Alabama Federal Court Will Analyze Blue Cross Blue Shield Antitrust Claims Under Per Se Standard; Defers Decision on “Single Entity” Defense

by Patterson Belknap Webb & Tyler LLP
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A court’s decision regarding the proper standard of review in a Sherman Act Section 1 case—whether to analyze the defendant’s conduct as a per se antitrust violation or under the “rule of reason”—is highly significant.  The rule of reason requires a plaintiff to show that the anticompetitive effects of the conduct are not outweighed by its procompetitive benefits—often, a factually intensive analysis.  But under the per se standard a plaintiff (and the court) may dispense with this balancing test; it is necessary only to prove that the conduct actually happened.

The defendants in the Blue Cross Blue Shield multi-district antitrust litigation recently learned that a court in the Northern District of Alabama will review certain claims against them under the per se standard.

The Blue Cross Blue Shield Association is not itself an insurer, but a network of dozens of plans (“Blue Plans”) across the country.  Its governance structure was approved by a vote of the member plans, who have also agreed to be bound by the Association’s rules.  Nevertheless, the plans operate as autonomous economic entities.  The Association’s board is comprised of the CEO of each of the Blue Plans, plus its own CEO.

As relevant to the antitrust claims, the Association owns the Blue Cross and Blue Shield trademarks, which it licenses to the Blue Plans.  Each of these license agreements includes an exclusive service area within which the licensee may use the marks.  Using the marks outside of the service area could subject the Blue Plan to fines or license termination.  (A member plan is free to operate non-Blue-branded products outside of its exclusive service area.)  Starting in 2005, the association developed the “National Best Efforts” rule, requiring a member plan to derive at least two-thirds of its national health insurance revenue under its Blue brands.

Without deciding whether the service area allocation alone would constitute a per se antitrust violation the court found that the allocation, together with other anticompetitive restraints including the “National Best Efforts” rule, qualify the case for per se treatment.  The best efforts rule, the court said, constitutes an “output restriction” that is one of the classic examples (along with horizontal market allocation and price-fixing) of a per se violation.

In doing so, the district court focused heavily on the Supreme Court decision in United States v. Sealy, Inc., and its progeny.  In Sealy, individual mattress manufacturers and licensees of the Sealy mark agreed not to sell Sealy-branded mattresses outside of allotted geographic areas. There was also evidence of price fixing through the use of Sealy’s protocols.  The Supreme Court, finding that Sealy was an “instrumentality” of the manufacturers for purposes of horizontal territorial allocation, held that the per se standard applied. Here, too, the district court decided that the Association could serve as such an instrumentality.

Not all is lost for defendants; they will still have an opportunity to rely on a “single entity” defense.  Since Section 1 of the Sherman Act is concerned with agreements among multiple economic actors, defendants can avoid liability on a showing that, for purposes of the alleged anticompetitive conduct, they operated as a single entity.  Here, defendants argue that the licensing of the Blue Marks—the activity that imposed the anticompetitive restraints—occurred at the hands of the Association, i.e. a single entity.  Both parties moved for summary judgment on that argument, but the court found that it could not be resolved as a matter of law.

We will continue to monitor this case going forward, and report on any developments—including possible implications for other restrictions implemented by similar associations.

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