U.S. v. Delta Dental of Rhode Island

• Decision Date: 02 October 1996
• Docket Number: C.A. No. 96-113/P.
• Citation: 943 F.Supp. 172
• Parties: UNITED STATES of America, Plaintiff, v. DELTA DENTAL OF RHODE ISLAND, Defendant.
• Court: U.S. District Court — District of Rhode Island

943 F.Supp. 172

UNITED STATES of America, Plaintiff, v. DELTA DENTAL OF RHODE ISLAND, Defendant.

C.A. No. 96-113/P.

United States District Court, D. Rhode Island.

October 2, 1996.

Anthony C. DiGioia, U.S. Attorney's Office, Providence, RI, Anne K. Bingaman, Joel I. Klein, Rebecca P. Dick, Gail Kursh, David Jordan, Steven Kramer, Paul J. O'Donnell and Michael S. Spector, U.S. Department of Justice, Antitrust Division, Washington, DC, for Plaintiff.

William R. Landry, Blish & Cavanagh, Providence, RI, and William Kopit, Epstein, Becker & Green, P.C., Washington, DC, for Defendant.

ORDER AND MEMORANDUM

PETTINE, Senior District Judge.

The Report and Recommendation of United States Magistrate Judge, Robert W. Lovegreen filed on July 12, 1996 in the above-captioned matter is hereby accepted pursuant to 28 U.S.C. § 636(b)(1).

Delta Dental of Rhode Island ("Delta") objects to the Magistrate Judge's ("Magistrate") Report and Recommendation, which recommended a denial of Delta's Fed. R.Civ.P. 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. Accordingly, I must make a de novo "determination of those portions of the report ... to which objection is made." 28 U.S.C. § 636(b)(1)(B). After carefully considering the Magistrate's Report and Recommendation, Delta's objections, and the United States of America's ("Government")'s Opposition to Defendant's Objections to the Magistrate's Report and Recommendation, for the following reasons, I fully accept the Magistrate Judge's Report and Recommendation. In so doing, I incorporate in whole, and without discussion, the Magistrate's statement of facts as well as the Magistrate's discussion of Fed.R.Civ.Proc. 12(b)(6) standards, and, for reasons of clarity, I attach in full the Magistrate's Report and Recommendation.

DISCUSSION

1. Sherman Antitrust Act, § 1 and § 2: General Principles

To fully understand Delta's objections to the Magistrate's Report and Recommendation, it is important to understand §§ 1 and 2 of the Sherman Act.

According to § 1 of the Sherman Act ("§ 1"), "[e]very contract, combination .. or conspiracy in restraint of trade or commerce among the several States, or with foreign nations, is declared illegal." 15 U.S.C. § 1. § 1 plaintiffs must prove the existence of two elements: (1) a contract, combination, or conspiracy among two or more parties, that (2) unreasonably restrains trade.¹ Standard Oil Co. v. United States, 221 U.S. 1, 59-60, 31 S.Ct. 502, 515-16, 55 L.Ed. 619 (1911). The second element, unreasonable restraint of trade, can be further divided into two categories of cases. Courts consider whether a restraint on trade is either: (1) a per se violation;² or (2) a restraint subject to the "rule of reason" analysis. "Under this rule, the fact finder weighs all the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Continental T.V., Inc. v. Sylvania, Inc., 433 U.S. 36, 49, 97 S.Ct. 2549, 2557, 53 L.Ed.2d 568 (1977). Thus, the rule of reason analysis requires courts to conduct a highly fact-specific inquiry.³

In the case at hand, the Government does not allege that Delta's Prudent Buyer clause (also referred to as "Most Favored Nation" or "MFN" clause) is a per se violation of § 1. Therefore, I must apply the "rule of reason" analysis. According to this analysis, the Government has the burden of showing "that the anti-competitive effects of the agreement outweigh their legitimate business justifications." Monahan's Marine Inc. v. Boston Whaler Inc., 866 F.2d 525, 526-27 (1st Cir. 1989).

Whereas § 1 requires the existence of a "contract, combination ... or conspiracy" and thus requires the involvement of two or more entities, § 2 of the Sherman Act, ("§ 2") regulates the unilateral conduct of a single entity "when it threatens actual monopolization." Copperweld Corporation v. Independence Tube Corporation, 467 U.S. 752, 767, 104 S.Ct. 2731, 2739, 81 L.Ed.2d 628 (1984). A § 2 plaintiff establishes a violation by showing two elements: "(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident." Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 480, 112 S.Ct. 2072, 2089, 119 L.Ed.2d 265 (1992), quoting, United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1703-04, 16 L.Ed.2d 778 (1966). Plaintiffs generally have more difficulty establishing the second element. "The second element of a § 2 claim is the use of monopoly power `to foreclose competition, or to destroy a competitor.'" Eastman Kodak, supra, 504 U.S. at 482, 112 S.Ct. at 2090, quoting, United States v. Griffith, 334 U.S. 100, 107, 68 S.Ct. 941, 945, 92 L.Ed. 1236 (1948). In other words, the second element involves proving "a scheme of willful acquisition or maintenance of monopoly power." Eastman Kodak, supra, 504 U.S. at 483, 112 S.Ct. at 2091.

In sum, § 1 primarily regulates anticompetitive agreements between two or more entities, while § 2 typically regulates the unilateral action of a single entity. Further, the relevant inquiries under § 1 and § 2 are distinct.

2. Discussion Of Delta's Objections To The Magistrate's Report and Recommendation

Delta raises a number of objections to the Magistrate's Report and Recommendation. I will discuss these objections in the context of § 1's two required elements.

a. The Magistrate Properly Concluded That Delta's Prudent Buyer Clause Is Sufficient to Satisfy the "Concerted Action" Requirement of § 1

In its Motion to Dismiss, Delta argued that the Government's "complaint challenges a contractual provision which is automatically included in all contracts between Delta Dental and its participating dentists as a matter of a unilateral policy, and thus fails to allege conspiratorial action sufficient to state a claim under § 1 of the Sherman Act." Defendant Delta Dental of Rhode Island's Motion to Dismiss [emphasis added]. The Magistrate, in his Report and Recommendation, rejected this argument stating:

Although the Supreme Court has recognized that § 1 does not reach conduct that is "wholly unilateral," Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 767-68, 104 S.Ct. 2731, 2739-40, 81 L.Ed.2d 628 (1984), concerted action may be amply demonstrated by an express agreement. Addyston Pipe & Steel Co. v. United States, 175 U.S. 211, 213-218, 20 S.Ct. 96, 97-99, 44 L.Ed. 136 (1899). Here, there is no dispute that each participating dentist agrees explicitly to comply with Delta's Participating Dentist's Agreement, which incorporates by reference Delta's Rules and Regulations, including the MFN clause at issue. Thus, every contract between Delta and a participating dentist contains the MFN clause at issue. As a result, the requisite concerted action has been alleged.

Magistrate's Report and Recommendation, at 9-10. Delta objects to the Magistrate's reasoning, arguing that "since the United States Supreme Court's decision in Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 761, 104 S.Ct. 1464, 1469, 79 L.Ed.2d 775 (1984), the threshold for vertical restraint cases under Section 1 has become considerably higher than the Report and Recommendation would suggest." Memorandum of Defendant Delta Dental of Rhode Island in Support of Its Objections to Magistrate's Report and Recommendation, at 58. According to Delta, under Monsanto, a § 1 conspiracy requires a "meeting of the minds" between the supplier and purchaser. Delta contends that the Prudent Buyer clause does not manifest this required "meeting of the minds," but rather merely constitutes a unilateral policy on the part of Delta and unilateral acceptance of the policy by participating dentists.

With this objection, Delta is merely reiterating its position that the Prudent Buyer clause is nothing more than a unilateral policy. Accordingly, because the Magistrate adequately responded to this argument in his Report and Recommendation, and because Delta raises no additional arguments in its objection, I must reject Delta's objection.

Moreover, Delta's argument is disingenuous. The Government has averred that it is clear to all dentists participating in Delta that they must comply with the Prudent Buyer policy, and it is just as clear that if they receive fees lower than Delta's set fee schedule, they run the risk of Delta lowering their reimbursement fees. To highlight this allegation, the Government cites a January 1994 letter Delta allegedly wrote to participating dentists to discourage them from participating in Dental PPO of Rhode Island. The letter states in relevant part:

[Y]our profile reflects certain adjustments necessitated by our reimbursement policy. We understand that you have agreed to accept these fees from the Dental Blue PPO. As a result, your Delta Dental of Rhode Island reimbursement has been limited to these levels.

Complaint, ¶ 23. Through this letter, Delta makes it abundantly clear to participating dentists that the only way to avoid the risk of lower Delta fees is to refuse to accept any fees lower than Delta's fee schedule. Thus, despite Delta's contentions otherwise, its Prudent Buyer clause is not merely a unilateral policy on the part of Delta. Rather, it is a contractual clause to which Delta dentists expressly agree to comply. Further, pursuant to this contractual clause, Delta dentists are well aware that charging lower fees may result in Delta lowering their reimbursement rate.

Delta also argues that the Government did not allege that Delta Dental "coerced" the participating dentists. Memorandum of Defendant Delta Dental of Rhode Island in Support of Its Objections To Magistrate's Report and Recommendation, at 64. According to Delta, "cases which have inferred `concerted action,' have done so only where...