United States V Dentsply International, Inc

United States v Dentsply International, Inc.

277 F. Supp. 2d 387; 2003 U.S. Dist. LEXIS 14139; 2003-2 Trade Cas. (CCH) P74,120

August 8, 2003, Decided, August 8, 2003, Filed

(Case description prepared only for discussion at the UNCTAD Study Tour for Russian Member Universities of the Virtual Network on 26.03.2009. Description does not reflect the views of UNCTAD nor of any member country.)

Summary: Dentsply International (“Dentsply”) was accused of using anticompetitive tactics to keep its competitors from entering in the market of prefabricated artificial teeth sold in the United States. The US district court found Dentsply had not violated the antitrust law. The decision was appealed. The decision of the United States Court of Appeals for the Third Circuit will be revealed to you at the end of the session.

Participants in the artificial tooth sector fall into one of four categories: (1) manufacturers, (2) dealers, (3) dental laboratories (“labs”), and (4) dentists. Manufacturers historically distribute their teeth either directly to dental labs, through dental dealers, or through a combination of the two methods.

Manufacturers

Dentsply manufactures a range of professional dental products, among which are artificial teeth. Dentsply has been the dominant tooth manufacturer in the US for a long time. Its market share based on revenue is 75%-80% and has remained at this level for at least the past decade. Dentsply has introduced a number of improvements in artificial teeth. It also invests in new manufacturing equipment to produce high-quality, lower-priced teeth.

The two primary competitors to Dentsply in the artificial tooth market are Ivoclar (market share about 5% of final consumption) and Vita (3%). Other manufacturers also sell into the US market. Two manufacturers have recently entered, in 2000 and 2001 respectively, although their market shares are small.

Dental laboratories

Dental laboratories buy almost all of the artificial teeth sold in the US. They use the teeth to make or repair dentures. About 7000 labs fabricate dentures. Labs fabricate dentures according to the prescription of the dentist. A prescription may designate the shade (colour), the mould (shape), and the brand. (Besides shade and mould, artificial teeth can also vary in aesthetics and durability.) However, only 10% of dentists specify the brand of teeth to be used. Dental labs compete on the basis of price and service; fast service is valued by patients and dentists.

Dental dealers

Hundreds of dental dealers operate in the US, though there has been substantial consolidation in the past decade due to the development of lower cost, reliable overnight shipping. Dealers maintain large inventories of teeth due to the thousands of mould and shade combinations. In many cases, dealers maintain one tooth stock to service customers across the US. About 60% of orders for Dentsply teeth are “drop shipments.” With a “drop shipment,” the lab places an order with the dealer, the dealer places an order with Dentsply, and Dentsply ships directly from its inventory to the lab.

Dealers compete with one another to sell Dentsply teeth to dental laboratories. As a result, most dealers sell Dentsply teeth to labs at lower prices than Dentsply suggests. Dental labs purchase from multiple dealers. One reason they do so is to get lower prices.

Distribution by other manufacturers

Ivoclar distributes directly to labs.
Vita distributes through a unique dealer, Vident. Vita committed not to use any other dealer and Vident committed not to distribute any products that compete with Vita’s products.
One other manufacturer has a unique dealer; the others use both dealers and direct sales.

Dentsply’s relationship with dealers

In the early to mid 1990s, Dentsply sold teeth through 35 to 40 dealers. Today there are 23 authorised dealers. Dealers are free to stop buying from Dentsply without penalty.

In 1993, Dentsply introduced ten criteria required of dealers or potential dealers. Among these was Dealer Criterion Number 6: Dealers could not to begin to sell artificial teeth from other manufacturers. However, dealers who already carried competing brands when the criteria were announced could continue to carry them, an arrangement called "grandfathering."

“The express purpose of Dealer Criterion 6 was exclusionary—to block competitors from dealers selling [Dentsply’s] teeth by tying up those dealers.”

Dentsply did indeed terminate dealers who began to sell competing brands. In the recent past, no dealer has voluntarily walked away from Dentsply in order to begin to sell competing brands.

Profits and pricing

Dentsply’s tooth business has long been highly profitable. The average price-cost margin on its tooth products is about 80% and has been increasing over time. Since 1990 profits from Dentsply’s tooth division have increased by 32%.

According to the Senior Product Manager, Dentsply sets the prices in the marketplace and others compete under its price umbrella. The price of Dentsply’s high-quality teeth is about midway between the prices of Vita’s and Ivoclar’s high-quality teeth. Since 1997, Dentsply has annually increased prices by 1-1.5% above inflation. Dentsply has a reputation for aggressive price increases.

Experts for both parties testified that if Dealer Criterion 6 were abolished, then prices would fall.

Court’s findings

The court found that the US Department of Justice (DOJ) had failed to show that Dentsply could exclude competitors and control price. (“The inquiry does not end with proof of high market share. The DOJ must also prove Dentsply has the power to control prices or exclude competitors.”)

(1) The court noted that competitors could, and did, sell directly to the labs. It attributed the two main rivals’ failure to gain market share to their own business decisions, not to Dentsply’s exclusionary practices.

“As direct distribution to the dental laboratories is a viable and, in some ways, advantageous method of distribution, Dentsply’s exclusive arrangements with dealers do not foreclose a substantial share of the market or present an unreasonable restraint on competition.”
“Other dealers besides the 23 dealers used by Dentsply are available to other manufacturers as well.”
“The important point for purposes of this case is that a dealer could leave at any time if an attractive alternative became available.”

(2) The court found that the DOJ had provided no evidence that Dentsply had established supra-competitive pricing, noting that Dentsply’s margins were not shown to be higher than that of other tooth manufacturers and that high margins are to be expected in a market with significant pre-sale promotion.

“In sum, because direct distribution is viable, non-Dentsply dealers are available, and Dentsply dealers may be converted at any time, the DOJ has failed to prove that Dentsply’s actions have been or could be successful in preventing ‘new or potential competitors from gaining a foothold in the market[.]’”

Dentsply had offered a pro-competitive justification for Dealer Criterion 6 in the event that the DOJ had succeeded in establishing that Dentsply had violated the antitrust law. But the court noted that Dentsply’s pre-litigation rationale for Dealer Criterion 6 was expressly to exclude competitors from dealers. The court concluded that, “Dentsply cannot prove that Dealer Criterion 6 is pro-competitive.” It said, too, that, “Other evidence further belies the litigation inspired justification for Dealer Criterion 6,” and went on to enumerate them. These had been more fully evaluated earlier in the decision:

The court found that “focusing dealer services” was not a valid reason for the exclusive dealing because “dealers have every incentive on their own to make sure that their level of service for any given tooth brand does not suffer….If a customer is dissatisfied with the service it receives from one Dentsply dealer, it will simply buy [Dentsply] teeth from another dealer.”

The court also found that “free-riding” was not a valid reason since dealers did not engage in bait-and-switch, relevant promotions were brand-specific and thus were not subject to free-riding, and Dentsply would increase its spending on promotions and marketing absent Dealer Criterion 6.

Exercise:

Group 1: Choosing one or two of the "approximate" laws to apply, argue Dentsply's side of the case. Prepare to comment on Group 3's presentation.

Group 2: Choosing one or two of the "approximate" laws to apply, argue the government's side of the case. Prepare to comment on Group 3's presentation.

Group 3: Choosing one or two of the "approximate" laws to apply, analyze the facts of the case and reach a judgment, if possible. Provide your reasoning.

Some things to think about

Does the case meet the threshold related to market power under the law(s) you apply? What precise criterion or criteria did you use?
What is the correct criterion for exclusion in this case, e.g., is it whether competitors can “gain a foothold” or, instead, whether they can become competitively significant? That is, do consumers benefit from competitors gaining footholds?
Does the following constitute a reasonable free-riding defence for Dealer Criterion 6: If dentists do not specify the brand and non-Dentsply teeth are found to be faulty, then consumers will attribute the failure to artificial teeth generally and this will harm Dentsply’s reputation?

Approximate timing:

Group discussions 40 minutes

Reassembly.

One spokesperson from each group makes the presentations: Group 1, 2, 3 of 8 minutes each.

General discussion, including comments on "judgments:" approx. 20 minutes.