TJOFLAT, Circuit Judge:
This case, which involves intersecting questions of antitrust law and class action procedure, comes to us on appeal from the United States District Court for the Southern District of Florida. Louisiana Wholesale Drug Co. ("Louisiana Wholesale") and Valley Drug Co. ("Valley Drug") allege that the defendant Abbott Laboratories ("Abbott"), violated section 4 of the Clayton Act, 15 U.S.C. § 15
The facts of this case have been discussed extensively both by the district court and by this court in a companion case, Valley Drug Co. v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294 No. 02-12091 (11th Cir. 2003).
In 1987, Abbott began exclusively marketing the chemical compound, terazosin hydrochloride, under the trademark name "Hytrin." Hytrin, which is used in the treatment of hypertension and benign prostatic hyperplasia, proved to be a profitable drug for the company. According to the Federal Trade Commission ("FTC"), Hytrin generated $540 million in sales for Abbott in 1998 alone. This figure constituted more than twenty percent of Abbott's net sales of pharmaceutical products in the United States that year. In re Terazosin Hydrochloride Antitrust Litigation, 164 F.Supp.2d 1340, 1343 (S.D.Fla. 2000) (hereinafter "In re Terazosin Hydrochloride I"), rev'd Valley Drug v. Geneva Pharmaceuticals, Inc., No. 02-12091 344 F.3d 1294 (11th Cir. Sept. 15, 2003).
The commercial success of Hytrin predictably whetted the appetites of generic drug manufacturers who are in the business of developing products that have similar chemical properties to successful pharmaceutical
Although in some contexts imitation may be the sincerest form of flattery, in the pharmaceutical industry imitation is almost invariably the subject of robust litigation because imitation, in the form of generic drug competition, often severely threatens to dissipate the profits a company gains from sales of the original, patented drug. The scenario between Abbott and Geneva conformed to this pattern: shortly after Abbott received notice of Geneva's intended challenge to its patents, the company exercised its statutory right to sue Geneva for patent infringement by initiating several actions against Geneva in the United States District Court for the Northern District of Illinois.
In June 1994, Zenith also emerged as a contender in the race to bring the first generic terazosin hydrochloride drug to market when it filed an Abbreviated New Drug Application ("ANDA") for a terazosin hydrochloride drug that challenged one of Abbott's Hytrin patents.
As mentioned before, the somewhat complex history of Abbott's legal disputes
Plaintiffs are regional wholesalers who purchased Hytrin directly from Abbott during the period the defendants' agreements were in effect. They characterize the defendants' settlement agreements as "illegal" market-allocation arrangements that harmed direct purchasers of Hytrin by causing them to be overcharged by (1) keeping interchangeable, but less expensive, generic versions of Hytrin off the market; and (2) causing direct purchasers to lose discounts on Hytrin that they might have received if the settlement agreements had not shielded Abbott from generic competition. The district court agreed with the plaintiffs and granted them partial summary judgment on the issue of whether the defendants' settlement agreements constituted per se violations of § 1 of the Sherman Act. In re Terazosin Hydrochloride I.
On November 30, 1999, the plaintiffs moved for class certification on behalf of all persons who directly purchased terazosin hydrochloride from Abbott during the period March 31, 1998 through the time when the settlement agreements terminated. The district court granted plaintiffs' consolidated motions for class certification on September 20, 2001, and sua sponte amended the order on September 28, to define the class as "all entities who purchased Hytrin, also known by the chemical name terazosin hydrochloride, directly from Abbott at any time during the period commencing March 31, 1998, through August 13, 1999." In re Terazosin Hydrochloride Antitrust Litig., 203 F.R.D. 551 (S.D.Fla.2001) (hereinafter "In re Terazosin Hydrochloride II").
On appeal, the defendants raise a number of issues which can be condensed into two questions: (1) whether the district court erred in accepting an "overcharge" methodology for measuring impact and damages where generic drugs and branded
The burden of proof to establish the propriety of class certification rests with the advocate of the class. Jones v. Diamond, 519 F.2d 1090, 1099 (5th Cir.1975)
Rule 23 establishes the legal road-map courts must follow when determining whether class certification is appropriate.
These four prerequisites of Rule 23(a) are commonly referred to as "numerosity, commonality, typicality, and adequacy of representation, and they are designed to limit class claims to those fairly encompassed by the named plaintiffs' individual claims." Prado-Steiman v. Bush, 221 F.3d 1266, 1278 (11th Cir.2000). Failure to establish any one of these four factors and at least one of the alternative requirements of Rule 23(b) precludes class certification. See generally, Amchem Products, Inc. v. Windsor, 521 U.S. 591, 615-18, 117 S.Ct. 2231, 2246-48, 138 L.Ed.2d 689 (1997).
The district court ruled that class certification was appropriate in this case because it found that the plaintiffs' claims satisfied the prerequisites of Rule 23(a) and the "predominance" requirement of Rule 23(b)(3). In re Terazosin Hydrochloride II, 203 F.R.D. at 555. In determining that the four factors identified under Rule 23(a) had been met by the plaintiffs, the district court stated that, "[t]he defendants have not seriously contested these issues." Id. Assuming this were true (and the record of the case calls into question the district court's assertion), a court nevertheless has the responsibility of conducting its own inquiry as to whether the requirements of Rule 23 have been satisfied in a particular case. Martinez-Mendoza v. Champion Int'l Corp., 340 F.3d 1200, 1216 n. 37 (11th Cir.2003) ("Under Rule 23(c)(1) `[t]he trial court has an independent obligation to decide whether an action was properly brought as a class action, even where[, as here,] neither party moves for a ruling on class certification.'") (quoting McGowan v. Faulkner Concrete Pipe Co., 659 F.2d 554, 559 (5th Cir.1981)).
Significantly, the existence of minor conflicts alone will not defeat a party's claim to class certification: the conflict must be a "fundamental" one going to the specific issues in controversy. Id. at 326-27; 1 Herbert Newberg & Alba Conte, Newberg on Class Actions § 3.26 at 3-143 to 144 (3d ed.1992). A fundamental conflict exists where some party members claim to have been harmed by the same conduct that benefitted other members of the class. In such a situation, the named representatives cannot "vigorously prosecute the interests of the class through qualified counsel" because their interests are actually or potentially antagonistic to, or in conflict with, the interests and objectives of other class members. See, e.g., In re HealthSouth, 213 F.R.D. at 461-63; See also, Auto Ventures, Inc. v. Moran, 1997-1 Trade Cas. (CCH) ¶ 71,779, 1997 WL 306895 (S.D.Fla.1997) (refusing to certify a class of Toyota dealers because "the class collapses into distinct groups of winners and losers."); Accord, Warren v. City of Tampa, 693 F.Supp. 1051, 1061 (M.D.Fla. 1988) ("Conflicts pertaining to the specific issues being litigated will bar class certification.").
For this reason, in Pickett v. Iowa Beef Processors, 209 F.3d 1276 (11th Cir.2000), we reversed a district court decision granting class certification to plaintiffs where the class definition included cattle producers who claimed to have been harmed by contracts and marketing agreements that some of the unnamed members of the class had benefitted from.
When viewed in the light cast by the aforementioned cases, the district court's decision to certify a class of Hytrin purchasers notwithstanding the existence of a potential, significant conflict among class members cannot be countenanced. Here, the plaintiffs have not met their burden under Rule 23(a)(4) of demonstrating that no fundamental conflict exists within the class. In particular, they have not offered any facts to challenge the defendants' assertions that the three national wholesalers, whose transactions with Abbott constitute over fifty percent of the plaintiffs' total claims, experienced a net gain from the absence of generic drugs in the market for terazosin hydrochloride.
While the defendants lay great emphasis on the existence of "cost-plus contracts," this fact, standing on its own, would be insufficient to prove net economic benefit if it were not for the specific nature of the product and the industry involved in this case. In addition to noting that the national wholesalers charge more, and receive more, from selling higher-priced branded Hytrin, the defendants claim — and we do not disagree or agree at this point — that because of the inelastic demand for certain pharmaceutical products, "a drop in price of terazosin (due to generic competition or otherwise) does not lead to an increase in sales volumes on which a wholesaler could make up its lower margin." (Def. Brief on Appeal of Class Certification. No. 02-10171-J at 10). The reason for this according to Abbott is that "[s]o-called `maintenance drugs' that are taken continuously to treat a severe chronic condition — like terazosin — are one of the very rare categories of products whose sales are not responsive to price fluctuations. Indeed, the total demand for terazosin actually decreased after generic entry." Id.
Along with this fact, the record indicates that some of the national wholesalers are further injured rather than benefitted by generic competition because the wholesalers, who play a central role in the distribution of branded drugs, are often bypassed in the distribution chain for many generic sales, causing them to lose sales. For example, retail pharmacies like Rite-Aid, one of McKesson's largest customers, purchased most of their branded Hytrin from wholesalers while purchasing the bulk of their generic terazosin drugs directly from Geneva, a generic drug manufacturer. From the record provided to us thus far, it seems likely that the national wholesalers lose both margin and volume with generic competition. Thus, these class members appear to benefit from the effects of the conduct alleged to be wrongful by the named plaintiffs because their net economic situation is better off when branded drugs dominate the market. Class certification under these circumstances would be inappropriate. See Phillips, 502 F.2d at 367 ("When as here, there is complaint as to injury from an allegedly invalid action ... and the action may be taken as conferring economic benefits or working economic harm, depending on the circumstances of the individual, the foundations of maintenance of a class action are undermined.").
It is important to stress that as an appellate court reviewing this record, we do not here pass judgment on the ultimate legitimacy of Abbott's arguments. It may turn out that the national wholesalers presently encompassed by the class do not experience a net benefit from the absence of generic competition because of factors not disclosed in the record before us thus far or because, after a careful assessment
The plaintiffs contend, and the district court agreed, that "downstream discovery" should be foreclosed by the Supreme Court's holdings in Hanover Shoe v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968), and Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977). While we agree that the holdings in these two cases are relevant to some of the issues which will need to be addressed in this case by the trial court, neither Hanover Shoe nor Illinois Brick addressed a party's burden to satisfy the class certification prerequisites established by Rule 23(a). Instead, those cases concerned the unique circumstances under which a plaintiff in an antitrust action is granted standing to sue defendants notwithstanding the fact that the plaintiff arguably has not suffered a net economic loss from the defendants' wrongful conduct because it was able to pass on the illegal overcharges it incurred to its own consumers.
As we have acknowledged, "Hanover Shoe said that a manufacturer cannot assert a `passing on' defense (that is, the defense that the plaintiff has no damages when he passed the overcharge on down the production line) against a direct purchaser of its product." Lowell v. American Cyanamid Co., 177 F.3d 1228, 1229 n. 3 (11th Cir.1999). We do not deviate from this understanding nor do we disagree with the Tenth Circuit's declaration, cited to us by Louisiana Wholesale and Valley Drug in their brief, that "Hanover Shoe precludes the argument that [plaintiff] did not suffer cognizable antitrust injury merely because it passed overcharges on to its customers or otherwise was shielded from competition by defendants' anticompetitive behavior.... As a direct purchaser, [plaintiff] may sue for and recover the full amount of the illegal overcharge." Sports Racing Services v. Sports Car Club of America, 131 F.3d 874, 885 (10th Cir. 1997) (quotations omitted). These cases simply stand for the proposition that a direct purchaser who passes on overcharges to his own customers nevertheless suffers cognizable antitrust injury and may sue to recover damages regardless of whether he actually profited from the defendants' conduct. Noticeably, however, the question these cases address is a distinctly separate question from the issue of whether class certification is appropriate where a fundamental conflict exists among the named and unnamed members of a class.
Nevertheless, plaintiffs' brief is replete with references to Hanover Shoe and Illinois Brick as if these cases were a talisman warding away the requirements of Rule 23 and barring this court from exercising its duty to conduct an inquiry into whether the plaintiffs' proposed class satisfies the four requirements of Rule 23(a). We do not interpret the holdings of Hanover Shoe and Illinois Brick in this broad fashion. Similarly, we disagree with Louisiana Wholesale and Valley Drug when they assert "it would be a complete perversion of the rule and rationale of these cases to stop indirect purchasers from being
We do not dispute that if the defendants' settlement agreements illegally restrained competition, then all of the class members, including the three national wholesalers, would have suffered antitrust injury that is cognizable under Hanover Shoe. In such a scenario, the wholesalers would be afforded the right to sue the defendants for their alleged antitrust violations, even if they experienced a net gain, provided they choose to exercise their right to do so (and provided the Hanover Shoe "cost-plus exception" does not apply to them). Yet while we do not challenge this part of the plaintiffs' arguments, we do note that neither Hanover Shoe nor its progeny imbue the named representatives in this case with the automatic right to certify a class where the economic reality of the situation reveals that a fundamental conflict may exist among the class members because of their different economic circumstances and different economic interests. Instead, we read Hanover Shoe as directing a court to overlook the potential net gain, or conversely the potential absence of a net loss, that a direct purchaser may in fact have experienced for the purposes of providing the direct purchaser with standing to sue and a means for calculating damages in antitrust violation litigation. Hanover Shoe does not hold that this net economic gain must be ignored or overlooked by a court when determining whether Rule 23 has been satisfied. Accordingly, in the absence of direction from the Supreme Court on this issue, we will not interpret the "fundamental conflict/antagonistic interests" prong of the Rule 23(a)(4) inquiry in this case any differently than we would apply it in all other contexts. See, e.g., Pickett, 209 F.3d at 1280 (ruling that a class cannot be certified where some class members benefitted economically from conduct alleged to be illegal by the named representatives).
In the present case, the defendants have presented evidence that the cognizable antitrust injury suffered by the national wholesalers may have been outweighed by the economic benefits these parties experienced in the absence of generic competition. In short, the profits received by some class members from selling branded Hytrin in the absence of generic competition, and the greater volume of Hytrin sold by these parties in the absence of generic competition, may suggest a trade-off the national wholesalers were content to make in order to experience greater profits. This economic reality would lead the national wholesalers and other similarly situated class members to have divergent interests and objectives from the named representatives with respect to the fundamental issues in controversy in this litigation. Along these lines, we note that this case has been brought by two regional wholesalers with relatively small claims who do not sell on a cost-plus basis, while the three national wholesalers with the bulk of the claims have chosen not to participate in the litigation or have assigned their interests to third-parties. This, along with the other evidence provided in the record, suggests that the interests of the named representatives are not substantially aligned with the interests of all of the class members whom they purport to represent because some of the class members would have experienced a net gain from the conduct alleged to be wrongful in this instance. It is highly
Bearing in the mind that for purposes of analyzing whether any antagonistic interests exist between the proposed representatives and the rest of the class, "the defendant does not have to show actual antagonistic interest; the potentiality is enough," In re HealthSouth, 213 F.R.D. at 462, we deem that class certification is inappropriate in this case given the record before us. Nevertheless, as mentioned above, the national wholesalers and those similarly situated are free to initiate their own antitrust claims against the defendants pursuant to the Hanover Shoe rule.
As another circuit noted in Paper Systems, Inc. v. Nippon Paper Industries Co., Ltd., 281 F.3d 629, 633 (7th Cir.2002), the Hanover Shoe/Illinois Brick rules "create powerful incentives [for direct purchasers] to investigate and file suit," and "to maximize deterrence" by ensuring that the direct purchasers will be able to recover the "full overcharge." Neither of these important policy goals is thwarted by a refusal to include within a class definition sophisticated class members whose actual economic interests significantly diverge from the named representatives. Those direct purchasers of Hytrin who did not experience a net benefit from the defendants' allegedly illegal conduct are certainly free to pursue a class action on behalf of all similarly situated parties against the defendants provided they satisfy the other requirements of Rule 23(a) and (b). Similarly, those members who may have experienced a net benefit from the defendants' conduct are nevertheless free to assert their own claims against the defendants under Hanover Shoe because the "passing on" defense will not apply against them unless the defendants establish that they are entitled to an exception to this rule.
In short, all we hold today is that the claims of these disparate groups cannot be mixed together under Rule 23(a) where the economic reality of the situation leads some class members to have economic interests that are significantly different from — and potentially antagonistic to — the named representatives purporting to represent them.
First, the district court retains discretion in determining how much discovery is enough to establish whether or not the class members experienced a net benefit or net loss in the absence of generic competition. Second, and perhaps more importantly, this argument from counsel for Louisiana Wholesale and Valley Drug is baffling since it is the plaintiffs who initially informed the district court that an algebraic formula easily could be devised to compute the plaintiffs' claimed damages. Many of the factors taken into account by plaintiffs' experts in deriving their formula, e.g., "the amount of Hytrin purchased from Abbott by a class member," "the expected price difference between Hytrin and the generic [substitute]," and "the expected substitution rate of generic terazosin [hydrochloride]" can just as easily be used in creating a formula to determine whether certain class members experienced a net gain in the absence of generic competition. In re Terazosin Hydrochloride II, 203 F.R.D. at 559 (alterations in original). Along these lines, the district court noted that the plaintiffs had access to Abbott's "sales volume, pricing, and discount records," which would enable plaintiffs to establish class-wide impact and damages for purposes of satisfying the "predominance" requirement of Rule
In this case, Louisiana Wholesale and Valley Drug chose not to proffer any evidence along these lines and, having failed to satisfy their burden, have not demonstrated that class certification is appropriate. Thus, where the record presently reveals that the antitrust injury suffered by some class members was arguably outweighed by the benefits they gained from the absence of generic competition, the actual economic interests of these members would substantially diverge from the objectives of the named representatives and other members. Rule 23(a)(4) does not permit a class to be certified under such circumstances because it would be impossible for the named representatives to "vigorously prosecute the interests of the class" if significant members in the class actually experience a net benefit from the conduct challenged by the named representatives. In re HealthSouth, 213 F.R.D. at 456; see also, Piazza v. Ebsco Indus., Inc., 273 F.3d 1341, 1346 (11th Cir.2001) (noting that "adequacy of representation means that the class representative has common interests with unnamed class members and will vigorously prosecute the interests of the class through qualified counsel.") (internal quotations omitted). In the matter at hand, it would not be difficult to imagine that the national wholesalers, who benefitted from the defendants' conduct, would have substantially different interests and objectives than the named representatives purporting to represent them. Cf., Sosna v. Iowa, 419 U.S. 393, 403, n. 13, 95 S.Ct. 553, 559, 42 L.Ed.2d 532 (1975) (noting that although "[t]here are frequently cases in which it appears the particular class a party seeks to represent does not have a sufficient homogeneity of interests to warrant certification.... In this case, however, it is difficult to imagine why any person in the class appellant represents would have an interest in seeing Iowa Code § 598.6 (1973) upheld.").
For the foregoing reasons, we VACATE the district court's order granting class certification and REMAND the case for proceedings consistent with this opinion.