells
for more than its ritonavir component purchased as Norvir,
and Kaletra therefore does not meet the legal standard
articulated by Judge Hand. See also Mishawaka v. Ameri-
can Electric Power Co., 616 F.2d 976 (7th Cir. 1980);
Concord v. Boston Edison Co., 915 F.2d 17 (1st Cir. 1990)
(Breyer, J.) (describing the very limited scope of a price-
squeeze doctrine). We therefore need not decide whether
Alcoa’s holding about price squeezes is sound.
Schor does not contend that Kaletra is an instance of
predatory pricing. Even if the ritonavir component of
4 No. 05-3344

Kaletra were deemed to cost the same (per milligram) as
ritonavir sold as Norvir, the imputed price of Kaletra’s
lopinavir component would be above the average variable
cost of its manufacture. None of Abbott’s rivals contends
that, at Kaletra’s going price, it is unable to sell its own
protease inhibitor profitably. If Abbott’s rivals continue
to make money from their protease inhibitors, they
cannot be knocked out of the market and Abbott will be
unable to raise the price of Kaletra. And without any
prospect of rivals’ exit, there is also no prospect of higher
prices later (“recoupment,” in antitrust argot) and no
antitrust worry. See Brooke Group Ltd. v. Brown & Wil-
liamson Tobacco Corp., 509 U.S. 209 (1993); Matsushita
Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574
(1986). A (relatively) low price for ritonavir in Kaletra then
is an unalloyed benefit for consumers. The antitrust laws
condemn high prices, not low ones, and it would be wholly
inappropriate to use the Sherman Act to oblige Abbott to
raise its price for Kaletra. And if, as Schor seems to con-
tend, Kaletra is not as beneficial for consumers as the
combination of Norvir and a protease inhibitor other than
lopinavir, then it is easy to understand why Kaletra is sold
at a discount: there’s no antitrust rule against reducing the
price of products that consumers desire less than competi-
tive goods.
That leaves the question whether there is a free-standing
theory of “monopoly leveraging.” The first subject would
have to be whether Abbott enjoys a monopoly, which seems
unlikely. A patent does not (necessarily) create market
power. See Illinois Tool Works, Inc. v. Independent Ink, Inc.,
126 S. Ct. 1281 (2006). Although the complaint alleges (and
we therefore must assume) that ritonavir is unique in its
ability to inhibit Cytochrome P450-3A4, the only benefit of
that effect is to reduce the quantity of protease inhibitor
required for treatment. Many drugs act as protease inhibi-
tors and are substitutes for Abbott’s products. In addition
No. 05-3344 5

to lopinavir and saquinavir, which we have already men-
tioned, amprenavir (Agenerase®), atazanavir (Reyataz®),
fosamprenavir (Lexiva®), indinavir (Crixivan®), and
nelfinavir (Viracept ® ) are widely used. See
http://www.aidsmeds.com/PIs.htm. Nonetheless, because
the complaint was dismissed under Rule 12(b)(6), we
must assume that Abbott has market power. Likewise we
must assume that some clever combination of prices for
Norvir and Kaletra could induce one or more of Abbott’s
rivals to withdraw their protease inhibitors from the
market, or reduce the rate of new entry. Still, there is no
antitrust concern unless Abbott could make a monopoly
profit for itself by keeping other drugs off the market—and
there is no good economic reason to think that it could
do so.
The problem with “monopoly leveraging” as an antitrust
theory is that the practice cannot increase a monopolist’s
profits. Abbott has (we must assume) a monopoly, but a
monopolist can take its monopoly profit just once. It can
collect a monopoly profit for ritonavir and allow a competi-
tive market to continue in other products. Or, by reduc-
ing the price of ritonavir, it can induce customers to buy
more from it. But it can’t do both. Suppose the competitive
price of ritonavir would be $2 per 100 mg, and that the
monopoly price is $7; suppose further that the competitive
price of some other protease inhibitor such as saquinavir is
$3 per 400 mg. Without ritonavir, the patient must
take 3,600 mg of saquinavir daily, at a price of $27; take
100 mg of ritonavir with each 800 mg of saquinavir, how-
ever, and the cost falls to $26 (1,600 mg of saquinavir plus
200 mg of ritonavir) even with ritonavir at the monopoly
price. If Abbott offered Kaletra at $24 for a daily dose, that
would knock saquinavir out of the market—but Abbott
would make less money than if it had charged the monopoly
price for ritonavir alone. If it then raised the price of
Kaletra to $28 (say), the producer of saquinavir would bring
6 No. 05-3344

that drug back to market—and Abbott would lose money
from reduced sales even if it did not, for it would now be
charging an (implicit) price of $8 per dose of ritonavir, or
more than the profit-maximizing, monopoly price.
The basic point is that a firm that monopolizes some
essential component of a treatment (or product or service)
can extract the whole monopoly profit by charging a
suitable price for the component alone. If the monopolist
gets control of another component as well and tries to
jack up the price of that item, the effect is the same as
setting an excessive price for the monopolized component.
The monopolist can take its profit just once; an effort to
do more makes it worse off and is self-deterring. See
Philip Areeda & Herbert Hovenkamp, 9 Antitrust Law ¶¶
1706a, 1706b (2d ed. 2000).
The monopolist’s profit-maximizing strategy is not to take
over the market in related products (ritonavir and other
protease inhibitors are complements, not substitutes, given
the bad side effects when ritonavir is used alone) but to
promote competition among the other producers. The less
the complements cost, the more the monopolist can charge
for its own product. Thus Microsoft does not
make computers but encourages vigorous competition
among Dell, Hewlett-Packard, Sony, Lenovo, and other
participants in that market; the less it costs to buy the
hardware, the more sales of operating system software
there will be and the more Microsoft can charge. Similarly
Abbott hopes that competition among other drug manu-
facturers will drive down the price of protease inhibitors;
the less they cost, the more Abbott can charge for Norvir (or
the ritonavir component in Kaletra). There’s no reason to
think that Abbott would be better off if it took over
the market in protease inhibitors and tried to charge a
monopoly price for substances that complement ritonavir.
And if a manufacturer cannot make itself better off by
injuring consumers through lower output and higher prices,
No. 05-3344 7

there is no role for antitrust law to play. See Menasha Corp.
v. News America Marketing In-Store, Inc., 354 F.3d 661, 663
(7th Cir. 2004); Ball Memorial Hospital, Inc. v. Mutual
Hospital Insurance, Inc., 784 F.2d 1325, 1333-34 (7th Cir.
1986).
We appreciate the potential reply that it is impossible to
say that a given practice “never” could injure consumers. A
creative economist could imagine unusual combinations of
costs, elasticities, and barriers to entry that would
cause injury in the rare situation. See Einer Elhauge,
Defining Better Monopolization Standards, 56 Stan. L. Rev.
253, 282-93 (2003); Robin Cooper Feldman, Defensive
Leveraging in Antitrust, 87 Geo. L.J. 2079 (1999); Michael
H. Riordan & Steven C. Salop, Evaluating Vertical Mergers,
63 Antitrust L.J. 513, 516-19 (1995); Michael D. Whinston,
Tying, Foreclosure & Exclusion, 80 Am. Econ. Rev. 837
(1990); Thomas G. Krattenmaker & Steven C. Salop,
Anticompetitive Exclusion: Raising Rivals’ Costs To Achieve
Power over Price, 96 Yale L.J. 209, 230-49 (1986). But just
as rules of per se illegality condemn practices that almost
always injure consumers, so antitrust law applies rules of
per se legality to practices that almost never injure consum-
ers.
Rules for predatory pricing are good examples. Lower
prices almost always benefit consumers. Subjecting all low
prices to litigation, and the inevitable risk of error in a
search for the rare instances in which consumers could
be made worse off in the long run by low prices today, would
make it more risky for firms to reduce prices, and they
would be less inclined to do so—to consumers’ considerable
detriment. That’s why in Matsushita and Brooke Group the
Supreme Court held that low prices are lawful, even if the
seller has considerable market power, unless rivals have
been driven out of the market and recoupment is either
ongoing or imminent. It is why any firm’s unilateral conduct
is almost always deemed lawful unless it creates a danger-
8 No. 05-3344

ous probability of success in monopolizing. Spectrum Sports,
Inc. v. McQuillan, 506 U.S. 447 (1993). Cf. Areeda &
Hovenkamp, 9 Antitrust Law ¶1730 (recommending the
greatest restraint in condemning any unilateral practice as
“monopolization,” given the risk of forbidding a practice
that benefits consumers in ways that judges do not appreci-
ate); David S. Evans & A. Jorge Padilla, Designing Antitrust
Rules for Assessing Unilateral Practices, 72 U. Chi. L. Rev.
73, 80-83 (2005).
Just so with arguments that low prices are designed
to “leverage” a firm from one monopoly to another. As long
as rivals continue to sell, and no second monopoly is in
prospect, the search for the rare situation in which that
second monopoly just might allow the firm to gain a profit
by injuring consumers is not worth the candle. The search
itself (and the risk of error in the judicial process) has much
more chance of condemning a beneficial practice than of
catching a detrimental one. A price high enough to avoid
condemnation under predatory-pricing rules cannot be
condemned under a “monopoly leveraging” theory that is
just a predatory-pricing variant without the intellectual
discipline of that doctrine. Schor does not contend that
Kaletra’s pricing could be condemned under Matsushita or
Brooke Group, so there is nothing to this case.
Having said this, we must acknowledge that one court
of appeals has adopted just such an undisciplined
monopoly-leveraging principle. See Image Technical
Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1208-13
(9th Cir. 1997). Perhaps some portions of Berkey Photo v.
Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1980), should be
included in the same category. At least one court of appeals
has gone the other way, rejecting Image Technical by name.
See In re Independent Services Organizations Antitrust
Litigation, 203 F.3d 1322, 1327 (Fed. Cir. 2000). It would be
possible to cabin Image Technical by observing that, despite
the opinion’s language, the case arose from a refusal to deal,
No. 05-3344 9

so it occupies one of the traditional antitrust categories
rather than a claim of “naked” monopoly leveraging of the
sort that Schor attempts to pursue. But we think it better
to join the Federal Circuit in saying that Image Technical
just got it wrong.
The ninth circuit did not give any reason for thinking that
a monopolist’s acquisition of market power in a complemen-
tary product injures consumers. Instead the court attrib-
uted the principle to Eastman Kodak Co. v. Image Technical
Services, Inc., 504 U.S. 451 (1992). That’s a misunderstand-
ing of the Supreme Court’s opinion. See Digital Equipment
Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756, 762-63
(7th Cir. 1996). What the Supreme Court held in Image
Technical is not that firms with market power are forbidden
to deal in complementary products, but that they can’t do
this in ways that take advantage of customers’ sunk costs.
Kodak sold copiers that customers could service themselves
(or through independent service organizations). Having
achieved substantial sales, Kodak then moved to claim all
of the repair work for itself. That change had the potential
to raise the total cost of copier-plus-service above the
competitive level—and, we observed in Digital Equipment,
above the price that Kodak could have charged had it
followed a closed-service model from the outset. Schor does
not accuse Abbott of any similar switch that would exploit
customers’ sunk costs; none is possible in this market.
Unless we generalize the Supreme Court’s decision in Image
Technical to a rule against selling products that comple-
ment those in which the defendant has market
power—which Digital Equipment already has held would be
inappropriate—Schor is left without a leg to stand on.
Schor pretty much concedes most of this analysis but
maintains that patented products are different. That’s what
the ninth circuit said in Image Technical. But why would a
patent matter? A given patent may (or may not, see Illinois
Tool Works) create market power, but if a monopolist
10 No. 05-3344

cannot gain by “leveraging” its way to dominance of a
related product, the fact that the patent rather than
something else supplies the market power can’t create an
antitrust problem.
Abbott’s patents do more to support its position than
to assist Schor. Recall that the patents cover not only
ritonavir administered by itself but also ritonavir adminis-
tered in combination with another protease inhibitor.
Abbott therefore could take control of the market in combi-
nation treatments until the patents expire. A patent does
not permit its owner to condition use of the patented
product on the surrender of a monopoly in some other
unpatented product. See Ethyl Gasoline Corp. v. United
States, 309 U.S. 436, 457-58 (1940); Motion Picture Patents
Co. v. Universal Film Manufacturing Co., 243 U.S. 502, 512
(1917). But the product “ritonavir in combination with
another protease inhibitor” is patented to Abbott, which
therefore is entitled to monopolize the combination. Yet it
has not done so—doubtless because, as we have explained,
Abbott’s profits are highest when the price of other protease
inhibitors is lowest, and Abbott therefore has a powerful
incentive to encourage competition among other producers
rather than monopolize the market for all protease inhibi-
tors. It would make little sense to use the antitrust laws to
condemn Abbott for a strategy (a) that it has not in fact
pursued; (b) that would disserve its own interests; and (c)
that the patents entitle Abbott to pursue if it chooses.
One final topic and we are done. Schor maintains that he
is entitled to prevail without regard to the merits—that
issue preclusion (collateral estoppel) blocks Abbott from
offering any legal defense. Three users of protease inhibi-
tors have brought essentially identical suits against Abbott.
Two were filed in the Northern District of California and
the third, Schor’s, in the Northern District of Illinois.
District Judge Wilkin denied Abbott’s motion to dismiss one
of the California suits under Rule 12(b)(6). See Doe v.
No. 05-3344 11

Abbott Laboratories, 2004 U.S. Dist. LEXIS 29129 (N.D. Cal.
Oct. 21, 2004). Then she consolidated them and denied (as
premature) Abbott’s motion for summary judgment, con-
cluding that plaintiffs are entitled to conduct additional
discovery. See In re Abbott Laboratories NORVIR Anti-Trust
Litigation, 2005 U.S. Dist. LEXIS 24238 (N.D. Cal. Sept. 12,
2005). According to Schor, these decisions conclusively
establish that his complaint does state a claim on which
relief may be granted; all that remains for decision, he
insists, is whether the complaint’s allegations can be proved
at trial.
There are two problems with Schor’s use of issue preclu-
sion. The first is that the California decisions are not final.
They do not resolve any issue in plaintiffs’ favor; they
conclude only that more litigation is required. No judgment
has been entered; Abbott has not had an opportunity to
appeal. Federal law determines the preclusive effect of a
federal court’s decision, and as a matter of federal law the
denial of a motion (whether under Rule 12(b)(6) or Rule 56),
so that a suit continues and the issue remains alive, has no
preclusive effect. See Financial Acquisition Partners L.P. v.
Blackwell, 440 F.3d 278, 284-85 (5th Cir. 2006). Although
it is possible to imagine circumstances under which the
denial of a motion to dismiss may conclusively resolve some
concrete issue, see Gilldorn Savings Association v. Com-
merce Savings Association, 804 F.2d 390, 393-96 (7th Cir.
1986), that’s not what happened in the Northern District of
California. Nothing has been resolved there with finality.
Even if a point of law had been resolved against Abbott in
the California suits, that would not be preclusive in Illinois.
Schor is invoking a doctrine known as offensive non-mutual
issue preclusion. (The preclusion is offensive because Schor
is the plaintiff and non-mutual because he is not a party to
the California cases. A decision favorable to Abbott in
California would not have been conclusive against Schor in
Illinois, unless the California court first certified a class and
12 No. 05-3344

Schor failed to opt out.) Although federal law recognizes the
possibility of offensive non-mutual issue preclusion, see
Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979), the
Supreme Court added in Parklane that circumstances may
make its application inappropriate. One of those circum-
stances is a difference in the governing law. A district court
in California must apply the ninth circuit’s decision in
Image Technical. We need not. Having concluded that
Image Technical misunderstood the Sherman Act, we are
unwilling to allow its effect to extend beyond the boundaries
of that circuit. The district court in Illinois did not err in
making an independent decision about the merit of Schor’s
complaint.
AFFIRMED

A true Copy:
Teste:

________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—7-26-06