Stop & Shop v. Blue Cross & Blue Shield of R.I.

• Decision Date: 24 June 2004
• Docket Number: No. 03-2061.,03-2061.
• Parties: The STOP & SHOP SUPERMARKET COMPANY; Walgreen Eastern Company, Inc., Plaintiffs, Appellants, v. BLUE CROSS & BLUE SHIELD OF RHODE ISLAND; Coordinated Health Partners, Inc., d/b/a Blue Chip; CVS Corporation; Pharmacare Management Services, Inc., Defendants, Appellees. C. Daniel Haron; Ronald Bochner; Maxi Drug, Inc., d/b/a Brooks Pharmacy; Provider Health Services, Inc.; United Healthcare Corporation, Defendants.
• Court: U.S. Court of Appeals — First Circuit

373 F.3d 57

The STOP & SHOP SUPERMARKET COMPANY; Walgreen Eastern Company, Inc., Plaintiffs, Appellants, v. BLUE CROSS & BLUE SHIELD OF RHODE ISLAND; Coordinated Health Partners, Inc., d/b/a Blue Chip; CVS Corporation; Pharmacare Management Services, Inc., Defendants, Appellees.

C. Daniel Haron; Ronald Bochner; Maxi Drug, Inc., d/b/a Brooks Pharmacy; Provider Health Services, Inc.; United Healthcare Corporation, Defendants.

No. 03-2061.

United States Court of Appeals, First Circuit.

Heard February 4, 2004.

Decided June 24, 2004.

John J. Curtin, Jr. with whom Daniel L. Goldberg, Alicia L. Downey, Bingham McCutchen LLP, William M. Dolan III, Brown Rudnick Berlack Israels LLP, Gregg A. Hand and White & Case LLP were on brief for appellants.

Steven E. Snow with whom Robert K. Taylor, Daniel S. Crocker and Partridge Snow & Hahn LLP were on brief for appellees Blue Cross & Blue Shield of Rhode Island and Coordinated Health Partners, Inc., d/b/a Blue Chip.

Bruce D. Sokler with whom Yee Wah Chin, Noam B. Fischman, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., James A. Ruggieri and Higgins, Cavanagh & Cooney LLP were on brief for appellees CVS Corporation and Pharmacare Management Services, Inc.

Before BOUDIN, Chief Judge, HOWARD, Circuit Judge, and SARIS,^* District Judge.

BOUDIN, Chief Judge.

Stop & Shop Supermarket Company ("Stop & Shop") and Walgreen Eastern Co., Inc., ("Walgreen") brought an antitrust suit against a number of defendants primarily based on section 1 of the Sherman Act, 15 U.S.C. § 1 (2000), lost certain of their claims on summary judgment, and then suffered a directed verdict at the jury trial held on the balance of their claims. They now appeal on several grounds as to certain defendants (the other defendants settled). We begin with a description of background events and proceedings in the district court.

Blue Cross and Blue Shield of Rhode Island ("Blue Cross") is the major health insurer in that state, offering various plans that cover, among other medical expenses, the cost of prescription drugs. Until 1997, Blue Cross managed drug benefits itself and provided a substantially "open" pharmacy system — that is to say, most subscribers could buy drugs at any pharmacy. Blue Cross determined what drugs it would reimburse, set (by negotiation) what would be paid to the pharmacies, and processed subscriber claims.

Beginning in 1997, Blue Cross decided to use a pharmacy benefits manager to administer its prescription drug benefits. Such managers often set up a "closed" network of pharmacies, providing greater insurance coverage to those subscribers who use network pharmacies. In exchange for inclusion in the network, and therefore increased volume of drug sales, the network pharmacies typically agree to provide drugs at lower prices, resulting in lower costs to the insurer.

In this case, Blue Cross invited bids from managers and received three, one of which Blue Cross disqualified. The second manager was PharmaCare, a subsidiary of CVS, a well known major drug store chain (52 pharmacies in Rhode Island). The third manager, Wellpoint, proposed a closed network limited to pharmacies operated by Stop & Shop (18 pharmacies) and Walgreen (15 pharmacies). After obtaining further bids from Wellpoint and PharmaCare, in December 1997 Blue Cross selected PharmaCare to manage a closed network that initially included the CVS pharmacies and most independent pharmacies in Rhode Island.

During this period, PharmaCare was itself negotiating with yet another benefit manager — Provider Health Services, Inc. ("Provider"). Provider managed a closed network, comprised mainly of Brooks Pharmacies (42 pharmacies in the state), serving another insurer — United Healthcare of New England, Inc. ("United") — doing business in Rhode Island. In February 1998, Provider agreed to allow CVS stores to join the United/Provider network; and in May 1998, PharmaCare allowed Brooks and other Provider pharmacies to join the Blue Cross/PharmaCare closed network.

Ancillary to these arrangements, Brooks and Provider's other pharmacies agreed — obviously for PharmaCare's benefit — not to join other networks competing for Blue Cross' business. PharmaCare in turn agreed not to admit into the Blue Cross/PharmaCare network new drug stores (beyond CVS, the independents, and the pharmacies in the United/Provider network). Blue Cross consented to the enlargement of its closed network and in November 1998 signed a formal three-year contract with PharmaCare.

Not all Blue Cross customers are covered by plans that effectively restrict them to closed network pharmacies. Blue Cross offers multiple plans, and one set allows customers to fill prescriptions at any pharmacy without economic penalty. Blue Cross' counsel estimated in oral argument that perhaps two-thirds of Blue Cross' customers are restricted to its closed network; our own review of the record suggests that the number — which obviously varies over time — may be closer to three-quarters.

Unhappy with losing the opportunity to serve many Blue Cross customers on competitive terms, Stop & Shop brought the present action on June 9, 1999, against Blue Cross, PharmaCare and CVS, charging violations of federal and state antitrust laws; in March 2000, Walgreen joined as co-plaintiff and an amended complaint was filed on May 2, 2000. United Health, Provider, and Brooks were also initially defendants but they were dropped after agreeing to admit plaintiffs to the United/Provider network.

On motions for summary judgment, the district court wrote a detailed opinion rejecting plaintiffs' claims that any per se violation of the antitrust laws had been plausibly shown. Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 239 F.Supp.2d 180, 195 (D.R.I.2003). It rejected claims that any of the arrangements comprised naked horizontal restraints such as a group boycott. Id. at 189-91. However, the court ruled that factual issues precluding summary judgment were raised as to whether any of defendants' conduct was actionable under the rule of reason. Id. at 193.

At this time, the district court said that Blue Cross represented about 60 percent of the customers in Rhode Island whose retail drug purchases were reimbursed; and United provided such benefits to about 25 percent. Stop & Shop, 239 F.Supp.2d at 183. These figures were the lynchpin of the pretrial report by plaintiffs' expert witness, Dr. Bruce Stangle, who stressed the 85 percent figure in concluding that "an out-of-network entrant would be precluded from competing in a substantial portion of the relevant market."

Thereafter the district court considered in limine motions filed by Blue Cross. Subject to reconsideration at trial, the court granted a motion to exclude certain evidence as to the bidding process leading to PharmaCare's selection and the related decisions of PharmaCare and Provider to expand their respective closed networks to include each other's present pharmacy members. The court denied, again subject to reconsideration at trial, a motion to exclude key testimony from plaintiffs' expert witness, Dr. Stangle.

Trial began in June 2003. On the sixth day of trial, the district court upheld a defense objection to Dr. Stangle's proposed testimony concerning the proper definition of the relevant market. Plaintiffs tendered a summary of the proposed testimony as an offer of proof and rested. The district court then granted a defense motion for judgment as a matter of law, holding (in an oral ruling from the bench) that absent an adequate market definition, the plaintiffs could not make out a rule of reason claim under the antitrust laws.

The plaintiffs now appeal, arguing that the district court erred in granting partial summary judgment on the per se claims, in excluding several items of evidence including Dr. Stangle's testimony on market definition, and in directing a verdict. Rulings on summary judgment and directed verdicts are reviewed de novo, Wolinetz v. Berkshire Life Ins. Co., 361 F.3d 44, 47 (1st Cir.2004) (summary judgment); Ahern v. Scholz, 85 F.3d 774, 793 (1st Cir.1996) (directed verdict); the standard for review of rulings excluding evidence depends on the nature of the underlying issue (fact, law, judgment call), see Blake v. Pellegrino, 329 F.3d 43, 46 (1st Cir.2003).

Per se claims. Plaintiffs begin their brief by contesting the district court's summary judgment ruling that no legitimate per se claims were presented. As our prior decisions have explained, antitrust claims under section 1 of the Sherman Act ordinarily require a burdensome multi-part showing: that the alleged agreement involved the exercise of power in a relevant economic market, that this exercise had anti-competitive consequences, and that those detriments outweighed efficiencies or other economic benefits. This is the so-called rule of reason calculus. See, e.g., Eastern Food Servs. v. Pontifical Catholic Univ. Servs. Ass'n, 357 F.3d 1, 5 (1st Cir.2004); Fraser v. Major League Soccer, L.L.C., 284 F.3d 47, 59 (1st Cir.2002), cert. denied, 537 U.S. 885, 123 S.Ct. 118, 154 L.Ed.2d 144 (2002).

This calculus is bypassed if the collusive arrangement falls instead within one of several categories (e.g., naked horizontal price fixing) in which liability attaches without need for proof of power, intent or impact. Eastern Food Servs., 357 F.3d at 4 & n. 1. For that reason plaintiffs typically try to bring their claims within per se rubrics. Whether a plaintiff's alleged facts comprise a per se claim is normally a question of legal characterization that can often be resolved by the judge on a motion to dismiss or for summary judgment. See, e.g., Addamax Corp. v. Open Software Found., Inc., 152 F.3d 48, 50-51 (1st Cir.1998).

The most important per se categories are naked horizontal price-fixing, market allocation, and output restrictions. Sometimes group boycotts are called per se violations, but the label here is only minimally...