Rheumatology Diagnostics Laboratory, Inc et al v. Blue Shield of California Life & Health Insurance Company

Filing 113

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS FIRST AMENDED COMPLAINT by Judge William H. Orrick as to 96 , 97 , 98 and 99 Motions to Dismiss. Quest's Motion to Dismiss Hunter, PBP, and SPA's Second Cause of Action under the "unlawful" and "unfair" prongs of the UCL and Third Cause of Action is DENIED. Quest's Motion to Dismiss all of Hunter's causes of action against it is GRANTED WITH PREJUDICE for all claims prior to the effecti ve date of the settlement agreement. The defendants' Motions to Dismiss all other causes of action are GRANTED WITH LEAVE TO AMEND. The plaintiffs shall file any amended complaint within 30 days from the date of this Order. (jmdS, COURT STAFF) (Filed on 10/18/2013)

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UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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RHEUMATOLOGY DIAGNOSTICS
LABORATORY, INC., et al.,

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Plaintiffs,
v.

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AETNA, INC., et al.,
Defendants.

United States District Court
Northern District of California

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Case No. 12-cv-05847-WHO
ORDER GRANTING IN PART AND
DENYING IN PART MOTIONS TO
DISMISS FIRST AMENDED
COMPLAINT
Re: Dkt. Nos. 96, 97, 98, 99

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INTRODUCTION

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Plaintiffs Rheumatology Diagnostics Laboratory, Inc. (“RDL”), Pacific Breast Pathology

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Medical Corporation (“PBP”), Hunter Laboratories, Inc. (“Hunter”), and Surgical Pathology

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Associates LLC (“SPA”) bring suit against defendants California Physicians‟ Services, Inc., d/b/a

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Blue Shield of California (“BSC”), Blue Cross and Blue Shield Association (“BCBSA”),1 Aetna,

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Inc., Quest Diagnostics Incorporated, and Quest Diagnostics Clinical Laboratories, Inc. 2 The

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plaintiffs‟ First Amended Complaint (“FAC”) alleges various violations of the federal Sherman

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Act and California‟s Cartwright Act, Unfair Competition Law, and Unfair Practices Act. Dkt. No.

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94. It also alleges intentional and negligent interference with prospective economic advantage.

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The defendants move to dismiss the plaintiffs‟ FAC. Dkt. Nos. 96-99.
Based on the parties‟ briefs and arguments, and for the reasons below, the Motions to

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Dismiss are GRANTED IN PART and DENIED IN PART.

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BCBSA is not an insurer. However, for the sake of convenience, unless otherwise indicated, the
Court will refer to the non-Quest defendants as “insurers.”
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This Order collectively refers to Quest Diagnostics Incorporated and Quest Diagnostics Clinical
Laboratories, Inc., as “Quest.”

FACTUAL BACKGROUND

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For purposes of the Motions to Dismiss, the Court accepts as true the following factual

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allegations in the FAC.

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I.

THE PARTIES AND RELEVANT MARKETS

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The plaintiffs are all “engaged in the commercial reference laboratory business” in

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California. FAC ¶¶ 10-13. Defendant Quest is also a provider of clinical laboratory services and

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competes with the plaintiffs. FAC ¶¶ 2, 18. Defendants Aetna and BSC are health insurance

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companies. FAC ¶¶ 14-15. Defendant BCBSA licenses the “Blue Cross” and “Blue Shield”

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names to health insurance companies across the country (“Blue Plans”), such as BSC, and Blue

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Plans are governed by the “Blue Card policy” or licensing agreement. FAC ¶¶ 3-5.
BCBSA is owned by its members and the 38 Blue Plans fund it. FAC ¶ 29. “Blue Cross

United States District Court
Northern District of California

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and Blue Shield insure approximately 32% of the U.S. population.” FAC ¶ 28. More than 91

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percent of providers and 96 percent of hospitals in the United States contract directly with Blue

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Plans, which insure more Californians than any other insurer. FAC ¶ 28. “Historically, each Blue

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Plan has been permitted by the terms of the Agreement to contract with independent clinical labs

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located within or outside of the BluePlan‟s state or territory.” FAC ¶ 29.

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The FAC alleges five product and geographic markets:

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The Routine Clinical Laboratory Testing market is the market for routine chemical analysis

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of bodily fluids ordered by physicians for outpatient diagnosis and analysis. FAC ¶ 26(a). It is a

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high-volume market where tests are performed by automated equipment. Results are typically

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reported electronically within 24 hours after the physician ordered the test. Physicians prefer to

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use diagnostic labs near the site of the specimen to avoid air transport and to ensure timely results.

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Consequently, the relevant geographic market for Routine Clinical Laboratory Testing is regional,

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and here, it is the “Northern California region,” which runs from Fresno, California, to the Oregon

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border.

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The Anatomic Pathology Laboratory Testing market consists of labs that analyze tissue

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samples for diagnosing disease. FAC ¶ 26(b). The relevant geographic market is the Northern

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California region.
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The Specialty Rheumatologic Laboratory Testing market is the market for highly

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specialized testing ordered by rheumatologists for diagnosing and treating autoimmune disorders

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and diseases. FAC ¶ 26(c). The relevant geographic market is the entire United States.
The Advanced Lipid Testing market is the market for highly specialized testing to

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diagnose and treat coronary heart disease. FAC ¶ 26(d). The relevant geographic market is the

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entire United States.

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The Specialty Breast Pathology Testing is the market for highly specialized analysis of

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breast biopsy tissue for diagnosis and prognosis of breast cancer. FAC ¶ 26(e). Physicians in

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California typically order breast pathology tests from labs throughout California. The relevant
geographic market is California.

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United States District Court
Northern District of California

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II.

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THE BCBSA-QUEST AGREEMENT
Changes to the “BlueCard” policy, announced in May 2010, but implemented around

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October 2012, created barriers preventing smaller independent labs from providing services to

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patients across the country. FAC ¶ 27. This conduct affected Hunter in the Advanced Lipid

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Testing market and RDL in the Specialty Rheumatological Laboratory Testing market. FAC ¶ 27.

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In the past, labs submitted claims for services provided to Blue Card members from

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another state to the Blue Plan where the performing lab is located. FAC ¶ 30. The local Blue Plan

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then worked with the member‟s own Blue Plan to adjudicate the claim, and the member‟s cost-

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sharing amount was calculated at the in-network rate based on the performing lab‟s provider status

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with the Blue Plan to which the claim was submitted. FAC ¶ 30.

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Now, under changes supported by Quest, the performing laboratory must submit claims to

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the patient’s Blue Plan even though the lab may not be an in-network provider for that particular

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Blue Plan. FAC ¶ 31. If the patient is not insured where the laboratory services were performed,

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then the Blue Plan in the laboratory‟s region will not adjudicate the claim. Thus, BSC refuses to

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accept claims for Blue Plan patients from outside of California for tests the plaintiffs perform.

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FAC ¶ 31.

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This change is “drying up new business and leading to client terminations,” as well as
creating “staggering administrative costs.” FAC ¶ 32. “[I]t is impossible for independent
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laboratories such as Plaintiffs to obtain in-network status with each BluePlan” with patients that

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might be served by those laboratories, especially because the “vast majority of BluePlans have

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been denying applications” from out-of-state laboratories, if they even respond at all. FAC ¶ 31.

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Quest “acts in concert” with BCBSA “to prevent competitors from gaining in-network status.”

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FAC ¶ 33. Because of their size, only Quest and one other national laboratory—Labcorp—are

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able to join all Blue Plan networks across the country, and independent laboratories lose business

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to them. FAC ¶¶ 33 & 37.

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Under the new Blue Card policy, when an out-of-network laboratory submits a claim to the
relevant Blue Plan, the Blue Plan “commonly pays the patient directly,” rather than the laboratory

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that has obtained the assignment of benefits from the patient,” in violation of California law. FAC

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Northern District of California

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¶ 34. Paying the patients directly confuses them, and patients often spend the money without

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realizing that they were supposed to forward it to the laboratory. FAC ¶ 34.

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Under the policy change, claims cannot be made electronically, nor can providers
electronically check on the status of submitted claims. FAC ¶ 35.
The new policy “harms competition by molecular, anatomic pathology, and other specialty

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labs to the benefit of” Quest because physicians steer business to Quest away from out-of-state

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specialty labs, which are out-of-network and thus more expensive. FAC ¶ 36. This policy

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“drive[s] the BluePlans into nearly exclusive arrangements with [Quest] (and Labcorp) for

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specialty and molecular tests” because specialty labs in one physical location cannot contract with

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38 Blue Plans to maintain in-network status even though they may perform services from several

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local Blue Plan areas. FAC ¶ 37. “A substantial share of the market is now foreclosed to specialty

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labs . . . .” FAC ¶ 38. A majority of Blue Plans will not contract with labs outside their area, will

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not add additional labs, and a few have exclusive contracts with Quest. FAC ¶ 37. RDL

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unsuccessfully attempted to get in the Blue Plan networks of many states and has had to hire more

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employees to deal with the new policy‟s reimbursement changes even though it has not had a

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“significant new client” for over four months. FAC ¶¶ 39-41. Hunter has been similarly

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unsuccessful in trying to get in Blue Plan networks or new clients. FAC ¶¶ 46 & 49.

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Distinguished labs “are seeing dramatic reductions in revenue due to this change as they
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are out-of-network for almost all BluePlan regions,” and customers and providers complain that

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labs like RDL, which is allegedly higher quality, are being kept out of network. FAC ¶¶ 38 & 42.

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Hunter‟s “HunterHeart program”—“a nationwide program” which relies on in-network processing

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through the BlueCard program—has lost over 90 percent of its clients outside of California. FAC

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¶ 43. BSC‟s termination of Hunter in 2009 led to a decrease in its surgical pathology volumes, as

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did Aetna‟s termination of Hunter on September 15, 2012. FAC ¶ 51.

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In a June 2012 investor presentation, the CEO of Quest, Steve Rusckowski, stated that
health insurers “want[] to narrow their networks” and “there should be more consolidation in the

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volumes around fewer suppliers of laboratory testing services and that plays nicely into what we

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are all about and what this industry is all about.” FAC ¶ 24. He further states, “We do have an

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United States District Court
Northern District of California

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opportunity with some of our health plan partners to help them narrow the network. We‟re

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working together with the health plans to get more volume and they see an opportunity in their

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cost structure, and we see an opportunity with our volumes to do that with them.” FAC ¶ 24.

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Quest “acted in concert” with BCBSA “to promote the exclusionary change in BlueCard

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Policy.” Members of the American Clinical Laboratory Association (“ACLA”), which represents

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clinical laboratories, expressed concern about the Blue Card change, so the ACLA drafted a letter

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to BCBSA protesting it. FAC ¶ 54. However, Quest, the largest contributor to ACLA‟s funding,

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vetoed the letter. Quest thus “manipulated a trade association to exclude competition from

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independent regional labs and indirectly to harm patient care” even though it “was well aware of

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the anti-competitive nature of the change in policy and the devastating effect it would have on

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competitors.” FAC ¶ 54. Quest knew that the policy change meant that no independent lab could

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compete with it because only Quest and Labcorp have a “physical national presence.” FAC ¶ 54.

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Similarly, in response to an April 5, 2012, letter from the California Clinical Laboratory

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Association to BCBSA expressing concern about the policy changes, BCBSA responded that the

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laboratories should contact Jim Barkach “to discuss national partnership Agreements.” FAC ¶ 55.

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However, Barkach never responded to the repeated phone calls and emails from the CEO of

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Hunter or the CEO of a company that negotiates insurance contracts for laboratories nationwide.

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FAC ¶ 55. When the latter CEO reached Barkach on his personal cell phone, Barkach said that
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“no laboratories could match the „deal‟ that [BCBSA] had with [Quest] and hung up.” FAC ¶ 55.

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BCBSA and Quest “have conspired to restrain Plaintiffs and other small laboratories from
even negotiating or discussing the opportunity to continue providing service to [BCBSA‟s]

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members on an in-network basis.” FAC ¶ 56. The new policy “pursuant” to BCBSA‟s

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“agreement with Quest functions as a boycott of Plaintiffs” because Blue Card plans nationwide

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“instruct physicians to utilize only in-network diagnostic services and pay in-network providers

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(i.e., [Quest]) more and in a different manner than the newly out-of-network Plaintiffs.” FAC

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¶ 56. The Blue Plans “have been very overt in their efforts to cut off business to labs” like Hunter

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“and to instead steer business to” Quest, its “partner.” FAC ¶ 57. The FAC attaches a letter from

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Blue Cross Blue Shield of Florida to physicians who use Hunter, stating that services provided to

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United States District Court
Northern District of California

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out-of-state labs will be treated as out-of-network. FAC ¶ 57, Ex. 6. Thus, out-of-pocket

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expenses to patients may be higher and the physicians should refer to in-network labs, “such as

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Quest Diagnostics.” FAC ¶ 57. These changes have driven business away from smaller

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independent labs to Quest. FAC ¶ 58.

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III.

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BELOW-COST SALES
A “requisition” is a group of tests, ordered at one time, for a single patient. FAC ¶ 59.

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Because one patient may have multiple tests, a requisition usually includes two or three lab tests.

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FAC ¶ 59. Quest‟s Securities and Exchange Commission (“SEC”) filings contain information

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allowing for a “simple calculation of fully-allocated cost per requisition,” which ranged from

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$30.79 in 2004 to $42.53 in 2011, increasing at a “generally consistent pace.” FAC ¶ 59. Because

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of the higher cost of labor, real estate, and other costs in California, the cost of performing

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laboratory tests for patients in California tends to be higher than the national average. FAC ¶ 60.

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Thus, Quest‟s “average cost per requisition in California will be slightly higher than the amounts

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reported in its SEC filings.” FAC ¶ 60.

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Quest “routinely and knowingly provides its customers in California with capitated

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contracts that result in revenues far below its reported costs.” FAC ¶ 61. In one example from

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2005, James Clayton, the contracting manager for Physicians Medical Group of Santa Cruz, told

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Hunter that his group entered into a five-year exclusive capitated contract for laboratory services
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with Quest. FAC ¶ 61. The rate was $0.45 per member per month which, based on standard

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utilization rates, amounts to less than $5.00 in revenue per requisition—less than 20 percent of

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Quest‟s average cost per requisition. FAC ¶ 61. Quest‟s average revenue per requisition on its

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capitated contracts are “far below” its average costs as reported to the SEC, and “there are no cost

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savings that could possibly allow the capitated contracts [Quest] enters into to be profitable.”

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FAC ¶ 62.
Quest heavily discounts services to providers and IPAs. FAC ¶ 64. Quest‟s own reports

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show that its revenue from these sources is “far below [Quest‟s] costs as reported in its SEC

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filings.” FAC ¶ 65. Quest enters such agreements “to force and keep competition out of the
market,” and it “recoups its losses by illegally inducing the referral of higher-paying „pull-

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Northern District of California

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through‟ government and other business.” FAC ¶ 65. One Quest report “shows that in most cases

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[Quest‟s] capitated rates are so low that [Quest] loses money on them.” FAC ¶ 66. While Quest

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“lost money on the discounted capitated rates paid” by “almost every [IPA] customer,” it “made

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up for those losses with the [fee-for-service] pull-through business, which is paid for by the

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government and other third-party payers.” FAC ¶ 67. Of the 68 IPA customers listed in that

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report, Quest reported a loss on the capitated rates of 46 of those customers, whereas it reported

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“substantial profits on the pull-through business” of all 68. FAC ¶ 68. From 2004-2008, Quest‟s

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SEC filings “show that [its] revenue per requisition on its capitated accounts is far less than its

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average cost per requisition,” but “there is no significant cost-savings associated with capitated

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accounts that would allow these rates to be profitable.” FAC ¶ 70.
Indeed, in addition to below-cost capitated rates, Quest “routinely offers [] below-cost”

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fee-for-service rates to physicians and clinics that are billed directly. FAC ¶ 71. Quest‟s annual

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10-K filings with the SEC reflect that Quest lost money on such clients for at least the last nine

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years. FAC ¶ 72. From 2004-2008, Quest lost even more money on capitated contracts. FAC

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¶ 72.

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In 2009, both a suit filed by the State of California and a federal qui tam suit alleged that

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Quest‟s capitated contracts were priced below cost to “pull through” government business in

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violation of federal and state kickback laws. FAC ¶ 73. After the suits became public, Quest
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stopped reporting its requisition volume for capitated contracts in its 10-K filings. FAC ¶ 73.

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Quest‟s prices for specific tests are also “far below cost.” FAC ¶ 74. For example, while

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Quest‟s average cost (derived based on information from Quest‟s 10-K filings, “standard industry

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price-points, and Plaintiffs‟ costs”) for performing a complete-blood-count test in California is

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approximately $9.04, it charges certain clients between $1.42 and $2.75 per test, leaving the

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plaintiffs and other laboratories unable to compete. FAC ¶¶ 74-75. In 2005, Quest billed

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providers below cost for 42 of the most commonly ordered tests. FAC ¶ 76.
Quest‟s conduct forecloses new entrants from the market, such as PBP. FAC ¶ 78. It also

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forces competitors to sell their businesses to Quest, such as Dignity Healthcare, whose CEO said
that Quest was “„killing Dignity‟s outreach business‟ with loss-leading capitation agreements

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Northern District of California

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throughout the state.” FAC ¶ 79.

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IV.

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THE AETNA-QUEST AGREEMENT
Aetna, which insures approximately nine percent of the United States population,

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conspired with Quest to eliminate or exclude 400 regional laboratories from Aetna‟s provider

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network in exchange for discounts. FAC 27, ¶ 81. Hunter and PBP have been denied in-network

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status with Aetna, while SPA “is de facto denied [Aetna] network status for approximately 50% of

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its business because [Hunter] is denied network status.” FAC ¶ 80. Quest “publicly states that it

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has a „preferred national provider‟ contract with [Aetna] to serve [Aetna‟s] HMO-based, point-of-

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service, and physician office members.” FAC ¶ 81. Under this agreement, Aetna steers its

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physicians‟ lab testing to Quest and away from Hunter, PBP, and SPA. FAC ¶ 81.

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Hunter, PBP, SPA, and other regional labs that are outside Aetna‟s network are “at a

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tremendous competitive disadvantage.” FAC ¶ 84. Dr. Henry Hamilton, the manager of a

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physician‟s office in northern California, “recently” told a vice president at Hunter that patients do

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not pay deductibles or co-payments for Quest‟s services because Quest is the only “preferred

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laboratory vendor” for Aetna. FAC ¶ 82.

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In October 2011, Quest approached Aetna and “pushed for an exclusive nationwide

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contract in exchange for steep discounts.” FAC ¶ 85. Although Aetna refused to enter into an

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exclusive contract, it agreed to terminate four hundred regional-lab contracts by letting them lapse.
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FAC ¶ 85 & n.4. Hunter—“the only remaining substantial in-network competitor” of Quest in

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northern California—was terminated on September 15, 2012. FAC ¶ 85. Aetna has rejected

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multiple requests for independent laboratories to be added to its network, “based specifically on

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[Quest‟s] refusal to allow such new additions.” FAC ¶ 86.
Quest “bargained for right-of-first-refusal contracts with [Aetna] under which Quest

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controls entry into markets.” FAC ¶ 87. Aetna must get Quest‟s approval before Aetna contracts

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with a lab, including ones that may want to launch a new network of hospital labs. FAC ¶ 87.

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Aetna refuses to even consider negotiating with laboratories: in one instance, it rejected Hunter‟s

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offer of a 90 percent discount to remain in-network, which Hunter offered “in order to demonstrate

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[Aetna] and [Quest‟s] exclusionary behavior.” FAC ¶ 88.

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Northern District of California

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“Aetna has also engaged in wide-spread harassment and intimidation of patients and

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physicians to steer business to [Quest] and to stop [them] from sending laboratory work” to out-of-

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network laboratories, such as the plaintiffs, even though Aetna‟s contracts with patients allow

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them to go out-of-network. FAC ¶ 89. Aetna sent letters to its customers encouraging them to use

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Quest and stating that Hunter is more expensive. FAC ¶ 90, Exs. 8 & 9.
In addition, Quest and Aetna created “physician bonus pools” to induce physicians to refer

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all of their lab tests to Quest. FAC ¶ 92. HMOs, including Aetna, create “bonus pools,” from

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which out-of-network testing costs are deducted, then any surplus is shared with the physicians.

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FAC ¶ 92. Physician groups have an incentive to refer “lucrative” fee-for-service Medicare

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business to Quest, but not its regional lab competitors. FAC ¶ 93. This arrangement caused

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Quest‟s Medicare revenue to grow by hundreds of millions of dollars in all five product markets,

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to the detriment of regional labs such as Hunter. FAC ¶ 94.

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V.

THE BSC-QUEST AGREEMENT

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In 2009, Hunter was Quest‟s largest private competitor in northern California, and

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Westcliff was the largest private laboratory in California and Quest‟s second largest competitor in

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southern California. FAC ¶ 96. Quest threatened not to renew its contract with BSC unless BSC

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agreed not to renew its contracts with Westcliff and Hunter; to further induce BSC, Quest offered

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a 10 percent discount that “forced” BSC to accept. FAC ¶ 96. (Hunter learned that BSC‟s
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agreement with Quest required Hunter‟s termination from a BSC senior network manager around

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April 29, 2010. FAC ¶ 99.) Within three months, Westcliff entered bankruptcy. FAC ¶ 96. BSC

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terminated its contract with Hunter, after which Quest sales representatives told physicians that

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Hunter was expensive out-of-network, that Quest “would soon drive” Hunter into bankruptcy, and

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that they should send patients to Quest to “avoid service disruptions from imminent bankruptcy.”

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FAC ¶ 97. Hunter‟s business began to suffer after the termination but “was not able to survive.”

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FAC ¶¶ 98 & 100.
Hunter, “which averaged 45% annual growth in Northern California for five years, could

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no longer compete for market share” after BSC‟s termination. FAC ¶ 101. A chart in the FAC
reflects that Hunter had rapid growth from 2005—apparently its first year with revenue—to 2009.

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Northern District of California

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Its 2009 revenue was about $21 million, after which BSC terminated its contract with Hunter.

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Hunter‟s revenue then dropped to about $19 million. In 2011, it went back up to about $21

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million. After Aetna terminated its contract as well, Hunter‟s revenue dropped to about $20

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million in 2012. FAC 33. Hunter “could never get back to pre-termination annual revenue and

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operating losses ballooned to $15.4 million.” FAC ¶ 101. Hunter lost accounts totaling $1.3

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million. FAC ¶ 101.
On February 14, 2013, Hunter “received an unsolicited application” from BSC to join its

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network and to sign an Allied and Ancillary Provider Agreement. FAC ¶ 102, Ex. 10. After

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Hunter sent in its application, BSC told Hunter “through counsel that under no circumstances

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would [Hunter] be permitted back in-network and that it should cease all efforts to apply.” FAC

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¶ 102 (original emphasis).

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In August 2013, Hunter sold a “majority of its laboratory testing business at a deep

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discount.” FAC ¶ 103. SPA‟s business was affected because approximately 50 percent of SPA‟s

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business is “tied” to Hunter. FAC ¶ 104.

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VI.

WAIVING CO-PAYS AND DEDUCTIBLES

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Quest capped patient obligations or waived all patient co-pays and deductibles to prevent

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physicians from using competitor labs. FAC ¶ 105. Quest may lose money by doing this, but “it

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makes up the losses with „pull through‟” government business. FAC ¶ 105. Physicians can
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provide these waivers, but doing so to obtain Medicare and Medicaid business is prohibited by

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anti-kickback laws. FAC ¶ 106.

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VII.

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ANTICOMPETITIVE EFFECTS
The conduct described above has affected all five product markets. FAC ¶ 108. Because

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BCBSA covers 32 percent of the United States population, and Aetna covers nine percent,

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exclusion from those two networks “effectively precludes Plaintiffs . . . from serving over 40% of

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the population.” FAC ¶ 109. And because most physicians prefer to use a laboratory that can

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service “a significant portion” of its patients on an in-network basis, loss of in-network status for

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“as little as 10% of a physician‟s patients can cause a laboratory to be dropped” by the physician

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completely. FAC ¶ 109.

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Northern District of California

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Quest is the largest laboratory in the world even though it may have questionable quality.

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FAC ¶¶ 110-112. Barriers to entry and expansion in the regional relevant markets for the sale of

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specialty testing are also high. FAC ¶ 113. Quest is estimated to have a 46 percent share of the

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“independent lab market in California,” which is followed by Labcorp with a 20 percent share.

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FAC ¶ 116. In particular, it has a 73 percent market share of the “[n]orthern California physician

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outpatient market” based on figures that are partially estimated by Hunter. FAC ¶ 117.

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PROCEDURAL HISTORY
On June 25, 2013, the Honorable Jon Tigar dismissed the plaintiffs‟ original Complaint

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with leave to amend. Dkt. No. 85 (“Order”). Judge Tigar found that the plaintiffs failed to

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adequately plead the existence of a horizontal agreement between the insurer defendants or a

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vertical agreement between BCBSA and Quest. Order 12. While Judge Tigar found that the

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plaintiffs adequately pleaded vertical agreements between Aetna and Quest, and BSC and Quest—

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which he assessed to see whether they were illegal exclusive-dealing contracts—he concluded that

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the plaintiffs failed to adequately plead foreclosure of the relevant markets and did not provide

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sufficient allegations showing how competition was adversely affected by the defendants‟ actions.

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Order 15-19. For the same reasons, and because the plaintiffs did not adequately plead a

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“dangerous probability of recoupment” or an agreement, the plaintiffs‟ monopolization, attempted

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monopolization, and conspiracy to monopolize cause of action failed. Order 19-22. With regard
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to the Unfair Practices Act claim against Quest, Judge Tigar found that the plaintiffs failed to

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allege Quest‟s prices or costs, and with regard to the interference with prospective economic

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advantage claims, Judge Tigar found that the plaintiffs did not sufficiently allege an underlying

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wrongful act or that the defendants owed them a duty of care. Order 22-24. For all the reasons

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above, Judge Tigar also found that the plaintiffs‟ Unfair Competition Law cause of action failed.

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Order 24.

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On August 9, 2013, the plaintiffs filed their FAC asserting the same causes of action. Dkt.
No. 94. The plaintiffs bring the following causes of action against all of the defendants: (1)

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violation of California‟s Cartwright Act, CAL. BUS. & PROF. CODE §§ 16700 et seq.; (2) violation

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of California‟s Unfair Competition Law (“UCL”), CAL. BUS. & PROF. CODE §§ 17200 et seq.; (4)

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Northern District of California

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intentional interference with prospective economic advantage; (5) negligent interference with

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prospective economic advantage; (6) monopolization or attempted monopolization in violation of

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the Sherman Act, 15 U.S.C. § 2; (7) bilateral conspiracies to restrain trade and monopolize in

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violation of the Sherman Act, 15 U.S.C. § 1; and (8) bilateral conspiracies to monopolize and

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attempt to monopolize in violation of the Sherman Act, 15 U.S.C. § 2. The plaintiffs‟ Third Cause

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of Action for a violation of California‟s Unfair Practices Act (“UPA”), CAL. BUS. & PROF. CODE

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§§ 17043, 17044, is brought against Quest only. The plaintiffs seek treble damages and injunctive

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and other relief. The defendants now move to dismiss the FAC.3
LEGAL STANDARD

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20

A motion to dismiss is proper under Federal Rule of Civil Procedure 12(b)(6) where the

21

pleadings fail to state a claim upon which relief can be granted. FED. R. CIV. P. 12(b)(6). The

22

Court must “accept factual allegations in the complaint as true and construe the pleadings in the

23

light most favorable to the nonmoving party,” Manzarek v. St. Paul Fire & Marine Ins. Co., 519

24
25
26
27
28

3

On August 20, 2013, the Court held a case management conference. Pursuant to Judge
Tigar‟s April 29, 2013, order denying a stay of discovery requested by the defendants, the Court
ordered discovery to continue in this case. Dkt. No. 95. The Court also instructed the parties to
inform the Court by August 29, 2013, if the parties are unable to agree to a reasonable scope for
discovery; no such notice was given.
12

1

F.3d 1025, 1031 (9th Cir. 2008), drawing all “reasonable inferences” from those facts in the

2

nonmoving party‟s favor, Knievel v. ESPN, 393 F.3d 1068, 1080 (9th Cir. 2005). A complaint

3

may be dismissed if it does not allege “enough facts to state a claim to relief that is plausible on its

4

face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility

5

when the pleaded factual content allows the court to draw the reasonable inference that the

6

defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

7

However, “a complaint [does not] suffice if it tenders naked assertions devoid of further factual

8

enhancement,” id. (quotation marks and brackets omitted), and the court need not “assume the

9

truth of legal conclusions merely because they are cast in the form of factual allegations,” W. Min.
Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981). If a motion to dismiss is granted, a court

11
United States District Court
Northern District of California

10

should normally grant leave to amend unless it determines that the pleading could not possibly be

12

cured by allegations of other facts. Cook, Perkiss & Liehe v. N. Cal. Collection Serv., Inc., 911

13

F.2d 242, 247 (9th Cir. 1990).
DISCUSSION4

14
15

I.

SECTION 1

16

Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust

17

or otherwise, or conspiracy, in restraint of trade or commerce.” 15 U.S.C. § 1. Despite the literal

18

language of the statute, only “unreasonable” restraints of trade are unlawful. State Oil Co. v.

19

Khan, 522 U.S. 3, 10 (1997). Where an agreement is “so plainly anticompetitive that no elaborate

20

study of the industry is needed to establish their illegality,” the court should find it per se illegal.

21

Nat’l Soc. of Prof’l Eng’rs v. United States, 435 U.S. 679, 692 (1978). Otherwise, the Supreme

22

Court “presumptively applies rule of reason analysis, under which antitrust plaintiffs must

23

demonstrate that a particular contract or combination is in fact unreasonable and anticompetitive

24

before it will be found unlawful.” Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006).
To survive a motion to dismiss in a Section 1 case, “an allegation of parallel conduct and a

25
26
27
28

4

Because California‟s Cartwright Act mirrors the federal Sherman Act, the Court analyzes them
jointly according to federal law. Cnty of Tuolumne v. Sonora Cmty. Hosp., 236 F.3d 1148, 1160
(9th Cir. 2001); G.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256, 265 (Ct. App. 1983).
13

1

bare assertion of conspiracy will not suffice.” Twombly, 550 U.S. at 556. Rather, “claimants must

2

plead not just ultimate facts (such as a conspiracy), but evidentiary facts which, if true, will prove:

3

(1) a contract, combination or conspiracy among two or more persons or distinct business entities;

4

(2) by which the persons or entities intended to harm or restrain trade or commerce [ ]; (3) which

5

actually injures competition.” Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1047 (9th Cir. 2008).

6

“In addition to these elements, plaintiffs must also plead (4) that they were harmed by the

7

defendant‟s anti-competitive contract, combination, or conspiracy, and that this harm flowed from

8

an „anti-competitive aspect of the practice under scrutiny.‟ This fourth element is generally

9

referred to as „antitrust injury‟ or „antitrust standing.‟” Brantley v. NBC Universal, Inc., 675 F.3d
1192, 1197 (9th Cir. 2012) (citations omitted). “The Ninth Circuit [ ] held that . . . a Section 1

11
United States District Court
Northern District of California

10

claim should „answer the basic questions: who, did what, to whom (or with whom), where, and

12

when?‟” In re High-Tech Employee Antitrust Litig., 856 F. Supp. 2d 1103, 1116 (N.D. Cal. 2012)

13

(citation omitted).

14

“Restraints imposed by agreement between competitors have traditionally been

15

denominated as horizontal restraints, and those imposed by agreement between firms at different

16

levels of distribution as vertical restraints.” Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717,

17

730 (1988). “[A] group of competitors may act in concert to harm another competitor or exclude

18

that competitor from the market,” thus forming a horizontal agreement. Brantley, 675 F.3d at

19

1198. “Vertical agreements that foreclose competitors from entering or competing in a market can

20

injure competition by reducing the competitive threat those competitors would pose. . . . [but]

21

[o]ther types of vertical agreements do not necessarily threaten an injury to competition.” Id.

22

“[A] vertical restraint is not illegal per se unless it includes some agreement on price or price

23

levels.” Bus. Elecs. Corp., 485 U.S. at 735-36.

24

The plaintiffs appear to allege both horizontal and vertical agreements in violation of

25

Section 1 of the Sherman Act. They allege three separate vertical agreements between each of the

26

insurers and Quest. FAC ¶¶ 56, 87, 96. They also appear to allege that the defendants are all part

27

of a single overarching conspiracy. See, e.g., FAC ¶¶ 119 & 120. Judge Tigar characterized the

28

overarching conspiracy as a horizontal agreement in the form of a “hub and spoke” arrangement.
14

1

Order 10. The plaintiffs do not dispute that characterization, so the Court will also treat it as such.

2

A. The Plaintiffs Do Not Adequately Allege A Horizontal Agreement.

3

The Court is unaware of any Ninth Circuit cases dealing with hub-and-spoke conspiracies
in the antitrust context, but other courts and commentators have addressed them. A hub-and-

5

spoke conspiracy involves “a series of vertical agreements between each individual competitor and

6

a common [entity].” 1 ANTITRUST LAW DEVELOPMENTS 20 (Am. Bar Ass‟n Section of Antitrust

7

Law ed., 7th ed. 2012) (“ALD”). The common entity is the “hub,” and it enters into individual

8

agreements with other entities that compete with each other, which form the “spokes.” Id. Such

9

agreements may be perfectly legal. “The series of agreements becomes an actionable horizontal

10

conspiracy, however, when there is some set of facts showing a connecting agreement among the

11
United States District Court
Northern District of California

4

horizontal competitors that form the spokes.” Id. (citing In re Microsoft Corp. Antitrust Litig., 127

12

F. Supp. 2d 728, 733 (D. Md. 2001), aff’d sub nom. Dickson v. Microsoft Corp., 309 F.3d 193 (4th

13

Cir. 2002)). This horizontal agreement is the “rim” that connects the “hub” and “spokes” into a

14

wheel. Id.; see also In re Nat’l Ass’n of Music Merchants, Musical Instrums. & Equip. Antitrust

15

Litig., 2011 WL 3702453, at *5 (S.D. Cal. Aug. 22, 2011).

16

Judge Tigar dismissed this aspect of the Complaint because the plaintiffs “did not allege

17

that any insurer knew of the others‟ [alleged] contracts with Quest.” Order 10. In other words, the

18

plaintiffs did not adequately plead an agreement that formed the “rim” connecting the “spokes.”

19

The FAC suffers the same infirmity. Not only does the FAC lack any allegation about an actual

20

agreement between all the defendants, it does not even allege any evidence of parallel conduct that

21

might “raise[] a suggestion of a preceding agreement.” Twombly, 550 U.S. at 557. The only

22

pleaded connection between any of the insurers is the fact that BCBSA licenses the “Blue Shield”

23

name to BSC, but as with the Complaint, the FAC fails to show how BSC‟s and BCBSA‟s

24

respective alleged agreements with Quest are connected by “either an agreement or understanding

25

that [these] „spokes‟ would cooperate in [a] conspiracy.” In re Nat’l Ass’n of Music Merchants,

26

2011 WL 3702453, at *5 (citing Toys “R” Us, Inc. v. F.T.C., 221 F.3d 928, 931-36 (7th Cir.

27

2000)). Beyond that, the FAC only alleges individual agreements between each insurer and Quest.

28

There is no sufficiently pleaded horizontal agreement.
15

1

The separate subsections of the “Factual Background” portions of the plaintiffs‟ briefs

2

opposing Aetna, BSC, and BCBSA‟s Motions to Dismiss that detail the “Amendments,”

3

“Additional Allegations,” and “New Allegations” in the FAC do not reflect any new facts to

4

support the existence of a “rim.” Opp‟n to Aetna 4-5; Opp‟n to BSC 3-4; Opp‟n to BCBSA 4.

5

The same is true of the “Factual Background” portion of the plaintiffs‟ brief opposing Quest‟s

6

Motion to Dismiss. Opp‟n to Quest 2-10. The plaintiffs‟ briefs do not even attempt to baldly

7

assert the existence of a “rim” which connects the three alleged vertical agreements. See, e.g.,

8

Opp‟n to Quest 13-14 (listing agreements FAC alleged). While the plaintiffs repeatedly state that

9

“BCBSA exists solely for the benefit of the BluePlans and to facilitate their concerted action,” id.,
which may show a “rim” between BCBSA and BSC, these are “only ultimate facts . . . and legal

11
United States District Court
Northern District of California

10

conclusions. They fail[ ] to plead the necessary evidentiary facts to support those conclusions.”

12

Kendall, 518 F.3d at 1047-48. But even accepting those conclusory assertions as true, concerted

13

action alone is insufficient to establish a Section 1 violation. The plaintiffs still fail to plead facts

14

showing a horizontal agreement, Twombly, 550 U.S. at 556, or any common design or scheme,

15

and they make no legal argument that absolves their need to do so.

16

The Motions to Dismiss the plaintiffs‟ First, Seventh, and Eighth Causes of Action are

17

GRANTED WITH LEAVE TO AMEND to the extent that they relate to a horizontal agreement

18

between the defendants.

19
20

B. The Plaintiffs Do Not Adequately Allege An Unreasonable Vertical Agreement.
1. BCBSA-Quest

21

The plaintiffs fail to adequately plead the existence of an agreement between BCBSA and

22

Quest to change the Blue Card policy to keep the plaintiffs and other laboratories out of Blue Plan

23

networks. The FAC alleges that Quest “supported” these changes and that Quest “act[ed] in

24

concert” with BCBSA to prevent competitors from getting into the network. FAC ¶¶ 31, 33 & 54.

25

The plaintiffs also allege that Jim Barkach of BCBSA told Hunter‟s CEO over the phone that no

26

laboratory could match the “deal” that BCBSA had with Quest and hung up. FAC ¶ 55. The sole

27

remaining allegation linking Quest to BCBSA‟s Blue Card changes is that Quest vetoed ACLA‟s

28

sending a letter to BCBSA protesting the changes to the Blue Card policy. FAC ¶ 54. Based on
16

1

these exact facts, Judge Tigar found that the plaintiffs failed to adequately plead a vertical

2

agreement between BCBSA and Quest. Indeed, he concluded that Quest‟s explanation for why it

3

vetoed the letter—namely, that it acted independently and in its own interests—“is so convincing

4

that plaintiffs‟ explanation”—that BCBSA and Quest agreed to drive Quest‟s competitors out of

5

business—“is implausible.” Order 12 (quoting Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir.

6

2011)).

7

The Court finds no reason to conclude differently when it is presented with the same facts

8

as the original Complaint. The Court also notes that the plaintiffs‟ argument that Quest and

9

BCBSA had an actual agreement is also implausible because the plaintiffs do not explain why
Quest would bother vetoing a protest letter to BCBSA if it indeed had an agreement with BCBSA.

11
United States District Court
Northern District of California

10

Such an effort appears futile and further shows the implausibility of the plaintiffs‟ theory.

12

The plaintiffs state, “The FAC contains sufficient allegations to plausibly allege an

13

agreement. Quest and BCBSA entered into an agreement designed to drive business to Quest and

14

drive Quest‟s competitors out of business.” Opp‟n to BCBSA 7. In addition, “The change to the

15

BlueCard plan was made by BCBSA and Quest acting together . . . .” Opp‟n to BCBSA 8.

16

Finally, “The question before the Court is whether it is plausible that BCBSA and Quest agreed to

17

implement the change. The answer is yes.” Opp‟n to BCBSA 9. But repeating the same

18

conclusion over and over without giving any facts to support it is insufficient to state a claim—

19

Rule 8 cannot be worn down by brute force. As the Ninth Circuit instructs, a plaintiff must “plead

20

the necessary evidentiary facts to support those conclusions.” Kendall, 518 F.3d at 1047-48.

21

Here, the plaintiffs provide nothing but conclusions.

22

The Motions to Dismiss the plaintiffs‟ First, Seventh, and Eighth Causes of Action are

23

GRANTED WITH LEAVE TO AMEND to the extent that they relate to a vertical agreement

24

between BCBSA and Quest.

25
26

2. BSC-Quest
Judge Tigar found that the plaintiffs adequately pleaded the existence of a vertical

27

agreement between BSC and Quest, and analyzed whether it constituted an unreasonable exclusive

28

dealing arrangement. Order 12-13. He concluded that the agreement as alleged in the original
17

1

Complaint was not illegal. Order 16. The Court will analyze the agreement as pleaded in the

2

FAC.
“Exclusive dealing” is an arrangement whereby a seller of a product or service prevents a

3
4

buyer from purchasing that product or service from any other seller. Allied Orthopedic Appliances

5

Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991, 996 (9th Cir. 2010). Because there are “well-

6

recognized economic benefits to exclusive dealing arrangements,” Omega Envtl., Inc. v. Gilbarco,

7

Inc., 127 F.3d 1157, 1162 (9th Cir. 1997), “an exclusive-dealing arrangement does not constitute a

8

per se violation of section 1,” Twin City Sportservice, Inc. v. Charles O. Finley & Co., Inc., 676

9

F.2d 1291, 1303-04 (9th Cir. 1982). “Under the antitrust rule of reason, an exclusive dealing
arrangement violates Section 1 only if its effect is to „foreclose competition in a substantial share

11
United States District Court
Northern District of California

10

of the line of commerce affected.‟” Allied Orthopedic Appliances, 592 F.3d at 996 (citation

12

omitted). Although not the exclusive or primary factor, courts typically look (at least initially) to

13

the percentage share of the relevant market foreclosed by the challenged agreement to determine

14

whether the agreement is unreasonable.5 ALD 215-16. Different courts have required different

15

levels of foreclosure before finding that an agreement is anticompetitive, id. n.1370-1372, but the

16

Ninth Circuit does not appear to have clearly established such a threshold.
Here, as with their original Complaint, the plaintiffs provide no allegations sufficient to

17
18

show whether the BSC-Quest agreement “foreclose[d] competition in a substantial share” of the

19

relevant markets, nor do they provide any indicia that competition has been harmed. While the

20

FAC alleges that Hunter was Quest‟s “largest privately owned competitor operating a full-service

21

laboratory in Northern California” and “Westcliff was the largest privately owned laboratory in

22

California and Quest‟s second largest competitor in Southern California,” FAC ¶ 96, this is not

23

enough to show the size of the relevant markets, let alone the magnitude of foreclosure. Nor are

24

Hunter‟s revenues from 2003 to 2012 and the allegation that it “averaged 45% annual growth in

25

Northern California for five years” enough. FAC ¶¶ 100 & 101. The FAC does not state which of

26

the five relevant markets it identifies in the FAC is affected by the BSC-Quest agreement; how

27
5

28

Judge Tigar found the plaintiffs‟ alleged product and geographic markets adequately pleaded,
and those same markets are pleaded here.
18

1

large that market is; what market participants there are; how the agreement affected the plaintiffs‟

2

shares, Quest‟s share, or any other market participant‟s share; whether there are other purchasers

3

in the relevant market to which market participants may turn aside from BSC; or how competition

4

has been harmed. “Proving injury to competition in a rule of reason case almost uniformly

5

requires a claimant to . . . show the effects upon competition within [the relevant] market.” Oltz v.

6

St. Peter’s Cmty. Hosp., 861 F.2d 1440, 1446 (9th Cir. 1988). Without providing any of this

7

information, the plaintiffs‟ claim fails.

8
9

While recognizing that Judge Tigar held that the “original Complaint did not sufficiently
allege foreclosure of market opportunities,” the plaintiffs argue, “The FAC rectifies this problem.”
Opp‟n to BSC 7-8. It does not. The plaintiffs merely contend that the agreement foreclosed

11
United States District Court
Northern District of California

10

Hunter, Westcliff, and SPA from opportunities. Id. Assuming that is true, the plaintiffs must still

12

provide the Court with enough allegations to determine whether a “substantial share” of the

13

relevant market was foreclosed. The plaintiffs point out that Judge Tigar quoted the Ninth Circuit

14

as stating that a court should not engage in “blind reliance upon market share, divorced from

15

commercial reality.” Id. 8 (quoting Order 19). Even ignoring the fact that Judge Tigar‟s statement

16

comes from his discussion about Section 2 and market power, and accepting that the Court should

17

not unduly rely on market shares, the plaintiffs‟ FAC is nonetheless completely devoid of any

18

context in which to evaluate their claims. It may very well be that Hunter, Westcliff, and SPA

19

constitute a “substantial share” of the relevant market or markets, but with only what the plaintiffs

20

present, the Court cannot tell. All that can be said is that three of Quest‟s alleged competitors

21

were injured, but the antitrust laws are meant to protect competition, not competitors. As the

22

Ninth Circuit has said, a “claimant [must] demonstrate harm to the economy beyond the

23

claimants‟ own injury.” Oltz, 861 F.2d at 1448. The plaintiffs have not given the Court sufficient

24

information to determine whether competition generally has been harm, and thus they have not

25

sufficiently pleaded that the BSC-Quest agreement is unreasonable under Section 1.

26

The Motions to Dismiss the plaintiffs‟ First and Seventh Causes of Action are

27

DISMISSED WITH LEAVE TO AMEND to the extent that they relate to a vertical agreement

28

between BSC and Quest.
19

1

C. Aetna-Quest

2

Judge Tigar found that the plaintiffs adequately pleaded the existence of a vertical

3

agreement between Aetna and Quest, and analyzed whether it constituted an unreasonable

4

exclusive dealing arrangement. Order 12-13. He concluded that the agreement as alleged in the

5

original Complaint was not illegal. Order 18-19. The Court will analyze the agreement as pleaded

6

in the FAC. The agreement allegedly covers (1) steep discounts from Quest in exchange for the

7

termination from Aetna‟s network of 400 regional labs across the United States; (2) a right of first

8

refusal for Quest before Aetna enters into a new contract with Quest‟s competitors in a certain

9

area; (3) “wide-spread harassment and intimidation of patients and physicians to steer business” to
Quest; and (4) “bonus pools” from which physicians are paid the remainder of money previously

11
United States District Court
Northern District of California

10

set aside that has not been spent out-of-network.

12

The plaintiffs‟ claims concerning the Aetna-Quest agreement fail for substantially the same

13

reasons their claims concerning the BSC-Quest agreement failed: the plaintiffs do not sufficiently

14

allege anticompetitive effects in a relevant market, whether through substantial foreclosure or

15

otherwise. Here, the plaintiffs allege that Aetna “insures approximately 9% of the U.S.

16

population.” FAC ¶ 81. However, they do not state Aetna‟s market share in any of the five

17

product and geographic markets identified in the FAC, three of which are not national. Even

18

assuming that the nine percent figure is an adequate proxy for Aetna‟s share in each of the pleaded

19

markets, and assuming that those shares represent the shares of the markets foreclosed from

20

Quest‟s competitors—and these are bold assumptions—the foreclosure is insufficient to find an

21

anticompetitive effect. In his Order, Judge Tigar held that “with respect to „exclusive dealing,

22

foreclosure levels are unlikely to be of concern where they are less than 30 or 40 percent.‟” Order

23

18 (citing Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d 57, 66 (1st

24

Cir. 2004) (Boudin, J.)). Many other cases are in accord with this level. ALD 215-16. On this

25

basis, Judge Tigar found the original Complaint lacking. The nine percent figure has not changed

26

from the original Complaint to the FAC. Because the plaintiffs do not plead materially new facts,

27

the Court also finds the FAC lacking in this regard.

28

As with the BSC-Quest agreement, the plaintiffs do not provide the Court with any other
20

1

context in which to judge whether there has been substantial foreclosure or any other indicia of

2

anticompetitive effects. They allege harm to “other competitors” and “independent laboratories,”

3

Opp‟n to Aetna 9; FAC ¶ 86, but do not say who. They claim that 400 laboratories were

4

wrongfully excluded from Aetna‟s network, but do not say where these laboratories are or in

5

which markets they operate, as well as their positions in those markets. The plaintiffs assert that

6

the alleged right of first refusal allows Quest to determine its competitors, but do not claim that

7

Quest ever exercised that right.6 In addition, the plaintiffs argue that “[t]he FAC alleges harm to

8

the market is [sic] several ways.” Opp‟n to Aetna 8. They claim that “Plaintiffs and other small

9

labs are being forced out of business” and cite to paragraphs 96, 100, and 103 of the FAC.
However, those paragraphs refer to harm that BSC allegedly caused—they have nothing to do with

11
United States District Court
Northern District of California

10

Aetna‟s alleged agreement. The plaintiffs also cite to Exhibits 8 and 9 of the FAC to show

12

Aetna‟s “coercion” and “harassment” of physicians to use Quest. Opp‟n to Aetna 8. However,

13

these letters only state, “Hunter Laboratories will soon be out of network for Aetna members . . .

14

we want to make you aware that our agreement with them will end . . . Our members pay much

15

more to use out-of-network providers. You can help your patients save money by referring them

16

to in-network laboratories,” and other apparently accurate, non-harassing statements. The

17

plaintiffs‟ arguments are belied by the evidence they present.
Rebutting Aetna‟s argument that it does not make economic sense for a purchaser to

18
19

conspire with a supplier to give that supplier market power, the “Plaintiffs agree with Aetna and

20

Quest‟s contention that it is not in the long-term economic interest of Aetna . . . to conspire with

21

Quest to drive competitors out of business. However, Aetna‟s failure to put their long term

22

business interests ahead of short term gains is certainly not implausible.” Opp‟n to Aetna 9. In

23

response to an identical argument, the Stop & Shop court wrote that “courts tend to be skeptical of

24

such claims.” Stop & Shop, 373 F.3d at 66. It continued that “an excluded supplier remains free

25

to offer evidence that, in the individual instance, the anti-competitive consequences of an

26

exclusive contract outweigh the benefits . . . [t]his almost always requires a showing of injury to

27
6

28

The FAC only states that Quest “has bargained for” a right of first refusal—it never says that
Aetna ever agreed to it.
21

1

competition.” Id. Here, the plaintiffs have not presented any plausible injury to competition—

2

only injury to themselves. See Brantley, 675 F.3d at 1198 (stating that an injury to competition

3

must be “beyond the impact on the plaintiffs themselves”). Thus, their argument cannot be

4

accepted.
The plaintiffs argue that “[b]ecause of how the market for independent clinical lab testing

5
6

operates, foreclosure of as little as ten percent of the market prevents a lab from offering any

7

services to a physician, meaning that the agreement between Quest and Aetna has significant

8

anticompetitive effects.” Opp‟n to Aetna 10. Judge Tigar has already rejected the plaintiffs‟

9

attempts “merely to repeat [this] claim.” Order 18. The Court also finds the plaintiffs‟ argument
conclusory and wholly unsupported: the plaintiffs have not explained why this is true in theory

11
United States District Court
Northern District of California

10

and have not sufficiently pleaded that this has actually led to substantial foreclosure in a relevant

12

market.7 In any event, the heart of the plaintiffs‟ complaints is that they are not part of Aetna‟s

13

network—that is quite different from Aetna‟s foreclosing them from the market. While the

14

plaintiffs argue that the defendants‟ actions limit consumer choice, the Ninth Circuit has explicitly

15

held that “allegations that an agreement has the effect of reducing consumers‟ choices . . . does not

16

sufficiently allege an injury to competition.” Brantley, 675 F.3d at 1202.
With regard to the right of first refusal, the plaintiffs cite Hahn v. Oregon Physicians’

17
18

Services, 868 F.2d 1022, 1029 (9th Cir. 1988), for the proposition that the Sherman Act prohibits

19

network agreements in which one provider can determine which other providers can compete

20

against it. Opp‟n to Aetna 10. Judge Tigar also already rejected that argument, Order 16 n.2, and

21

the Court finds no reason to expend additional judicial resources addressing resurrected

22

arguments.
Finally, the plaintiffs cite to Perinatal Medical Group, Inc. v. Children’s Hospital Central

23
24

California, No. 09-cv-1273-LJO, 2010 WL 1525511, at *9 (E.D. Cal. April 15, 2010), as further

25

support for its argument that the Sherman Act does not permit market participants to choose its

26
7

27
28

The plaintiffs‟ argument appears to stem from the allegation in their FAC that “loss of innetwork status with respect to as little as 10% of a physician‟s patients can cause a laboratory to be
dropped from use by the physician, completely.” FAC ¶ 109. This assertion is quite different than
the argument the plaintiffs make in their opposition briefs.
22

1

competitors. Opp‟n to Aetna 10. Concerning a vertical agreement between a hospital and a group

2

of physicians, the court held, “Under certain factual circumstances, an exclusive contract between

3

a hospital and specialty group of physicians, that requires every patient treated at the hospital to

4

use the services of that firm of physicians, may violate Section 1 of the Sherman Act.” Perinatal

5

Med. Grp., 2010 WL 1525511, at *9. That case is distinguishable, however, because it involves

6

an exclusive contract, which ultimately is not what is present here—as the plaintiffs state, Aetna

7

“refused to enter into the exclusive contract.” FAC ¶ 85. Indeed, the plaintiffs never allege that

8

Aetna members are not allowed to go out of the network, and Exhibits 8 and 9 to the FAC suggest

9

that they can. Thus, no cases the plaintiffs cite help them.
The Motions to Dismiss the plaintiffs‟ First and Seventh Causes of Action are GRANTED

10

United States District Court
Northern District of California

11

WITH LEAVE TO AMEND to the extent they relate to a vertical agreement between Aetna and

12

Quest.

13

II.

SECTION 2

14

Section 2 of the Sherman Act makes it unlawful for anyone to “monopolize, or attempt to

15

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

16

the trade or commerce among the several States.” 15 U.S.C. § 2. The plaintiffs allege that Quest

17

has monopolized and attempted to monopolize the relevant markets, and that the defendants all

18

conspired to monopolize the relevant markets.

19

A. The Plaintiffs Do Not Adequately Allege Monopolization.

20

To establish liability for a monopolization claim, a plaintiff must demonstrate “(1) the

21

possession of monopoly power in the relevant market and (2) the willful acquisition or

22

maintenance of that power as distinguished from growth or development as a consequence of a

23

superior product, business acumen, or historic accident.” Eastman Kodak Co. v. Image Tech.

24

Servs., Inc., 504 U.S. 451, 480 (1992). A private plaintiff must also demonstrate antitrust injury

25

by “prov[ing] that his loss flows from an anticompetitive aspect or effect of the defendant‟s

26

behavior.” Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995). “Market share

27

is evidence from which the existence of monopoly power may be inferred, but it should not be

28

equated with monopoly power. Blind reliance upon market share, divorced from commercial
23

1

reality, could give a misleading picture of a firm‟s actual ability to control prices or exclude

2

competition.” Hunt-Wesson Foods, Inc. v. Ragu Foods, Inc., 627 F.2d 919, 924 (9th Cir. 1980).

3

“The second element of a successful monopolization claim requires that the conceded monopolist

4

have engaged in „willful‟ acts directed at establishing or retaining its monopoly.” Calif. Computer

5

Prods., Inc. v. Int’l Bus. Machines Corp., 613 F.2d 727, 735 (9th Cir. 1979). “The test of willful

6

maintenance or acquisition of monopoly power is whether the acts complained of unreasonably

7

restrict competition.” Drinkwine v. Federated Publ’ns, Inc., 780 F.2d 735, 739 (9th Cir. 1985).

8
9

With regard to the first element, the plaintiffs allege that Quest has “an estimated 73%
market share of the Northern California physician outpatient market” based on Hunter‟s
“experience in this industry” and publicly available information, that Quest “has a 46% share of

11
United States District Court
Northern District of California

10

the independent lab market in California,” and that its “website boasts that „Quest Diagnostics is

12

the world‟s leading provider of diagnostic information services.‟” FAC ¶¶ 114, 116 & 117. What

13

is fatal for the plaintiffs‟ monopolization claim is that neither the “Northern California physician

14

outpatient market” nor the “independent lab market in California” is one of the five product and

15

geographic markets alleged in the FAC. The same is true of the world market for “diagnostic

16

information services.” To state a claim, the plaintiffs must allege “monopoly power in the

17

relevant market,” and not just any market. Eastman Kodak, 504 U.S. at 480 (emphasis added).

18

Judge Tigar previously rejected the plaintiffs‟ monopolization claim based on their earlier

19

allegation that Quest had “70% market share of the Northern California physician outpatient

20

market” because that was not one of the alleged relevant markets, yet the plaintiffs persist in

21

making a nearly identical claim. Order 20; Compl. ¶ 74. Quest rightly points out the plaintiffs‟

22

second failing in this regard, Quest Br. 15, but the plaintiffs make no attempt whatsoever in their

23

opposition brief to respond to this important point.

24

With regard to the second element, the plaintiffs fail to establish that Quest‟s alleged

25

actions “unreasonably restrict competition” for the same reason their Section 1 vertical-agreement

26

claims fail, namely, the plaintiffs do not provide any context against which the Court may evaluate

27

the extent to which competition has been restricted. As the Ninth Circuit has said, “The

28

defendant‟s acts [under the second element] are properly analyzed analogously to contracts,
24

1

combinations and conspiracies under [Section 1] of the Sherman Act . . . .” Calif. Computer

2

Prods., 613 F.2d at 735-36. To begin, the plaintiffs do not describe the dynamics over time of any

3

of the five alleged relevant markets. Within those markets, the plaintiffs do not say how Quest has

4

grown or maintained its market position or how competition generally has fared relative to Quest.

5

The plaintiffs do not explain how Quest‟s alleged actions have “unreasonably restricted

6

competition.” The FAC does allege that “[s]ince January 1, 2002, an estimated 49% of [Quest‟s]

7

revenue has come from acquisitions” and “[o]ver the last eleven years[, Quest] has only added

8

$600 million from internal growth and annual fee increases (approximately 8% of revenue growth)

9

versus $3.15 billion from acquisitions.” FAC ¶ 115. However, the plaintiffs‟ monopolization
claims are completely belied by their conclusion that “[Quest] is only able to grow through

11
United States District Court
Northern District of California

10

acquisitions.” Id. But the defendants‟ monopolization claims are not based on anticompetitive

12

acquisitions. Without alleging facts showing that Quest‟s challenged conduct “unreasonably

13

restricts competition,” the monopolization claims fail.

14

With regard to the final element, the plaintiffs fail to show antitrust injury. “First, a

15

plaintiff seeking to establish competitive injury resulting from a rival‟s low prices must prove that

16

the prices complained of are below an appropriate measure of its rival‟s costs.” Weyerhaeuser co.

17

v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312, 318 (2007) (quoting Brooke Group Ltd. v.

18

Brown & Williamson Tobacco Corp., 509 U.S. 209, 211 (1993)). The Ninth Circuit has suggested

19

that the “appropriate measure” is marginal cost. Rebel Oil, 51 F.3d at 1433. Second, a plaintiff

20

must show “a dangerous probability of recoupment of losses” by “demonstrat[ing] that there is a

21

likelihood that the predatory scheme alleged would cause a rise in prices above a competitive level

22

that would be sufficient to compensate for the amounts expended on the predation.”

23

Weyerhaeuser, 549 U.S. at 318, 320. As with the original Complaint, the plaintiffs fail to

24

adequately plead “a dangerous probability of recoupment.” Judge Tigar already rejected the

25

plaintiffs‟ theory that recoupment occurred through “pull-through” business from government and

26

other fee-for-service billings. Order 21. However, the FAC reasserts that same claim. In

27

addition, the FAC fails to allege that such business is priced above a competitive level, or that

28

Quest‟s alleged scheme will lead to its raising the prices of laboratory diagnostic services above
25

1

supra-competitive levels. Without these allegations, the plaintiffs cannot support their causes of

2

action for monopolization.

3

The plaintiffs fail to adequately plead that Quest monopolized any relevant market.

4

B. The Plaintiffs Do Not Adequately Allege Attempted Monopolization.

5

“To establish a Sherman Act § 2 violation for attempted monopolization, a private plaintiff

6

seeking damages must demonstrate four elements: (1) specific intent to control prices or destroy

7

competition; (2) predatory or anticompetitive conduct directed at accomplishing that purpose; (3) a

8

dangerous probability of achieving „monopoly power‟; and (4) causal antitrust injury.” Rebel Oil,

9

51 F.3d at 1432-33. The requirements for monopolization and attempted monopolization are
similar, “differing primarily in the requisite intent and the necessary level of monopoly power.”

11
United States District Court
Northern District of California

10

Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1202 (9th Cir. 1997).

12

“[A] specific intent to destroy competition or build monopoly is essential to guilt for the

13

mere attempt.” Times-Picayune Publ’g Co. v. United States, 345 U.S. 594, 626 (1953). Such an

14

intent may be “shown indirectly by proof of illegal conduct and, where necessary, market power.”

15

Calif. Computer Prods., 613 F.2d at 737. Demonstrating a dangerous probability of

16

monopolization “requires inquiry into the relevant product and geographic market and the

17

defendant‟s economic power in that market.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447,

18

459 (1993). Market power can be shown by actual harm to competition inflicted by the defendant,

19

such as restricted output or supracompetitive prices, or by the defendant‟s dominant market share

20

and barriers to entry in the relevant market. Rebel Oil, 51 F.3d at 1434.

21

Here, the Court need not go into a detailed inquiry into whether the plaintiffs fail to

22

sufficiently allege attempted monopolization—they do. As discussed above, while the plaintiffs

23

allege five relevant markets, they do nothing to explain the dynamics of those markets, let alone

24

Quest‟s place in those markets. They have not adequately alleged how big Quest is in each market

25

or whether it has market power, what harm to competition has occurred, whether prices have

26

exceeded or will exceed competitive levels, and how other competitors are affected. Without such

27

information, the plaintiffs fail to plead intent or a dangerous probability of achieving monopoly

28

power. And for the same reasons they do not adequately plead injury from monopolization, they
26

1
2
3

also fail to do so here.
The plaintiffs fail to adequately plead that Quest attempted to monopolize any relevant
market.

4

C. The Plaintiffs Do Not Adequately Allege A Conspiracy To Monopolize.

5

“To prove a conspiracy to monopolize in violation of § 2, [a plaintiff] must show four

6

elements: (1) the existence of a combination or conspiracy to monopolize; (2) an overt act in

7

furtherance of the conspiracy; (3) the specific intent to monopolize; and (4) causal antitrust

8

injury.” Paladin Assocs., Inc. v. Mont. Power Co., 328 F.3d 1145, 1158 (9th Cir. 2003). “The

9

aggregation of market shares of several rivals is justified if the rivals are alleged to have conspired

10

United States District Court
Northern District of California

11

to monopolize.” Rebel Oil, 51 F.3d at 1437.
As discussed above, the plaintiffs fail to plead any agreement or conspiracy, specific intent,

12

or antitrust injury. Further, the insurers do not even compete in the same market as the plaintiffs,

13

and “[i]t is axiomatic in antitrust law that a defendant may not be found liable under the Sherman

14

act for monopolizing or attempting or conspiring to monopolize a market unless that defendant is a

15

competitor in the relevant market and his conduct creates a dangerous probability that he will gain

16

a dominant share of the market.” Transphase Sys., Inc. v. S. Calif. Edison Co., 839 F. Supp. 711,

17

717 (C.D. Cal. 1993); see also Mercy-Peninsula Ambulance, Inc. v. Cnty. of San Mateo, 791 F.2d

18

755, 759 (9th Cir. 1986). Thus, the plaintiffs fail to adequately plead that the defendants

19

conspired to monopolize any relevant market.

20

The plaintiffs repeatedly cite to In re High-Tech Employee Antitrust Litig., 856 F. Supp. 2d

21

at 1118, for the proposition that “[a] co-conspirator need not know of the existence or identity of

22

the other members of the conspiracy or the full extent of the conspiracy.” Rather, they argue,

23

“plaintiffs should be given the full benefit of their proof without tightly compartmentalizing the

24

various factual components and wiping the slate clean after scrutiny of each. . . . [T]he character

25

and effect of a conspiracy are not to be judged by dismembering it and viewing its separate parts,

26

but only by looking at it as a whole. . . .” Id. (citation omitted). The problem for the plaintiffs,

27

however, is that these portions of In re High-Tech Employee Antitrust Litigation only refer to the

28

element of intent. Here, perhaps except for the overt-act element (which the Court does not
27

1

decide), the plaintiffs fail to adequately plead any other element of conspiracy to monopolize.

2

Indeed, the plaintiffs provide no argument that they have established intent except for their

3

conclusory assertion that “Plaintiffs meet this standard.” Opp‟n to Quest 22. The seeming

4

liberality of In re High-Tech Employee Antitrust Litigation does not save the FAC from its other

5

deficiencies.
The Motions to Dismiss the plaintiffs‟ First, Sixth, Seventh, and Eighth Causes of Action

6
7

for monopolization, attempted monopolization, and conspiracy to monopolize are GRANTED

8

WITH LEAVE TO AMEND.

9

III.

UNFAIR PRACTICES ACT
The plaintiffs bring a cause of action under the UPA against Quest only. Under the UPA,

11
United States District Court
Northern District of California

10

“It is unlawful for any person . . . to sell any article or product at less than the cost thereof to such

12

vendor, or to give away any article or product, for the purpose of injuring competitors or

13

destroying competition.” CAL. BUS. & PROF. CODE § 17043. It is also unlawful “to sell or use any

14

article or product” at less than cost. CAL. BUS. & PROF. CODE § 17044. A violation of the UPA is

15

unlike a violation of the Sherman Act for predatory pricing because the Sherman Act “looks to the

16

ultimate monopolistic impact and threatened harm produced by the pricing scheme—that is, the

17

probability of recoupment through future supracompetitive pricing upon elimination of

18

competitors.” Bay Guardian Co. v. New Times Media LLC, 187 Cal. App. 4th 438, 455-56 (Ct.

19

App. 2010). On the other hand, “section 17043 does not require an anticompetitive impact” or

20

showing a dangerous probability of recoupment. Id. at 456. “The Sherman Act . . . seek[s] to

21

prevent anticompetitive acts that impair competition or harm competitors, whereas the UPA

22

reflects a broader legislative concern not only with the maintenance of competition, but with the

23

maintenance of fair and honest competition.” Id. (citations, brackets, and quotation marks

24

omitted).

25

In order to adequately plead a claim under the UPA, “a plaintiff must allege, in other than

26

conclusionary terms, the defendant‟s sales price, costs in the product, and cost of doing business.”

27

Fisherman’s Wharf Bay Cruise Corp. v. Super. Ct. of the City and Cnty. of San Francisco, 114

28

Cal. App. 4th 309, 322 (2003). The element of “purpose” is shown through a “desire” to injure
28

1

competitors or destroy competition. Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20

2

Cal. 4th 163, 169 (1999).

3

“California § 17043 uses a „fully allocated cost‟ or „average total cost‟ method to
determine whether goods are sold below cost.” Blue Sky Color of Imagination, LLC v. Mead

5

Westvaco Corp., No. 10-cv-02175-DDP, 2010 WL 4366849, at *5 (C.D. Cal. Sept. 23, 2010).

6

“The concept of fully allocated cost has been equated with average total cost, which reflects that

7

portion of the firm‟s total costs—both fixed and variable—attributable on an average basis to each

8

unit of output.” Turnbull & Turnbull v. ARA Transp., Inc., 219 Cal. App. 3d 811, 820 (Ct. App.

9

1990) (citation and quotation marks omitted). In other words, “a fair allocation of all fixed or

10

variable costs associated with production of the article or product.” Pan Asia Venture Capital

11
United States District Court
Northern District of California

4

Corp. v. Hearst Corp., 74 Cal. App. 4th 424, 432 (Ct. App. 1999). “To be legally acceptable, the

12

allocation of indirect or fixed overhead costs to a particular product or service must be reasonably

13

related to the burden such product or service imposes on the overall cost of doing business.”

14

Turnbull, 219 Cal. App. 3d at 822.

15

The plaintiffs adequately plead a claim under the UPA. The plaintiffs allege that Quest‟s

16

Securities and Exchange Commission (“SEC”) filings from 2004 to 2012 “report its total costs,

17

and its total number of requisitions.” FAC ¶ 59. They allege that “revenue, costs, and profits are

18

often measured and reported on a per-requisition” basis in the laboratory industry. FAC ¶ 59.

19

Using the total costs and total number of requisitions reported in the SEC filings, the plaintiffs

20

derive a “fully-allocated cost per requisition,” FAC ¶ 59, which corresponds with the “costs in the

21

product.” The plaintiffs also derive revenues per requisition, FAC ¶ 72, which corresponds with

22

the “sales price,” for both capitated contracts and fee-for-service accounts from the SEC filings.

23

Based on these non-“conclusionary” numbers incorporated into the chart in paragraph 72 of the

24

FAC, the plaintiffs show that Quest has been underpricing its requisitions from 2004 to 2012. The

25

plaintiffs also identify particular tests that are allegedly priced below cost. See, e.g., FAC ¶¶ 74,

26

76 & 77. In addition, the plaintiffs allege that Quest priced below cost “for the purpose of injuring

27

Plaintiffs and destroying competition.” FAC ¶ 140.

28

Quest argues that the plaintiffs‟ UPA claim fails because they must show prices and costs
29

1

on a product-by-product basis and cites to Fisherman’s Wharf Bay Cruise Corporation v. Superior

2

Court of the City and County of San Francisco to support that proposition. Quest Br. 18-19 (citing

3

114 Cal. App. 4th at 326). Fisherman’s Wharf says no such thing—it merely held that a plaintiff

4

must plead a below-cost sale “without regard to whether other above-cost sales on identical or

5

similar products made the overall enterprise profitable.” Furthermore, it did not prohibit the

6

calculation method used by the plaintiffs. Indeed, the allegation that the defendants‟ costs-per-

7

requisition has been consistently below revenue-per-requisition makes it plausible that at least one

8

product was priced below cost.

9

To be sure, California courts have suggested that it is acceptable to aggregate figures rather
than attempt to precisely define costs and revenue on a product-by-product basis. See Turnbull,

11
United States District Court
Northern District of California

10

219 Cal. App. 3d at 821-23; see also W. Union Fin. Servs., Inc. v. First Data Corp., 20 Cal. App.

12

4th 1530, 1537 (Ct. App. 1993). There is no need to “only measure[] such costs which are

13

causally related to the service or product in question.” Turnbull, 219 Cal. App. 3d at 821 (citing

14

MCI Commc’ns Corp. v. Am. Tel. & Tel. Co., 708 F.2d 1081, 1115, 1122 (7th Cir. 1983)). This is

15

not to say that aggregating costs is persuasive. As the court in Turnbull and the Seventh Circuit

16

recognize, average total cost “is a quite arbitrary allocation of costs among different classes of

17

service. . . . Despite trenchant criticism on economic grounds, [it] continues to be widely used for

18

regulatory purposes, inter alia, because of its ease of application in dividing an authorized total

19

revenue requirement among individual products or services—much as a pie is divided into slices.

20

But [it] cannot purport to identify those costs which are caused by a product or service, and this is

21

fundamental to economic cost determination.” Turnbull, 219 Cal. App. 3d at 821 (citing MCI

22

Commc’ns Corp., 708 F.2d at 1116)). But the method has been deemed acceptable.

23

As one court noted, “the concept of cost may appear simple, but can often prove

24

deceptively hard to grasp in the real world.” Pan Asia Venture Capital, 74 Cal. App. 4th at 435.

25

This is especially true in an industry such as the one here, where patients may be covered by

26

capitated or fee-for-service contracts, and may order combinations of tests dissimilar from those of

27

other patients and be charged by requisition rather than by test, and where providers operate under

28
30

1

individually negotiated contracts that may contain varied terms, such as volume discounts.8 Using

2

average total cost can avoid manipulation or distortion by a multi-product supplier (as Quest is)

3

who can allocate certain costs from one product to another, thus giving the appearance of above-

4

cost pricing on a disputed product. See Turnbull, 219 Cal. App. 3d at 822.
The UPA “appears to be a painstaking endeavor by the legislature to combat the abuses

5
6

which the business interests have deemed unfair practices in the competitive field.” ABC Int’l

7

Traders, Inc. v. Matsushita Elec. Corp., 14 Cal. 4th 1247, 1256 (1997) (quoting Max Factor & Co.

8

v. Kunsman, 5 Cal. 2d 446, 478 (1936) (Shenk, J., dissenting)). To require the plaintiffs to plead

9

with an unreasonable degree of specificity would undermine the UPA‟s admonition that the statute
“shall be liberally construed that its beneficial purposes may be subserved.” CAL. BUS. & PROF.

11
United States District Court
Northern District of California

10

CODE § 17002. Much of the information that must be pleaded—Quest‟s costs and the prices it

12

charges by product—is in Quest‟s hands and not easily accessed by the plaintiffs. The Court does

13

not “forget that proceeding to [ ] discovery can be expensive” or that the plaintiffs must meet their

14

burden under Federal Rule of Civil Procedure 8. Twombly, 550 U.S. at 558. However, even in a

15

case where the plaintiff “fail[ed] to allege a definite cost of doing business,” the California Court

16

of Appeal held that “it would serve no useful purpose to require a speculative allegation of cost

17

which adds nothing to the notice given by the pleadings in their present state. Accordingly, we

18

view the present pleadings as sufficient under section 17043 and find error in sustaining the

19

demurrer thereto.” G.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256, 275 (Ct. App. 1983).

20

In sum, “the determination of cost is best approached on a case-by-case basis.” Id. So

21

long as the method used was not “arbitrary or irrational,” it is sufficient for pleading purposes.

22

See Turnbull, 219 Cal. App. 3d at 822-23. Finding that the plaintiffs adequately plead their UPA

23

claim based on the information alleged in the FAC does not mean that the information or

24

calculations provided are necessarily correct or even that the plaintiffs are likely to succeed in

25
8

26
27
28

As the California Court of Appeal stated, “Having in mind the incredibly complex nature of the
package being offered by defendants . . . proof of their costs will undoubtedly become a lawyer‟s
nightmare, though it may turn out to be a C.P.A.‟s dream. All the same we find nothing in the
Act‟s definition of „costs‟ which compels a holding that plaintiffs can never prove what they
allege.” Paramount Gen. Hosp. Co. v. Nat’l Med. Enters., Inc., 42 Cal. App. 3d 496, 504 (Ct.
App. 1974) (citations omitted).
31

1

proving their claim. Quest may dispute the details of the calculation method later to the trier of

2

fact. However, the purpose of pleading is to put a defendant on sufficient notice of its alleged

3

wrongdoing, and the plaintiffs have done so here. G.H.I.I., 147 Cal. App. 3d at 276.

4

Quest argues that at least some of the plaintiffs‟ claims are barred by one-year and three-

5

year statutes of limitations. Quest Br. 20. That may be true. The FAC alleges underpricing from

6

2004 to 2012. However, “It is only when a complaint shows on its face that it is necessarily

7

barred, rather than possibly, that a demurrer on such grounds will be sustained. . . . [W]hile the

8

statute of limitations may preclude [the plaintiffs] from recovering some damages, it does not

9

provide a reason for sustaining [a] demurrer.” G.H.I.I. v. MTS, Inc., 147 Cal. App. 3d 256, 279
(Ct. App. 1983) (citation omitted). The FAC does not show on its face that the UPA claim is

11
United States District Court
Northern District of California

10

“necessarily barred.” Dismissing any portion of this cause of action now is unwarranted.

12

Quest also argues that “Plaintiffs‟ UPA claim fails because it does not allege that [Quest]

13

acted with the purpose of injuring Plaintiffs as opposed to competitors generally” and cites to

14

Sybersound Records, Inc. v. UAV Corp., 517 F.3d 1137, 1153-54 (9th Cir. 2008), in support.

15

Quest Br. 20 (original emphasis). However, Sybersound only states that the plaintiff there failed

16

to plead purpose—it did not hold that a plaintiff must plead that the defendant acted with the

17

purpose of injuring the plaintiff specifically. Here, however, the plaintiffs allege that Quest

18

underpriced “for the purpose of injuring Plaintiffs and destroying competition,” FAC ¶ 140, which

19

meets “the purpose [requirement], i.e., the desire, of injuring competitors or destroying

20

competition” and addresses Quest‟s concern that the plaintiffs did not plead that it intended to

21

injure them. Cel-Tech Commc'ns, 20 Cal. 4th at 169 (emphasis added).

22

Quest argues that none of the underpricing is alleged to have affected RDL. Quest Reply

23

7. The Court agrees and GRANTS WITH LEAVE TO AMEND Quest‟s Motion to Dismiss the

24

plaintiffs‟ Third Cause of Action to the extent that it relates to RDL.

25

Quest argues that the original Complaint stated that PBP did not come into existence until

26

2011, and thus PBP cannot have any claims predating that year. Quest Reply 7. However,

27

because such an allegation is not present in the FAC, the Court finds dismissal based on an

28

allegation in a non-operative pleading inappropriate.
32

Except with regard to RDL, Quest‟s Motion to Dismiss the plaintiffs‟ Third Cause of

1
2

Action is DENIED.

3

IV.

4

UNFAIR COMPETITION LAW
The plaintiffs bring a cause of action under the UCL against all defendants. The UCL

5

prohibits “any unlawful, unfair or fraudulent business act or practice.” CAL. BUS. & PROF. CODE §

6

17200. “Each of these three adjectives captures a separate and distinct theory of liability.” Rubio

7

v. Capital One Bank, 613 F.3d 1195, 1203 (9th Cir. 2010) (quotation marks omitted).

8

A. “Fraudulent” Prong

9

The “fraudulent” prong of the UCL “requires a showing [that] members of the public are
likely to be deceived.” Wang v. Massey Chevrolet, 97 Cal. App. 4th 856, 871 (2002). The

11
United States District Court
Northern District of California

10

plaintiffs do not allege that the defendants engaged in any fraudulent conduct that is likely to

12

deceive the public. Thus, the Motion to Dismiss the plaintiffs‟ Second Cause of Action under the

13

“fraudulent” prong of the UCL is GRANTED WITH LEAVE TO AMEND.

14

B. “Unlawful” Prong

15

The “unlawful” prong of the UCL “borrows violations of other laws and treats them as

16

independently actionable.” Daugherty v. Am. Honda Motor Co., Inc., 51 Cal. Rptr. 3d 118, 128

17

(Ct. App. 2006). Because the Court has found that Hunter, PBP, and SPA adequately state a claim

18

against Quest under the UPA, Quest‟s Motion to Dismiss their Second Cause of Action under the

19

“unlawful” prong of the UCL is DENIED. Because the plaintiffs fail to adequately plead any

20

other cause of action, the Motions to Dismiss all other claims under the “unlawful” prong of the

21

UCL are GRANTED WITH LEAVE TO AMEND.

22

C. “Unfair” Prong

23

Courts have employed two tests under the “unfair” prong of the UCL. Some courts have

24

held that the “unfair” prong requires alleging a practice that “offends an established public policy

25

or is immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers,” and

26

the policy must be “tethered to specific constitutional, statutory or regulatory provisions.” Bardin

27

v. Daimlerchrysler Corp., 39 Cal. Rptr. 3d 634, 642, 645 (Ct. App. 2006) (quotations omitted).

28

Other courts have held that the court must apply a balancing test that “weigh[s] the utility of the
33

1

defendant‟s conduct against the gravity of the harm to the alleged victim.” Schnall v. Hertz Corp.,

2

93 Cal. Rptr. 2d 439, 456 (Ct. App. 2000).
A violation of the UPA undoubtedly “offends an established public policy.” Because the

3
4

Court has found that Hunter, PBP, and SPA adequately state a claim against Quest under the UPA,

5

Quest‟s Motion to Dismiss their Second Cause of Action under the “unfair” prong of the UCL is

6

DENIED. Because the plaintiffs fail to adequately plead any other conduct that may be unfair, the

7

Motions to Dismiss all other claims under the “unfair” prong of the UCL are GRANTED WITH

8

LEAVE TO AMEND.

9

V.

11
United States District Court
Northern District of California

10

INTERFERENCE WITH PROSPECTIVE ECONOMIC ADVANTAGE
A. The Plaintiffs Do Not Adequately Allege Intentional Interference With
Prospective Economic Advantage.
The elements of an interference with prospective economic advantage claim are “(1) an

12

economic relationship between the plaintiff and some third party, with the probability of future

13

economic benefit to the plaintiff; (2) the defendant‟s knowledge of the relationship; (3) intentional

14

acts on the part of the defendant designed to disrupt the relationship; (4) actual disruption of the

15

relationship; and (5) economic harm to the plaintiff proximately caused by the acts of the

16

defendant.” CRST Van Expedited, Inc. v. Werner Enters., Inc., 479 F.3d 1099, 1108 (9th Cir.

17

2007) (quoting Korea Supply Co. v. Lockheed Martin Corp., 29 Cal. 4th 1134, 1153 (2003)). A

18

plaintiff must “allege an act that is wrongful independent of the interference itself.” Id. (citing

19

Della Penna v. Toyota Motor Sales, U.S.A., Inc., 11 Cal 4th 376, 392-93 (1995)). “[A]n act is

20

independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional,

21

statutory, regulatory, common law, or other determinable legal standard.” Korea Supply, 29 Cal.

22

4th at 1159.

23

To show an economic relationship, “the cases generally agree that it must be reasonably

24

probable the prospective economic advantage would have been realized but for defendant‟s

25

interference.” Youst v. Longo, 43 Cal. 3d 64, 71 (1987). Any alleged relationship cannot be based

26

upon “overly speculative expectancies,” and a seller of some good must show “an existing

27

relationship with an identifiable buyer.” Westside Ctr. Assocs. v. Safeway Stores 23, Inc., 42 Cal.

28

App. 4th 507, 522, 527 (Ct. App. 1996). Alleged relationships with “potential customers” are
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insufficient because they are nothing more than “speculative economic relationship[s].” Silicon

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Knights, Inc. v. Crystal Dynamics, Inc., 983 F. Supp. 1303, 1312 (N.D. Cal. 1997). Not requiring

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an allegation of an existing relationship “allows recovery no matter how speculative the plaintiff‟s

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expectancy. It assumes what normally must be proved, i.e., that it is reasonably probable the

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plaintiff would have received the expected benefit had it not been for the defendant‟s

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interference.” Westside Ctr. Assocs., 42 Cal. App. 4th at 523.
The plaintiffs fail to sufficiently plead the existence of an economic relationship with a

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third party. The FAC only contains vague allegations of “Plaintiffs‟ [prospective] relationships

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with patients and physicians,” see, e.g., FAC ¶¶ 149 & 150, but do not say who the patients or
physicians are. The plaintiffs appear to be referring to all Aetna- and BSC-contracted patients and

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Northern District of California

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physicians. See FAC ¶¶ 144 & 145. However, claiming that each of the universe of such

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individuals has an “identifiable” and “existing” economic relationship with the plaintiffs is simply

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too speculative and hypothetical. As Westfield Center Associates correctly reasons, to say that the

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plaintiffs have an economic relationship with all Aetna- and BSC-contracted patients and

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physicians is assuming what needs to be proved.9
Even if such a relationship was cognizable, the plaintiffs have not adequately pleaded that

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the alleged prospective economic advantage “would have been realized but for defendant‟s

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interference.” Youst, 43 Cal. 3d at 71 (emphasis added).
The plaintiffs fail to adequately plead that the defendants intentionally interfered with a

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prospective economic advantage. The Motions to Dismiss the plaintiffs‟ Fourth Cause of Action

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are GRANTED WITH LEAVE TO AMEND.

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B. The Plaintiffs Do Not Adequately Allege Negligent Interference with Prospective
Economic Advantage.

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“The tort of negligent interference with economic relationship arises only when the

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defendant owes the plaintiff a duty of care.” Silicon Knights, 983 F. Supp. at 1313. Because the

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Aetna and BSC argue that the plaintiffs are barred from bringing interference with prospective
economic advantage claims because they are not strangers to the alleged relationships. Aetna Br.
14; BSC Br. 20. Because the Court finds that the plaintiffs have not adequately pleaded any
relationship, there is no need to address Aetna and BSC‟s argument.
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plaintiffs fail to allege that any of the defendants owe them a duty of care, their claim for negligent

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interference with prospective economic advantage fails. In addition, because the other elements of

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a claim for negligent interference with prospective economic relationship are identical to those for

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intentional interference with prospective economic advantage, the plaintiffs‟ claim here fails for

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the same reasons their intentional claim failed.
The Motions to Dismiss the plaintiffs‟ Fifth Cause of Action are GRANTED WITH

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LEAVE TO AMEND.

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VI.

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HUNTER SETTLEMENT AGREEMENT
Quest argues that a settlement agreement between it and Hunter releases Quest from all

claims predating the effective date of the agreement. Quest Reply 7. The settlement agreement in

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State of California ex rel. [Relator] v. Quest Diagnostic Laboratories, Inc., et al., No. CIV 34-

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2009-00048406, in the Superior Court of California, County of Sacramento, states that Hunter

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“covenant[s] not to sue and release[s] the Quest Releasees from any and all claims, rights,

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demands, suits, matters, issues, actions or causes of action, liabilities, damages, losses, obligations,

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and judgments of any kind or nature whatsoever, from the beginning of time through the Effective

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Date of this Settlement Agreement, whether known or unknown, contingent or absolute, suspected

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or unsuspected, disclosed or undisclosed, matured or unmatured, for damages, injunctive relief, or

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any other remedy . . . .” Sandrock Decl. Ex. A at 15 (Dkt. No. 99-2). The effective date, which is

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defined as the “date of signature of the last signatory,” appears to be May 19, 2011. Sandrock

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Decl. Ex. A at 19-21.

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The settlement agreement is broad enough to encompass the claims in this suit, and the

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plaintiffs do not dispute this (except that the plaintiffs argue that Quest has not explicitly provided

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the effective date). Opp‟n to Quest 25. The Court takes judicial notice of the settlement

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agreement, which is a court document, as well as the effective date of May 19, 2011, as defined by

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the agreement and its signatures. Pappas v. Bank of Am. 401(k) Plan for Legacy Cos., No. 11-

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55570, 2013 WL 2303521, at *3 (9th Cir. May 28, 2013) (holding that settlement agreements are

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judicially noticeable). Based on the settlement agreement, all causes of action by Hunter against

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Quest barred by the agreement are DISMISSED WITH PREJUDICE.
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In a single sentence, Quest argues that SPA‟s claims against it should also be dismissed

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“due to the close connection” between Hunter and SPA alleged in the FAC. SPA is not a party to

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the settlement agreement, and Quest provides no persuasive argument why the Court should treat

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it as if it were. Quest‟s Motion to Dismiss SPA‟s causes of action based on Quest‟s settlement

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agreement with Hunter is DENIED.
CONCLUSION

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At the August 20, 2013, case management conference, the Court stated that it was

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cognizant of the potentially burdensome and expensive nature of discovery in complex cases such

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as this one. Dkt. No. 95. Given Judge Tigar‟s previous order denying a stay of discovery,
however, the Court allowed limited discovery. At oral argument, plaintiffs asserted that discovery

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has provided additional information to include in an amended complaint. Because the FAC had

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already been filed prior to the August 20th case management conference, and the plaintiffs did not

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have the benefit of the subsequent discovery while drafting their FAC, it is fair and just to allow

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them to amend their allegations one more time.

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Based on the foregoing, Quest‟s Motion to Dismiss Hunter, PBP, and SPA‟s Second Cause

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of Action under the “unlawful” and “unfair” prongs of the UCL and Third Cause of Action is

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DENIED. Quest‟s Motion to Dismiss all of Hunter‟s causes of action against it is GRANTED

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WITH PREJUDICE for all claims prior to the effective date of the settlement agreement. The

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defendants‟ Motions to Dismiss all other causes of action are GRANTED WITH LEAVE TO

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AMEND.

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The plaintiffs shall file any amended complaint within 30 days from the date of this Order.

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The Court advises the plaintiffs to carefully consider the deficiencies in their pleadings identified

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by Judge Tigar‟s detailed Order and this Order in amending their pleading. In addition, the Court

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notes that the plaintiffs‟ time and resources—as well as those of the Court—are not well-spent in

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addressing arguments that have already been rejected absent newly-discovered facts or law.
IT IS SO ORDERED.
Dated: October 18, 2013
______________________________________
WILLIAM H. ORRICK
United States District Judge

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