Royal Drug Co., Inc. v. Group Life and Health Ins. Co.

• Decision Date: 06 August 1984
• Docket Number: No. 83-1544,83-1544
• Citation: 737 F.2d 1433
• Parties: , 1984-2 Trade Cases 66,137 ROYAL DRUG COMPANY, INC., etc., et al., Plaintiffs-Appellants, v. GROUP LIFE AND HEALTH INSURANCE CO., etc., et al., Defendants-Appellees. GROUP LIFE AND HEALTH INSURANCE CO., etc., et al., Plaintiffs-Appellees v. ROYAL DRUG COMPANY, INC., etc., et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1433

737 F.2d 1433

79 A.L.R.Fed. 857, 1984-2 Trade Cases 66,137

ROYAL DRUG COMPANY, INC., etc., et al., Plaintiffs-Appellants, v. GROUP LIFE AND HEALTH INSURANCE CO., etc., et al.,

Defendants-Appellees.

GROUP LIFE AND HEALTH INSURANCE CO., etc., et al., Plaintiffs-Appellees v. ROYAL DRUG COMPANY, INC., etc., et al., Defendants-Appellants.

No. 83-1544.

United States Court of Appeals Fifth Circuit.

Aug. 6, 1984.

Tinsman & Houser, Inc., Joel H. Pullen, San Antonio, Tex., for Royal drugs.

Cox & Smith, Keith E. Kaiser, A. Michael Ferrill, San Antonio, Tex., for Group Life.

Wm. C. Church, Jr., San Antonio, Tex., for Walgreen Texas Co.

Richard P. Corrigan, San Antonio, Tex., for Sommers Drug Store.

Appeal from the United States District Court for the Western District of Texas.

Before CLARK, Chief Judge, JOLLY and DAVIS, Circuit Judges.

CLARK, Chief Judge:

Plaintiff pharmacies challenge a prepaid prescription drug insurance program as illegal conduct under section 1 of the Sherman Act. We affirm the district court's grant of summary judgment for defendants.

I

A group of independent pharmacists in San Antonio, Texas, brought this antitrust action in 1975 against Group Life and Health Insurance Co., known as Blue Shield of Texas (Blue Shield), and three other pharmacies. The complaint alleged that Blue Shield's prepaid prescription drug program violated section 1 of the Sherman Act, 15 U.S.C. Sec. 1, as illegal price fixing, or alternatively as an illegal secondary group boycott of pharmacies that do not participate in the program. Originally, the district court granted summary judgment for defendants, holding the challenged agreements to be exempt from the antitrust laws under the McCarran-Ferguson Act, 15 U.S.C. Sec. 1012(b), because they constituted the "business of insurance." This court reversed, holding that the challenged agreements were not a part of the business of insurance. Royal Drug Co. v. Group Life & Health Ins. Co., 556 F.2d 1375 (5th Cir.1977). The Supreme Court affirmed this court's decision. Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979).

On remand, the district court granted summary judgment for defendants on the merits, holding that the challenged prepaid drug insurance plans do not violate federal antitrust laws. We affirm.

II

The Supreme Court described the challenged prepaid drug insurance arrangement thus:

Blue Shield offers insurance policies which entitle the policyholders to obtain prescription drugs. If the pharmacy selected by the insured has entered into a "Pharmacy Agreement" with Blue Shield, and is therefore a participating pharmacy, the insured is required to pay only $2 for every prescription drug. The remainder of the cost is paid directly by Blue Shield to the participating pharmacy. If, on the other hand, the insured selected a pharmacy which has not entered into a Pharmacy Agreement, and is therefore a non-participating pharmacy, he is required to pay the full price charged by the pharmacy. The insured may then obtain reimbursement from Blue Shield for 75% of the difference between that price and $2.

Blue Shield offered to enter into a Pharmacy Agreement with each licensed pharmacy in Texas. Under the Agreement, a participating pharmacy agrees to furnish prescription drugs to Blue Shield's policyholders at $2 for each prescription, and Blue Shield agrees to reimburse the pharmacy for the pharmacy's cost of acquiring the amount of the drug prescribed. Thus, only pharmacies that can afford to distribute prescription drugs for less than this $2 markup can profitably participate in the plan.

99 S.Ct. at 1072 (footnote omitted).

The original $2 dispensing fee was increased to $2.20 in 1976, and to $3.00 in 1981. There is no allegation or evidence in the record that Blue Shield consulted with pharmacies in setting these fees. The plaintiffs note that this program has achieved great popularity among Blue Shield's insureds. The record does not indicate what portion of total drug sales are made under these arrangements.

III

The plaintiffs, nine of which participate in Blue Shield pharmacy agreements, argue that these agreements constitute per se illegal activity under the Sherman Act as simultaneously horizontal and vertical price-fixing arrangements.

Several federal courts have previously considered the legality of pharmacy agreements virtually identical to those at issue here. See Medical Arts Pharmacy of Stamford, Inc. v. Blue Cross & Blue Shield of Connecticut, Inc., 675 F.2d 502 (2d Cir.1982), aff'g 518 F.Supp. 1100 (D.Conn.1981); Sausalito Pharmacy, Inc. v. Blue Shield of California, 677 F.2d 47 (9th Cir.), cert. denied, 456 U.S. 1016, 103 S.Ct. 376, 74 L.Ed.2d 510 (1982), aff'g on basis of opinion below, 544 F.Supp. 230 (N.D.Cal.1981); Feldman v. Health Care Service Corp., 562 F.Supp. 941 (N.D.Ill.1982). These courts have uniformly upheld these agreements as nonviolative of antitrust laws. ¹ We briefly summarize fundamental legal principles discussed at greater length in those cases before addressing the specific contentions by which the plaintiffs seek to put those cases in error.

Section 1 of the Sherman Act outlaws "[e]very contract, combination ..., or conspiracy, in restraint of trade among the several States ...." Courts have declared certain agreements or practices per se illegal "which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use ...." Northern Pacific Ry. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). See Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 99 S.Ct. 1551, 1557, 60 L.Ed.2d 1 (1979) (activity is per se illegal under antitrust laws if "plainly anticompetitive and very likely to be without redeeming virtue"). Activity that is not "manifestly anticompetitive" is analyzed under the rule of reason, which inquires into the unreasonableness of the restraint on competition, looking to "all of the circumstances of the case, including the facts peculiar to the business and the history of, reasons for, and market impact of the restraint ...." Medical Arts Pharmacy v. Blue Cross & Blue Shield of Connecticut, Inc., 675 F.2d at 504.

Price-fixing agreements have been held to be per se illegal. See, e.g., Arizona v. Maricopa County Medical Society, 457 U.S. 332, 102 S.Ct. 2466, 2472-75, 73 L.Ed.2d 48 (1982). We find, however, that the conduct challenged here falls outside those categories of activity classified as per se illegal price fixing.

A

The pharmacy agreements do not constitute a per se illegal horizontal combination such as that involved in United States v. Masonite Corp., 316 U.S. 265, 62 S.Ct. 1070, 86 L.Ed. 1461 (1942), because the agreements do not run between competitors in the pharmaceutical industry, nor between competitors in the insurance industry, but between individual pharmacies and Blue Shield, which does not compete with pharmacies. Nor is there any allegation that Blue Shield has sought the support or advice of the competing pharmacies in establishing the fixed fees. Hence this case is outside the ambit of Arizona v. Maricopa County Medical Society, 457 U.S. 332, 102 S.Ct. 2466, 73 L.Ed.2d 48 (medical fee schedules established by foundation composed of medical practitioners constituted per se illegal price fixing), and Blue Cross v. Virginia, 211 Va. 180, 176 S.E.2d 439 (1970) (Blue Cross pharmaceutical plan that received support of state pharmaceutical society with respect to establishment of fees constituted per se illegal price fixing under federal and state antitrust laws). Rather, as Medical Arts noted, these pharmacy agreements are "novel restraints with potential procompetitive effects," 675 F.2d at 505. They fall outside established per se categories of illegal activities.

The plaintiffs argue that even though Blue Shield does not compete with pharmacies, the uniform contracts entered into separately between competing sellers and a "powerful buyer" nevertheless constitute an illegal horizontal combination. This argument seems to assert the theory of "conscious parallelism," under which a combination among drugstore competitors might be established by circumstantial evidence of parallel conduct among the competitors. "[T]wo elements must be established by a plaintiff relying on a theory of conscious parallelism: (1) that the defendants engaged in consciously parallel action, (2) which was contrary to their economic self-interest so as not to amount to a good faith business judgment." Pan-Islamic Trade Corp. v. Exxon Corp., 632 F.2d 539, 559 (5th Cir.1980). In order to avoid summary judgment under this theory, the plaintiff cannot rely on proof of parallel behavior alone; significant probative evidence of conscious parallelism is required, "with ... some 'plus' factor which tends to indicate that the asserted unilateral behavior was not such in fact ...." Paul Kadair, Inc. v. Sony Corp. of America, 694 F.2d 1017, 1027 n. 27 (5th Cir.1983). The plaintiffs have failed to come forward with any significant probative evidence that would establish a fact issue as to whether the participating pharmacies did not act according to independent exercises of their respective business judgments to increase drug sales and customer traffic.

Apparently recognizing their failure to satisfy these criteria for "conscious parallelism," the plaintiffs insist that they do not intend to assert a classic conscious parallelism case and don't need to because the evidence of the actual pharmacy agreements negates any need to establish a combination by means of circumstantial evidence. This distinction fails to further plaintiffs' position, for the pharmacy agreements do not run between competitors and hence do not in and of themselves...