/>iA Sixth Circuit panel recently ended years-long litigation challenging an allegedly dominant health system’s conduct as a per se illegal group boycott against a smaller, competing hospital through the health system’s provider and payer contracts. The Medical Center at Elizabeth Place, LLC v. Atrium Health System, et al., Case No. 17-3863 (6th Cir. Apr. 25, 2019). The plaintiff earlier obtained an appellate ruling that the health system could not use a single-entity Copperweld[1] defense, which is based on a Supreme Court holding that a parent corporation and its wholly owned subsidiary are not legally capable of conspiring with each other under Section 1 of the Sherman Act. Despite this, the case was ultimately decided in favor of the defendants without any final substantive ruling whether the defendants’ joint conduct violated Section 1. As the Sixth Circuit explained, the plaintiffs bet their entire case on being able to establish that the defendants’ conduct was so obviously anticompetitive that it had no plausible procompetitive features by alleging only a per se violation. Finding that the challenged conduct had a plausible procompetitive rationale, the plaintiff’s case would only have been permitted to proceed had the plaintiff also alleged a rule of reason violation.
Background and Procedural History
In 2014, The Medical Center at Elizabeth Place, LLC (“MCEP”) filed a complaint against Premier Health Partners (“Premier”) and its hospital affiliates alleging that the defendants contracted with area physicians and payers on the condition that they did not do business with MCEP. MCEP opened in 2006 as a physician-owned hospital in Dayton, Ohio. Premier, a joint venture among four hospitals governed by a joint operating agreement (“JOA”), is a dominant health care network in the Dayton area. While the JOA merged some of the hospitals’ health care and financial functions, including joint negotiations for payer contracts, the individual hospitals retained control of other activities.
MCEP challenged two components of the defendants’ conduct. First, MCEP argued that Premier unreasonably restrained trade through “panel limitations,” wherein the hospital defendants stipulated to payers that they would renegotiate rates if the payers added MCEP to their networks. Second, MCEP alleged that the defendants took direct, concerted action against MCEP by threatening to stop referrals to MCEP physicians and through non-compete agreements that evicted MCEP physicians from defendant-owned office space. MCEP’s threatened loss of referrals argument centered on a letter sent by the defendants to Dayton-area physicians stating the defendants’ opinion that MCEP would have a negative impact on the community.
This case has a long history at the trial and appellate levels, including a district court judge’s recusal on the eve of trial. The initial disputes centered on whether Premier and its hospital affiliates should be treated as a single entity under the Copperweld doctrine, or whether they were separate entities capable of conspiring with each other under Section 1. The Copperweld doctrine has been extended in subsequent cases to other relationships, including certain partial ownership arrangements, joint ventures, and joint operating agreements. In 2014, the district court granted summary judgment for the defendants, holding that through the JOA defendants constituted a single entity incapable of conspiring with itself under Copperweld. On appeal, after a factual review of Premier’s conduct, the Sixth Circuit reversed and remanded in 2016, finding that a reasonable juror could find that Premier comprised multiple competing entities, and therefore could engage in concerted action.
Once it was established that the defendants were capable of conspiring, the focus turned to whether per se or rule of reason analysis was the appropriate standard under which to analyze Premier’s conduct. In a per se case, the plaintiff need not prove the challenged restraint’s effects on the market because the anticompetitive effects are assumed to be inherent in the conduct. Alternatively, under the rule of reason, the court undertakes a balancing analysis where the restraints on trade are weighed against procompetitive justifications. In 2017, on remand, the district court denied the defendants’ motion for summary judgment argument that MCEP’s allegation of a per se antitrust violation failed as a matter of law because the alleged restraints on trade were plausibly procompetitive. However, on the eve of trial, the district court judge recused himself, and the defendants moved for reconsideration of the denial of their summary judgment motion.
Under the new district court judge, the defendants’ motion was granted. Starting with the undisputed premise that Premier is a legitimate joint venture, the district court held that the defendants presented plausible procompetitive justifications for their actions under the JOA, and thus the rule of reason was the appropriate standard to analyze the restraint on trade. However, because MCEP had only alleged per se violations, the case was dismissed with prejudice.
Plaintiff MCEP Loses on Appeal
Reviewing the lower court’s grant of summary judgment for the defendants de novo, the Sixth Circuit affirmed. Under Section 1, unreasonable restraints on trade are declared illegal, and a restraint may be found to be unreasonable either per se or as analyzed under the rule of reason. Here, MCEP only pursued a per se claim. The Sixth Circuit held that “at the summary judgment phase, the right question to ask regarding per se claims is whether the plaintiff has shown that the challenged restraint is so obviously anticompetitive that it should be condemned as per se illegal. [But if] the record indicates that the challenged restraint is plausibly procompetitive, then summary judgment for the defendants is appropriate.”
When the conduct of a joint venture is challenged—as is the case here—the focus of the analysis is on the relationship of that conduct to the legitimate procompetitive purpose of the joint venture. The Supreme Court distinguished between three categories of joint venture restraints on trade in Dagher[2]—only the last of which justifies per se treatment: 1) restraints that are core to the joint venture’s efficiency enhancing purpose; 2) restraints that are ancillary to the joint venture’s efficiency enhancing purpose; and 3) restraints that are nakedly unrelated to the purpose of the joint venture. The Sixth Circuit concluded that the challenged conduct constituted ancillary restraints, and thus could not be condemned as per seillegal.
A restraint is ancillary if it bears a reasonable relationship to the joint venture’s success. The parties disagreed on what is “reasonable,” following a circuit split on the issue. MCEP relied on the Eleventh Circuit’s standard that an ancillary restraint must be necessary to achieve the joint venture’s efficiency enhancing purpose. The Sixth Circuit instead agreed with Premier’s position—and the standard followed in the Second, Seventh, Eighth, and Ninth Circuits—that a restraint is ancillary if there exists a plausibleprocompetitive rationale for it.
With respect to the conduct at issue, the Sixth Circuit found that a panel limitation is designed to maintain a high volume of patients and that it is plausible that it contributes to the efficiency-enhancing purpose of the joint venture by lowering the cost of health care services. With respect to the alleged threat to stop referrals, the Sixth Circuit held that the letter expressing the defendants’ opinion does not constitute a restraint. Regarding the non-compete agreements that Premier imposed, the court found that their purpose was to prevent a misalignment of incentives and thus was plausibly related to Premier’s goal of integrating providers in its network.
MCEP also argued that the district court erred in dismissing the “rim” portion of its “hub, spoke, and rim” conspiracy claim, where the rim represents agreements among payers and physicians (induced by Premier) to boycott MCEP. The defendants conceded that if MCEP could prove that Premier orchestrated an agreement among the payers to not offer managed care contracts to MCEP, the per se rule would apply and that claim should go to trial. However, the Sixth Circuit agreed with the lower court that MCEP’s amended complaint failed to include this claim and permitting it now would severely prejudice the defendants. The dissent agreed that no per se violations occurred, but dissented on the determination that MCEP should not be allowed to amend its complaint to include the “rim” claim.
While the case is concluded, we are left without a determination as to whether the conduct of Premier would have been deemed a reasonable restraint ancillary to the legitimate purposes of the Premier joint venture. Although not a holding, the case does contain helpful language recognizing the need for efficiency-enhancing restraints that are designed to align incentives for efficient care. Despite the outcome and some helpful language, this case provides another important reminder for health care joint ventures that their conduct with respect to competitors should be guided by the overarching efficiency-enhancing purposes of the joint venture.
Endnotes
1 Copperweld Corp. v. Independent Tube Corp., 467 U.S. 752 (1984).
2 Texaco Inc. v. Dagher, 547 U.S. 1 (2006).
