Cascade Health Solutions v. PeaceHealth , 515 F.3d 973 ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CASCADE HEALTH SOLUTIONS FKA 
MCKENZIE-WILLAMETTE HOSPITAL,
an Oregon nonprofit corporation,
Plaintiff-Appellant,
v.
PEACEHEALTH, a Washington State
nonprofit corporation,
Defendant-Appellee, No. 05-35627
and  D.C. No.
PACIFICSOURCE HEALTH PLANS, CV-02-06032-ALH
Defendant,
REGENCE BLUECROSS
BLUESHIELD OF OREGON;
PROVIDENCE HEALTH PLAN;
MCKENZIE-WILLAMETTE REGIONAL
MEDICAL CENTER ASSOCIATES, LLC,
Defendant-Intervenors.

1529
1530 CASCADE HEALTH v. PEACEHEALTH
MCKENZIE-WILLAMETTE HOSPITAL, 
Plaintiff-Appellee,
v.
PEACEHEALTH, a Washington State
nonprofit corporation,
Defendant-Appellant,
and No. 05-35640
PACIFICSOURCE HEALTH PLANS,  D.C. No.
Defendant, CV-02-06032-HA
REGENCE BLUECROSS
BLUESHIELD OF OREGON;
PROVIDENCE HEALTH PLAN;
MCKENZIE-WILLAMETTE REGIONAL
MEDICAL CENTER ASSOCIATES, LLC,
Defendant-Intervenors.

MCKENZIE-WILLAMETTE HOSPITAL, 
Plaintiff-Appellee,
No. 05-36153
v.
 D.C. No.
PEACEHEALTH, a Washington State CV-02-06032-HA
nonprofit corporation,
Defendant-Appellant.

CASCADE HEALTH v. PEACEHEALTH 1531
MCKENZIE-WILLAMETTE HOSPITAL,  No. 05-36202
an Oregon nonprofit corporation, D.C. No.
Plaintiff-Appellant, CV-02-06032-HA
v.
PEACEHEALTH,  ORDER
CERTIFYING
Defendant-Appellee. QUESTION TO
THE SUPREME
COURT OF
 OREGON
Filed February 1, 2008
Before: Ronald M. Gould, Richard A. Paez, and
Johnnie B. Rawlinson, Circuit Judges.
ORDER
GOULD, Circuit Judge:
McKenzie-Willamette Hospital (“McKenzie”) filed a com-
plaint in the district court against PeaceHealth asserting seven
claims for relief, two of which arose under Oregon state law
for price discrimination and intentional interference with pro-
spective economic advantage.1 The jury found in McKenzie’s
favor on both of the Oregon state law claims, and Peace-
Health appealed. Since the jury’s verdict, an intervening U.S.
Supreme Court ruling, Brooke Group Ltd. v. Brown & Wil-
liamson Tobacco Corp., 509 U.S. 209 (1993), has injected
uncertainty into the status of Oregon’s price discrimination
1
The remaining five claims arose under the federal antitrust laws for:
monopolization, attempted monopolization, conspiracy to monopolize,
tying, and exclusive dealing.
1532 CASCADE HEALTH v. PEACEHEALTH
doctrine. Because McKenzie’s price discrimination claim
raises an important, dispositive issue of Oregon law, we
respectfully certify a question for review by the Supreme
Court of Oregon, pursuant to Or. Rev. Stat. § 28.200, namely
whether Oregon price discrimination law follows the require-
ments as the U.S. Supreme Court delineated in Brooke Group.
We offer the following statement of relevant facts and expla-
nation of the “nature of the controversy in which the ques-
tion[ ] arose.” Or. Rev. Stat. § 28.210(2) (2005).
Background
McKenzie and PeaceHealth are the only two providers of
hospital care in Lane County, Oregon. The jury found, and the
parties do not dispute on appeal, that the relevant market in
this case is the market for primary and secondary acute care
hospital services in Lane County. Primary and secondary
acute care hospital services are common medical services like
setting a broken bone and performing a tonsillectomy. Some
hospitals also provide what the parties call “tertiary care,”
which includes more complex services like invasive cardio-
vascular surgery and intensive neonatal care.
In Lane County, PeaceHealth operates three hospitals while
McKenzie operates one. McKenzie’s sole endeavor is
McKenzie-Willamette Hospital, a 114-bed hospital that offers
primary and secondary acute care in Springfield, Oregon.
McKenzie does not provide tertiary care. In the time period
leading up to and including this litigation, McKenzie had been
suffering financial losses, and, as a result, merged with Triad
Hospitals, Inc.2 so that it could add tertiary services to its
menu of care.
The largest of PeaceHealth’s three facilities is Sacred Heart
2
As a result of the merger, McKenzie’s name changed to Cascade
Health Solutions. For the purposes of this order, we, like the parties, con-
tinue to refer to Cascade Health Solutions as McKenzie.
CASCADE HEALTH v. PEACEHEALTH 1533
Hospital, a 432-bed operation that offers primary, secondary,
and tertiary care in Eugene, Oregon. PeaceHealth also oper-
ates Peace Harbor Hospital, a 21-bed hospital in Florence,
Oregon and Cottage Grove Hospital, an 11-bed hospital in
Cottage Grove, Oregon. In Lane County, PeaceHealth has a
90% market share of tertiary neonatal services, a 93% market
share of tertiary cardiovascular services, and a roughly 75%
market share of primary and secondary care services.
An appreciation of the relationship between hospitals and
insurers is necessary to understand the price discrimination
issues in this case. In the transaction between a hospital that
sells care services and an insurer that buys care services, the
price agreed upon is often referred to as a “reimbursement
rate.” For example, in a hospital-insurer contract, the agreed
upon price might be “a 90% reimbursement rate.” A 90%
reimbursement rate price means that, when the insurer must
purchase services from the hospital, the insurer gets a 10%
discount off the hospital’s regular price, also called the charge
master or list price. It follows that hospitals prefer high reim-
bursement rates and insurers prefer low reimbursement rates,
as each group pursues its own economic interest.
McKenzie asserts that PeaceHealth offered insurers dis-
counts of 35% to 40% on tertiary services if the insurers made
PeaceHealth their sole preferred provider for all services—
primary, secondary, and tertiary. In 2001, for example, Peace-
Health was the only preferred provider of hospital care under
the preferred provider plan (“PPP”) of Regence BlueCross
BlueShield of Oregon (“Regence”).3 At that time, Regence
was paying PeaceHealth a 76% reimbursement rate for all of
PeaceHealth’s medical services, including primary, second-
ary, and tertiary services. Around that time, pursuant to Mc-
3
In a preferred provider plan, health care providers contract with an
insurer to provide health care to the insurer’s customers. The insurer’s cus-
tomers pay much higher prices if they obtain services from providers other
than those with whom their insurer has contracted.
1534 CASCADE HEALTH v. PEACEHEALTH
Kenzie’s request, Regence considered adding McKenzie to
the PPP as a preferred provider of primary and secondary ser-
vices. When Regence’s contract with PeaceHealth came up
for its annual renewal, Regence solicited two proposals from
PeaceHealth. Under one proposal, PeaceHealth would remain
the only preferred provider. Under the other proposal, Mc-
Kenzie would be added as a preferred provider. PeaceHealth
offered an 85% reimbursement rate for all services if it
remained Regence’s sole preferred provider of primary, sec-
ondary, and tertiary services, and a 90% reimbursement rate
if McKenzie was added as a preferred provider of primary and
secondary services. Regence thereafter declined to include
McKenzie as a preferred provider.
That same year, McKenzie sought and received admission
as a preferred provider of primary and secondary services
under the preferred plan offered by Providence Health Plan
(“Providence”). Until then, PeaceHealth was the only pre-
ferred provider of primary, secondary, and tertiary services in
the Providence preferred plan. Upon McKenzie’s admission
as a preferred provider, PeaceHealth increased its reimburse-
ment rate with Providence from 90% to 93%. The evidence
showed that insurers who made PeaceHealth their exclusive
preferred provider across all services, thus purchasing from
PeaceHealth a full complement of primary, secondary, and
tertiary services, paid lower reimbursement rates than insurers
who purchased tertiary services from PeaceHealth, but at least
some primary and secondary services from McKenzie.
Based on these incidents, McKenzie brought, among other
antitrust law claims, a claim of primary-line price discrimina-
tion4 under Oregon state law. McKenzie’s theory was that
4
Price discrimination claims can take three forms: primary line, second-
ary line, or tertiary line. Primary-line price discrimination includes con-
duct, like predatory pricing, that injures the direct competitors of the
discriminating seller. See Volvo Trucks N. Am., Inc. v. Reeder-Simco
GMC, Inc., 126 S. Ct. 860, 870 (2006).
CASCADE HEALTH v. PEACEHEALTH 1535
PeaceHealth discriminated in price as between Regence and
Providence. Specifically, PeaceHealth, who was the exclusive
preferred provider in Regence’s PPP, charged Regence an
85% reimbursement rate while PeaceHealth charged Provi-
dence, an insurer with whom PeaceHealth had no exclusive
arrangement, a 93% reimbursement rate. McKenzie alleged
that PeaceHealth’s price discrimination injured McKenzie
because its pricing scheme was the cause of McKenzie’s
inability to obtain preferred status with Regence.
To decide whether McKenzie established a claim of
primary-line price discrimination under Oregon law, the dis-
trict court instructed the jury as follows:
[I]n order for the plaintiff to establish a violation of
the price discrimination statute, it has the burden of
proving each and every one of the following ele-
ments by a preponderance of the evidence: (1) That
there were contemporaneous sales by a defendant to
other insurers in the relevant market; (2) that defen-
dant has discriminated in price between insurers in
the contemporaneous sale of hospital services; and
(3) that the effect of defendant’s price discrimination
was to substantially lessen competition or create a
monopoly in the sale of hospital services in the rele-
vant market, or to injure, destroy or prevent competi-
tion between plaintiff and defendant.
The district court derived its instruction from Oregon’s price
discrimination law as stated in the Oregon Supreme Court’s
1978 decision in Redmond Ready-Mix, Inc. v. Coats, 582 P.2d
1340 (Or. 1978). However, in light of what the Oregon
Supreme Court has previously said, an intervening United
States Supreme Court opinion, Brooke Group Ltd. v. Brown
& Williamson Tobacco Corp., 509 U.S. 209 (1993), calls into
question the validity of both Redmond Ready-Mix and the jury
instruction relying on it.
1536 CASCADE HEALTH v. PEACEHEALTH
After the United States Supreme Court clarified the federal
price discrimination law in Brooke Group, no Oregon court
has published an opinion interpreting section 646.040, leaving
Oregon price discrimination law to this degree currently
unsettled, as we see it. Because resolution of McKenzie’s
price discrimination claim rests on a question of state law, we
must decide how the Oregon Supreme Court would decide the
issue before us. See, e.g., Burlington Ins. Co. v. Oceanic
Design & Constr., Inc., 383 F.3d 940, 944 (9th Cir. 2004).
However, here, after and in light of Brooke Group, it is
unclear to us how the Oregon Supreme Court would decide
the primary-line price discrimination issue at play.
On the one hand, the Oregon Supreme Court might con-
tinue to follow its precedent in Redmond Ready-Mix. In Red-
mond Ready-Mix, the plaintiff brought a primary-line price
discrimination suit under section 646.040 against the husband
and wife who were the plaintiff’s competitor in the market to
sell retail pre-mixed concrete. 582 P.2d at 1342. The plaintiff
asserted that the defendants sold concrete for a lower price in
the geographic areas in which the plaintiff competed with the
defendants than in the geographic areas in which the plaintiff
did not compete. See id. at 1342-45. The trial court found that
the defendants did not violate section 646.040. See id. at
1342. The trial court reasoned that although the defendants
sold concrete at lower prices in the competitive geographic
area than in other areas, the plaintiff did not establish that the
lower prices lessened competition as required by the section
646.040 because the “defendants were not selling below their
average cost.” Id. The Oregon Supreme Court affirmed.
Id. at 1352.
In accordance with the prevailing federal case law at the
time, the Oregon Supreme Court noted that a claim of
primary-line price discrimination could be sustained upon a
showing that the defendant price discriminated with a “preda-
tory intent.” See id. at 1348. The Oregon Supreme Court
CASCADE HEALTH v. PEACEHEALTH 1537
pointed out that predatory intent could be implied from
below-cost selling. Id. at 1350. It held, however, that there
was no evidence the defendants priced below cost. See id. It
then held that, alternatively, the plaintiffs could establish a
claim of primary-line price discrimination by showing that the
defendants’ price discrimination resulted in a substantial
impairment of competition. Id. The court considered several
factors to determine whether the defendants’ price discrimina-
tion impaired competition. See id. These factors included: (a)
monopoly or overpowering position of the seller in the mar-
ket; (b) aggressive objectives towards the seller’s smaller
rivals; (c) deep, sustained undercutting of rivals’ prices; (d)
persistent sales below the seller’s cost; and (e) actual or
impending demise of a seller’s sole rival in a market. Id. In
conclusion, and in view of these factors, the Oregon Supreme
Court held that the evidence did not demonstrate any impair-
ment of competition and affirmed the judgment of the trial
court. See id. at 1352.
If the Oregon Supreme Court would still follow Redmond
Ready-Mix, then the trial court’s jury instruction is valid.
Under Redmond Ready-Mix, unlike under Brooke Group, dis-
cussed below, a plaintiff can establish a claim of primary-line
price discrimination by showing either predatory intent, e.g.,
by showing “below cost” sales, id. at 1350, or a substantial
impact on competition, shown by demonstrating some of the
above-mentioned five indicia key to confirming the existence
of competitive impairment, id.
On the other hand, in the light of its prior pronouncements,
we think it likely that the Oregon Supreme Court will decide
to follow Brooke Group, or at least that is a significant possi-
bility raising question in our mind whether we can properly
affirm a judgment of the district court that was based on the
Redmond Ready-Mix view of the required elements of price
discrimination under Oregon law. While Oregon is entirely
free to chart a state law antitrust course that is independent
from the federal doctrine, we cannot wholly ignore the likeli-
1538 CASCADE HEALTH v. PEACEHEALTH
hood that the Oregon Supreme Court now would follow fed-
eral price discrimination law as set forth in Brooke Group.
For one thing, the Oregon price discrimination statute,5 Or.
Rev. Stat. § 646.040, is nearly identical to and indeed is mod-
eled on the federal price discrimination provisions in § 2 of
the Robinson-Patman Act,6 15 U.S.C. § 13. Second, and more
importantly, the Oregon Supreme Court has previously and
explicitly declared that federal price discrimination law would
5
The Oregon statute provides:
It is unlawful for any person engaged in commerce or food com-
merce, or both, in the course of such commerce, either directly
or indirectly, to discriminate in price between different purchas-
ers of commodities, or services or output of a service trade, of
like grade and quality or to discriminate in price between differ-
ent sections, communities or cities or portions thereof or between
different locations in sections, communities, cities or portions
thereof in this state, where the effect of such discrimination may
be substantially to lessen competition or tend to create a monop-
oly in any line of commerce, or to injure, destroy or prevent com-
petition with any person who either grants or knowingly receives
the benefit of such discrimination, or with customers of either of
them.
Or. Rev. Stat. § 646.040(1).
6
The Robinson-Patman Act provides:
It shall be unlawful for any person engaged in commerce, in the
course of such commerce, either directly or indirectly, to discrim-
inate in price between different purchasers of commodities of like
grade and quality, where either or any of the purchases involved
in such discrimination are in commerce, where such commodities
are sold for use, consumption, or resale within the United States
or any Territory thereof or the District of Columbia or any insular
possession or other place under the jurisdiction of the United
States, and where the effect of such discrimination may be sub-
stantially to lessen competition or tend to create a monopoly in
any line of commerce, or to injure, destroy, or prevent competi-
tion with any person who either grants or knowingly receives the
benefit of such discrimination, or with customers of either of
them . . . .
15 U.S.C. § 13(a).
CASCADE HEALTH v. PEACEHEALTH 1539
guide the interpretation of Oregon price discrimination law in
section 646.040. Yamaha Store of Bend, Or., Inc. v. Yamaha
Motor Corp., 798 P.2d 656, 659 n.6 (Or. 1990), modified on
reconsideration on other grounds, 806 P.2d 123 (Or. 1991);
Redmond Ready-Mix, 582 P.2d at 1346. Also, the Oregon
Supreme Court stated in Redmond Ready-Mix that it was
reaching its decision at a time when “[m]uch of the ‘federal
law’ on [primary-line price discrimination was] in a recog-
nized state of confusion.” Redmond Ready-Mix, 582 P.2d at
1346.
Brooke Group has now dispelled that confusion in at least
one area—a plaintiff in a federal primary-line price discrimi-
nation case must prove that its rival priced below cost. Thus
Brooke Group’s clarification of federal price discrimination
law calls into question whether the Oregon Supreme Court
will continue to interpret Oregon price discrimination law as
outlined in Redmond Ready-Mix. The Oregon Supreme Court
might now decide to follow Brooke Group by analogy in
interpreting the parallel state price discrimination law,7 or
conversely, it might decide to adhere to its prior decision
without change. If the former is the case, then the district
court’s instruction on state law was error, but if the latter is
the case, then the jury instruction and the jury verdict on Ore-
gon price discrimination law should stand. Because we are
uncertain of how the Oregon Supreme Court will now view
this important question, we certify it to the Oregon Supreme
Court.
7
In Brooke Group, a primary-line price discrimination case brought
under the Robinson-Patman Act, the Supreme Court held that, in a single
product predatory pricing case, a plaintiff must prove (1) below-cost pric-
ing and (2) likelihood of recoupment regardless of “whether the claim
alleges predatory pricing under § 2 of the Sherman Act or primary-line
price discrimination under the Robinson-Patman Act.” Brooke Group Ltd.,
509 U.S. at 222.
1540 CASCADE HEALTH v. PEACEHEALTH
Question Certified
We respectfully certify the following dispositive question
of law to the Oregon Supreme Court:8
Under the Oregon price discrimination statute, Or. Rev.
Stat. § 646.040, is a plaintiff required to show (1) below-cost
pricing and (2) likelihood of recoupment? In other words,
does Oregon law now follow the elements of a primary-line
price discrimination claim as outlined in Brooke Group?
Conclusion
We respectfully request the Oregon Supreme Court to exer-
cise its discretionary authority to accept and decide this ques-
tion of law. We do not intend our framing of this question to
restrict the Oregon Supreme Court’s consideration of any
issues that it determines are relevant. We have previously
acknowledged both the Oregon Supreme Court’s ability to
“reformulate the relevant state law questions as it perceives
them to be in light of the contentions of the parties,” Lom-
bardo v. Warner, 391 F.3d 1008, 1010 (9th Cir. 2004) (en
banc) (citations omitted), and our obligation to abide by that
court’s determination of the state law questions presented, id.
If the Oregon Supreme Court resolves this question, we will
resolve the issue in our case precisely in accord with its
answer.
The Clerk of this Court is hereby ordered to transmit forth-
with to the Oregon Supreme Court, under official seal of the
United States Court of Appeals for the Ninth Circuit, a copy
of this order, signed by the presiding judge, and all relevant
briefs and excerpts of record pursuant to Or. Rev. Stat.
§ 28.215 (2005) and Or. R. App. Proc. 12.20(1)(b). Pursuant
8
Even though this course of action was not suggested by either party,
we may properly certify this question sua sponte. See Or. Rev. Stat.
§ 28.205 (2005).
CASCADE HEALTH v. PEACEHEALTH 1541
to Oregon Rule of Appellate Procedure 12.20(5)(c) the Clerk
of this Court shall transmit to the Oregon Supreme Court all
or any portion of the district court record in this case as that
Court deems necessary or appropriate.
Further proceedings in our court on the certified question
are stayed pending the Oregon Supreme Court’s decision
whether it will accept review, and if so, our receipt of the
answer to the certified question. The case is withdrawn from
submission, in pertinent part, until further order from this
Court. The panel will resume control and jurisdiction on the
certified question upon receiving an answer to the certified
question or upon the Oregon Supreme Court’s decision to
decline to answer the certified question. When the Oregon
Supreme Court decides whether or not to accept the certified
question, the parties shall file a joint report informing us of
the decision. If the Oregon Supreme Court accepts the certi-
fied question, the parties shall file a joint status report every
six months after the date of the acceptance, or more fre-
quently if circumstances warrant.
IT IS SO ORDERED.
_________________________________
RONALD M. GOULD
Circuit Judge, United States Court of Appeals
for the Ninth Circuit
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