United States v. Boston Scientific Corp.

Citations: 253 F. Supp. 2d 85; 2003 U.S. Dist. LEXIS 4828; 2003 WL 1656467Docket: CIV.A.00-12247-PBS

Court: District Court, D. Massachusetts; March 28, 2003; Federal District Court

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The United States government is pursuing a civil penalty of $35 million against Boston Scientific Corporation (BSC) for violating a Federal Trade Commission (FTC) consent order intended to maintain competition in the intravascular ultrasound (IVUS) catheter market. The FTC claims BSC's actions reduced competition by driving Hewlett-Packard (HP) out of the market, decreasing IVUS competitors from three to two, and hampering innovation in catheter technology. The government argues that a significant sanction is necessary to uphold FTC authority. In contrast, BSC contends that any violations were minor, that it did not benefit from them, that competition and innovation thrived, and that HP would have exited the market regardless. After a trial regarding penalties, the court ordered BSC to pay $7,040,000.

The document also provides background on coronary artery disease, its treatment, and the advantages of IVUS over traditional angiography. Coronary artery disease, characterized by plaque buildup in arteries, is a leading cause of death in the U.S. Angiography, while useful for assessing blood flow, has limitations in detecting plaque and calcium buildup. IVUS, by providing a three-dimensional view, offers more precise measurements of arterial narrowing and plaque characteristics. Studies indicate that a significant percentage of plaque may go undetected by angiography, underscoring the importance of utilizing both diagnostic methods for effective treatment management, including angioplasty and stenting.

Angioplasty is a procedure that involves using a balloon to dilate and open arteries, often accompanied by the placement of a stent, a metal scaffold that keeps the artery open. Intravascular ultrasound (IVUS) plays a crucial role in ensuring proper stent placement and can assist in plaque removal. IVUS is also vital for both diagnosing existing artery diseases and conducting research aimed at preventing such diseases, with pharmaceutical companies utilizing IVUS measurements to assess the effectiveness of new plaque-preventing drugs in FDA clinical trials.

IVUS technology consists of a console connected to a patient interface unit and an IVUS catheter, which is a flexible tube with a transducer that emits ultrasound waves to create images of the artery. Two types of IVUS catheters exist: "phased array" catheters, which use multiple stationary transducers, and "mechanical" catheters, which contain a single spinning transducer. The IVUS catheter is guided through the coronary arteries using a guidewire and captures images during the procedure, often repeated post-angioplasty or stent placement to assess treatment success.

The catheters vary in diameter, measured in French (1 French = approximately 1/3 mm), with smaller diameters allowing easier maneuverability, while larger diameters may provide better imaging. Ultrasound frequency, measured in megahertz, correlates with image quality, with higher frequencies yielding clearer images. The market for IVUS catheters is predominantly made up of coronary catheters, used primarily by interventional cardiologists, while peripheral catheters are used by vascular surgeons and interventional radiologists.

Before the 1995 merger of BSC and CVIS, HP was a leading manufacturer of IVUS consoles compatible with BSC catheters, while CVIS produced both catheters and consoles. BSC's catheters were exclusively compatible with HP consoles, and a joint marketing agreement existed between BSC and HP from 1992 to 1995, wherein BSC marketed HP consoles while selling its own catheters.

Before the merger, the BSC-HP system and CVIS system were major competitors in the IVUS market, with each controlling approximately half of the customer base. About 50% of U.S. IVUS hospitals used HP consoles, while 40% utilized CVIS consoles. In terms of catheter sales, BSC accounted for 40%, and CVIS for 50%. Endosonics held smaller market shares with its phased-array products. BSC's Sonocath catheter, when paired with the HP SNOS 100 console, produced industry-leading image quality but suffered from poor ergonomics. In contrast, CVIS's Ultracross catheter offered better handling. Notably, CVIS was the sole provider of an automatic pullback device (APD), crucial for precise measurements in arterial examinations, and held the relevant patent. Prominent IVUS physicians, including Dr. Nissen, Dr. Mintz, and Dr. Fitzgerald, endorsed the APD and were influential in the field, impacting the technology's adoption and usage. In 1994, BSC announced plans to acquire CVIS and SCIMED, the latter working on IVUS catheter development. The acquisition aimed to leverage CVIS's intellectual property amid ongoing patent disputes and would result in BSC controlling 90% of the IVUS catheter market, effectively eliminating competition. The FTC subsequently filed a lawsuit to block the merger, arguing it would significantly reduce competition and create a monopoly in the IVUS catheter market, as BSC would dominate both the manufacturing of catheters and supply to HP, its only console competitor.

BSC strategically replaced its New York counsel with Michael Sohn from Arnold and Porter, a former FTC General Counsel, which facilitated the FTC's approval of BSC's acquisitions on the condition that BSC share its technology to enable HP's entry into the catheter market. To comply, BSC initiated negotiations for a technology transfer agreement with HP in late 1994, culminating in a signed agreement on February 21, 1995. Key negotiators included Nancy Kerins for HP, alongside Cynthia Danaher, Mark Low, and Al Kyle, while Joseph Ciffolillo and Paul Sandman represented BSC.

During the negotiations, the importance of the APD technology emerged, driven by feedback from medical professionals that highlighted its critical role in market success. HP's negotiators insisted on including APD rights in the licensing agreement to ensure that their console customers could access the latest IVUS catheter technology, as IVUS consoles represented a significant long-term investment and needed to remain relevant amidst rapid innovation. The negotiations were completed quickly over President's Day weekend in February 1995. However, during the final review, a BSC lawyer mistakenly crossed out a reference to the Webler patent related to the APD technology in the agreement, indicating that the legal review process was flawed and that the attached list of intellectual property was overly broad, including patents irrelevant to the technology intended for transfer.

Top managers at BSC, including Paul Sandman, initially intended to exclude the Angioplasty Device (APD) from a licensing agreement with Hewlett-Packard (HP) due to the belief that exclusive rights were essential for competitive advantage. However, the February 21, 1995 Agreement with HP granted a license for certain BSC patents and technologies, referred to as 'Licensed Technology,' which encompassed all issued patents of BSC, SCIMED, and CVIS relevant to the development, manufacture, and sale of specified Licensed Products, including ultrasound imaging catheters and guidewires. The Webler patent for APD technology was explicitly included in the licensed intellectual property. The Agreement also required BSC to provide technical specifications for new catheters 180 days before their commercial launch and included a commitment for BSC to supply catheters to HP at below-market prices for several years.

Furthermore, the Federal Trade Commission (FTC) approved the merger of BSC, CVIS, and SCIMED on February 23, 1995, under a consent order aimed at fostering competition in the IVUS catheter market. The FTC required BSC to license its IVUS technology to HP, with the objective of enabling HP to compete alongside the newly merged entity in both the IVUS catheter and console markets. Despite these requirements, the FTC's order lacked strong enforcement mechanisms, as HP did not guarantee its continued market presence, leaving BSC with a dominant 90% market share in catheters. The FTC withdrew its legal action, mandating BSC to license the IVUS technology portfolio to HP or another approved entity within ten days of the order’s finalization.

The Order was criticized for its poor drafting, leading to inconsistencies with the HP/BSC agreement and failing to incorporate all provisions of the full agreement. BSC was obligated to perform three key actions: license its IVUS intellectual property to HP, provide technological information about new BSC catheters 180 days prior to market release (a requirement only in the Agreement), and sell IVUS catheters to HP for resale under an interim supply agreement. These requirements aimed to enable HP to develop its IVUS catheter and ensure the ongoing market viability of HP's console by maintaining a steady supply of catheters. 

Implementation of the Order faced challenges, including initial restrictions on HP accessing BSC's factory due to a confidentiality agreement, which caused a three-week delay. Despite this, the technology transfer proceeded smoothly, with John Rourke from HP and John Maroney from BSC establishing a working relationship. However, from 1996 to 1998, Peter Dorward from HP expressed frustration over ongoing disputes regarding the implementation of various agreements, particularly concerning the APD. 

Shortly after the agreement was signed, a conflict arose over the interpretation of "Licensed Products" and the inclusion of the Webler patent. BSC contended that the inclusion was a mistake and sought to narrow the rights granted in the Agreement. BSC avoided FTC involvement to prevent escalating the situation, while HP refrained from reporting issues to the FTC to maintain a cooperative relationship essential for technology transfer. During an April 11, 1995 meeting, HP's General Counsel noted that the FTC preferred a credible licensee and acknowledged discrepancies between the Consent Order and Licensing Agreement, asserting that the Licensing Agreement should prevail. He also expressed concerns about the flawed nature of the Agreement and the consequences of renegotiation, which could further complicate matters with the FTC.

BSC maintained that its Agreement with HP would override any inconsistencies with the Order. Throughout their discussions, BSC contested HP's entitlement to the APD, asserting that its inclusion in Exhibit A was erroneous. HP dismissed BSC's position as implausible and declined to negotiate further on the APD patent after BSC's firm stance against HP's rights. The clarification letter agreed upon by both parties on April 19, 1995, did not mention the APD, misleadingly suggesting no ongoing dispute, which BSC was aware of at the time. BSC’s compliance report to the FTC failed to disclose this dispute, leading the Court to find it materially misleading.

Competition escalated between BSC and HP in developing new catheters, with HP opting to create its unique "Scout" catheter and forming a distribution partnership with Guidant. Despite facing delays due to unrelated FDA issues, the Scout was set for market introduction in 1998. HP sought to develop an APD and initially partnered with INDEC, but BSC's patent counsel sent a warning letter to INDEC regarding potential infringement related to HP's involvement, causing INDEC to withdraw from the project. BSC trained its sales team to assert exclusive rights to the APD, while HP negotiated a separate agreement with Quinton Instrument Co. for APD development. This agreement included an indemnity clause for potential patent infringement lawsuits with BSC. Quinton's APD device received FDA approval on July 30, 1997, and was available on the market by early 1998, with no legal challenges to its manufacturing rights.

BSC initiated the development of the Discovery Catheter in 1995-1996, intending it to be a smaller, more manageable, and advanced imaging catheter with an increased ultrasound frequency from 30 to 50 MHz. The launch aimed for March 1998 to outpace the competing Scout catheter, with the first units shipped on June 3, 1998. However, the Discovery Catheter faced a temporary recall in September 1998 due to technical sheath issues, followed by a permanent recall in June 1999. Throughout 1997 and 1998, BSC marketed the Discovery catheter while informing customers, including Dr. Nissen, that HP could not sell the device. Although HP was later allowed to create an interface for the Discovery, initial confusion existed regarding its access under an interim supply agreement. BSC denied HP's request for the catheters, citing the "removable imaging core" as a reason, suggesting it was a pretext to limit HP's access despite the core's minimal medical purpose. BSC's internal notes indicated an intention to outmaneuver HP with the Discovery. Apart from the Discovery, BSC sold over 15,000 other catheters to HP, though they had minor disputes over contract compliance.

On July 9, 1997, the FTC interpreted its Order concerning BSC's Discovery catheter, asserting that HP had sufficient notice to interface with the removable core and was not competitively disadvantaged. BSC claimed HP could develop its own core catheter. The Order mandates BSC to supply IVUS catheters as requested by HP for three years, defining IVUS catheters broadly to include various types of ultrasound devices. Additionally, there remains a dispute regarding the automatic pullback device, with BSC arguing it should not be classified under the License Agreement's definitions, asserting it enhances the console rather than being part of the catheter itself.

The automatic pullback device patent is confirmed as part of the licenses to be granted. BSC claims it faced time constraints that hindered its ability to identify non-catheter patents for exclusion from the licensing agreement. However, BSC's proposed limitation appears contradictory to the language in the agreement, which states that the definition of the patent list is "no narrower" than the claims in Exhibit A. Accepting BSC's interpretation would undermine the objectives of a prior Order, as the lack of access to the automatic pullback device would restrict the functionality of compatible catheters on HP's console, contradicting the open interface goal outlined in Paragraph 7. BSC did not seek guidance from the FTC despite its disagreements. In March 1998, amid escalating disputes with the FTC and HP, BSC offered a settlement to license the Webler Patent and sell limited Discovery Catheters to HP until the Scout Catheter became available, which HP rejected.

In February 1998, the HP Scout catheter was highly praised at a trade show for its success, featuring an integrated automatic pullback device. However, a month later, Danaher initiated steps to exit the catheter market due to three main factors: slower-than-anticipated growth in the IVUS market, HP's declining ultrasound business, and the cumbersome implementation of the HP-BSC agreement, which consumed significant management time. Danaher felt frustrated by BSC's resistance in negotiations, which detracted from her focus on core business areas. Additionally, HP's ability to provide critical catheters was diminishing, leading to customer concerns and negatively impacting HP's market position. HP's market share in the console segment fell from approximately 40-45% in 1995-1996 to about 20% upon its exit. While BSC's expert disputed the extent of HP's loss in installed consoles, he acknowledged a decline in new console sales. According to sales figures, HP sold 70 consoles in 1995, decreasing to 19 in 1998. Danaher attributed this decline to uncertainty about catheter compatibility and the overall slower growth of the IVUS market, with industry leaders expressing doubts about HP's catheter supply capabilities. BSC asserted it would not allow the Scout catheter to interface with its new consoles, as it was not considered "native technology."

HP faced significant challenges with the Scout catheter, which could only operate on 25% of the existing console base. The situation was worsened by the trend of "bundling," where console customers received discounts for long-term contracts with catheter manufacturers, potentially making them hesitant to partner with HP due to uncertain catheter supply. Prior to HP's exit, bundling accounted for 20% of BSC's console sales and was increasing in importance. By October 1998, when the Scout catheter was completed and received FDA approval, it was well-received by leading cardiologists and had a distribution agreement with Guidant. However, HP withdrew from the catheter and console markets in November 1998, and the Scout catheter was never commercially released. 

In January 1999, HP initiated litigation against BSC, which was later settled. The FTC filed a complaint against BSC in October 2000, leading to a court ruling on September 28, 2001, that BSC violated the FTC's final order by not licensing the APD in good faith and failing to comply with the interim supply agreement for the Discovery catheter. The potential civil penalties for these violations, which could reach up to $11,000 per day post-November 19, 1996, are subject to six determining factors: harm to the public, benefit to the violator, good or bad faith of the violator, ability to pay, deterrence of future violations, and vindication of the FTC's authority. 

The court concluded that BSC's actions harmed the public by contributing to HP's withdrawal from the IVUS catheter market. BSC's claims about HP's lack of access to the Discovery catheter discouraged new customers from purchasing HP consoles, leading to a significant decline in HP's market share.

BSC's noncompliance with the Order's requirements regarding the Advanced Performance Device (APD) and the Discovery catheter, along with its obligations related to the Scout Catheter and new BSC consoles, significantly influenced HP's decision to exit the market. Although HP's departure was also affected by issues in its ultrasound division, the Court concluded that BSC's conduct was a tipping factor leading to HP's abandonment of the Scout catheter and the intravascular ultrasound (IVUS) console market. BSC contended that competition was not adversely affected by HP's exit, citing Endosonics' rapid market growth to 35% share. However, the subsequent lack of competition resulted in decreased catheter innovation, negatively impacting public health, as indicated by the FTC's expert, Dr. Schumann. BSC's investment in catheter research and development significantly declined post-acquisition of CVIS in 1995 and after HP's exit in 1998, with 1999 seeing no new catheters introduced and minimal new products in the following years. The cancellation of a $4.1 million project aimed at creating a new catheter further exemplified this reduced innovation. By 1999, doctors were still relying on the inferior Ultracross catheter, and notable advancements only resumed in 2000 with the introduction of the 3.5 French Atlanta catheter, which many deemed subpar compared to the Scout. BSC's console innovation stagnated until late 2001 with the launch of the Galaxy. The Court noted that while BSC cited reduced IVUS sales as a reason for decreased R&D spending, a critical factor was its acquisition of 90% market share, which diminished its drive for innovation. The outcome has adversely affected heart disease patients, leaving them with outdated technology compared to what was available in 1995. The FTC argued that BSC gained financially from HP's market exit, saving $12.9 million in R&D costs and generating $8-11 million in catheter sales that would have gone to HP, alongside significant international profits. BSC countered that it did not benefit from HP's departure, highlighting Endosonics' market presence and declining domestic sales.

BSC asserts that the relevant market for evaluating violations is the domestic market rather than the international one, and disputes the allocation of fixed costs in assessing economic benefits. The Court deemed this factor of limited significance due to unclear methodology in valuing domestic benefits. Regarding BSC's bad faith, the Court found that BSC believed its Agreement with HP superseded the Order and failed to consult the FTC out of concern for complicating matters. BSC had a duty to disclose any misunderstandings about the APD in its compliance report instead of merely hinting at issues. The report did not adequately detail substantial communications with HP regarding licensing, violating the Order's requirements. BSC's neglect to seek an FTC advisory opinion on its potentially non-compliant actions was indicative of bad faith. The Court noted that BSC should have sought clarification on the Order's scope rather than risk non-compliance. Specifically, BSC's refusal to provide the Discovery catheter to HP, under the false pretense that it was not covered by the Order, showed a lack of respect for the consent decree. Although BSC initially acted in good faith by transferring technology and providing access to most catheters, its conduct concerning the Discovery catheter and APD was not in good faith. BSC did not claim an inability to pay sanctions, with a market capitalization exceeding $10 billion as of May 10, 2002. The FTC seeks a maximum penalty of $35 million to uphold its authority and deter future violations, noting its history of resolving anticompetitive mergers through consent orders and injunctions.

BSC contends that the FTC predominantly resolves merger challenges through settlements and argues that the FTC's proposed sanctions are inconsistent with past fines. Historically, fines for consent decree violations have ranged from $3 million to $4 million, with most falling below $1 million, typically less than 5% of the maximum penalties. The Court recognizes a strong interest in upholding FTC authority and deterring violations of consent decrees. BSC, having acquired a 90% market share through a consent order, subsequently breached that order, evidently aiming to eliminate HP from the catheter market through actions contrary to the decree. The Court concludes that BSC violated both the letter and spirit of the consent order, which was intended to foster competition. The Court finds that allowing such breaches would undermine the FTC’s enforcement power, incentivizing parties to flout consent decrees post-injunction withdrawal.

Regarding the APD violation, the Court identifies a continuous breach from May 5, 1995, until at least March 1998, determining a fine of $5,000 per day until the FTC's ruling in July 1997. Following an FTC compliance ruling, the Court doubles the fine to $10,000 per day for subsequent violations, totaling $6,325,000. The fine for the Discovery violation is set at $11,000 daily from March 1, 1998, to May 5, 1998, totaling $715,000. Consequently, the Court orders Boston Scientific Corporation to pay a civil penalty of $7,040,000 to the FTC, emphasizing compliance reporting requirements as outlined in the FTC order.

Commencing on the Second Anniversary of the Effective Date, HP is prohibited from directly or indirectly contracting with the same third party for both the manufacture and sale of the Licensed Products. The Court's Memorandum and Order from August 8, 2002, delineated the timeline for sales and promotional activities regarding the Discovery Catheter in 1998. In 1996, BSC fulfilled a 180-day requirement for providing technical information on the Ultracross catheter, which became its best-selling product in 1997. Sales figures indicate BSC/CVIS sold 136 consoles in 1995, decreasing to 104 consoles in 1998, while Endosonics had fluctuating sales from 41 units in 1995 to 29 in 1998. Although BSC's actions did not violate the consent order, it was found to breach Section 7 of the Agreement, which mandates that each party provide open interfaces to the IVUS products of the other party following FDA approval or product introduction, lasting until the tenth anniversary of the Effective Date. Each party is required to cooperate on existing products and can upgrade their consoles while ensuring no disadvantages in interfacing occur. The provision also stipulates that all necessary technical specifications must be shared no later than 180 days before the commercial introduction of new devices. Danaher interpreted this provision to mean that while BSC could upgrade its consoles, it was obligated to interface HP's catheters with new consoles, a view supported by the Court. Although HP claims no direct evidence of lost console sales due to BSC's market statements, circumstantial evidence suggests customer concerns about the availability of APDs and the Discovery Catheter negatively impacted HP's competitive sales. An analysis from January 19, 1995, by Dr. Schumann, an FTC economic expert, warned that the merger would significantly harm competition in research and development, ultimately affecting consumers, specifically patients with cardiovascular disease.