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Filed April 2, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NOS. 96-1891, 96-1892, 96-1922, 96-1923 97-1013, and 97-1014

BROKERAGE CONCEPTS, INC.

v.

U.S. HEALTHCARE, INC.; CORPORATE HEALTH ADMINISTRATORS, INC.; UNITED STATES HEALTH CARE SYSTEMS OF PENNSYLVANIA, INC., d/b/a THE HEALTH

MAINTENANCE ORGANIZATION OF PENNSYLVANIA; RICHARD WOLFSON; SCOTT MURPHY;

WILLIAM BROWNSTEIN

Richard Wolfson, Scott Murphy and William Brownstei n, Appellants in No. 96-1891

U.S. Healthcare, Inc.; United States Health Care Sy stems of Pennsylvania, Inc., d/b/a The Health Maintenance Organization of Pennsylvania and Corporate Health Administrators, Inc. Appellants in No. 96-1892

U.S. Healthcare, Inc.; Corporate Health Administrat ors, Inc.; United States Health Care Systems of Pennsylvania, Inc., d/b/a The Health Maintenance Organization of Pennsylvania; Richard Wolfson; Scott Murphy; Willia m Brownstein, Appellants in No. 96-1922

Brokerage Concepts, Inc., Appellant in No. 96-1923U.S. Healthcare, Inc.; United States Health Care Sy stems of

Pennsylvania, Inc., d/b/a The Health Maintenance Organization of Pennsylvania and Corporate Health Administrators, Inc., Appellants in No. 97-1013

Richard Wolfson; Scott Murphy; and William Brownste in, Appellants in No. 97-1014

On Appeal From the United States District Court For the Eastern District of Pennsylvania (D.C. Civ. No. 95-cv-01698)

Argued: July 22, 1997

Before: BECKER, MANSMANN, and ROSENN, Circuit Judges.

(Filed April 2, 1998)

DAVID H. MARION, ESQUIRE FRANCIS P. NEWELL, ESQUIRE HOWARD J. BASHMAN, ESQUIRE
PATRICK T. RYAN, III, ESQUIRE Montgomery, McCracken, Walker & Rhoads, LLP

123 So. Broad Street Philadelphia, PA 19106

Counsel for Richard Wolfson, Scott Murphy and William Brownstein

PATRICK W. KITTREDGE, ESQUIRE LISA G. MILLER, ESQUIRE Kittredge, Donley, Elson, Fullem & Embick, LLP 421 Chestnut Street, 5th Floor Philadelphia, PA 19109

2ROBERT E. BLOCH, ESQUIRE

ROY T. ENGLERT, JR., ESQUIRE (ARGUED)
DONALD M. FALK, ESQUIRE ROBERT L. BRONSTON, ESQUIRE Mayer, Brown & Platt 2000 Pennsylvania Avenue,

NW Washington, DC 20006-1882

Counsel for U.S. Healthcare, Inc., Corporate Health Administrators, United States Health Care Systems of Pennsylvania, Inc. d/b/a The Health Maintenance Organization of Pennsylvania

RICHARD L. BAZELON, ESQUIRE (ARGUED)
A. RICHARD FELDMAN, ESQUIRE

Bazelon & Lees 1515 Market Street, 7th Floor Philadelphia, PA 19102

Counsel for Brokerage Concepts, Inc.

OPINION OF THE COURT

BECKER,* Chief Circuit Judge.

___________________________________________________ ______________

* Honorable Edward R. Becker, United States Circuit Judge for the Third Circuit, assumed Chief Judge status on Februa ry 1, 1998.

3TABLE OF CONTENTS

I. INTRODUCTION 5

II. FACTS & PROCEDURAL HISTORY 11

A. The Parties 11 B. Gary's Decision to Self-insure 12 C. Gary's Switch to CHA/U.S. Healthcare 16

D. Economic Evidence 19 1. Impact on Gary's 19 2. Knowlton's Survey 20

3. Interaction Between U.S. Healthcare and Other Pharmacy Operations 20 4. The Setting of Reimbursement Prices 21 E. The Jury Verdict 22

III. THE ANTITRUST ISSUES 23

A. Introduction -- Characterization of BCI's Clai m 23 B. Per se Liability 27 1. Defining the Relevant Market 28

a. The Product Market 29 b. The Geographic Market 32 2. U.S. Healthcare's Power in the Tying Market 33

a. Evidence of Market Share 34 b. Other Factors Bearing on Market Power 37

C. The Rule of Reason Claim 40

D. Conclusion 42

IV. CIVIL RICO 42

A. Introduction 42 B. RICO Standing 43

C. Predicate Acts of BCI's RICO Claim 45

1. Extortion under the Hobbs Act 45 a. The Definition of "wrongful". 48 b. Lawful Versus Unlawful Claims to Property 51 c. Evidence of Other Unlawful Objectives 56 2. Commercial Bribery 58

3. Mail and Wire Fraud 60

4. The Travel Act 61

D. Conclusion 61

4V. TORTIOUS INTERFERENCE 62

VI. CONCLUSION 73

I. INTRODUCTION:

The revolutionary changes in the health care field over the past decade have spawned many novel market arrangements. Perhaps the most significant developm ent is the ascendency of managed-care driven health mainte nance organizations ("HMOs"), whose hold over a large num ber of subscribers has permitted them to wield considerabl e economic power over health care providers. This ant itrust, civil RICO, and state law tortious interference cas e against defendant U.S. Healthcare, one of the nation's larg est HMO's, two of its wholly-owned subsidiaries, and th ree of its top officers, is an exemplar of the legal fallo ut from this development.

This appeal presents several quite difficult and im portant first impression questions for us, including: (1) whether the

defendants' use of economic fear in the context of hard business bargaining constitutes wrongful conduct amounting to extortion for civil RICO purposes; (2) whether the inability of the plaintiff to prevail on antitr ust and

extortion-based civil RICO claims forecloses a succ essful

state law tortious interference claim based on the same facts; and (3) whether the defendants' hard bargai ning constituted "wrongful means" so as to forfeit the d efense of privileged business competition to a tortious inter ference

claim.

The lawsuit emanates from U.S. Healthcare's refusal to approve the application of a new Abington, Pennsylv ania store of "I Got It at Gary's" ("Gary's"), a small s outheastern Pennsylvania pharmacy, health and beauty aid chain, for membership in U.S. Healthcare's network of medical prescription providers. U.S. Healthcare conditioned membership in its provider network on Gary's agreem ent to discontinue its contractual relationship with plain tiff Brokerage Concepts, Inc. ("BCI"), a health care con sulting firm whose specialty is serving as a Third Party Administrator ("TPA") for health benefit self-insur ers (such

5as Gary's), and to give its TPA business to a U.S. Healthcare

subsidiary, Corporate Health Administrators ("CHA")

.

U.S. Healthcare also applied pressure on Gary's in other ways -- through "hard-ball" negotiation tactics, wh ich deliberately left Gary's "hanging" as to whether it s new application would be approved, and a seemingly vind ictive audit of Gary's generic prescription drug dispensin g policy at one of its stores that was already part of the

U.S. Healthcare network. Since U.S. Healthcare subs cribers constituted a significant portion of its customer b ase, Gary's understandably yielded to the pressure and g ave its TPA business to CHA. BCI thereupon sued in federal district court asserting Sherman Act and civil RICO claims,

as well as a claim of tortious interference with co ntractual relations under Pennsylvania law. BCI sought compensatory and treble damages, injunctive relief, and

counsel fees on its antitrust and civil RICO claims , and compensatory and punitive damages on its state law tortious interference claim. Gary's is not a party to the

lawsuit.

The case proceeded to trial before a jury, which re ndered a verdict finding U.S. Healthcare and its officers liable to BCI on all of BCI's claims, and awarding compensato ry and punitive damages. On post-trial motions, the distri ct court upheld the verdict but ruled that: (1) BCI must ele ct between the punitive damages awarded on its state l aw claim and the treble damages awarded on its federal claims (i.e., that it cannot recover both); and (2) if it elects the state law remedies, BCI cannot also collect the att orney's

fees that are available under its RICO and antitrus t claims. The defendants' appeal of the district court's deni al of its post-verdict motion for judgment as a matter of law or, in the alternative, for a new trial, attacks the jury verdict on all fronts, asserting that the verdict is tainted b y erroneous evidentiary rulings and jury instructions, and also that there is insufficient evidence to sustain any of th e claims under proper instructions. BCI cross-appeals, conte nding that, under Fineman v. Armstrong World Indus., Inc. , 980 F.2d 171, 218-19 (3d Cir. 1992), the district court erred in requiring BCI to elect which remedies it will recov er, and also in refusing to award injunctive relief to BCI under

either RICO or the antitrust laws.

6Because all three of BCI's claims are grounded upon

U.S. Healthcare's leveraging of its economic power, and because, under the jury instructions given by the d istrict court, the RICO and state law claims may depend on the existence of a viable antitrust claim, the threshol d doctrinal battleground has been over antitrust law. This aspe ct of the case is quite complex, not because of the need for sophisticated economic analysis or the resolution o f any close or cutting-edge trade regulation issue, but r ather because of the difficulty of attempting to shoehorn into the

traditional antitrust model a claim that resists su ch

characterization.

The matter was presented to the district court prim arily as a tying case, under which a plaintiff can assert both a per se and a "rule of reason" claim. In a typical t ying case, a seller leverages its market power in the market f or the tying product to require the buyer of the product t o purchase an unwanted product in the tied market, th ereby (unlawfully) foreclosing competition in that market . But Gary's, the party who has been "put upon," is a sel ler, not a buyer, in the tying product market: when U.S. Hea lthcare accepts Gary's into its network of providers, what Gary's gains is the opportunity to sell drugs to U.S. Heal thcare subscribers. The defendants, in contrast, contend t hat the case is better viewed as one of reciprocal dealing which, they submit, carries with it less stringent antitru st

standards.

As will appear, our disposition of BCI's antitrust claim will take us through a number of layers of analysis , dealing with both its per se and rule of reason claims, and in the course thereof treating such matters as product mar ket definition (and the applicability vel non of the de cision in Eastman Kodak Co. v. Images Technical Servs., 504 U .S. 451 (1992)); geographic market definition (and the lack of utility of a flawed market survey in identifying th e market); and above all, with the sufficiency of the record e vidence (including the inferences which can be drawn theref rom) to support a legally viable antitrust claim. In the en d, we conclude that, since the record before us does not support a finding that U.S. Healthcare exercised appreciabl e market power in a properly defined tying market, or that t he

7arrangement at issue harmed competition in the tied

market, the antitrust jury verdicts on both the per se and

the rule of reason claims must be set aside.

In support of its civil RICO claim, BCI alleges a v ariety of predicate acts, as a civil RICO claim requires. Alt hough we deal with all of the predicate acts invoked, reject ing defendants' contention that BCI lacks RICO standing , the only acts that arguably could come within RICO's am bit are alleged extortionate acts by the defendants. Under the Hobbs Act, 18 U.S.C. S 1951, "[e]xtortion" is defin ed as "the obtaining of property from another, with his consen t, induced by wrongful use of actual or threatened for ce, violence, or fear." 18 U.S.C. S 1951(b)(2). The "fe ar" may be of economic loss as well as of physical harm. See U nited States v. Addonizio, 451 F.2d 49, 72 (3d Cir. 1972) . In this case, the evidence is clear that U.S. Healthcare em ployed economic leverage in an effort to force Gary's to c hose CHA as its TPA. However, while BCI contends that this c onduct amounts to extortion through the wrongful use of th e fear of economic loss, defendants assert that the conduc t is merely hard business bargaining that cannot be made to fit within the statutory framework of Hobbs Act extorti on.

As will be shown, resolution of BCI's extortion cla im

turns on whether the defendants' use of economic fe ar in the context of hard business bargaining was legally wrongful, an issue with which we have not previousl y had

occasion to deal. We conclude that the "claim of ri ght" defense to extortion (i.e., a defense based on a la wful claim to the property obtained by the allegedly extortion ate acts) formulated by the Supreme Court in United States v. Enmons, 410 U.S. 396 (1973), is applicable in cases , such as this one, which involve solely the allegation of the use of economic fear in a transaction between two private parties. In so concluding, we are mindful of, and address, t hose cases that reject the broad application of Enmons o utside of

the labor context in which it arose for fear that i t would "effectively repeal the Hobbs Act." See United Stat es v. Agnes, 753 F.2d 293 (3d Cir. 1985).

Having determined that the claim of right defense i s available to the defendants in this case, we addres s the difficult problem of separating out lawful from unl awful

8claims to property. We make no effort to announce a ny

broad principles in this difficult area. Drawing in struction from Enmons and Viacom Int'l v. Icahn, 747 F. Supp. 205 (S.D.N.Y. 1990), we make a rule only for a very nar row subset of the potential universe of extortion cases : one involving the accusation of the wrongful use of eco nomic fear where two private parties have engaged in a mu tually beneficial exchange of property. We conclude that B CI's extortion claim can only survive if Gary's had a ri ght to pursue its business interests free of the fear that it would be excluded from U.S. Healthcare's provider network . Albeit with misgivings, we find that since Pennsylvania, u nlike other states, has no "Any Willing Provider" law tha t compels HMOs to allow all interested and minimally qualifie d providers into their network, BCI had no such right . If such a law was in force, Gary's would have had a legal entitlement to be a member of the provider network and

thus to be free of the fear that it would be exclud ed from that network if it did not switch TPA providers. Ha ving determined that BCI did not present a sustainable c ase of extortion, or establish any of the other predicate acts alleged, we set aside the jury verdict as to the ci vil RICO

count.

That BCI's federal claims have fallen is not, howev er, the end of its case. BCI also alleges the defendants un lawfully and improperly interfered with its existing and pro spective contractual relations with Gary's in violation of Pennsylvania tort law. While BCI must prove a numbe r of things to prevail on a tortious interference claim under Pennsylvania law, only one is in serious dispute he re. The battleground is over Restatement (Second) of Torts S 768 which sets forth a competitors privilege, and in fa ct over only one facet of that section, S 768(1)(d), which withdraws immunity from liability if the competitor employs " wrongful means." The Pennsylvania Supreme Court has yet to d efine that term and hence we must predict how it would do so to

resolve this case.

The parties' debate in this area was focused primar ily on whether Pennsylvania would limit wrongful means to conduct that is independently actionable. While the parties have ably briefed that point, the disposition of BC I's claim

9does not require us to resolve it. Rather, we concl ude,

based upon a passage from S 768 comment (e), that e ven if the Pennsylvania Supreme Court were to require independently actionable means, it would not apply that requirement in cases, such as this one, where the defendant exerted "economic pressure" or "a superio r power" in a market unrelated to the competitive mar ket. Here, BCI proffered ample evidence from which a jur y could conclude that U.S. Healthcare attempted to acquire Gary's TPA business by threatening Gary's with withdrawal of membership in the U.S. Healthcare provider network, an unrelated market. BCI also adduced evidence of heav yhanded tactics by U.S. Healthcare in that market fo r pharmacy customers.

In addition to our analysis of the substance of Pennsylvania tort law, we address defendants' more fundamental argument that tort liability is not app ropriate here. The crux of that argument is that BCI's tort claims are predicated on the same conduct that underlie it s federal claims, and that the law should therefore not permi t BCI to repackage these failed claims as tortious interfere nce. As will be shown, in our view, BCI has attempted just the opposite. That is, it has taken conduct that consti tutes

tortious interference with contractual relations an d has attempted to turn it into a violation of both feder al antitrust and racketeering laws. While these attempts have be en frustrated on this appeal, that result does not for eclose

BCI's state law claim. BCI's tortious interference claim does not require proof of criminal conduct as does its e xtortion claim, nor is it anchored in the same kind of marke t based

considerations as is its antitrust claim. We see no need for congruence between federal antitrust law, which is designed to protect competition and free access to markets, and state business tort law, which is designed to p rotect competitors.

Notwithstanding this conclusion, the tortious inter ference verdict cannot stand, and a new trial on the tort c laims is necessary, because the jury instructions permitted the jury

to find tortious interference based on antitrust an d/or civil RICO violations which, we have concluded, did not e xist. Hence, while we reverse outright on the antitrust a nd civil

10RICO claims, we will remand the tortious interferen ce

claims for a new trial. We intimate no view on the question whether defendants' behavior was outrageous enough to justify an award of punitive damages under Pennsylv ania law; that will be for determination on remand. Sinc e the antitrust and RICO claims are out of the case, we a lso need not address the question of the propriety of injunc tive relief for either RICO or antitrust claims, or the interes ting issues posed by the cross-appeal.

II. FACTS & PROCEDURAL HISTORY

A. The Parties

BCI serves as a TPA for employers who wish to selfinsure for their health benefits and other insuranc e needs. In this capacity, BCI designs the employer's self-i nsured benefit plan and usually recommends a health servic es provider network. The providers in the network then supply the health care, and BCI reviews and processes the resulting claims for the employer. In addition, BCI typically helps the employer purchase "stop-loss" insurance p olicies that cap the employers' exposure for large individu al and aggregate claims. BCI also serves as an insurance b roker for employees who choose to purchase fully-insured policies.

U.S. Healthcare develops, owns, operates, and marke ts HMOs in many states in the eastern United States, including Pennsylvania and New Jersey. These HMOs a re operated by wholly owned subsidiaries, including de fendant United States Healthcare Systems of Pennsylvania, I nc., d/b/a The Health Maintenance Organization of Pennsylvania ("HMO PA"), which operates as U.S. Healthcare's HMO for Pennsylvania. As of Decem ber 31, 1994, U.S. Healthcare and its subsidiaries had approximately 1,695,000 subscribers enrolled in its insured plans.

CHA is also a wholly owned subsidiary of U.S. Healthcare. It is a TPA, and provides the same type of services for self-insured employers as does BCI. In the geographic areas in which U.S. Healthcare operates an

11HMO, CHA utilizes only the U.S. Healthcare network of

doctors and hospitals. Similarly, U.S. Healthcare b ars all

TPAs other than CHA access to its network. At all t imes relevant to the present dispute, defendant Richard Wolfson was the Director of Pharmacy Programs and the Chair man of the Board of U.S. Healthcare, defendant William Brownstein served as the Regional Pharmacy Director for Pennsylvania, and defendant Scott Murphy was the Se nior Vice President of U.S. Healthcare, and the senior m arketing

executive for CHA. We will at times refer to U.S. H ealthcare, CHA, and HMO PA collectively as the "corporate defendants," and Wolfson, Brownstein and Murphy collectively as the "individual defendants."

B. Gary's Decision to Self-insure

U.S. Healthcare has established a network of health care providers which includes doctors, hospitals, and pharmacies in various geographic regions. Under the U.S. Healthcare prescription purchase program, indi viduals

who enroll as subscribers in U.S. Healthcare's HMOs select one pharmacy from the network of providers at which they will purchase prescription drugs. Subscribers can c hange their pharmacy designation by filling out a form. U nder this program, subscribers can purchase their prescriptio n drugs for a small co-payment (such as $5.00), with the re st of the cost of the prescription reimbursed to the pharmacy by U.S. Healthcare. In addition, U.S. Healthcare pays the pharmacies that serve the prescription purchase pla n a set monthly amount based on the number of U.S. Healthca re subscribers designating that pharmacy, without rega rd to the actual purchases of drugs from that pharmacy. Because subscribers seldom purchase prescription dr ugs from pharmacies other than those within the network

, membership in the U.S. Healthcare network is highly

coveted.

In 1991, Eagleville Pharmacy, Incorporated, d/b/a/ I Got It At Gary's ("Gary's") was a pharmacy chain of fou r stores in suburban Philadelphia. All four stores served as approved providers in the U.S. Healthcare pharmacy network. At this time, Gary's offered its full-time employees two options for their health insurance coverage: a Blue

12Cross/Blue Shield plan and a U.S. Healthcare HMO.

Approximately 35 Gary's employees enrolled as U.S. Healthcare members. In 1991, to save costs, Ga ry's decided to terminate its relationship with Blue Cro ss/Blue Shield and U.S. Healthcare, and to self-insure.

In need of a TPA to process its claims, Gary's eval uated several contenders, and then entered a written cont ract with BCI, terminable upon 30 days prior written not ice. Sandra Chen, the benefits manager at Gary's, sent termination letters to Blue Cross/Blue Shield and U.S. Healthcare.1 In response to the letter, Chen t estified that she received an angry and verbally abusive pho ne call from an unidentified U.S. Healthcare marketing exec utive.2 So began the wrath of U.S. Healthcare. Upon receipt of Gary's letter terminating its insurance contract, D avid Rocchino, one of U.S. Healthcare's sales vice-presi dents, telephoned Wolfson to inform him of the new develop ment and expressed his displeasure. Wolfson became "upse t" that Gary's had decided to self-insure, and knowing that Gary's was approved to serve as a pharmacy for U.S. Healthcare subscribers, promptly ordered an in ternal "quality assurance" review of the generic utilizati on rates of Gary's stores. Wolfson admitted at trial that his o nly reason for ordering such a review was that Gary's had term inated U.S. Healthcare coverage for its employees, but he testified that ordering a retaliatory review was not inapprop riate.3

___________________________________________________ ______________

1. The letter to U.S. Healthcare read:

Dear Sirs:

This letter is to advise U.S. Healthcare t hat effective June 30th, 1991, . . . Gary's will discontinue its me dical insurance

coverage with your organization. Please adjust your records to reflect

this upcoming change and advise me of any infor mation you may need to finalize our relationship.

2. In contrast, Chen testified to the receipt of a polite and professional phone call from a Blue Cross/Blue Shield representa tive, inquiring if they could accommodate Gary's needs in anyway and a s to the reason behind Gary's decision to cancel their health care contract.

3. When asked by BCI's counsel whether he ordered t he review of Gary's in response to Gary's decision to terminate with U. S. Healthcare, Wolfson responded:

13In August 1993, Gary's opened its fifth store, in

Abington, Pennsylvania. Gary's applied for admissio n of the new store to U.S. Healthcare's pharmacy network. Wo lfson, acting as director of U.S. Healthcare's pharmacy pr ogram, advised Brownstein not to process the application. U.S. Healthcare's executives acknowledged in their testimony that their motivation in refusing to proc ess Gary's application was retaliatory, based on a beli ef that Gary's did not deserve U.S. Healthcare's business o nce Gary's had terminated U.S. Healthcare's contract in a manner that Wolfson and Brownstein found to be offe nsive. In compliance with Wolfson's instructions, Brownste in did not process the application. However, at this time, no one at U.S. Healthcare told Gary's of the decision to r efuse to process the application. Instead, Gary's was inform ed that the application would be processed in due course. A s Wolfson conceded at trial, the plan was to "let [Ga ry's] hang . . . until they did something."

At the same time that Gary's Abington store applied for membership in the pharmacy network, U.S. Healthcare , at the instruction of Brownstein, performed a two-day, on-site audit of the utilization of generic drugs at Gary's store in Eagleville, Pennsylvania. The audit measured the pharmacy's compliance with the requirement of U.S. Healthcare's provider agreement that generic d rugs be used whenever possible to contain costs. The audit results suggested that Gary's dispensed brand-name drugs in stead of generic drugs at a rate higher than the median o f the U.S. Healthcare provider, and lacked complete documentation of prescription requests. Brownstein' s audit also demonstrated that the average cost-per-prescri ption to U.S. Healthcare at the Eagleville pharmacy was in l ine with the network median, so that the store's prescriptio ns were not costing U.S. Healthcare more on average than ot her

___________________________________________________ ______________

Well, I didn't think it was appropriate wi th an account that we

had a relationship with just to send a "dear s ir" letter [of termination] to a post office box . . . . I didn't feel th at they were giving us

due consideration and if they were operating i n that fashion, I

wanted to look to see if in fact there were any othe r issues related to the

I Got It At Gary's Pharmacies.

14pharmacies. Brownstein forwarded the audit results to the

Quality Assurance Committee, which referred the mat ter to

the Peer Review Committee. The Peer Review Committe e, consisting of three outside pharmacists, had the po wer to recommend sanctions to Wolfson, who would then deci de whether or not to impose them.

On November 16, 1993, the Peer Review Committee recommended that Gary's Eagleville store be put on" freeze" for three-months. The freeze was implemented and, a s a result, U.S. Healthcare removed the Eagleville stor e from the list of approved pharmacies, and new U.S. Healt hcare subscribers could not designate that store as their location for purchasing prescription drugs. In contrast to t he treatment of Gary's, other pharmacies with generic drug utilization rates lower than the Eagleville pharmac y and less complete documentation of prescription request s, had not been "frozen," and instead had received lesser or no sanctions. In fact, the parties stipulated that out of the approximately 1300 pharmacies in the U.S. Healthcar e network for southeastern Pennsylvania and southern New Jersey, the freeze sanction had been imposed for ge neric utilization reasons only four times (including its use against Gary's) in all of 1993 and 1994.

Although the extent to which Wolfson and Brownstein were involved in the implementation of the freeze s anction is unclear, both had participated regularly in Qual ity Assurance and Peer Review Committee meetings.

Brownstein later cited the results of the audit on the Eagleville store as the reason for the delay in pro cessing the Abington store's application for membership in the pharmacy network, stating that U.S. Healthcare had concerns about Gary's dispensing too many brand-nam e drugs at its stores.

Faced with a freeze on its Eagleville store and no movement on the Abington store's application for membership in the pharmacy network, Gary's Presiden t, Gary Wolf, set up a meeting with U.S. Healthcare of ficials, including Wolfson and marketing executive Scott Mur phy, for December 1, 1993. Among the issues discussed we re Gary's generic drug use and the admission of the Ab ington store to the U.S. Healthcare provider network.

15U.S. Healthcare expressed its displeasure with Gary 's

termination of U.S. Healthcare coverage in 1991, an d

Wolfson commented that "we like to do business with people who do business with us." At the same meetin g, U.S. Healthcare requested and received permission t o bid on Gary's TPA business for the next annual contract period.

C. Gary's Switch to CHA/U.S. Healthcare

Following the meeting with U.S. Healthcare, Wolf instructed his sister, Robin Risler, the Director o f Human Resources at Gary's, to "take a look at" switching to the TPA services offered by CHA at the anniversary date of Gary's contract with BCI (at which time the contrac t could be terminated with 30 days advance notice.) Concurr ently, Wolf sent a letter to Wolfson (dated December 6, 19 93) expressing, among other things, his "commitment tha t we will do everything possible to afford [U.S. Healthc are/CHA] the opportunity to service our company's needs as l ong as the programs are mutually beneficial", and requesti ng that U.S. Healthcare consider acting on the pending appl ication for Gary's Abington store.

When the December 6 letter failed to produce any movement on the Abington store, Wolf explained to C hen that, in order to get the Abington store approved, Gary's needed to "appease" U.S. Healthcare, and instructed her to write a further letter to U.S. Healthcare assuring them that Gary's would consider CHA's bid for its TPA service s. This letter, dated January 3, 1994, and addressed to Mur phy, was more explicit then the December 6 letter. It st ated:

As you requested, I am writing you to ackn owledge the agreement made between I got it at Gary's and U.S. Healthcare. We agree that as long as there are no additional cost[s] to the plan or reductio n in service,

US Healthcare will assume the role of TPA for our self insured medical plan on July 1, 1994.

* * *

We also understand that in anticipation of our strengthening relationship, US Healthcare will release the provider number for our pharmacy in Ab ington, PA.

16Chen testified that once this letter was written, i t was a

"foregone conclusion" that, as long as CHA's bid wa s comparable and for the same services, Gary's would switch to CHA. As of this time, CHA had not yet submitted a formal proposal to Gary's.

In January 1994, within weeks of Chen's letter, U.S. Healthcare had inspected the Abington pharmacy , and, without further ado, approved its participation in the provider network. Brownstein testified that he was informed that Gary's had agreed to switch TPAs to CHA, and " on the basis of that," was instructed to enroll Gary's Abi ngton store in the provider network. U.S. Healthcare acte d with such speed in approving the Abington store's applic ation for membership in the provider network that it failed t o follow its own standard approval procedures, and did not p resent the store's application to the Membership Applicati on Credentials Committee until after the pharmacy was already participating as a provider.

In February 1994, U.S. Healthcare lifted the freeze on the Eagleville store. Similarly, Gary's sixth pharmacy in Aston, Pennsylvania, was accepted into the provider networ k without delay. At approximately this same time, Rob in Risler, who testified that, ultimately, the selecti on of a TPA was her responsibility, hired an insurance broker t o assist her in evaluating the competing TPAs. In early June 1994, both BCI and CHA submitted bids for Gary's TPA busi ness, but CHA was given the opportunity to review BCI's b id before submitting its final proposal. In May 1994, even before Gary's had received a proposal from U.S. Hea lthcare, Risler told Lori Manley, the BCI customer service representative, that Gary's would be switching to CHA/U.S. Healthcare. Manley testified that Risler c onfided that she felt she was being "strongarmed" by U.S. Healthcare, that "she herself did not want to leave BCI"

and that the decision "was out of her control." Two other BCI employees similarly testified that in the sprin g of 1994, Risler denied having any real choice in the decisio n to give Gary's TPA business to CHA in light of the loss of U.S. Healthcare's business that Gary's would suffer if it failed to switch TPAs. The testimony with respect t o Risler of Manley and the two additional BCI employees was

17admitted over U.S. Healthcare's objection as state of mind

evidence. See infra note 31.

As the time for Gary's formal switch to CHA drew ne ar, U.S. Healthcare scheduled another on-site "quality assurance" audit, this time of Gary's Lansdale stor e for June 16, 1994. In the second week of June, Risler o fficially informed BCI of Gary's decision to give its TPA bus iness to CHA. After Gary's decision was officially announced , the audit of the Lansdale store uncovered no problems. Moreover, there were no further audits of Gary's pharmacies.

The reasons behind Risler's decision to switch to C HA are in dispute. BCI's TPA expert, Carlton Harker, testi fied that for the one year period of 1994-95, the BCI proposa l would have saved Gary's approximately $64,000, or 14%, compared to the proposal submitted by CHA. Harker further testified that he did not perceive any sign ificant differences in the services provided under the resp ective plans that would explain the cost differential. Ris ler testified that, in making the decision to give Gary 's TPA business to CHA, she was motivated by non-price, qu ality of service reasons. She also acknowledged, however, that

she had been satisfied with BCI's services. At all events, the

results of the decision are clear -- BCI lost its c ontract with Gary's.

In March 1995, BCI filed the present suit challengi ng the defendants' actions that preceded Gary's decision t o terminate its TPA contract with BCI. BCI proceeded at trial against defendants on four counts. Count I alleged that U.S. Healthcare, HMO PA, and CHA violated Section 1 of the Sherman Act, 15 U.S.C. S 1, by tying the partic ipation by Gary's in the U.S. Healthcare pharmacy network t o the purchase of CHA's TPA services for Gary's employees . In Count II, BCI alleged that all defendants violated the Racketeer-Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. S 1961 et seq., by engaging in or conspiring to commit at least two acts of racketeer ing activities, among them extortion, bribery, mail and wire fraud, and violations of the Travel Act.

In a Count III, BCI also contended that, to the ext ent that defendants Wolfson, Murphy, and Brownstein were not

18principal wrongdoers, they are liable for aiding an d abetting

under RICO. Finally, in Count IV, BCI alleged that all defendants tortiously interfered with its existing or prospective contractual relationship with Gary's in violation of state law. BCI sought treble damages and attorne ys fees under its federal law claims. It also sought puniti ve damages from each defendant in connection with its state

law claim.

D. Economic Evidence

1. Impact on Gary's

BCI argued at trial that Gary's ability to operate profitably depended on the business of U.S. Healthc are subscribers. As evidence, BCI pointed to the partie s' stipulation that, as of December 1993, when Wolfson told Gary Wolf that U.S. Healthcare likes to do business with people "who do business with us," 9,178 U.S. Health care subscribers had designated Gary's as their provider pharmacy, and that in 1993, Gary's subscribers purc hased $1.66 million of prescription drugs. BCI's expert D r. Calvin Knowlton, who is an associate professor and Chair o f the Department of Pharmacy Practice and Pharmacy Administration at the Philadelphia College of Pharm acy and Science, and the President of the American Pharmace utical Association, testified that, based on the stipulate d information and Gary's Sales Reports, in 1993,

U.S. Healthcare members accounted for between 3-15% of Gary's prescription drug sales, and, by 1995, for 2 0% of prescription drug sales in Gary's Montgomery County

stores.

If Gary's operated as an unapproved pharmacy, any

U.S. Healthcare subscriber who wanted to fill his o r her prescription at Gary's would have to pay full price , instead of a small co-payment. Additionally, Gary's head pharmacist testified that prescription drug purchas ers are valuable consumers because they typically purchase other items in addition to their prescription drugs. BCI also presented evidence that the prescription drug busin ess of pharmacies is a low-margin business that depends on high volume in order to operate profitably. In order to maximize

19their sales, pharmacies typically become members of as

many prescription drug plans as possible. Out of approximately 1300 participating pharmacies in southeastern Pennsylvania and southern New Jersey, only four pharmacies left the U.S. Healthcare pharmacy n etwork in the period from January 1, 1993 to October 1, 19 95 for reasons other than going out of business.

2. Knowlton's Survey

At trial, BCI presented a telephone survey of the m arket areas surrounding several of Gary's pharmacies, per formed by Dr. Knowlton, which was admitted over objection. In this survey, pharmacy students telephoned six to eight pharmacies in the vicinity of three arbitrarily sel ected Gary's store locations and asked them a series of q uestions. Knowlton drew conclusions regarding U.S. Healthcare 's market power based only on the responses of those s tores that listed U.S. Healthcare as their primary HMO cu stomer. He testified that based on this survey U.S. Healthc are's market share of prescription drug sales for the mar ket areas served by the two largest Gary's pharmacies a nd the new Abington pharmacy was approximately 25%. Knowlt on further testified that other sources of information indicated that his survey conclusions as to market share woul d apply generally in Montgomery County.

3. Interaction Between U.S. Healthcare and Other Pharmacy Operations

The jury also heard evidence of the interaction bet ween U.S. Healthcare and Rite-Aid, Shop-Rite, Food Circu s, Walmart, Phar-mor and Weis Markets. With respect to the pharmacy operation in each of these chains, U.S. Healthcare conditioned participation in the pr ovider network upon their making U.S. Healthcare insurance available to their employees. Despite initial resis tance, RiteAid, Phar-Mor and Weis Markets ultimately agreed to offer their employees U.S. Healthcare insurance products. There was, however, an absence of supporting evidence on the point, and it is not clear that these large compani es made U.S. Healthcare a part of their benefits package in response to economic pressure rather than for legitimate bus iness

reasons.

20Shop-Rite and Food Circus responded by filing

complaints with the New Jersey Department of Insura nce.4 After the Department of Insurance took action, U.S. Healthcare agreed to accept the stores into it s provider network notwithstanding their refusal to offer U.S. Healthcare coverage. The Walmart stores also r esisted U.S. Healthcare's policy, choosing instead to forgo membership in the provider network. U.S. Healthcare did approve the Walmart stores in Massachusetts, where an Any Willing Provider statute was in force. Defendan ts' experts testified that linkage of network membershi p and purchase of TPA services was normal business behavi or and was not anti-competitive.

4. The Setting of Reimbursement Prices

BCI also presented evidence of how U.S. Healthcare exercised its market power to set reimbursement pri ces. In January 1996, it effected a drastic reduction in th e reimbursements it paid to participating pharmacies for prescription drugs dispensed to U.S. Healthcare

subscribers. Dr. Knowlton testified that this reduc tion,

when considered with the fact that U.S. Healthcare does not pay pharmacies a dispensing fee, made U.S. Healthca re's overall compensation to pharmacies the lowest of an y thirdparty payor in the southeastern Pennsylvania region . Yet, notwithstanding the major reimbursement price reduc tion, only two pharmacies out of approximately 8000 in 12 or 13 states discontinued their participation in the U.S. Healthcare provider network.

Dr. Knowlton testified that, based on this evidence , and

the evidence of U.S. Healthcare's successful domina nce of other pharmacies, exclusion from the U.S. Healthcar e provider network could threaten Gary's survival. As a result, he testified that Gary's had no choice but to accept U.S. Healthcare's arrangement.

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4. The record does not develop the extent to which these complaints may have been facilitated by New Jersey's enactment, in July 1994, of an Any Willing Provider statute which provides that a phar macy cannot be excluded from an HMO if it "accepts the terms" of t he HMO. N.J. Stat. Ann. S 26:2J-4.7(a)(2) (West 1996).

21E. The Jury Verdict

After 17 days of trial, the case was submitted to t he jury on special interrogatories. The jury returned a ver dict for BCI on all counts and awarded BCI $200,000 in compensatory damages.5 The jury also awarded BCI $1,000,000 in punitive damages in connection with i ts tortious interference claim. That award was apporti oned as follows: $400,000 against U.S. Healthcare, $200,000 against CHA, $100,000 against HMO PA, $200,000 agai nst Wolfson, $75,000 against Murphy, and $25,000 agains t

Brownstein.

At the close of BCI's case, and again at the close of all evidence, the defendants moved, pursuant to Fed. R. Civ. P. 50(a), for judgment as a matter of law. These motio ns were denied. Following the verdict, defendants renewed t heir motion for judgment as a matter of law pursuant to Fed. R. Civ. P. 50(b). Concurrently, defendants filed an al ternative motion for a new trial pursuant to Fed. R. Civ. P. 59. The district court denied these motions in all respects . On appeal, defendants challenge the denial of these mo tions. The majority of the issues before us arise from the district court's denial of defendants' renewed motion for ju dgment as a matter of law, and, as to these issues, our re view is plenary. See Stelwagon Mfg. Co. v. Tarmac Roofing, 63 F.3d 1267, 1270-71 (3d Cir. 1995) ("The legal foundation for the jury's verdict is reviewed de novo while the factua l findings

are reviewed to determine whether the evidence and justifiable inferences most favorable to the prevai ling party afford any rational basis for the verdict."). Where a different standard of review is implicated, it will be noted in the text.

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5. The district court's initial order of judgment m ade it unclear whether BCI was to receive $200,000 in total compensatory d amages, or to recover that amount separately on each of its three legal theories (thus allowing a total recovery of $600,000 in compensato ry damages). In response to defendants' motion, pursuant to Fed. R. Civ. P. Rule 59(e), to alter or amend the order of judgment, the distri ct court subsequently amended its order to make clear that BCI may recove r only once the $200,000 in compensatory damages that it was awarde d. BCI does not dispute this point on appeal.

22III. THE ANTITRUST ISSUES

A. Introduction -- Characterization of BCI's Claim

BCI's antitrust claim arises from U.S. Healthcare's decision to use the leverage acquired by virtue of its ability to provide Gary's access to thousands of potential pharmacy customers to pressure Gary's into selectio n of its subsidiary, CHA, as its TPA. BCI claims that this arrangement was an illegal tie in violation S 1 of the Sherman Act, 15 U.S.C. S 1, which generally outlaws "[e]very contract . . . in restraint of [interstate or international] trade or commerce." Defendants submi t that their conduct was simply hard bargaining that is we ll

within the mainstream of business conduct and does not form the basis of a cognizable antitrust claim.

At trial, BCI's theory of the case prevailed. The j ury found that U.S. Healthcare's practices were illegal under both per

se and rule of reason theories of antitrust liabili ty. On appeal, defendants challenge the characterization o f the arrangement at issue as a tying arrangement. They c ontend that the arrangement was one of reciprocal dealing and not tying, and that as a result the per se test for ant itrust liability is inapplicable. Before turning to a revi ew of the jury verdict, which the defendants challenge, we wi ll consider the characterization question.

Tying exists where a seller conditions the sale of one good (the tying product) on the buyer also purchasing an other, separate good (the tied product). See Town Sound & Custom Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468, 475 (3d Cir. 1992) (in banc). The antitrust concern over ty ing arrangements arises when the seller can exploit its market power in the tying market to force buyers to purcha se the tied product which they otherwise would not, thereb y restraining competition in the tied product market. 6 See

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6. Of course, not all tying arrangements have anti- competitive effects in violation of the Sherman Act. The Supreme Court has twice made use of the following as an example of a tie that is not a concern of the

antitrust laws: "[I]f one of a dozen food stores in a communi ty were to refuse to sell flour unless the buyer also took sugar it woul d hardly tend to

23Allen-Myland, Inc. v. International Bus. Mach. Corp ., 33 F.3d

194, 200 (3d Cir. 1994); Jefferson Parish Hosp. Dis t. No. 2 v. Hyde, 466 U.S. 2, 12 (1984).

Unlike tying -- where one party is only a seller an d the other only a buyer -- reciprocal dealing exists whe re "two parties face each other as both buyer and seller. O ne party offers to buy the other party's goods, but only if the second party buys other goods from the first party." Spart an Grain & Mill Co. v. Ayers, 581 F.2d 419, 424 (5th Cir. 19 78). More colloquially, reciprocal dealing exists when one pa rty tells the other: "I'll buy from you, if you buy from me." Again, like tying, not all reciprocal dealing arrangements are anticompetitive. The Sherman Act is concerned with what has been termed "coercive" reciprocal dealing, where a party uses its economic power as a purchaser in one marke t in order to restrict competition in another market whe re it is a seller. See Betaseed, Inc. v. U & I, Inc., 681 F. 2d 1203, 1216 (9th Cir. 1982).7

BCI argued, and the jury found, that U.S. Healthcar e and CHA tied the purchase of CHA's TPA services to the right to continued participation in the U.S. Healthcare phar macy network. In order to characterize this arrangement as a tie, U.S. Healthcare must be deemed to have "sold" Gary' s the ability to participate in its pharmacy network, but only if Gary's also purchased CHA's TPA services. Defendant s contend that BCI's characterization is not correct since U.S. Healthcare did not "sell" Gary's the ability t o participate in the pharmacy network as participatio n in that network is free. In fact, the ultimate result of the

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restrain competition if its competitors were ready and able to sell flour by itself." Jefferson Parish Hosp. Dist. No. 2 v. H yde, 466 U.S. 2, 12 (1984) (quoting Northern Pac. R. Co. v. United Stat es, 356 U.S. 1 (1958)). Indeed package sales such as those noted in the for egoing example may be used by a seller as a means of competing, and ma y be desired by buyers. The Sherman Act is not designed to preclude such arrangements. See id.

7. This is distinguished from "mutual" reciprocal d ealing which occurs "when both parties stand on equal footing with resp ect to purchasing power, yet they agree to purchase from one another. " Betaseed, 681 F.2d

at 1216.

24contract was that money flowed in the opposite dire ction --

from U.S. Healthcare to Gary's in exchange for pres cription drugs purchased by U.S. Healthcare members that designated one of Gary's stores as their network ph armacy. Thus, defendants argue, the arrangement is more accurately labeled as reciprocal dealing where U.S. Healthcare conditioned its agreement to purcha se prescription drugs from Gary's on Gary's agreement to purchase TPA services from CHA.

We agree that the arrangement is not tying. While t here is force to defendants' broader argument, we do not believe that the relationship between Gary's and U.S. Healt hcare can be neatly squeezed into the purchase/sale parad igm. As a result, we are hesitant to conclude that the arrangement was reciprocal dealing, but instead bel ieve that the true character of the arrangement lies som ewhere between the two practices. Fortunately, resolution of the antitrust issue presented in this appeal does not r equire us to wedge the facts into either doctrinal box, for w e conclude that there was insufficient evidence to support lia bility under the Sherman Act regardless of the label place d on the challenged arrangement.

The law is well developed as to when tying arrangem ents should give rise to liability under the Sherman Act . Such arrangements can be deemed illegal per se or be fou nd to violate the rule of reason. Per se liability exists where the defendant is found to have appreciable market power in the tying market. In such cases, the ability to leverag e this power to restrain trade in the tied market is presu med and no inquiry need be made into the actual prevailing market conditions in that market. See Jefferson Parish, 46 6 U.S. at 15-18 & n. 25; Town Sound, 959 F.2d at 477. Where appreciable tying market power cannot be shown, inq uiry into the tied product market cannot be avoided, and the plaintiff therefore has the more difficult burden o f showing that the arrangement violated the rule of reason be cause it unreasonably restrained competition in the tied pro duct market. See Jefferson Parish, 466 U.S. at 29.

In contrast to tying arrangements, reciprocal deali ng has not been the subject of extensive case law developm ent. Indeed, this Court has yet to set forth a test for determining

25when a reciprocal dealing arrangement runs afoul of the

Sherman Act.8 Defendants seek to persuade us to fil l this vacuum by holding that reciprocal dealing arrangeme nts cannot be found illegal per se, but instead should be judged only under the less rigorous rule of reason test.9 This position has not been adopted by any of our sister circuits. All those that have examined the relationship betwe en tying and reciprocal dealing have determined that each pr actice

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8. Defendants suggest that we set forth a rule for judging reciprocal dealing arrangements in W.L. Gore & Assocs., Inc. v . Carlisle Corp., 529 F.2d 614, 624 (3d Cir. 1976) where we stated that:

[T]he use of substantial purchasing power in one product market

to coerce a supplier into a reciprocating pur chase in another market may be an illegal restraint of trade if th e user's purchasing power is sufficiently substantial and its use resul ts in substantial

foreclosure of competition in the other weaker product market.

In Gore, the owner of two patents brought an action for infringement. The defendant's answer denied the validity of the p atents, asserted that one of the patents was unenforceable because of fra ud in its procurement, and counterclaimed for damages allegin g a violation of the Sherman Act. After trial, the district court entere d a judgment holding one of the patents valid and infringed and the othe r patent invalid, granting the plaintiff an injunction restraining th e defendant from infringing the valid patent, and determining that p laintiff had violated the Sherman Act. Both parties appealed from the jud gment. In determining that we had jurisdiction to review the injunction, we expressly stated that we had no jurisdiction in an interlocutory appeal

over the antitrust counterclaim of the defendant. S ee id. at 618. Thus, the statement in Gore regarding reciprocal dealing was dicta, and does

not establish a rule.

9. In support of this view, defendants primarily re ly on Phillip E. Areeda et al., Antitrust Law, a leading treatise. Areeda a rgues that "forced reciprocal exchanges are . . . legally distinct fro m ties and need not receive the same antitrust treatment." X Areeda, An titrust Law P 1750c, at 268 (1996). He believes that reciprocal trading should not be illegal per se, and that such a claim should instead be jud ged solely under the rule of reason test. See Id. P 1778, at 460-61. Pro fessor Areeda's view may be colored by his belief that tying arrangement s also should not be illegal per se, a view that is contrary to current law. See IX Areeda, Antitrust Law P 1730, at 406 14 (1991).

26should be evaluated under both the per se and rule of

reason tests.10

This position is logical since both practices impli cate the

same antitrust concern -- the unlawful extension of economic power in one market to another market. How ever, we decline to resolve this conflict here since the amorphous and idiosyncratic nature of this case does not prov ide an appropriate framework in which to fully flesh out t he need for a separate test for reciprocal dealing arrangem ents. Further, we need not reach this issue in order to r esolve the present appeal since we find that BCI failed to set forth either a valid per se or rule of reason antitrust c laim -- a finding fatal to both a tying claim and a reciproca l dealing claim under any test we might devise.

B. Per se Liability

Since our jurisprudence regarding both per se and r ule of reason liability has developed in the context of ty ing cases, we will use the terms "tying" product market and "t ied" product market to describe the two markets at issue despite our belief that the arrangement in this cas e lies somewhere between tying and reciprocal dealing. The per se test is used in cases where exploitation of leverag e in the market for the tying product is "probable". See Jef ferson Parish, 466 U.S. at 15; Town Sound, 959 F.2d. at 47 6-77. The elements of a per se claim are (1) the defenda nt seller

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10. See, e.g., Betaseed, Inc. v. U&I, Inc., 681 F.2 d 1203, 1221 (9th Cir. 1982) ("The similarity between coercive reciprocity and tying arrangements, both in form and in anti-competitive consequences, leads to the conclusion that the two practices should be judged by similar standards."); Spartan Grain & Mill Co. v. Ayers, 58 1 F.2d 419, 425 (5th Cir. 1978) (holding that label of tying and recipro cal dealing was immaterial, and that the per se standard should be applied in both); E.T. Barwick Indus. v. Walter E. Heller & Co., 692 F. Su pp. 1331 (N.D. Ga. 1987) (same legal standards apply to reciprocal dea ling as tying), aff'd 891 F.2d 906 (11th Cir. 1989). See also II Earl W. Kintner, Federal Antitrust Law S 10.67, at 264-65 (1980) ("[T]he ver y presence of the element of coercion indicates that such reciprocal dealings are only anticompetitive in effect. It is widely agreed that coe rcive reciprocality,

like tying arrangements, should be considered a per se v iolation of Section 1
of the Sherman Act.").

27must sell two distinct products; (2) the seller mu st possess

market power in the tying product market; and (3) a substantial amount of interstate commerce must be

affected. See id. at 477. Where such elements are s hown, the defendant's tying practices are condemned witho ut further proof of anti-competitive effect. See id. P rincipally at issue in this appeal is whether BCI met its burden of proving the second element of this test: that U.S. Healthcare exercised market power in the tying market.11

The jury determined that U.S. Healthcare exercised sufficient market power in the tying market to cons titute a per se violation of the Sherman Act. The viability of that finding, however, depends on the correctness of the market definition sent to the jury. Defendants maintain th at the definition was incorrect as a matter of law, and th at U.S. Healthcare could not exercise sufficient power in a properly defined tying market to sustain a per se c laim.

1. Defining the Relevant Market

Before we can evaluate the extent to which U.S. Healthcare exercises power in the tying market , that market must be properly defined. A market has two components, product and geographic. See Brown Shoe Co. v. United States, 370 U.S. 294, 325-28 (1962). The burden is on the plaintiff to define both components of th e relevant market. See Queen City Pizza, Inc. v. Domino's Pizz a, Inc., 124 F.3d 430, 436 (3d Cir. 1997); Pastore v. Bell T elephone Co., 24 F.3d 508, 512 (3d Cir. 1994); Tunis Bros Co ., Inc. v. Ford Motor Co., 952 F.2d 715, 726 (3d Cir. 1991). T he tying market definition asserted by BCI and adopted by th e jury was: "U.S. Healthcare members with prescription dru g benefits in the areas surrounding . . . Gary's phar macies in suburban Philadelphia." Defendants contend that thi s definition contains both a flawed product market -- U.S. Healthcare members with prescription drug bene fits-- and a flawed geographic market -- the areas surroun ding Gary's pharmacies in suburban Philadelphia. They su bmit

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11. The other issues have not been briefed by the p arties. The third element is plainly not disputed. While arguably the re is an implicit challenge to the first element, it would involve th e characterization question, and we need not reach it.

28instead that the relevant tying market consists of "all

purchasers of prescription drugs in the greater Phi ladelphia

area."

We agree that BCI failed to meet its burden of pres enting sufficient evidence to support the product and geog raphic markets adopted by the jury. However, while the evi dence enables us to determine that the proper product mar ket consists of all purchasers of prescription drugs, i t is more difficult to determine the relevant geographic mark et on the basis of the record. Fortunately, as will be shown, delineation of the exact contours of the geographic market is not necessary to an evaluation of the merit of p laintiff's per se claim. We turn first to the product market i ssue.

a. The Product Market

BCI has posited a single brand market consisting so lely of U.S. Healthcare members with prescription drug b enefits. Should we accept this market definition our inquiry would be at an end, for U.S. Healthcare must, by definiti on, control 100% of this product market regardless of t he geographic market. BCI seeks to support this produc t market by arguing that no products are "reasonably interchangeable" with U.S. Healthcare members, and that it is compelled by the Supreme Court's decision in Eas tman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992). Examining each of these contentions in turn , we conclude that this narrow market definition cannot stand

as a matter of law.

The outer boundaries of a product market are determ ined by evaluating which products would be reasonably interchangeable by consumers for the same purpose. See Allen-Myland, 33 F.3d at 201 n.8; Town Sound, 959 F .2d at 480. "Interchangeability implies that one product i s roughly equivalent to another for the use to which it is pu t; while there might be some degree of preference for the on e over the other, either would work effectively." Allen My land, 33 F.3d at 206. One measure of interchangeability is " cross elasticity of demand between the product itself and substitutes for it." Queen City Pizza, 124 F.3d at 437 (quoting Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (1962)).

29When there is cross-elasticity of demand between pr oducts

in a market, "the rise in the price of a good withi n [the] relevant market would tend to create a greater dema nd for other like goods in that market." Tunis Brothers, 9 52 F.2d

at 722.

Thus the issue is which products, if any, Gary's, t he consumer, would find to be reasonably interchangeab le with, or substitutable for, U.S. Healthcare members who purchase prescription drugs. Defendants argue that no evidence in the record contradicts the logical assu mption that Gary's considers members of other prescription plans, or uninsured persons, completely interchangeable wi th U.S. Healthcare members. We agree.

The only evidence to which BCI directs us to suppor t its argument that there are no products reasonably interchangeable with U.S. Healthcare customers is t hat when U.S. Healthcare lowered the prices it would pa y to pharmacies for the purchase of prescription drugs b y U.S. Healthcare members, none of the pharmacies dro pped

out of the U.S. Healthcare network. BCI asserts tha t this shows that there is no cross-elasticity of demand b etween U.S. Healthcare members and other purchasers of prescription drugs since, if there were, then the l owering of prices would have caused pharmacies to stop doing

business with U.S. Healthcare customers in favor of other customers who paid more.

This evidence does not support BCI's market definit ion. The fact that participating pharmacies do not drop out of the U.S. Healthcare network when it lowers its paym ent schedule does not prove that U.S. Healthcare's acti on failed to increase the pharmacies demand for customers who are not members of U.S. Healthcare. Even though pharmac ies undoubtedly desire higher profit customers, it woul d not be necessary for them to drop out of the U.S. Healthca re network in order to pursue, or acquire, these custo mers. Nor would it be economically rational to do so sinc e pharmacies, like most businesses, seek as many cust omers as they can find.12

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12. We assume that membership in the U.S. Healthcar e network remained profitable after U.S. Healthcare lowered i ts payment schedule.

30Moreover, to the extent that BCI is arguing that

U.S. Healthcare customers are not interchangeable w ith other customers because the market for prescription customers is so competitive that U.S. Healthcare me mbers are difficult to replace, this argument also does n ot support its product market definition. Product market defin ition turns on the existence of close substitutes for a p articular product, not on the ability of any particular consu mer to switch effortlessly to such substitutes. It is true that when Gary's loses a supply of customers it must compete for other customers to make up lost sales; however, thi s does not mean that those new customers, when found, woul d not be interchangeable with U.S. Healthcare members from Gary's standpoint.

BCI also seeks to support its single brand market b y reference to the Supreme Court's opinion in Kodak. That case, however, is inapposite. In Kodak, independent service organizations brought suit alleging that Kodak had tied replacement parts for its copiers to Kodak repair s ervice. See 504 U.S. at 459. Although Kodak exercised compl ete control over the market for the tying product -- replacement parts for its copiers -- since they wer e unique, see id. at 456-57, it argued that it could not, as a matter of law, have sufficient market power in that deriva tive aftermarket to restrain trade because the primary m arket for new copiers was competitive. According to Kodak , any attempt to exercise market power in the derivative market for copier parts would raise the "life cycle" cost of owning a Kodak copier, and customers would buy fewer Kodak copiers, making the attempt unprofitable. See id. a t 470.

The Supreme Court declined to let Kodak's economic theory prevail on summary judgment, holding that, u nder certain circumstances, the buyer of a Kodak copier could be "locked in" to the Kodak parts market by virtue of the

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To the extent that BCI is arguing that pharmacies s tayed in the U.S. Healthcare network despite the fact that it be came unprofitable to do so, this argument renders their overall claim a non sequitur. U.S. Healthcare cannot exercise control over pharma cies via access to its network where membership in that network causes pha rmacies to lose

money.

31high "switching costs" of purchasing a new copier f rom

another manufacturer. See id. at 476. In such a sit uation, Kodak copier owners would be forced to purchase cop ier parts from Kodak since there were no reasonable substitutes for such parts. Thus, Kodak establishes that a single brand market may be considered the relevant market where a legitimate class of consumers is locked in to purchasing a non-interchangeable tying product in a derivative market due to high switching costs in th e primary market. See Queen City Pizza, 124 F.3d at 4 39-40.

BCI directs us to no evidence introduced at trial t o support a conclusion that Kodak is applicable to th is case. On appeal, they argue that U.S. Healthcare members are "locked in" to U.S. Healthcare and, by extension, t o the pharmacies in its provider network. We doubt that t his argument is factually correct, for we find no evide nce suggesting that U.S. Healthcare members who wish to switch HMOs face switching costs significant enough to constitute a lock in. But even if it is, the argume nt is misplaced since Kodak is concerned with the situati on where the victims of the alleged tie -- in that cas e, the purchasers of Kodak copiers -- are faced with high switching costs and thus are "locked in" to the mar ket for the tying product. Under BCI's theory of the case, Gary's is the purchaser of the tying product which is U.S. He althcare members who purchase prescription drugs. Thus in or der to fall within Kodak's concept of lock in, BCI need ed to, at a minimum, provide evidence that Gary's -- not

U.S. Healthcare members -- was locked into the

U.S. Healthcare network. That it did not do.

b. The Geographic Market

BCI proposed a non-contiguous, gerrymandered geographic market consisting solely of the areas surrounding Gary's pharmacies in suburban Philadelp hia. To meet its burden of proving the relevant geograph ic market, see Tunis Brothers Co., 952 F.2d at 726, BC I was required to show that the geographic market it prop osed was "the area in which a potential buyer may ration ally look for the goods or services he or she seeks." Se e id.

32(quoting Pennsylvania Dental Ass'n v. Medical Serv. Ass'n of

Pa., 745 F.2d 248, 260 (3d Cir. 1984)).

The only evidence that BCI offered to support its geographic market was testimony from Dr. Knowlton t hat the area from which Gary's stores, or any pharmacie s, draw their customers is made up of primary and secondary trading areas surroundings its stores. Knowlton def ines a primary trading area is the geographic area surroun ding a pharmacy from which it draws 50% of its clientele, and a secondary trading area as the geographic area from which

it draws 90% of its clientele.

We believe that Knowlton is undoubtedly correct to the extent that the jury could reasonably find that pha rmacy customers generally use pharmacies near their home. Thus we reject defendants' argument that the relevant ge ographic market should be the greater Philadelphia area.13 H owever, mere invocation of the common-sense precept that customers use pharmacies near their homes does not satisfy BCI's burden of showing that the particular geographic market chosen fairly represents "the are a in which a potential buyer may rationally look for the goods or services he or she seeks." In this case, where BCI introduced no evidence to support such a conclusion , an amorphous and gerrymandered geographic market canno t stand as a matter of law. See id. at 727 ("The mere delineation of a geographical area, without referen ce to a market as perceived by consumers and suppliers, fai ls to meet the legal standard necessary for the relevant geographic market.").

2. U.S. Healthcare's Power in the Tying Market

Having determined that the market definition adopte d by the jury was erroneous as a matter of law, we are n ow faced with the task of assessing U.S. Healthcare's market

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13. Defendants rely primarily on evidence that Gary 's advertised in the greater Philadelphia area to support their expansiv e conception of the geographic market. This reliance is misplaced since "the geographic market is not comprised of the region in which the seller attempts to sell its product, but rather is comprised of the area wh ere his customers would look to buy such a product." Tunis Bros., 952 F.2d at 726.

33power in a properly defined market on the basis of the trial

record. Our task is made more difficult by the fact that the

record does not contain sufficient evidence to enab le us to clearly define the relevant geographic market. In m ost instances, the proper course in the face of such

circumstances would be to remand the case for a new trial; however, our review of the record indicates that it is simply not possible for U.S. Healthcare to have exercised sufficient market power in the properly defined product market to constitute a per se violation in any plausible geog raphic

market.

In order to impose per se antitrust liability, it m ust be shown that the defendant had "appreciable economic power in the tying market." Kodak, 504 U.S. at 464 (empha sis added). "Market power is defined as the ability`to raise prices or to require purchasers to accept burdensom e terms that could not be exacted in a completely competiti ve market.' " Allen-Myland, 33 F.3d at 200 (quoting Un ited States Steel Corp. v. Fortner Enters., Inc. (Fortne r II), 429 U.S. 610, 620 (1977)). Since "[t]he existence of su ch power ordinarily is inferred from the seller's possession of a predominant share of the market," Kodak, 504 U.S. a t 464 (citations omitted), we turn first to an inquiry in to U.S. Healthcare's share of the market for drug pres cription customers. In so doing, we are mindful of the fact that "[m]arket share, of course, is only one type of evi dence that may prove the defendant has sufficient market power to impose per se antitrust liability." Allen-Myland, 3 3 F.3d at

209.

a. Evidence of Market Share

At trial, BCI's sole evidence of market share deriv ed from a survey conducted by Dr. Knowlton. His survey conc luded that U.S. Healthcare members purchased twenty to tw entyfive percent of the prescriptions at the surveyed pharmacies. Defendants argue that this market share is

insufficient as a matter of law to serve as the bas is for a finding of a per se violation. We agree.14 The high est

(Text continued on page 36)

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14. Defendants also argue that the district court a bused its discretion in admitting the survey. We also agree with this conte ntion; however, since

34we conclude that even if the survey were admitted, it would not help

BCI, we address the methodological errors that shou ld have barred its admission only briefly.

Survey results offered as proof of the matter asser ted are hearsay, and thus the results of a survey, and any testimony bas ed on those results, cannot be admitted into evidence unless the survey falls into a recognized class exception to the hearsay rule or i nto the residual exception contained in Fed. R. Evid. 803(24). See P ittsburgh Press Club v. United States, 579 F.2d 751, 755-58 (3d Cir. 197 8). In this case none of the class exceptions are present, so we examine whether the survey contains the "circumstantial guarantees of trustwor thiness" required for admissibility under Rule 803(24).

In Pittsburgh Press, we stated that "the circumstan tial guarantees of trustworthiness are for the most part satisfied if the poll is conducted

in accordance with generally accepted survey principle s." Id. at 758. We

then discussed several factors which must be examin ed in determining whether a poll meets generally accepted survey prin ciples

A proper universe must be examined and a r epresentative sample must be chosen; the persons conducting the survey must be experts; the data must be properly gathere d and accurately reported. It is essential that the sample design, the questionnaires and the manner of interviewing meet the st andards of objective surveying and statistical techniques.

Id.

The proponent of the evidence has the burden of est ablishing these elements of admissibility. See id. In this case, we find that this burden was not met and that the methodology of the survey was so flawed that

the district court's decision to admit it was not c onsistent with the

exercise of sound discretion.

Knowlton's survey was designed to determine U.S. He althcare's market share in the region close to three of Gary's six ph armacy locations. To determine market share, he had pharmacy students ca ll six to eight to pharmacies within varying distances of each of the three pharmacies (resulting in a total universe of twenty pharmacies ). The pharmacists at these pharmacies were then asked to name the HMO wi th which they did the majority of their business, and to report t he percentage of their prescription business for which that HMO was respon sible.

This methodology is flawed in several respects. We identify two particularly significant errors. First, the survey questions used were not objective. For example, pharmacists were asked:

35estimate of U.S. Healthcare's market share resultin g from

Knowlton's survey -- which, in addition to the methodological errors set out in note 14, used the improper geographic market discussed at pp. 32-33, supra -- was twenty five percent. Even were we to accept this pe rcentage as accurate, it is insufficient in itself to impose per se antitrust liability. See Jefferson Parish, 466 U.S. at 27 (defendant hospital's 30 percent share of market sh owed that it lacked the "kind of dominant market positio n that obviates the need for further inquiry into competit ive conditions."); see also Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 612-13 (1953) (defendants sha re of 33-40 percent of advertising market insufficient to invoke per se rule). In fact, since Jefferson Parish no co urt has inferred substantial market power from a market sha re

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You provide services for people with presc ription cards, like PCS

and Paid, et cetera. You also provide services for people on specific

HMO plans like Keystone, U.S. Healthcare, et c etera. What's the name

of the HMO with which you did the most prescr iption business . . .?

This question improperly slants the response by hig hlighting respondent to U.S. Healthcare's market presence. People respon ding to a survey tend to react to the framing of a question. See, e.g. J. R. Eiser, Social Psychology 219-20 (1986). In addition, this questio n specifically excluded large institutional, non-HMO purchasers of prescrip tion drugs such as PCS and PAID. As a result, it narrowed the product market from "purchasers of prescription drugs" to "HMO purchase rs of prescription drugs".

Second, while Knowlton surveyed 20 pharmacies, he o nly used the data obtained from 14 of those pharmacies in tabula ting his results. This decision resulted from the fact that only four teen of the twenty pharmacies surveyed named U.S. Healthcare as their largest HMO customer. Knowlton simply ignored the other six pha rmacies whose data presumably stated a lower estimate of U.S. Healthca re's market share. This type of selective analysis violates the requir ement that, in order

for survey results to be admissible, the "data must be properly gathered and accurately reported".

We conclude that the cumulative effect of these, an d other, methodological errors render it impossible to say t hat this survey was "conducted in accordance with generally accepted su rvey principles," and

thus it should not have been admitted.

36below 30 percent. See, e.g. Town Sound, 959 F.2d at 481

(affirming summary judgment for defendant with cont rol of 10-12% of tying product market); Marts v. Xerox, 77 F.3d 1109, 1113 n.6 (8th Cir. 1996) (18% share of one po rtion of photocopier market too small for unlawful tying) ; Continental Trend Resources, Inc. v. OXY USA, Inc., 44 F.3d 1465, 1482 (10th Cir. 1995) (affirming grant of sum mary judgment for defendants where defendants controlled less than 10% of relevant market, since "plaintiffs fail ed to establish defendants had sufficient strength in the relevant market."), vacated on other grounds and remanded, 1 16 S. Ct. 1843 (1996); Breaux Bros. Farms, Inc. v. Tec he Sugar Co., Inc, 21 F.3d 83, 87-88 (5th Cir. 1994) (17.5 p ercent share of relevant market for tying product "is not normally sufficient to satisfy the requirements of the per s e rule.").

Because U.S. Healthcare's true market share in a properly defined geographic area could be no higher than 25 percent, plaintiff's cannot rely solely on marke t share to establish a per se antitrust violation.15

b. Other Factors Bearing on Market Power

Factors other than market share can establish that U.S. Healthcare exercised appreciable power in the market for pharmaceutical customers. See Allen-Myland, 33 F.3d at 209. BCI contends that in this case market power ca n be inferred from the numerosity of the ties imposed by the defendants, and by "market realities" which indicat e that the figures for prescription drug sales understate the importance of U.S. Healthcare members to a pharmacy 's

bottom line.

In order to demonstrate tying market power through evidence of the widespread acceptance of a tie, the plaintiff must show that the tie was accepted by an appreciab le number of buyers within that market, and that there is an

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15. We note that evidence produced at trial showed that 16% of the residents of the greater Philadelphia area belong t o a U.S. Healthcare plan. We assume, therefore, that U.S. Healthcare's market share in the relevant geographic market lies somewhere between 1 6%, its share in an impermissibly broad geographic market, and 25%, its share in an impermissibly narrow one.

37"absence of other explanations for the[ir] willingn ess . . . to

purchase the package." See Fortner II, 429 U.S. 610 , 618 n.10 (1977); see also Grappone, Inc v. Subaru of Ne w England, Inc., 858 F.2d 792, 797-98 (1st Cir. 1988) (widespread acceptance of tie not evidence of marke t power where there are plausible business reasons for acce pting tie). In this case, BCI has failed to meet its burd en.

At trial, the only evidence offered by BCI concerni ng other ties by defendants was that, with respect to six la rge chains -- Rite-Aid, Shop-Rite, Food Circus, Walmart, Phar- mor and Weis Markets -- defendants attempted to tie app roval of additional pharmacies for participation in the U.S. Healthcare network to each chain agreeing to o ffer CHA and/or U.S. Healthcare to its employees. Of the se purported tying attempts, only three -- those invol ving RiteAid, Phar-Mor and Weis Markets -- were deemed "successful" by the plaintiff. However, as we have already observed, BCI failed to demonstrate that these larg e companies did not base their decision to make U.S. Healthcare a part of their benefits package on plausible business reasons, see supra pp. 20-21. Wi thout some such showing, the evidence of other tie-ins is insufficient to constitute proof of appreciable mar ket power.16

BCI also argues that market power can be inferred f rom the fact that exclusion from the U.S. Healthcare ph armacy network would have a major adverse impact on a pharmacy, to the point of threatening that pharmacy 's survival. BCI submits that since the prescription d rug business is a low-margin business that depends on h igh volume, large purchasers such as U.S. Healthcare ex ert considerable market power. As an example of this ma rket power, BCI again directs us to the evidence that U.S. Healthcare was able to lower its payment sched ule to

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16. We further note that while it is apparent that Rite-Aid, Phar-Mor and Weis Markets are large chains, pharmacies are only a part of their business and BCI has offered no specific evidence t hat the number of pharmacies affected by the alleged tie-ins constitu ted "an appreciable number of buyers within the market."

38pharmacies without loss of pharmacy participation i n its

network.17

This argument has two flaws. In the first instance, it proves too much. The evidence at trial showed that Gary's was a member of forty or more networks that provide d access to pharmaceutical customers. There is no evi dence, and no reason to believe, that the customers that U.S. Healthcare delivers are any more desirable tha n those delivered by other networks. Thus, if we accept the logic of BCI's argument, each of these networks exercises su fficient market power to violate the per se rule of antitrus t liability. Yet, it would pervert the antitrust notion of marke t power to find that each of over forty organizations, deli vering the same product, has sufficient market power over a pharmacy such as Gary's to generate a per se violat ion of

the antitrust laws.

BCI's argument also runs counter to the purpose of the antitrust laws. "The purpose of the Sherman Act `is not to protect businesses from the working of the market; it is to protect the public from the failure of the market.' " Queen City Pizza, 124 F.3d at 441 (quoting Spectrum Sport s, Inc. v. McQuillan, 506 U.S. 447, 458 (1993)); see also T own Sound, 959 F.2d at 494 (it is "no concern of the an titrust laws" that a practice may consign even an entire "c lass of competitors . . . to competitive oblivion," unless "consumers [a]re also hurt because of diminished competition." ); United States v. Syufy Enterprises, 903 F.2d 659, 668 (9th Cir. 1990) ("[i]t can't be said often enough that the an titrust laws protect competition, not competitors."). If we were to accept BCI's argument that a showing of appreciable market power can be based solely on a pharmacy's "n eed" for customers, we would in effect outlaw the agglom eration of pharmacy customers -- a result that provides ben efits to individual consumers -- in order to protect pharmac ies. This result would stand antitrust jurisprudence on its head, and establish a precedent whereby the antitru st laws would protect competitors rather than competition a nd

consumers.

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17. See supra p. 21.

39C. The Rule of Reason Claim

The jury also found that defendants were liable und er the

rule of reason standard for antitrust violations. U nlike a per se case where a showing that the defendant had mark et power in the tying market leads to a presumption th at it is using that power to expand into the tied market, to succeed on a rule of reason claim the plaintiff must prove that the alleged tie "unreasonably restrained competition." Jefferson Parish, 466 U.S. at 29; see also Town Sound, 959 F. 2d at 495 (in order to support a rule of reason claim, pl aintiff must prove that the tie in question caused an "inju ry to competition"). This burden "necessarily involves an inquiry into the actual effect of the [challenged conduct] on competition [in the tied market]." 466 U.S. at 29.1 8

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18. BCI contends that by failing to specifically ch allenge the sufficiency of the evidence of anti-competitive effects in the tied market in their

preverdict motions for judgment as a matter of law mad e pursuant to Fed. R. Civ. P. 50(a), defendants waived their right to raise that specific argument in their post-trial Rule 50 motions, or th ereafter. In their pretrial motions, made both at the conclusion of plain tiff's case and at the conclusion of all evidence, the defendants' challen ge to the sufficiency

of

the evidence on the rule of reason claim read:

The evidence is insufficient to support a finding or sustain a

verdict that U.S. Healthcare's practices constitut ed an unreasonable restraint of trade in light of all the cir cumstances of the case.

Plaintiff has offered no such evidence.

Under Rule 50(a), a pre-verdict motion for judgment as a matter of law "shall specify the judgment sought and the law and the facts on which the moving party is entitled to the judgment." Furt her, a post-trial motion for judgment as a matter of law made pursuan t to Rule 50(b) "must be preceded by a Rule 50(a) motion sufficient ly specific to afford the party against whom the motion is directed with an opportunity to cure possible defects in proof which otherwise migh t make its case legally insufficient." Lightning Lube, Inc. v. Witc o Corp., 4 F.3d 1153, 1173 (3d Cir. 1993) (quoting Acosta v. Honda Motor Co., 717 F.2d 828, 831-32 (3d Cir. 1983)); see also Fineman v. Armstro ng World Indus., Inc., 980 F.2d 171, 183-84 (3d Cir. 1992) (compliance wit h Rule 50(a) "ensures that the party bearing the burden of proof will have an opportunity to buttress its case before it goes to the jury and the moving party will not gain unfair advantage through surpri se.").

While the text of the Rule 50(a) motion quoted abov e is far from a model of completeness or clarity, we do not measure its sufficiency by40Before we can determine whether there was harm to

competition in the tied market, that market must be defined. BCI had the burden of defining the tied ma rket, but made no attempt to do so at trial. On appeal, B CI

contends that the tied market consists of the marke t for the provision of health insurance and benefits -- a mar ket that includes HMOs and personal choice plans in addition to TPAs. We find no support for this broad market defi nition. Instead, we believe, on the basis of the record, th at the proper tied market consists solely of the market fo r TPA services. BCI is a TPA provider and the harm allege d to have occurred as result of the tying arrangement to ok place

in the market for TPA services.

In that market, the only evidence of harm to compet ition was that BCI failed to renew one contract, its cont ract with Gary's. That showing is insufficient as a matter of law since it fails to show competitive harm to the tied marke t as a whole. See Town Sound, 959 F.2d at 493 (requiring foreclosure of a "substantial portion" of the tied market to hurt competition.); see also Virtual Maintenance, I nc. v. Prime Computer, Inc., 957 F.2d 1318, 1330 (6th Cir. ) ("[t]he foreclosure of 400 computer systems out of the thou sands of systems [in the tied market] is insignificant as a matter of law"), vacated, 506 U.S. 910 (1992), reinstated in pertinent part, 11 F.3d 660, 663-64 (6th Cir. 1993)

.

Moreover, even if we accepted the broad market whic h BCI proposed, it still failed to provide sufficient evidence of competitive harm. The only evidence offered to show that competition was adversely affected in this broad ma rket

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the text alone, but against the background, as refl ected in the record, of what the party now claiming waiver understood as to the tenor of the Rule 50 movant's position and theory. See Acosta, 7 17 F.2d at 832 ("[T]he communicative content, `specificity' and no tice giving function of an assertion [in a rule 50(a) motion] should be jud ged in context.") In Fineman, for example, we held that a general motion for a directed verdict contesting the sufficiency of the evidence with respect to "coercion" preserved defendant's challenge to the s ufficiency of the evidence with respect to the tortious interference claim, because "plaintiffs' counsel was clearly on notice of the l egal rubric under which [defendants] planned to proceed." 980 F.2d at 184. We think that is the case here, and hence find no waiver.

41consisted of the previously mentioned studies of se veral

large pharmacy chains which faced pressure to offer their employees membership in the U.S. Healthcare HMO. Th ese studies do not provide any evidence of market forec losure or harm to competition since those pharmacies that were "forced" to offer their employees U.S. Healthcare c overage did so in addition to, rather than instead of, othe r health insurance plans. Further, even if this evidence did show harm to competition, BCI has introduced no evidence in

which to evaluate the extent to which such foreclos ure harmed competition in the broad market for health insurance services generally.

D. Conclusion

Since the record before us does not support a findi ng that U.S. Healthcare exercised appreciable market p ower in a properly defined tying market or that the arrange ment at issue harmed competition in the tied market, the an titrust jury verdicts on both the per se and the rule of re ason claims must be set aside.19

IV. CIVIL RICO

A. Introduction

The jury found that U.S. Healthcare's business prac tices constituted a pattern of racketeering activity in v iolation of 18 U.S.C. SS 1962(c) and (d). Section 1962(c) prohi bits any person employed by or associated with an enterprise from conducting or participating in the conduct of that enterprise's affairs through a pattern of racketeer ing activity. A pattern of racketeering activity "requi res at least two acts of racketeering activity", 18 U.S.C.S 1961 (5). Racketeering activity is defined as an act or threa t chargeable as one of a variety of state felonies or any act which is "indictable" under specifically listed fed eral criminal statutes, see 18 U.S.C. S 1961(A)-(B). Sec tion 1962(d) outlaws any conspiracy to violate the other

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19. Since we find that the jury verdict must be set aside, we need not address defendants challenge to the rule of reason jury instructions.

42subsections of S 1962, including, as is relevant to this case,

S 1962(c).

U.S. Healthcare challenges the jury verdict on two primary grounds, asserting that (1) BCI failed to e stablish its standing to recover for any offenses allegedly committed against Gary's; and (2) BCI failed to present a su stainable case that the defendants committed any of the alleg ed predicate acts. We address each argument in turn.

B. RICO Standing

The section of RICO allowing private parties such a s BCI to pursue a civil action provides that:

[a]ny person injured in his business by re ason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reas onable attorney's fee.

18 U.S.C. S 1964(c)

The Supreme Court examined the standing requirement of this statutory provision in Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992). The Court no ted that Congress modeled S 1964(c) on the Clayton Act, and found that a plaintiff's right to sue under RICO, as unde r the federal antitrust laws, requires a showing that the alleged violation was the proximate cause of the plaintiff' s injury.

See id. at 267-68. The Court looked to the common l aw for guidance in defining the proximate cause requiremen t. In so doing, it focused primarily on one element of pr oximate cause: the directness of the relationship "between the injury asserted and the injurious conduct alleged." Id. at 268. This requirement of a direct relation was held to generally preclude recovery by "a plaintiff who com plained of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts." Id. at 268-6 9.

On the facts presented in Holmes, the Court held th at the plaintiff, Securities and Investor Protection Corpo ration ("SIPC"), had not met the proximate cause requireme nt and thus had no standing to bring suit under RICO . SIP C is a

43private nonprofit corporation, created pursuant to the

Securities Investors Act, which most broker-dealers are required by law to join and which has a statutory d uty to

advance funds to reimburse the customers of member broker-dealers that are unable to meet their obliga tions. See id. at 261. SIPC brought a civil RICO action al leging that Holmes, and other former members of a brokerag e firm, conspired in a stock manipulation scheme that prevented two broker-dealers from meeting their obligations, thereby requiring SIPC to advance near ly $13 million to cover claims by the customers of the aff ected broker-dealers. SIPC sought standing under S 1964(c ) by arguing, inter alia, that it was subrogated to the rights of

those customers of the broker-dealers who did not purchase the manipulated securities but incurred lo ses when the broker-dealers failed and could no longer meet their obligations. See id. at 270.

The Court assumed, for the sake of argument, that S IPC was entitled to stand in the shoes of the non-purch asing customers, but held that the defendants' conduct wa s not the proximate cause of those customers' injuries. T he Court

held that "the link is too remote between the stock manipulation alleged and the customers' harm, being purely contingent on the harm suffered by the broke r dealers . . . [t]he broker-dealers simply cannot pa y their bills, and only that intervening insolvency connect s the conspirators' acts to the losses suffered by the no npurchasing customers and general creditors." Id. at 271.

Defendants' argue that, under Holmes, BCI lacks standing in this case. They assert that since BCI i s alleging that Gary's has been a victim of the RICO predicate acts, BCI exemplifies the "plaintiff who complain[s] of h arm flowing merely from the misfortunes visited upon a third person." Id. at 268. We disagree. The injury proved by BCI, the loss of its TPA contract with Gary's, is not de rivative of any losses suffered by Gary's. Unlike the injuries suffered by the non-purchasing customers in Holmes, BCI's in jury was not contingent upon any injury to Gary's, nor i s it more appropriately attributable to an intervening c ause that was not a predicate act under RICO. Here, BCI' s TPA relationship with Gary's was a direct target of the alleged

44scheme -- indeed, interference with that relationsh ip may

well be deemed the linchpin of the scheme's success

. Accordingly, we conclude that BCI had standing to p ursue its civil RICO claim.20

C. Predicate Acts of BCI's RICO Claim

In its special verdict form, the jury found that ea ch defendant had committed one or more types of the predicate acts of: (1) extortion under the Hobbs Ac t, 18 U.S.C. S 1951; (2) violation of Pennsylvania's comm ercial bribery statute, 18 Pa. Cons. Stat. S 4108(b); (3) mail fraud, 18 U.S.C. S 1341; (4) wire fraud, 18 U.S.C. S 1343; and (5) violation of the Travel Act, 18 U.S.C. S 1952. Defendants challenge the verdict on the ground that BCI has fa iled to prove that defendants' conduct violated any of thes e laws. Defendants contend that this failure to prove any p redicate acts, and a fortiori to show a pattern of racketeer ing activity, entitles them to judgment as a matter of law on the RICO claims. In their submission, the conduct under lying each of the alleged predicate acts was at its botto m no more than aggressive business bargaining and, just as BC I cannot convert aggressive business tactics into ant itrust violations, it cannot shoehorn such tactics into th e definitions of the predicate acts at issue here. We shall devote the bulk of our time to the important and di fficult

issue of whether the defendants' conduct amounted t o Hobbs Act extortion. The others alleged predicate a cts are disposed of easily .

1. Extortion under the Hobbs Act

The Hobbs Act imposes criminal penalties on "[w]hoe ver in any way or degree obstructs, delays, or affects commerce or the movement of any article or commodity in comm erce, by robbery or extortion or attempts or conspires to do so."

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20. We note, however, that BCI's RICO standing is l imited to injuries arising from its competition with U.S. Healthcare f or Gary's TPA business. BCI does not have RICO standing to recove r for any injuries suffered by other pharmacies as a result of their r elations with

U.S. Healthcare since there is no evidence that the se relations directly injured BCI.

4518 U.S.C. S 1951. "Extortion" is defined in the Act as "the

obtaining of property from another, with his consen t, induced by wrongful use of actual or threatened for ce, violence, or fear, or under color of official right ." 18 U.S.C. S 1951(b)(2). The term "fear" includes the fear of economic loss. See United States v. Addonizio, 451 F.2d 49, 72 (3d Cir. 1972); United States v. Capo, 817 F.2d 947, 95 1 (2d Cir. 1987) (in banc).

BCI alleges that the defendants extorted Gary's hea lth benefits business by conditioning access to the U.S. Healthcare provider network on Gary's agreemen t to switch to CHA as its TPA. According to BCI, this co nduct amounts to extortion through the wrongful use of th e fear of economic loss. Defendants respond that the use o f economic leverage in this manner cannot be made tof it within the statutory framework of Hobbs Act extorti on. They reason that any fear of economic loss felt by Gary's was the result of the give and take of bargaining b etween U.S. Healthcare and Gary's in a business setting in which both parties offered and received something of valu e. They

contend that the use of this economic fear to extra ct concessions from Gary's was not wrongful, as requir ed by the Hobbs Act, but is instead part and parcel of no rmal business negotiations.

As will appear, we conclude that plaintiff's theory , which is quite ingenious, does not state a viable claim o f extortion

because the defendants' use of the fear of economic loss in the context of hard business bargaining was not (le gally) wrongful. While this decision may seem compelled by common sense, it is not easily derived from our pre cedent. This Court has not had prior occasion to address th e line separating the legitimate use of economic fear to a cquire property in a business setting (i.e., hard bargaini ng) from the wrongful use of such fear (i.e., extortion). Ac cordingly, we turn for guidance to the decisions of those few courts that have previously faced the issue. Because it lo oms so large on the Hobbs Act landscape, we must first, ho wever, consider the Supreme Court's decision in United Sta tes v. Enmons, 410 U.S. 396 (1973), which construes the meaning of the term "wrongful" under the Act.

46