Messner v. Northshore Univ. HealthSystem

• Decision Date: 28 February 2012
• Docket Number: No. 10–2514.,10–2514.
• Citation: 669 F.3d 802,2012 Trade Cases P 77763
• Parties: Steven MESSNER, et al., Plaintiffs–Appellants, v. NORTHSHORE UNIVERSITY HEALTHSYSTEM, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

2012-1 Trade Cases P 77,763

669 F.3d 802

Steven MESSNER, et al., Plaintiffs–Appellants,

v.NORTHSHORE UNIVERSITY HEALTHSYSTEM, Defendant–Appellee.

No. 10–2514.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 8, 2011.Decided Jan. 13, 2012.Rehearing Denied Feb. 28, 2012.

Mary Jane Fait (argued), Attorney, Wolf, Haldenstein, Adler, Freeman & Herz, Chicago, IL, for Plaintiffs–Appellants.

Duane M. Kelley, Attorney, Winston & Strawn LLP, Chicago, IL, Gene C. Schaerr (argued), Attorney, Winston & Strawn LLP, Washington, DC, for Defendant–Appellee.

Kenneth A. Wexler, Attorney, Wexler Wallace LLP, Chicago, IL, for Amicus Curiae Consumer Federation of America and US PIRG.Avidan Joel Stern, Attorney, Lynch & Stern, LLP, Chicago, IL, for Amicus Curiae American Antitrust Institute.

Before SYKES, TINDER, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

Under Federal Rule of Civil Procedure 23(b)(3), a class may be certified only if questions of law and fact common to members of the class predominate over questions affecting only individual members of the class. In this case, plaintiff-appellant Steven Messner and other named plaintiffs alleged that a merger between defendant-appellee Northshore University HealthSystem and Highland Park Hospital violated federal antitrust law. In fact, the Federal Trade Commission found that the merger violated section 7 of the Clayton Act, 15 U.S.C. § 18. Plaintiffs seek treble damages and injunctive relief under section 4 of the Clayton Act, 15 U.S.C. § 15, and they seek certification of a class of individual patients and third-party payors who allegedly paid higher prices for hospital care as a result of the merger.

One key issue on the merits will be proof that the merger had an antitrust impact on the plaintiff class, primarily in the form of higher prices. To show the predominance of common questions regarding the merger's antitrust impact on class members, plaintiffs proposed to rely on the same economic and statistical methods used by the Federal Trade Commission staff and Northshore's own economic experts to analyze antitrust impact in the merger litigation before the FTC. The basic method, called “difference-in-differences,” is designed to estimate the amount of Northshore's price increases that resulted from exercise of market power rather than from other factors. This analysis, plaintiffs claimed, will show that Northshore leveraged its newfound market power to impose higher prices on insurers and patients.

The district court denied plaintiffs' motion for class certification, concluding that their expert had not shown that his proposed methodology could address the antitrust impact issue on a class-wide basis. The district court believed that plaintiffs' proposed methodology required proof that defendant raised its prices at uniform rates affecting all class members to the same degree. Finding a lack of uniformity in price increases, the district court concluded that plaintiffs could not show predominance and that class certification should be denied. The district court based this conclusion on its belief that plaintiffs' expert had conceded that the common methodological framework by which he proposed to demonstrate impact to members of the class was invalid absent uniform price increases. Plaintiffs sought interlocutory appeal under Rule 23(f).

Because of the importance of the issue for this case and for private antitrust enforcement, particularly with respect to hospitals and health care providers with complex pricing systems, we granted the petition for interlocutory appeal. We find that the district court's conclusion that a lack of uniform price increases required denial of class certification was erroneous as a matter of both fact and law, resulting in a denial that we must find was an abuse of discretion. Although plaintiffs' expert initially believed that Northshore did in fact increase its prices uniformly across all services, he acknowledged that it might not have done so, and he explained how his common methodology could show impact to the class despite such complications. Apart from the expert's supposed concession, the degree of uniformity the district court demanded simply is not required for class certification under Rule 23(b)(3). In essence, it is important not to let a quest for perfect evidence become the enemy of good evidence. We vacate the district court's denial of class certification and remand this matter for further proceedings.

We begin by reviewing Northshore's merger and the FTC proceedings that found it unlawful, and then turn to the proceedings in the district court on class certification. On the merits of the appeal, we consider first the district court's procedural handling of a challenge to the testimony of Northshore's expert witness, then the central substantive issue of proving antitrust impact on a class-wide basis. We conclude by considering some additional objections to class certification raised by Northshore.

I. The Merger and the FTC Proceedings

On January 1, 2000, defendant Northshore, then doing business as Evanston Northwestern Healthcare Corporation, merged with Highland Park Hospital, located in Highland Park, Illinois. Prior to the merger, Northshore owned Evanston Hospital in Evanston, Illinois, as well as Glenbrook Hospital in nearby Glenview, Illinois.

In February 2004, the Federal Trade Commission filed an administrative complaint against Northshore alleging that the merger violated section 7 of the Clayton Act, 15 U.S.C. § 18, by substantially lessening competition for general acute care inpatient hospital services in the “area directly proximate to the three [Northshore] hospitals and contiguous geographic areas in northeast Cook County and southeast Lake County, Illinois.” In re Evanston Northwestern Healthcare Corp., 2007 WL 2286195, at *3 (F.T.C. Aug. 6, 2007). Following an eight-week trial, an administrative law judge concluded that the merger violated the Clayton Act. The judge ordered Northshore to divest Highland Park Hospital. Id. at *4.

On appeal in 2007, the Federal Trade Commission agreed with the ALJ that the merger enabled Northshore to exercise increased market power and that it used that power to increase its prices by a substantial amount. The FTC pointed out that Northshore's own economic expert found a price increase of nine to ten percent. Id. at *66. The FTC concluded that the evidence as a whole demonstrated that Northshore's “substantially higher-than-predicted merger-coincident price increases were due to market power, rather than competitively-benign factors.” Id. None of Northshore's alternative explanations for those price increases, the FTC concluded, were supported by the record. Id. The FTC rejected Northshore's arguments that the merger made Highland Park a meaningful competitor in the market, that the merger's anticompetitive effects were outweighed by quality improvements at Highland Park resulting from the merger, and that Northshore's not-for-profit status reduced the potential for anticompetitive harm. Id. at *67–*73. The FTC affirmed the ALJ's ruling that the merger violated section 7 of the Clayton Act. Id. at *76.

When it came to the question of remedy, however, the FTC concluded that divestiture of Highland Park was not required. The FTC instead required Northshore to use “separate and independent” teams—one for Evanston and Glenbrook, and another for Highland Park—to negotiate contracts going forward. Id. at *77–*79. This remedy, the Commission concluded, would provide for effective competition between the hospitals and avoid the “complex, lengthy, and expensive process” of divestiture. Id. at *79.

II. Proceedings in the District Court

In April 2008, plaintiff Messner filed this class action suit against Northshore. (Dkt. 64, Ex. A.) Messner's suit was one of several similar actions challenging the merger, all of which were consolidated under the title In re Evanston Northwestern Healthcare Antitrust Litigation. In their consolidated class action complaint, Messner and the other named plaintiffs accuse Northshore of monopolization and attempted monopolization of the market for “general inpatient and hospital-based outpatient services” in the “the geographic triangle created by ... Evanston Hospital, Glenbrook Hospital, and Highland Park Hospital,” in violation of section 2 of the Sherman Act, 15 U.S.C. § 2. (Dkt. 224.) They also allege that the merger substantially lessened competition in that market in violation of section 7 of the Clayton Act, 15 U.S.C. § 18. Plaintiffs bring their claims under sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15 & 26, requesting injunctive relief and treble damages for injuries they suffered as a result of the alleged antitrust violations.

Plaintiffs moved for class certification pursuant to Rule 23(b)(3) on behalf of “All persons or entities ... who purchased or paid for inpatient hospital services or hospital-based outpatient services directly from Northshore ..., its wholly-owned hospitals, predecessors, subsidiaries, or affiliates ... from at least as early as January 1, 2000 to the present.” ¹ In support of that motion, plaintiffs offered the expert report of Dr. David Dranove, an economist on the faculty of Northwestern University who specializes in the health care industry. He would use common economic and econometric methods to prove the antitrust impact of Northshore's actions on the class and to estimate damages. Dranove would do so with the difference-in-differences method, by comparing “the percentage change in [Northshore's] prices between the pre- and post-merger periods ... to the percent change in prices at a control group of local hospitals during the same period.” App. 126. “If the percentage change at [Northshore] is higher than the change at the control group by a statistically significant amount,” plaintiffs said, “impact can be demonstrated.” App. 126–27. Plaintiffs said that this same...