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Antitrust UCL and Privacy

Alabama Federal Court Allows Antitrust Claims Against Blue Cross Blue Shield for Territorial Allocation, Price-Fixing and Boycott Violations to Proceed to Trial

Bryan Wang
Zelle LLP

On April 5, 2018, the U.S. District Court for the Northern District of Alabama granted partial summary judgment to healthcare provider and consumer plaintiffs in the Blue Cross Blue Shield Antitrust Litigation, ruling that agreements among the Blue Cross Blue Shield entities to allocate markets and limit competition should be reviewed as a per se violation of the Sherman Act.In re Blue Cross Blue Shield Antitrust Litig., MDL No. 2406, Case No. 2:13-CV-20000-RDP, 2018 WL 1640023 (N.D. Ala. Apr. 5, 2018).

Background

The lawsuit was filed by a number of small employers and healthcare providers against the Blue Cross Blue Shield Association (“BCBS”) and its licensee Blue Plans (collectively, the “Blues”) for allocating geographic markets for the sale of commercial health insurance and/or commercial healthcare financing services.Plaintiffs moved for summary judgment to find that the agreements between the Blues to allocate territories should be accorded per se treatment under the Sherman Act.Plaintiffs also moved for a finding that the BCBS’s rules that limit unbranded competition between the Blues should similarly be treated under a per se standard.

The BCBS organization consists of 36 independent Member Plans (“Plans”) that each sell health insurance.Id. at *4.The Plans are the governing members of BCBS, who may also amend or repeal the BCBS bylaws by vote.Id.The bylaws recognize that each Plan is autonomous in its operation, and is financially independent.Id.The CEOs of each Plan comprise the BCBS board, in addition to a BCBS CEO that the BCBS board elects annually by a majority vote.Id.BCBS grants each Plan the right to use the Blue Cross and Blue Shield trademarks (“Blue Marks”).Id. at *5.Each plan signs a license agreement with BCBS that identifies an exclusive “service area” (“ESA”) where a Plan may use the Blue Marks.Id.BCBS can modify or terminate the license agreements by a three-quarters vote from the Plans.Id.

In 1982, BCBS implemented a long-term business strategy that required consolidation so there would only be one Plan per state.Id.at *8.Then in 1992, BCBS developed the BlueCard Program (“BlueCard”) to require local Plans to provide discounts available locally to all BCBS members nationwide.Id.Under BlueCard, the Plan that the member belongs in will reimburse the local provider with the same rate as the local Plan.Id.In 1994, BCBS adopted the Local Best Efforts Rule which required that at least 80% of a Plan’s annual revenue to come from services under the Blue Mark.Id.BCBS expanded this in 2005 when it adopted the National Best Efforts rule which required a Plan to derive at least 66.6% of its national health insurance revenue from Blue brands.Id. at *9.In 1999, BCBS adopted a Blue Mark Uncoupling Rule that prevented a Plan from uncoupling the Plan’s name from the Blue Mark.Id.A Plan that chooses to use the Blue Mark may not uncouple it from its trade name in the future.Id.

Single Entity Defense Denied Because Genuine Issues of Material Fact Remained

The court began stating that Sherman Act Section 1 only applies to concerted activity among multiple economic actors.Id.at *15.It stated Section 1 does not apply to single entities because there is no concerted conduct between separate economic actors required for Section 1.Id.This raises the single entity defense that can defeat a Section 1 claim.Id.The single entity defense is not an absolute defense as the court found in American Needle, Inc. v. National Football League, 560 U.S. 183 (2010).The U.S. Supreme Court in Am. Needle held a single entity can still violate Section 1 when it is controlled by a group of competitors that join and use the single entity as a vehicle for concerted activity.The key consideration is whether the agreement joins together separate decisionmakers with separate economic interests.Id. at *16.Decisionmakers working together under the appearance of a single entity deprive the market of independent economic actors necessary for competition.Id.

The court noted that the Blue Marks play a central role in the business strategy employed by the Blues and recognized that when the Blues merged, they formed a single entity to license the Blue Marks.Id. at *15.However, this undisputed fact is not dispositive because competitors are still not allowed to make a horizontal agreement vertical by setting up a single licensing corporation.Id.The analysis focuses on the actual role of the actors rather than their labels.Id.The court found that plaintiffs had “presented sufficient evidence to create a genuine issue of material fact as to the validity and/or enforceability of the [Blue] Marks, and it is the licensing of these [Blue] Marks that constitutes the ‘function’ for which Defendants claim single entity status.”Id. at *16.The court further found that it was genuinely disputed whether the Blues were acting as a single entity with respect to enforcing the Blue Marks.Id. at *17.For these reasons, the court denied the parties’ respective motions for summary judgment on the single entity defense. Id.

Court Finds Per Se Rule Applies to the Blues’ Territorial Division and Limit on Unbranded Competition Horizontal Restraints

The court found that BCBS is comparable to a licensee-controlled entity, and thus the ESA should be treated as a horizontal rather than vertical allocation agreement.Id. at *18.In so ruling, the court relied on two controlling U.S. Supreme Court precedents, U.S. v. Sealy, Inc., 388 U.S. 350 (1967), and U.S. v. Topco Associates, Inc., 405 U.S. 596 (1972).

The U.S. Supreme Court in Sealy held that the licensor, Sealy, was an instrumentality of the licensees for purposes of horizontal market allocation.The Court found a horizontal restraint because the licensees agreed to not sell Sealy branded products outside their geographic area. The Court found that the licensee’s price fixing was proof that Sealy was an instrumentality and not a separate entity.In Topco, the Court also held that territorial restraints were horizontal allocations subject to per se condemnation.It found the per sestandard appropriate because the licensees owned almost all the licensor’s stock, and the licensor agreed not to allow other competitors into designated licensee areas.

Applying the antitrust principles from these decisions (id., at *15), the court found a horizontal restraint after comparing BCBS’s organization to the licensee-controlled entities in Sealy and Topco.Id. at *18.The BCBS bylaws demonstrated that the Plans controlled and funded BCBS.Id.It also described itself as an organization controlled by the Plans.Id.The BCBS board consists of CEOs from the licensee Plans.Id.The board controls the terms of the license agreement, which it could amend or add regulations to.Id.The BCBS long-term business strategy merged the Plans in a geographic area that extinguished prior vertical restraints.Id. at *19.Thus, the court concluded that the ESA allocations were a horizontal restraint between competitors rather than a vertical one of a licensor.Id.

The court continued to compare the market allocation licensing agreements to Sealy and Topco because the Plans agreed to only sell health insurance plans to a certain geographic region.Id.The Plans agreed not to sell plans and services with the Mark outside of their geographic service areas as part of the ESA license condition.Id. In addition to the ESA, the Plans instituted two more restraints by limiting output of non-branded health insurance in the licensee’s service area and nationwide.Id.These restraints of trade were found to be even more restrictive than those in Topco and Sealy because the licensees from those decisions could still sell non-branded products.Id.BCBS placed strict limits on each Plans option to sell non-branded health insurance plans inside and outside their service areas under the National Best Efforts rule.Id.

The court found that BCBS’s National Best Efforts rule was an output restriction on a Plan’s non-Mark branded business.Id. at *22.The National Best Efforts rule requires a Plan to derive at least 66.6% of its national health insurance revenue from products with the Blue Mark.Id.This would limit any health revenue a Plan could generate from non-branded services.Id.The court concluded that the National Best Efforts rule operated as an output restriction on a Plan’s unbranded business.Id.The court found the output restriction was not essential to the product because health insurance is generally provided to consumers without these restraints from other national providers.Id. at *23.BCBS itself offered health insurance without such restraints until 2005, when it implemented National Best Efforts. Id.The rule limited the extent that Plans could compete with non-Blue Mark brands, which restricted the Plans output.Id.The court held that this restriction constituted a per se violation of the Sherman Act.Id.

BCBS’s arguments to distinguish itself from Sealy and Topco did not persuade the court.Id. at *20.BCBS tried to compare its nationwide health insurance to the joint blanket license agreement created in Broadcast Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1 (1979).Id.BCBS argued that the ESA and other rules helped create a new health insurance product. Id.The court distinguished BMI from the present case because the court did not find that BCBS created a new product.Id.The court found that the plan to go to ESAs constituted a new marketing and sales strategy rather than a new product.It further found that the products before the 1980 market allocation to the present remained the same.Id.Because the product remained unchanged, market allocation was not necessary.Id.Thus, the court held BCBS could not rely on BMI’s unique product defense to avoid the per se standard of review.Id.

Court Finds Rule of Reason Applies to Anticompetitive Pricing and Boycott Claims Asserted Against the BlueCard Program

The court recognized that not all agreements between competitors are price fixing.Id. at *24.Pricing decisions made within a legitimate joint venture are not per se price-fixing violations.Id.A joint venture is considered a single firm if the parties who would normally be competitors pool their capital together and share risk of loss.Id.Joint ventures may not necessarily stifle competition because they can create economies of scale and efficiencies.Id. at *25.The court found that the Plans offered discount rates and integrated assets like a joint venture.Id. at *26.The plans shared profits and risks of loss because they would benefit or be harmed by any one Plan’s discount negotiation.Id. at *26.BCBS functioned as a cooperative purchasing arrangement which may have both procompetitive and anticompetitive effects.Id.The court held that the rule of reason was the proper standard because the integrative aspects of the BlueCard resembled a joint venture.Id.

The court next turned to the standard established in Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284, 298 (1985) to review plaintiffs’ group boycott allegations under BlueCard.The U.S. Supreme Court in Nw. Wholesaler Stationers held group boycotts are subject to per se analysis if the boycott blocks access to a necessary market or if the boycotting firm possesses market power in the relevant market.The court found that the plaintiffs did not show BCBS had market power over a market subject to the alleged group boycott.Id.Plaintiffs also did not show BCBS exclusively controlled a portion of the market.Id. at *27.The court concluded both parties needed to submit more evidence to determine what the appropriate standard of review for group boycotts should be.Id.Because plaintiffs had not shown either element yet, the court would review the alleged boycott under the rule of reason.Id.

Applying the reasoning in Clorox Company v. Sterling Winthrop, Inc., 117 F.3d 50 (2d Cir. 1997), the court held that BCBS Blue Mark Uncoupling Rules should be analyzed under the rule of reason.Id.The Second Circuit in Clorox held that the trademark restriction should be examined under the rule of reason because trademark agreements are generally favored by the court, trademark agreements regulating use can be distinguished from trademark agreements that divide the market, and there was no indication of traditional per se violations.Id.

The court in the present case found the Blue Mark Uncoupling Rules were similar to those in Clorox because they only restrained independent competitors from using the Blue Marks for certain products but not from selling products under other trademarks.Id. at *28.The Plans were only prohibited from using the trade names to sell certain core health insurance products and services.Id.The rule was meant to protect the strength of the Blue Marks by preventing transfer of the Blue Marks’ goodwill to other unique marks created by the individual Plans.Id.The court found that the BCBS Uncoupling Rules were not per se restraints because there were potential procompetitive benefits.Id.

Conclusion

The court faithfully applied the Supreme Court’s prior decisions to find that the per se standard of review was appropriate to horizontal restraints, noting that the “Supreme Court jealously guards the precedential effect of its opinions.”Id.The court continued by stating the “Supreme Court has specifically cautioned district courts and appellate courts against reading the tea leaves and predicting which antitrust precedents are now disfavored.”Id.The court used Sealy and Topco as “polestars” to navigate the antitrust issues in this case.Id.The court concluded that BCBS’s market allocation and certain output restrictions would be analyzed under a per se standard as horizontal restraint.Id.But the court would apply the rule of reason to BlueCard associated violations.Id.

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