Feds sue Patterson Cos., two others, accuses them of denying discounts to small dental offices

The Federal Trade Commission says the nation's three largest dental-product distributors, including Minnesota's Patterson Cos., have been illegally restraining competition and distorting prices in the $10 billion market for products used by dentists.

Gloves and cement, dental chairs and lights — all are offered with bulk discounts through large national dental-supply distributors, including Patterson of Mendota Heights, New York-based Henry Schein Inc., and Pennsylvania-based Benco Dental Supply Co.

This week the FTC announced it was suing the distributors in federal administrative court for allegedly conspiring to restrain trade. The FTC alleges the distributors conspired to refuse to provide discounts to buying groups that negotiate bulk discounts on behalf of small and solo dental practices.

"The alleged agreement among Benco, Henry Schein and Patterson deprived independent dentists of the benefits of participating in buying groups," the FTC said in a news release.

Patterson, Henry Schein, and Benco control about 85 percent of the market for their supplies, the FTC says. Patterson is thought to control about a third of the market.

All three dental supply companies defended their practices in statements on Tuesday. Patterson called the FTC's allegations "meritless" and said it will defend itself vigorously against the claims. Henry Schein noted that it does business with dozens of different buying groups.

The FTC allegations come as the companies battle similar claims in a spate of private antitrust lawsuits filed since 2012. Securities filings for Patterson and Schein say the companies have been hit with numerous lawsuits, including a series of lawsuits pending in federal court in New York, that allege a pattern of fixing prices, allocating customers and boycotting entities for anticompetitive reasons.

Patterson is one of the largest publicly traded companies in Minnesota, with about 7,500 full-time employees and net income of $170 million on $5.6 billion of revenue in the fiscal year that ended in April 2017. Although Patterson was founded as a dental supply company, it has moved aggressively into the animal-health field in recent years. Dental supplies now make up 43 percent of total sales.

The FTC said Tuesday it will not make its lawsuit public until all parties have reviewed it to redact confidential business information, which is likely to take a few days.

The FTC news release summarizing the suit alleges that Patterson participated in a conspiracy to unreasonably restrain competition and deprive independent dentists of competitive pricing, violating Section 5 of the federal FTC Act.

Specifically, the FTC alleges Benco and Henry Schein formed an agreement to refuse to provide bulk discounts or compete for the business of purchasing groups working on behalf of smaller dental practices. The news release says the legal complaint details communications between Benco and Henry Schein executives attempting to ensure compliance with the illicit agreement.

The complaint accuses Patterson of joining this anticompetitive arrangement at some point, the FTC news release says. The complaint also alleges that Benco repeatedly invited a fourth supplier to take part.

The U.S. dental sector continues to be dominated by smaller and solo practices, but a 2015 research report from the American Dental Association found that large practices are rising quickly. Total revenue at practices with more than 500 employees more than doubled between 2002 and 2012, while revenue at practices with less than 10 employees grew by just 8 percent.

Kevin Ellich, a senior research analyst with Minneapolis-based Craig-Hallum Capital Group, said national distribution companies like Patterson play an important role in U.S. dentistry.

"There's a reason why these big distribution companies exist. It's because dentists offices don't have big supply rooms and they're not keeping a lot of product on hand," he said. "And for the digital equipment side, Patterson provides a lot of technical support. They've invested a lot in a call center and they have service technicians who go out and work with the dentists and office staff."

Patterson said in a statement Tuesday that it maintains the "highest levels of integrity and ethical standards" and has a long history of working with all types of customers.

"The complaint seeks injunctive relief and does not seek monetary damages," the statement said.

"Based on the FTC's original definition of buying groups, the company does business with more than 100 buying groups. Even under a narrower definition recently advanced by the FTC, the Company has done business, and continues to do business, with the very groups it is now accused of boycotting," the Henry Schein statement says.

Benco said in a statement that the family-owned company expects to resolve the issue with the FTC in a way "that clarifies the integrity of our people and processes."