Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of Rhode Island

United States Court of Appeals
For the First Circuit

No. 03-2061

THE STOP & SHOP SUPERMARKET COMPANY;
WALGREEN EASTERN COMPANY, INC.,

Plaintiffs, Appellants,

v.

BLUE CROSS & BLUE SHIELD OF RHODE ISLAND;
COORDINATED HEALTH PARTNERS, INC., d/b/a BLUE CHIP;
CVS CORPORATION; PHARMACARE MANAGEMENT SERVICES, INC.,

Defendants, Appellees.
__________

C. DANIEL HARON; RONALD BOCHNER;
MAXI DRUG, INC., d/b/a BROOKS PHARMACY;
PROVIDER HEALTH SERVICES, INC.; UNITED HEALTHCARE CORPORATION.

Defendants.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF RHODE ISLAND

[Hon. Ernest C. Torres, U.S. District Judge]

Before

Boudin, Chief Judge,

Howard, Circuit Judge,

and Saris,* District Judge.

*
Of the District of Massachusetts, sitting by designation.
 John J. Curtin, Jr. with whom Daniel L. Goldberg, Alicia L.
Downey, Bingham McCutchen LLP, William M. Dolan III, Brown Rudnick
Berlack Israels LLP, Gregg A. Hand and White & Case LLP were on
brief for appellants.
Steven E. Snow with whom Robert K. Taylor, Daniel S. Crocker
and Partridge Snow & Hahn LLP were on brief for appellees Blue
Cross & Blue Shield of Rhode Island and Coordinated Health
Partners, Inc., d/b/a Blue Chip.
Bruce D. Sokler with whom Yee Wah Chin, Noam B. Fischman,
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., James A.
Ruggieri and Higgins, Cavanagh & Cooney LLP were on brief for
appellees CVS Corporation and Pharmacare Management Services, Inc.

June 24, 2004
 BOUDIN, Chief Judge. Stop & Shop Supermarket Company

(“Stop & Shop") and Walgreen Eastern Co., Inc., ("Walgreen")

brought an antitrust suit against a number of defendants primarily

based on section 1 of the Sherman Act, 15 U.S.C. § 1 (2000), lost

certain of their claims on summary judgment, and then suffered a

directed verdict at the jury trial held on the balance of their

claims. They now appeal on several grounds as to certain

defendants (the other defendants settled). We begin with a

description of background events and proceedings in the district

court.

Blue Cross and Blue Shield of Rhode Island (“Blue Cross”)

is the major health insurer in that state, offering various plans

that cover, among other medical expenses, the cost of prescription

drugs. Until 1997, Blue Cross managed drug benefits itself and

provided a substantially "open" pharmacy system--that is to say,

most subscribers could buy drugs at any pharmacy. Blue Cross

determined what drugs it would reimburse, set (by negotiation) what

would be paid to the pharmacies, and processed subscriber claims.

Beginning in 1997, Blue Cross decided to use a pharmacy

benefits manager to administer its prescription drug benefits.

Such managers often set up a "closed" network of pharmacies,

providing greater insurance coverage to those subscribers who use

network pharmacies. In exchange for inclusion in the network, and

therefore increased volume of drug sales, the network pharmacies

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typically agree to provide drugs at lower prices, resulting in

lower costs to the insurer.

In this case, Blue Cross invited bids from managers and

received three, one of which Blue Cross disqualified. The second

manager was PharmaCare, a subsidiary of CVS, a well known major

drug store chain (52 pharmacies in Rhode Island). The third

manager, Wellpoint, proposed a closed network limited to pharmacies

operated by Stop & Shop (18 pharmacies) and Walgreen (15

pharmacies). After obtaining further bids from Wellpoint and

PharmaCare, in December 1997 Blue Cross selected PharmaCare to

manage a closed network that initially included the CVS pharmacies

and most independent pharmacies in Rhode Island.

During this period, PharmaCare was itself negotiating

with yet another benefit manager--Provider Health Services, Inc.

("Provider"). Provider managed a closed network, comprised mainly

of Brooks Pharmacies (42 pharmacies in the state), serving another

insurer--United Healthcare of New England, Inc. ("United")--doing

business in Rhode Island. In February 1998, Provider agreed to

allow CVS stores to join the United/Provider network; and in May

1998, PharmaCare allowed Brooks and other Provider pharmacies to

join the Blue Cross/PharmaCare closed network.

Ancillary to these arrangements, Brooks and Provider's

other pharmacies agreed--obviously for PharmaCare's benefit--not to

join other networks competing for Blue Cross' business. PharmaCare

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in turn agreed not to admit into the Blue Cross/PharmaCare network

new drug stores (beyond CVS, the independents, and the pharmacies

in the United/Provider network). Blue Cross consented to the

enlargement of its closed network and in November 1998 signed a

formal three-year contract with PharmaCare.

Not all Blue Cross customers are covered by plans that

effectively restrict them to closed network pharmacies. Blue Cross

offers multiple plans, and one set allows customers to fill

prescriptions at any pharmacy without economic penalty. Blue

Cross’ counsel estimated in oral argument that perhaps two-thirds

of Blue Cross' customers are restricted to its closed network; our

own review of the record suggests that the number–-which obviously

varies over time--may be closer to three-quarters.

Unhappy with losing the opportunity to serve many Blue

Cross customers on competitive terms, Stop & Shop brought the

present action on June 9, 1999, against Blue Cross, PharmaCare and

CVS, charging violations of federal and state antitrust laws; in

March 2000, Walgreen joined as co-plaintiff and an amended

complaint was filed on May 2, 2000. United Health, Provider, and

Brooks were also initially defendants but, they were dropped after

agreeing to admit plaintiffs to the United/Provider network.

On motions for summary judgment, the district court wrote

a detailed opinion rejecting plaintiffs' claims that any per se

violation of the antitrust laws had been plausibly shown. Stop &

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Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 239 F.

Supp. 2d 180, 195 (D.R.I. 2003). It rejected claims that any of

the arrangements comprised naked horizontal restraints such as a

group boycott. Id. at 189-91. However, the court ruled that

factual issues precluding summary judgment were raised as to

whether any of defendants' conduct was actionable under the rule of

reason. Id. at 193.

At this time, the district court said that Blue Cross

represented about 60 percent of the customers in Rhode Island whose

retail drug purchases were reimbursed; and United provided such

benefits to about 25 percent. Stop & Shop, 239 F. Supp. 2d at 183.

These figures were the lynch-pin of the pretrial report by

plaintiffs' expert witness, Dr. Bruce Stangle, who stressed the 85

percent figure in concluding that "an out-of-network entrant would

be precluded from competing in a substantial portion of the

relevant market."

Thereafter the district court considered in limine

motions filed by Blue Cross. Subject to reconsideration at trial,

the court granted a motion to exclude certain evidence as to the

bidding process leading to PharmaCare's selection and the related

decisions of PharmaCare and Provider to expand their respective

closed networks to include each other's present pharmacy members.

The court denied, again subject to reconsideration at trial, a

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motion to exclude key testimony from plaintiffs' expert witness,

Dr. Stangle.

Trial began in June 2003. On the sixth day of trial, the

district court upheld a defense objection to Dr. Stangle’s proposed

testimony concerning the proper definition of the relevant market.

Plaintiffs tendered a summary of the proposed testimony as an offer

of proof and rested. The district court then granted a defense

motion for judgment as a matter of law, holding (in an oral ruling

from the bench) that absent an adequate market definition, the

plaintiffs could not make out a rule of reason claim under the

antitrust laws.

The plaintiffs now appeal, arguing that the district

court erred in granting partial summary judgment on the per se

claims, in excluding several items of evidence including Dr.

Stangle’s testimony on market definition, and in directing a

verdict. Rulings on summary judgment and directed verdicts are

reviewed de novo, Wolinetz v. Berkshire Life Ins. Co., 361 F.3d 44,

47 (1st Cir. 2004) (summary judgment); Ahern v. Scholz, 85 F.3d

774, 793 (1st Cir. 1996) (directed verdict); the standard for

review of rulings excluding evidence depends on the nature of the

underlying issue (fact, law, judgment call), see Blake v.

Pellegrino, 329 F.3d 43, 46 (1st Cir. 2003).

Per se claims. Plaintiffs begin their brief by

contesting the district court's summary judgment ruling that no

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legitimate per se claims were presented. As our prior decisions

have explained, antitrust claims under section 1 of the Sherman Act

ordinarily require a burdensome multi-part showing: that the

alleged agreement involved the exercise of power in a relevant

economic market, that this exercise had anti-competitive

consequences, and that those detriments outweighed efficiencies or

other economic benefits. This is the so-called rule of reason

calculus. See, e.g., Eastern Food Servs. v. Pontifical Catholic

Univ. Servs. Ass'n, 357 F.3d 1, 5 (1st Cir. 2004); Fraser v. Major

League Soccer, L.L.C., 284 F.3d 47, 59 (1st Cir. 2002), cert.

denied, 537 U.S. 885 (2002).

This calculus is bypassed if the collusive arrangement

falls instead within one of several categories (e.g., naked

horizontal price fixing) in which liability attaches without need

for proof of power, intent or impact. Eastern Food Servs., 357

F.3d at 4 & n.1. For that reason plaintiffs typically try to bring

their claims within per se rubrics. Whether a plaintiff's alleged

facts comprise a per se claim is normally a question of legal

characterization that can often be resolved by the judge on a

motion to dismiss or for summary judgment. See, e.g., Addamax

Corp. v. Open Software Found., Inc., 152 F.3d 48, 50-51 (1st Cir.

1998).

The most important per se categories are naked horizontal

price-fixing, market allocation, and output restrictions.

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Sometimes group boycotts are called per se violations, but the

label here is only minimally useful since many arrangements that

are literally concerted refusals to deal have potential

efficiencies and are judged under the rule of reason. See U.S.

Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 593 (1st Cir.

1993). Minimum retail price fixing is a rare vertical arrangement

still comprising a per se violation–-that is why car makers only

“suggest” a retail price to dealers--but this offense is not

charged by plaintiffs in this case.1

Because the defendants moved for summary judgment, the

complaint allegations did not have to be taken as true, see R.W.

Intern Corp. v. Welch Food, Inc., 13 F.3d 478, 487 (1st Cir. 1994),

but the plaintiffs were entitled to the benefit of the doubt:

specifically, reasonable inferences were to be drawn in their favor

and genuine factual disputes were properly reserved for trial so

far as plaintiffs' sworn version of the facts conflicted with the

defendants’ sworn version. See Fed. R. Civ. P. 56(c); Douglas v.

York County, 360 F.3d 286, 290 (1st Cir. 2004). However, broadly

speaking what happened in this case is largely undisputed, although

some of the details are obscure.

1
The per se categories are discussed with relevant citations
in Eastern Food Services, 357 F.3d at 4-5 & n.1, and other of our
decisions. On minimum vertical price fixing, see Augusta News Co.
v. Hudson News Co., 269 F.3d 41, 47 (1st Cir. 2001).

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 In a nutshell, the arrangements that concern plaintiffs

were two. First, Blue Cross contracted for a closed network for

its subscribers that excluded the plaintiffs after a bidding

contest that plaintiffs say was flawed and that they should have

won. Second, Blue Cross and its pharmacy benefits manager agreed

with United and its manager that their respective network

pharmacies would be admitted to each other’s closed networks; these

arrangements included exclusionary restrictions and (plaintiffs

suggest) other more sinister collaboration as to price.

We start with the creation of Blue Cross’ closed network.

The alleged unfair bidding aside, this is nothing other than an

exclusive dealing arrangement, slightly complicated by the

involvement of three or four sets of parties rather than the usual

two. Blue Cross, either directly or indirectly, is buying

prescription drugs for its subscribers. See Kartell v. Blue Shield

of Mass., Inc., 749 F.2d 922, 924-25 (1st Cir. 1984), cert. denied,

471 U.S. 1029 (1985). Blue Cross’ closed network effectively gives

certain drug stores the exclusive right to supply such drugs to

most of its customers.

This certainly inconveniences Blue Cross subscribers for

whom more outlets are a benefit. But, if Blue Cross is a competent

negotiator, the closed network should lower the cost to Blue Cross

of supplying drugs to customers (because most suppliers will cut

prices in exchange for increased volume, cf. U.S. Healthcare, 986

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F.2d at 591). Blue Cross might pass the savings on to customers

(lower premiums, smaller co-payments, broader coverage) or keep the

savings itself and pay its executives more (if competition among

health insurers is inadequate and state regulation absent).

Either way, the closed network is simply an exclusive

dealing arrangement which is not a per se violation of the

antitrust laws. See Tampa Elec. Co. v. Nashville Coal Co., 365

U.S. 320, 327-29 (1961); Eastern Food Servs., 357 F.3d at 8. The

arrangement might still be unlawful under the rule of reason

depending upon the particular circumstances--that is, depending

upon the balance between efficiencies gained and any harm to

competition that could be shown, id. at 5, but we are concerned for

the moment only with whether per se treatment was warranted. It

was not.

Nothing is changed by plaintiffs’ claim that the bidding

was unfair. “Bid rigging” of a certain kind is a per se violation

of the antitrust laws, e.g., JTC Petroleum Co. v. Piasa Motor

Fuels, Inc., 190 F.3d 775, 777 (7th Cir. 1999) (Posner, C.J.); but

this refers to horizontal price fixing whereby two or more

suppliers (or occasionally purchasers) secretly fix the price at

which they will bid. See id. When Blue Cross, through its

benefits manager, gave exclusive rights to CVS and certain other

pharmacies, it was not bidding at all; it was inviting bids and

making its own decision as to which bid to accept.

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 Ordinarily, it would be in Blue Cross’ interest to accept

the lowest cost bid, assuming services were equivalent. Plaintiffs

say that Blue Cross manipulated the bidding (e.g., by giving CVS

information about Wellpoint’s bid), which conceivably could happen

if Blue Cross were corrupt or incompetent (an alternative, benign

reason would be to press PharmaCare to improve its offer). But the

antitrust laws are not meant to police bad management; the market

(or the insurance regulator) is expected to do that.

This brings us to the first part of the second

transaction, namely, the agreements that let the Blue Cross and

United pharmacies serve in each other’s closed networks. These are

undoubtedly horizontal agreements, Blue Cross and United being

competitors (as are PharmaCare and Provider), and so draw closer

scrutiny. But on their face, they are not exclusionary or

otherwise anti-competitive: they allow more pharmacies to compete

for the same consumer’s business (e.g., Brooks can supply Blue

Cross customers) and give customers more options.

The main anti-competitive threat, to the extent it

exists, lies not in admission of new pharmacies but in ancillary

provisions that might exclude others by agreement. It appears that

the United/Provider network remained free to admit other

pharmacies: it did in fact admit the plaintiffs as part of an

agreement to settle this lawsuit. But the district court says that

the contracts precluded the Blue Cross/PharmaCare network from

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admitting any other new pharmacies (beyond the United/Provider

pharmacies), Stop & Shop, 239 F. Supp. 2d at 184, so the contracts

did for some period restrict Blue Cross/PharmaCare from admitting

plaintiffs.

Like the original exclusive dealing contract, this is a

possible antitrust violation, but it is not a per se violation.

The reason is that the closed pharmacy arrangement is valuable to

participating pharmacies in part because it directs volume to them;

thus, the United/Provider pharmacies had a direct interest, in

exchange for allowing CVS to compete for their captive subscribers,

in not only being allowed to compete for Blue Cross’ customers but

in making sure that yet additional new member pharmacies did not

unreasonably dilute this benefit.

This does not mean that the ancillary restriction is

lawful but only that per se condemnation is not appropriate. Joint

ventures involving direct competitors not infrequently exclude

other competitors. Cf. N.W. Wholesale Stationers, Inc. v. Pac.

Stationery & Printing Co., 472 U.S. 284, 296-97 (1985). Imagine a

research and development consortium between a dozen small

manufacturers that by agreement excluded any new entrants; the

arrangement might enhance competition with larger manufacturers,

and yet the original members might be unwilling to commit resources

to the venture if other competitors–-even small ones–-were able to

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enter at will and share in the inventions. See XIII Hovenkamp,

Antitrust Law ¶ 2115a (1999).

A further explicit provision of the reciprocal expansions

barred the United/Provider pharmacies from participating in other

networks competing for Blue Cross’ business. Stop & Shop, 239 F.

Supp. 2d at 184. This, too, is not a per se violation. By

admitting the Brooks pharmacies into its own closed network, Blue

Cross and PharmaCare were in effect including them in a joint

venture. There are sometimes legitimate reasons why one party to

a joint venture can insist as the price of entry that a new member

limit its existing competitive freedom. XIII Hovenkamp ¶ 2213.

Here, PharmaCare was creating and administering a network

for Blue Cross and, in the course of doing so, it would be

providing favored access to network pharmacies, bolstering their

connection with subscribers, and conceivably giving them

information valuable in their servicing of the customers.

PharmaCare might legitimately be unwilling to expand the network to

include pharmacies who were at the same time preparing to join a

new consortium to replace PharmaCare as Blue Cross’ manager.

Despite plaintiffs’ looser description, the restraint

does not prevent Brooks pharmacies from joining other networks but

only from involving themselves in attempts to supplant PharmaCare

with Blue Cross. The restraint might still be unjustified–-with

efficiency gains outweighed by competitive harm–-and so perish

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after a rule of reason analysis. But restraints that are truly

ancillary to a larger efficiency-gaining enterprise–-here, the

expanded closed network--are not normally condemned per se without

looking at likely consequences. Addamax Corp., 152 F.3d at 52; see

XIII Hovenkamp ¶ 2213c(1).

If the rhetoric of older group boycott cases were taken

at face value, such agreements might appear to fall within a per se

ban. Cf. Associated Press v. United States, 326 U.S. 1, 13-14, 18-

19 (1945). After all, in two different aspects, the ancillary

agreements are promises by one competitor or group of competitors

to another not to deal with a third competitor (CVS, through

PharmaCare, not to include Stop & Shop and Walgreen in the

PharmaCare network; Brooks not to consort with Stop & Shop and

Walgreen to compete for the Blue Cross contract). But the rhetoric

cannot be taken literally.

After all, every joint venture among competitors that

limits membership fits the lay definition of "an agreement not to

deal," and at least in recent years the Supreme Court has flatly

rejected the per se label for those that have some efficiency

achieving benefits. N.W. Wholesale Stationers, 472 U.S. at 295-98.

To the extent the group boycott label is useful at all to describe

a per se violation, it is principally a warning against

anticompetitive secondary boycotts--e.g., manufacturers who agree

not to supply a store that buys from a discounting manufacturer.

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Cf. Fashion Originators' Guild of Am., Inc. v. FTC, 312 U.S. 457,

465-67 (1941); U.S. Healthcare, 986 F.2d at 593.

This brings us finally to the intimations in plaintiffs’

brief of more sinister collaboration. In attacking the dismissal

of per se claims, the plaintiffs accuse the district court of

“ignor[ing] compelling evidence of per se illegal, horizontal

agreements and their anticompetitive motives and effects,” a

statement followed by bullet points that cross-reference back to

the briefs’ statement of facts. Putting aside the bid rigging and

ancillary-agreement charges already dealt with above, the pertinent

factual charge is as follows:

After Blue Cross's selection of
PharmaCare's bid in late 1997, representatives
of CVS and representatives of PharmaCare,
engaged in a series of meetings, discussions,
and written correspondence wit h
representatives of competing pharmacies Brooks
and the independent pharmacy members of
Provider. (J.A. 210-217, Stmt. ¶¶ 89-113).
As a result, these competitors agreed to set
identical prescription reimbursement rates,
both directly and by an equalizing mechanism
that entailed payments by CVS to Brooks and
Provider's independent pharmacies for each
United prescription that CVS filled. (J.A.
216, 218-19, Stmt. ¶¶ 108-10, 120; J.A. 1987-
89; J.A. 3053-54; J.A. 3081-84; J.A. 3129-32.)
The parties likewise discussed identical co-
payment levels. (J.A. 2923.)

This description insinuates wrongdoing but without the

precision needed to advance the argument. Obviously any

arrangement that reciprocally admitted United’s pharmacies into the

Blue Cross network and Blue Cross’ into United’s would involve some

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arrangements as to various payment matters. This would not permit

CVS and Brooks to agree in general on prices at which prescription

drugs could be sold to the public. But the respective insurers and

their benefit managers would be entitled to discuss with newly

entering pharmacies reimbursement and co-payment rates; and there

would be nothing startling about new-comers expecting the same

reimbursement as earlier network members.2

Partial integration of the two networks--each operating

at three levels, insurer, benefit manager, and retailer--involves

settling on component payments which–-at least within each

network–-may well involve identical payments to all participating

pharmacies. It was plaintiffs' job to explain in detail to us just

what the arrangements were and why they plausibly constituted

antitrust violations. In the context of partial integration, simply

to refer to "identical principal reimbursement rates," "an

equalization mechanism," and "identical co-payment levels" is to

substitute innuendo for analysis.

2
As for the “equalization” payments by CVS to Brooks and
Provider's independent pharmacies, Blue Cross/Pharmacare apparently
reimburses its pharmacies for certain prescription drugs at lower
rates than those at which United/Provider reimburses its pharmacies
for the same drugs. To compensate United's pharmacies for agreeing
to the lower reimbursement rates, CVS and the other Blue Cross
pharmacies agreed to pay United's pharmacies $.25 for every United
subscriber's prescription that they filled. This might or might
not be a permissible arrangement, but it is not naked price fixing
by competitors.

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 This fatal obscurity has one exception. Immediately after

the paragraph quoted above, there is a further paragraph describing

a February 1998 meeting between PharmaCare and two Stop & Shop

representatives. PharmaCare had recently won the Blue Cross

contract, and it was then negotiating with United pharmacies for

reciprocal inclusion. Stop & Shop was asking to be included as

well. According to a memorandum describing the meeting prepared by

a Stop & Shop representative, the PharmaCare president said no.

The memorandum says that the reasons PharmaCare gave for

this refusal were that the negotiations to set up the new

PharmaCare network had been difficult, that it had required "horse

trading" (apparently a reference to the United/Provider

negotiations), and that adding a "third" chain (apparently

referring to Stop & Shop on top of CVS and Brooks) would make the

situation even more complex. The memorandum concluded its

recitation by saying:

[The PharmaCare president] also lectured John
and I about our industry not being farsighted
[sic] to stick together on pricing issues and
that we had only ourselves to blame for the
extremely low reimbursement rates in the
market.

In their opening brief, plaintiffs describe this last

statement as "another reason" for plaintiffs' exclusion from the

expanded Blue Cross network. The intimation (by a benefits manager

owned by CVS) that the retail pharmacies in general ought to stick

together to raise reimbursement rates paid to them by insurers

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might well interest the Antitrust Division, but plaintiffs have a

grievance only if their refusal to adhere was "another reason" for

their exclusion. This claim is unsupported by the language of the

memorandum or the follow-up depositions of the participants which

we have ourselves read.

The trial. The absence of plausible per se claims in no

way dooms the plaintiffs’ case. The initial core arrangement-–the

creation of a closed network by Blue Cross and PharmaCare

comprising CVS and various independent pharmacies--is a classic

exclusive dealing arrangement. To simplify slightly (and without

repeating details) Blue Cross, in exchange for better prices, gave

its business exclusively to one group of pharmacies, agreeing for

three years not to deal with others including Walgreen and Stop &

Shop.

Such agreements are not universally forbidden by the

Sherman Act–-indeed, they are quite common–-but may, depending on

the circumstances, unreasonably restrain trade. XI Hovenkamp,

Antitrust Law ¶¶ 1802-07, 1810-1814, 1821 (1998). Because such

agreements can achieve legitimate economic benefits (reduced cost,

stable long-term supply, predictable prices), no presumption

against such agreements exists today. Compare Standard Oil Co. of

Cal. v. United States, 337 U.S. 293, 306-307, 313-14 (1949), with

Tampa Elec. Co., 365 U.S. at 334.

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 Indeed, courts tend to be skeptical of such claims

because it is not in the long-term interest of the company that

grants the "exclusive deal" to drive out of business competitors of

the grantee. Here, Blue Cross would be disserved by making CVS a

monopolist, which could then exploit Blue Cross by demanding higher

reimbursement. Still, an excluded supplier remains free to offer

evidence that, in the individual instance, the anti-competitive

consequences of an exclusive contract outweigh the benefits.

This almost always requires a showing of injury to

competition; some savings are likely or else the buyer would

ordinarily not agree to forego dealing with other suppliers, and in

any event an agreement that caused no harm would not be worth

condemning. But harm does not mean a simple loss of business or

even the demise of a competitor but an impairment of the

competitive structure of the market. See Brown Shoe Co. v. United

States, 370 U.S. 294, 344 (1962).

If an exclusive dealing contract cuts off stores like

Walgreen from an unduly large portion of the available market for

its goods, it and others like it might cease to provide

prescription drugs. And if this led or was likely to lead to a

shortage of competing drug stores (and new entry was difficult),

the few remaining existing competitors might then be able to

conspire or otherwise misbehave without being disciplined by

competition. Where such foreclosure and negative effects are the

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result of an agreement, the Sherman Act may condemn the agreement

as unreasonable. Eastern Food Servs., 357 F.3d at 8; see XI

Hovenkamp ¶1802b.

Accordingly, at trial, it was critical to any attack on

the exclusive dealing arrangement-–and almost any other non-per-se

claim one could imagine-–that plaintiffs establish a relevant

market and harm within it. For the exclusive dealing contract, the

first step would be to show the extent of foreclosure resulting

from the Blue Cross contract with CVS and others in the PharmaCare

network, taking account of other existing foreclosures (e.g., by

United/Provider until its settlement with plaintiffs). Cf. Tampa

Elec. Co., 365 U.S. at 327-29; Eastern Food Servs., 357 F.3d at 8.

Plaintiffs sought to offer their market definition

evidence primarily, as is typical, through an economist, Dr.

Stangle. Dr. Stangle’s position in his pretrial report was that

the relevant market was “the retail sale of health care financed or

insurance reimbursed pharmaceutical products” (the product

dimension of the market) in Rhode Island (the geographic

dimension). Obviously, excluding retail sales that are not

financed or reimbursed increases the percentage size of the

foreclosed market.

In explaining why he distinguished between reimbursed

purchases and all others, Dr. Stangle pointed to the much smaller

direct cost to the Blue Cross customer who purchased the same drug

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from a closed network pharmacy (e.g., CVS) as opposed to a non-

network pharmacy (e.g., Walgreen). The defendants protested that

this ignored the customer’s “true” cost of the CVS drugs which

included a share of the insurance premium that the subscriber (or

his employer) paid to Blue Cross and also ignored other elements

affecting the comparison, such as partial reimbursement for out-of-

network purchases.

Pointing to these supposed flaws in Dr. Stangle's market

definition, the district court refused to allow the jury to

consider it. Then, as already recounted, the plaintiffs made a

proffer of the testimony for the record and rested, the defense

moved for a directed verdict, and the judge granted the motion and

entered judgment for the defendants. The judge said that any

remaining evidence in the record supporting the plaintiffs’ market

definition was too thin to permit the jury to find the proposed

market in the absence of expert testimony.

Plainly, for high-cost prescription drugs, whether

insurance will cover purchases at a particular pharmacy tends to be

crucial to consumer choice, and Dr. Stangle was correct in

retorting to the defense that a customer who has paid his insurance

premium (or had it paid for him) will–-at least for high priced

drugs–-seek out closed network pharmacies if reimbursement is

higher and shun those not within the insurer’s closed network. At

the point of sale, the customer is interested in what he pays and

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gets reimbursed, not some imputed (and now sunk) insurance premium

cost.

Unfortunately for Dr. Stangle's market definition, the

concern in an ordinary exclusive dealing claim by a shut-out

supplier is with the available market for the supplier. Here, for

Walgreen and Stop & Shop, their potential customers are

presumptively all retail customers for prescription drugs-–not just

that smaller sub-group who are insured or reimbursed. To say

that some sub-group of customers is foreclosed proves nothing by

itself about the impact on pharmacies.3

This is the same defect we recently addressed in Eastern

Food Services. There, as here, a shut-out supplier complained that

the foreclosed customers (in Eastern, they were students and

faculty seeking food services on a university campus) were

foreclosed by the university’s exclusive dealing contract with

another vendor. 357 F.3d at 3-4, 6-7. But the impact of the

foreclosure on the supplier depended not on the impact on the

students and faculty but on how many unforeclosed vending machine

customers remained elsewhere. Id. at 6-7.

Walgreen and Stop & Shop sell prescription drugs to lots

of customers including those whose purchases are not reimbursed.

3
One of the defendants suggests that Rhode Island is too large
a geographic market because customers shop locally. Reflection
will reveal that--whatever the correct market--this argument is a
different version of the same mistake of focusing on the customer
rather than the supplier.

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Conceivably, the latter could be so small a group that foreclosure

of a large percentage of reimbursed customers would still be fatal,

or there might be some special circumstance that made separate

consideration of the sub-group appropriate. But the former

possibility would still have to be proved, normally by a proper

market definition; and of the latter, there is no hint in this

case.

Conceivably, some adjustment to account for the omission

of self-paying customers could be devised from existing evidence:

plaintiffs say that Blue Cross and United insure 70 percent of

Rhode Islanders. But even if a figure representing the entire

market could be derived, the number foreclosed by Blue Cross (and

formerly by United) remains unknown because a significant portion

of Blue Cross' customers have policies that do not effectively

restrict them to the closed network. Nor is it our job to build

plaintiffs' case for them.

The plaintiffs refer to other record evidence that they

say was available to the jury to establish the same reimbursed-

drugs product market without testimony from Dr. Stangle. The

evidence is described in some detail; for example, the Stop & Shop

executive in charge of pharmacy products testified to the same

large differential in out of pocket costs to reimbursed and

unreimbursed customers. But this simply repeats the same mistake

in focus without the Ph.D.

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 It may be worth adding that even a high number would not

necessarily establish an antitrust violation. XI Hovenkamp ¶¶

1820b at 147, 1820d. How much of the market must remain open to

support decent competition depends on scale economies (retail

pharmacies are different than car makers), on ease of re-entry, and

on other factors. Cf. id. at ¶ 1820d. The still somewhat useful

Learned Hand formula for monopoly power has no counterpart in

exclusive dealing law. United States v. Aluminum Co. of America,

148 F.2d 416, 424 (2d Cir. 1945). But reliable numbers are an

essential starting point and were not supplied.

For exclusive dealing, foreclosure levels are unlikely to

be of concern where they are less than 30 or 40 percent. See

Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 45-46

(1984) (O'Connor, J., concurring); Hovenkamp, Federal Antitrust

Policy 436-37 & nn. 43-45 (2d ed. 1999) (collecting cases). But

while low numbers make dismissal easy, high numbers do not

automatically condemn, but only encourage closer scrutiny based on

factors just mentioned. There are a few cases to the contrary,

Hovenkamp, Federal Antitrust Policy, at 437 n. 49, but they cannot

be reconciled with Tampa, 365 U.S. at 329, 333; see also Roland

Machinery Co. v. Dresser Indus., Inc., 749 F.2d 380, 393-94 (7th

Cir. 1984) (Posner, J.); XI Hovenkamp, ¶ 1820b at 147, 1821d.

The plaintiffs also complain that the district court

should have permitted them to offer at trial evidence on two other

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matters: “[first] that Blue Cross manipulated its bidding process

and the selection of PharmaCare to manage its closed pharmacy

network . . . [and second] evidence showing the mutual, concerted

expansion of the defendants’ closed pharmacy networks.” This

evidence, say the plaintiffs, was relevant to their broad rule of

reason case even if neither incident was a per se violation.

Plaintiffs devote only three paragraphs (and one long

quotation from an old warhorse) to explaining why or how this

evidence might be relevant to their “broader challenge to the

defendants’ course of conduct . . . .” The warhorse is the

reminder in Chicago Board of Trade v. United States, 246 U.S. 231,

238 (1918), since repeated in other cases, that in assessing a

restraint, a broad array of prior history of the restraint, motive,

surrounding conditions and the like may be pertinent.

Whether evidence was wrongly excluded depends in part on

what it was offered to prove. Plaintiffs' brief says that the two

excluded incidents were relevant to show “deliberate, concerted

action by the defendants” and “that the concerted action

unreasonably restrained or tended to restrain trade in the relevant

market.” The former proposition is admitted (there are explicit

agreements); and the latter is simply an abstract description of

the Sherman Act’s rule of reason and is not a honed antitrust

theory for which specific evidence might or might not be relevant.

-26-
 Chicago Board of Trade is not an endorsement of kitchen-

sink antitrust in which anything that might alarm a jury is made

admissible. Plaintiffs had, so far as appears, only one

substantial and relevant antitrust theory–-namely, that Blue Cross

had adopted a competitively harmful exclusive dealing arrangement,

made more fearsome by its reciprocal expansion and coupled with

overbroad ancillary restraints. For this, collaboration was

patent–-no one denied the existence of the contracts. The

allegedly flawed bidding process added nothing to proof of

collaboration and had no demonstrated antitrust significance.

In their brief on appeal, plaintiffs suggest that the bid

process evidence showed that Blue Cross was determined to exclude

plaintiffs for the indefinite future and "would have permitted an

inference that the three-year terms of the network agreements were

illusory." The only "restraint" within the meaning of the Sherman

Act was the contractual limitation on Blue Cross' ability to add

new pharmacies; any unilateral decision thereafter to exclude

plaintiffs would not extend the pertinent "restraint."

The reciprocal expansion incident was arguably more

relevant. It did not affect the extent of total foreclosure–-

United had not previously included plaintiffs; but (merely as an

example) some of the ancillary terms seemingly made it harder for

the plaintiffs to join either network or start a competing network.

Yet the district judge’s in limine ruling did not exclude proof of

-27-
the terms–-only proof of the details of negotiations, and at trial

the district judge apparently reversed the tentative exclusion and

allowed in some of the details.

There is yet another problem. As already noted, neither

the alleged sham bidding process nor the reciprocal expansion of

closed networks was a per se violation although the latter,

particularly with its ancillary restraints, had a bearing on any

rule of reason attack on the core exclusive dealing arrangement.

It is not easy to think of a rule of reason analysis that does not

depend on showing adverse effects on competition in a properly

defined relevant market. Cf. Augusta News Co., 269 F.3d at 47.

This predicate failed with Dr. Stangle's testimony.

Some antitrust cases are intrinsically hopeless because

(as in Eastern) they merely dress up in antitrust garb what is, at

best, a business tort or contract violation. By contrast, Blue

Cross’ adoption of a closed network whose impact was arguably

reinforced by its reciprocal expansion coupled with ancillary

restraints, might be an unreasonable foreclosure of a properly

defined market. However, as plaintiffs omitted the proof, one

simply cannot tell.

Whether or not there was an antitrust violation affecting

the plaintiffs, some of Blue Cross’ customers will doubtless be

inconvenienced by restricting their purchases to the closed

network. If use of a closed network reduces costs for Blue Cross

-28-
and also reduces or holds down the price of a closed market policy,

this may be a legitimate outcome--especially if an open market

policy is also an available option. There are few free lunches in

the world of commerce.

The possibility always remains that a dominant company

may act inefficiently or may unfairly exploit its customers. The

usual check for such abuses is competition (here, United is an

obvious competitor for Blue Cross) but competition may sometimes be

inadequate. In such cases antitrust may not always offer customers

much protection, Aluminum Co. of America, 148 F.2d at 429; but

state regulation--sometimes wisely and sometimes not--is usually

free to fill the gap.

Affirmed.

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