Brokerage Concepts v. US Healthcare Inc (Part I) ( 1998 )

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
4-2-1998
Brokerage Concepts v. US Healthcare Inc (Part I)
Precedential or Non-Precedential:
Docket 96-1891,96-1922,96-1923,96-1892,97-1013,97-1014
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"Brokerage Concepts v. US Healthcare Inc (Part I)" (1998). 1998 Decisions. Paper 65.
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Volume 1 of 2
Filed April 2, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NOS. 96-1891, 96-1892, 96-1922, 96-1923
97-1013, and 97-1014
BROKERAGE CONCEPTS, INC.
v.
U.S. HEALTHCARE, INC.; CORPORATE HEALTH
ADMINISTRATORS, INC.; UNITED STATES HEALTH CARE
SYSTEMS OF PENNSYLVANIA, INC., d/b/a THE HEALTH
MAINTENANCE ORGANIZATION OF PENNSYLVANIA;
RICHARD WOLFSON; SCOTT MURPHY;
WILLIAM BROWNSTEIN
Richard Wolfson, Scott Murphy and William Brownstein,
Appellants in No. 96-1891
U.S. Healthcare, Inc.; United States Health Care Systems
of Pennsylvania, Inc., d/b/a The Health Maintenance
Organization of Pennsylvania and Corporate Health
Administrators, Inc.
Appellants in No. 96-1892
U.S. Healthcare, Inc.; Corporate Health Administrators, Inc.;
United States Health Care Systems of Pennsylvania, Inc.,
d/b/a The Health Maintenance Organization of
Pennsylvania; Richard Wolfson; Scott Murphy; William
Brownstein,
Appellants in No. 96-1922
Brokerage Concepts, Inc.,
Appellant in No. 96-1923
U.S. Healthcare, Inc.; United States Health Care Systems of
Pennsylvania, Inc., d/b/a The Health Maintenance
Organization of Pennsylvania and Corporate Health
Administrators, Inc.,
Appellants in No. 97-1013
Richard Wolfson; Scott Murphy; and William Brownstein,
Appellants in No. 97-1014
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civ. No. 95-cv-01698)
Argued: July 22, 1997
Before: BECKER, MANSMANN, and ROSENN,
Circuit Judges.
(Filed April 2, 1998)
DAVID H. MARION, ESQUIRE
FRANCIS P. NEWELL, ESQUIRE
HOWARD J. BASHMAN, ESQUIRE
PATRICK T. RYAN, III, ESQUIRE
Montgomery, McCracken, Walker &
Rhoads, LLP
123 So. Broad Street
Philadelphia, PA 19106
Counsel for Richard Wolfson, Scott
Murphy and William Brownstein
PATRICK W. KITTREDGE, ESQUIRE
LISA G. MILLER, ESQUIRE
Kittredge, Donley, Elson,
Fullem & Embick, LLP
421 Chestnut Street, 5th Floor
Philadelphia, PA 19109
2
ROBERT E. BLOCH, ESQUIRE
ROY T. ENGLERT, JR., ESQUIRE
(ARGUED)
DONALD M. FALK, ESQUIRE
ROBERT L. BRONSTON, ESQUIRE
Mayer, Brown & Platt
2000 Pennsylvania Avenue,
NW
Washington, DC 20006-1882
Counsel for U.S. Healthcare, Inc.,
Corporate Health Administrators,
United States Health Care Systems
of Pennsylvania, Inc. d/b/a The
Health Maintenance Organization of
Pennsylvania
RICHARD L. BAZELON, ESQUIRE
(ARGUED)
A. RICHARD FELDMAN, ESQUIRE
Bazelon & Lees
1515 Market Street, 7th Floor
Philadelphia, PA 19102
Counsel for Brokerage Concepts, Inc.
OPINION OF THE COURT
BECKER,* Chief Circuit Judge.
_________________________________________________________________
* Honorable Edward R. Becker, United States Circuit Judge for the
Third Circuit, assumed Chief Judge status on February 1, 1998.
3
TABLE OF CONTENTS
I. INTRODUCTION 5
II. FACTS & PROCEDURAL HISTORY 11
A. The Parties 11
B. Gary's Decision to Self-insure 12
C. Gary's Switch to CHA/U.S. Healthcare 16
D. Economic Evidence 19
1. Impact on Gary's 19
2. Knowlton's Survey 20
3. Interaction Between U.S. Healthcare and
Other Pharmacy Operations 20
4. The Setting of Reimbursement Prices 21
E. The Jury Verdict 22
III. THE ANTITRUST ISSUES 23
A. Introduction -- Characterization of BCI's Claim 23
B. Per se Liability 27
1. Defining the Relevant Market 28
a. The Product Market 29
b. The Geographic Market 32
2. U.S. Healthcare's Power in the Tying Market 33
a. Evidence of Market Share 34
b. Other Factors Bearing on Market Power 37
C. The Rule of Reason Claim 40
D. Conclusion 42
IV. CIVIL RICO 42
A. Introduction 42
B. RICO Standing 43
C. Predicate Acts of BCI's RICO Claim 45
1. Extortion under the Hobbs Act 45
a. The Definition of "wrongful". 48
b. Lawful Versus Unlawful Claims to Property 51
c. Evidence of Other Unlawful Objectives 56
2. Commercial Bribery 58
3. Mail and Wire Fraud 60
4. The Travel Act 61
D. Conclusion 61
4
V. TORTIOUS INTERFERENCE 62
VI. CONCLUSION 73
I. INTRODUCTION:
The revolutionary changes in the health care field over
the past decade have spawned many novel market
arrangements. Perhaps the most significant development is
the ascendency of managed-care driven health maintenance
organizations ("HMOs"), whose hold over a large number of
subscribers has permitted them to wield considerable
economic power over health care providers. This antitrust,
civil RICO, and state law tortious interference case against
defendant U.S. Healthcare, one of the nation's largest
HMO's, two of its wholly-owned subsidiaries, and three of
its top officers, is an exemplar of the legal fallout from this
development.
This appeal presents several quite difficult and important
first impression questions for us, including: (1) whether the
defendants' use of economic fear in the context of hard
business bargaining constitutes wrongful conduct
amounting to extortion for civil RICO purposes; (2) whether
the inability of the plaintiff to prevail on antitrust and
extortion-based civil RICO claims forecloses a successful
state law tortious interference claim based on the same
facts; and (3) whether the defendants' hard bargai ning
constituted "wrongful means" so as to forfeit the defense of
privileged business competition to a tortious interference
claim.
The lawsuit emanates from U.S. Healthcare's refusal to
approve the application of a new Abington, Pennsylvania
store of "I Got It at Gary's" ("Gary's"), a small southeastern
Pennsylvania pharmacy, health and beauty aid chain, for
membership in U.S. Healthcare's network of medical
prescription providers. U.S. Healthcare conditioned
membership in its provider network on Gary's agreement to
discontinue its contractual relationship with plaintiff
Brokerage Concepts, Inc. ("BCI"), a health care consulting
firm whose specialty is serving as a Third Party
Administrator ("TPA") for health benefit self-insurers (such
5
as Gary's), and to give its TPA business to a U.S. Healthcare
subsidiary, Corporate Health Administrators ("CHA").
U.S. Healthcare also applied pressure on Gary's in other
ways -- through "hard-ball" negotiation tactics, which
deliberately left Gary's "hanging" as to whether its new
application would be approved, and a seemingly vindictive
audit of Gary's generic prescription drug dispensing policy
at one of its stores that was already part of the
U.S. Healthcare network. Since U.S. Healthcare subscribers
constituted a significant portion of its customer base,
Gary's understandably yielded to the pressure and gave its
TPA business to CHA. BCI thereupon sued in federal
district court asserting Sherman Act and civil RICO claims,
as well as a claim of tortious interference with contractual
relations under Pennsylvania law. BCI sought
compensatory and treble damages, injunctive relief, and
counsel fees on its antitrust and civil RICO claims, and
compensatory and punitive damages on its state law
tortious interference claim. Gary's is not a party to the
lawsuit.
The case proceeded to trial before a jury, which rendered
a verdict finding U.S. Healthcare and its officers liable to
BCI on all of BCI's claims, and awarding compensatory and
punitive damages. On post-trial motions, the district court
upheld the verdict but ruled that: (1) BCI must elect
between the punitive damages awarded on its state law
claim and the treble damages awarded on its federal claims
(i.e., that it cannot recover both); and (2) if it elects the
state law remedies, BCI cannot also collect the attorney's
fees that are available under its RICO and antitrust claims.
The defendants' appeal of the district court's denial of its
post-verdict motion for judgment as a matter of law or, in
the alternative, for a new trial, attacks the jury verdict on
all fronts, asserting that the verdict is tainted by erroneous
evidentiary rulings and jury instructions, and also that
there is insufficient evidence to sustain any of the claims
under proper instructions. BCI cross-appeals, contending
that, under Fineman v. Armstrong World Indus., Inc., 980
F.2d 171, 218-19 (3d Cir. 1992), the district court erred in
requiring BCI to elect which remedies it will recover, and
also in refusing to award injunctive relief to BCI under
either RICO or the antitrust laws.
6
Because all three of BCI's claims are grounded upon
U.S. Healthcare's leveraging of its economic power, and
because, under the jury instructions given by the district
court, the RICO and state law claims may depend on the
existence of a viable antitrust claim, the threshold doctrinal
battleground has been over antitrust law. This aspect of the
case is quite complex, not because of the need for
sophisticated economic analysis or the resolution of any
close or cutting-edge trade regulation issue, but rather
because of the difficulty of attempting to shoehorn into the
traditional antitrust model a claim that resists such
characterization.
The matter was presented to the district court primarily
as a tying case, under which a plaintiff can assert both a
per se and a "rule of reason" claim. In a typical tying case,
a seller leverages its market power in the market for the
tying product to require the buyer of the product to
purchase an unwanted product in the tied market, thereby
(unlawfully) foreclosing competition in that market. But
Gary's, the party who has been "put upon," is a seller, not
a buyer, in the tying product market: when U.S. Healthcare
accepts Gary's into its network of providers, what Gary's
gains is the opportunity to sell drugs to U.S. Healthcare
subscribers. The defendants, in contrast, contend that the
case is better viewed as one of reciprocal dealing which,
they submit, carries with it less stringent antitrust
standards.
As will appear, our disposition of BCI's antitrust claim
will take us through a number of layers of analysis, dealing
with both its per se and rule of reason claims, and in the
course thereof treating such matters as product market
definition (and the applicability vel non of the decision in
Eastman Kodak Co. v. Images Technical Servs., 504 U.S.
451 (1992)); geographic market definition (and the lack of
utility of a flawed market survey in identifying the market);
and above all, with the sufficiency of the record evidence
(including the inferences which can be drawn therefrom) to
support a legally viable antitrust claim. In the end, we
conclude that, since the record before us does not support
a finding that U.S. Healthcare exercised appreciable market
power in a properly defined tying market, or that the
7
arrangement at issue harmed competition in the tied
market, the antitrust jury verdicts on both the per se and
the rule of reason claims must be set aside.
In support of its civil RICO claim, BCI alleges a variety of
predicate acts, as a civil RICO claim requires. Although we
deal with all of the predicate acts invoked, rejecting
defendants' contention that BCI lacks RICO standing, the
only acts that arguably could come within RICO's ambit are
alleged extortionate acts by the defendants. Under the
Hobbs Act, 18 U.S.C. S 1951, "[e]xtortion" is defined as "the
obtaining of property from another, with his consent,
induced by wrongful use of actual or threatened force,
violence, or fear." 18 U.S.C. S 1951(b)(2). The "fear" may be
of economic loss as well as of physical harm. See United
States v. Addonizio, 451 F.2d 49, 72 (3d Cir. 1972). In this
case, the evidence is clear that U.S. Healthcare employed
economic leverage in an effort to force Gary's to chose CHA
as its TPA. However, while BCI contends that this conduct
amounts to extortion through the wrongful use of the fear
of economic loss, defendants assert that the conduct is
merely hard business bargaining that cannot be made to fit
within the statutory framework of Hobbs Act extortion.
As will be shown, resolution of BCI's extortion claim
turns on whether the defendants' use of economic fear in
the context of hard business bargaining was legally
wrongful, an issue with which we have not previously had
occasion to deal. We conclude that the "claim of right"
defense to extortion (i.e., a defense based on a lawful claim
to the property obtained by the allegedly extortionate acts)
formulated by the Supreme Court in United States v.
Enmons, 410 U.S. 396 (1973), is applicable in cases, such
as this one, which involve solely the allegation of the use of
economic fear in a transaction between two private parties.
In so concluding, we are mindful of, and address, those
cases that reject the broad application of Enmons outside of
the labor context in which it arose for fear that it would
"effectively repeal the Hobbs Act." See United States v.
Agnes, 753 F.2d 293 (3d Cir. 1985).
Having determined that the claim of right defense is
available to the defendants in this case, we address the
difficult problem of separating out lawful from unlawful
8
claims to property. We make no effort to announce any
broad principles in this difficult area. Drawing instruction
from Enmons and Viacom Int'l v. Icahn, 747 F. Supp. 205
(S.D.N.Y. 1990), we make a rule only for a very narrow
subset of the potential universe of extortion cases: one
involving the accusation of the wrongful use of economic
fear where two private parties have engaged in a mutually
beneficial exchange of property. We conclude that BCI's
extortion claim can only survive if Gary's had a right to
pursue its business interests free of the fear that it would
be excluded from U.S. Healthcare's provider network. Albeit
with misgivings, we find that since Pennsylvania, unlike
other states, has no "Any Willing Provider" law that compels
HMOs to allow all interested and minimally qualified
providers into their network, BCI had no such right. If such
a law was in force, Gary's would have had a legal
entitlement to be a member of the provider network and
thus to be free of the fear that it would be excluded from
that network if it did not switch TPA providers. Having
determined that BCI did not present a sustainable case of
extortion, or establish any of the other predicate acts
alleged, we set aside the jury verdict as to the civil RICO
count.
That BCI's federal claims have fallen is not, however, the
end of its case. BCI also alleges the defendants unlawfully
and improperly interfered with its existing and prospective
contractual relations with Gary's in violation of
Pennsylvania tort law. While BCI must prove a number of
things to prevail on a tortious interference claim under
Pennsylvania law, only one is in serious dispute here. The
battleground is over Restatement (Second) of Torts S 768
which sets forth a competitors privilege, and in fact over
only one facet of that section, S 768(1)(d), which withdraws
immunity from liability if the competitor employs "wrongful
means." The Pennsylvania Supreme Court has yet to define
that term and hence we must predict how it would do so to
resolve this case.
The parties' debate in this area was focused primarily on
whether Pennsylvania would limit wrongful means to
conduct that is independently actionable. While the parties
have ably briefed that point, the disposition of BCI's claim
9
does not require us to resolve it. Rather, we conclude,
based upon a passage from S 768 comment (e), that even if
the Pennsylvania Supreme Court were to require
independently actionable means, it would not apply that
requirement in cases, such as this one, where the
defendant exerted "economic pressure" or "a superior
power" in a market unrelated to the competitive market.
Here, BCI proffered ample evidence from which a jury could
conclude that U.S. Healthcare attempted to acquire Gary's
TPA business by threatening Gary's with withdrawal of
membership in the U.S. Healthcare provider network, an
unrelated market. BCI also adduced evidence of heavy-
handed tactics by U.S. Healthcare in that market for
pharmacy customers.
In addition to our analysis of the substance of
Pennsylvania tort law, we address defendants' more
fundamental argument that tort liability is not appropriate
here. The crux of that argument is that BCI's tort claims
are predicated on the same conduct that underlie its federal
claims, and that the law should therefore not permit BCI to
repackage these failed claims as tortious interference. As
will be shown, in our view, BCI has attempted just the
opposite. That is, it has taken conduct that constitutes
tortious interference with contractual relations and has
attempted to turn it into a violation of both federal antitrust
and racketeering laws. While these attempts have been
frustrated on this appeal, that result does not foreclose
BCI's state law claim. BCI's tortious interference claim does
not require proof of criminal conduct as does its extortion
claim, nor is it anchored in the same kind of market based
considerations as is its antitrust claim. We see no need for
congruence between federal antitrust law, which is
designed to protect competition and free access to markets,
and state business tort law, which is designed to protect
competitors.
Notwithstanding this conclusion, the tortious interference
verdict cannot stand, and a new trial on the tort claims is
necessary, because the jury instructions permitted the jury
to find tortious interference based on antitrust and/or civil
RICO violations which, we have concluded, did not exist.
Hence, while we reverse outright on the antitrust and civil
10
RICO claims, we will remand the tortious interference
claims for a new trial. We intimate no view on the question
whether defendants' behavior was outrageous enough to
justify an award of punitive damages under Pennsylvania
law; that will be for determination on remand. Since the
antitrust and RICO claims are out of the case, we also need
not address the question of the propriety of injunctive relief
for either RICO or antitrust claims, or the interesting issues
posed by the cross-appeal.
II. FACTS & PROCEDURAL HISTORY
A. The Parties
BCI serves as a TPA for employers who wish to self-
insure for their health benefits and other insurance needs.
In this capacity, BCI designs the employer's self-insured
benefit plan and usually recommends a health services
provider network. The providers in the network then supply
the health care, and BCI reviews and processes the
resulting claims for the employer. In addition, BCI typically
helps the employer purchase "stop-loss" insurance policies
that cap the employers' exposure for large individual and
aggregate claims. BCI also serves as an insurance broker
for employees who choose to purchase fully-insured
policies.
U.S. Healthcare develops, owns, operates, and markets
HMOs in many states in the eastern United States,
including Pennsylvania and New Jersey. These HMOs are
operated by wholly owned subsidiaries, including defendant
United States Healthcare Systems of Pennsylvania, Inc.,
d/b/a The Health Maintenance Organization of
Pennsylvania ("HMO PA"), which operates as
U.S. Healthcare's HMO for Pennsylvania. As of December
31, 1994, U.S. Healthcare and its subsidiaries had
approximately 1,695,000 subscribers enrolled in its insured
plans.
CHA is also a wholly owned subsidiary of
U.S. Healthcare. It is a TPA, and provides the same type of
services for self-insured employers as does BCI. In the
geographic areas in which U.S. Healthcare operates an
11
HMO, CHA utilizes only the U.S. Healthcare network of
doctors and hospitals. Similarly, U.S. Healthcare bars all
TPAs other than CHA access to its network. At all times
relevant to the present dispute, defendant Richard Wolfson
was the Director of Pharmacy Programs and the Chairman
of the Board of U.S. Healthcare, defendant William
Brownstein served as the Regional Pharmacy Director for
Pennsylvania, and defendant Scott Murphy was the Senior
Vice President of U.S. Healthcare, and the senior marketing
executive for CHA. We will at times refer to U.S. Healthcare,
CHA, and HMO PA collectively as the "corporate
defendants," and Wolfson, Brownstein and Murphy
collectively as the "individual defendants."
B. Gary's Decision to Self-insure
U.S. Healthcare has established a network of health care
providers which includes doctors, hospitals, and
pharmacies in various geographic regions. Under the
U.S. Healthcare prescription purchase program, individuals
who enroll as subscribers in U.S. Healthcare's HMOs select
one pharmacy from the network of providers at which they
will purchase prescription drugs. Subscribers can change
their pharmacy designation by filling out a form. Under this
program, subscribers can purchase their prescription drugs
for a small co-payment (such as $5.00), with the rest of the
cost of the prescription reimbursed to the pharmacy by
U.S. Healthcare. In addition, U.S. Healthcare pays the
pharmacies that serve the prescription purchase plan a set
monthly amount based on the number of U.S. Healthcare
subscribers designating that pharmacy, without regard to
the actual purchases of drugs from that pharmacy.
Because subscribers seldom purchase prescription drugs
from pharmacies other than those within the network,
membership in the U.S. Healthcare network is highly
coveted.
In 1991, Eagleville Pharmacy, Incorporated, d/b/a/ I Got
It At Gary's ("Gary's") was a pharmacy chain of four stores
in suburban Philadelphia. All four stores served as
approved providers in the U.S. Healthcare pharmacy
network. At this time, Gary's offered its full-time employees
two options for their health insurance coverage: a Blue
12
Cross/Blue Shield plan and a U.S. Healthcare HMO.
Approximately 35 Gary's employees enrolled as
U.S. Healthcare members. In 1991, to save costs, Gary's
decided to terminate its relationship with Blue Cross/Blue
Shield and U.S. Healthcare, and to self-insure.
In need of a TPA to process its claims, Gary's evaluated
several contenders, and then entered a written contract
with BCI, terminable upon 30 days prior written notice.
Sandra Chen, the benefits manager at Gary's, sent
termination letters to Blue Cross/Blue Shield and
U.S. Healthcare.1 In response to the letter, Chen testified
that she received an angry and verbally abusive phone call
from an unidentified U.S. Healthcare marketing executive.2
So began the wrath of U.S. Healthcare. Upon receipt of
Gary's letter terminating its insurance contract, David
Rocchino, one of U.S. Healthcare's sales vice-presidents,
telephoned Wolfson to inform him of the new development
and expressed his displeasure. Wolfson became "upset"
that Gary's had decided to self-insure, and knowing that
Gary's was approved to serve as a pharmacy for
U.S. Healthcare subscribers, promptly ordered an internal
"quality assurance" review of the generic utilization rates of
Gary's stores. Wolfson admitted at trial that his only reason
for ordering such a review was that Gary's had terminated
U.S. Healthcare coverage for its employees, but he testified
that ordering a retaliatory review was not inappropriate.3
_________________________________________________________________
1. The letter to U.S. Healthcare read:
Dear Sirs:
This letter is to advise U.S. Healthcare that effective June
30th,
1991, . . . Gary's will discontinue its medical insurance
coverage
with your organization. Please adjust your records to reflect
this
upcoming change and advise me of any information you may need
to finalize our relationship.
2. In contrast, Chen testified to the receipt of a polite and professional
phone call from a Blue Cross/Blue Shield representative, inquiring if
they could accommodate Gary's needs in anyway and as to the reason
behind Gary's decision to cancel their health care contract.
3. When asked by BCI's counsel whether he ordered the review of Gary's
in response to Gary's decision to terminate with U.S. Healthcare, Wolfson
responded:
13
In August 1993, Gary's opened its fifth store, in
Abington, Pennsylvania. Gary's applied for admission of the
new store to U.S. Healthcare's pharmacy network. Wolfson,
acting as director of U.S. Healthcare's pharmacy program,
advised Brownstein not to process the application.
U.S. Healthcare's executives acknowledged in their
testimony that their motivation in refusing to process
Gary's application was retaliatory, based on a belief that
Gary's did not deserve U.S. Healthcare's business once
Gary's had terminated U.S. Healthcare's contract in a
manner that Wolfson and Brownstein found to be offensive.
In compliance with Wolfson's instructions, Brownstein did
not process the application. However, at this time, no one
at U.S. Healthcare told Gary's of the decision to refuse to
process the application. Instead, Gary's was informed that
the application would be processed in due course. As
Wolfson conceded at trial, the plan was to "let [Gary's] hang
. . . until they did something."
At the same time that Gary's Abington store applied for
membership in the pharmacy network, U.S. Healthcare, at
the instruction of Brownstein, performed a two-day, on-site
audit of the utilization of generic drugs at Gary's store in
Eagleville, Pennsylvania. The audit measured the
pharmacy's compliance with the requirement of
U.S. Healthcare's provider agreement that generic drugs be
used whenever possible to contain costs. The audit results
suggested that Gary's dispensed brand-name drugs instead
of generic drugs at a rate higher than the median of the
U.S. Healthcare provider, and lacked complete
documentation of prescription requests. Brownstein's audit
also demonstrated that the average cost-per-prescription to
U.S. Healthcare at the Eagleville pharmacy was in line with
the network median, so that the store's prescriptions were
not costing U.S. Healthcare more on average than other
_________________________________________________________________
Well, I didn't think it was appropriate with an account that we
had
a relationship with just to send a "dear sir" letter [of
termination] to
a post office box . . . . I didn't feel that they were giving us
due
consideration and if they were operating in that fashion, I
wanted to
look to see if in fact there were any other issues related to the
I Got
It At Gary's Pharmacies.
14
pharmacies. Brownstein forwarded the audit results to the
Quality Assurance Committee, which referred the matter to
the Peer Review Committee. The Peer Review Committee,
consisting of three outside pharmacists, had the power to
recommend sanctions to Wolfson, who would then decide
whether or not to impose them.
On November 16, 1993, the Peer Review Committee
recommended that Gary's Eagleville store be put on"freeze"
for three-months. The freeze was implemented and, as a
result, U.S. Healthcare removed the Eagleville store from
the list of approved pharmacies, and new U.S. Healthcare
subscribers could not designate that store as their location
for purchasing prescription drugs. In contrast to the
treatment of Gary's, other pharmacies with generic drug
utilization rates lower than the Eagleville pharmacy and
less complete documentation of prescription requests, had
not been "frozen," and instead had received lesser or no
sanctions. In fact, the parties stipulated that out of the
approximately 1300 pharmacies in the U.S. Healthcare
network for southeastern Pennsylvania and southern New
Jersey, the freeze sanction had been imposed for generic
utilization reasons only four times (including its use against
Gary's) in all of 1993 and 1994.
Although the extent to which Wolfson and Brownstein
were involved in the implementation of the freeze sanction
is unclear, both had participated regularly in Quality
Assurance and Peer Review Committee meetings.
Brownstein later cited the results of the audit on the
Eagleville store as the reason for the delay in processing the
Abington store's application for membership in the
pharmacy network, stating that U.S. Healthcare had
concerns about Gary's dispensing too many brand-name
drugs at its stores.
Faced with a freeze on its Eagleville store and no
movement on the Abington store's application for
membership in the pharmacy network, Gary's President,
Gary Wolf, set up a meeting with U.S. Healthcare officials,
including Wolfson and marketing executive Scott Murphy,
for December 1, 1993. Among the issues discussed were
Gary's generic drug use and the admission of the Abington
store to the U.S. Healthcare provider network.
15
U.S. Healthcare expressed its displeasure with Gary's
termination of U.S. Healthcare coverage in 1991, and
Wolfson commented that "we like to do business with
people who do business with us." At the same meeting,
U.S. Healthcare requested and received permission to bid
on Gary's TPA business for the next annual contract period.
C. Gary's Switch to CHA/U.S. Healthcare
Following the meeting with U.S. Healthcare, Wolf
instructed his sister, Robin Risler, the Director of Human
Resources at Gary's, to "take a look at" switching to the
TPA services offered by CHA at the anniversary date of
Gary's contract with BCI (at which time the contract could
be terminated with 30 days advance notice.) Concurrently,
Wolf sent a letter to Wolfson (dated December 6, 1993)
expressing, among other things, his "commitment that we
will do everything possible to afford [U.S. Healthcare/CHA]
the opportunity to service our company's needs as long as
the programs are mutually beneficial", and requesting that
U.S. Healthcare consider acting on the pending application
for Gary's Abington store.
When the December 6 letter failed to produce any
movement on the Abington store, Wolf explained to Chen
that, in order to get the Abington store approved, Gary's
needed to "appease" U.S. Healthcare, and instructed her to
write a further letter to U.S. Healthcare assuring them that
Gary's would consider CHA's bid for its TPA services. This
letter, dated January 3, 1994, and addressed to Murphy,
was more explicit then the December 6 letter. It stated:
As you requested, I am writing you to acknowledge the
agreement made between I got it at Gary's and
U.S. Healthcare. We agree that as long as there are no
additional cost[s] to the plan or reduction in service,
US Healthcare will assume the role of TPA for our self
insured medical plan on July 1, 1994.
* * *
We also understand that in anticipation of our
strengthening relationship, US Healthcare will release
the provider number for our pharmacy in Abington, PA.
16
Chen testified that once this letter was written, it was a
"foregone conclusion" that, as long as CHA's bid was
comparable and for the same services, Gary's would switch
to CHA. As of this time, CHA had not yet submitted a
formal proposal to Gary's.
In January 1994, within weeks of Chen's letter,
U.S. Healthcare had inspected the Abington pharmacy, and,
without further ado, approved its participation in the
provider network. Brownstein testified that he was informed
that Gary's had agreed to switch TPAs to CHA, and "on the
basis of that," was instructed to enroll Gary's Abington
store in the provider network. U.S. Healthcare acted with
such speed in approving the Abington store's application for
membership in the provider network that it failed to follow
its own standard approval procedures, and did not present
the store's application to the Membership Application
Credentials Committee until after the pharmacy was
already participating as a provider.
In February 1994, U.S. Healthcare lifted the freeze on the
Eagleville store. Similarly, Gary's sixth pharmacy in Aston,
Pennsylvania, was accepted into the provider network
without delay. At approximately this same time, Robin
Risler, who testified that, ultimately, the selection of a TPA
was her responsibility, hired an insurance broker to assist
her in evaluating the competing TPAs. In early June 1994,
both BCI and CHA submitted bids for Gary's TPA business,
but CHA was given the opportunity to review BCI's bid
before submitting its final proposal. In May 1994, even
before Gary's had received a proposal from U.S. Healthcare,
Risler told Lori Manley, the BCI customer service
representative, that Gary's would be switching to
CHA/U.S. Healthcare. Manley testified that Risler confided
that she felt she was being "strongarmed" by
U.S. Healthcare, that "she herself did not want to leave BCI"
and that the decision "was out of her control." Two other
BCI employees similarly testified that in the spring of 1994,
Risler denied having any real choice in the decision to give
Gary's TPA business to CHA in light of the loss of
U.S. Healthcare's business that Gary's would suffer if it
failed to switch TPAs. The testimony with respect to Risler
of Manley and the two additional BCI employees was
17
admitted over U.S. Healthcare's objection as state of mind
evidence. See infra note 31.
As the time for Gary's formal switch to CHA drew near,
U.S. Healthcare scheduled another on-site "quality
assurance" audit, this time of Gary's Lansdale store for
June 16, 1994. In the second week of June, Risler officially
informed BCI of Gary's decision to give its TPA business to
CHA. After Gary's decision was officially announced, the
audit of the Lansdale store uncovered no problems.
Moreover, there were no further audits of Gary's
pharmacies.
The reasons behind Risler's decision to switch to CHA are
in dispute. BCI's TPA expert, Carlton Harker, testified that
for the one year period of 1994-95, the BCI proposal would
have saved Gary's approximately $64,000, or 14%,
compared to the proposal submitted by CHA. Harker
further testified that he did not perceive any significant
differences in the services provided under the respective
plans that would explain the cost differential. Risler
testified that, in making the decision to give Gary's TPA
business to CHA, she was motivated by non-price, quality
of service reasons. She also acknowledged, however, that
she had been satisfied with BCI's services. At all events, the
results of the decision are clear -- BCI lost its contract with
Gary's.
In March 1995, BCI filed the present suit challenging the
defendants' actions that preceded Gary's decision to
terminate its TPA contract with BCI. BCI proceeded at trial
against defendants on four counts. Count I alleged that
U.S. Healthcare, HMO PA, and CHA violated Section 1 of
the Sherman Act, 15 U.S.C. S 1, by tying the participation
by Gary's in the U.S. Healthcare pharmacy network to the
purchase of CHA's TPA services for Gary's employees. In
Count II, BCI alleged that all defendants violated the
Racketeer-Influenced and Corrupt Organizations Act
("RICO"), 18 U.S.C. S 1961 et seq., by engaging in or
conspiring to commit at least two acts of racketeering
activities, among them extortion, bribery, mail and wire
fraud, and violations of the Travel Act.
In a Count III, BCI also contended that, to the extent that
defendants Wolfson, Murphy, and Brownstein were not
18
principal wrongdoers, they are liable for aiding and abetting
under RICO. Finally, in Count IV, BCI alleged that all
defendants tortiously interfered with its existing or
prospective contractual relationship with Gary's in violation
of state law. BCI sought treble damages and attorneys fees
under its federal law claims. It also sought punitive
damages from each defendant in connection with its state
law claim.
D. Economic Evidence
1. Impact on Gary's
BCI argued at trial that Gary's ability to operate
profitably depended on the business of U.S. Healthcare
subscribers. As evidence, BCI pointed to the parties'
stipulation that, as of December 1993, when Wolfson told
Gary Wolf that U.S. Healthcare likes to do business with
people "who do business with us," 9,178 U.S. Healthcare
subscribers had designated Gary's as their provider
pharmacy, and that in 1993, Gary's subscribers purchased
$1.66 million of prescription drugs. BCI's expert Dr. Calvin
Knowlton, who is an associate professor and Chair of the
Department of Pharmacy Practice and Pharmacy
Administration at the Philadelphia College of Pharmacy and
Science, and the President of the American Pharmaceutical
Association, testified that, based on the stipulated
information and Gary's Sales Reports, in 1993,
U.S. Healthcare members accounted for between 3-15% of
Gary's prescription drug sales, and, by 1995, for 20% of
prescription drug sales in Gary's Montgomery County
stores.
If Gary's operated as an unapproved pharmacy, any
U.S. Healthcare subscriber who wanted to fill his or her
prescription at Gary's would have to pay full price, instead
of a small co-payment. Additionally, Gary's head
pharmacist testified that prescription drug purchasers are
valuable consumers because they typically purchase other
items in addition to their prescription drugs. BCI also
presented evidence that the prescription drug business of
pharmacies is a low-margin business that depends on high
volume in order to operate profitably. In order to maximize
19
their sales, pharmacies typically become members of as
many prescription drug plans as possible. Out of
approximately 1300 participating pharmacies in
southeastern Pennsylvania and southern New Jersey, only
four pharmacies left the U.S. Healthcare pharmacy network
in the period from January 1, 1993 to October 1, 1995 for
reasons other than going out of business.
2. Knowlton's Survey
At trial, BCI presented a telephone survey of the market
areas surrounding several of Gary's pharmacies, performed
by Dr. Knowlton, which was admitted over objection. In this
survey, pharmacy students telephoned six to eight
pharmacies in the vicinity of three arbitrarily selected
Gary's store locations and asked them a series of questions.
Knowlton drew conclusions regarding U.S. Healthcare's
market power based only on the responses of those stores
that listed U.S. Healthcare as their primary HMO customer.
He testified that based on this survey U.S. Healthcare's
market share of prescription drug sales for the market
areas served by the two largest Gary's pharmacies and the
new Abington pharmacy was approximately 25%. Knowlton
further testified that other sources of information indicated
that his survey conclusions as to market share would apply
generally in Montgomery County.
3. Interaction Between U.S. Healthcare and Other
Pharmacy Operations
The jury also heard evidence of the interaction between
U.S. Healthcare and Rite-Aid, Shop-Rite, Food Circus,
Walmart, Phar-mor and Weis Markets. With respect to the
pharmacy operation in each of these chains,
U.S. Healthcare conditioned participation in the provider
network upon their making U.S. Healthcare insurance
available to their employees. Despite initial resistance, Rite-
Aid, Phar-Mor and Weis Markets ultimately agreed to offer
their employees U.S. Healthcare insurance products. There
was, however, an absence of supporting evidence on the
point, and it is not clear that these large companies made
U.S. Healthcare a part of their benefits package in response
to economic pressure rather than for legitimate business
reasons.
20
Shop-Rite and Food Circus responded by filing
complaints with the New Jersey Department of Insurance.4
After the Department of Insurance took action,
U.S. Healthcare agreed to accept the stores into its provider
network notwithstanding their refusal to offer
U.S. Healthcare coverage. The Walmart stores also resisted
U.S. Healthcare's policy, choosing instead to forgo
membership in the provider network. U.S. Healthcare did
approve the Walmart stores in Massachusetts, where an
Any Willing Provider statute was in force. Defendants'
experts testified that linkage of network membership and
purchase of TPA services was normal business behavior
and was not anti-competitive.
4. The Setting of Reimbursement Prices
BCI also presented evidence of how U.S. Healthcare
exercised its market power to set reimbursement prices. In
January 1996, it effected a drastic reduction in the
reimbursements it paid to participating pharmacies for
prescription drugs dispensed to U.S. Healthcare
subscribers. Dr. Knowlton testified that this reduction,
when considered with the fact that U.S. Healthcare does not
pay pharmacies a dispensing fee, made U.S. Healthcare's
overall compensation to pharmacies the lowest of any third-
party payor in the southeastern Pennsylvania region. Yet,
notwithstanding the major reimbursement price reduction,
only two pharmacies out of approximately 8000 in 12 or 13
states discontinued their participation in the
U.S. Healthcare provider network.
Dr. Knowlton testified that, based on this evidence, and
the evidence of U.S. Healthcare's successful dominance of
other pharmacies, exclusion from the U.S. Healthcare
provider network could threaten Gary's survival. As a
result, he testified that Gary's had no choice but to accept
U.S. Healthcare's arrangement.
_________________________________________________________________
4. The record does not develop the extent to which these complaints may
have been facilitated by New Jersey's enactment, in July 1994, of an Any
Willing Provider statute which provides that a pharmacy cannot be
excluded from an HMO if it "accepts the terms" of the HMO. N.J. Stat.
Ann. S 26:2J-4.7(a)(2) (West 1996).
21
E. The Jury Verdict
After 17 days of trial, the case was submitted to the jury
on special interrogatories. The jury returned a verdict for
BCI on all counts and awarded BCI $200,000 in
compensatory damages.5 The jury also awarded BCI
$1,000,000 in punitive damages in connection with its
tortious interference claim. That award was apportioned as
follows: $400,000 against U.S. Healthcare, $200,000
against CHA, $100,000 against HMO PA, $200,000 against
Wolfson, $75,000 against Murphy, and $25,000 against
Brownstein.
At the close of BCI's case, and again at the close of all
evidence, the defendants moved, pursuant to Fed. R. Civ. P.
50(a), for judgment as a matter of law. These motions were
denied. Following the verdict, defendants renewed their
motion for judgment as a matter of law pursuant to Fed. R.
Civ. P. 50(b). Concurrently, defendants filed an alternative
motion for a new trial pursuant to Fed. R. Civ. P. 59. The
district court denied these motions in all respects. On
appeal, defendants challenge the denial of these motions.
The majority of the issues before us arise from the district
court's denial of defendants' renewed motion for judgment
as a matter of law, and, as to these issues, our review is
plenary. See Stelwagon Mfg. Co. v. Tarmac Roofing, 63 F.3d
1267, 1270-71 (3d Cir. 1995) ("The legal foundation for the
jury's verdict is reviewed de novo while the factual findings
are reviewed to determine whether the evidence and
justifiable inferences most favorable to the prevailing party
afford any rational basis for the verdict."). Where a different
standard of review is implicated, it will be noted in the text.
_________________________________________________________________
5. The district court's initial order of judgment made it unclear whether
BCI was to receive $200,000 in total compensatory damages, or to
recover that amount separately on each of its three legal theories (thus
allowing a total recovery of $600,000 in compensatory damages). In
response to defendants' motion, pursuant to Fed. R. Civ. P. Rule 59(e),
to alter or amend the order of judgment, the district court subsequently
amended its order to make clear that BCI may recover only once the
$200,000 in compensatory damages that it was awarded. BCI does not
dispute this point on appeal.
22
III. THE ANTITRUST ISSUES
A. Introduction -- Characterization of BCI's Claim
BCI's antitrust claim arises from U.S. Healthcare's
decision to use the leverage acquired by virtue of its ability
to provide Gary's access to thousands of potential
pharmacy customers to pressure Gary's into selection of its
subsidiary, CHA, as its TPA. BCI claims that this
arrangement was an illegal tie in violation S 1 of the
Sherman Act, 15 U.S.C. S 1, which generally outlaws
"[e]very contract . . . in restraint of [interstate or
international] trade or commerce." Defendants submit that
their conduct was simply hard bargaining that is well
within the mainstream of business conduct and does not
form the basis of a cognizable antitrust claim.
At trial, BCI's theory of the case prevailed. The jury found
that U.S. Healthcare's practices were illegal under both per
se and rule of reason theories of antitrust liability. On
appeal, defendants challenge the characterization of the
arrangement at issue as a tying arrangement. They contend
that the arrangement was one of reciprocal dealing and not
tying, and that as a result the per se test for antitrust
liability is inapplicable. Before turning to a review of the
jury verdict, which the defendants challenge, we will
consider the characterization question.
Tying exists where a seller conditions the sale of one good
(the tying product) on the buyer also purchasing another,
separate good (the tied product). See Town Sound & Custom
Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468, 475 (3d
Cir. 1992) (in banc). The antitrust concern over tying
arrangements arises when the seller can exploit its market
power in the tying market to force buyers to purchase the
tied product which they otherwise would not, thereby
restraining competition in the tied product market.6 See
_________________________________________________________________
6. Of course, not all tying arrangements have anti-competitive effects in
violation of the Sherman Act. The Supreme Court has twice made use of
the following as an example of a tie that is not a concern of the
antitrust
laws: "[I]f one of a dozen food stores in a community were to refuse to
sell flour unless the buyer also took sugar it would hardly tend to
23
Allen-Myland, Inc. v. International Bus. Mach. Corp., 33 F.3d
194, 200 (3d Cir. 1994); Jefferson Parish Hosp. Dist. No. 2
v. Hyde, 466 U.S. 2, 12 (1984).
Unlike tying -- where one party is only a seller and the
other only a buyer -- reciprocal dealing exists where "two
parties face each other as both buyer and seller. One party
offers to buy the other party's goods, but only if the second
party buys other goods from the first party." Spartan Grain
& Mill Co. v. Ayers, 581 F.2d 419, 424 (5th Cir. 1978). More
colloquially, reciprocal dealing exists when one party tells
the other: "I'll buy from you, if you buy from me." Again,
like tying, not all reciprocal dealing arrangements are anti-
competitive. The Sherman Act is concerned with what has
been termed "coercive" reciprocal dealing, where a party
uses its economic power as a purchaser in one market in
order to restrict competition in another market where it is
a seller. See Betaseed, Inc. v. U & I, Inc., 681 F.2d 1203,
1216 (9th Cir. 1982).7
BCI argued, and the jury found, that U.S. Healthcare and
CHA tied the purchase of CHA's TPA services to the right to
continued participation in the U.S. Healthcare pharmacy
network. In order to characterize this arrangement as a tie,
U.S. Healthcare must be deemed to have "sold" Gary's the
ability to participate in its pharmacy network, but only if
Gary's also purchased CHA's TPA services. Defendants
contend that BCI's characterization is not correct since
U.S. Healthcare did not "sell" Gary's the ability to
participate in the pharmacy network as participation in
that network is free. In fact, the ultimate result of the
_________________________________________________________________
restrain competition if its competitors were ready and able to sell flour
by itself." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12
(1984) (quoting Northern Pac. R. Co. v. United States, 356 U.S. 1 (1958)).
Indeed package sales such as those noted in the foregoing example may
be used by a seller as a means of competing, and may be desired by
buyers. The Sherman Act is not designed to preclude such
arrangements. See id.
7. This is distinguished from "mutual" reciprocal dealing which occurs
"when both parties stand on equal footing with respect to purchasing
power, yet they agree to purchase from one another." Betaseed, 681 F.2d
at 1216.
24
contract was that money flowed in the opposite direction --
from U.S. Healthcare to Gary's in exchange for prescription
drugs purchased by U.S. Healthcare members that
designated one of Gary's stores as their network pharmacy.
Thus, defendants argue, the arrangement is more
accurately labeled as reciprocal dealing where
U.S. Healthcare conditioned its agreement to purchase
prescription drugs from Gary's on Gary's agreement to
purchase TPA services from CHA.
We agree that the arrangement is not tying. While there
is force to defendants' broader argument, we do not believe
that the relationship between Gary's and U.S. Healthcare
can be neatly squeezed into the purchase/sale paradigm.
As a result, we are hesitant to conclude that the
arrangement was reciprocal dealing, but instead believe
that the true character of the arrangement lies somewhere
between the two practices. Fortunately, resolution of the
antitrust issue presented in this appeal does not require us
to wedge the facts into either doctrinal box, for we conclude
that there was insufficient evidence to support liability
under the Sherman Act regardless of the label placed on
the challenged arrangement.
The law is well developed as to when tying arrangements
should give rise to liability under the Sherman Act. Such
arrangements can be deemed illegal per se or be found to
violate the rule of reason. Per se liability exists where the
defendant is found to have appreciable market power in the
tying market. In such cases, the ability to leverage this
power to restrain trade in the tied market is presumed and
no inquiry need be made into the actual prevailing market
conditions in that market. See Jefferson Parish, 466 U.S. at
15-18 & n. 25; Town Sound, 959 F.2d at 477. Where
appreciable tying market power cannot be shown, inquiry
into the tied product market cannot be avoided, and the
plaintiff therefore has the more difficult burden of showing
that the arrangement violated the rule of reason because it
unreasonably restrained competition in the tied product
market. See Jefferson Parish, 466 U.S. at 29.
In contrast to tying arrangements, reciprocal dealing has
not been the subject of extensive case law development.
Indeed, this Court has yet to set forth a test for determining
25
when a reciprocal dealing arrangement runs afoul of the
Sherman Act.8 Defendants seek to persuade us to fill this
vacuum by holding that reciprocal dealing arrangements
cannot be found illegal per se, but instead should be judged
only under the less rigorous rule of reason test.9 This
position has not been adopted by any of our sister circuits.
All those that have examined the relationship between tying
and reciprocal dealing have determined that each practice
_________________________________________________________________
8. Defendants suggest that we set forth a rule for judging reciprocal
dealing arrangements in W.L. Gore & Assocs., Inc. v. Carlisle Corp., 529
F.2d 614, 624 (3d Cir. 1976) where we stated that:
[T]he use of substantial purchasing power in one product market
to
coerce a supplier into a reciprocating purchase in another market
may be an illegal restraint of trade if the user's purchasing
power is
sufficiently substantial and its use results in substantial
foreclosure
of competition in the other weaker product market.
In Gore, the owner of two patents brought an action for infringement.
The defendant's answer denied the validity of the patents, asserted that
one of the patents was unenforceable because of fraud in its
procurement, and counterclaimed for damages alleging a violation of the
Sherman Act. After trial, the district court entered a judgment holding
one of the patents valid and infringed and the other patent invalid,
granting the plaintiff an injunction restraining the defendant from
infringing the valid patent, and determining that plaintiff had violated
the Sherman Act. Both parties appealed from the judgment. In
determining that we had jurisdiction to review the injunction, we
expressly stated that we had no jurisdiction in an interlocutory appeal
over the antitrust counterclaim of the defendant. See id. at 618. Thus,
the statement in Gore regarding reciprocal dealing was dicta, and does
not establish a rule.
9. In support of this view, defendants primarily rely on Phillip E. Areeda
et al., Antitrust Law, a leading treatise. Areeda argues that "forced
reciprocal exchanges are . . . legally distinct from ties and need not
receive the same antitrust treatment." X Areeda, Antitrust Law P 1750c,
at 268 (1996). He believes that reciprocal trading should not be illegal
per se, and that such a claim should instead be judged solely under the
rule of reason test. See Id. P 1778, at 460-61. Professor Areeda's view
may be colored by his belief that tying arrangements also should not be
illegal per se, a view that is contrary to current law. See IX Areeda,
Antitrust Law P 1730, at 406 14 (1991).
26
should be evaluated under both the per se and rule of
reason tests.10
This position is logical since both practices implicate the
same antitrust concern -- the unlawful extension of
economic power in one market to another market. However,
we decline to resolve this conflict here since the amorphous
and idiosyncratic nature of this case does not provide an
appropriate framework in which to fully flesh out the need
for a separate test for reciprocal dealing arrangements.
Further, we need not reach this issue in order to resolve
the present appeal since we find that BCI failed to set forth
either a valid per se or rule of reason antitrust claim -- a
finding fatal to both a tying claim and a reciprocal dealing
claim under any test we might devise.
B. Per se Liability
Since our jurisprudence regarding both per se and rule of
reason liability has developed in the context of tying cases,
we will use the terms "tying" product market and "tied"
product market to describe the two markets at issue
despite our belief that the arrangement in this case lies
somewhere between tying and reciprocal dealing. The per se
test is used in cases where exploitation of leverage in the
market for the tying product is "probable". See Jefferson
Parish, 466 U.S. at 15; Town Sound, 959 F.2d at 476-77.
The elements of a per se claim are (1) the defendant seller
_________________________________________________________________
10. See, e.g., Betaseed, Inc. v. U&I, Inc., 681 F.2d 1203, 1221 (9th Cir.
1982) ("The similarity between coercive reciprocity and tying
arrangements, both in form and in anti-competitive consequences, leads
to the conclusion that the two practices should be judged by similar
standards."); Spartan Grain & Mill Co. v. Ayers, 581 F.2d 419, 425 (5th
Cir. 1978) (holding that label of tying and reciprocal dealing was
immaterial, and that the per se standard should be applied in both); E.T.
Barwick Indus. v. Walter E. Heller & Co., 692 F. Supp. 1331 (N.D. Ga.
1987) (same legal standards apply to reciprocal dealing as tying), aff'd
891 F.2d 906 (11th Cir. 1989). See also II Earl W. Kintner, Federal
Antitrust Law S 10.67, at 264-65 (1980) ("[T]he very presence of the
element of coercion indicates that such reciprocal dealings are only anti-
competitive in effect. It is widely agreed that coercive reciprocality,
like
tying arrangements, should be considered a per se violation of Section 1
of the Sherman Act.").
27
must sell two distinct products; (2) the seller mu st possess
market power in the tying product market; and (3) a
substantial amount of interstate commerce must be
affected. See id. at 477. Where such elements are shown,
the defendant's tying practices are condemned without
further proof of anti-competitive effect. See id. Principally at
issue in this appeal is whether BCI met its burden of
proving the second element of this test: that
U.S. Healthcare exercised market power in the tying market.11
The jury determined that U.S. Healthcare exercised
sufficient market power in the tying market to constitute a
per se violation of the Sherman Act. The viability of that
finding, however, depends on the correctness of the market
definition sent to the jury. Defendants maintain that the
definition was incorrect as a matter of law, and that
U.S. Healthcare could not exercise sufficient power in a
properly defined tying market to sustain a per se claim.
1. Defining the Relevant Market
Before we can evaluate the extent to which
U.S. Healthcare exercises power in the tying market, that
market must be properly defined. A market has two
components, product and geographic. See Brown Shoe Co.
v. United States, 370 U.S. 294, 325-28 (1962). The burden
is on the plaintiff to define both components of the relevant
market. See Queen City Pizza, Inc. v. Domino's Pizza, Inc.,
124 F.3d 430, 436 (3d Cir. 1997); Pastore v. Bell Telephone
Co., 24 F.3d 508, 512 (3d Cir. 1994); Tunis Bros Co., Inc. v.
Ford Motor Co., 952 F.2d 715, 726 (3d Cir. 1991). The tying
market definition asserted by BCI and adopted by the jury
was: "U.S. Healthcare members with prescription drug
benefits in the areas surrounding . . . Gary's pharmacies in
suburban Philadelphia." Defendants contend that this
definition contains both a flawed product market --
U.S. Healthcare members with prescription drug benefits--
and a flawed geographic market -- the areas surrounding
Gary's pharmacies in suburban Philadelphia. They submit
_________________________________________________________________
11. The other issues have not been briefed by the parties. The third
element is plainly not disputed. While arguably there is an implicit
challenge to the first element, it would involve the characterization
question, and we need not reach it.
28
instead that the relevant tying market consists of "all
purchasers of prescription drugs in the greater Philadelphia
area."
We agree that BCI failed to meet its burden of presenting
sufficient evidence to support the product and geographic
markets adopted by the jury. However, while the evidence
enables us to determine that the proper product market
consists of all purchasers of prescription drugs, it is more
difficult to determine the relevant geographic market on the
basis of the record. Fortunately, as will be shown,
delineation of the exact contours of the geographic market
is not necessary to an evaluation of the merit of plaintiff's
per se claim. We turn first to the product market issue.
a. The Product Market
BCI has posited a single brand market consisting solely
of U.S. Healthcare members with prescription drug benefits.
Should we accept this market definition our inquiry would
be at an end, for U.S. Healthcare must, by definition,
control 100% of this product market regardless of the
geographic market. BCI seeks to support this product
market by arguing that no products are "reasonably
interchangeable" with U.S. Healthcare members, and that it
is compelled by the Supreme Court's decision in Eastman
Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451
(1992). Examining each of these contentions in turn, we
conclude that this narrow market definition cannot stand
as a matter of law.
The outer boundaries of a product market are determined
by evaluating which products would be reasonably
interchangeable by consumers for the same purpose. See
Allen-Myland, 33 F.3d at 201 n.8; Town Sound, 959 F.2d at
480. "Interchangeability implies that one product is roughly
equivalent to another for the use to which it is put; while
there might be some degree of preference for the one over
the other, either would work effectively." Allen Myland, 33
F.3d at 206. One measure of interchangeability is "cross
elasticity of demand between the product itself and
substitutes for it." Queen City Pizza, 124 F.3d at 437
(quoting Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (1962)).
29
When there is cross-elasticity of demand between products
in a market, "the rise in the price of a good within [the]
relevant market would tend to create a greater demand for
other like goods in that market." Tunis Brothers, 952 F.2d
at 722.
Thus the issue is which products, if any, Gary's, the
consumer, would find to be reasonably interchangeable
with, or substitutable for, U.S. Healthcare members who
purchase prescription drugs. Defendants argue that no
evidence in the record contradicts the logical assumption
that Gary's considers members of other prescription plans,
or uninsured persons, completely interchangeable with
U.S. Healthcare members. We agree.
The only evidence to which BCI directs us to support its
argument that there are no products reasonably
interchangeable with U.S. Healthcare customers is that
when U.S. Healthcare lowered the prices it would pay to
pharmacies for the purchase of prescription drugs by
U.S. Healthcare members, none of the pharmacies dropped
out of the U.S. Healthcare network. BCI asserts that this
shows that there is no cross-elasticity of demand between
U.S. Healthcare members and other purchasers of
prescription drugs since, if there were, then the lowering of
prices would have caused pharmacies to stop doing
business with U.S. Healthcare customers in favor of other
customers who paid more.
This evidence does not support BCI's market definition.
The fact that participating pharmacies do not drop out of
the U.S. Healthcare network when it lowers its payment
schedule does not prove that U.S. Healthcare's action failed
to increase the pharmacies demand for customers who are
not members of U.S. Healthcare. Even though pharmacies
undoubtedly desire higher profit customers, it would not be
necessary for them to drop out of the U.S. Healthcare
network in order to pursue, or acquire, these customers.
Nor would it be economically rational to do so since
pharmacies, like most businesses, seek as many customers
as they can find.12
_________________________________________________________________
12. We assume that membership in the U.S. Healthcare network
remained profitable after U.S. Healthcare lowered its payment schedule.
30
Moreover, to the extent that BCI is arguing that
U.S. Healthcare customers are not interchangeable with
other customers because the market for prescription
customers is so competitive that U.S. Healthcare members
are difficult to replace, this argument also does not support
its product market definition. Product market definition
turns on the existence of close substitutes for a particular
product, not on the ability of any particular consumer to
switch effortlessly to such substitutes. It is true that when
Gary's loses a supply of customers it must compete for
other customers to make up lost sales; however, this does
not mean that those new customers, when found, would
not be interchangeable with U.S. Healthcare members from
Gary's standpoint.
BCI also seeks to support its single brand market by
reference to the Supreme Court's opinion in Kodak. That
case, however, is inapposite. In Kodak, independent service
organizations brought suit alleging that Kodak had tied
replacement parts for its copiers to Kodak repair service.
See 504 U.S. at 459. Although Kodak exercised complete
control over the market for the tying product --
replacement parts for its copiers -- since they were unique,
see id. at 456-57, it argued that it could not, as a matter
of law, have sufficient market power in that derivative
aftermarket to restrain trade because the primary market
for new copiers was competitive. According to Kodak, any
attempt to exercise market power in the derivative market
for copier parts would raise the "life cycle" cost of owning a
Kodak copier, and customers would buy fewer Kodak
copiers, making the attempt unprofitable. See id. at 470.
The Supreme Court declined to let Kodak's economic
theory prevail on summary judgment, holding that, under
certain circumstances, the buyer of a Kodak copier could
be "locked in" to the Kodak parts market by virtue of the
_________________________________________________________________
To the extent that BCI is arguing that pharmacies stayed in the
U.S. Healthcare network despite the fact that it became unprofitable to
do so, this argument renders their overall claim a non sequitur.
U.S. Healthcare cannot exercise control over pharmacies via access to its
network where membership in that network causes pharmacies to lose
money.
31
high "switching costs" of purchasing a new copier from
another manufacturer. See id. at 476. In such a situation,
Kodak copier owners would be forced to purchase copier
parts from Kodak since there were no reasonable
substitutes for such parts. Thus, Kodak establishes that a
single brand market may be considered the relevant market
where a legitimate class of consumers is locked in to
purchasing a non-interchangeable tying product in a
derivative market due to high switching costs in the
primary market. See Queen City Pizza, 124 F.3d at 439-40.
BCI directs us to no evidence introduced at trial to
support a conclusion that Kodak is applicable to this case.
On appeal, they argue that U.S. Healthcare members are
"locked in" to U.S. Healthcare and, by extension, to the
pharmacies in its provider network. We doubt that this
argument is factually correct, for we find no evidence
suggesting that U.S. Healthcare members who wish to
switch HMOs face switching costs significant enough to
constitute a lock in. But even if it is, the argument is
misplaced since Kodak is concerned with the situation
where the victims of the alleged tie -- in that case, the
purchasers of Kodak copiers -- are faced with high
switching costs and thus are "locked in" to the market for
the tying product. Under BCI's theory of the case, Gary's is
the purchaser of the tying product which is U.S. Healthcare
members who purchase prescription drugs. Thus in order
to fall within Kodak's concept of lock in, BCI needed to, at
a minimum, provide evidence that Gary's -- not
U.S. Healthcare members -- was locked into the
U.S. Healthcare network. That it did not do.
b. The Geographic Market
BCI proposed a non-contiguous, gerrymandered
geographic market consisting solely of the areas
surrounding Gary's pharmacies in suburban Philadelphia.
To meet its burden of proving the relevant geographic
market, see Tunis Brothers Co., 952 F.2d at 726, BCI was
required to show that the geographic market it proposed
was "the area in which a potential buyer may rationally
look for the goods or services he or she seeks." See id.
32
(quoting Pennsylvania Dental Ass'n v. Medical Serv. Ass'n of
Pa., 745 F.2d 248, 260 (3d Cir. 1984)).
The only evidence that BCI offered to support its
geographic market was testimony from Dr. Knowlton that
the area from which Gary's stores, or any pharmacies, draw
their customers is made up of primary and secondary
trading areas surroundings its stores. Knowlton defines a
primary trading area is the geographic area surrounding a
pharmacy from which it draws 50% of its clientele, and a
secondary trading area as the geographic area from which
it draws 90% of its clientele.
We believe that Knowlton is undoubtedly correct to the
extent that the jury could reasonably find that pharmacy
customers generally use pharmacies near their home. Thus
we reject defendants' argument that the relevant geographic
market should be the greater Philadelphia area.13 However,
mere invocation of the common-sense precept that
customers use pharmacies near their homes does not
satisfy BCI's burden of showing that the particular
geographic market chosen fairly represents "the area in
which a potential buyer may rationally look for the goods or
services he or she seeks." In this case, where BCI
introduced no evidence to support such a conclusion, an
amorphous and gerrymandered geographic market cannot
stand as a matter of law. See id. at 727 ("The mere
delineation of a geographical area, without reference to a
market as perceived by consumers and suppliers, fails to
meet the legal standard necessary for the relevant
geographic market.").
2. U.S. Healthcare's Power in the Tying Market
Having determined that the market definition adopted by
the jury was erroneous as a matter of law, we are now
faced with the task of assessing U.S. Healthcare's market
_________________________________________________________________
13. Defendants rely primarily on evidence that Gary's advertised in the
greater Philadelphia area to support their expansive conception of the
geographic market. This reliance is misplaced since "the geographic
market is not comprised of the region in which the seller attempts to sell
its product, but rather is comprised of the area where his customers
would look to buy such a product." Tunis Bros., 952 F.2d at 726.
33
power in a properly defined market on the basis of the trial
record. Our task is made more difficult by the fact that the
record does not contain sufficient evidence to enable us to
clearly define the relevant geographic market. In most
instances, the proper course in the face of such
circumstances would be to remand the case for a new trial;
however, our review of the record indicates that it is simply
not possible for U.S. Healthcare to have exercised sufficient
market power in the properly defined product market to
constitute a per se violation in any plausible geographic
market.
In order to impose per se antitrust liability, it must be
shown that the defendant had "appreciable economic power
in the tying market." Kodak, 504 U.S. at 464 (emphasis
added). "Market power is defined as the ability``to raise
prices or to require purchasers to accept burdensome terms
that could not be exacted in a completely competitive
market.' " Allen-Myland, 33 F.3d at 200 (quoting United
States Steel Corp. v. Fortner Enters., Inc. (Fortner II), 429
U.S. 610, 620 (1977)). Since "[t]he existence of such power
ordinarily is inferred from the seller's possession of a
predominant share of the market," Kodak, 504 U.S. at 464
(citations omitted), we turn first to an inquiry into
U.S. Healthcare's share of the market for drug prescription
customers. In so doing, we are mindful of the fact that
"[m]arket share, of course, is only one type of evidence that
may prove the defendant has sufficient market power to
impose per se antitrust liability." Allen-Myland, 33 F.3d at
209.
a. Evidence of Market Share
At trial, BCI's sole evidence of market share derived from
a survey conducted by Dr. Knowlton. His survey concluded
that U.S. Healthcare members purchased twenty to twenty-
five percent of the prescriptions at the surveyed
pharmacies. Defendants argue that this market share is
insufficient as a matter of law to serve as the basis for a
finding of a per se violation. We agree.14 The highest
(Text continued on page 36)
_________________________________________________________________
14. Defendants also argue that the district court abused its discretion in
admitting the survey. We also agree with this contention; however, since
34
we conclude that even if the survey were admitted, it would not help
BCI, we address the methodological errors that should have barred its
admission only briefly.
Survey results offered as proof of the matter asserted are hearsay, and
thus the results of a survey, and any testimony based on those results,
cannot be admitted into evidence unless the survey falls into a
recognized class exception to the hearsay rule or into the residual
exception contained in Fed. R. Evid. 803(24). See Pittsburgh Press Club
v. United States, 579 F.2d 751, 755-58 (3d Cir. 1978). In this case none
of the class exceptions are present, so we examine whether the survey
contains the "circumstantial guarantees of trustworthiness" required for
admissibility under Rule 803(24).
In Pittsburgh Press, we stated that "the circumstantial guarantees of
trustworthiness are for the most part satisfied if the poll is conducted
in
accordance with generally accepted survey principles." Id. at 758. We
then discussed several factors which must be examined in determining
whether a poll meets generally accepted survey principles
A proper universe must be examined and a representative sample
must be chosen; the persons conducting the survey must be
experts; the data must be properly gathered and accurately
reported. It is essential that the sample design, the
questionnaires
and the manner of interviewing meet the standards of objective
surveying and statistical techniques.
Id.
The proponent of the evidence has the burden of establishing these
elements of admissibility. See id. In this case, we find that this burden
was not met and that the methodology of the survey was so flawed that
the district court's decision to admit it was not consistent with the
exercise of sound discretion.
Knowlton's survey was designed to determine U.S. Healthcare's market
share in the region close to three of Gary's six pharmacy locations. To
determine market share, he had pharmacy students call six to eight to
pharmacies within varying distances of each of the three pharmacies
(resulting in a total universe of twenty pharmacies). The pharmacists at
these pharmacies were then asked to name the HMO with which they
did the majority of their business, and to report the percentage of their
prescription business for which that HMO was responsible.
This methodology is flawed in several respects. We identify two
particularly significant errors. First, the survey questions used were not
objective. For example, pharmacists were asked:
35
estimate of U.S. Healthcare's market share resulting from
Knowlton's survey -- which, in addition to the
methodological errors set out in note 14, used the improper
geographic market discussed at pp. 32-33, supra -- was
twenty five percent. Even were we to accept this percentage
as accurate, it is insufficient in itself to impose per se
antitrust liability. See Jefferson Parish, 466 U.S. at 27
(defendant hospital's 30 percent share of market showed
that it lacked the "kind of dominant market position that
obviates the need for further inquiry into competitive
conditions."); see also Times-Picayune Pub. Co. v. United
States, 345 U.S. 594, 612-13 (1953) (defendants share of
33-40 percent of advertising market insufficient to invoke
per se rule). In fact, since Jefferson Parish no court has
inferred substantial market power from a market share
_________________________________________________________________
You provide services for people with prescription cards, like PCS
and
Paid, et cetera. You also provide services for people on specific
HMO
plans like Keystone, U.S. Healthcare, et cetera. What's the name
of
the HMO with which you did the most prescription business . . .?
This question improperly slants the response by highlighting respondent
to U.S. Healthcare's market presence. People responding to a survey tend
to react to the framing of a question. See, e.g. J.R. Eiser, Social
Psychology 219-20 (1986). In addition, this question specifically excluded
large institutional, non-HMO purchasers of prescription drugs such as
PCS and PAID. As a result, it narrowed the product market from
"purchasers of prescription drugs" to "HMO purchasers of prescription
drugs".
Second, while Knowlton surveyed 20 pharmacies, he only used the
data obtained from 14 of those pharmacies in tabulating his results.
This decision resulted from the fact that only fourteen of the twenty
pharmacies surveyed named U.S. Healthcare as their largest HMO
customer. Knowlton simply ignored the other six pharmacies whose data
presumably stated a lower estimate of U.S. Healthcare's market share.
This type of selective analysis violates the requirement that, in order
for
survey results to be admissible, the "data must be properly gathered and
accurately reported".
We conclude that the cumulative effect of these, and other,
methodological errors render it impossible to say that this survey was
"conducted in accordance with generally accepted survey principles," and
thus it should not have been admitted.
36
below 30 percent. See, e.g. Town Sound, 959 F.2d at 481
(affirming summary judgment for defendant with control of
10-12% of tying product market); Marts v. Xerox, 77 F.3d
1109, 1113 n.6 (8th Cir. 1996) (18% share of one portion
of photocopier market too small for unlawful tying);
Continental Trend Resources, Inc. v. OXY USA, Inc., 44 F.3d
1465, 1482 (10th Cir. 1995) (affirming grant of summary
judgment for defendants where defendants controlled less
than 10% of relevant market, since "plaintiffs failed to
establish defendants had sufficient strength in the relevant
market."), vacated on other grounds and remanded, 116
S. Ct. 1843 (1996); Breaux Bros. Farms, Inc. v. Teche Sugar
Co., Inc, 21 F.3d 83, 87-88 (5th Cir. 1994) (17.5 percent
share of relevant market for tying product "is not normally
sufficient to satisfy the requirements of the per se rule.").
Because U.S. Healthcare's true market share in a
properly defined geographic area could be no higher than
25 percent, plaintiff's cannot rely solely on market share to
establish a per se antitrust violation.15
b. Other Factors Bearing on Market Power
Factors other than market share can establish that
U.S. Healthcare exercised appreciable power in the market
for pharmaceutical customers. See Allen-Myland, 33 F.3d at
209. BCI contends that in this case market power can be
inferred from the numerosity of the ties imposed by the
defendants, and by "market realities" which indicate that
the figures for prescription drug sales understate the
importance of U.S. Healthcare members to a pharmacy's
bottom line.
In order to demonstrate tying market power through
evidence of the widespread acceptance of a tie, the plaintiff
must show that the tie was accepted by an appreciable
number of buyers within that market, and that there is an
_________________________________________________________________
15. We note that evidence produced at trial showed that 16% of the
residents of the greater Philadelphia area belong to a U.S. Healthcare
plan. We assume, therefore, that U.S. Healthcare's market share in the
relevant geographic market lies somewhere between 16%, its share in an
impermissibly broad geographic market, and 25%, its share in an
impermissibly narrow one.
37
"absence of other explanations for the[ir] willingness . . . to
purchase the package." See Fortner II, 429 U.S. 610, 618
n.10 (1977); see also Grappone, Inc v. Subaru of New
England, Inc., 858 F.2d 792, 797-98 (1st Cir. 1988)
(widespread acceptance of tie not evidence of market power
where there are plausible business reasons for accepting
tie). In this case, BCI has failed to meet its burden.
At trial, the only evidence offered by BCI concerning other
ties by defendants was that, with respect to six large chains
-- Rite-Aid, Shop-Rite, Food Circus, Walmart, Phar-mor
and Weis Markets -- defendants attempted to tie approval
of additional pharmacies for participation in the
U.S. Healthcare network to each chain agreeing to offer
CHA and/or U.S. Healthcare to its employees. Of these
purported tying attempts, only three -- those involving Rite-
Aid, Phar-Mor and Weis Markets -- were deemed
"successful" by the plaintiff. However, as we have already
observed, BCI failed to demonstrate that these large
companies did not base their decision to make
U.S. Healthcare a part of their benefits package on
plausible business reasons, see supra pp. 20-21. Without
some such showing, the evidence of other tie-ins is
insufficient to constitute proof of appreciable market power.16
BCI also argues that market power can be inferred from
the fact that exclusion from the U.S. Healthcare pharmacy
network would have a major adverse impact on a
pharmacy, to the point of threatening that pharmacy's
survival. BCI submits that since the prescription drug
business is a low-margin business that depends on high
volume, large purchasers such as U.S. Healthcare exert
considerable market power. As an example of this market
power, BCI again directs us to the evidence that
U.S. Healthcare was able to lower its payment schedule to
_________________________________________________________________
16. We further note that while it is apparent that Rite-Aid, Phar-Mor and
Weis Markets are large chains, pharmacies are only a part of their
business and BCI has offered no specific evidence that the number of
pharmacies affected by the alleged tie-ins constituted "an appreciable
number of buyers within the market."
38
pharmacies without loss of pharmacy participation in its
network.17
This argument has two flaws. In the first instance, it
proves too much. The evidence at trial showed that Gary's
was a member of forty or more networks that provided
access to pharmaceutical customers. There is no evidence,
and no reason to believe, that the customers that
U.S. Healthcare delivers are any more desirable than those
delivered by other networks. Thus, if we accept the logic of
BCI's argument, each of these networks exercises sufficient
market power to violate the per se rule of antitrust liability.
Yet, it would pervert the antitrust notion of market power
to find that each of over forty organizations, delivering the
same product, has sufficient market power over a
pharmacy such as Gary's to generate a per se violation of
the antitrust laws.
BCI's argument also runs counter to the purpose of the
antitrust laws. "The purpose of the Sherman Act ``is not to
protect businesses from the working of the market; it is to
protect the public from the failure of the market.' " Queen
City Pizza, 124 F.3d at 441 (quoting Spectrum Sports, Inc.
v. McQuillan, 506 U.S. 447, 458 (1993)); see also Town
Sound, 959 F.2d at 494 (it is "no concern of the antitrust
laws" that a practice may consign even an entire "class of
competitors . . . to competitive oblivion," unless "consumers
[a]re also hurt because of diminished competition."); United
States v. Syufy Enterprises, 903 F.2d 659, 668 (9th Cir.
1990) ("[i]t can't be said often enough that the antitrust
laws protect competition, not competitors."). If we were to
accept BCI's argument that a showing of appreciable
market power can be based solely on a pharmacy's "need"
for customers, we would in effect outlaw the agglomeration
of pharmacy customers -- a result that provides benefits to
individual consumers -- in order to protect pharmacies.
This result would stand antitrust jurisprudence on its
head, and establish a precedent whereby the antitrust laws
would protect competitors rather than competition and
consumers.
_________________________________________________________________
17. See supra p. 21.
39
C. The Rule of Reason Claim
The jury also found that defendants were liable under the
rule of reason standard for antitrust violations. Unlike a per
se case where a showing that the defendant had market
power in the tying market leads to a presumption that it is
using that power to expand into the tied market, to succeed
on a rule of reason claim the plaintiff must prove that the
alleged tie "unreasonably restrained competition." Jefferson
Parish, 466 U.S. at 29; see also Town Sound, 959 F.2d at
495 (in order to support a rule of reason claim, plaintiff
must prove that the tie in question caused an "injury to
competition"). This burden "necessarily involves an inquiry
into the actual effect of the [challenged conduct] on
competition [in the tied market]." 466 U.S. at 29.18
_________________________________________________________________
18. BCI contends that by failing to specifically challenge the sufficiency
of the evidence of anti-competitive effects in the tied market in their
pre-
verdict motions for judgment as a matter of law made pursuant to Fed.
R. Civ. P. 50(a), defendants waived their right to raise that specific
argument in their post-trial Rule 50 motions, or thereafter. In their pre-
trial motions, made both at the conclusion of plaintiff's case and at the
conclusion of all evidence, the defendants' challenge to the sufficiency
of
the evidence on the rule of reason claim read:
The evidence is insufficient to support a finding or sustain a
verdict
that U.S. Healthcare's practices constituted an unreasonable
restraint of trade in light of all the circumstances of the case.
Plaintiff has offered no such evidence.
Under Rule 50(a), a pre-verdict motion for judgment as a matter of law
"shall specify the judgment sought and the law and the facts on which
the moving party is entitled to the judgment." Further, a post-trial
motion for judgment as a matter of law made pursuant to Rule 50(b)
"must be preceded by a Rule 50(a) motion sufficiently specific to afford
the party against whom the motion is directed with an opportunity to
cure possible defects in proof which otherwise might make its case
legally insufficient." Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153,
1173 (3d Cir. 1993) (quoting Acosta v. Honda Motor Co., 717 F.2d 828,
831-32 (3d Cir. 1983)); see also Fineman v. Armstrong World Indus., Inc.,
980 F.2d 171, 183-84 (3d Cir. 1992) (compliance with Rule 50(a)
"ensures that the party bearing the burden of proof will have an
opportunity to buttress its case before it goes to the jury and the moving
party will not gain unfair advantage through surprise.").
While the text of the Rule 50(a) motion quoted above is far from a
model of completeness or clarity, we do not measure its sufficiency by
40
Before we can determine whether there was harm to
competition in the tied market, that market must be
defined. BCI had the burden of defining the tied market,
but made no attempt to do so at trial. On appeal, BCI
contends that the tied market consists of the market for the
provision of health insurance and benefits -- a market that
includes HMOs and personal choice plans in addition to
TPAs. We find no support for this broad market definition.
Instead, we believe, on the basis of the record, that the
proper tied market consists solely of the market for TPA
services. BCI is a TPA provider and the harm alleged to
have occurred as result of the tying arrangement took place
in the market for TPA services.
In that market, the only evidence of harm to competition
was that BCI failed to renew one contract, its contract with
Gary's. That showing is insufficient as a matter of law since
it fails to show competitive harm to the tied market as a
whole. See Town Sound, 959 F.2d at 493 (requiring
foreclosure of a "substantial portion" of the tied market to
hurt competition.); see also Virtual Maintenance, Inc. v.
Prime Computer, Inc., 957 F.2d 1318, 1330 (6th Cir.) ("[t]he
foreclosure of 400 computer systems out of the thousands
of systems [in the tied market] is insignificant as a matter
of law"), vacated, 506 U.S. 910 (1992), reinstated in
pertinent part, 11 F.3d 660, 663-64 (6th Cir. 1993).
Moreover, even if we accepted the broad market which
BCI proposed, it still failed to provide sufficient evidence of
competitive harm. The only evidence offered to show that
competition was adversely affected in this broad market
_________________________________________________________________
the text alone, but against the background, as reflected in the record, of
what the party now claiming waiver understood as to the tenor of the
Rule 50 movant's position and theory. See Acosta, 717 F.2d at 832
("[T]he communicative content, ``specificity' and notice giving function of
an assertion [in a rule 50(a) motion] should be judged in context.") In
Fineman, for example, we held that a general motion for a directed
verdict contesting the sufficiency of the evidence with respect to
"coercion" preserved defendant's challenge to the sufficiency of the
evidence with respect to the tortious interference claim, because
"plaintiffs' counsel was clearly on notice of the legal rubric under which
[defendants] planned to proceed." 980 F.2d at 184. We think that is the
case here, and hence find no waiver.
41
consisted of the previously mentioned studies of several
large pharmacy chains which faced pressure to offer their
employees membership in the U.S. Healthcare HMO. These
studies do not provide any evidence of market foreclosure
or harm to competition since those pharmacies that were
"forced" to offer their employees U.S. Healthcare coverage
did so in addition to, rather than instead of, other health
insurance plans. Further, even if this evidence did show
harm to competition, BCI has introduced no evidence in
which to evaluate the extent to which such foreclosure
harmed competition in the broad market for health
insurance services generally.
D. Conclusion
Since the record before us does not support a finding
that U.S. Healthcare exercised appreciable market power in
a properly defined tying market or that the arrangement at
issue harmed competition in the tied market, the antitrust
jury verdicts on both the per se and the rule of reason
claims must be set aside.19
IV. CIVIL RICO
A. Introduction
The jury found that U.S. Healthcare's business practices
constituted a pattern of racketeering activity in violation of
18 U.S.C. SS 1962(c) and (d). Section 1962(c) prohibits any
person employed by or associated with an enterprise from
conducting or participating in the conduct of that
enterprise's affairs through a pattern of racketeering
activity. A pattern of racketeering activity "requires at least
two acts of racketeering activity", 18 U.S.C.S 1961(5).
Racketeering activity is defined as an act or threat
chargeable as one of a variety of state felonies or any act
which is "indictable" under specifically listed federal
criminal statutes, see 18 U.S.C. S 1961(A)-(B). Section
1962(d) outlaws any conspiracy to violate the other
_________________________________________________________________
19. Since we find that the jury verdict must be set aside, we need not
address defendants challenge to the rule of reason jury instructions.
42
subsections of S 1962, including, as is relevant to this case,
S 1962(c).
U.S. Healthcare challenges the jury verdict on two
primary grounds, asserting that (1) BCI failed to establish
its standing to recover for any offenses allegedly committed
against Gary's; and (2) BCI failed to present a su stainable
case that the defendants committed any of the alleged
predicate acts. We address each argument in turn.
B. RICO Standing
The section of RICO allowing private parties such as BCI
to pursue a civil action provides that:
[a]ny person injured in his business by reason of a
violation of section 1962 of this chapter may sue
therefor in any appropriate United States district court
and shall recover threefold the damages he sustains
and the cost of the suit, including a reasonable
attorney's fee.
18 U.S.C. S 1964(c)
The Supreme Court examined the standing requirement
of this statutory provision in Holmes v. Securities Investor
Protection Corp., 503 U.S. 258 (1992). The Court noted that
Congress modeled S 1964(c) on the Clayton Act, and found
that a plaintiff's right to sue under RICO, as under the
federal antitrust laws, requires a showing that the alleged
violation was the proximate cause of the plaintiff's injury.
See id. at 267-68. The Court looked to the common law for
guidance in defining the proximate cause requirement. In
so doing, it focused primarily on one element of proximate
cause: the directness of the relationship "between the
injury asserted and the injurious conduct alleged." Id. at
268. This requirement of a direct relation was held to
generally preclude recovery by "a plaintiff who complained
of harm flowing merely from the misfortunes visited upon a
third person by the defendant's acts." Id. at 268-69.
On the facts presented in Holmes, the Court held that the
plaintiff, Securities and Investor Protection Corporation
("SIPC"), had not met the proximate cause requirement and
thus had no standing to bring suit under RICO . SIPC is a
43
private nonprofit corporation, created pursuant to the
Securities Investors Act, which most broker-dealers are
required by law to join and which has a statutory duty to
advance funds to reimburse the customers of member
broker-dealers that are unable to meet their obligations.
See id. at 261. SIPC brought a civil RICO action alleging
that Holmes, and other former members of a brokerage
firm, conspired in a stock manipulation scheme that
prevented two broker-dealers from meeting their
obligations, thereby requiring SIPC to advance nearly $13
million to cover claims by the customers of the affected
broker-dealers. SIPC sought standing under S 1964(c) by
arguing, inter alia, that it was subrogated to the rights of
those customers of the broker-dealers who did not
purchase the manipulated securities but incurred loses
when the broker-dealers failed and could no longer meet
their obligations. See id. at 270.
The Court assumed, for the sake of argument, that SIPC
was entitled to stand in the shoes of the non-purchasing
customers, but held that the defendants' conduct was not
the proximate cause of those customers' injuries. The Court
held that "the link is too remote between the stock
manipulation alleged and the customers' harm, being
purely contingent on the harm suffered by the broker
dealers . . . [t]he broker-dealers simply cannot pay their
bills, and only that intervening insolvency connects the
conspirators' acts to the losses suffered by the non-
purchasing customers and general creditors." Id. at 271.
Defendants' argue that, under Holmes, BCI lacks
standing in this case. They assert that since BCI is alleging
that Gary's has been a victim of the RICO predicate acts,
BCI exemplifies the "plaintiff who complain[s] of harm
flowing merely from the misfortunes visited upon a third
person." Id. at 268. We disagree. The injury proved by BCI,
the loss of its TPA contract with Gary's, is not derivative of
any losses suffered by Gary's. Unlike the injuries suffered
by the non-purchasing customers in Holmes, BCI's injury
was not contingent upon any injury to Gary's, nor is it
more appropriately attributable to an intervening cause
that was not a predicate act under RICO. Here, BCI's TPA
relationship with Gary's was a direct target of the alleged
44
scheme -- indeed, interference with that relationship may
well be deemed the linchpin of the scheme's success.
Accordingly, we conclude that BCI had standing to pursue
its civil RICO claim.20
C. Predicate Acts of BCI's RICO Claim
In its special verdict form, the jury found that each
defendant had committed one or more types of the
predicate acts of: (1) extortion under the Hobbs Act, 18
U.S.C. S 1951; (2) violation of Pennsylvania's commercial
bribery statute, 18 Pa. Cons. Stat. S 4108(b); (3) mail fraud,
18 U.S.C. S 1341; (4) wire fraud, 18 U.S.C. S 1343; and
(5) violation of the Travel Act, 18 U.S.C. S 1952. Defendants
challenge the verdict on the ground that BCI has failed to
prove that defendants' conduct violated any of these laws.
Defendants contend that this failure to prove any predicate
acts, and a fortiori to show a pattern of racketeering
activity, entitles them to judgment as a matter of law on the
RICO claims. In their submission, the conduct underlying
each of the alleged predicate acts was at its bottom no more
than aggressive business bargaining and, just as BCI
cannot convert aggressive business tactics into antitrust
violations, it cannot shoehorn such tactics into the
definitions of the predicate acts at issue here. We shall
devote the bulk of our time to the important and difficult
issue of whether the defendants' conduct amounted to
Hobbs Act extortion. The others alleged predicate acts are
disposed of easily .
1. Extortion under the Hobbs Act
The Hobbs Act imposes criminal penalties on "[w]hoever
in any way or degree obstructs, delays, or affects commerce
or the movement of any article or commodity in commerce,
by robbery or extortion or attempts or conspires to do so."
_________________________________________________________________
20. We note, however, that BCI's RICO standing is limited to injuries
arising from its competition with U.S. Healthcare for Gary's TPA
business. BCI does not have RICO standing to recover for any injuries
suffered by other pharmacies as a result of their relations with
U.S. Healthcare since there is no evidence that these relations directly
injured BCI.
45
18 U.S.C. S 1951. "Extortion" is defined in the Act as "the
obtaining of property from another, with his consent,
induced by wrongful use of actual or threatened force,
violence, or fear, or under color of official right." 18 U.S.C.
S 1951(b)(2). The term "fear" includes the fear of economic
loss. See United States v. Addonizio, 451 F.2d 49, 72 (3d
Cir. 1972); United States v. Capo, 817 F.2d 947, 951 (2d
Cir. 1987) (in banc).
BCI alleges that the defendants extorted Gary's health
benefits business by conditioning access to the
U.S. Healthcare provider network on Gary's agreement to
switch to CHA as its TPA. According to BCI, this conduct
amounts to extortion through the wrongful use of the fear
of economic loss. Defendants respond that the use of
economic leverage in this manner cannot be made tofit
within the statutory framework of Hobbs Act extortion.
They reason that any fear of economic loss felt by Gary's
was the result of the give and take of bargaining between
U.S. Healthcare and Gary's in a business setting in which
both parties offered and received something of value. They
contend that the use of this economic fear to extract
concessions from Gary's was not wrongful, as required by
the Hobbs Act, but is instead part and parcel of normal
business negotiations.
As will appear, we conclude that plaintiff's theory, which
is quite ingenious, does not state a viable claim of extortion
because the defendants' use of the fear of economic loss in
the context of hard business bargaining was not (legally)
wrongful. While this decision may seem compelled by
common sense, it is not easily derived from our precedent.
This Court has not had prior occasion to address the line
separating the legitimate use of economic fear to acquire
property in a business setting (i.e., hard bargaining) from
the wrongful use of such fear (i.e., extortion). Accordingly,
we turn for guidance to the decisions of those few courts
that have previously faced the issue. Because it looms so
large on the Hobbs Act landscape, we must first, however,
consider the Supreme Court's decision in United States v.
Enmons, 410 U.S. 396 (1973), which construes the
meaning of the term "wrongful" under the Act.
46