Precision CPAP, Inc. et al v. Jackson Hospital et al

Filing 53

OPINION. An appropriate judgment will be entered. Signed by Honorable Myron H. Thompson on 3/8/2010. (cb, )

IN THE DISTRICT COURT OF THE UNITED STATES FOR THE MIDDLE DISTRICT OF ALABAMA, NORTHERN DIVISION

PRECISION CPAP, INC.; MEDICAL PLACE, INC.; PHASE III VANS, INC. d/b/a EAST MEDICAL EQUIPMENT AND EQUIPMENT AND SUPPLY; and MED-EX,

) ) ) ) ) ) ) Plaintiffs, ) ) v. ) ) JACKSON HOSPITAL; MED-SOUTH ) INC.; JMS HEALTH SERVICES, ) LLC, d/b/a JACKSON MED) SOUTH HOME HEALTH, LLC,; ) BAPTIST HEALTH, INC.; ) BAPTIST VENTURES-AMERICAN ) HOME PATIENT; ) ) Defendants. ) OPINION

CIVIL ACTION NO. 2:05cv1096-MHT (WO)

The plaintiffs, which are in the durable medical equipment (DME) business, bring this private antitrust suit against the defendants, which are hospitals,

corporations, and affiliates, claiming violations of §§ 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1 & 2,

as privately enforced through §§ 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15 & 26, as well as violations of Alabama state antitrust law, 1975 Ala. Code § 6-5-60. The plaintiffs are as follows: Precision CPAP, Inc.;

Medical Place, Inc.; Phase III Vans, Inc., d/b/a/ East Medical Equipment and Supply; and Med-Ex. are as follows: The defendants

Jackson Hospital; Med-South, Inc.; JMS

Health Services, L.L.C., d/b/a Jackson Med-South Home Health, Patient, Patient. L.L.C.; Inc.; Baptist and Health, Inc.; American Home Home

Baptist

Ventures-American

Specifically, the plaintiffs allege that the

defendants have illegally excluded them from the DME market. Jurisdiction over the plaintiffs' federal claims is proper pursuant to 28 U.S.C. §§ 1331 (federal

question) and 15 U.S.C. § 4 (antitrust); supplemental jurisdiction over the state claims is proper under 28 U.S.C. § 1367. Now before the court is the defendants' motion to dismiss the plaintiffs' first amended complaint. Fed. R.

2

Civ. P. 12(b)(6).

For the reasons that follow, the

motion will be granted.

I. MOTION-TO-DISMISS STANDARD In considering a defendant's motion to dismiss, the court accepts the plaintiff's allegations as true, Hishon v. King & Spalding, 467 U.S. 69, 73 (1984), and construes the complaint in the plaintiff's favor, Duke v. Cleland, 5 F.3d 1399, 1402 (11th Cir. 1993). "The issue is not

whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).

To survive a dismissal motion, a complaint need not contain "detailed factual allegations," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007), but rather "only enough facts to state a claim to relief that is plausible on its face," id. at 570.

3

II. BACKGROUND The relevant facts as alleged by the plaintiffs are as follows. formerly The plaintiffs are corporations engaged or in the business of providing DME

engaged

(including beds, walkers, wheelchairs, and oxygen tanks) for the home-health Alabama. care of The patients vast in and around of the

Montgomery,

majority

plaintiffs' business results from the sale or lease of DME to patients who have been discharged from local hospitals and prescribed DME by their physicians. Defendant Jackson Hospital, in Montgomery, and

defendant Baptist Health, which operates two hospitals in Montgomery as well as a hospital in nearby Prattville, Alabama, are the primary source of hospital services for a majority of Montgomery-area residents. Until the late

1990s, the plaintiffs focused their DME marketing efforts on the staff at these hospitals and on patients awaiting discharge. When patients did not choose a DME provider,

they were assigned to a provider on a rotating basis.

4

In the late 1990s, Jackson Hospital and Baptist Health each decided to enter the DME market. Jackson

entered into a joint venture with defendant Med-South, Inc., a DME provider, to operate JMS Health Services. Similarly, Baptist Health entered into a joint venture with defendant to American Home Patient, Inc., a DME Home

provider, Patient. of DME

operate

Baptist

Ventures-American

Each joint venture created an in-house provider for the patients at Jackson's and Baptist's

respective hospitals.1 Once these joint ventures were formed, Jackson

Hospital began referring its patients with DME needs to JMS, and the hospitals operated by Baptist Health began referring Ventures. their The patients hospitals with DME needs their to Baptist of

ended

practice

assigning DME providers on a rotating basis to patients who do not choose a provider. Unless patients

1. The amended complaint does not allege that Jackson Hospital and Baptist Health cooperated in any way with each other, only that they both entered similar joint ventures with different DME providers. 5

specifically requested an outside DME provider, they were referred to the hospital's affiliated DME provider. The hospitals plaintiffs have allege that their and referrals that they from have

almost

vanished

suffered a loss of revenue as a result of the defendants' actions. Plaintiff Med-Ex sold the assets of its

business and alleges that the sale price of the assets was depressed as a result of the defendants' actions.

III. FEDERAL CLAIMS A. Antitrust Standing

As a threshold matter, the court must address whether the plaintiffs have standing to sue under the Sherman and Clayton Acts. Section 4 of the Clayton Act defines the

class of persons who may bring a private-damages action under antitrust laws. It states:

"Any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefore in any district of the United States in the district in which the defendant resides or is found or has 6

an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney's fee." 15 U.S.C. § 5. Despite this language, which could

conceivably "encompass every harm that can be attributed directly to the consequences of an antitrust violation," Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 529 (1983), the courts have interpreted this statute more narrowly. In

considering whether a party has standing to bring suit under the antitrust laws, a court should first determine "whether the plaintiff suffered `antitrust injury.'"

Todorov v. DCH Healthcare Auth., 921 F.2d 1438, 1449 (11th Cir. 1991). Antitrust injury is "injury of the

type the antitrust laws were intended to prevent and that flows from that which makes defendants' acts unlawful." Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977). Specifically, "[t]he injury should reflect

the anticompetitive effects either of the violation or of

7

anticompetitive acts made possible by the violation." Id. Second, is "the an court should determine of whether the

plaintiff laws."

efficient

enforcer

the

antitrust

Todorov, 921 F.2d at 1449.

This requires an

examination of factors including: "1) the existence of a causal connection between the antitrust violation and the alleged injury; 2) the nature of plaintiff's alleged injury; 3) the directness or indirectness of the asserted injury and the related inquiry of whether the damages are speculative; 4) the potential for duplicative recovery or complex apportionment of damages; and, finally, 5) the existence of a more direct victim of the alleged anticompetitive conduct." Austin v. Blue Cross & Blue Shield of Alabama, 903 F.2d 1385, 1388 (11th Cir. 1990). To determine antitrust

standing, "a court must review the allegations contained in the complaint." Id. at 1387.

The plaintiffs allege that the hospitals and their captive DME providers combined to restrict access to the market for DME sales and rentals to patients discharged from their hospitals. Specifically, the hospitals ceased 8

the rotational assignment of patients to the plaintiffs and other DME providers; denied the plaintiffs access to the hospital staff and patients; and instructed case workers on staff to refer patients to the captive DME providers. The plaintiffs allege that, as a result, in

most cases patients know of only one choice of DME provider. According to the plaintiffs, this has led to

an increase in the captive DME providers' market power to the point where they can cut services and raise prices without any corresponding drop in usage or revenues. The defendants are contend that to the plaintiffs' antitrust

allegations standing. plaintiffs

insufficient

establish

In particular, the defendants argue that the lack antitrust standing because they are

unable to show that prices have actually risen for DME not covered by Medicare or that the quality has eroded for DME covered by Medicare. According to the

defendants, the plaintiffs did not suffer an antitrust

9

injury and, even if they had, the plaintiffs would not be the most efficient enforcers of the antitrust laws.

1.

Antitrust Injury The defendants rely on the reasoning in Todorov to

support their contention that the plaintiffs did not suffer an antitrust injury. There, the Eleventh Circuit

Court of Appeals held that a doctor lacked antitrust standing to sue a hospital for failure to grant

privileges in the radiology department. Todorov was a practicing neurologist who relied on CT scans to diagnose his patients. 1442. Todorov, 921 F.2d at

He referred many of his patients to DCH Healthcare DCH would receive a fee

Authority for the procedure.

from patients' insurance companies for the CT scan, even though Todorov usually examined the film himself. To

obtain some of the profits from the procedure, Todorov applied for privileges at DCH to administer and

officially interpret CT scans.

DCH, however, denied his

10

application. Todorov brought suit against defendants for conspiracy under Section 1 of 2 the of Sherman the Act and Act.

monopolization

under

Section

Sherman

Specifically, he alleged that radiologists controlled the market and were reaping supercompetitive profits. The court held that Todorov's alleged injury was not the "type the antitrust laws were intended to prevent and that flows from that which makes the defendants' acts unlawful." Id. at 1453. Todorov "applied for privileges

in the radiology department so that he could reap the profits that the radiologists received" from the inflated prices that patients were charged. Id. at 1452. Thus,

his primary objective in bringing suit was to benefit from supercompetitive prices rather than create

competition for consumers.

This was not a cognizable

antitrust injury because "[t]he antitrust laws were not enacted to permit one person to profit from the

anticompetitive behavior of another person." 1454.

Id. at

11

Contrary to the defendants' contention, this case is distinguishable from Todorov. Whereas Todorov failed to

allege any injury to competition from DCH's denial of access to radiologist in this privileges, that the the plaintiffs' were

allegations

case,

hospitals

channeling patient choice to their captive DME providers, are sufficient to show the necessary injury to

competition.

See Advanced Health-Care Servs, Inc. v.

Radford Cmty Hosp., 910 F.2d 139, 149 (4th Cir. 1990). In addition, the failure of the plaintiffs to allege an actual increase in prices or an actual deterioration in the quality of DME does not defeat the claim of an antitrust injury. In making a determination of whether a plaintiff has alleged antitrust injury, "a court must consider the effect on competition and not simply the effect on the ultimate consumer." Key Enterprise of

Delaware, Inc. v. Venice Hospital, 919 F.2d 1550, 1559 (11th Cir. 1990), vacated as moot en banc, 9 F.3d 893

12

(11th Cir. 1993).2

If the allegations of the plaintiffs

are proven true, competition has been injured because competing DME vendors no longer have access to the

discharged-hospital patients who require DME. Finally, this court disagrees with the defendants' contention that the plaintiffs, through this action, seek only to increase their profits and therefore have not alleged a cognizable antitrust injury. Unlike Todorov,

the plaintiffs' damages in this case are not premised on their ability to profit while patients "paid an

artificially inflated price."

Todorov, 921 F.2d at 1454.

Instead, the plaintiffs seek to ameliorate the potential for an increase in price and erosion in the quality of DME by reintroducing competition into the DME market for discharged-hospital patients. While an increase in the

2. The defendants correctly assert that Key Enterprises has no precedential authority since it was vacated on mootness grounds. However, a court can find the reasoning in vacated cases to be of persuasive value. See e.g., United States v. Johnson, 399 F.3d 1297, 1298 n.1 (2005) (concluding that a vacated opinion can have persuasive value). 13

plaintiffs' successful

profit suit, it

will does

be

a

likely come at

byproduct the

of

a

not

continued

detriment of consumers and competition.

2.

Efficient Enforcer of the Antitrust Laws The second issue that must be addressed to determine

the plaintiffs' antitrust standing is whether they would be "efficient enforcer[s] of the antitrust laws."

Todorov, 921 F.2d at 1449.

As stated, there is a non-

exhaustive list of five factors that should be assessed in determining whether a plaintiff is an efficient

enforcer of the antitrust laws. addressing plaintiffs any would particular not be

The defendants, without contend that of the the

factor, efficient

enforcers

antitrust laws. factors in turn.

The court will address each of the

The first factor this court must address is "the existence of a causal connection between the antitrust violation and the alleged injury." Austin, 903 F.2d at

14

1388.

In

this

case,

the

plaintiffs

allege

that

violations of the Sherman Act have caused a loss of business and create the potential for an increase in price and an erosion in the quality of DME. This court

finds that the allegations are sufficient to show a causal connection between the asserted antitrust

violation and the alleged injury. Areeda et al., Antitrust Law ¶

See 2A Phillip E. 338 (hereinafter,

"Areeda") ("It is ... enough that the antitrust violation contributes significantly to the plaintiff's injury, even if other factors amounted in the aggregate to a more substantial cause."). According to the second factor, this court must look to "the nature of plaintiff's alleged injury," Austin, 903 F.2d at 1388, "including the status of the plaintiff as consumer or competitor in the relevant market,"

Potters Medical Ctr. v. City Hosp. Ass'n, 800 F.2d 568, 575 (6th Cir. 1986), to determine whether plaintiff is an efficient enforcer of the antitrust laws. The plaintiffs

15

in

the

instant

case

are

clearly

competitors

in

the

relevant market as they allegedly lost profits as a result of the this defendants' second factor exclusionary supports a practices. finding of

Therefore,

antitrust standing. The third through fifth factors raise more difficult issues. In a case that is most analogous to the present

case and that addresses these three factors, Park Ave. Radiology Assocs., P.C. v. Methodist, 198 F.3d 246, 1999 WL 1045098 (6th Cir. 1999) (table),3 plaintiffs, providers 3. Park Avenue, although unpublished, obviously still can have persuasive value. Based on the similarities between Park Avenue and the present case, this court will look to the Sixth Circuit's treatment of the antitrust standing issue (particularly the issue of whether the plaintiffs were efficient enforcers of the antitrust law) as a guide to resolution of the question of standing in this case. To support their argument that there was antitrust standing, the plaintiffs looked to two cases that addressed whether a competitor DME provider had antitrust standing to bring suit. See Key Enterprises, 919 F.2d at 1559-60; Advanced Health-Care Services, Inc. v. Radford Community Hospital, 910 F.2d 139, 149 (4th Cir. 1990). However, in neither of the cases did the court address the second prong of the antitrust-standing determination: whether the plaintiff would be an efficient enforcer of the antitrust laws. (continued...) 16

of outpatient-radiologist services for patients referred to them by primary-care physicians, appealed from a

dismissal of their claims for lack of antitrust standing. The physicians with staff privileges at the Methodist Hospitals were members of Metrocare, Inc., a company that negotiated with third-party payors of managed health care programs on behalf of its member physicians. Metrocare

was a member of Health Choice, Inc., which operated a preferred-provider organization. Plaintiffs alleged that Health Choice contracted with employers and insurance companies to make Methodist Health's hospital services and Metrocare physician services available at a

discounted rate to beneficiaries in the relevant groups. After making entering into of the contract, to Metrocare plaintiffs. stopped This

referrals

patients

3. (...continued) Todorov, which was decided after these two cases, requires that this court look to whether plaintiffs would be efficient enforcers of the antitrust laws in order to determine whether they have antitrust standing. Therefore, this court will look to Park Avenue because it provides more relevant guidance on this issue. 17

resulted in a loss of business to the plaintiffs. Addressing indirectness of the the third factor ("the directness the or

asserted

injury

and

related

inquiry of whether the damages are speculative," Austin, 903 F.2d at 1388), the Park Avenue court held that the injury to plaintiff radiologists was indirect because "their claimed lost profits [were] derivative of the alleged harm inflicted on third parties--the health care consumers and their third-party providers," that is, insurance companies and employers. 1045089, at *5-*6. Park Avenue, 1999 WL

The court also held that the damages

were speculative because the number of lost referrals was difficult to measure. Id. at *6.

Analogously, in the instant case, the injury of lost profits to the plaintiffs is indirect and derivative of the alleged harm inflicted on the discharged patients. In addition, the damages are speculative because it would be difficult for the plaintiffs to measure the number of lost referrals resulting from the hospitals' allegedly

18

exclusionary

conduct.

This

factor

therefore

weighs

against affording the plaintiffs antitrust standing. Addressing the fourth factor, the Park Avenue court explained that "the potential for duplicative recovery or complex apportionment of damages exist if Plaintiffs were allowed to go forward inasmuch as the parties directly harmed would also have a cause of action." Id, at *7.

Here, in the instant case, if the plaintiffs were allowed to go forward with the suit, there is a risk that of are

duplicative

recovery

because

the

patients

directly harmed by the exclusionary conduct could also bring suits against the hospitals and the captive DME providers. In addition, if plaintiffs were awarded

damages, this court would face the difficult prospect of identifying damages and apportioning them among directly victimized plaintiffs. This factor patients and the indirectly affected

See Associated General, 459 U.S. at 545. therefore weighs against affording the

plaintiffs antitrust standing.

19

Addressing the fifth and final factor ("the existence of a more direct victim of the alleged anticompetitive conduct," Austin, 903 F.2d at 1388), the Park Avenue court identified the healthcare consumers and third-party insurers as the direct victims of the alleged antitrust violations. patients Id. at *6-*7. the direct Similarly, in this case, the victims of the allegedly

are

exclusionary conduct that limits their choice of DME providers and could have the potential of increasing the price and eroding the quality of DME. Thus, three of the five factors identified in Austin (including the indirectness of the asserted injury and the speculative nature of the damages; the potential for duplicative recovery or complex apportionment of damages; and the existence of a more direct victim of the

anticompetitive

conduct)

weigh

against

judicial

enforcement of the plaintiffs' antitrust claim. However, as discussed above, the factors identified in Austin should not be considered exhaustive.

20

Prominent antitrust commentators Phillip Areeda and Herbert Hovenkamp have identified additional factors that are relevant to this case. These commentators argue that

competitor antitrust standing serves antitrust policy when "(a) the rival is in a position to detect a

violation earlier than consumers are; or (b) the rival's injury is large, while the injuries of individual

consumers are likely to be very small or the consumers have collective action problems making their suit

cumbersome or less likely."

2A Areeda ¶ 348.

Addressing first whether the plaintiffs are in a position to detect a violation earlier than the patients, the plaintiffs allege that patients rarely have a

preferred DME provider.

As a result, the system of

hospital-staff referral to the captive DME providers combined with the denial to competing DME providers of access to hospitals to market their services results in a situation in which patients, "with very few exceptions, know of only one choice for durable medical equipment."

21

Plaintiffs' First Amended Complaint, at ¶ 24 (doc. no. 21). Without knowledge of alternatives, patients will

not be able to detect the evidence of an antitrust violation, including higher prices and an erosion in the quality of services. The Park Avenue court addressed a similar issue and explained that the role of third-party payors (employers and insurance companies) was an important element not addressed in the radiologists' argument that they were the most efficient enforcers of antitrust law. In

particular, the court surmised that, "if Plaintiffs are providing a superior and more cost efficient product as they allege, then the third-party providers ... will direct their members to Plaintiffs, and those patients who may not have any third party coverage will do the same in a competitive market." 1045098, at *5. For those covered by insurance, such as Medicare, the holding in Park Avenue is persuasive that the third-party Park Avenue, 1999 WL

22

payor would be as well positioned as rivals to detect an antitrust violation. However, for those not covered by

insurance, it is not clear how the method of detection identified in Park Avenue would operate. In cases

involving uninsured patients who do not have knowledge of DME prior to their entry into the hospital and to whom non-captive DME providers are unable to market their services in the hospital, there is no third-party payor to direct patients to the most cost-efficient DME

provider. Thus, uninsured patients are poorly positioned relative to rival DME providers to detect an antitrust violation. In addition, even if the captive DME providers

ultimately raised the prices or allowed their services to erode, the harm to individual patients is likely to be very small in comparison to the plaintiffs' loss of profits resulting from the defendants' anticompetitive conduct. As a result, the likelihood that patients will

23

bring suit to ameliorate the allegedly anticompetitive conduct is minimal. While it is a close call, this court finds that the plaintiffs are efficient enforcers of the antitrust law. The plaintiffs are much better positioned than consumers to detect an antitrust violation earlier. In addition,

consumers would suffer from collective-action problems in bringing a suit because of the relatively small injury experienced by individual consumers by the rise in price or decline in the quality of DME. On the basis of the finding that the plaintiffs are efficient enforcers of the antitrust laws combined with the finding above that the plaintiffs have demonstrated antitrust injury, this court concludes that the

plaintiffs have antitrust standing to sue for damages under the Sherman and Clayton Acts. This court now

addresses whether the plaintiffs have stated claims under §§ 1 and 2 of the Sherman Act for which relief can be granted.

24

B.

Sherman Act § 1

Under § 1 of the Sherman Act, "[e]very contract, combination in the form of trust or otherwise, or

conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1.4 "Although the Sherman Act,

by its terms, prohibits every agreement `in restraint of trade,'" the Supreme Court "has long recognized that Congress intended to outlaw only unreasonable

restraints." (1997). The

State Oil Co. v. Khan, 522 U.S. 3, 10 plaintiffs bring a claim of coercive

reciprocity and concerted refusal to deal under § 1 of the Sherman Act.

4. Although the Sherman Act itself does not provide a private right of action, the Clayton Act permits private parties to seek damages or injunctive relief for antitrust violations. 15 U.S.C. §§ 15, 26. 25

1.

Coercive Reciprocity Count I of the plaintiffs' amended complaint alleges

restraint of trade in violation of § 1 of the Sherman Act; more specifically, the plaintiffs allege that the defendants have engaged in an illegal restraint of trade by contracting, combining, or conspiring to use their control of hospital services to coerce patients into buying or renting DME from their joint-venture

affiliates.

The plaintiffs term their claim "coercive

reciprocity," or "the practice of using economic leverage in one market coercively to secure competitive advantage in another." Plaintiff's Opposition to Motion to Dismiss

(doc. no. 33) at 3 (citing Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1360 (Fed. Cir. 1999)). Courts have recognized that reciprocal dealing can constitute an illegal restraint of trade under § 1. Typically, reciprocal dealing involves two parties who "face each other as both buyer and seller. One party offers to buy the other party's goods, but only if the

26

second party buys other goods from the first party." Spartan Grain & Mill Co. v. Ayers, 581 F.2d 419, 424 (5th Cir. 1978).5 Reciprocal Spartan Grain dealing & Mill, is 581 not, F.2d by at itself, 423. illegal. Rather,

reciprocal-dealing arrangements illegally restrain trade only when they are coercive--that is, only when a

defendant uses its market power, or leverage, over one product to induce the purchase or sale of a second product, a transaction that would not otherwise take place in a competitive market. "In each case one side of It

a transaction has special power in the market place.

uses this power to force those with whom it deals to make concessions in another market." 581 F.2d at 425. Spartan Grain & Mill,

5. In Bonner v. Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), the Eleventh Circuit Court of Appeals adopted as binding precedent all of the decisions of the former Fifth Circuit handed down prior to the close of business on September 30, 1981. 27

Here,

the

plaintiffs

allege

that

the

defendant

hospitals use their market power over hospital services to coerce patients into dealing exclusively with the hospitals' respective affiliated DME provider. patients who receive hospital services at That is, Jackson

Hospital are coerced into buying or renting DME from JMS, and patients who receive hospital services at Baptist hospitals are coerced into buying or renting DME from Baptist Ventures, even though those patients would buy or rent from the plaintiffs in a competitive market. As support for their argument, the plaintiffs rely on the holding in the vacated Eleventh Circuit opinion, Key Enterprise . In that case, the defendant hospital

pressured home-health-care nurses to refer patients to the hospital's DME provider. home-health-care nurses were 919 F.2d at 1561-63. not employees of The the

hospital and relied on access to patients to remain in business. The court determined that the act of the

hospital constituted coercive reciprocity as it involved

28

a

buyer

(the

hospital)

conditioning

the

purchase

of

services from the sellers (home-health-care nurses) on the sellers' marketing of the buyers' service. Here, the plaintiffs argue that the defendants

"coerce, pressure, or otherwise unduly influence the patients, doctors, nursing homes and home health care agents to select or recommend only the captive DME

companies to the exclusion of Plaintiffs."

Plaintiff's The only

First Amended Complaint, at ¶ 37 (doc. no. 21).

factual allegation that the plaintiffs make to support this conclusory statement is that the hospitals have instructed "case workers and staff to steer patients to the captive DME companies." allegation reciprocity is not Id. at ¶ 24. to support 550 This factual a coerciveat 570

sufficient See

claim.

Twombly,

U.S.

(requiring at the pleading stage factual allegations that plausibly suggest a violation of the antitrust laws). Unlike the independent home-health-care nurses in Key Enterprise who felt that their access to the hospital was

29

conditioned on patient referrals to the DME provider, the plaintiffs in this case make no allegations that the hospitals similarly coerced hospital staff or case

workers into referring the hospital's DME providers to patients; in particular, there is no allegation that the hospital staff's continued employment, pay, or benefits at the hospital or access to the hospital were in any way conditioned on them referring patients to their

hospital's DME providers.

Moreover and perhaps most

importantly, there is nothing the complaint to suggest that the hospitals and their staff otherwise had a buyerseller or other comparable commercial relationship. See

Spartan Grain & Mill, 581 F.2d at 423 ("A reciprocal dealing arrangement exists when two parties face each other as both buyer and seller."). In the absence of any

such factual allegations in the complaint of coercion arising out of a buyer-seller relationship or something comparable, the plaintiffs' coercive-reciprocity claim

30

fails to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6).

2.

Concerted Refusal to Deal Count II of the amended complaint alleges that the

defendants have acted in concert in refusing to deal with the plaintiffs by failing to provide access to the

discharged patients in violation of § 1 of the Sherman Act. The plaintiffs in their brief opposing the

dismissal motion have clarified that it is the concerted actions of the hospitals and their respective captive DME providers that is at issue; they do not allege that the four hospitals engaged in any illegal concerted actions among themselves. The plaintiffs have made sufficient allegations of agreements between the three hospitals and their captive DME provider to state a claim that they were acting in concert. However, the more difficult question is whether the allegation in the complaint that the hospitals and

31

captive DME providers refused to deal with the plaintiffs states a claim under § 1 of the Sherman Act for which relief can be granted. not. The plaintiffs allege that the hospitals unilaterally ceased the DME rotational assignment that existed prior to the entry into the market of their DME providers. In This court concludes that it does

addition, the plaintiffs allege that, since the hospitals entered into the joint ventures, they have refused to provide the plaintiffs with access to the hospitals so that they can market their DME. that these acts constituted a The plaintiffs contend refusal to deal in

violation of the Sherman Act. The plaintiffs rely on two Supreme Court cases to support their refusal-to-deal claim. In Lorain Journal

Co. v. United States, 342 U.S. 143 (1951), the Court held that a newspaper publisher that enjoyed a substantial monopoly in the in mass dissemination Ohio, engaged of in news and

advertising

Lorain,

unlawful

32

exclusionary conduct when it refused to accept any local advertisements from any entity that advertised on a radio station run by the Elyria-Lorain Broadcasting Company. As a result, numerous advertisers refrained from

advertising on the radio. newspaper publisher's

The Court explained that the "not only reduced the

actions

number of customers available to [the radio station] in the field of local Lorain advertising and strengthened the Journal's monopoly in that field, but more

significantly tended to destroy and eliminate [the radio station] altogether." Id. at 149.

The newspaper publisher argued that it had a right "to select its customers and to refuse to accept

advertisement from whomever it pleases." The Court agreed that that there was was not such a

Id. at 155. right, but In

explained

the

right

unqualified.

particular, the Court explained that the publisher could not exercise that right in a manner contrary to the

33

Sherman Act.

Id.

The Court therefore held that the

publisher's action violated the Sherman Act. In the second case cited by the plaintiffs, Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), the Court added greater In specificity Skiing, to two the ski

refusal-to-deal

standard.

Aspen

companies, Ski Co. (which operated three ski mountains) and Highland (which operated a fourth ski mountain), offered an all-Aspen ski ticket, in which customers could ski on any of the four mountains. The revenues from

sales were divided between the companies based on usage of the mountains. This arrangement lasted for 15 years,

when Ski Co. proposed a fixed-revenue-sharing arrangement that it knew Highland would not accept. Highland rejected the offer. As expected,

Ski Co. discontinued the

all-Aspen ski ticket and instead offered ski tickets limited to the three mountains that it operated. In addition to the discontinuance of the all-Aspen ski ticket, Ski Co. also refused to sell any lift tickets

34

to Highland either at the tour operator's discount or at retail. Id. at 593. Highlands then developed the

"Adventure Pack," which consisted of a three-day ski pass at Highlands and three vouchers equal to the price of a daily lift ticket at a Ski Co. mountain. to accept the vouchers. Ski Co. refused

Unable to offer a package that

included access to the Ski Co. mountains, Highlands' share of the market for downhill skiing services declined dramatically. The Court reiterated that "[t]he high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified." at 601. Id.

A firm's refusal to deal is unlawful "[i]f [it]

has been attempting to exclude rivals on some basis other than efficiency." omitted). Id. at 605 (internal quotation marks

The Court identified two indicators that Ski

Co. was attempting to exclude rivals on a basis other than efficiency. First, Ski Co. "elected to make an

important change in a pattern of distribution that had

35

originated in a competitive market and had persisted for several years." Id. at 603. Such a change was contrary

to consumer demand, as "skiers demonstrably preferred four mountains to three." decided to forgo daily Id. at 606. ticket sales Second, Ski Co. from vouchers

obtained by Skiers contained in Highlands' Adventure Pack. "Ski From this conduct, it was proper to infer that Co. elected to forgo these short-run benefits

because it was more interested in reducing competition in the Aspen market over the long run by harming its smaller competitors." Id. at 608.

In the present case, the plaintiffs, relying on the reasoning in Aspen Skiing, argue that the defendants can point to no increased efficiency resulting from refusing to deal with the plaintiffs. However, the plaintiffs

ignore the subsequent modification of the refusal-to-deal standard in Verizon Communications, Inc. v. Trinko, 540 U.S. 398 (2004), where the Court broadened the right of firms to refuse to deal with rivals.

36

In Trinko, the Court explained that "[c]ompelling ... firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically The Court was

beneficially activities."

Id. at 407-08.

concerned about the fact that "[e]nforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing--a role for which they are ill suited." at 408. Id.

Therefore, the Court held that, "as a general

matter, the Sherman Act does not restrict the longrecognized right of a trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom it will deal." omitted). Id. (citation and internal quotation marks

The Court explained that only under certain will a refusal to deal with rivals

circumstances

constitute an antitrust violation under the Sherman Act.

37

The Court identified Aspen Skiing as being "at or near the outer boundary of [antitrust] liability." at 409. Id.

This Aspen Skiing exception applies only if:

"(a) the defendant engaged in a prior course of dealing with its rival; and (b) the unilateral termination of a voluntary (and thus presumably profitable) course of dealing suggested a willingness to forsake short-term profits to achieve an anticompetitive end." Id.

(emphasis added). In the present case, there allegedly was a prior course of dealing between the plaintiffs and defendant hospitals as demonstrated by the rotational system.

However, the unilateral termination of a voluntary course of dealing by the hospitals in this case does not suggest a willingness to forsake short-term profits. The

hospitals terminated the course of dealing after entering into a joint venture with their respective DME providers, and there is nothing in the plaintiffs' complaint,

outside of conclusory allegations, plausibly suggesting

38

that the decision to cease the rotational system and exclude competitor DME providers from access to the

hospital was for any purpose other than increasing both the short-term and long-term profits of their DME

providers.

This case is thus distinguishable from Aspen

Skiing in which Ski Co. decided to forgo short-term profits in the form of redeeamable vouchers provided by its competitor. In light of the clear direction from the Supreme Court not to extend the refusal-to-deal exception beyond Aspen Skiing, the plaintiffs' concerted-refusal-to-deal claim fails to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6).

C.

Sherman Act § 2

The plaintiffs assert four claims under § 2 of the Sherman Act. Under § 2, it is unlawful to "monopolize,

or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the

39

trade or commerce among the several States." § 2.

15 U.S.C.

Section 2 "covers behavior by a single business as

well as coordinated action taken by several businesses." Spanish Broad. Sys. of Florida, Inc. v. Clear Channel Communications, Inc., 376 F.3d 1065, 1074 (11th Cir. 2004). A violation of § 2 "requires harm to competition

that must occur within a relevant ... market, with a specific set of geographical boundaries and a narrow delineation of the products at issue." Id. Therefore,

this court must first identify the relevant market in this case.

1.

Relevant Market A relevant market consists of both a product market

and a geographic market.

Brown Shoe Co. v. United The parties agree that and Prattville,

States, 370 U.S. 294, 324 (1962). the geographic market is

Montgomery

Alabama.

The dispute concerns the definition of the

product market.

40

"The

outer

boundaries

of

a

product

market

are

determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." T. Harris Young & Assocs., Inc.

v. Marquette Elecs., Inc., 931 F.2d 816, 824 (11th Cir. 1991). Within broader product markets, "well-defined

submarkets may exist which, in themselves constitute product markets for antitrust purposes." Id. The

boundaries of a submarket are determined by "examining such practical indicia as industry or public recognition of the submarket as a separate economic entity, the product's production peculiar characteristics distinct and uses, unique

facilities,

customers,

distinct

prices, sensitivity to price changes, and specialized vendors." The Id. plaintiffs allege that the relevant product

market in this case includes two submarkets that consist of the sale and rental of DME for patients discharged from Jackson Hospital and the Baptist Health hospitals,

41

respectively. plaintiffs'

The definition

defendants of the

contend relevant

that market

the is

implausible and the market should instead be understood more broadly to consist of the sale and rental of DME to all outlets in the geographic market. Based on an examination of the practical indicia for determining a relevant market, the court finds that the plaintiffs have identified the relevant product submarket as the rental and sale of DME in hospitals. However, the

plaintiffs' argument that the submarket is disaggregated as between the two sets of hospitals, such that two product submarkets exist within the one geographic

market, lacks merit. The complaint alleges that the market is bounded by a distinct method of distribution to a distinct segment of customers. In particular, it is a method of

distribution whereby hospital patients are prescribed DME while in the hospital, and those DME needs are arranged through staff at the hospital.

42

Several courts have found a method of distribution to be a relevant submarket for antitrust purposes. See

e.g., Henry v. Chloride, 809 F.2d 1334, 1342 (8th Cir. 1087) (batteries sold by route salespersons are a

distinct submarket from batteries sold from warehouses or stores); Greyhound Computer Corp., Inc. v. Int'l Bus. Mach. Corp., 559 F.2d 488, 494 (9th Cir. 1977) (lease of computers a distinct submarket from the sale of

computers); Columbia Broad. Sys., Inc. v. F.T.C., 414 F.2d 974, 979 (7th Cir. 1969) (records sold through record clubs are a distinct submarket); F.T.C. v.

Staples, Inc., 970 F.Supp. 1066, 1080 (D.D.C. 1997) (sale of consumable a office supplies through from office the supply of

superstores consumable Eastern

distinct

submarket

sale

office

supplies v.

through Masel

other Co.,

outlets); Inc., 502

Dental

Corp.

Isaac

F.Supp. 1354, 1361 (E.D. Pa. 1980) (sale of facebows wholesale retail). a distinct market from sale of facebows

43

This court finds this case law persuasive and finds that the method of distribution of DME to hospital

patients is the relevant product submarket for antitrust purposes. The indicia that the sale and rental of DME in

hospitals constitute a relevant submarket include the plaintiffs' allegations that there is industry

recognition that the sale and rental of DME to hospitals is a distinct market. providers service a In addition, the hospital DME distinct class of discharged

patients, and there is allegedly less sensitivity of consumer demand to changes in the price or quality of the DME to discharged patients in hospitals. However, the court cannot agree with the plaintiffs' suggestion that the sale and rental of DME in the two sets of hospitals represent two separate and distinct submarkets. submarket by The plaintiffs seek not only to define the the method of distribution, which as

described above is recognized in the case law, but also on the basis of the position or location of the

44

consumers.

In particular, they argue that the two sets

of hospitals constitute two separate submarkets because the hospitals that have are two separate to sets two of discharged DME

patients providers.

referred

different

This court has not found any cases in which

the relevant product market is defined on the basis of the position or location of consumers. The one case cited by plaintiffs is inapposite. The

Ninth Circuit Court of Appeals in Greyhound Computer Corp. held that the leasing of computers constitutes a distinct submarket of separate from other methods sale of of

distribution computers.

computers,

including

the

559 F.2d at 494.

The court did address

whether leases and sales served different customer needs; however, this was in the context of an examination of one of the indicia for determining the existence of a leasing submarket. The court ultimately defined the submarket in

terms of the leasing method of distribution, not in terms

45

of the class or group of consumers to whom computers were leased. The only case that this court has been able to find that is somewhat analogous holds that submarkets cannot be defined in terms of the location or position of the consumers. In Rohlfing v. Manor Care, Inc., 172 F.R.D.

330 (N.D. Ill. 1997), the plaintiffs alleged that the relevant market consisted of "the sale of pharmaceutical products to residents Id. at 345. of Manor Care nursing home

facilities."

The court explained that "it

is improper to define a market simply by identifying a group of customers who have purchased a given product; rather the market consists of the those array of

`interchangeable'

products

that

consumers

confronted when making their product selection, plus those products which could quickly be supplied as

interchangeable alternatives." Id. The court recognized that it was particularly inappropriate to define the market on the basis of a particular set of consumers in

46

that case because Manor Care residents who are unhappy with the pharmaceutical service supplied by their nursing home could simply transfer to a different nursing home that does not utilize that service. This court finds the Id. at 346. in Rohlfing

reasoning

persuasive.

It is inappropriate to define the product

submarket on the basis of a particular set of patients because the market is defined by the interchangeability of the use of the product itself, not the users of the product. Patients in hospitals are in a sense a captured

audience; nonetheless, if they are dissatisfied with the DME supplied by their hospital, they could either express their preference for an alternative DME provider to the hospital staff or transfer to another hospital that does not utilize that DME provider. This ability of hospital

patients to access DME from other sources demonstrates that the relevant market, at the very least, includes both of the DME providers that are involved in joint ventures with the respective sets of hospitals.

47

In sum, this court concludes that the relevant market for purposes of determining whether defendants have

violated § 2 of the Sherman Act is the distribution of DME through hospitals in Montgomery and Prattville,

Alabama.

2.

Shared Monopoly On the basis of this definition of the relevant

market, the court concludes that the plaintiffs' four asserted claims under § 2 of the Sherman Act should be dismissed. As discussed above, in order to prove a

violation of § 2 of the Sherman Act, the plaintiffs must demonstrate entities activity. either in that a single entity in or multiple

acting

concert

engaged

monopolizing

The plaintiffs have not alleged a violation of

§ 2 by a "single hospital" or concerted activity by the two hospital distributors of DME. The relevant of market DME, consists of two and hospital Baptist

distributors

Jackson

Med-South

48

Ventures-American Home Patient.6

Plaintiffs have not

alleged any agreement or concerted activity between the two distributors. The only allegation is that of

parallel conduct derived from the fact that the hospitals entered into the joint ventures with their respective DME providers during the same broadly defined time period (the late 1990s). The Supreme Court has clearly held,

that, "[w]hile a showing of parallel business behavior is admissible circumstantial evidence from which the fact finder may infer agreement, it falls short of

6. Because there are two hospital distributors in the relevant market, this case is distinguishable from the cases relied upon by that plaintiffs that involved claims of monopolization of DME markets under § 2 of the Sherman Act. In Key Enterprise, the claim of monopolization was brought against a single hospital, with monopoly power in the relevant market, and its affiliated DME supplier. 919 F.2d at 1552. In Advanced Health-Care Services, the claim of monopolization was brought against three separate hospitals and their affiliated DME suppliers in three different geographic markets in which the hospitals had monopoly power. 910 F.2d at 141-43. Finally, in M&M Medical Supplies and Services, Inc., v. Pleasant Valley Hospital, Inc., the claim of monopolization was brought against a single hospital, with monopoly power in the relevant market, and its affiliated DME supplier. 981 F.2d 160, 162 (4th Cir. 1993). 49

conclusively

establishing

agreement

or

itself

constituting a Sherman Act offense."

"While a showing of

parallel `business behavior is admissible circumstantial evidence from which the fact finder may infer agreement,' it falls short of `conclusively establish[ing] agreement or ... itself constitut[ing] a Sherman Act offense.'" Twombly, 550 U.S. at 553 (quoting Theatre Enterprises, Inc. v. Paramount Film Distributing Corp., 346 U.S. 537, 540-41 (1954)). Allegations of parallel conduct, without more, are not sufficient to survive a motion to dismiss. Twombly, 550 U.S. at 556-57. The complaint vaguely alleges that defendants have engaged in a series of unlawful and wrongful activities and communications that constitute monopolization,

attempted monopolization, and conspiracy to monopolize. In the absence of any allegations of concerted activity between the hospitals' two DME providers, the only theory that could possibly support these claims would be one based on shared monopoly.

50

Under a theory of shared monopoly, "a group of firms that collectively possess monopoly power can be found liable for joint monopolization." ABA Section of

Antitrust Law, Antitrust Law Developments (5th ed. 2002), at 312. The former Fifth Circuit Court of Appeals,

consistent with other courts that have addressed the issue, has rejected any claim of violation of § 2 of the Sherman Act predicated on a theory of shared monopoly. See American Tel. and Tel. Co. v. Delta Communications Corp., 579 F.2d 972 (5th Cir. 1978), adopting opinion, 408 F.Supp. 1075 (S.D. Miss. 1976) (rejecting a claim that networks constituting an oligopoly can violate § 2 of the Sherman Act and explaining that "[t]he Sherman Act neither mentions nor regulates oligopolies.");7 see also Kramer v. Pollock-Krasner Foundation, 890 F.Supp. 250, 256 (S.D.N.Y. 1995) (rejecting a shared monopoly claim and explaining that "the offense of monopolization under Section 2 refers to market dominance by a `single

7.

See supra note 5. 51

firm.'"); Sun Dun, Inc. v. Coca-Cola Co., 740 F.Supp. 381, 391 (D. Md. 1990) ("An examination of the history of the Sherman Act did reveals not that Congress' concept of or

`monopoly'

include

`shared

monopolies'

`oligopolies' at all, but rather the complete domination of a market by a single economic entity."); H.L. Hayden Co. v. Siemens Medical Systems, Inc., 672 F.Supp. 724, 741 (S.D.N.Y. 1987) ("Two competitors could conspire to oligopolize ... but it would not constitute an offense under a literal reading of section 2 [of the Sherman Act]."); Consolidated Terminal Systems, Inc. v. ITT World Communications, Inc., 535 F.Supp. 225, 228-29 (S.D.N.Y. 1982) ("An oligopoly or a shared monopoly, does not in itself violate § 2 of the Sherman Act."). Not only must the monopolization and attempted

monopolization claim fail as a result of this court's rejection of a theory of shared monopoly, but so must any claim of conspiracy to monopolize. The court in Sun Dun,

52

addressing a conspiracy to monopolize claim in a similar context, persuasively held that "[w]hen ... two or more competitors conspire to create a market environment in which competition and market entry is improperly restricted, but in which market power continues to be shared among these otherwise unrelated entities, ... there is no conspiracy to monopolize claim stated under Section 2, and the claim must therefore be dismissed." 740 F.Supp. at 392. In other words, a conspiracy to

monopolize claim requires either actions by a single firm or concerted activity by multiple firms. been alleged in the complaint. In sum, the plaintiffs' Count Count Count V VI IV Count claim of of III of claim of Neither has

monopolization, monopolization, monopolize, and

attempted to to

claim claim

conspiracy conspiracy

monopolize based on the so-called essential facility doctrine all fail to state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6). Each of these

claims requires either allegations of concerted activity 53

or sufficient monopoly power by a single firm that are not set forth in the complaint.

IV.

STATE CLAIMS

In Count VII, the plaintiffs assert violations of Alabama Antitrust Law. They state that their state

claims and their governing law are the same as their federal claims and their governing law. See Ex parte

Rice, 67 So.2d 825, 829 (1953) (per curiam) ("The federal statutes ... prescribe the terms of unlawful monopolies and restraints of trade as they should also be

administered in Alabama."); see also Avery Freight Lines, Inc. v. Alabama Pub. Serv. Comm'n, 104 So.2d 705, 709 (1958) ("In construing the terms and provisions of

Alabama statutes derived from federal statutes, such terms and provisions will usually be considered as having the meaning given by the federal courts."). Therefore,

the plaintiffs' state claims fail for the same reasons that their federal ones do.

54

V. CONCLUSION For the foregoing reasons, the defendants' motion to dismiss will be granted on the plaintiffs' federal and state claims. An appropriate judgment will be entered. DONE, this the 8th day of March, 2010. /s/ Myron H. Thompson UNITED STATES DISTRICT JUDGE