In re Delta Dental Antitrust Litig., No. 19 CV 6734

• Citation: 484 F.Supp.3d 627
• Decision Date: 04 September 2020
• Docket Number: No. 19 CV 6734,MDL No. 2931
• Parties: IN RE DELTA DENTAL ANTITRUST LITIGATION
• Court: U.S. District Court — Northern District of Illinois

484 F.Supp.3d 627

IN RE DELTA DENTAL ANTITRUST LITIGATION

No. 19 CV 6734

MDL No. 2931

United States District Court, N.D. Illinois, Eastern Division.

Signed September 4, 2020

MEMORANDUM OPINION AND ORDER

Elaine E. Bucklo, United States District Judge

Plaintiffs in this multi-district litigation are dental service providers who claim on behalf of themselves and a class that defendants — thirty-nine dental service corporations licensed to use the Delta Dental name (the "Delta Dental State Insurers"), together with the Delta Dental Plans Association ("DDPA"), and DDPA's affiliates and subsidiaries Delta Dental Insurance Company, DeltaCare USA, and Delta USA Inc. — violated Section 1 of the Sherman Act, 15 U.S.C. § 1, through a multifaceted conspiracy to exercise monopsony power and restrain competition in the dental insurance business. According to the consolidated complaint ("CC," or sometimes, for simplicity, "the complaint"), defendants engaged in three types of concerted, anticompetitive conduct: First, they agreed to divide the market for dental insurance into thirty-nine states or territories, allocating exclusive control of each to a specific Delta Dental State Insurer, and agreeing that none would sell or attempt to sell dental insurance outside of its own allocated territory. Second, they allegedly conspired to fix artificially low reimbursement rates to providers of dental goods and services, which providers were constrained to accept due to defendants’ dominant market position. Finally, defendants allegedly agreed to restrict the amount of revenue that any Delta Dental State Insurer could derive from selling non-Delta Dental branded dental insurance. Plaintiffs allege that rather than pass on to consumers the savings they achieved through their anticompetitive conduct, defendants paid exorbitant salaries to their executives and padded their already inflated capital reserves.

Defendants move to dismiss the consolidated amended complaint in its entirety pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons that follow, I deny the motion.

I.

In reviewing the sufficiency of a complaint, I accept all well-pled facts as true and draw all permissible inferences in favor of the plaintiff. Agnew v. Nat'l Collegiate Athletic Ass'n, 683 F.3d 328, 334 (7th Cir. 2012). "The Federal Rules of Civil Procedure require only that a complaint provide the defendant with ‘fair notice of what the ... claim is and the grounds upon which it rests.’ " Id. (quoting Erickson v. Pardus , 551 U.S. 89, 93, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) ).

Plaintiffs’ claims arise under Section 1 of the Sherman Act, which prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States." 15 U.S.C. § 1. Plaintiffs assert their claims pursuant to the Clayton Act, which establishes a private right of action for injunctive relief (which plaintiffs seek in Count I) and damages (which they seek in Count II) by persons threatened or injured by a violation of the antitrust laws.

According to the consolidated complaint, the DDPA is "funded and controlled by the Delta Dental State Insurers, and acts as a vehicle for their concerted activity, including via a contract entered into by each Delta Dental State Insurer with the Delta Dental Plans Association (the ‘Delta Dental Plan Agreement’)." CC at ¶ 2. Together, defendants are the "largest providers of insurance for dental services in the U.S." Id. at ¶ 3. Plaintiffs allege that defendants have divided the national market into thirty-nine exclusive territories, id. , with each Delta Dental State Insurer exercising significant market power in the dental insurance market of its allotted territory. See CC at ¶¶ 25-63. Delta Dental's average market share across the United States was between 59% and 65% between 2013 and 2017. Id. at ¶ 90.

The cornerstone of defendants’ allegedly anticompetitive conduct is the "market allocation mechanism." Plaintiffs state that:

By carving the 50 U.S. States into 39 exclusive territories in which Delta Dental State Insurers are guaranteed to be free from competition from other Delta Dental State Insurers, the Delta Dental State Insurers have each secured monopsony power within their assigned territories, and Defendants as a group have secured monopsony control over the market for dental insurance across the U.S.

Id. at ¶ 3. "Absent the monopsony powers and territorial protections secured" through the market allocation mechanism, plaintiffs allege, consumers would have greater choice in the dental insurance they purchase, while dental providers would have greater choice in the insurance they choose to accept from their patients. Id.

The complaint goes on to allege that defendants have enhanced their monopsony control through a second unlawful restraint in the form of a price-fixing agreement, which defendants carry out by sharing pricing information to determine, in concert, "the lowest and most punitive rates of reimbursement" that dental providers will accept. CC at ¶ 125. Plaintiffs claim that providers have no choice but to accept defendants’ below-market reimbursement rates due to defendants’ market dominance. Id. Plaintiffs acknowledge that defendants’ below-market reimbursement rates could, theoretically, translate to savings in the premiums paid by their policyholders; but they assert that rather than passing on any savings to consumers of dental products and services, defendants have paid lavish salaries to their executives and bloated their capital reserves. Id.

Plaintiffs term the third alleged element of defendants’ anticompetitive conspiracy the "revenue restriction mechanism." They allege that the Delta Dental Plan Agreement establishes "a direct cap," on the amount of non-Delta Dental branded business the Delta Dental State Insurers may conduct. CC at ¶ 119. Plaintiffs assert that these restrictions "directly limit the amount of competition and the number of competitors in the market in which Delta Dental State Insurers (or their subsidiaries) could compete for customers," reducing the insurance options available to both providers and consumers.

II.

A claim under Section 1 of the Sherman Act comprises three elements: "(1) a contract, combination, or conspiracy; (2) a resultant unreasonable restraint of trade in the relevant market; and (3) an accompanying injury."

Denny's Marina, Inc. v. Renfro Prods., Inc. , 8 F.3d 1217, 1220 (7th Cir. 1993). Courts employ three modes of analysis to determine whether conduct alleged to violate Section 1 has anticompetitive effects: the Rule of Reason, per se analysis, and the quick-look approach. Agnew v. Nat'l Collegiate Athletic Ass'n , 683 F.3d 328, 335 (7th Cir. 2012).

"The standard framework for analyzing an action's anticompetitive effects on a market is the Rule of Reason." Id. Under this mode of analysis, "the plaintiff carries the burden of showing that an agreement or contract has an anticompetitive effect on a given market." Id. In a narrower class of cases, however, the challenged conduct may be deemed anticompetitive per se, which is appropriate when a "practice facially appears to be one that would always or almost always tend to restrict competition and decrease output." Id. at 336 (quoting National Collegiate Athletic Association v. Board of Regents , 468 U.S. 85, 100, 104 S.Ct. 2948, 82 L.Ed.2d 70 (1984) (" NCAA ")). Yet, "there is often no bright line separating per se from Rule of Reason analysis. Per se rules may require considerable inquiry into market conditions before the evidence justifies a presumption of anticompetitive conduct." NCAA , 468 U.S. at 104 n. 26, 104 S.Ct. 2948. Courts have also developed a third mode of analysis called the "quick-look" approach, which is employed where "no elaborate industry analysis is required to demonstrate the anticompetitive character of ... an agreement." Id. This approach asks whether an "observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect." Id. (quoting NCAA , 468 U.S. at 109, 104 S.Ct. 2948, and California Dental Ass'n v. F.T.C., 526 U.S. 756, 770, 119 S.Ct. 1604, 143 L.Ed.2d 935 (1999) ). All of these frameworks are intended to answer the same question: "whether or not the challenged restraint enhances competition." Id. (citations omitted).

The theory of plaintiffs’ case is that through the market allocation mechanism, the price-fixing mechanism, and the revenue restriction mechanism—each of which plaintiffs allege to be anticompetitive—defendants have formed a buyers’ cartel to exert monopsony power that is illegal per se under the Sherman Act. See Vogel v. American Soc. Of Appraisers , 744 F.2d 598, 601 (7th Cir. 1984) ("buyer cartels, the object of which is to force the prices that suppliers charge the members of the cartel below the competitive level, are illegal per se."); see also Mandeville Island Farms v. American Crystal Sugar Co. , 334 U.S. 219, 68 S.Ct. 996, 92 L.Ed. 1328 (1948) (control of sugar beet market by conspiracy of buyers violated Sherman Act). Plaintiffs claim that defendants’ conduct violates the Sherman Act per se, but that defendants are liable even if the quick-look or Rule of Reason analyses are employed. CC at ¶¶ 121-22. Defendants challenge plaintiffs’ claims on numerous legal and factual fronts, adding up to their view that the complaint does not state an actionable antitrust claim on any theory. In addition, defendants raise three independent grounds for dismissal: failure to plead an antitrust injury, failure to plead concerted action, and exemption from liability under the McCarran-Ferguson Act.

Per Se Analysis

The core of the alleged conspiracy is the market allocation mechanism, which defendants acknowledge functions generally in the manner plaintiffs describe. Each Delta Dental State Insurer is allocated a defined territory within the United States and agrees...