Case Title: NORTHWEST MEDICAL LAB. v. Blue Cross

Citation: 310 Or. 72, 794 P.2d 428

Docket Number: 

State: oregon

Court: Oregon Supreme Court

Date: 1990-06-14T00:00:00Z

Document:
794 P.2d 428 (1990)
310 Or. 72
NORTHWEST MEDICAL LABORATORIES, Inc., an Oregon Corporation, and East Portland X-Ray Clinic, P.C., an Oregon Professional Corporation, Petitioners On Review,
v.
BLUE CROSS and Blue Shield of Oregon, Inc., an Oregon Non-Profit Corporation, Oregon Preferred Care Network, Inc., an Oregon Non-Profit Corporation, Good Samaritan Hospital and Medical Center, Inc., an Oregon Non-Profit Corporation, and Northwest Physicians Association, Inc., an Oregon Corporation, Respondents On Review.
CC A8604-01953; CA A46938; SC S36303.

Supreme Court of Oregon.
Argued and Submitted December 12, 1989.
Reassigned April 30, 1990.
Decided June 14, 1990.
*429 Michael J. Morris, of Bennett, Hartman, Tauman & Reynolds, P.C., Portland, argued the cause and filed the petition for petitioners on review.
E. Walter Van Valkenburg, of Stoel Rives Boley Jones & Grey, Portland, argued the cause and filed the response to the petition for respondents on review.
Roger Tilbury and Roch Steinbach, Portland, filed a brief on behalf of amicus curiae Portland Retail Druggists Ass'n.
Before PETERSON, C.J., and LINDE, CARSON, JONES, GILLETTE, VAN HOOMISSEN and FADELEY, JJ.[*]
PETERSON, Chief Justice.
Plaintiffs appealed to the Court of Appeals from the trial court's denial of their request for an injunction and other equitable relief under Oregon's "Little Sherman Act," ORS 646.725.[1] Plaintiffs alleged that defendants conspired to refuse to deal with them, thereby denying them access to a market necessary for effective competition.
Defendants are Blue Cross and Blue Shield of Oregon, Inc. (BCBSO); Oregon Preferred Care Network, Inc. (OPCN); Good Samaritan Hospital and Medical Center, Inc. (Good Samaritan); and Northwest Physicians Association, Inc. (NPA). Plaintiffs are Northwest Medical Laboratories, Inc., an independent laboratory that provides testing and similar services, and East Portland X-Ray Clinic, P.C., an independent clinic that provides radiology services. After de novo review in equity, ORS 19.125(3), see ORS 646.770, the Court of Appeals affirmed the judgment of the trial court. NW Medical Lab. v. Blue Cross and Blue Shield, 97 Or. App. 74, 775 P.2d 863 (1989). We in turn review de novo, see ORS 19.125(4), and affirm the decision of the Court of Appeals.
The parties "accept the statement of facts contained in the Court of Appeals' opinion." We adopt those findings on de novo review and begin with those facts:
97 Or. App. at 76-81, 775 P.2d 863. (Some footnotes omitted.)
In this section of the opinion we will briefly discuss the development of what has come to be known as two rules of Sherman Act antitrust federal law, the "rule of reason" and the "per se rule." We will then state our interpretation of the per se rule under ORS 646.725 in a refusal-to-deal context. In parts B and C of section III, we will apply the per se rule and the rule of reason to the facts of this case.
There are no reported Oregon cases applying ORS 646.725 in a context similar to the facts at issue. The reported Oregon cases interpreting ORS 646.725 are King City Realty v. Sunpace, 291 Or. 573, 633 P.2d 784 (1981), and Golden West Insulation v. Stardust Investment Co., 47 Or. App. 493, 615 P.2d 1048 (1980). Both cases concern "tying" arrangements.
ORS 646.715(2) provides in part:
Read literally, ORS 646.725 and section 1 of the Sherman Act prohibit every agreement in "restraint of trade." The Supreme Court of the United States recognized early that such an interpretation would overly fetter freedom of contract without resulting in more active competition in the market involved. In Standard Oil Co. v. United States, 221 U.S. 1, 60, 31 S. Ct. 502, 515, 55 L.Ed: 619 (1911), the Supreme Court advanced the rule-of-reason standard by construing the Act to prohibit only contracts in unreasonable restraint of trade. Under the rule of reason, "the factfinder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition." Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49, 97 S. Ct. 2549, 2557, 53 L. Ed. 2d 568 (1977).
In order to simplify the process of determining whether certain practices unreasonably restrain trade, the Supreme Court developed a per se rule of illegality. Under this rule, a practice that facially has the likelihood of predominantly anticompetitive effects (that is, would always or almost always restrict competition without any offsetting market efficiencies) is illegal per se. See Northwest Stationers v. Pacific Stationery, 472 U.S. 284, 289-90, 105 S. Ct. 2613, 2616-17, 86 L. Ed. 2d 202 (1985). The "per se approach permits categorical judgments with respect to certain business practices that have proved to be predominantly anticompetitive. Courts can thereby avoid the `significant costs' in `business certainty and litigation efficiency' that a full-fledged rule-of-reason inquiry entails." Id., 472 U.S.  at 289, 105 S. Ct.  at 2617 (quoting Arizona v. Maricopa County Medical Society, 457 U.S. 332, 343-44, 102 S. Ct. 2466, 2472-73, 73 L. Ed. 2d 48 (1982)).
In Northwest Stationers, the Supreme Court refined the per se rule as applied to a refusal to deal where the defendant expelled plaintiff from a joint buying cooperative. In that case the Court held that a plaintiff, who asserted that expulsion from a joint buying cooperative is illegal per se, must present a threshold case that the cooperative possesses market power or unique access to a business element necessary for effective competition. 472 U.S.  at 298, 105 S. Ct.  at 2621.
In light of ORS 646.715(2)  which requires that we look to federal caselaw  and after reviewing federal caselaw, we interpret ORS 646.725 as follows: A challenged practice violates ORS 646.725 only if the practice constitutes an unreasonable restraint of trade. The rule of reason is the appropriate analysis unless the practice is illegal per se. A per se violation is unreasonable as a matter of law. In a refusal-to-deal context, a plaintiff seeking application of the per se rule must present a threshold case that a defendant who possesses market power or unique access to a business element necessary for effective competition has refused to deal. If the *434 plaintiff meets this threshold showing, the defendant can avoid judgment under the per se rule by establishing that the practice is justified by plausible arguments that it was intended to enhance overall efficiency and make markets more competitive.[2]
We first dispose of a preliminary issue. Relying on language from Arizona v. Maricopa County Medical Society, 457 U.S. 332, 102 S. Ct. 2466, 73 L. Ed. 2d 48 (1982), defendants argue that we need not engage in any antitrust analysis because they have formed a "true joint venture." They maintain that they are a single firm competing with others in the market and have complete freedom to choose those with whom they will deal.
In Maricopa, the State of Arizona brought an antitrust action against two foundations that had established schedules of maximum fees that participating doctors would accept as payment in full for services performed for patients insured under plans approved by the foundations. The Court held that the maximum-fee agreements were per se unlawful under section 1 of the Sherman Act. Defendants here rely on the following statement:
Even if defendants have formed a "true joint venture," they do not automatically escape antitrust laws. We do not read Maricopa to hold that a true "joint venture is ipso facto free from antitrust scrutiny."[3] Some of the most significant antitrust *435 cases have held joint ventures to be culpable.[4] In determining whether defendants' actions have violated ORS 646.725, we look at substance, not form. We turn, therefore, to a discussion of plaintiffs' claims.
Plaintiffs argue that the agreements between the Network providers to not refer laboratory and radiology services to plaintiffs constitute a group boycott (a refusal to deal) and on their face are a per se violation of ORS 646.725.
Northwest Stationers v. Pacific Stationery, 472 U.S. 284, 105 S. Ct. 2613, 86 L. Ed. 2d 202 (1985), is instructive concerning the application of the per se rule in a refusal-to-deal context. In that case, the defendant was a wholesale purchasing cooperative whose membership consisted of office supply retailers. The defendant expelled the plaintiff from membership. Thereafter, the plaintiff brought suit alleging that the expulsion without procedural protection was a group boycott that limited its ability to compete and should be considered per se violative of section 1 of the Sherman Act.
The Court stated that "`[g]roup boycotts' are often listed among the classes of economic activity that merit per se invalidation under § 1[, but] [e]xactly what types of activity fall within the forbidden category is * * * far from certain." 472 U.S.  at 293-94, 105 S. Ct.  at 2619. (Citations omitted.) Accordingly, the Court took "[s]ome care * * * in defining the category of concerted refusals to deal that mandate per se condemnation." 472 U.S.  at 294, 105 S. Ct.  at 2619. The Court summarized its treatment of refusal-to-deal cases under the per se rule:
Turning to the facts of that case, the Court identified several efficiency-enhancing characteristics of wholesale purchasing cooperatives in general and found efficiencies more directly related to the defendant's expulsion of the plaintiff from the cooperative:
In holding that the defendant's expulsion of the plaintiff did not fall within the category of activity that is, as a matter of law, anticompetitive so as to mandate per se invalidation under section 1 of the Sherman Act, the Court stated:
We interpret Northwest Stationers to stand for the proposition that a plaintiff seeking application of the per se rule to an alleged concerted refusal to deal must present a threshold case that a defendant who possesses market power or unique access to a business element necessary for effective competition has refused to deal. The logical extension of Northwest Stationers is that if the plaintiff meets this threshold showing, the defendant must establish that the practice is justified by plausible arguments that it was intended to enhance overall efficiency and make markets more competitive.
We realize that the above approach may blur the distinction between the per se and rule-of-reason approaches. The Supreme Court of the United States, however, has recognized that "there is often no bright line separating per se from Rule of Reason analysis." NCAA v. Board of Regents of Univ. of Okla., 468 U.S. 85, 104 n. 26, 104 S. Ct. 2948, 2961-62 n. 26, 82 L. Ed. 2d 70 (1984). These two approaches, however, may be distinguished by the depth of inquiry. See Polk Bros., Inc. v. Forest City Enterprises, Inc., 776 F.2d 185, 189 (7th Cir.1985).
Turning to the facts at bar, we must first identify the relevant market. In this case, it is the laboratory and radiology markets. The relevant geographic market is the Portland metropolitan area, the only area in which BCBSO offers Network.
Plaintiffs have failed to present a threshold case that defendants possess  through the arrangements between Network and other providers  market power or unique access to a business element necessary for effective competition in the medical laboratory and radiology markets. *437 With respect to market power, there is no evidence concerning the percentage of laboratory and radiology markets that defendants occupy. There is also no evidence by direct inference. The only available evidence is that subscribers to Network comprise only approximately 2.1 percent of the total market for health insurance in Portland.
Concerning unique access to a business element necessary for effective competition, the facts show that plaintiffs are effectively competing in the laboratory and radiology markets. We find that Northwest Medical Laboratories receives a large number of referrals of clients insured by BCBSO under other plans, which accounts for approximately 10 percent of its gross revenue. Furthermore, doctors who are Network providers continue to refer a significant number of non-Network patients to that laboratory. We also find that East Portland X-Ray's 1986 gross revenue was approximately $4,000,000, reflecting a Network lock-out loss of $100,000. East Portland also continues to receive significant revenues from BCBSO under non-Network plans. Additionally, East Portland is the "locked-in" provider of radiology services in other closed-panel plans. Under these facts, it is clear that plaintiffs' ability to compete is not dependent upon their ability to become Network providers.
In sum, plaintiffs have failed to make the required threshold showing that defendants' actions are illegal per se. We therefore turn to the generally applicable rule of reason.
Application of the rule of reason to the instant facts is not a difficult task. The basic inquiry is whether the restraint in question "is one that promotes competition or one that suppresses competition." National Soc. of Professional Engineers v. U.S., 435 U.S. 679, 691, 98 S. Ct. 1355, 1365, 55 L. Ed. 2d 637 (1978). Plaintiffs have failed to show that the refusal to deal has injured competition in any way. The fact that these particular plaintiffs may have lost business does not demonstrate any injury to competition.
In contrast to the absence of anticompetitive impact, there was evidence of the procompetitive impact of defendants' conduct. The evidence shows that one of the central concepts behind the formation of Network was the use of a limited panel of providers in order to control utilization while ensuring that quality remained high. As stated in the above-mentioned facts, "[a]ll Network providers are required to participate in a utilization review and quality assurance program, designed to monitor the quality of service and to eliminate the use of needless services, and thereby to control costs and to reduce the price of medical care to consumers." Dr. John Santa, Medical Director for Network, testified about the efficiencies that result from a health plan's use of a limited panel of providers in conjunction with a risk-pool feature. Dr. Santa also testified that it was important to limit the number of providers on the panel in order to make utilization controls work. He contrasted Network with an earlier plan that had "basically taken * * * virtually all providers in the Portland Metro area and they had some very significant problems." We accept this testimony as a portrayal of accurate historical fact.
In addition, defendants' share of the health insurance market is so small that any overall anticompetitive effect is questionable.
In short, defendants have employed procompetitive concepts to create an entity that competes in the laboratory and radiology markets. It was plaintiffs' burden to prove that defendants' conduct was anticompetitive, and plaintiffs have not done so. Accordingly, plaintiffs have failed to establish a rule-of-reason claim under ORS 646.725. Cf. Seaboard Supply Co. v. Congoleum Corp., 770 F.2d 367, 375 (3d Cir.1985).[5]
*438 The decision of the Court of Appeals and the judgment of the circuit court are affirmed.
[*]  Linde, J., retired January 31, 1990; Jones, J., resigned April 30, 1990.
[1]  ORS 646.725 provides:

"Every contract, combination in the form of trust or otherwise, or conspiracy in restraint of trade or commerce is declared to be illegal."
Section 1 of the Sherman Antitrust Act, 26 Stat 209, 15 U.S.C. § 1 (1890), in part provides:
"Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal."
[2]  Then Professor and later Judge Robert Bork has commented on the procedural implications of the per se rule:

"Suppose that the government brings suit charging defendants with agreeing to an illegal division of markets. The first step is to determine whether the facts and contentions of the parties properly bring the case within the ambit of the per se rule. If a per se violation seems proven either by the pleadings or at any stage during the trial, the court should announce that fact. At this point the defendants could avoid judgment against themselves and obtain an opportunity to go on with the trial only by making an acceptable offer to prove that the market division was ancillary. This would require an offer to prove a contract integration (unless that were conceded) and, in any case, the statement of an economically plausible theory which, if borne out by the evidence the defendants offer to adduce, would show their agreement to have a substantial capacity for increasing the efficiency of the integration. * * * [T]he economics involved in judging the plausibility of defendants' theory, and thus the acceptability of their offer of proof, are not overly complex and are suitable for judicial use in the litigation process. Many trials will end at this point with a decision that defendants have not offered a plausible theory of efficiency." Bork, The Rule of Reason and the Per Se Concept: Price Fixing and Market Division (Part II), 75 Yale L J 373, 388-89 (1966).
[3]  In context, the Court of Appeals correctly reasoned:

"The language quoted from Arizona v. Maricopa County Medical Society, supra, addresses the question of why the Court considered the arrangement there to involve more than `literal price fixing.' Here, there is no contention that price fixing is involved. The only claimed violation is a refusal to deal. The Court's discussion in Maricopa, therefore, is not directly applicable. Additionally, read in the context of the Supreme Court's entire opinion, the quoted language only suggests that, if the arrangement in Maricopa had involved some greater level of integration between the foundations and the insurance providers, it could have been saved from per se illegality. It does not suggest, and we do not read it to hold, that an arrangement that constitutes a joint venture is ipso facto free from antitrust scrutiny. Firms that are genuinely joined together for the accomplishment of some business purpose are capable of acting concertedly and anti-competitively through a refusal to deal. We hold that, as a general proposition, although the extent of integration among firms engaged in a common enterprise may be relevant to the question of whether the arrangement should be treated as an illegal combination per se, characterizing an agreement as a `joint venture' says nothing about the effect of the arrangement on competition and does not mean that the entity is free from antitrust scrutiny." 97 Or. App. at 85, 775 P.2d 863. (Some citations omitted.)
[4]  See, e.g., United States v. Sealy, Inc., 388 U.S. 350, 87 S. Ct. 1847, 18 L. Ed. 2d 1238 (1967).
[5]  In that case, plaintiff Seaboard, a long-standing wholesale distributor of Congoleum products, brought suit against Congoleum and a new commissioned sales agent alleging, inter alia, that defendants had conspired to boycott Seaboard. The court stated:

"The district court also found that Seaboard had failed to present evidence which would establish anti-competitive effect and therefore could not prevail on a rule of reason analysis. Plaintiff produced evidence only of its own decrease in sales of Congoleum products. The defendants' evidence showed, however, that intrabrand competition increased and, by using a sales agent, Congoleum was able to reduce its market prices and compete more effectively with other manufacturers. In this situation we must not overlook the Supreme Court's admonition in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 US 477, 488, 97 S Ct 690, 697, 50 L Ed 2d 701 (1977), `The antitrust laws, however, were enacted for "the protection of competition, not competitors."' We noted earlier the absence of evidence tending to show an anti-competitive effect. On this record, the district court did not err in finding that plaintiff had failed to present a rule of reason claim under section 1 of the Sherman Act." (Emphasis in original; footnote omitted.)