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From Antitrust Law Daily, October 22, 2013

Laboratories’ monopolization, restraint of trade claims fail against competitor and insurers, below-cost sales claim survives)

By Tobias J. Gillett, J.D., LL.M.

Commercial reference laboratories failed to adequately plead Sherman Act restraint of trade and monopolization claims, California Unfair Competition Law (UCL) claims, or common law claims against a competitor and insurers that allegedly agreed with the competitor to exclude the laboratories from their networks and to induce physicians and patients to use the competitor’s services instead, the federal district court in San Francisco has ruled (Rheumatology Diagnostics Laboratory, Inc. v. Aetna, Inc., October 18, 2013, Orrick, W.). However, the court found that the laboratories did sufficiently allege a claim that the competitor underpriced its services in order to drive out competition, in violation of California’s Unfair Practices Act and the UCL.

Rheumatology Diagnostics Laboratory, Inc. (RDL), Pacific Breast Pathology Medical Corp., Hunter Laboratories, Inc., and Surgical Pathology Associates LLC (SPA) are California commercial reference laboratory companies. The laboratories alleged that insurers California Physicians’ Services, Inc., doing business as Blue Shield of California (BSC); Blue Cross and Blue Shield Association (BCBSA); and Aetna, Inc. conspired with the clinical laboratory services provider Quest Diagnostics Inc. to monopolize and restrain trade in the markets for (1) routine chemical analysis of bodily fluids ordered by physicians for outpatient diagnosis and analysis in the “Northern California region,” (2) labs the analyze samples for diagnosing disease in Northern California, (3) testing ordered by rheumatologists for diagnosing autoimmune disorders and diseases in the United States, (4) testing to diagnose and treat coronary heart disease in the United States, and (5) analysis of breast biopsy tissue for diagnosis and prognosis of breast cancer in California.

According to the plaintiffs, BCBSA changed the policies for its “Blue Card” so that labs must submit claims for services provided to Blue Card members from another state to patient’s Blue Plan, even where the lab may not be an in-network provider for that plan, rather than to the Blue Plan where the lab is located. This change allegedly led physicians to steer business to Quest, one of only two national laboratories capable of joining all Blue Plan networks, rather than to the plaintiffs. BCBSA and Quest allegedly “conspired to restrain Plaintiffs and other small laboratories from even negotiating or discussing the opportunity to continue providing services to BCBSA’s members on an in-network basis.”

Although Aetna refused to enter into an exclusive contract with Quest, it allegedly agreed to terminate 400 regional-lab contracts by letting them lapse. Quest also negotiated right-of-first-refusal contracts with Aetna under which Aetna had to get Quest’s approval before Aetna contracted with a lab. Aetna also encouraged patients and physicians to steer business to Quest rather than to out-of-network laboratories, even though Aetna’s contracts with patients allowed them to go out-of-network. Aetna and Quest also established bonus pools, from which out-of-network costs were deducted before being shared with physicians, thus inducing physicians to refer lab tests to Quest.

Quest sought to eliminate competition from Hunter and another California laboratory, Westcliff, by threatening that it would not renew its contract with BSC unless BSC agreed not to renew its contracts with Hunter and Westcliff and by offering a 10 percent discount to further induce BSC. BSC’s termination of the two laboratories allegedly led to Westcliff’s bankruptcy and Hunter’s forced sale of a majority of its testing business at a deep discount.

In addition, Quest allegedly engaged in below-cost sales by entering into capitated contracts for laboratory services, under which Quest charged rates per member that, based on standard utilization rates, were far below its average cost per requisition. Quest allegedly entered those agreements “to force and keep competition out of the market” and “recoup[ed] its losses by illegally inducing the referral of higher-paying ‘pull-through’ government and other business.” Quest also allegedly capped patient obligations or waived patient co-pays and deductibles to prevent physicians from using competitor labs, and made up the losses with ‘pull-through’ government business.

On June 25, 2013, the federal district court in San Francisco dismissed the plaintiffs’ complaint, including its Sherman Act, California Cartwright Act, California Unfair Practices Act, and California Unfair Competition Law claims, with leave to amend. On August 9, 2013, the plaintiffs filed an amended complaint asserting the same causes of action. The defendants moved to dismiss.

Horizontal agreement. The plaintiffs failed to allege a hub-and-spoke conspiracy between Quest and the insurers, with Quest as the hub and the insurers as the spokes. As in the previous decision, the plaintiffs did not adequately a horizontal agreement between the insurers, or even any parallel conduct that might suggest such an agreement. Even accepting the plaintiffs’ “conclusory assertions” that “BCBSA exists solely for the benefit of the BluePlans and to facilitate their concerted action,” this allegation of concerted action was insufficient to show a horizontal agreement between BCS and BCBSA.

Vertical agreement. The plaintiffs presented the same facts to support their allegations of a vertical agreement between BCBSA and Quest, and the court found “no reason to conclude differently” than the district court previously held when presented with those facts. Moreover, the court noted that the allegation that Quest had suppressed a trade association protest letter to BCBSA “further show[ed] the implausibility” of the alleged vertical agreement, because such an effort would appear “futile “ if Quest in fact had an agreement with BCBSA.

The plaintiffs also failed to adequately plead the existence of a vertical agreement between BSC and Quest, as Judge Tigar had also found. The allegations that Hunter was Quest’s largest private competitor in Northern California, and that Westcliff was the largest private laboratory in California, were insufficient to show the size of relevant markets or the amounts of the markets that were foreclosed. The complaint failed to allege which of the five relevant markets were affected by the BSC-Quest agreement, how large that market was, what companies participated in that market, how the agreement affected the shares of any market participants, whether there were any other purchasers to which market participants could turn other than BSC, or how competition had been harmed. Even if the agreement had foreclosed Hunter, Westcliff, and SPA from opportunities, the complaint did not allege the shares of the market held by those companies, and the antitrust laws protected competition, not competitors.

Similarly, the plaintiffs failed to allege Aetna’s market share in any of the five markets for their claims of a vertical agreement between Aetna and Quest. The allegation that Aetna insured “approximately 9% of the U.S. population” was insufficient to find an anticompetitive effect, even if that figure was an adequate proxy for Aetna’s share in each market. The plaintiffs also did not allege the identities of any other harmed competitors or that Quest ever exercised its right of first refusal. Letters from Aetna to physicians only showed “apparently accurate, non-harassing statements,” and thus failed to support the claim that Aetna coerced physicians to use Quest. Moreover, the plaintiffs did not present any plausible injury to competition, rather than just injury to themselves, and the claim that the agreement foreclosed the plaintiffs from Aetna’s network was “quite different from Aetna’s foreclosing them from the market.” Finally, Aetna had not entered into an exclusive contract, and exhibits attached to the complaint suggested that Aetna members were permitted to go out of network.

Monopolization. The plaintiffs also did not adequately allege their monopolization claim against Quest. Although the plaintiffs alleged that Quest had “an estimated 73% market share of the Northern California physician outpatient market,” and that Quest had “a 46% share of the independent lab market in California,” neither the “Northern California physician outpatient market” nor the “independent lab market in California” was one of the five alleged geographic market.

Moreover, the plaintiffs failed to establish that Quest’s actions had unreasonably restrained competition. The plaintiffs did not allege whether Quest had grown or maintained its position in the markets, or how its competition had fared. The plaintiffs’ conclusion that Quest could only grow through acquisitions “completely belied” their monopolization claims, because those claims were not based on anticompetitive acquisitions.

Finally, the plaintiffs failed to show an antitrust injury from Quest’s low prices. The district court had already rejected the plaintiffs’ argument that Quest had recouped its losses from “pull-through” business from government and other fee-for-service billings. The plaintiffs also failed to allege that the “pull-through” business was priced above a competitive level, or that Quest’s scheme would cause it to raise prices for laboratory service above competitive levels.

Attempted monopolization. The plaintiffs did not adequately allege “how big Quest is in each market or whether it has market power, what harm to competition has occurred, whether prices have exceeded or will exceed competitive levels, and how other competitors are affected,” and thus “fail[ed] to plead intent or a dangerous probability of achieving monopoly power.” Moreover, they failed to adequately plead injury from monopolization for the same reasons they failed to plead it for their monopolization claim.

Conspiracy to monopolize. The plaintiffs also failed to plead that the defendants had conspired to monopolize any relevant markets. As with their previous claims, the plaintiffs “fail[ed] to plead any agreement or conspiracy, specific intent, or antitrust injury.” Moreover, the insurers did not compete in the same market as the plaintiffs, and therefore could not be found liable for monopolizing or attempting or conspiring to monopolize the market.

Unfair Practices Act. However, the court found the plaintiffs did state a claim under California’s Unfair Practices Act (UPA), which prohibits “sell[ing] any article or product at less than the cost thereof to such vendor, or to give away any article or product, for the purpose of injuring competitors or destroying competition. The plaintiffs sufficiently alleged Quest’s “sales price, costs in the product, and costs of doing business” by alleging a “fully-allocated cost per requisition” derived from Quest’s Securities and Exchange Commission filings (“costs in the product”), as well as revenues per acquisition (“sales price”) for captitated contracts and fee-for-service accounts. The plaintiffs showed that Quest had been underpricing its requisitions from 2004 to 2012, and identified particular tests that were sold below cost.

The court found that the plaintiffs did not have to allege prices and costs on a product-by-product basis, and merely had to allege a below-cost sale. Moreover, the plaintiffs’ allegation that the defendants’ costs per requisition had been consistently below revenue per requisition made it plausible that at least one product was priced below cost. Further, much of the information about Quest’s costs and prices could not be accessed by the plaintiffs prior to discovery, and the plaintiffs’ pleadings sufficiently put Quest on notice of their claims. In addition, the complaint did not on its face show that the plaintiffs’ claim was necessarily barred by barred by the statute of limitations, and hence dismissal at that stage was unwarranted. However, the court noted that none of the underpricing was alleged to have affected RDL, and hence the court dismissed the claim to the extent it related to RDL.

Unfair Competition Law. The court dismissed the plaintiffs’ claims under the “fraudulent” prong of the Unfair Competition Law (UCL) because the plaintiffs did not allege that the defendants had engaged in any fraudulent conduct that was likely to deceive the public. Since the plaintiffs did state a claim under the UPA, the court denied the motion to dismiss as to the plaintiffs’ claim under the “unlawful” prong based on the alleged UPA violation, but dismissed it as to all other claims. Similarly, the court denied the motion to dismiss the plaintiffs’ claim under the “unfair” prong because “[a] violation of the UPA undoubtedly ‘offends an established public policy,’ but dismissed it as to all other claims.

The court also dismissed the plaintiffs’ claims for intentional interference with prospective economic advantage and negligent interference with prospective economic advantage. Because the plaintiffs asserted that limited discovery occurring after the filing of the complaint had provided additional information that could be included in an amended complaint, the court allowed the plaintiffs to amend their claims one more time. However, the court dismissed with prejudice certain claims by Hunter that were subject to a prior settlement agreement between Hunter and Quest.

The case is No. 12-cv-05847-WHO.

Attorneys: Anne Marie Murphy (Cotchett, Pitre & McCarthy, LLP) for Rheumatology Diagnostics Laboratory, Inc., Pacific Breast Pathology Medical Corp., Hunter Laboratories, LLC, and Surgical Pathology Associates. Craig Ellsworth Stewart (Jones Day) for Aetna, Inc. Ryan M. Sandrock (Sidley Austin, LLP) for Quest Diagnostics Inc. and Quest Diagnostics Clinical Laboratories, Inc. Jean M Doherty (Jenner and Block LLP) for Blue Cross and Blue Shield Association. Christopher John Kelly (Mayer Brown LLP) for California Physicians’ Services, Inc.

Companies: Rheumatology Diagnostics Laboratory, Inc.; Pacific Breast Pathology Medical Corp.; Hunter Laboratories, Inc.; Surgical Pathology Associates LLC; California Physicians’ Services, Inc.; Blue Cross and Blue Shield Association; Aetna, Inc.; Quest Diagnostics Inc.; Quest Diagnostics Clinical Laboratories, Inc.

MainStory: TopStory Antitrust StateUnfairTradePractices CaliforniaNews

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