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
-10-
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.
-24-
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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Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of Rhode Island
Court: Court of Appeals for the First Circuit
Date filed: 2004-06-24
Citations: 373 F.3d 57
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