Editor’s Note: In a recent “Antitrust Practice Group Bulletin” for the American Health Lawyers Association, Manatt Health examined the August 9, 2017, decision by a federal district court to dismiss Sherman Act group boycott claims that The Medical Center at Elizabeth Place, LLC (MCEP) brought against Premier Health Partners (Premier) and its participating hospitals, because MCEP erroneously sought to apply the per se standard to the defendants’ activities. The decision provides guidance for considering restraints in the context of legitimate joint ventures and highlights the practical differences between pleading rule of reason and per se cases. Key points are summarized below.

Background

In 2012, MCEP, a 26-bed adult acute care hospital, sued Premier, a not-for-profit corporation formed by a Joint Operating Agreement among Atrium Health System, Catholic Health Initiatives, MedAmerica Health Systems Corporation, Samaritan Health Partners and UVMC. MCEP alleged that the defendants organized a group boycott of MCEP, denying MCEP access to essential managed care contracts, physicians and funding.

In 2014, Judge Black granted summary judgment for the defendants on the basis that they formed a single entity and therefore could not be “conspiring” under Section 1 of the Sherman Act. MCEP appealed, and in 2016 the U.S. Court of Appeals, Sixth Circuit reversed and remanded. Using the Supreme Court’s decision in American Needle, Inc. v. National Football League, 560 U.S. 183 (2010) as a guide, the Sixth Circuit ruled that a reasonable jury could conclude that the defendant hospitals, in fact, operated as independent entities, behaving more like competitors than one, united organization. (We reported on the case in the April 2016 issue of Manatt “Health Update.”)

On remand, Judge Black overruled a summary judgment motion brought by the defendants, arguing that, because the per se rule does not apply, MCEP’s claims should be dismissed. When Judge Black recused himself, the defendants filed a motion for reconsideration as to the applicable legal standard with Judge Rice. Judge Rice granted the defendants’ motion for summary judgment. The judge found that MCEP’s claim was not subject to per se condemnation and dismissed the complaint, because MCEP disavowed any reliance on the rule of reason.

When Are a Joint Venture’s Restraints Per Se Illegal?

Judge Rice explained that very few restraints are condemned per se. The vast majority are examined on a case-by-case basis under the “rule of reason” standard. A category is deemed per se illegal when the entire category of restraints has such a clear lack of redeeming virtue that it is conclusively presumed to be unreasonable. Therefore, the plaintiff does not need not prove an effect on the market.

Citing the Supreme Court’s decision in Texaco Inc. v. Dagher, 547 U.S. 1 (2006), Judge Rice stated that both a joint venture’s core and ancillary activities are subject to the rule of reason. Joint ventures are not insulated from per se violations. They are, however, more likely to be judged under the rule of reason, because they may increase efficiency. Therefore, otherwise per se illegal activities may be permitted when they are necessary to achieve the joint venture’s efficiency-enhancing purpose. 

The decision lays out the framework for considering whether a restraint is subject to the rule of reason or per se rule in the following decision tree:

Using this framework, the court examined the two restraints that MCEP challenged:

1. Volume-Based Pricing/Panel Limitation Provisions

Under the defendants’ panel limitations provision, if an insurer adds other hospitals to its network and dilutes the volume the defendants expect from that insurer, the defendants can terminate the contract or renegotiate rates. The court found that these provisions were not subject to per se condemnation for four reasons:

a) The provisions are a vertical—not horizontal—restraint. (A horizontal restraint must stem from a horizontal agreement, not just have horizontal effects.)

b) Even if the panel limitations provision was a horizontal restraint, because pricing is a core activity of the joint venture’s operations, it would still not be subject to per se treatment.

c) The restraint was not a blatant restraint of trade typically subject to per se analysis, because the contracts did not explicitly prohibit insurers from adding other hospitals. Courts have consistently rejected antitrust challenges to short-term exclusive contracts between insurers and hospitals.

d) The panel limitation was plausibly necessary to the joint venture’s purpose because it helped ensure that patient volume at the hospital remained steady as a quid pro quo for the discounted rates offered, which could reduce premiums and increase options for consumers. As a result, the restriction was plausibly necessary to the joint venture’s purpose and therefore subject to the rule of reason.  

2. Non-Compete Provisions

MCEP also challenged the defendants for enforcing certain non-compete provisions in leases and physician employment contracts when physicians invested in MCEP, affiliated with MCEP or referred patients to MCEP. Again, Judge Rice found these provisions to be purely vertical and therefore not subject to per se condemnation. After examining the non-compete clauses under Dagher, the judge concluded that the provisions were legal under the rule of reason. The non-compete provisions were core to the joint venture’s activities, and it is plausible that the restraints were necessary to achieve the procompetitive benefits of the joint venture.   

Aren’t Group Boycotts Always Per Se Illegal?

The court rejected MCEP’s contention that group boycotts are always per se unreasonable restraints on trade, making it improper to consider whether the challenged restraints are plausibly necessary to achieve some of the joint venture’s procompetitive objectives. Although the court noted that “it is true that group boycotts have often been included on the list of ‘classes of economic activity that merit per se invalidation under § 1,’” the court concluded that not all concerted refusals to deal (i.e., group boycotts) are predominantly anticompetitive.

Citing Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. 284 (1985), the court identified three characteristics of per se illegal group boycotts:

1. They involve joint efforts to disadvantage competitors by cutting off access to necessary supplies and customers;
2. The defendants possess a dominant position in the relevant market; and
3. The practices are generally not justified by plausible arguments that they were intended to enhance overall efficiency and increase market competition.

A concerted refusal to deal does not need to possess all these traits to merit per se treatment. In this case, however, the court found that, even assuming arguendo that the alleged group boycott involved efforts to disadvantage MCEP by cutting off access to necessary managed care contracts, physicians and/or investors, and assuming Premier possessed a dominant position in the relevant market, the challenged restraints were nevertheless plausibly intended to increase both overall efficiency and market competition. Therefore, they were not subject to per se condemnation.