ANTITRUST II. MCDONALD v. JOHNSON & JOHNSON: STANDING IN PRIVATE ANTITRUST LITIGATION

Transcription

1 1187 ANTITRUST II MCDONALD v. JOHNSON & JOHNSON: STANDING IN PRIVATE ANTITRUST LITIGATION INTRODUCTION Standing to sue in antitrust cases is based on section 4 of the Clayton Antitrust Act. 1 That section provides in part that "[alny person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefore in any district court of the United States...and shall recover threefold the damages by him sustained...-2 A literal reading of this statute is broad enough to encompass every harm that can be attributed directly or indirectly to the consequences of an antitrust violation. 3 Consequently, the circuit courts have attempted to articulate a precise test to determine whether a party injured by an antitrust violation may recover treble damages. Some courts have focused on tests concerning the directness of the injury involved. 4 Other courts look at the area of the economy the antitrust violation was aimed at, 5 and still other courts have adopted variations of the foregoing. 6 The Supreme Court of the United States has recently developed a standard to provide uniformity in deciding this issue. 7 The 1. Clayton Antitrust Act, 15 U.S.C. 15 (1982). 2. Id. 3. Associated Gen. Contractors v. California State Council, 103 S. Ct. 897, 904 (1983). 4. See Volasco Prods. Co. v. Lloyd A. Fry Roofing Co., 308 F.2d 383, 395 (6th Cir. 1962) (court held a party must not be too remote or removed from the direct injury to recover under antitrust laws), cert. denied, 372 U.S. 907 (1963); Productive Inventions Inc. v. Trico Prods. Corp., 224 F.2d 678, (2d Cir. 1955) (court held that only those at whom the violation is directly aimed having standing, while those only harmed incidentally have no standing under antitrust laws), cert. denied, 350 U.S. 936 (1956); Loeb v. Eastman Kodak Co., 183 F.2d 704, 709 (3d Cir. 1910) (court held that a claimant must receive direct injury from the alleged illegal acts of a defendant. See also Ames v. A.T.&T., 166 F. 820, (C.C.D. Mass. 1909). Commentators have cited the foregoing case as the original expression of the direct injury test. See, e.g., Saul, Antitrust Standing: Some Light at Last?, 14 U. TOL L. REv. 521, 523 n.10 (1983). 5. See Pan-Islamic Trade Corp; v. Exxon Corp., 632 F.2d 539, 548 (5th Cir. 1980) (court held that the claimant must conduct business within the economic target area of the alleged antitrust violation); Engine Specialties Inc. v. Bombardier Ltd., 605 F.2d 1, 18 (1st Cir. 1979) (court held that claimants need not be targets but can recover compensable injury by being within the target area). 6. See Malamud v. Sinclair Oil Corp., 521 F.2d 1142, (6th Cir. 1975) (court held that a plaintiff must come within the "zone of interests" protected by the antitrust laws). 7. Associated General, 103 S. Ct. at The Court concluded that the rele-

2 1188 CREIGHTON LAW REVIEW [Vol. 17 first circuit to apply this newly-formed test was the United States Court of Appeals, Eighth Circuit, in McDonald v. Johnson & Johnson.8 In McDonald, former executives of Stimulation Technology (StimTech), a corporation manufacturing transcutaneous electronic nerve stimulators (TENS), 9 sued Johnson & Johnson for breach of contract, fraud, and antitrust violations arising out of the sale of StimTech to Johnson & Johnson. 0 The Eighth Circuit determined, by utilizing the Supreme Court's new test, that the plaintiffs did not have standing to bring the antitrust claims." FACTS AND HOLDING TENS is a surgically-implanted device designed for the treatment of certain types of pain. 12 This device provides electrical stimulation to nerve fibers on the skin which block the transmission of pain sensations, thereby reducing pain in the patient. 13 TENS was first developed by Norman Hagfors in the late 1960's. 14 In August of 1970, Hagfors incorporated StimTech to market this new device. 15 Stanley McDonald joined StimTech in September, 1971 to develop a sales and marketing plan for TENS. 16 In vant factors in deciding whether a party has standing to sue under antitrust laws includes the causal connection between the antitrust violation and the harm to the plaintiff; improper motive; whether the injury was of the type the antitrust statute was intended to forestall; the directness between the injury and the market restraint; speculative nature of the damages and the risk of duplicate recoveries and complex damage apportionment. Id. See also notes and accompanying text infra F.2d 1370 (8th Cir. 1983). 9. These stimulators are used to treat pain by sending electric currents into the body through electrodes attached at the site of the pain. See id. at 1372 n.l. 10. Id. at Id. at F. Supp. at 1282, The interest in these devices originated from a paper published by two medical doctors in 1965 entitled "The Gate Theory of Pain." Id. This paper described a mechanism by which nerve fibers transmit pain signals to the brain. Id. Applications of the gate theory proved to be successful in surgically-implanted devices. Id. Dr. Donlin Long, neurosurgeon at the University of Minnesota, described the development of an external stimulator which would achieve the same results as the surgically-implanted device. Id. Dr. Long was joined in work by Norman Hagfors, who designed the first modern solid-state TENS device. Id. 13. Id. 14. Id. 15. Id. Another purpose for incorporating StimTech was to enter into a licensing arrangement with a foreign heart pacemaker manufacturer to sell the pacemakers. Id. The proceeds from the sale of pacemakers would provide a financial base to support the development and marketing of TENS devices. Id. 16. Id. at Mr. Stanley McDonald had been with Medtronic in a marketing position from 1967 to Id. Prior to that, McDonald had been in a sales position with E.R.Squibb Company. Id. McDonald's title in the corporation was Vice-President for Marketing. Id.

3 19841 ANTITRUST , Clayton Jensen assumed a position with StimTech as Vice President in charge of manufacturing. 17 These three men made up the executive staff of StimTech Corporation.' Although Hagfors, McDonald, and Jensen pledged their personal assets to StimTech, the company still needed additional funds to finance expanded research and development.' 9 McDonald estimated that seven million dollars would be needed to advance TENS to its full potential. 20 StimTech considered several options to raise additional capital, including: (1) making a public offering of common stock; (2) promoting private placements of common stock; (3) combining forces with Devices Company, a company manufacturing over the counter drugs; and (4) accepting a proposal from Johnson & Johnson. 2 1 Basically, Johnson & Johnson's proposal consisted of the purchase of 37.1% of StimTech's stock for $700, Hagfors, McDonald, and Jensen accepted this proposal and the sale was consummated in In 1974, negotiations began between Johnson & Johnson and StimTech over the purchase of the remaining StimTech stock. 24 The parties finally agreed upon a stock purchase plan which would "be based upon a high degree of mutual trust and confidence by the Company (StimTech), Stockholders (Hagfors et al), and Johnson & Johnson". 25 During negotiations, the major representations made by Johnson & Johnson were that: (1) StimTech would get 17. Id. Mr. Clayton Jensen graduated with a degree in mechanical engineering from the University of Minnesota. Id. Prior to coming to StimTech, Jensen held a position with the McQuay Corporation. Id. 18. Id. 19. Id. at Id. "Underlying McDonald's sales and marketing plan was the emphasis on the company's urgent need for additional funds to support its projected research and development." Id. 21. Id. From 1972 to 1973, StimTech contacted potential investors to help raise the additional capital needed to provide financing for reseach and development. Id. It is to be noted that Mr. Hagfors was sought out by Dr. Jack McConnell, Director of Corporate Development for Johnson & Johnson. Id. McConnell approached Hagfors concerning the case flow problems of StimTech. Id. McConnell stated that the purpose of the contract was to consider Johnson & Johnson's buying an interest in StimTech. Id. 22. Id The purchase of 37.1% of the stock of Stim-Tech by Johnson & Johnson was labelled Phase I. Id. Phase II was the purchase of the remaining shares of stock by Johnson & Johnson within 180 days of the signing of the 1973 Agreement. Id. The agreement also included that "shareholders hope to negotiate a pay-out over 5 to 10 years for said million dollars conditioned upon the performance of the Company in the manner which they contemplated.'" Id. Johnson & Johnson agreed to negotiate with plaintiffs, but did not acquiesce in the purchase price. Id. 23. Id. 24. Id. at Id. at 1299.

4 1190 CREIGHTON LAW REVIEW [Vol. 17 financial and managerial backing from Johnson & Johnson; (2) StimTech could avail itself of the Johnson & Johnson sales force which consisted of more than 4,000 persons; and (3) StimTech could make use of the Johnson & Johnson worldwide sales orientation, which had distribution to all but a few countries in the world. 26 Relying on these representations, Hagfors, McDonald, and Jensen sold their remaining shares of StimTech to Johnson & Johnson. 27 The purchase agreement provided that Hagfors, McDonald, and Jensen would receive a minimum of $1.3 million for the StimTech stock, and a maximum of $7 million based on the amount of StimTech's profits during the years 1974 to In addition, Hagfors, McDonald, and Jensen each entered into five year non-competition agreements and three year employment contracts with Johnson & Johnson. 29 From 1974 to 1979, Johnson & Johnson managed the operations of StimTech. 30 StimTech's sales increased sevenfold over this period of time, but its aggregate operating losses totalled $7.3 miillion. 31 Because of these losses, Hagfors, McDonald, and Jensen never received more than $1.3 million for the sale of their stock. 32 Furthermore, McDonald and Hagfors were demoted in their employment status, and Jensen was discharged altogether during this period. 33 On May 2, 1979, Hagfors, McDonald, and Jensen filed suit against Johnson & Johnson alleging that Johnson & Johnson vio- 26. Id. In addition, 4) StimTech would be able to realize the maximum earn-out based solely on sales of $140 million; and 5) StimTech could expect the cooperation of the Johnson & Johnson athletic division in introducing TENS for sports medicine. Id. 27. Id. at Id. The stock purchase agreement provided that compensation for the stock would be roughly $2.00 for every $1.00 of profit earned by StimTech from 1974 to Id F.2d at The employment contracts automatically renewed for successive one-year periods after the first three years, unless terminated by Johnson & Johnson, which it could do with three months notice at any time after the first three years. Id. 30. Id. When Johnson & Johnson took over StimTech in 1974, StimTech had lost, under the operation of the three plaintiffs, over $400,000. Id. Between 1974 and 1979, Johnson & Johnson supplied StimTech with $10.9 million of working capital. Id. During this time, StimTech's net TENS sales reached 25-30% of industry sales. Id. Since 1975, no firm has ever had more than a 31% market share. Id. at 1372 n Id. at Id. 33. Id. McDonald stayed as an employee of Johnson & Johnson for 2% years before he voluntarily left and was released from his non-compete agreement to buy another pain control company. Id. at 1377 n.9. The other two plaintiffs finished out the three years as employees of Johnson & Johnson, although at the end of the time period Jensen was fired. Id. See also note 16 and accompanying text supra.

5 19841 ANTITRUST 1191 lated sections 1 and 2 of the Sherman Antitrust Act, violated section 7 of the Clayton Antitrust Act, breached their contract, and committed fraud. 34 Hagfors, McDonald, and Jensen argued that they were deprived of their fair share under the contract because Johnson & Johnson wrongfully suppressed StimTech's product, TENS, in the marketplace. 35 After the acquisition of StimTech stock was completed, a number of policy changes were implemented by Johnson & Johnson which adversely affected growth and development of TENS. 36 A hiring freeze in the marketing area was put into effect which stunted the growth of the TENS product. 37 StimTech was not permitted to use the Johnson & Johnson name in connection with marketing or labeling its products or in dealing with its consumers. 38 Another policy change involved the rejection of the sales of TENS devices to certain customers. 39 Hagfors, McDonald, and Jensen also alleged that the suppression was intentional, as TENS was a competitor in over-the-counter pain relief drugs, which is a main industry of Johnson & Johnson. 40 By suppressing TENS, Johnson & Johnson's other products would fare better in the marketplace. 4 1 Suppression of TENS also reduced profits in the product. 42 According to the purchase agreement, Hagfors, McDonald, and Jensen were to receive a higher price for the sale of their stock if profits from TENS sales were high. 43 Thus, a reduction in profits prevented Hagfors, McDonald, and Jensen from realizing a higher price from the sale of the StimTech stock. 44 After hearing the evidence, the United States District Court for the District of Minnesota determined that Johnson & Johnson had violated sections 1 and 2 of the Sherman Antitrust Act. 45 The court awarded treble damages of $170.4 million on each antitrust count. 46 In addition: (1) $5.7 million was awarded to Hagfors, Mc F.2d at F. Supp. at Id. at Id. In February of 1975, a total freeze was imposed on StimTech. Id. 38. Id. 39. Id. at Pain Control Centers International, a chain of pain clinics, offered to buy 25 centers of TENS product for $200,000; Johnson & Johnson rejected the offer. Id. 40. Id. at Id. 42. Id. 43. Id. 44. See note 28 and accompanying text supra F. Supp. at , Id. at ($170.4 million damages is based on treble $56.8 million compensatory damages). Johnson, 722 F.2d at 1372.

6 1192 CREIGHTON LAW REVIEW [Vol. 17 Donald, and Jensen for breach of contract; (2) $6.275 million was awarded to compensate for actual damages incurred as a result of fraud; and (3) $25 million was awarded as punitive damages. 47 On appeal, and following two subsequent rehearings, the Eighth Circuit affirmed the award of $5.7 million for breach of contract, 48 and vacated and remanded the judgment awarding $6.275 for actual damages based on the fraud claim 49 as well as the $25 million punitive damages award. 50 However, the court vacated the treble damage awards relating to the antitrust claims for lack of standing to sue. 51 Chief Judge Lay delivered the majority opinion for the Eighth Circuit. 52 The central issue he addressed was whether Hagfors, McDonald, and Jensen were the proper parties to bring a private antitrust action against Johnson & Johnson. 53 His analysis of this issue revolved around the Supreme Court's recently adopted Associated General test. 54 Pursuant to the test, he determined Hagfors, McDonald, and Jensen did not have standing to sue. 55 Although the Eighth Circuit also addressed the fraud and punitive damages claims, those issues carried less weight in the decision, and will not be a center of the discussion here. The main focus of this article will be on the standing issue. BACKGROUND Judicial power under Article HI of the Constitution of the United States "exists only to redress or otherwise to protect against injury to the complaining party". 56 A litigant who does not "stand to profit in some personal interest" by prevailing on his claim has not presented a case or controversy; he is said to lack standing. 57 In other words, the policies underlying the case or con F. Supp. at F.2d at Id. 50. Id. at Id. 52. Id. at Judge Heaney was the only circuit judge to fie a concurring and dissenting opinion. Id. at Id. at The opinion was outlined in three issues: standing issue, fraud claim, and punitive damages claim. Id. at The standing issue was reversed in the opinion. Id. at The fraud claim upon subsequent rehearings was vacated and remanded by the Eighth Circuit. Id. at The punitive damages award was also remanded to the district court for a new trial. Id. at Id. at (citing Associated Gen. Contractors v. California State Council, 103 S. Ct. 897 (1983)). See also note 8 supra. 55. Id. at Warth v. Seldin, 422 U.S. 490, 499 (1975). 57. Simon v. Eastern Ky. Welfare Rights Org., 426 U.S. 26, 39 (1976).

7 1984] ANTITRUST 1193 troversy requirement are designed to "assure that concrete adverseness which sharpens the presentation of issues A litigant needs a "personal stake in the outcome". 5 9 In addition to these general standing requirements, areas of law have specific requirements for standing. For instance, section 4 of the Clayton Antitrust Act provides that "[a)ny person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefore in any district court of the United States... and shall recover threefold the damages by him sustained.. "..",60 Even though the language under section 4 of the Clayton Act is broad, federal courts have developed theories of standing that plaintiffs must meet before they are allowed to maintain an antitrust suit. 61 Two basic theories have developed: the direct-injury approach and the target-area approach. 62 The direct-injury approach provides that anyone in privity with an alleged antitrust violator has standing to maintain a suit. 63 The direct-injury approach focuses on the relationship between the parties. 64 The target-area approach, on the other hand, grants standing to any plaintiff who lies within the sector of the economy affected by the alleged antitrust activity. 65 The target-area approach thus focuses on the impact of the antitrust activity. 66 Each of the eleven circuits in the federal court system have applied or at least discussed one of these two approaches, or a derivative thereof, in determining whether a plaintiff has standing to maintain an antitrust claim. 67 Until now, the Eighth Circuit has 58. Baker v. Carr, 369 U.S. 186, 204 (1962). 59. Id U.S.C. 15 (1982). 61. See notes 4-7 and accompanying text supra. 62. See notes 4, 5, 6, and accompanying text supra. 63. See, e.g., Clark Oil Co. v. Phillips Petroleum Co., 148 F.2d 580, (8th. Cir. 1945). 64. Volasco Prods. Co. v. Lloyd A. Fry Roofing Co., 308 F.2d 383, 395 (6th Cir. 1962) (court held that a supplier is too remote and removed to recover damages for violation of antitrust laws directed at the supplier's customer). 65. Karseal Corp. v. Richfield Oil Corp., 221 F.2d 358, 365 (9th Cir. 1955). 66. See also id. 67. Carroll v. Protection Maritime Ins. Co., 512 F.2d 4, 9 (1st Cir. 1975); Malamud v. Sinclair Oil Corp., 521 F.2d 1142, 1152 (6th Cir. 1975); Pacific Seafarers, Inc. v. Pacific Far East Line, 48 F.R.D. 347, 351 (D.C. Cir. 1969); SCM Corp. v. Radio Corp. of Am., 407 F.2d 166, 171 (3d Cir. 1969), cert. denied, 395 U.S. 943 (1969); Nationwide Auto Appraiser Serv. v. Association of Casualty and Sur. Cos., 382 F.2d 925, 929 (10th Cir. 1967); South Carolina Council of Milk Producers, Inc. v. Newton, 360 F.2d 414, 418 (4th Cir. 1966), cert. denied, 385 U.S. 934 (1966); Sanitary Milk Producers v. Bergjans Farm Dairy, Inc., 368 F.2d 679, (8th Cir. 1966); Martens v. Barrett, 245 F.2d 844, 846 (5th Cir. 1957); Karseal Corp. v. Richfield Oil Corp., 221 F.2d 358, 363

8 1194 CREIGHTON LAW REVIEW [Vol. 1.7 applied a derivative of the target-area approach. 6 8 The first of these approaches to be developed was the directinjury approach, which grants standing to plaintiffs who suffer direct injury from the alleged illegal acts of the defendant. 69 This approach was first formulated in Loeb v. Eastman Kodak. 70 In Loeb, the plaintiff alleged that the defendant's antitrust violations had caused him losses in his capacities as a stockholder and creditor of a bankrupt corporation. 71 The Third Circuit Court of Appeals determined that any antitrust injury suffered by a stockholder was indirect, remote and consequential, and need not be subject to a recovery by the stockholder. 72 The Loeb court feared a multiplicity of suits would result if such parties had standing to maintain an antitrust cause of action. 73 The court, therefore, implemented a direct-injury test which denied recovery if an intermediate party was present between the plaintiff and the alleged violation. 74 Courts have had difficulty focusing the direct-injury approach into a general rule by which to determine what injuries are too remote to bring a plaintiff within the terms of the antitrust laws. 75 The First and Third Circuits apply the approach on a "competitors only" basis. 76 Not only must a plaintiff suffer a direct injury due to the antitrust violation, but the status of the plaintiff must be that of a competitor with the defendant. 7 7 In the Tenth Circuit, decisions on the standing issue appear to have aligned on opposite ends of a spectrum. 7 8 The Ten Circuit itself has adopted a narrow directinjury approach. 7 9 The opinions of two districts within the Tenth Circuit seem to favor a foreseeable target-area approach and an unrestricted approach. 80 The latter formulations do not require the plaintiff to be a competitor but rather, require the plaintiff (9th Cir. 1955); Roseland v. Phister Mfg. Co. 125 F.2d 417, 420 (7th Cir. 1942); Loeb V. Eastman Kodak Co., 183 F. 704, 709 (3d Cir. 1910) F.2d 679, (8th Cir. 1966). 69. Loeb v. Eastman Kodak, Co., 183 F. 704, 709 (3d Cir. 1910). 70. Id. 71. Id. at Id. at Id. 74. Id. at Harrison v. Paramount Pictures, Inc., 115 F. Supp. 312, 317 (E.D. Pa. 1953), affid, 211 F.2d 405 (3d Cir. 1954), cert. denied, 348 U.S. 828 (1954). 76. Swider, Standing To Sue in Private Antitrust Litigation: Circuits in ConfliCt, 10 IND. L. REv. 532, , 539 (1977). 77. Id. 78. Id. at Id.; see Nationwide Auto Appraiser Serv. v. Association of Casualty & Sur. Cos., 382 F.2d 925 (10th Cir. 1967). 80. Swider, supra note 76, at ; see H.F.&S. Co. v. American Standard Inc.,

9 1984] ANTITRUST 1195 prove the injury incurred was foreseeable by the defendant. 81 The Second Circuit Court of Appeals, while labeling its test a target-area approach, in actuality uses a direct-injury approach which incorporates elements of the interpretations discussed above. 82 This court requires that the plaintiff allege more than foreseeability of injury; in addition, the plaintiff must suffer direct injury and have the status of competitor with the defendant. 8 3 The second approach utilized by the circuit courts is the target-area approach. 84 This test consists of two parts. 85 First, the plaintiff must be injured in fact by the antitrust violation. 86 Second, the plaintiff must be within the sector of the economy at which the antitrust violator was aiming. 87 The plaintiff need not be in privity with the antitrust violator, but need only lie within the affected area. 88 The first case to develop this approach was the Ninth Circuit Court of Appeals case of Karseal Corp. v. Richfield Oil Corp. 89 There, Karseal, a manufacturer, sued Richfield Oil Corp. for injuries caused by Richfield to the independent retailers who bought Karseal's products through wholesale distributors. 90 The court granted Karseal standing to bring suit against Richfield and stated: "Karseal was within the target area of the illegal practices of Richfield; that Karseal was not only hit, but was aimed at, by Richfield." 91 Like the direct-injury approach, the target-area approach is also subject to many interpretations. The Fourth and Fifth Circuits have developed a "proximate target-area approach. ' '92 Plaintiffs must prove they were within the sector of the economy in which the violation threatened a breakdown of competitive condi- 336 F. Supp. 110, 116 (D. Kan. 1972); Wilson v. Ringsby Truck Lines, Inc., 320 F. Supp. 699 (D. Colo. 1970). 81. Swider, supra note 76, at Id. at Calderone Enters. Corp. v. United Artist Theatre Circuit, Inc., 454 F.2d 1292, 1295, 1296 n.2 (2d Cir. 1971). 84. Conference of Studio Unions v. Loew's, Inc., 193 F.2d 51, (9th Cir. 1951), cert. denied, 342 U.S. 919 (1952). 85. Karseal Corp. v. Richfield Oil Corp., 221 F.2d 358, (9th Cir. 1955). 86. Id. at Id. 88. Id. (citing Clark Oil Co. v. Phillips Petroleum Co., 148 F.2d 580, (8th Cir.), cert. denied, 326 U.S. 734 (1945). 89. Id.; See Note, Antitrust and Standing: A Question of Legal Cause, 67 MNN. L. REV. 1011, 1018 n.38 (1983). The target area approach of Studio Union was modified by the Ninth Circuit in Karseal. Swider, supra note 76, at F.2d at Id. at Daily v. Quality School Plan, Inc., 380 F.2d 484, (5th Cir. 1967); South Carolina Council of Milk Producers, Inc. v. Newton, 360 F.2d 414, 419 (4th Cir.), cert. denied, 385 U.S. 934 (1966).

10 1196 CREIGHTON LAW REVIEW [Vol. 1.7 tions and that they were proximately injured thereby. 93 The Sixth Circuit's variation requires the plaintiff not only to prove he was injured in fact, but also to prove that he was within the "zone of interests to be protected or regulated by the statute or constitutional guarantee in question. ' 94 Neither the Seventh nor the District of Columbia Circuit Courts of Appeals has committed itself to a single interpretation of the target-area approach. 95 In the past, the Eighth Circuit has applied the target-area approach in antitrust standing cases. 96 Recently, however, the court has applied a combination of the direct-injury and target-area approaches. 97 Confronted with varying approaches of the circuit courts, the Supreme Court has attempted to provide some direction on the standing issue. 98 Three leading cases illustrate the Supreme Court's efforts in this area. 99 The first case decided was Brunswick v. Pueblo Bowl-O-Mat in In this case, Brunswick, Inc., a leader in the manufacture of bowling equipment and the largest operator of bowling centers, had purchased a number of failing bowling centers. 1 1 Pueblo, an operator of a bowling center, alleged that because of Brunswick's size, Brunswick had the ability to drive out smaller competitors and thereby substantially lessen competition The Court rejected the idea that every loss causally related to an antitrust violation was recoverable under section 4 of the Clayton Antitrust Act and therefore denied standing to Pueblo In its decision, the F.2d at 487 (quoting South Carolina Council of Milk Producers, Inc. v. Newton, 360 F.2d 414, 418 (4th Cir. 1966). 94. See Malamud v. Sinclair Oil Corp., 521 F.2d 1142, 1151 (6th Cir. 1975) (quoting Association of Data Procession Service Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970)). 95. See Roseland v. Phister Mfg. Co., 125 F.2d 417 (7th Cir. 1942); Midway Enter., Inc. v. Petroleum Mktg. Corp., 375 F. Supp. 1339, 1345 (D. Md. 1974); Pacific Seafarers, Inc. v. Pacific Far East Line, 48 F.R.D. 347 (D.D.C. 1969). 96. Minnesota v. United States Steel Corp., 299 F. Supp. 596, (D. Minn. 1969), vacated on other grounds, 438 F.2d 1380 (8th Cir. 1971). 97. McDonald v. Johnson & Johnson, 722 F.2d 1370, 1374 (8th Cir. 1983). 98. See Associated Gen. Contractors of Cal. v. California State Council, 103 S. Ct. 897 (1983). The Supreme Court stated that the newly-formed antitrust standing test was in response to the fact that there was a "struggle of federal judges to articulate a precise test to determine whether a party injured by an antitrust violation may recover treble [antitrust] damages. Id. at See Associated Gen. Contractors of Cal. v. California State Council, 103 S. Ct. 897 (1983); Blue Shield of Va. v. McCready, 457 U.S. 465 (1982); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977) U.S. 477 (1977) Id. at Id. at Id. at 489. The Supreme Court defined the issue in the following manner:

11 19841 ANTITRUST 1197 Supreme Court introduced the term "antitrust injury" into the realm of standing framework.' m 4 "Antitrust injury" subsequently became the lodestar of standing in antitrust cases In order to establish antitrust injury, a plaintiff must show: (1) actual injury causally linked to an illegal presence in the market; (2) injury of the type the antitrust laws were intended to prevent; (3) an injury which flows from that which makes the defendant's acts unlawful; and (4) the injury must reflect the anticompetitive effect of either the violation or of anticompetitive acts made possible by the violation. 0 6 In Brunswick, the Court focused on the type of injury pleaded and its relationship to the alleged anticompetitive conduct. 0 7 This injury was labelled "antitrust injury" and was the essential element in determining standing to maintain an antitrust suit. 0 8 Having rendered its decision in denying standing to Pueblo, the Court continued in dictum to limit the pool of potential litigants in antitrust suits It stated that the purpose of the antitrust laws is the protection of competition, not competitors." l 0 The antitrust laws come into play only when competition is unduly restricted."' Plaintiffs may have the status of competitors, but they must allege an antitrust injury, that is to say, an injury of the type the antitrust laws were intended to prevent and one that flows from that which made the defendant's acts unlawful. 112 This injury should also reflect the anticompetitive effect of either the violation, or of the anticompetitive acts made possible by the violation." l 3 The Brunswick case left some areas of antitrust standing in question. For example, it was not clear from the Supreme Court's "whether antitrust damages are available where the sole injury alleged is that competitors were continued in business, thereby denying respondents an anticipated increase in market shares." Id. at 484. The Supreme Court rejected the Third Circuit's holding allowing recovery for any loss "causally linked" to "the mere presence of the violator in the market." Id. at Brunswick, 429 U.S. at Id.; see also Note, supra note 89, at U.S. at Id. at Id. at See Chrysler v. Fedders Corp., 643 F.2d 1229, 1234 (6th Cir. 1981) (interpreting Brunswick as holding that pleading antitrust injury is an essential element of standing under section 4 of the Clayton Antitrust Act) Id. at U.S. at 488 (citing Brownshoe Co. v. United States, 370 U.S. 294, 320 (1962)) Id Id. at Id. It should, in short, be "the type of loss the claimed violation... would be likely to cause." Id. (citing Zenith Radio Corp. v. Hazeltine Research, 395 U.S. 100, 125 (1969)).

12 1198 CREIGHTON LAW REVIEW [Vol. 17 opinion what injuries the antitrust laws were intended to prevent." 4 In addition, it was difficult to determine which aspect of the defendant's conduct constituted an antitrust violation. 1 5 Consequently, Brunswick has been criticized as being difficult to apply to particular cases." l 6 Having addressed antitrust standing where the plaintiff was a competitor, the Supreme Court next addressed the issue of antitrust standing where the plaintiff was a consumer." 7 In Blue Shield of Virginia v. McCready, 118 Mrs. McCready was a health plan subscriber who had employed the services of a psychologist. 1 9 According to the plan, costs for the treatment by a psychologist were not reimbursed, whereas the costs of comparable treatment by a psychiatrist were reimbursed by the plan. 20 Mc- Cready brought the antitrust action alleging Blue Shield had engaged in a conspiracy in violation of section 1 of the Sherman Antitrust Act to exclude psychologists from receiving compensation under Blue Shield's plans. 121 In addition, Blue Shield's failure to reimburse was in furtherance of the conspiracy and caused her injury which would be recoverable under section 4 of the Clayton Act. 122 Although the Supreme Court prefaced its decision by stating that not every person tangentially affected by an antitrust violation is allowed standing, 123 the Court determined that McCready had standing to sue under section 4 of the Clayton Act. 124 The central issue in McCready was whether a consumer whose injury was allegedly too "fortuitous," "incidental" and "remote" could meet the Brunswick antitrust injury test and thereby have standing to bring an antitrust cause of action. 125 The Supreme Court's analysis examined the following issues: (1) the plain language application of the statute; 26 (2) the possibility of double recovery by the plaintiff; 127 (3) the remoteness of the par Note, supra note 89, at Id. See notes and accompanying text supra Id Blue Shield of Va. v. McCready, 457 U.S. 465 (1982). In this case the Court states in a footnote that the principle case and Brunswick involve different claims. Id. at 483 n.19. Throughout the McCready opinion the court compares and contrasts the two cases. Id. at Id. Id. at Id Id. at Id. at 470. Id. at Id. at Id. at Id. at Id. at 474.

13 19841 ANTITRUST 1199 ticular injury from the alleged violation; 128 (4) the expansion of standing to plaintiffs other than competitors; 129 and (5) the nature of the injury, specifically, was it one that Congress sought to redress in providing a private remedy for violations of the antitrust laws. 130 Again, despite its efforts at clarification, the Supreme Court failed to conclusively settle the area of antitrust standing. The dissent illustrated this failure through its criticism of the majority opinion. 131 Justice Rehnquist wrote the dissent, wherein he pointed out that, according to Brunswick, plaintiffs could recover only if they suffered injury from the anticompetitive effects of the alleged antitrust violation of a type that the laws were designed to prevent and which resulted from that which made the defendant's act unlawful. 132 For example, in the McCready case, McCready alleged no anticompetitive effect upon herself. 33 She did not state that the antitrust activity affected the availability of psychological services. 134 Under Brunswick, according to Justice Rehnquist, Mc- Cready would not be allowed to pursue her cause of action. 135 The Supreme Court's third and most recent attempt to clarify antitrust standing was the 1983 case of Associated General Contractors of California v. California State Council of Carpenters.136 This case involved a labor union's suit against a contractors' association. 137 The labor union alleged that the association was involved in a conspiracy to restrain the union's business. 38 The complaint stated that the association had coerced some of its members to enter into business relationships with non-union contractors and sub-contractors, thereby adversely affecting the labor union's business activities The Court ruled that the labor union did not have standing to bring an antitrust action against the contractors' association. 4 In making its decision, the Court listed six 128. Id. at Id Id. at See id. at (Rehnquist, J., dissenting). The Justice concluded that majority's rationale for granting McCready antitrust standing is not supported by any reasoned basis. Id. at 492. Moreover he felt that majority substituted labels for analysis. Id Id. at Id Id Id. at S. Ct. 897 (1983) Id. at Id. at Id. at Id. at 913.

14 1200 CREIGHTON LAW REVIEW [Vol. 17 factors to be used in determining whether the labor union had standing.' 41 These factors were whether there was: (1) a causal connection between the alleged antitrust violation and the harm to the plaintiff; (2) an improper motive present on the part of the defendant; (3) an injury of a type that Congress sought to redress with the antitrust laws; (4) directness between the injury and the market restraint; (5) a problem with speculative damages; and (6) a risk of duplicate recoveries or complex damage apportionment. 1 4 ANALYSIS Because McDonald v. Johnson & Johnson is the first case to have applied the Associated General test, it provides a preliminary indication of whether the Supreme Court was successful in its latest attempt to clarify antitrust standing.'" If McDonald turns out to be a representative application of Associated General, it seems clear the Supreme Court will have to speak again on the issue of antitrust standing. The first factor of the Associated General test considered by the Eighth Circuit was the causal connection between the alleged antitrust violation and the harm to the plaintiff. 145 The court agreed that a causal connection existed between the antitrust violation and the harm caused, but stated that "more must be shown."' 46 The Eighth Circuit cited Brunswick as the case wherein the Supreme Court required that "the injury... [be] directly related to the harm the antitrust laws were designed to protect."' 47 Although the court, perhaps correctly, found the first factor to have been satisfied, 148 it arguably misinterpreted Brunswick. Nowhere in the Brunswick opinion does it appear that the plaintiff must have suffered a direct injury before he would be al See note 7 supra S. Ct. at 908, F.2d 1370 (8th Cir. 1983) See 103 S. Ct. at The Associated General test is further illuminated by the Supreme Court's action in those cases in which certiorari had been requested. In the two cases in which antitrust standing had been granted, the Court vacated and remanded for further consideration in light of Associated General. H.S. Crocker Co. v. Ostrofe, 103 S. Ct. 1244, 1244 (1983); Mitsui & Co. Ltd. v. Industrial Inv. Dev. Corp., 103 S. Ct. 1244, 1245 (1983). Significantly, the Supreme Court denied certiorari in the third case, in which the Seventh Circuit affirmed a judgment for defendants on the basis of lack of standing. Bichan v. Chemetron Corp., 103 S. Ct. 1261, 1261 (1983) F.2d at Id Id. (citing Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477 (1977)) Id.

15 1984] ANTITRUST 1201 lowed standing to bring an antitrust suit. 149 Brunswick only required the injury to be causally linked to an illegal presence in the market and to be of a type that the antitrust laws were intended to prevent. 150 Thus, the Eighth Circuit appears to be misinterpreting the Brunswick decision. The second factor the Eighth Circuit addressed was the improper motive of the defendant. 151 Here, the court simply relied on the finding of the jury to sustain its assumption that this factor had been satisfied. 152 According to the facts, when Johnson & Johnson purchased StimTech Corporation, it took control of all of the assets of the company. 153 Hagfors, McDonald, and Jensen signed noncompetition agreements with Johnson & Johnson and agreed that Johnson & Johnson would have total rights to the idea behind the TENS product. 154 The jury appears to have concluded that these non-competition agreements evidenced an improper motive. 155 It can be argued that the Eighth Circuit accepted the jury's conclusion on this subject too readily. The lower court sustained the jury's finding of an improper motive on two bases. First, the court looked to the signed and enforced non-competition agreement as a restraint and suppression of meaningful competition by the plaintiffs. 156 Nevertheless, these agreements are not per se evidence of an improper motive by the party enforcing the agreement. 157 In many cases, these agreements may be necessary to protect the buyer's legitimate interests. 5 8 Second, the court noted that Johnson & Johnson took, along with the corporate stock, all the money of the two plaintiffs. 159 The fact that these people invested all their money is unfortunate, but arguably irrelevant 149. See Brunswick Corp. v. Pueblo Bowl-O-Mat, 429 U.S. 477 (1977). The Brunswick Court said that the plaintiff must show antitrust injury of the type the laws were designed to prevent and which flows from that which makes defendant's act unlawful. Id. at 489. See notes and accompanying text supra U.S. at F.2d at Id McDonald v. Johnson & Johnson, 537 F. Supp. 1282, 1325 (D. Minn. 1982) The district court is cited for these purposes because the appellate court omitted the facts in its discussion Id F.2d at F. Supp. at See generally United States v. Empire Gas Corp. 537 F.2d 296, 307 (8th Cir. 1976) (stating covenants not to compete generally are not violative of the antitrust laws) Syntex Laboratories Inc. v. Norwich Pharmacal Co., 315 F. Supp. 45, (S.D.N.Y. 1970) (stating a covenant not to compete, if reasonably limited in time and geography, is necessary to protect the buyers legitimate interests) Id.

16 1202 CREIGHTON LAW REVIEW [Vol. 17 under the Associated General standing test. 160 The third factor of the Associated General test is whether the injury suffered by the plaintiff was of a type that Congress sought to redress with the antitrust laws The Eighth Circuit did not address this factor individually. After it had purported to consider the five other factors, the court concluded that the bottom line was that the evidence clearly did not support a finding that plaintiff's injury was a type Congress sought to redress by the antitrust laws. 162 Thus, the Eighth Circuit converted the Supreme Court's six-factor test into a five-factor test. The Associated General's fourth factor involves consideration of the directness between the injury and the market restraint. 63 The Eighth Circuit emphasized this factor above all others in its opinion. 64 It began its analysis of this factor by evaluating the identity of the litigants. 165 The court recognized that the plaintiffs initially represented the majority shareholders of StimTech Corporation. 166 The court implied that these plaintiffs would have been granted standing to sue had they retained their interest in StimTech In other words, if they had retained their interest, they would have suffered direct injury. 168 Because these plaintiffs voluntarily withdrew from the market by selling their interest in StimTech Corporation, they were precluded from asserting a direct injury as a result of the market restraint and thus lost their ability to maintain an antitrust action against Johnson & Johnson. 169 Persuasive authority holds that plaintiffs lack standing to bring suit for antitrust violations when they have voluntarily withdrawn from the market' 7 0 The plaintiffs, however, argued that they did not voluntarily withdraw from the market. 171 They presented evidence trying to prove that they were deceived into selling their interests to John Id S. Ct. at F.2d at S. Ct. at See 722 F.2d at Id. at Id Id. The Court states, "[I]t is clear that by selling their stock plaintiff's voluntarily withdrew individually and in their representative capacity from further competition in the TENS market. Cases are legion that preclude plaintiff standing to bring suit for antitrust violations when they have voluntarily withdrawn from the market." Id See id Id. at Id. at F. Supp. at 1329.

17 19841 ANTITRUST 1203 son & Johnson The Eighth Circuit did not consider this evidence on the issue of antitrust standing, 173 but did use it to decide the issues of fraud and breach of contract. 174 Upon subsequent rehearings, the Eighth Circuit affirmed the breach of contract claim, but vacated and remanded the fraud action. 175 Nevertheless, there is a strong indication that the withdrawal by the plaintiffs was not entirely voluntary. The court elsewhere in its opinion acknowledged that the plaintiffs originally sold StimTech Corporation to Johnson & Johnson with the belief that TENS would be promoted in the marketplace. 176 The plaintiffs stated, and the court agreed, that Johnson & Johnson made material promises to be performed by Johnson & Johnson in the future. 77 It was established that the plaintiffs relied on these promises in signing the contract to sell their interests, and that Johnson & Johnson failed to carry out these promises. 7 8 The Eighth Circuit did find that there had been a F.2d at Under Minnesota law when promises are made with intent to defraud and without the intent to perform, this constitutes actionable fraud. Id. (citing Vandeputte v. Soderholm, 298 Minn. 505, -, 216 N.W.2d 144, 147 (1974); Wojtkowski v. Peterson, 234 Minn. 63, -, 47 N.W.2d 455, 458 (1951)) See 722 F.2d at Id. at Id. at F.2d at 1372 (citing a provision of agreement between plaintiffs and Johnson & Johnson) Id. at 1372, F. Supp. at Mr. Whitlock, an employee of Johnson & Johnson testified that he would utilize Johnson & Johnson to put StimTech Corp. "tops in the pacer business." Id. The court further established that once Johnson & Johnson completed its acquisition of StimTech the company: (1) delayed the introduction of new products by StimTech, in particular a more comfortable and more effective electrode for StimTech's TENS devices; (2) refused to provide StimTech with up front money with which to fund research and development, requiring instead that such funding be done out of gross profits even though plaintiffs made it clear that StimTech did not have such money and that was why they joined Johnson & Johnson; (3) imposed transfer pricing upon StimTech products sold to other Johnson & Johnson companies and thereby further weakened StimTech's cash position; (4) transferred all substantial pacemaker development work to another Johnson & Johnson subsidiary, thereby depriving StimTech of the necessary technical expertise to stay current in the industry and eventually leading to a drastic decline in what was once StimTech's "bread and butter" business, which, in turn, caused StimTech to be short of funds for development of the TENS business; (5) refused to permit the plaintiffs to develop a smaller and more commercially attractive TENS device in late 1974; (6) forbade the display of StimTech's products at its annual meetings; (7) refused to let StimTech use the Johnson & Johnson name; (8) imposed a hiring freeze on StimTech; (9) vetoed any significant expansion of StimTech's nurse liasion program under which registered nurses assisted its employees in sales, patient instruction and research with regard to TENS devices; (10) demoted and fired the plaintiffs; (11) turned down at least $200, of orders from Pain Control Centers International; (12) failed to have its other companies provide assistance to StimTech;

18 1204 CREIGHTON LAW REVIEW [Vol. 17 breach of contract based on this evidence, but failed to apply the same evidence to the issue of antitrust standing. 179 Had this evidence been used on the issue of antitrust standing, it is arguable that the court would have found that the withdrawal from the market was not voluntary and, therefore, that the plaintiffs still have the status of competitors. 8 0 Once their status as competitors was established, the issue of standing to bring suit would have leaned toward that of allowing the plaintiffs to bring the action. 18 ' The fifth factor considered in Associated General concerned the speculative nature of the damages. 182 The trial court awarded treble damages of $170.4 million based on loss of anticipated profits. 183 The Eighth Circuit held that these damages were speculative, arguably without fully considering the issue. 84 To establish these damages at the trial court level, the plain- (13) through its subsidiary McNeil Laboratories, watered down StimTech's advertising campaign to promote TENS devices as an alternative to drugs; (14) failed to develop for StimTech a conductive gel which would have made the TENS device more marketable; (15) refused to resell StimTech to the plaintiffs; (16) failed to promote TENS devices with the same vigor and resources used to promote its pain and control drugs; (17) subjected the plaintiffs to five year non-compete agreements; (18) failed to make use of Dr. Long as a consultant, while preventing him from performing consulting services to anyone else in the TENS industry; (19) maintained a high turnover rate of StimTech personnel, including going through three separate sales forces while under Johnson & Johnson ownership; (20) continually refused to pursue suggestions by the plaintiffs of the development of TENS; (21) instituted a "concentrated effort program" whereby StimTech was to concentrate its sales efforts in those geographic territories where it was already successfully selling its products and forego expanding its domestic sales efforts; (22) prohibiting the planning and construction of small foreign factories and assembly plants, similar to those used by such competitors as Medtronic, for the purpose of producing StimTech products; (23) transferred Mr. Clark to StimTech as Executive Vice President of Marketing where his salary was 1 times that of Mr. Hagfors, the President, and his authority included direct communication with Johnson & Johnson management; (24) decided not to expand either Midwest Pain or the concept of pain control clinics as centers where doctors could refer patients for instruction in the use of TENS devices; (25) provided no assistance in plaintiff's efforts to market TENS devices for use in sports medicine, veterinary medicine and dental science even though Johnson & Johnson had subsidiaries in all three areas; and (26) prohibited StimTech from entering international markets even though Japan looked very promising and the United Kingdom and Europe which were serviced by Devices had only a single salesman and limited financial resources to market StimTech's TENS devices. Id. at F.2d at See notes and accompanying text supra See Swider, supra note 76, at 539. See also Cromar Co. v. Nuclear Materials & Equip. Corp., 395 F. Supp. 198 (M.D. Pa. 1975) S. Ct. at F. Supp. at F.2d at 1378.