The Northern District of California Tosses Antitrust Claim Against Kaiser

Ian L. Papendick
Jeanifer E. Parsigian
Amanda Jereige
Winston & Strawn LLP

In NorthBay Healthcare Group v. Kaiser Foundation Health Plan, Inc., the Northern District of California recently dismissed without leave to amend the plaintiffs’ antitrust claims based on monopolization and conspiracy-to-monopolize theories under Section 2 of the Sherman Act. No. 17-cv-05005-LB, 2018 WL 4096399 at *1 (N.D. Cal. Aug. 28, 2018). The dismissal was with prejudice because the Court had dismissed with leave to amend twice before, and thus any further amendment would be futile given the plaintiffs’ repeated failure to allege sufficient facts to state a plausible claim. Id. The Court expressly noted that the plaintiffs failed to heed the Court’s previous warnings to enhance their conclusory allegations. Id. at *1.

While the limited factual detail in the complaint provided a relatively straightforward basis to dismiss the plaintiffs’ claims, the Court’s careful analysis of antitrust injury principles makes the decision worthy of closer examination.

Background

Plaintiffs NorthBay Healthcare Group and NorthBay Healthcare Corporation, a hospital group in Solana County, California, alleged that Defendants, Kaiser Foundation Hospitals, Inc., Kaiser Foundation Health Plan, Inc., and The Permanente Medical Group, Inc., which operated two major hospitals in the Solano area, used anticompetitive tactics to “steer” trauma patients away from Plaintiffs’ hospitals, and to send uninsured patients to Plaintiffs’ hospitals to drive up its costs. Id. at 3-5. Plaintiffs pleaded that, because trauma centers are particularly profitable to hospitals, the lost opportunities to treat trauma patients were particularly damaging. Id. at *11.

To support these allegations, Plaintiffs alleged a single instance in which paramedics received instruction from a defendant to route a Level II trauma patient to one of Defendants’ hospitals rather than to one of Plaintiffs’. Id. at *3. As to Plaintiffs’ claim that Defendants steered uninsured patients to Plaintiffs, the complaint described a single instance where a defendant called a plaintiff in an alleged attempt to transfer an uninsured homeless patient, who Defendants claimed previously received cancer treatment at one plaintiff’s hospital. Id.

To support these allegations, Plaintiffs alleged a single instance in which paramedics received instruction from a defendant to route a Level II trauma patient to one of Defendants’ hospitals rather than to one of Plaintiffs’. Id. at *3. As to Plaintiffs’ claim that Defendants steered uninsured patients to Plaintiffs, the complaint described a single instance where a defendant called a plaintiff in an alleged attempt to transfer an uninsured homeless patient, who Defendants claimed previously received cancer treatment at one plaintiff’s hospital. Id.

Plaintiffs also sought to rely on harm to non-party Western Health Advantage (“WHA”), a non-profit health plan for which Plaintiffs were the only in-network hospitals in Solano County. Id. at 2-3. Plaintiffs argued that WHA was essentially the only competitor to Defendants’ health plans in Solano county. Because of the affiliation between Plaintiffs’ hospitals and WHA, Plaintiffs argued, conduct that weakening Plaintiffs necessarily weakens WHA, and resulted in harm to competition among insurance plans in the geographic market. Id.

The District Court’s Analysis

In granting Defendants’ motion to dismiss, the Court’s first focus was the conclusory nature of Plaintiffs’ allegations and minimal facts, including only a single example of a patient being “steered” to a Defendant hospital. However, notwithstanding the Court’s citation to Twombly’s plausibility requirement in the standard of review—which could have offered a basis to summarily dispose of Plaintiffs’ claims in light of the paucity of facts alleged in the Complaint—the Court went on to analyze and dismiss Plaintiffs’ claims under the a four-step test for antitrust injury, which requires: “(1) unlawful conduct, (2) causing an injury to the plaintiff, (3) that flows from that which makes the conduct unlawful, . . . and (4) that is of the type the antitrust laws were intended to prevent’—as well as a fifth element that ‘the injured party be a participant in the same market as the alleged tortfeasors. . .’” Id. at *6 (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)).

The District Court started with the reminder that “Plaintiffs sometimes forget that the antitrust injury analysis must begin with the identification of defendant’s specific unlawful conduct.” Id. (citing Am. Ad. Mgmt. v. Gen. Tel. Co. of Cal., 190 F.3d 1051, 1055 (9th Cir. 1999)). Seeing only “‘[n]aked assertions devoid of further factual enhancement,’” Id. at *7 (quoting NorthBay Healthcare Grp. V. Kaiser Found. Health Plan, Inc., 305 F. Supp. 3d 1065, 1074 (N.D. Cal. 2018)), the Court held that Plaintiffs did not plausibly allege either unlawful “steering” or an unlawful termination of the parties’ reimbursement agreement, and therefore failed to sufficiently plead even the first element of an antitrust injury. Id.

The Court then proceeded to assess Plaintiffs’ allegations under the second and third requirements for antitrust injury: “‘a plaintiff must prove that his loss flows from an anticompetitive aspect or effect of the defendant’s behavior,’” and that “‘[i]f the injury flows from aspects of the defendant’s conduct that are beneficial or neutral to competition, there is no antitrust injury, even if the defendant’s conduct is illegal per se.’” Id. at *8 (quoting Rebel Oil Co. v. Atl, Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995)) (emphasis in original). Having already found insufficient allegations of anticompetitive conduct, the outcome of the Court’s analysis was essentially a foregone conclusion. Nonetheless, the Court discussed in detail the multiple problems with Plaintiffs’ claimed injury from an antitrust injury perspective. Id. at *9.

Plaintiffs, the Court explained, could not meet their burden to plead antitrust injury with allegations of injury to patients, the consumers in the relevant market, whom the complaint alleged received deficient care due to Defendants’ “steering,” or with allegations of injury to Plaintiffs themselves, through the termination of the parties’ reimbursement agreement, where Plaintiffs “would have [been] injured … in the same way regardless of whether or not defendant has a potential to monopolize.” Id.at *10 (citing Am. Ad. Mgmt., 190 F. 3d at 1056).

Nor, the Court went on, were any of the Plaintiffs’ alleged injuries “of the type the antitrust laws were intended to prevent.” Id. at *11. The Court emphasized that “‘antitrust laws are only concerned with acts that harm allocative efficiency and raise the price of goods above their competitive level or diminish their quality.’” Id. (quoting Pool Water Prods. V. Olin Corp., 258 F.3d 1024, 1034 (9th Cir. 2011)) (emphasis in original). Plaintiffs’ argument of harm to competition—that without steady revenues, including from their trauma centers, to fulfill their significant debt obligations, Plaintiffs were in danger of being eliminated from the market, which would result in Defendants obtaining a monopoly over hospital services in the geographic market resulting in higher prices—did not persuade the Court. Plaintiffs could not rely on their allegedly vulnerable position in the market, resulting from what the Court characterized as a “bad business decision” of “overextending itself by taking out an unprecedented amount of debt,” to make “what is at best, a business tort or contract violation” into an antitrust injury. Id. at *12-13 (citing Hu Honua Bioenergy, LLC v. Haw. Elec. Indus., Inc., No. 16-00634 JMS-KJM, 2018 WL 491780, at *12 (D. Haw. Jan. 19, 2018)) (internal quotation marks omitted).

Finally, the Court rejected Plaintiffs’ attempt to claim antitrust injury based on alleged harm to its affiliate, non-party WHA, in the health insurance market. Relying on the “inextricably intertwined” doctrine, which allows a plaintiff that is not a market participant to establish antitrust injury and thus standing if its injury is sufficiently intertwined with the anticompetitive effect on the relevant market, Plaintiffs argued if they were driven out of hospital services market, WHA would be forced to exit the health insurance market, eliminating an important competitor to Defendants’ health plans. Id. at 14. The Court deemed this argument a “red herring,” holding that Plaintiffs had not plausibly alleged that Defendants’ conduct was threatening its existence, and the “invocation of the phrase ‘inextricably intertwined’ does not create an antitrust injury where one does not exist otherwise.” Id. at 15.

Conclusion

While grounding its decision in the woefully conclusory nature of Plaintiffs’ allegations of Defendants’ purportedly unlawful conduct, the Court’s extensive discussion of Plaintiffs’ claims within the framework of the antitrust injury elements is a helpful illustration of the type of antitrust injury theories that are insufficient to state an antitrust claim even if they had been supported by sufficient allegations of fact.