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UNITED STATES DISTRICT COURT
DISTRICT OF RHODE ISLAND
)
UNITED STATES OF AMERICA, )
)
Plaintiff, ) Civil Action No. 96-113B
)
vs. )
)
DELTA DENTAL OF RHODE ISLAND, )
)
Defendant. )
___________________________________)
MEMORANDUM OF THE UNITED STATES IN OPPOSITION TO
DEFENDANT'S OBJECTIONS TO REPORTS AND RECOMMENDATION
Steven Kramer
Mark J. Botti
William E. Berlin
Michael S. Spector
Attorneys
Antitrust Division
U.S. Department of Justice
Antitrust Division
325 7th Street, N.W.
Washington, D.C. 20530
(202) 307-0997
Sheldon Whitehouse
United States Attorney
Anthony DiGioia
Assistant United States Attorney
District of Rhode Island
10 Dorrance Street
Providence, RI 02903
(401) 528-5477
August 13, 1996.
Page I
TABLE OF CONTENTS
PAGE
I. PROCEDURAL HISTORY AND STATUS...............................2
II. THE ALLEGATIONS OF THE COMPLAINT MUST
BE ACCECPTED AS TRUE.........................................5
III. STATEMENT OF THE CLAIM......................................5
IV. ARGUMENT.....................................................12
A. The Complaint Adequately Alleges That Delta's MFN
Clause Unreasonably Restrains Trade In Violation of
Section 1 ..............................................13
1. Delta's Agreements with Dentists, Which
Incorporate the MFN Clause, Constitute the
Requisite Concerted Action and Have Caused
the Anticompetitive Effects Alleged in the
Complaint..........................................13
2. The Complaint Easily Establishes Unreasonable
Anticompetitive Effects that Violate
Section 1.........................................17
B. The Opinions of the First Circuit in Kartell
and of this Court and the First Circuit in
Ocean State Pose No Legal Bar to this Challenge to
Delta's MFN Clause.....................................20
1. Delta Misreads Kartell and Ocean State . ...21
a. Kartell is Inapposite to this Case and
Undermines Delta's Argument..............22
b. Ocean State Does Not Require Dismissal of
this Case....................................25
(1) Ocean State Resolved a Narrow Issue. ...26
(2) Construed in Context, Ocean State
Resolved the Same Narrow Issue
Resolved in Kartell ..............29
(3) Delta's Interpretation of Ocean State
Conflicts with Long-standing
Section 1 Doctrine......................30
Page ii
2. Net Anticompetitive Effects Were Not Established
by the Plaintiffs in Ocean State But Are Clearly
Alleged Here, Sharply Distinguishing the Two
Cases ............................................32
3. The Other MFN Cases Do Not Support Delta's
Claim. ...........................................34
C. The Court Should Proceed to the Merits of the Case....35
V. CONCLUSION...................................................37
Page iii
TABLE OF CASES
PAGE
Addyston Pipe & Steel Co. v. United States,
175 U.S. 211 (1899)..............................................13,14
Air Courier Conference of America v. American Postal
Workers Union, 498 U.S. 517 (1991).......................26
Aspen Skiing Co. v. Aspen Highlands Skiing Co.,
472 U.S. 585 (1985)..........................................31
Blue Cross and Blue Shield of Michigan v. Michigan
Association of Psychotherapy Clinics,
1980-2 Trade Cas. ¶ 63,351 (E.D. Mich. 1980).....................14,34
Blue Cross and Blue Shield of Ohio v. Bingaman,
Case No. 1:94 CV2297 (N.D. Ohio 1966)............................34
Blue Cross & Blue Shield United of Wisconsin v.
Marshfield Clinic, 65 F.3d 1406 (7th Cir. 1995)..................34
Business Electronics Corp. v. Sharp Electronics Corp.,
485 U.S. 717 (1988)..............................................12,17
Chicago Bd. of Trade v. United States,
246 U.S. 231 (1918)..............................................31
Cintech Industrial Coatings, Inc. v. Bennett Industries,
Inc.,85 F.3d 1198 (6th Cir. 1996) ......................17
Connell Construction Company, Inc. v. Plumbers and
Steamfitters Local Union No. 100, 421 U.S. 616 (1975) ...........17
Continental T.V., Inc. v. GTE Sylvania, Inc.,
433 U.S. 36 (1977) ..............................................31
Eastman Kodak Co. v. Image Tech. Serv., Inc.,
504 U.S. 451 (1992) passim
FTC v. Indiana Federation of Dentists,
476 U.S. 447 (1986)..............................................19
Page iv
Garita Hotel Limited Partnership, Etc. v. Ponce Federal
Bank, F.S.B., 958 F.2d 15, 17 (1st Cir. 1992) ............5
In Re Chicken Antitrust Litigation, 560 F. Supp. 943
(N.D. Ga. 1979) .................................................17
Kartell v. Blue Shield of Massachusetts, 749 F.2d 922
(1st Cir. 1984), cert. denied, 471 U.S. 1029 (1985) . . .passim
Kitsap Physicians Service v. Washington Dental Service,
671 F.Supp. 1267 (W.D. Wash. 1987)...............................35
Maple Flooring Ass'n v. United States,
268 U.S. 563 (1925) .............................................34
Mich. Assn. of Psychotherapy Clinics v. Blue Cross
and Blue Shield of Mich.
118 Mich. App. 505, 325 N.W.2d 471 (1982) .......................14
Monahan's Marine, Inc. v. Boston Whaler, Inc.,
866 F.2d 525 (1st Cir. 1989).....................................24
Monsanto Co. v. Spray-Rite Serv. Corp.,
465 U.S. 752 (1984) .................................................15
National Soc'y of Professional Engineers v. United States,
435 U.S. 679 (1978)..................................................12,17
NCAA v. Bd. of Regents of Univ. of Okla.,
468 U.S. 85 (1984) ..................................................18,19
Ocean State Physicians Health Plan v. Blue Cross & Blue
Shield of Rhode Island, 692 F. Supp. 52 (D.R.I. 1988),
aff'd, 883 F. 2d 110 (1st Cir. 1989), cert. denied,
494 U.S. 1027 (1990) passim
Reiter v. Sonatone Corp., 442 U.S. 330 (1979), ...............35
Reazin v. Blue Cross and Blue Shield of Kansas,
899 F.2d 951 (10th Cir.), cert. denied,
497 U.S. 1027 (1990) ................................................17,34
Scully Signal Co. v. Joyal, 881 F. Supp. 727 (D.R.I.
1995)................................................................4
Standard Oil Co. v. United States, 221 U.S. 1
(1911).................................................................14
Times-Picayune Publishing Co. v. United States,
345 U.S. 594 (1953)..............................................15,17
United Mine Workers v. Pennington, 381 U.S. 657 (1965).......17
Page v
U.S. Healthcare v. Healthsource, Inc.,
986 F.2d 589 (1st Cir. 1993) ....................................14,31
United States v. E.I. duPont de Nemours & Co.,
351 U.S. 377 (1956)..............................................34,36
United States v. Container Corp. of Am.,
393 U.S. 33 (1969) ..............................................15,17
United States v. Paramount Pictures, Inc.,
334 U.S. 131 (1948)..............................................36
Williamette Dental Group, P.C. v. Oregon Dental
Service Corporation, 882 P.2d 637 (Or. App. 1994)................34
Page 1
UNITED STATES DISTRICT COURT
DISTRICT OF RHODE ISLAND
)
UNITED STATES OF AMERICA, )
)
Plaintiff, ) Civil Action No. 96-113P
)
vs. )
)
DELTA DENTAL OF RHODE ISLAND, )
)
Defendant. )
___________________________________)
MEMORANDUM OF THE UNITED STATES IN OPPOSITION TO
DEFENDANT'S OBJECTIONS TO REPORT AND RECOMMENDATION
The United States brought this injunctive action to
challenge the continuing anticompetitive effects resulting from
a Most Favored Nation ("MFN") clause incorporated in contracts
between defendant Delta Dental of Rhode Island ("Delta") and
about 90% of all Rhode Island dentists. Under the MFN clause,
contracting dentists agree that Delta may limit its payments to
them to the lowest price that they charge to any other purchaser.
As the Complaint alleges, Delta's MFN clause has deterred Rhode
Island dentists from discounting their fees, below levels paid by
Delta, to rival dental plans and other purchasers of dental
services. The MFN clause has consequently excluded or retarded
the expansion of low-cost dental plans, substantially increased
the costs of dental insurance and dental services, and thus
reduced the range of meaningful choices available to consumers,
all in alleged violation of Section 1 of the Sherman Act. This
Page 2.
Court's determination of Delta's objections to United States
Magistrate Judge Robert W. Lovegreen's Report and Recommendation
will resolve whether--in Delta's ironic phrasing-- a "unique,"1
rule of the First Circuit requires dismissal of the Complaint,
which otherwise indisputably states a straightforward claim under
Section 1 case law. Based on a thorough analysis of the issues
raised by Delta's Rule 12(b)(6) motion, the Magistrate Judge's
Report determined that First Circuit precedent does not require
dismissal and that the Complaint states a Section 1 claim. The
Report consequently recommended "that defendant's motion to
dismiss be denied." Magistrate Judge's Report and Recommendation
("MJR&R") at 28. The United States urges this Court to accept
the Magistrate Judge's Report and Recommendation and to approve
his recommendation to deny Delta's motion.
I. PROCEDURAL HISTORY AND STATUS
The United States filed the Complaint on February 29, 1996.
Delta responded on March 21, 1996, pursuant to Fed.R.Civ.P.
12(b)(6) with its motion to dismiss for failure to state a claim.
Delta's motion and supporting memorandum raised two grounds for
dismissal, emphasizing an argument that MFN clauses are legal
under the Sherman Act regardless of their anticompetitive effects
unless they result in predatory pricing. Delta asserts that its
argument is supported by the First Circuit's decision in Page 3
v. Blue Shield of Massachusetts2, and the decisions of this Court
and the First Circuit in Ocean State Physicians Health Plan, Inc.
v. Blue Cross & Blue Shield of Rhode Island.3
Delta's motion also claimed that the Complaint fails to allege
concerted action. Delta's motion and supporting brief notably
did not argue that the Complaint fails to allege sufficient
anticompetitive effects to state a claim under otherwise
governing Section 1 case law.
By an order dated April 15, 1996, then presiding Senior U.S.
District Judge Boyle referred Delta's motion to a Magistrate
Judge for a Report and Recommendation. Magistrate Judge
Lovegreen heard oral arguments at a hearing on June 5, 1996.
The Magistrate Judge issued his Report and Recommendation on
July 12, 1996. The Report initially rejects Delta's argument
that the Complaint fails to allege an agreement, concluding that
"the requisite concerted action has clearly been alleged." MJR&R
at 10. The Report proceeds to analyze Delta's chief contention
that Kartell and Ocean State stand for the proposition that MFN
clauses, absent pricing that is predatory or below incremental
cost, are competitive as a matter of law. Based on a careful
analysis of those cases, the Report rejects Delta's argument,
concluding that,
Despite Kartell and Ocean State's broad
language, these decisions properly construed, fail
to establish a per se validation of MFN clauses in
Page 4.
all cases where pricing is not predatory or below
incremental cost. Such a blanket condonation of
MFN clauses would ignore the context Kartell and
Ocean State were decided in, run counter to the Sherman
Act's preference for fact-specific inquiries,
implausibly reject the premise that MFN clauses produce
substantial anticompetitive effects in particular
circumstances and contradict the Sherman Act's
animating concern for low consumer prices.
MJR&R at 20. Determining that the Complaint's allegations are
sufficient to state a claim under Section 1 of the Sherman Act,
id. at 26-28, the Report recommends that Delta's motion to
dismiss be denied. Id. at 28.
Delta served its objections to the Report and Recommendation
and supporting memorandum ("Def. Mem.") on July 25, 1996.
Delta's objections largely reargue variations on the two grounds
that the Magistrate Judge rejected, as is epitomized by Delta's
primary objection that, "The Magistrate Judge improperly refused
to apply" its interpretation of Ocean State. Delta's Objections
to Report and Recommendation at 2. Though Delta's memorandum
expounds at length, its arguments are wholly without merit.
In considering Delta's objections, this Court is required to
make a "de novo determination" of those portions of the Report
and Recommendation to which objection is made. 28 U.S.C.
§ 636(b)(1); Fed. R. Civ. P. 72(b). The Court may "accept,
reject, or modify the recommended decision." Id.; See Scully
Signal Co. v. Joyal, 881 F. Supp. 727, 731-32 (D.R.I. 1995).
II. THE ALLEGATIONS OF THE COMPLAINT MUST BE ACCEPTED AS TRUE
Page 5...
The standard for deciding a motion to dismiss under Rule
12(b)(6) is well settled: "[A] court ‘may dismiss for failure to
state a claim only if it clearly appears, according to the facts
alleged, that plaintiff cannot recover on any viable theory.'"
Garita Hotel Limited Partnership, Etc. v. Ponce Federal Bank,
F.S.B., 958 F.2d 15, 17 (1st Cir. 1992). The allegations of
the Complaint must be read "as a whole, in the light most
favorable to the plaintiff." Id. at 18. The Court must "take
the factual averments contained in the complaint as true,
indulging in every reasonable inference helpful to the
plaintiff's cause." Id. at 17. In ruling on a Rule 12(b)(6)
motion, the Court must exclude from consideration factual
allegations extraneous to the Complaint. Id.
Delta's appraisal of the Complaint's allegations, and
particularly its several premature arguments based on unsupported
facts outside the Complaint's allegations, reveal that Delta's
supporting memorandum has at times observed these principles in
the breach.
III. STATEMENT OF THE CLAIM
Delta insures or administers plans providing dental
insurance to about 35-45% of persons in Rhode Island covered by
dental insurance, which is a greater number than any other
insurer. Complaint, ¶ 8. Delta seeks to offer its enrollees the
broadest possible panel of dentists, and thus contracts with
about 90% of Rhode Island dentists to provide services to Delta
patients. Id. Each Delta participating dentist agrees to comply
Page 6
with Delta's Participating Dentist's Agreement (the "Agreement"),
and with Delta's Rules and Regulations, which the
Agreement incorporates by reference. Id., ¶ 12. The MFN clause
challenged in this case appears as Rule 10 of Delta's Rules and
Regulations. Id. Rule 7 gives Delta the additional contractual
right to audit dentists' records to determine whether they are
complying with the MFN clause. Id., ¶ 14. Thus, 90% of Rhode
Island dentists are, by agreement, subject to Delta's MFN
clause. Id., ¶¶ 8, 12. The Complaint challenges the
anticompetitive effects of the MFN clause in these agreements.
In contrast to Delta's inclusive approach to contracting
with dentists, some managed care plans such as preferred provider
organizations ("PPOs") and dental health maintenance
organizations ("HMOs") contract selectively with a limited panel
of dentists. Id., ¶¶ 8, 16, 18, 19, 26. Selective contracting
may help a managed care plan lower the cost of, and improve the
efficiency in, the delivery of dental services to their
enrollees. Id., ¶ 11. Inclusion in the panel of a managed care
plan offers a dentist the opportunity to gain new patients or
keep patients the dentist would otherwise lose. PPOs, for
example, provide financial incentives to their enrollees to use
panel dentists. Id., ¶¶ 19, 20. HMOs often do not cover the
services of dentists not on their panels. This steering of
patients to panel dentists gives a managed care plan the ability
to pay lower prices to dentists than Delta, which depends on not
Page 7
limiting its panel. Accordingly, these managed care plans are
able to offer patients lower premiums and out-of-pocket costs.4
The MFN clause in Delta's Participating Dentist's Agreement
has deterred some dentists from giving such managed care plans
the lower fees that these dentists would otherwise accept in
response to the plans' selective contracting with them. Id., ¶¶
16-18. Pursuant to that Agreement, Delta has the right to lower
its fees to the lowest fees that dentist charges to other plans
or any individual patient.5 Id., ¶ 17. Because Delta
patients are a significant portion of the practice of Rhode
Island dentists, Delta's MFN clause imposes a large financial
penalty on dentists who would otherwise be willing to offer
services to some individual patients and reduced-fee plans at
fees significantly lower than those paid by Delta. Id., ¶¶ 8-9,
12, 17, 22.
Page 8
Faced with enforcement of Delta's MFN clause and the
prospect of substantially lower payments for all of their Delta
patients if they participate in a lower-cost plan, Delta
participating dentists have either withdrawn from--or refused to
join--lower-cost dental plans, or insisted as a condition of
their participation that payments be increased to Delta's
levels.6 Id., ¶ 18. With 90% of Rhode
Island dentists agreeing to comply with Delta's MFN clause and
inhibited in discounting below Delta's fee level, the MFN clause
has prevented lower-cost plans from contracting with enough
dentists to serve their subscribers in Rhode Island, depriving
consumers of the benefits of increased competition.7
Id., ¶¶ 8, 18.
The Complaint details several examples of Delta's MFN
clause's anticompetitive blocking of the entry of low-cost plans.
For example, Delta's MFN clause caused dentists to withdraw from
Dental Blue PPO--a low-cost preferred provider organization
established in the fall of 1993 by Blue Cross and Blue Shield of
Massachusetts to serve Raytheon employees and their dependents,
including the approximately 1,000 employees and their dependents
at Raytheon's facility in Portsmouth, Rhode Island. Id., ¶¶ 19,
Page 9
23-24. Dental Blue PPO had initially succeeded in contracting
with a number of Rhode Island dentists at substantially
discounted rates--rates, by Delta's calculations, 14% lower than
Delta's. Id., ¶¶ 19, 20. These PPO savings would have
significantly reduced or eliminated Raytheon plan members' co-
payments. Id., ¶ 19.
Identifying Dental Blue PPO as a long-run competitive
threat, Delta's senior management pursued several related
tactics, including: (1) contacting the former chairman of the
Rhode Island Dental Association ("RIDA")'s Council on Dental
Programs, a supporter of Delta's MFN clause because he believes
it functions to set a floor on dentists' fees, who sent RIDA's
members a letter warning dentists of the "severe financial
penalties" from Delta's MFN clause if they were to enroll in the
Dental Blue PPO, id., ¶ 22; and (2) informing the Rhode Island
dentists, who Delta knew were participating in the Dental Blue
PPO, of its intent to apply its MFN clause and of the new,
reduced payment levels they would receive from Delta as a result
of their participation in the Dental Blue PPO. Id., ¶ 23.
By the end of January, 1994, the dental community had
received Delta's "message." Id. ¶ 24. All of the Rhode Island
dentists contacted by Delta withdrew from Dental Blue PPO, some
of them making clear to Delta at the time that their reason for
withdrawal was Delta's decision to apply its MFN clause, and
requesting that Delta raise back their payment levels to reflect
their withdrawal from Dental Blue PPO. Id., ¶ 24. Raytheon
Page 10
employees were thus denied the opportunity to lower or eliminate
their co-payments for dental care, and Rhode Island was denied
the entry of a low-cost dental insurance plan as a direct result
of the MFN embodied in Delta's agreement with Rhode Island
dentists.8 Id., ¶ 25.
Nor is the experience of Dental Blue PPO the only example of
how Delta's MFN clause has hindered entry or expansion of low-
cost dental plans. It also has caused dentists to refuse to
contract, at fees below levels paid by Delta, with at least two
other low-cost plans. In one instance, U.S. Healthcare attempted
to establish a plan in Rhode Island (as it had in other states)
that would have paid dentists at fee levels lower than Delta's,
but dentists uniformly refused to contract with U.S. Healthcare
because they feared that Delta would apply its MFN clause and
lower their rates for all of their Delta patients. Id., ¶ 29.
Page 11
Similarly, participating Delta dentists refused, because of
Delta's MFN clause, to contract with Dental Benefit Providers
("DBP") at fee levels below Delta's, forcing DBP to pay dentists
at Delta's higher rates to enter the market and depriving
consumers of a low-cost alternative. Id., ¶ 28.
Delta's MFN clause has also prevented two other
organizations--a self-insured employee group and an uninsured
retiree group--from recruiting additional dentists, at fee levels
substantially below Delta's, to their limited networks of
dentists, despite their preference for more Rhode Island dentists
to serve their members. Id., ¶ 27. Both have limited panels of
dentists in Rhode Island who have agreed to fees substantially
below Delta's; both have thus far avoided the application of
Delta's MFN clause--despite Delta's commitment to enforce the
clause--because Delta had been unaware of their operation. But
both have also refrained from recruiting additional dentists to
serve their members because of their well grounded concern that
such recruitment efforts would draw attention to their panels and
trigger Delta's enforcement of its MFN clause against their
existing panel dentists, causing them to disaffiliate. Id. As a
result, some of their members have been denied more accessible,
lower-cost dental care that would have been available in the
absence of the MFN clause. Id. They will also likely lose their
existing low-cost panels if Delta enforces its MFN clause
against the participating dentists. Id.
Page 12...
Delta also applies its MFN clause, although limited on its
face to lower fees obtained by rival plans, when dentists have
lowered their fees to uninsured patients. Complaint, ¶ 15.
Thus, Delta's MFN clause has raised the prices, and reduced the
availability, of dental services to some of Rhode Island's most
vulnerable consumers. Id.
In contrast to the MFN clause's actual anticompetitive
effects, the clause, by Delta's own admissions, has not generated
any meaningful savings or other procompetitive benefits. Id.,
¶ 32. Far from saving consumers money, Delta's MFN clause, in
fact, has essentially eliminated discounting by dentists below
Delta's fees, and--as recognized by the former chairman of the
RIDA's Council on Dental Programs--has set a floor on dental
fees, thus raising the costs of dental services and dental
insurance for Rhode Island consumers. Id., ¶ 22.
IV. ARGUMENT
Section 1 of the Sherman Act prohibits any "contract,
combination . . . or conspiracy" unreasonably in restraint of
trade. Business Electronics Corp. v. Sharp Electronics Corp.,
485 U.S. 717, 723 (1988); Nat'l Soc'y of Professional Engineers
v. United States, 435 U.S. 679, 687-92 (1978). Delta did not
argue to the Magistrate Judge, and does not suggest in its
Objections, that the facts alleged in the Complaint are
insufficient to show anticompetitive effects under settled
Supreme Court precedent. Instead, it argues that (1) the
Complaint does not allege "conspiratorial action" sufficient to
Page 13...
state a claim under Section 1 of the Sherman Act; and (2) rulings
of this Court and the First Circuit require holding Delta's MFN
clause legal under the antitrust laws. Neither argument is
sustainable.
A. The Complaint Adequately Alleges That Delta's MFN
Clause Unreasonably Restrains Trade In Violation
of Section 1
1. Delta's Agreements with Dentists, Which
Incorporate the MFN Clause, Constitute the
Requisite Concerted Action And Have Caused
the Anticompetitive Effects Alleged in the
Complaint
The Magistrate Judge concluded, based on long-settled
precedent, that the Complaint's challenge to the MFN clause in
contracts between Delta and its participating dentists satisfies
the concerted action requirement of Section 1. MJR&R at 9,
citing Addyston Pipe & Steel Co. v. United States, 175 U.S. 211,
213-18 (1899). He proceeded to reject Delta's additional
arguments that these agreements were not "unlawful" agreements,
finding that the Complaint adequately alleges that they
unreasonably restrain trade. Id.
Delta's specific objection to this part of the Magistrate
Judge's Report ignores the import of each participating dentist's
agreement to comply with Delta's MFN clause. Delta argues that
the MFN clause in its contracts is "a unilateral policy adopted
by Delta" that is "not sufficient to satisfy the ‘concerted
action' requirement of Section 1." Objection No. 6. According to
Delta, the Magistrate Judge's conclusion that this contractual
Page 14.....
clause satisfies the concerted action requirement "would
effectively outlaw the entire body of private contract law." Id.
Delta's objection is fundamentally misconceived. It is
precisely because an "express agreement" readily satisfies
Section 1's concerted action requirement,9
Addyston Pipe, 175 U.S. at 213-18, that the Supreme Court--
observing that "read literally, § 1 would outlaw the entire body
of private contract law"--has construed Section 1 to prohibit
only contracts that are "'unreasonably restrictive of competitive
conditions.'" Nat'l Soc'y of Professional Engineers, 435
U.S. at 687-88 (footnote omitted); Standard Oil Co. v. United
States, 221 U.S. 1, 69-70 (1911). In other words, under
Section 1, only concerted action that unreasonably restrains
trade is unlawful, but every contract constitutes concerted
action.10
Page 15...
In its brief, Delta does not attempt to defend its objection
that the MFN clause in its contracts is "a unilateral policy"
(Objection No. 6) but argues instead that despite its agreement
with the dentists, the anticompetitive effects alleged in the
Complaint result from "unilateral action by each dentist." Def.
Mem. at 61. The "unilateral action" that Delta cites is
dentists' decisions to disaffiliate from, or refuse to contract
with, reduced-fee plans. Id.
Contrary to Delta's contentions, Section 1 prohibits
contracts that cause anticompetitive effects even when the
agreement does not explicitly impose those anticompetitive
effects. See Times-Picayune Publishing Co. v. United States, 345
U.S. 594, 615 and n.35 (1953). See also United States v.
Container Corp. of Am., 393 U.S. 333, 336-37 (1969) (condemning
competitors' agreement to exchange price information because the
exchange "chill[ed] vigorous price competition" by stabilizing
prices, even though the price stabilization resulted from
Page 16
competitors' unilateral decisions, made in light of the
information exchanged).
Delta acknowledges that the Court must assume, for purposes
of deciding Delta's motion, the Complaint's allegations that
Delta's agreements with dentists, which incorporate the MFN
clause, are the cause of the anticompetitive effects alleged.
Def. Mem. at 35 n.**. The Complaint details the sequence of
events, starting with Delta's invocation of its MFN contractual
rights and including the subsequent resignation of dentists from
the Dental Blue PPO, that underlies the Complaint's allegation
that the MFN clause incorporated in all of Delta's Participating
Dentists' Agreements has caused significant anticompetitive
effects.11 Complaint, ¶¶ 19-25. The
Complaint, as the Magistrate Judge recognized, also alleges with
specificity the manner in which Delta's MFN clause causes the
anticompetitive effect.12 Complaint, ¶¶ 17-18; MJR&R
at 4, 23-24. Under Page 17..........
Picayune and Container Corp., the Complaint need allege no
more to establish unlawful concerted action.
2. The Complaint Easily Establishes Unreasonable
Anticompetitive Effects that Violate Section 1
In determining whether, under Section 1, Delta's MFN clause
imposes an unreasonable restraint on competition, application of
the rule of reason is appropriate. See Business Electronics
Corp., 485 U.S. at 723. The rule "focuses directly on a
challenged restraint's impact on competitive conditions." Nat'l
Soc'y of Professional Engineers, 435 U.S. at 688. "[T]he
inquiry mandated . . . is whether the restraint imposed is one
that promotes competition or one that suppresses competition."
Id. at 691. To determine the answer, courts weigh a restraint's
anticompetitive effects against any offsetting procompetitive
benefits. See Eastman Kodak Co. v. Image Tech. Serv., Inc., 504
U.S. 451, 478 (1992).
In view of the actual anticompetitive effects of Delta's MFN
clause alleged in the Complaint, "[t]he anticompetitive
consequences of this arrangement are apparent." Page 18.
Regents of Univ. of Okla., 468 U.S. 85, 106 (1984).
Specifically, the effects (Complaint, ¶ 35) of Delta's challenged
"conduct--higher [dental] service prices and market foreclosure
[of low-cost dental plans] is facially anticompetitive and
exactly the harm that antitrust laws aim to prevent." Eastman
Kodak, 504 U.S. at 478. The Complaint (¶¶ 16-18, 35)
further alleges that, as a consequence of Delta's MFN clause,
"[p]rice is higher and output lower than they would otherwise be,
and both are unresponsive to consumer preference." NCAA, 468 U.S. at
107. Indeed, the effects are exacerbated because,"[a]ccording to
Delta, the dental insurance market in Rhode Island ‘is being
driven entirely by [consumers' preference for low] price[s].'"
Complaint, ¶ 10. "A restraint that has the effect of reducing
the importance of consumer preference in setting price and output
is not consistent with [the] fundamental goal of antitrust law"
as a "consumer welfare prescription." NCAA, 468 U.S. at 107. In
short, Delta's MFN clause's substantial net anticompetitive
effects demonstrate a clear Section 1 violation.
The Magistrate Judge concluded that the Complaint alleges a
claim under Section 1:
Moreover, the government contends that the application
of Delta's MFN clause has resulted in no discernible,
monetary savings to Delta. In contrast, the
application and mere threat of application of Delta's
MFN clause has sustained or increased consumer prices
for dental services by preventing participating Delta
dentists from discounting fees. More concretely,
because most participating dentists are unwilling to
contract with other plans at reduced fees due to the
MFN clause, existing competing plans have not expanded
into lower price options and new reduced-fee plans have
been precluded from entering the market, thereby
Page 19..
adversely impacting the consumer. The net effect is an alleged
detrimental impact on the dental market without
any discernible competitive benefits.
MJR&R at 27 (emphasis in the original) (citation omitted). This
analysis by the Magistrate Judge in support of his conclusion
that the Complaint states a claim manifestly comports with
established Section 1 case law.13 NCAA, 468 at 107.
.
Page 20.
B. The Opinions of the First Circuit in Kartell and of this
Court and the First Circuit in Ocean State Pose
No Legal Bar to this Challenge to Delta's MFN
Clause
Alluding to Kartell and Ocean State, Delta objects foremost
that, "The Magistrate Judge improperly refused to apply the
well-settled law of this District and Circuit that the [MFN]
clause Delta Dental uses in its contracts with dentists does not
violate the antitrust laws in the absence of predatory
pricing."14 Objection No. 2 (emphasis
added). This objection grossly distorts the sense of the
Magistrate Judge's Report. Far from "improperly refus[ing] to
apply well-settled law," the Magistrate Judge determined that
Kartell and Ocean State embody no such "well-settled law,"
concluding that "these decisions, properly construed, fail to
establish a per se validation of MFN clauses in all cases where
pricing is not predatory." MJR&R at 20.
Page 21.
Having determined
Kartell and Ocean State did not establish Delta's purported,
"well-settled" rule, the Magistrate Judge cannot be faulted for
"improperly refus[ing] to apply" them as Delta urges.
As the Report recognizes, Kartell and Ocean State fail for
several reasons to support Delta's position. MJR&R at 20.
First, Kartell, to which Delta points as the genesis of its purported
governing rule, is not only inapplicable, but tends, upon
analysis, to refute Delta's position rather than support it.
Second, the First Circuit's actual holding in Ocean State is
quite narrow and does not govern this case. Third, the courts'
analyses in Kartell and Ocean State focused on challenges to
conduct that resulted in lower prices, rather than conduct
resulting in higher prices, as is the case here. Finally,
Delta's unprecedented per se legal theory, ostensibly derived
from Kartell and Ocean State, would conflict with "well settled"
Section 1 jurisprudence. MJR&R at 20.
1. Delta Misreads Kartell and Ocean State
In arguing that Ocean State requires dismissal of this
action, Delta claims that the First Circuit "held that [an MFN]
policy of a purchaser with market power - unaccompanied by
predatory purchasing conduct - as a matter of law - is not
‘exclusionary' and does not violate the antitrust laws." Def.
Mem. 20 (emphasis in original). In so characterizing the First
Circuit's decision, Delta has distorted the court's narrow
evidentiary holding in Ocean State into a broad rule that would
Page 22.
effectively preclude Section 1 condemnation of MFN clauses that
have had actual anticompetitive effects--such as the one
challenged here, which has caused higher prices and reduced
consumer choice. Neither Kartell nor Ocean State supports such a
rule.
a. Kartell is Inapposite to this
Case and Undermines Delta's Argument
The First Circuit's opinion in Kartell concerned a challenge
by physicians to Blue Shield of Massachusetts's ban on
physicians' balance billing, under which participating physicians
had to agree not to bill Blue Shield subscribers for amounts in
excess of Blue Shield's set payments. The trial court found that
this payment system, in view of Blue Shield's buying power, had
interfered "with the doctors' freedom to set higher prices for
more expensive services." Kartell, 749 F.2d at 924.
On appeal, the First Circuit reversed. Viewing Blue Shield
"as itself the purchaser of the doctors' services" on behalf of
its subscribers, id. at 924-25, the court then ruled that "any
buyer of goods or services [--even a monopolist--] is lawfully
entitled to bargain with its providers for the best
[nonpredatory] price it can get."15
Id. at 928-29.
Page 23
The First Circuit's holding in Kartell is inapplicable to
this case for two reasons. First, in Kartell, "[p]articipating
in Blue Shield's program [did] not stop doctors from taking
other patients or from charging those other [non-Blue Shield]
patients what they like[d]." Id. at 927 (emphasis added).
The Kartell court expressly distinguished this situation from
one raising antitrust concern:
To find an unlawful restraint, one would have to look
at Blue Shield as if it were a 'third force,'
intervening in the marketplace in a manner that
prevents willing buyers and sellers from independently
coming together to strike price/quality bargains.
Antitrust law typically frowns upon behavior that
impedes the striking of such independent bargains.
Id. at 924.
In contrast to the situation in Kartell, Delta's MFN clause
is an intervening "third force" on dentists' charges to non-Delta
plans and patients, preventing dentists and low-cost dental plans
or uninsured patients from "coming together to strike [low-cost]
price/quality bargains." Id. Unlike the First Circuit's
observation in Kartell, "[p]articipating in [Delta's] program
does . . . stop [dentists] from . . . charging those other [non-
Delta] patients what they like." Id. at 927. Thus, the "seminal
case on point," according to Delta,16
actually supports this challenge to the substantial
anticompetitive effects of Delta's MFN clause.
The second principal distinction between Kartell and this
case arises from the Kartell court's observation that the claim
Page 24.
was against "low prices, not high prices." Id. at 930. The
court accordingly proceeded cautiously in assessing the claim
because "the Congress that enacted the Sherman Act saw it as a
way of protecting consumers against prices that were too high, not too
low." Id. at 931 (emphasis in original). The court observed
that "the relevant economic considerations may be very different
when low prices, rather than high prices, are at issue." Id. In
such cases, the "courts' task is to develop rules that will
discourage predatory pricing but allow ‘desirable price-cutting
activity.'" Monahan's Marine, 866 F.2d at 527.17
But the alleged effects of Delta's MFN clause is, precisely,
to discourage "desirable price-cutting activity," id., by
deterring discounting. The result--"higher [dental] service
prices and market foreclosure [of reduced-fee plans]--is facially
anticompetitive and exactly the harm that antitrust laws aim to
Page 25.
prevent." Eastman Kodak, 504 U.S. at 478. It would stand
Kartell on its head to draw from it a rule insulating MFNs
resulting, as alleged here, in higher prices and market
foreclosure from antitrust scrutiny.18. Kartell, 749 F.2d at 931.19
b. Ocean State Does Not
Require Dismissal of this Case
Equally unfounded is Delta's claim that in Ocean State the
First Circuit held broadly that an MFN clause "unaccompanied by
predatory purchasing conduct - as a matter of law - is not
‘exclusionary' and does not violate the antitrust laws." Def.
Mem. at 20.
(1) Ocean State Resolved a Narrow Issue
The source of Delta's claim that Ocean State limits
condemnation of MFN clauses to those involving predatory pricing
is the First Circuit's statement that "a policy of insisting on a
supplier's lowest price--assuming that the price is not
'predatory' or below the supplier's incremental cost--tends to
further competition on the merits and, as a matter of law, is not
exclusionary." Ocean State, 833 F. 2d at 1110. This statement
can be interpreted as Delta advocates only if read in isolation
Page 26..
from its context. But, it should go without saying that, "[t]his
statement like all others in . . . opinions, must be taken in the
context in which it was made." Air Courier Conference of America
v. American Postal Workers Union, 498 U.S. 517, 529 (1991).
As the Magistrate Judge recognized, "Ocean State's
pronouncement about the validity of Blue Cross's MFN clause was
made in a specific factual context under a legal provision
[Section 2] not at issue here." MJR&R at 22. On appeal from
this Court's grant of judgment notwithstanding the verdict, the
plaintiffs, Ocean State Physicians Health Plan and a certified
class of Ocean State participating physicians, claimed that Blue
Cross violated Section 2 because it instituted [its MFN] policy
with anticompetitive intent, that is, "not in order to save
money, but rather to induce physicians to resign from Ocean
State." Id. at 1104. Similarly, the plaintiffs also claimed that
Blue Cross applied its MFN policy with the anticompetitive intent
of "destroying Ocean State, rather than at the legitimate
goal of lowering costs." Id. at 1112. Thus, the First Circuit,
as had this Court, focused on the validity of Blue Cross's
business reasons. Id.; 692 F.Supp. at 61. The First Circuit's
assessment of these claims was limited to determining whether it
was clear from the evidence presented that "as a matter of law,
no conclusion but one can be drawn." Ocean State, 883 F.2d at
1105.
Evaluating the record on the issue of whether "Blue Cross
instituted [its MFN] policy not in order to save money, but
rather to induce physicians to resign from Ocean State," id. at
Page 27
1104, the First Circuit determined that "the record amply
supports Blue Cross's view that Prudent Buyer was a bona fide
policy." Id. at 1110. In explaining its conclusion that Blue
Cross's institution of its MFN policy was bona fide, the First
Circuit examined the MFN policy itself and considered the narrow
issue of the competitive merits "of insisting on a supplier's
lowest price" "as a naked proposition" or "as written." Id. at
1110, 1112.
In this context, the First Circuit's statement that "such a
policy of insisting on a supplier's lowest price--assuming that
the price is not ‘predatory' or below the supplier's incremental
cost--tends to further competition on the merits and, as a matter
of law, is not exclusionary," id. at 1110, appears in a very
different light than Delta has advocated. In the context of the
the plaintiffs' argument that the MFN policy was necessarily
exclusionary and thus a violation of section 2, the competitive
merits "of insisting on a supplier's lowest non-predatory price"
"as a naked proposition" or "as written" was evidence that Blue
Cross had instituted a bona fide policy. Thus, the sweeping rule
of law Delta attempts to read in Ocean State in fact amounts to
nothing more than a narrow holding that an MFN policy, "as a
naked proposition," is not necessarily exclusionary under Section
2.20.Defendant's Memorandum at
30.21 Id. at 1110, 1112. The
Page 28
Ocean
State court merely rejected the plaintiffs' argument that
Blue Cross's MFN policy served no purpose other than to destroy
competition.
Ocean State's holding, therefore, would govern the result of
this case only if the Complaint were challenging Delta's MFN
clause "as written" without regard to its effects. Of course,
the Complaint here challenges Delta's MFN clause precisely
because of its anticompetitive effects. Consequently, there is
no connection between the rule, upon which Delta relies,
upholding the facial validity of the MFN policy at issue in Ocean
State and the challenge in this case of an MFN clause that is
alleged to have caused substantial anticompetitive effects.
(2) Construed in Context, Ocean State
Resolved the Same Narrow Issue
Resolved in Kartell
Page 29.
As Delta itself notes, the First Circuit in Ocean State
concluded that Kartell "compelled" its conclusion that Blue
Cross's MFN policy, as written, was not exclusionary. Ocean
State, 883 F.2d at 1110-11. Kartell, as explained above,
was a case in which (1) Blue Shield's conduct did not operate as
a "'third force,' intervening in the marketplace in a manner that
prevents willing buyers and sellers from independently coming
together to strike price/quality bargains," 749 F.2d at 924; and
(2) the gravamen of the plaintiffs' antitrust claim was that
prices were too low. The Ocean State court's reasoning that Kartell
"compelled" its holding underscores the First Circuit's focus on
Blue Cross's MFN policy "as written," which did not impair the
opportunities of rivals and obtained lower prices.
Contrary to Delta's claims, therefore, the First Circuit
neither addressed nor purported to rule on the legality of an MFN
clause shown to have caused higher prices--and for good reason:
the only evidence of the Blue Cross policy's effects, cited as
anticompetitive by the plaintiffs there, was estimated savings of
$1.9 million, obtained through lower prices.22
Ocean State, 883 F.2d at 1110. These circumstances are in stark
contrast to the effects challenged here: Delta's MFN clause has
caused other plans to pay higher prices to dentists, resulting in
higher
Page 30.
prices for consumers, without achieving meaningful
savings for Delta. Consequently, Ocean State's reliance on
Kartell serves only to demonstrate that Ocean State cannot be
construed to foreclose this Section 1 challenge to Delta's MFN
clause.
(3) Delta's Interpretation of Ocean State
Conflicts with Long-standing
Section 1 Doctrine
Delta's attempt to expand Ocean State's holding to a
broad rule validating Delta's MFN clause would, in effect,
establish a rule of per se legality for MFN clauses, when
predatory pricing is not alleged. Such a rule would be
unprecedented in antitrust jurisprudence. As the Magistrate
Judge's Report recognizes, "The per se rule Delta urges would cut
a wide swath through the heart of § 1's case by case rule of
reason analysis ignoring the Supreme Court's admonition that
Legal presumptions that rest on formalistic
distinctions rather than actual market
realities are generally disfavored in
antitrust law."
MJR&R at 22 (quoting Eastman Kodak, 504 U.S. at 467-68). The
Supreme Court "has preferred to resolve antitrust claims on a
case-by-case basis, focusing on the ‘particular facts disclosed
by the record.'" Eastman Kodak, 504 U.S. at 467-68.
There is nothing in the Ocean State opinion that suggests
the First Circuit intended any such dramatic departure from
established antitrust precedent prescribing case-by-case
analysis. Indeed, the First Circuit--as had this Court, 692
F.Supp. at 70--enunciated and applied Professor Areeda's
formulation that Section 2 prohibits a monopolist's
Page 31....
"‘exclusionary' conduct . . . that not only (1) tends to impair
the opportunities of rivals, but also (2) either does not further
competition on the merits or does so in an unnecessarily
restrictive way.'" Ocean State, 883 F.2d at 1110.23
In view of the court's express articulation of a conventional
Section 2 standard and the narrow issues argued by the Ocean
State plaintiffs, Delta's argument that the First Circuit
adopted a rule of per se legality in Ocean State--without comment or
discussion--is simply implausible.24
2. Net Anticompetitive Effects Were Not Established
by the Plaintiffs in Ocean State But Are Clearly
Alleged Here, Sharply Distinguishing the Two Cases
Delta argues that the MFN policy in Ocean State had
anticompetitive effects far stronger than those alleged here.
Page 32.
This argument, however, is without legal foundation (once Ocean
State is properly interpreted) and without factual support
(in view of the courts' appraisal of the effects in Ocean State).
In making this argument, Delta ignores the absence of evidence
establishing net anticompetitive effects in the Ocean
State case. Indeed, the absence of evidence establishing
net anticompetitive effects undoubtedly explains why the
plaintiffs tried, unsuccessfully, to focus the issues on Blue
Cross's allegedly bad purpose.25
Two facts suggest why the plaintiffs in Ocean State appear
not to have pressed an argument that Blue Cross's MFN policy
caused net anticompetitive effects. First, 850, or over 70%, of
Ocean State's physicians remained on its panel despite the MFN
policy. See 883 F.2d at 1104. Unlike the allegations here that
Delta's MFN clause has rendered the Dental Blue PPO unmarketable
by causing dentists to disaffiliate from it and has impeded the
entry of other lower-cost plans, in Ocean State, according to
this Court, "[t]here was no evidence that [Blue Cross's MFN
policy] resulted in any anticompetitive effect or impaired Ocean
State's competitive opportunities."26
692 F.Supp. at 71. Second,
Page 33
Blue Cross achieved savings estimated at $1.9 million, 692
F.Supp. at 61; 883 F.2d at 1110. In contrast, as the Complaint
alleges, Delta concedes it has achieved no meaningful savings.
Thus, the Court in Ocean State was not presented with
persuasive evidence or argument that the MFN policy challenged
there harmed competition in the health insurance market, while,
on the other hand, it found substantial savings. In contrast,
the Complaint here alleges that Delta's MFN clause has deprived
Rhode Island consumers of lower-priced dental service and dental
insurance options, while providing Delta with no meaningful
savings. Thus, even if--as Delta argues incorrectly--Ocean State
ruled on the sufficiency of the effects in that case, the lack
of anticompetitive effects there would in no way require dismissal
here.27.
See also Armour & Co. v. Wantock, 323 U.S. 126, 132-33 (1944):
[W]ords of ... opinions are to be read in light of the
facts of the case under discussion. To keep opinions
Page 34........
within reasonable bounds precludes writing into them every
limitation or variation which might be suggested by the
circumstances of cases not before the Court.
28
3. The Other MFN Cases
Do Not Support Delta's Claim
Delta complains that the Magistrate Judge's Report "fails to
disclose" other cases that Delta suggests have held that any
anticompetitive effects of MFN clauses are beyond the reach of the
antitrust laws unless accomplished by predatory pricing. Objection
No. 4; Def. Mem. at 51. This charge is without foundation because
no other case remotely supports that proposition. Indeed, five of
the cases Delta cites recognize that MFN clauses may violate the
antitrust laws if the clauses have anticompetitive effects, without
limiting illegality to circumstances where predatory pricing
accompanies the MFN clause. Blue Cross and Blue Shield of Ohio v.
Bingaman, Case No. 1:94 CV 2297, slip op. at 12 (N.D. Ohio
1996); Blue Cross & Blue Shield United of Wisconsin v. Marshfield
Clinic, 65 F.3d 1406, 1415 (7th Cir. 1995), cert. denied, 116
S.Ct. 1288 (1996); Reazin v. Blue Cross and Blue Shield of Kansas,
899 F.2d 951, 971 (10th Cir.), cert. denied, 497 U.S. 1027 (1990);
Blue Cross and Blue Shield of Michigan v. Michigan Association of
Psychotherapy Clinics, 1980-2 Trade Cas. ¶ 63,351 at 75,794-95
Page 35...
(E.D. Mich. 1980); Williamette Dental Group, P.C. v. Oregon Dental
Service Corporation, 882 P.2d 637, 639, 642 (Or. App. 1994).29
Delta's criticism of the Magistrate Judge's failure to cite
these cases is therefore unfounded because those cases tend to
undermine, rather than support, Delta's interpretation of Ocean
State, which Delta properly recognizes would result in a
"unique rule." Def. Mem. at 6. Moreover, Delta cannot tenably
contend, and does not, that if Ocean State does not insulate its
MFN clause's anticompetitive effects from challenge, these cases
would somehow lead to that result and supersede the Supreme Court
cases, cited above, that support the claim here under Section 1.
C. The Court Should Proceed to the Merits of the Case
The Sherman Act is "a ‘consumer welfare prescription.'" Reiter
v. Sonotone Corp., 442 U.S. 330, 343 (1979). The ongoing
effect of Delta's challenged "conduct--higher [dental] service
prices and market foreclosure [of lower-cost dental plans]--is
facially anticompetitive and exactly the harm that antitrust laws
aim to prevent." Eastman Kodak, 504 U.S. at 478. But Delta would
have this Court (based on a claim of "fairness" to Delta) turn a
blind eye to the anticompetitive conduct of Rhode Island's largest
dental insurer and leave Teamster retirees, Raytheon employees,
their families, and other Rhode Island consumers (both uninsured
and
Page 36..
insured) subject to higher dental fees, reduced choice of dental
plans, and reduced dental care. Rewarding Delta's
misinterpretation of Ocean State by granting its motion to dismiss
would undermine Section 1's goal of protecting consumers from
anticompetitive conduct.
Interpreted correctly and in context, Ocean State's Rule 50(b)
holding, given the narrow issue resolved, provides no basis for
Delta to maintain in its contracts with dentists an MFN clause that
deprives consumers of lower-cost dental options. Delta implicitly
urges this Court to ignore controlling Supreme Court Section 1
decisions that eschew Delta's rigid, formalistic interpretation of
Ocean State in favor of a case-by-case analysis. See, e.g., du
Pont, 351 U.S. at 395 n.22.
"But the policy of the anti-trust laws is not qualified or
conditioned by the convenience of those whose conduct is
regulated." United States v. Paramount Pictures, Inc., 334 U.S. 131, 159
(1948). The anticompetitive harm to consumers alleged here and the
Complaint's uncontested grounding in conventional Section 1
precedent require that this litigation proceed without unnecessary
delay. In short, antitrust policy and equity dictate that this
Court proceed to the merits of the violation alleged in the
Complaint.
.
Page 37.
V. CONCLUSION
The Complaint states a claim under Section 1 of the Sherman
Act and neither Kartell nor the opinions in Ocean State bar this
action. For these reasons, discussed more fully above, this Court
should accept the Magistrate Judge's Report and Recommendation and
Delta's motion to dismiss the Complaint pursuant to Rule 12(b)(6)
should be denied.
Dated: August 13, 1996
Respectfully submitted,
________/s/________________________
Steven Kramer
Mark J. Botti
Michael S. Spector
William E. Berlin
Attorneys
U.S. Department of Justice
Antitrust Division
325 7th Street, N.W.
Washington, D.C. 20530
(202) 307-0997
Sheldon Whitehouse
United States Attorney
District of Rhode Island
________/s/________________________
By: Anthony DiGioia
Assistant United States Attorney
District of Rhode Island
10 Dorrance Street
Providene, RI 02903
(401) 528-5477
Bar #2495
.
Page 38
CERTIFICATE OF SERVICE
I hereby certify that on August 13,1996, copies of the
foregoing MEMORANDUM OF THE UNITED STATES IN OPPOSITION TO
DEFENDANT's OBJECTIONS TO REPORT AND RECOMMENDATION were served by
prepaid mail to:
William R. Landry
Blish & Cabanagh
30 Exchange Terrace
Providence, Rhode Island 02903
William G. Kopit
Epstein, Becker & Green, P.C.
1227 25th Street, N.W.
Washington, D.C. 20037-1156
___________________
Linda Mazmanian
.
FOOTNOTES
1
E.g., Defendant's Objections to Report and Recommendation at
3; Defendant's Memorandum at 6.
2
749 F.2d 922 (1st Cir. 1984), cert. denied, 471 U.S. 1029
(1985).
3
692 F. Supp. 52 (D.R.I. 1988), aff'd, 883 F.2d 1101 (1st
Cir. 1989), cert. denied, 494 U.S. 1027 (1990).
4
In deciding this Motion, the Court must accept the
Complaint's description of how selective contracting permits
managed care plans to obtain lower fees and pass the benefits onto
consumers. Accordingly, the Court should not consider Delta's
unsupported claim--raised prematurely on this Rule 12(b)(6) motion--
that these plans are somehow "less efficient competitors" than
Delta and that their ability to obtain lower prices from dentists
somehow deprives Delta's customers of the benefits of Delta's
purchasing power. Def. Mem. at 29. Indeed, as the Complaint
alleges, it is Delta's MFN clause that deprives its customers of
the benefits of competition and the option of lower prices for
dental insurance and dental care. See, e.g., Complaint, ¶ 26.
5
On its face, the MFN clause applies to all types of fee
arrangements, including capitated arrangements. Complaint, ¶ 12.
Capitated payments are fixed monthly amounts paid dentists per
patient. Id., ¶ 29. Delta argues that it will not invoke its MFN
clause for capitated fee arrangements. Def. Mem. at 55 n.*. Such
an allegation, of course, is not properly before the Court on
Delta's Rule 12(b)(6) motion.
6
Delta "has not enforced its MFN clause when a dentist, who
had considered or agreed to charge another plan substantially lower
fees, then raised the fees to Delta's level or disaffiliated from
the plan." Complaint, ¶ 13.
7
The importance to dental plans of contracting with dentists
at substantially discounted rates--and the converse harm caused by
Delta's MFN clause--is highlighted when one notes that the cost of
dental services generally constitutes about 85-90% of the price of
dental insurance. Id., ¶ 10.
8
Delta was thus content with disrupting Dental Blue PPO
through invocation of its MFN clause, rather than actually
obtaining lower prices for itself, a point of "no concern to
[D]elta." Def. Mem. at 62. These allegations refute Delta's
revisionist argument--raised prematurely on this Rule 12(b)(6)
argument--"that all that Delta Dental bargains for is the lowest
price." (Def. Mem. at 61). As Dental Blue PPO's experience
demonstrates, Delta applies its MFN clause to ensure that Delta
pays no more than its competitors, not necessarily to make sure
that Delta obtains the lowest price available.
Indeed, Delta developed a contingency plan to compete on price
with Dental Blue PPO by developing its own limited-panel, reduced-
fee PPO. Complaint, ¶ 26. Delta's plan to form its own PPO
establishes--contrary to another claim asserted prematurely by
Delta--that Delta has available to it viable, competitive
strategies to obtain low prices from dentists, and pass them on to
consumers, if that is what it wants to do. When Delta's MFN clause
brought about the collapse of the Dental Blue PPO, however, Delta
shelved its own PPO plans. Id.
9
For example, in U.S. Healthcare, Inc. v. Healthsource,
Inc., 986 F.2d 589 (1st Cir. 1993), the First Circuit analyzed
under Section 1 vertical exclusivity agreements by which
Healthsource gave financial incentives to some of its participating
physicians who agreed not to deal with another HMO. Id. at 594.
The agreement in Healthsource is analogous to the Delta arrangement
where a participating dentist agrees to comply with Delta's MFN
clause as a condition of contracting with Delta.
10
The decision of the Michigan state court in Mich. Assn. of
Psychotherapy Clinics v. Blue Cross and Blue Shield of Mich., 118
Mich. App. 505, 325 N.W.2d 471 (1982), should not lead to any
different result here. That court muddled the inquiry into the
lawfulness of a contract with the issue of whether concerted action
existed, in finding that a proposed participation agreement was not
subject to challenge under Section 1. Id., 118 Mich. App. at 517-18.
In fact, the same participation agreements were at issue
before the federal court in the related case, Blue Cross and Blue
Shield of Mich. v. Mich. Assn. of Psychotherapy Clinics, 1980-2
Trade Cas. (CCH) ¶ 63,351 (E.D. Mich. 1980), which evaluated the
lawfulness of those contracts under Section 1 on the premise that
concerted action existed. (FOOTNOTE CONT.')
Relying on Monsanto Co. v. Spray Rite Service Corp., 465 U.S.
752 (1984), and similar cases, Delta also argues that the Complaint
fails to allege facts supporting an inference of an actual
agreement with the dentists that they would refuse to participate
in reduced-fee plans. Def. Mem. at 61-62. Monsanto and its progeny
are relevant only where no express agreement exists and the issue
is whether a conspiracy can be inferred. In Monsanto, for
example, a terminated distributor alleged a conspiracy among
Monsanto and other distributors to fix the resale price of Monsanto
goods. 465 U.S. at 757. The plaintiff did not allege that
Monsanto had a contract with distributors that set the resale
price. Rather, the case addressed whether the alleged conspiracy
could be inferred. Here, the Complaint alleges anticompetitive
effects flowing from a contract term and the Monsanto standard is
irrelevant.
11
Delta's right to apply the MFN clause both retrospectively
and prospectively augments the effects of the clause. Delta's
audit clause gives it a powerful contractual right for enforcement
of the MFN. Complaint, ¶¶ 14-15. Delta may demand repayment from
a dentist of the differential between payments made for each Delta
patient and a lower amount paid by a non-Delta patient during the
time that the Delta patients were treated and billed using the
higher Delta fees. Delta may also reduce any outstanding bills
from a dentist for Delta patients by the amount charged non-Delta
patients during the time the Delta patients were treated. And, of
course, Delta may lower all future payments for a dentist based on
lower fees previously paid by non-Delta patients.
12
The potential chilling effect of MFNs on discounting is
well-recognized. United Mine Workers v. Pennington, 381 U.S. 657,
668 (1965) ("It is just such restraints [inherently flowing from
MFNs] upon the freedom of economic units to act according to their
own choice and discretion that run counter to antitrust policy.");
Connell Constr. Co. v. Plumbers and Steamfitters Local Union No.
100, 421 U.S. 616, 623 and nn 1&2 (1975); Cintech Industrial
Coatings, Inc. v. Bennett Industries, Inc., Case No. 94-4116, 85
F.3d 1198, 1996 WL 308903, slip op. at 2 (6th Cir. June 11, 1996);
In re Chicken Antitrust Litigation, 560 F. Supp. 943, 947 (N.D. Ga.
1979). See generally Manual for Complex Litigation (Third) § 23.23
at 182 (1995).
The potential anticompetitive effects of MFN clauses in health
care markets has been expressly recognized. Reazin v. Blue Cross
and Blue Shield of Kan., Inc., 663 F. Supp. 1360, 1418 (D. Kan.
1987), aff'd, 899 F.2d 951 (10th Cir.), cert. denied, 497 U.S. 1027
(1990).
13
In determining that the Complaint states a claim, the
Magistrate Judge concluded that the "complaint reveals a plausible
allegation that Delta possesses significant market power." MJR&R
at 23, 27. Though not disputing this conclusion, Delta objects
that Kartell and Ocean State render market power in this case
irrelevant. Objection No. 3; Def. Mem. at 25-32. But the
Magistrate Judge, of course, concluded that Kartell and Ocean State
do not control this case. Delta's objection itself then becomes an
irrelevant "red herring." Moreover, although--as the Magistrate
Judge determined--the Complaint adequately alleges market power,
the Complaint alleges also that Delta's MFN clause has led to
"sustained or increased dental costs in the form of premiums,"
MJR&R at 23, and "sustained or increased consumer prices for dental
services," MJR&R at 27. Such "'actual detrimental effects' . . .
can obviate the need for an inquiry into market power, which is but
a ‘surrogate for detrimental effects.'" FTC v. Indiana Federation
of Dentists, 476 U.S. 447, 461 (1986).
14
Delta misleadingly attempts to bolster this objection by
claiming repeatedly "that the legality of Delta Dental's [MFN]
clause under the Sherman Act had already been decided by this Court
in 1986 (and then in 1989 by the First Circuit on appeal) . . .
[citing Ocean State]" Def. Mem. at 5 (emphasis in original). See
also Def. Mem. at 13: (claiming "First Circuit squarely held in
Ocean State [citation omitted] that the very [MFN] clause at issue
here does not violate the antitrust laws") (emphasis in original);
Def. Mem. at 13 n*: (claiming "[i]t is undisputed that Delta
Dental's [MFN clause] . . . is the same one scrutinized in Ocean
State;") and Def. Mem. at 23: (claiming "Ocean State involved
precisely the same [MFN clause] challenged here") (emphasis in
original).
These claims are utterly baseless. Delta, of course, was not
a party in Ocean State, which involved a decision after trial on a
different party's MFN clause in different markets--physicians and
medical insurance--with very different effects: In Ocean State,
Blue Cross's MFN clause achieved net savings estimated at $1.9
million, and there was no evidence demonstrating, as here, net
anticompetitive effects resulting from the MFN. 883 F.2d at 1110.
15
The court's use of the term "nonpredatory" evidently meant
prices not below a doctor's incremental costs: "[T]he antitrust
laws interfere with a firm's freedom to set even uncompetitive
prices only in special circumstances, where, for example, a price
is below incremental cost," Kartell, 749 F.2d at 927. Thus,
Delta's musing that the word "predatory" encompasses higher prices,
Def. Mem. at 20 n*, is unsupportable.
16
Def. Mem. at 11.
17
In Monahan's Marine, decided in the same term as Ocean
State, the First Circuit discussed the importance of allowing
sellers to discount their goods or services. There, the First
Circuit expressed its belief that the antitrust laws should not be
read as discouraging suppliers from granting selective discounts:
If suppliers cannot charge low, nonpredatory
prices without the threat of antitrust actions,
they will hesitate to cut their prices. If
suppliers must cut prices to all competing
dealers or to none, if they cannot decide to
favor a single dealer, say, to promote their
product or to target a particular area, they
may well decide not to cut prices at all,
perhaps to the benefit of the dealers, but
certainly to the detriment of the Sherman Act's
ultimate beneficiary, the consumer.
Monahan's Marine, 866 F.2d at 527-28.
18
Kartell's concern about "predatory" pricing is irrelevant
to this case involving a restraint that causes higher prices. In
short, the "relevant economic considerations"
19
leading to the rule adopted in Kartell to govern a buyer's
impermissibly low pricing simply have no application to this
action, which challenges Delta's MFN clause precisely because it
deters dentists from charging lower fees and, as a result, causes
higher prices for dental services and dental insurance.
20
In Ocean State, the First Circuit noted that, "Ocean State
does not contend that the prices paid under [Blue Cross's MFN]
policy were ‘predatory' or below anyone's incremental cost." Ocean
State, 883 F.2d at 1111. If the court had indeed held, as Delta
claims, that MFN "clauses are, as a matter of law, pro-competitive
where their invocation is not accompanied by predatory fee
activity,"
21
Ocean State's failure to contend that the pricing was predatory
should have ended the court's analysis. Of course, the court
instead, after determining that the policy was not illegal on its
face, proceeded to analyze Ocean State's claims that "Blue Cross
applied the policy in a way that was in fact directed at the
illegitimate goal of destroying Ocean State, rather than at the
legitimate goal of lowering costs." Id. at 1112. This additional
analysis would have been superfluous if Ocean State's initial
holding were as broad as Delta contends, and it thus underscores
that the First Circuit actually ruled initially on only the narrow
issue of the MFN policy's legality as written.
22
The point is emphasized by the fact that it was the
plaintiffs who presented the evidence of Blue Cross's $1.9 million
in savings from its MFN policy, based on their ironic contention
that the savings showed the antitrust damages that the plaintiff
physician class had suffered in reduced fees. Id. at 61-62.
23
(citing 3 P. Areeda & D. Turner, Antitrust Law ¶ 626b at 78
(1978), quoted by Aspen Skiing Co. v. Aspen Highlands Skiing Co.,
472 U.S. 585 (1985)).
24
Moreover, because the Ocean State court held only that the
MFN policy "as written" was a bona fide policy, dismissing this
case in reliance on it would contravene the maxim that under
Section 1 "a good intention will [not] save an otherwise
objectionable regulation." Continental T.V., Inc. v. GTE Sylvania,
Inc., 433 U.S. 36, 49 n.15 (1977) (quoting from Chicago Board of
Trade v. United States, 246 U.S. 231, 238 (1918)); U.S. Healthcare
v. Healthsource, Inc., 986 F.2d at 596 (motive is important to the
extent that it serves as "a guide to expected effects, but effects
are still the central concern of the antitrust laws"). Extending
this holding to a rule rejecting, in this case, the Complaint's
allegations of anticompetitive effects as irrelevant, however,
would be tantamount to holding--in conflict with Chicago Board of
Trade and its progeny--that good intentions will trump bad
effects.
25
The Court understood the plaintiffs to argue that Blue
Cross's MFN clause was instituted for an anticompetitive purpose.
Ocean State, 883 F.2d at 1110. The Court also addressed the
argument that the clause, as applied, reflected that purpose. Id.
at 1112. But the Court did not address and plaintiffs clearly did
not press an argument that, regardless of Blue Cross's intent, the
MFN clause caused substantial anticompetitive effects without
offsetting procompetitive benefits.
26
Underlying this conclusion, in part, was this Court's
determination that any "payment Ocean State made to non-
participating physicians . . . was not a loss to Ocean State."
Ocean State, 692 F.Supp. at 63. The Court explained that the
payments were made out of a fund that Ocean State would have
otherwise returned to the physician plaintiff-class and thus simply
amounted to a transfer of funds among physicians. Id.
27
In this vein, the Supreme Court has admonished
that each case arising under the Sherman Act
must be determined upon the particular facts
disclosed by the record, and that the opinions
in those cases must be read in light
of their facts and of a clear recognition of the
essential differences in the facts of those cases, and in
the facts of any new case to which the rule of earlier
decisions is to be applied.
28
United States v. E.I. du Pont de Nemours & Co., 351 U.S.
377, 395 n. 22 (1956)(quoting from Maple Flooring Ass'n
v. United States, 268 U.S. 563, 579 (1925); accord,
Eastman Kodak Co. v. Image Technical Services, Inc. 504
U.S. 451 (1992).
29
The one other case cited by Delta is similarly
unavailing. Kitsap Physicians Service v. Washington
Dental Service, 671 F. Supp. 1267 (W.D. Wash. 1987),
involved a claim that an MFN clause constituted attempted
monopolization in violation of Section 2 of the Sherman
Act. The court denied
plaintiff's motion for a preliminary injunction, but did
not consider the MFN clause's effect on competition.
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