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08/12/81 Federal Prescription v. American Pharmaceutical

August 12, 1981







Before MacKINNON and EDWARDS, Circuit Judges and DAVIES,* United States Senior District Judge for the District of Fargo, North Dakota.


Appeals from the United States District Court for the District of Columbia (D.C.Civil Action No. 77-1163).



Federal Prescription Service, Inc. ("Federal") and its three owners brought an antitrust damage suit against the American Pharmaceutical Association, Inc. ("American") and certain other defendants. The other defendants have since been either dismissed or dropped as defendants and then named as co-conspirators. The district court found that American, the sole remaining defendant, had committed several violations of section one of the Sherman Act, 15 U.S.C. ยง 1, including participation in an unlawful conspiracy with the Iowa Board of Pharmacy Examiners to harm Federal through a series of governmental actions aimed at Federal's mail order pharmacy practice in Iowa. The court found that these and other unlawful actions damaged Federal to the extent of $28,000 in past lost profits and $6000 in costs to check for forgeries attributable to American's conspiracy against mail order pharmacy. The district court declined, however, to award any damages for future loss of profits or for losses incurred by the individual owners of Federal. American appeals from the ruling of liability, Federal appeals from the dismissal of a co-defendant and from the limitations on damages. We reverse the award of damages, holding that the facts of this case reflect no actionable conspiracy under the antitrust laws. We thus do not reach the question whether the amount of damages was properly computed. I. BACKGROUND

The district court's opinion, 484 F. Supp. 1195 (D.D.C.1980), details the facts and we recite only those that are relevant to the disposition on appeal. The plaintiff, Federal, was organized in 1963 and operates out of the small town of Madrid, Iowa. It is licensed to dispense prescription drugs by the Iowa Board of Pharmacy Examiners, an agency of the State of Iowa. *fn1 Federal specializes in mail order pharmacy: it solicits the business of persons throughout the United States, who mail their prescriptions to Federal and receive their drugs by return mail.

The American Pharmaceutical Association is the national professional society of pharmacists in the United States. Its 60,000 members include practicing pharmacists, scientists, educators, and government-employed pharmacists. The court found that about one-third of all practicing pharmacists in the United States are members of American.

The district court found that to maintain a sufficient volume of prescriptions a mail order pharmacy must advertise discounted prices on at least some of its items. These prices naturally tend to divert customers from the more traditional local pharmacies, which fill prescriptions for a walk-in local clientele. The reliance of mail order pharmacy on advertising and its competitive threat to the more traditional pharmacies was well known to the sole defendant in this case.

A. American's Anti-Mail Order Pharmacy Campaign

Since 1960 American has campaigned against the distribution of prescription drugs by mail. The district court found that

(although) this opposition was usually couched in terms of a concern that mail order pharmacies undermined the pharmacist-patient-physician relationship and thus threatened patient safety or public health, in fact (American) throughout was motivated primarily by its concerns for the economic well-being of its members. The validity of the health concerns, repeatedly expressed, was never satisfactorily supported at trial.

484 F. Supp. at 1200. In general terms, American sought to persuade governmental agencies, other trade groups, and national magazines that mail order dispensing of prescription drugs is harmful to the public health. This message was presented in correspondence, at meetings, in speeches, and in American's Journal and newsletter, which were distributed to its members and to others in the pharmacy profession.

One early success came in 1960, when American, acting jointly with the National Association of Retail Druggists, persuaded the American Medical Association to adopt a resolution calling upon physicians to discourage use of mail order prescription services, except in rural areas. American's message was also partially responsible, the district court found, for the passage of 16 state laws forbidding mail order practice, and 30-35 state laws or regulations that hampered mail order pharmacy by prohibiting the advertising of prescription drugs. *fn2 In addition, in 1962, American reported that 16 state boards of pharmacy had responded to its message by issuing cease-and-desist orders against mail order houses.

Playing an important role in American's anti-mail order pharmacy campaign was its Code of Ethics. Either expressly or by the interpretation of American's Judicial Board, the Code aimed to limit participation in mail order pharmacy by establishing two prohibitions: no member pharmacist could participate in any service eliminating the pharmacist-patient-prescriber relationship; and no member pharmacist could "solicit professional practice by means of advertising." The effect of these prohibitions was strengthened by a further prohibition that no member pharmacist could continue his employment in a pharmacy that did not comply with the other requirements of the Code. Id. 1201. *fn3 In 1975, faced with a Justice Department antitrust suit, American dropped its advertising ban in favor of a new provision stating that pharmacists "should strive to provide information to patients regarding professional services truthfully, accurately, and fully and should avoid misleading patients regarding the nature, cost, or value of the pharmacist's professional services." Id. The court found that the other bans, however, remained in effect.

Also instrumental in American's anti-mail order pharmacy campaign was its chief executive officer, William S. Apple. The district court found that Apple was a co-conspirator of American, on the basis that he had

traveled throughout the country to make speeches on behalf of (American,) and wrote numerous articles in which he constantly attacked mail order pharmacies and emphasized the need to uphold the Code of Ethics and rulings of the Judicial Board. Mail order prescription was pictured as a "scheme" that threatened to destroy community pharmacy service. Pharmacists were told they were fighting for economic survival and the opportunity to earn a living. Price-cutting was said to be a gimmick for conning the public. Advertising was described as professionally improper. Pharmacists were urged to alert physicians and regulatory officials as well as other pharmacists to the danger perceived. In this fashion, with the aid of (American's) publications, Apple largely succeeded in uniting the profession to a concerted opposition to mail order pharmacies.

Id. at 1204.

The district court found that Apple and American had enlisted several other organizations in a conspiracy to inhibit mail order competition for the benefit of American's pharmacist members. Among those labelled as co-conspirators was the National Association of Boards of Pharmacy. The membership of this group-a private organization-includes the members of the licensing boards which in each state regulate pharmaceutical practice. The National Association participated in the conspiracy, the court found, by adopting American resolutions that opposed mail order drug distribution and drug advertising and by sending copies of these to all of its members. The National Association also cooperated in setting up the 1960 conference "to determine what steps should be taken to oppose mail order drug distribution." Id. at 1203. At that meeting "all state boards (of pharmacy) were asked to use every legal method to oppose the establishment of mail order houses." Id.

The court found that the American College of Apothecaries was also a co-conspirator. Made up of pharmacy owners, this group was a national organization affiliated with American that "joined with American in opposing the distribution of prescription drugs by mail." 484 F. Supp. at 1203.

Also found to be a co-conspirator was each state pharmaceutical association that had been recognized by American. Each of these associations has the right to select two voting delegates to American's House of Delegates, its policy-making body. The chief administrative officers of all state pharmaceutical associations form the National Conference of State Pharmaceutical Association Executives. In its annual conference in 1960, this group and American co-sponsored a conference that resolved to oppose mail order pharmacies. In addition, 17 state associations had entered into reciprocal membership agreements with American whereby applicants for state association membership had to abide by American's Code of Ethics.

One of these state organizations affiliated with American was the Iowa Pharmaceutical Association. One thousand of its 1600 members were also members of American, *fn4 and, like several of the other state organizations, it adopted American's Code of Ethics as its own. It circulated opinions of American's Judicial Board to all of its members and submitted questions to the Board for further interpretations of the Code of Ethics. It established a Grievance Committee to enforce compliance with the Code and called on the Missouri Board of Pharmacy to take action against a Missouri mail order concern that was filling prescriptions from Iowa residents. Finally, in 1964 or 1965 the Association advised a Nebraska pharmacist who had complained of Federal's mail order practice that he should arrange to have bogus and forged prescriptions sent to Federal to see if they would be filled. When they were, the Association relayed the information to the Iowa Board of Pharmacy Examiners with a request that it take enforcement action against Federal, which it did.

The Iowa Board may be the most important of the co-conspirators found in this case. Like pharmacy boards generally, the Iowa Board is a governmental body empowered to license and regulate the practice of pharmacy. The court noted that during the time relevant to this suit the Iowa Pharmaceutical Association had the power to compile the list of persons from which the Governor would select members of the Board, and those persons were in each case members of the Iowa Association.

The Board, the court found, undertook a series of actions against Federal, several of them unlawful. The Board first denied Federal's license application, granting it only after being told by the Iowa Attorney General that state law did not prevent issuance of a pharmacy license to a mail order house. Then, in 1964, the Board delayed the grant of Federal's change of address license. The Board also imposed burdensome inspection conditions on Federal, and cooperated with pharmaceutical associations in Iowa and Nebraska in preparing forged prescriptions to be sent to Federal. In 1965, on the basis of these filled prescriptions, the Board revoked Federal's pharmacy license, but Federal succeeded in Iowa state court in having the revocation annulled. In 1968 the Board attempted to seize Federal's inventory pursuant to a search warrant, but withdrew the warrant after Federal filed suit to prevent the search and before any seizure was effected. In 1970 the Board withheld Federal's annual relicensing. In 1973 the Board induced the state to seek to have Federal enjoined from filling out-of-state prescriptions, but the action was dismissed and the Iowa Supreme Court affirmed the dismissal. Finally, in 1966, the Board denied Federal's request to be certified as a suitable employer of pharmacist interns. The reason for the denial, the court found, was that Federal did not belong to the Iowa Pharmaceutical Association. *fn5

Federal also encountered legal difficulties in Massachusetts. In 1967 the Massachusetts Pharmaceutical Association secured a state court judgment that Federal's mail order activities in Massachusetts constituted the unlicensed practice of pharmacy in that state. Federal did not appear in the Massachusetts proceedings to present its defense. The Massachusetts Association then asked that American finance a suit to enforce the Massachusetts judgment in Iowa under the Full Faith and Credit Clause. American agreed, and paid for two actions, one federal and one state, neither of which resulted in an enforcement of the Massachusetts judgment. The National Association of Boards of Pharmacy approved of this action, noting in its minutes that its staff was to support the Iowa suits, even though, the court found, the National Association "knew at the time that the Massachusetts suit ... had been instituted primarily for the purpose of eliminating Federal's price competition with the Massachusetts Association members." 484 F. Supp. at 1206.

B. Decision of the District Court

The district court concluded that there had been a "group boycott" among American, Apple, the National Association of Boards of Pharmacy, the American College of Apothecaries, each state pharmaceutical association, and the Iowa Board of Pharmacy Examiners. The court found that the boycott was designed to impede the access of Federal and other mail order pharmacies to prescription drug customers, and amounted to a per se violation of section 1 of the Sherman Act. The court cited as elements of this unlawful group boycott the pre-1975 ban on ...

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