SmileCare Dental Group v. Delta Dental Plan of California, Inc.

• Decision Date: 05 July 1996
• Docket Number: No. 94-56191,94-56191
• Parties: , 1996-2 Trade Cases P 71,464, 97 Cal. Daily Op. Serv. 5071, 96 Daily Journal D.A.R. 8154 SMILECARE DENTAL GROUP, Plaintiff-Appellant, v. DELTA DENTAL PLAN OF CALIFORNIA, INC., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 780

88 F.3d 780

65 USLW 2029, 1996-2 Trade Cases P 71,464,

97 Cal. Daily Op. Serv. 5071,

96 Daily Journal D.A.R. 8154

SMILECARE DENTAL GROUP, Plaintiff-Appellant, v. DELTA DENTAL PLAN OF CALIFORNIA, INC., Defendant-Appellee.

No. 94-56191.

United States Court of Appeals Ninth Circuit.

Argued and Submitted March 4, 1996.

Decided July 5, 1996.

Maxwell M. Blecher, Blecher & Collins, Los Angeles, California, for plaintiff-appellant.

Matthew L. Larrabee, Heller, Ehrman, White & McAuliffe, San Francisco, California, for defendant-appellee.

Appeal from the United States District Court for the Central District of California; Richard A. Gadbois, Jr., District Judge, Presiding. D.C. No. CV-93-05437-RG.

Before PREGERSON and T.G. NELSON, Circuit Judges, and LYNCH, ^* District Judge.

T.G. NELSON, Circuit Judge:

SmileCare Dental Group ("SmileCare") and Delta Dental Plan of California, Inc. ("Delta Dental") are dental insurers offering health care plans to employers, labor unions, and individuals. Delta Dental offers a co-payment plan under which it pays participating dentists a portion of their fee and requires them in return to collect the remainder, or co-payment, from their patients at the time of service. SmileCare offers a supplemental plan which provides coverage for the co-payment. Delta Dental does not recognize co-payments made by supplemental insurers as contractually valid, and deems participating dentists who accept such payments to be in breach of contract.

SmileCare appeals the district court's dismissal for failure to state a claim, alleging that Delta Dental's policy violates Section 2 of the Sherman Act, 15 U.S.C. § 2, because it illegitimately restricts competition and is aimed at eliminating SmileCare's supplemental dental plan. Amici Travelers Insurance Co., Prudential Insurance Co. of America and Golden Rule Insurance Co. appear in support of Delta Dental. We have jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm.

FACTS AND PROCEDURAL HISTORY

Both parties are dental insurers offering a variety of health care plans to employers, labor unions and individuals. According to SmileCare, sixty percent of all California residents with dental insurance are covered by Delta Dental. Ninety-five percent of California dentists are enrolled, on a nonexclusive basis, as Delta Dental service providers. Delta Dental offers a full coverage plan, but covers most of its insureds through its co-payment plans, which are considerably cheaper. Under the co-payment plan, Delta Dental pays participating dentists a portion of their fee and requires that the dentists recover the remainder directly from the patient as a co-payment. Dentists set their own fees, subject to approval by Delta Dental, and Delta Dental determines the amount of co-payment required according to the type of treatment performed. Delta Dental's contract with its service providers prohibits them from waiving the co-payment.

SmileCare offers a variety of dental health plans, but its primary business is a coverage plan called "SmileCare Coverage Plus," which is designed to supplement co-payment plans such as Delta Dental's. By paying participating dentists the co-payment, or an agreed-upon portion of the co-payment, Coverage Plus purports to fulfill the patient's payment obligations to the dentist. Coverage Plus subscribers are thereby provided with full dental coverage. According to SmileCare, Delta Dental has acted to thwart SmileCare and injure the consumer by refusing to accept co-payments from supplemental insurers. Delta Dental providers who accept SmileCare payments in lieu of patient co-payments are deemed by Delta Dental to be in breach of contract, and are allegedly penalized with reduced fee payments, threats of termination, and, in some cases, actual termination. ¹

SmileCare filed its first complaint against Delta Dental on September 8, 1993, alleging a violation of Section 2 of the Sherman Act. The complaint also alleged various causes of action under state law, which, as noted above, are not at issue on appeal. The district court granted Delta Dental's motion to dismiss with leave to amend. SmileCare's amended complaint, filed February 25, 1994, alleged virtually the same factual predicate as the first complaint, but also characterized Delta Dental's conduct as a "group boycott." On July 25, the district court dismissed SmileCare's federal claims with prejudice under Fed.R.Civ.P. 12(b)(6). Smilecare Dental Group v. Delta Dental Plan of California, 858 F.Supp. 1035 (C.D.Cal.1994). SmileCare timely appeals.

ANALYSIS

Standard of review.

Dismissal pursuant to Fed.R.Civ.P. 12(b)(6) is reviewed de novo. Everest & Jennings v. American Motorists Ins. Co., 23 F.3d 226, 228 (9th Cir.1994). All allegations of material fact are taken as true and construed in the light most favorable to the plaintiff. Id. at 229. A complaint should not be dismissed unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Id. The court may dismiss a complaint as a matter of law for "(1) lack of a cognizable legal theory or (2) insufficient facts under a cognizable legal claim." Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 534 (9th Cir.1984).

Whether specific conduct is anti-competitive is a question of law reviewed de novo. Oahu Gas Serv., Inc. v. Pacific Resources, Inc., 838 F.2d 360, 368 (9th Cir.), cert. denied, 488 U.S. 870, 109 S.Ct. 180, 102 L.Ed.2d 149 (1988). Dismissal for failure to state a claim is appropriate where "the complaint states no set of facts which, if true, would constitute an antitrust offense, notwithstanding its conclusory language regarding the elimination of competition and improper purpose." Rutman Wine Co. v. E. & J. Gallo Winery, 829 F.2d 729, 735 (9th Cir.1987) (quotations and alteration omitted).

I

Section 2 of the Sherman Act provides: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other persons, to monopolize any part of the trade or commerce ... shall be deemed guilty of a felony...." 15 U.S.C. § 2. "In order to state a claim for monopolization under Section 2 of the Sherman Act, a plaintiff must prove: (1) Possession of monopoly power in the relevant market; (2) willful acquisition or maintenance of that power; and (3) causal antitrust injury." Pacific Express, Inc. v. United Airlines, Inc., 959 F.2d 814, 817 (9th Cir.), cert. denied, 506 U.S. 1034, 113 S.Ct. 814, 121 L.Ed.2d 686 (1992). The following elements are required to establish an attempt to monopolize claim: "(1) specific intent to control prices or destroy competition; (2) predatory or anticompetitive conduct to accomplish the monopolization; (3) dangerous probability of success; and (4) causal antitrust injury." Id. Delta Dental does not dispute SmileCare's allegation that it possesses market power; ² the remaining issue is whether SmileCare has adequately alleged intentional predatory or anticompetitive conduct and resultant injury.

The briefs of both parties and amici devote a great deal of space to evaluating the competitive merits of insurance co-payment plans. However, the legality of co-payment plans and waiver prohibition clauses is neither at issue nor seriously in question. In Davidowitz v. Delta Dental Plan of California, Inc., 946 F.2d 1476, 1479 (9th Cir.1991), we adopted the Seventh Circuit's reasoning in Kennedy v. Connecticut Gen. Life Ins. Co., 924 F.2d 698 (7th Cir.1991), approving an insurer's prohibition on providers' waiver of patient co-payments because "waivers annul the benefits of the co-payment system." 924 F.2d at 699. Davidowitz extended Kennedy to uphold Delta Dental's non-assignment policy barring beneficiaries from assigning benefits to nonparticipating providers. 946 F.2d at 1481. The non-assignment clause prevented nonparticipating dentists from asking their patients to assign the dentists their rights to receive Delta Dental's checks, typically in exchange for waiver of the co-payment. Id. at 1477 n. 1.

Notwithstanding its lengthy forays into the questionable market benefits of insurance co-payment plans, SmileCare repeatedly asserts that it is not challenging Delta Dental's co-payment scheme per se. Nor is it questioning Delta Dental's right to insist that providers not waive the co-payment. Rather, it is challenging Delta Dental's behavior in refusing to honor supplemental insurers' coverage of the patient's co-payment because it deems such coverage as tantamount to waiver of the co-payment. The key issue, then, is whether Delta Dental's refusal to recognize as contractually valid a participating dentist's acceptance of co-payment from a supplemental insurer rather than from the patient herself has any impermissible anticompetitive effects. See Barry v. Blue Cross of California, 805 F.2d 866, 871-72 (9th Cir.1986). ³

The district court responded to this question after visiting the merits of co-payment plans themselves. Smilecare, 858 F.Supp. at 1038-39. The court opined that insurance creates a "moral hazard" because it desensitizes patients to cost and induces them to seek inordinate amounts of care; co-payments offset this hazard by forcing patients to reflect upon the cost of services and moderate their demands for treatment. Id. at 1038 (citing Ball Memorial Hosp., Inc. v. Mutual Hosp. Ins., Inc., 784 F.2d 1325, 1332 (7th Cir.1986); Kennedy, 924 F.2d at 699-701, and Davidowitz, 946 F.2d at 1479). The district court denied as a matter of law SmileCare's contention that "supplemental plans are not waivers of co-payments, but rather are merely substitutes for them," based on its finding that supplemental plans create the same "moral hazard" as waivers because they render patients insensitive to cost. Id. at 1039.

We need not adopt the "moral hazard" theory or reach a conclusion as to the relative market advantage of co-payment plans to decide the instant case. As we stated in...