City of New York v. Group Health Incorporated

Filing

OPINION, Affirmed, by RJM JMW RCW, FILED.[368524] [10-2286]

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10-2286-cv
City of New York v. Group Health Inc.

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UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term 2010
(Argued: May 4, 2011

Decided: August 18, 2011)

Docket No. 10-2286-cv
-----------------------------------------------------x
CITY OF NEW YORK,
Plaintiff-Appellant,
-- v. -GROUP HEALTH INCORPORATED, HIP FOUNDATION, INC., and
HEALTH INSURANCE PLAN OF GREATER NEW YORK,
Defendants-Appellees.
-----------------------------------------------------x
B e f o r e :

MINER, WALKER, and WESLEY, Circuit Judges.

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Appeal from a judgment of the United States District Court for

28

the Southern District of New York (Richard J. Sullivan, Judge)

29

granting summary judgment to Defendants-Appellees and dismissing

30

the complaint. The City of New York argues that the district court

31

erred by concluding that the market pled in its antitrust complaint

32

is legally insufficient and by denying the City’s motion to amend

33

its complaint.

34

and that it was within the district court’s discretion to deny

35

leave to amend.

36

court.

We conclude that summary judgment was appropriate

We therefore AFFIRM the judgment of the district

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ALAN H. KLEINMAN, Assistant
Corporation Counsel (Michael A.
Cardozo, Corporation Counsel of the
City of New York, June R. Buch,
John R. Low-Beer, Richard J. Costa,
Assistant Corporation Counsel, on
the brief), New York, N.Y., for
Plaintiff-Appellant City of New
York.
STEPHEN M. AXINN (Michael L.
Keeley, on the brief), Axinn,
Veltrop & Harkrider LLP, New York,
N.Y., for Defendant-Appellee Group
Health Incorporated.
BRUCE H. SCHNEIDER (Derek I.A.
Silverman, on the brief), Stroock &
Stroock & Lavan LLP, New York,
N.Y., for Defendants-Appellees
Health Insurance Plan of Greater
New York and HIP Foundation, Inc.
JOHN M. WALKER, JR., Circuit Judge:

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Plaintiff-Appellant City of New York appeals from a judgment

27

of the United States District Court for the Southern District of

28

New York (Richard J. Sullivan, Judge) granting summary judgment to

29

Defendants-Appellees

30

Foundation, Inc., and Health Insurance Plan of Greater New York

31

(together, “HIP”), and dismissing the City’s antitrust complaint

32

without leave to amend.

Group

Health

Incorporated

(“GHI”),

HIP

33

The City sued health insurance providers GHI and HIP under

34

federal and New York State antitrust laws, seeking to prevent the

35

companies

36

judgment to GHI and HIP, holding that the market definition the

37

City alleged as the basis of its claims is legally deficient.

from

merging.

The

district

2

court

granted

summary

It

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also denied the City’s motion to amend its complaint to allege a

2

new market definition.

3

appeal.

The City challenges these conclusions on

4

We agree with the district court that the alleged relevant

5

market is legally deficient, and conclude that its denial of leave

6

to amend was not an abuse of discretion.

7

district court’s judgment.

8
9
10

We therefore AFFIRM the

BACKGROUND
I.

New York City's Health Benefits Program and the Proposed

Merger

11

The City and several related entities obtain health insurance

12

for their employees and their employees’ dependents through the

13

City's

14

individuals are insured through the Program.

15

Labor Relations administers the Program jointly with the Municipal

16

Labor Committee, an association of about 50 unions that represent

17

the employees.

Health

Benefits

Program.

Approximately

1.2

million

The City's Office of

18

As a result of collective bargaining agreements and municipal

19

law requirements, the City offers its employees several types of

20

health insurance plans.

21

Health Maintenance Organization ("HMO") plan, a Participating

22

Provider Organization ("PPO") plan, or a Point of Service ("POS")

23

plan.

Employees can select coverage through a

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3

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The City periodically issues Requests for Proposals ("RFPs")

2

inviting insurers to propose plan designs and associated premiums.

3

Insurance providers compete to be selected during each procurement

4

round.

5

Employees choose among the plans that the City selects.

6

Those who do not receive Medicare benefits can choose among

7

thirteen plans, and Medicare participants can choose among fifteen.

8

GHI and HIP offer the two least expensive and most popular

9

plans.

GHI offers a PPO plan and HIP offers an HMO plan.
of

City

employees

and

non-Medicare

retirees

The

10

majority

select

11

coverage from GHI's or HIP’s plan, with only a small minority

12

choosing the plan with the third largest share of enrollment.

13

Under municipal law and by agreement between the City and the

14

Municipal Labor Committee, the City pays the entire premium for

15

employees who enroll in either the HIP plan or the GHI plan.

16

Employees who select more expensive coverage from another carrier

17

must pay any excess in the cost of that coverage over the cost of

18

the HIP plan.

19

In September 2005, GHI and HIP announced their intent to merge

20

and to convert from non-profit to for-profit status.

21

States Department of Justice and the New York State Attorney

22

General investigated the antitrust implications of the proposed

23

merger and decided not to challenge it.

24

Departments of Health and Insurance granted approval for GHI and

4

The United

The New York State

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HIP to combine their operations as an interim step pending approval

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of an acceptable plan of conversion to a publicly owned company

3

and, thereafter, a formal merger.

4

II.

5

Procedural History
On November 13, 2006, the City filed this action seeking an

6

injunction to block the merger.

7

merger under § 7 of the Clayton Act, 15 U.S.C. § 18, §§ 1 and 2 of

8

the Sherman Act, 15 U.S.C. §§ 1-2, and the Donnelly Act, N.Y. Gen.

9

Bus. L. § 340(1), New York's antitrust law.

It alleges that

10

because

majority

11

employees in the City's Health Benefits Program, the merger of the

12

carriers will substantially reduce competition, and will result in

13

monopolization of the relevant market and an increase in the

14

premiums that the City is required to pay.

15

the relevant market as the "low-cost municipal health benefits

16

market."

17

inexpensive and that the City selects for inclusion in the Health

18

Benefits Program.1

GHI's

and

HIP's

plans

The complaint challenges the

cover

a

vast

of

the

The complaint defines

This market includes only those insurance plans that are

19

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2
3
4
5
6
7
8
9

1

The complaint alleges that this relevant market also
includes the health insurance program that the New York City
Transit Authority administers. Because the parties did not
address this aspect of the alleged market in their briefing
before the district court, the district court did not consider it
in resolving the summary judgment motions. See City of New York
v. Group Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246,
at *3 n.3 (S.D.N.Y. May 11, 2010). The parties do not raise this
aspect of the alleged market on appeal.
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When the City filed its complaint, it moved for a temporary

2

restraining order blocking the merger.

3

case was initially assigned, denied the motion.

4

“there

5

analysis that the plaintiff has adopted here.

6

focused on what the City is paying for, and not so much on the

7

market of insurance coverage. . . .

8

the same, whether they're offered to the City or they're offered to

9

a private large employer.”

are

substantial

questions

Judge Karas, to whom the

about

the

He explained that
market

definition

It appears to be

I think the products . . . are

10

On December 4, 2009, after several years of discovery, GHI and

11

HIP moved for summary judgment dismissing the City's complaint.

12

They argued (1) that the market the City alleged in its complaint

13

is insufficient as a matter of law because it is based on the

14

City's preferences and ignores the market of insurance providers

15

that compete for the City's business, and (2) that the City could

16

not demonstrate a relevant antitrust injury because any increased

17

premiums would result from GHI's and HIP's conversion to for-profit

18

entities, not from their merger.

19

On January 20, 2010, nine days before its opposition papers

20

were due, the City sought leave to file a motion to amend its

21

complaint to add alternative market definitions.

22

to add two alternative markets: (1) all insurance plans the City

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selected for inclusion in the Health Benefits Program, not only the

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inexpensive plans; and (2) the market for all commercial medical

6

The City sought

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benefits in downstate New York.

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claim on the "Upward Pricing Pressure" test, which analyzes the

3

effect of a merger on the merged firm’s pricing incentives.

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City

5

establish the anticompetitive effect of the merger without the need

6

to define a relevant market.

7

contended

that

the

The City also sought to base its

Upward

Pricing

Pressure

test

The
could

The district court granted GHI and HIP's summary judgment

8

motion and denied the City's motion to amend.

9

Group Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246, at *7

City of New York v.

10

(S.D.N.Y. May 11, 2010).

11

alleged in its complaint is legally insufficient because it was

12

defined by the preferences of a single purchaser: the City. Id. at

13

*4-5. Judge Sullivan, to whom the case had been reassigned, denied

14

the City's motion to amend on the basis that (1) the City exhibited

15

undue delay because it was on notice of its potentially deficient

16

market definition at least as early as Judge Karas's denial of its

17

request for a temporary restraining order more than three years

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earlier, and (2) the amendments would prejudice GHI and HIP by

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forcing them to conduct substantial additional discovery after

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three and a half years of defending a lawsuit premised on the

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City's narrow market definition.

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It concluded that the market the City

Id. at *5-7.

The City appealed.

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DISCUSSION
I. Sufficiency of the Alleged Market

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We review an award of summary judgment de novo, affirming

4

"only if there is no genuine issue as to any material fact, and if

5

the moving party is entitled to a judgment as a matter of law."

6

Allianz Ins. Co. v. Lerner, 416 F.3d 109, 113 (2d Cir. 2005).

7

To state a claim under § 7 of the Clayton Act, §§ 1 or 2 of

8

the Sherman Act, or New York’s Donnelly Act, a plaintiff must

9

allege a plausible relevant market in which competition will be

10

impaired.

See, e.g., United States v. E.I. du Pont de Nemours &

11

Co., 353 U.S. 586, 593 (1957) (“Determination of the relevant

12

market is a necessary predicate to a finding of a violation of the

13

Clayton Act because the threatened monopoly must be one which will

14

substantially lessen competition within the area of effective

15

competition.” (internal quotation marks omitted)); Chapman v. New

16

York State Div. for Youth, 546 F.3d 230, 238 (2d Cir. 2008)

17

(Sherman Act); Benjamin of Forest Hills Realty, Inc. v. Austin

18

Sheppard Realty, Inc., 823 N.Y.S.2d 79, 83 (App. Div. 2006)

19

(Donnelly Act).

20

products ‘reasonably interchangeable by consumers for the same

21

purposes,’

22

substitute restrains a firm’s ability to raise prices above the

23

competitive level.”

24

386 F.3d 485, 496 (2d Cir. 2004) (quoting E.I. du Pont de Nemours

The relevant market must be defined “as all

because

the

ability

of

consumers

to

switch

to

a

Geneva Pharm. Tech. Corp. v. Barr Labs. Inc.,

8

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& Co., 351 U.S. at 395).

2

its

3

reasonable interchangeability and cross-elasticity of demand, or

4

alleges a proposed relevant market that clearly does not encompass

5

all interchangeable substitute products even when all factual

6

inferences are granted in plaintiff's favor, the relevant market is

7

legally insufficient."

8

City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430, 436 (3d

9

Cir. 1997)).

proposed

relevant

"[W]here the plaintiff fails to define

market

with

reference

to

the

rule

of

Chapman, 546 F.3d at 238 (quoting Queen

10

Here, the district court correctly concluded that the market

11

alleged in the City’s complaint is legally insufficient because it

12

is defined by the City’s preferences, not according to the rule of

13

reasonable interchangeability and cross-elasticity of demand.

14

market alleged in the City’s complaint ignores the competition

15

existing among insurance providers for the City’s business, as well

16

as the health insurance market for other large employers in the

17

region.

18

insurance companies other than those it selects for the Health

19

Benefits Program from proposing competitive products should the

20

merged firm raise its premiums to supracompetitive prices.

The

The City does not allege any factor that would prevent

21

The arguments the City raises on appeal are unavailing.

22

City first argues that the insurance plans it approves constitute

23

a unique market because they reflect the City's "sound policy

24

choices." A single purchaser's preferences, however, cannot define

9

The

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a market.

We faced a similar argument in Hack v. President and

2

Fellows of Yale College, in which the plaintiffs complained that

3

Yale was illegally tying dormitory housing to their education and

4

alleged that Yale, because of its uniqueness, constituted its own

5

market for education. 237 F.3d 81, 86-87 (2d Cir. 2000), abrogated

6

on other grounds by Swierkiewicz v. Sorema N.A., 534 U.S. 506

7

(2002).

8

is "unique, . . . in a collegiate sense," it does not constitute

9

its own tying market because "there are many institutions of higher

We rejected this contention, holding that, although Yale

10

learning providing superb educational opportunities."

Id. at 86.

11

Here,

have

12

particularly suitable to the City's needs, the City does not allege

13

any reason why other similar insurance plans are unsuitable or why

14

the numerous insurance providers in the area could not or would not

15

design suitable plans to compete with those that the City selected.

16

The City next argues that its proposed market is distinct from

17

a "single-purchaser market" because the employees who select their

18

insurance

19

employees choose health coverage only from the plans that the City

20

has already selected for inclusion in the Health Benefits Program.

21

The employees’ ability to choose among the plans in the Health

22

Benefits Program does not change the fact that the competition

23

among insurance providers for the business of the City and other

24

large employers would constrain the ability of the merged firm to

although

the

coverage

approved

also

insurance

constitute

10

plans

purchasers.

may

However,

been

the

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set its premium above a competitive price. It thus cannot save the

2

City’s artificially narrow market definition.

3

Finally, the City argues that the district court erred in

4

failing

to

consider

its

expert

report,

which,

it

argues,

5

establishes the harm to competition that would result from the

6

merger.

7

the basis that the alleged relevant market is legally insufficient.

8

The City's expert report was thus irrelevant.

9

II.

The district court, however, granted summary judgment on

Denial of the City’s Motion to Amend

10

"[W]e review a district court's denial of a motion to amend

11

under the abuse of discretion standard."

Gorman v. Consol. Edison

12

Corp., 488 F.3d 586, 592 (2d Cir. 2007).

A district court abuses

13

its discretion when it “bases its ruling on an incorrect legal

14

standard or on a clearly erroneous assessment of the facts.” Bronx

15

Household of Faith v. Bd. of Educ., 331 F.3d 342, 348 (2d Cir.

16

2003).

17

Rule 15(a)(2) of the Federal Rules of Civil Procedure provides

18

that “[t]he court should freely give leave [to amend the complaint]

19

when justice so requires.”

20

party to amend its complaint unless the nonmovant demonstrates

21

prejudice or bad faith.

22

of Am., N.A., 626 F.3d 699, 725 (2d Cir. 2010) (citing Block v.

23

First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993)).

The rule in our circuit is to allow a

AEP Energy Servs. Gas Holding Co. v. Bank

24

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During the course of briefing on GHI and HIP’s summary

2

judgment motion, the City moved to amend its complaint.

3

to add two additional market definitions: first, all insurance

4

providers participating in the City’s Health Benefits Program, not

5

just

6

commercial medical benefits in downstate New York.

7

to add an alternative basis for its antitrust claims, the Upward

8

Pricing Pressure Test, which, the City explains, “predicts the

9

likely competitive impact of a proposed merger based on how a

10

merger is likely to alter the merged firm’s pricing incentives.”2

11

The City argues that the Upward Pricing Pressure test can be used

12

instead of “the traditional approach of defining relevant markets.”

13

In denying the City’s motion to amend, the district court held

14

that the City had exhibited undue delay and that the proposed

15

amendment would prejudice GHI and HIP.

16

Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246, at *5-7

17

(S.D.N.Y. May 11, 2010).

18

was aware of the flaws in its complaint at least since Judge Karas

19

questioned the City’s market definition in denying its motion for

1
2
3
4
5
6
7
8
9
10
11

2

the

low-cost

providers,

and,

second,

all

It sought

providers

of

It also sought

City of New York v. Group

The district court noted that the City

The City explains that the Upward Pricing Pressure test
measures the effect of two opposing forces resulting
from a merger. First, the upward pricing pressure
induced by the merger is measured by the diversion
ratio, the sales that would otherwise be lost by a
price increase, but that get[] recaptured by the
diversion of those sales to the larger, merged entity.
The second, countervailing downward price pressure is
measured by efficiencies that would reduce the merged
firm’s marginal cost.

12

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a temporary restraining order more than three years earlier.

2

at *6. In addition, the district court explained that allowing the

3

amendment would unduly prejudice GHI and HIP by requiring them to

4

conduct substantial additional discovery on a different and much

5

broader market.

6

Pricing Pressure Test.

7

revealed a single decision of a federal court adopting this test,”

8

which, “[i]n light of the case law’s clear requirement that a

9

[p]laintiff allege a particular product market in which competition

10

Id.

Id.

The district court also rejected the Upward
It noted that “its research has not

will be impaired, . . . is hardly surprising.”

Id. at *6 n.6.

11

The City argues that the district court abused its discretion

12

by misapplying the standards that govern a motion to amend. First,

13

it argues that its addition of the market comprising all insurance

14

providers in the Health Benefits Program does not require an

15

amendment because that market represents only a “slight change”

16

from the market pled in the City’s initial complaint.

17

not the City’s addition of a market consisting of all insurance

18

providers

19

amendment, this market suffers from the same legal deficiency as

20

the market in the City’s initial complaint.

21

market

22

Benefits Program is not -- as is required -- defined by the rule of

23

reasonable interchangeability and cross-elasticity of demand.

24

ignores the market of health insurance providers in downstate New

in

limited

the

to

Health

the

Benefits

providers

13

Program

Whether or

requires

a

formal

As discussed above, a

participating

in

the

Health

It

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York that compete for the business of the City and other large

2

employers.

3

claims and its addition to the complaint would be futile.

4

Energy Servs. Gas Holding Co., 626 F.3d at 726 (“Leave to amend may

5

be denied on grounds of futility if the proposed amendment fails to

6

state a legally cognizable claim.”).

It thus cannot form the basis of the City’s antitrust
See AEP

7

The City next argues that GHI and HIP did not demonstrate

8

undue prejudice because they did not show that the amendment would

9

require them to redo, or discard, discovery already conducted. The

10

need to redo or discard discovery, however, is not the only form of

11

undue prejudice we have recognized.

12

prejudicial when, among other things, it would require the opponent

13

to expend significant additional resources to conduct discovery and

14

prepare for trial or significantly delay the resolution of the

15

dispute.”

16

(internal quotation marks omitted).

17

would, at a minimum, require additional discovery from large

18

employers other than the City in the downstate New York area and

19

from

20

business.

21

conclude that the need to obtain this discovery would delay

22

proceedings and require substantial additional expense.

the

An “[a]mendment may be

AEP Energy Servs. Gas Holding Co., 626 F.3d at 725-26

health

insurance

Here, the City’s amendment

providers

that

compete

for

their

It was not clearly erroneous for the district court to

23

In addition, as the district court explained, the City waited

24

more than three years to seek an amendment, and did so only after

14

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confronted with a motion for summary judgment challenging its

2

market definition.

3

the delay because GHI and HIP went along with discovery, also

4

waiting more than three years to challenge the City’s market

5

definition.

6

City’s complaint earlier in the litigation, their failure to do so

7

does not necessarily mitigate the City’s delay.

8

City’s delay in seeking amendment may not be evidence of bad faith,

9

we do not think it was an abuse of discretion for the district

10

court to find that this delay, together with the prejudice that

11

would result from the amendment, warranted denial of the City’s

12

motion to amend.

The City argues that it cannot be faulted for

While GHI and HIP could have sought dismissal of the

Although the

13

Finally, we find no error or abuse of discretion in the

14

district court’s rejection of the Upward Pricing Pressure test. As

15

the district court explained, and as we discussed above, the

16

applicable case law requires plaintiffs asserting a claim under the

17

Sherman Act, the Clayton Act, or the Donnelly Act to allege a

18

market in which the challenged merger will impair competition.

19

While

20

usefulness in assessing the impact of a merger, it does not explain

21

how the test can substitute for a definition of the relevant market

22

in the pleadings. Cf. Carl Shapiro, Deputy Ass’t Attorney Gen. for

23

Economics, Antitrust Division, U.S. Dep’t of Justice, Update from

24

the

the

City

Antitrust

explains

the

Division,

Upward

at

15

15

Pricing

(Nov.

Pressure

18,

test’s

2010),

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1

http://www.justice.gov/atr/public/speeches/264295.pdf (recognizing

2

need

3

Whether or not the Upward Pricing Pressure test -- and its results

4

in this case as explained by the City’s expert -- would, as the

5

City argues, be admissible as evidence of impaired competition is

6

not relevant to the adequacy of the pleadings.

7
8

to

define

11

market

in

any

antitrust

challenge).

As such, we find no abuse of discretion and affirm the
district court’s denial of the City’s motion to amend.

9
10

relevant

CONCLUSION
For the foregoing reasons, we AFFIRM the judgment of the
district court.

12

16