Court Opinion

ID: 4244461
Source: CourtListenerOpinion
Date Created: 2018-02-12 21:00:30.106466+00
Date Added: 2024-06-11T14:16:22.810102
License: Public Domain

FILED
                           NOT FOR PUBLICATION
                                                                             FEB 12 2018
                    UNITED STATES COURT OF APPEALS                       MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS

                            FOR THE NINTH CIRCUIT

COLLEEN EASTMAN; CHRISTI CRUZ;                   No. 16-15793
CARMEN MENDEZ,
                                                 D.C. No. 3:15-cv-00415-WHO
              Plaintiffs-Appellants,

 v.                                              MEMORANDUM*

QUEST DIAGNOSTICS
INCORPORATED,

              Defendant-Appellee.

                  Appeal from the United States District Court
                       for the Northern District of California
                 William Horsley Orrick, District Judge, Presiding

                    Argued and Submitted November 15, 2017
                            San Francisco, California

Before:      THOMAS, Chief Judge, and W. FLETCHER and PAEZ, Circuit
             Judges.

      Plaintiffs Colleen Eastman, Christi Cruz and Carmen Mendez appeal the

dismissal of their second amended complaint (“SAC”) against Quest Diagnostics.

We have jurisdiction under 28 U.S.C. § 1291. We review de novo a district court’s

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
grant of a Rule 12(b)(6) motion to dismiss for failure to state a claim. See Edwards

v. Marin Park, Inc., 356 F.3d 1058, 1061 (9th Cir. 2004). We affirm.

      1. The district court properly concluded plaintiffs failed to allege a plausible

monopolization claim under § 2 of the Sherman Act. Monopolization has two

elements: “(1) the possession of monopoly power in the relevant market and (2)

the willful acquisition or maintenance of that power as distinguished from growth

or development as a consequence of a superior product, business acumen, or

historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).

With respect to the second element, “[t]he test of willful maintenance or

acquisition of monopoly power is whether the acts complained of unreasonably

restrict competition.” Drinkwine v. Federated Publ’ns, Inc., 780 F.2d 735, 739

(9th Cir. 1985). The Sherman Act is not directed “against conduct which is

competitive, even severely so, but against conduct which unfairly tends to destroy

competition itself.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993).

      Plaintiffs alleged Quest maintained its market power through three

exclusionary practices: (1) exclusive dealing with medical providers; (2) collusion

with health plans; and (3) acquisition of competitors. The district court considered

each of the alleged exclusionary practices—both in isolation and in

                                          2
combination—and properly concluded plaintiffs failed to establish a plausible

monopolization claim.1

      Exclusive dealing with medical providers: Although plaintiffs allege

exclusive dealing in violation of § 2 of the Sherman Act, we may look to the

standard for adjudicating exclusive dealing claims under § 3 of the Clayton Act for

guidance. Twin City Sportservice, Inc. v. Charles O. Finley & Co., 676 F.2d 1291,

1304 n.9 (9th Cir. 1982). An exclusive dealing arrangement does not violate § 3 of

the Clayton Act unless it is “probable that performance of the contract will

foreclose competition in a substantial share of the line of commerce affected.”

Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961). When

addressing exclusive dealing under the Sherman Act, “a greater showing of

anticompetitive effect is required to establish a Sherman Act violation than a

section 3 Clayton Act violation.” Twin City Sportservice v. Charles O. Finley &

Co., 676 F.2d at 1304 n.9. Further,

             [t]o determine the substantiality in a given case, it is
             necessary to weigh the probable effect of the contract on
             the relevant area of effective competition, taking into

      1
        Plaintiffs actually allege four exclusionary practices under § 2 of the
Sherman Act. However, their allegations of “tying” and “exclusive dealing” with
medical providers are essentially the same exclusionary practice for § 2 purposes,
and therefore the analysis set forth for exclusive dealing also applies to the tying
claim for the purposes of § 2.
                                          3
             account the relative strength of the parties, the
             proportionate volume of commerce involved in relation to
             the total volume of commerce in the relevant market area,
             and the probable immediate and future effects which pre-
             emption of that share of the market might have on effective
             competition therein. It follows that a mere showing of the
             contract itself involves a substantial number of dollars is
             ordinarily of little consequence.

Tampa Elec. Co., 365 U.S. at 329.

      The district court did not err by concluding plaintiffs failed to allege facts

from which it could be plausibly inferred that Quest’s alleged exclusive dealing

arrangements with medical providers foreclosed a substantial share of the

plan/outpatient market. To plausibly allege foreclosure of the plan/outpatient

market—in a substantial share or otherwise—plaintiffs at the very least needed to

plead facts sufficient to support the inference that the exclusive dealing

arrangements have some appreciable impact on the market. Although plaintiffs

adequately explained how exclusive dealing arrangements with medical providers

operate, they did not allege how many medical providers have in fact entered

agreements with Quest. Nor did plaintiffs allege how the arrangements actually

agreed upon have impacted other laboratories in the plan/outpatient market. These

omissions are significant because, without such allegations, there are no facts that

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allow the court to evaluate the effect of the exclusive dealing arrangements in the

plan/outpatient market.

      Exclusive dealing/collusion with health plans: The district court properly

held that plaintiffs’ allegations related to exclusive dealing with health

plans—referred to as collusion by the district court—also failed to plausibly

demonstrate foreclosure of a substantial share of the market. As the district court

noted, plaintiffs alleged only that three laboratories were excluded from the Aetna

and Blue Shield networks as a result of agreements with Quest. Plaintiffs did not

allege the market shares of any of these laboratories, what portion of Aetna and

Blue Shield testing is performed out of network, how many laboratories remain in

the Aetna and Blue Shield networks, or even what portion of Aetna and Blue

Shield diagnostic testing is actually performed by Quest. Plaintiffs ultimately did

not allege a sufficient factual basis from which it is possible to infer that any

particular portion of the plan/outpatient market was foreclosed as a result of

exclusive dealing between health plans and Quest.

       Acquisition of competitors: In some instances, the merging of competitors

to form a monopoly may violate § 2 of the Sherman Act. See Standard Oil Co. of

New Jersey v. United States, 221 U.S. 1, 77 (1911) (holding Standard Oil’s

acquisitions resulted in “absolute control” over refined oil products, which

                                            5
established monopolization under § 2); Grinnell, 384 U.S. at 576 (holding a series

of three acquisitions “eliminated any possibility of an outbreak of competition” and

thereby “perfected the monopoly power to exclude competitors and fix prices.”).

To establish a § 2 violation, however, plaintiffs must still demonstrate how the

acquisitions unreasonably restricted competition. Drinkwine, 780 F.2d at 739.

      The district court properly concluded Quest’s acquisitions of three

competitors failed to plausibly establish a § 2 violation. Quest’s acquisition of

Unilab was not the typical merger of competitors because, as a result of the

divestiture of Quest assets to LabCorp, which the FTC required before approving

the acquisition, a new significant competitor entered the physician billing market.

Plaintiffs’ own allegations explain how the physician billing market is linked to the

plan/outpatient market. Thus, the addition of a significant competitor to the

physician billing market would entail an increase in competition in the

plan/outpatient market. Furthermore, the acquisitions of Berkeley HeartLab and

Dignity Health were both relatively insubstantial, increasing Quest’s market share

by only 6.6 percent. Plaintiffs never made allegations related to the remaining

competitors in the relevant market.

      Plaintiffs’ exclusive dealing and collusion claims do not allege sufficient

facts to support the drawing of any inferences about foreclosure of competition in

                                          6
the plan/outpatient market. Plaintiffs’ acquisition claim does not, on its own,

establish an unreasonable restriction of competition. Thus, plaintiffs’ allegations,

considered in combination, do not establish a plausible monopolization claim.2

      2. The district court properly held the plaintiffs failed to plausibly establish

per se tying under § 1 of the Sherman Act. Tying occurs when a “seller conditions

the sale of one product (the tying product) on the buyer’s purchase of a second

product (the tied product).” Rick-Mik Enters., Inc. v. Equilon Enters. LLC, 532
F.3d 963, 971 (9th Cir. 2008) (internal quotation marks omitted). “The essential

characteristic of an invalid tying arrangement lies in the seller’s exploitation of its

control over the tying product to force the buyer into the purchase of a tied product

that the buyer either did not want at all, or might have preferred to purchase

elsewhere on different terms.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504
U.S. 451, 464 n.9 (1992) (internal quotation marks and alterations omitted).

      A plaintiff must prove three elements to establish per se tying under § 1 of

the Sherman Act: “(1) that there exist two distinct products or services in different

markets whose sales are tied together; (2) that the seller possesses appreciable

      2
        Plaintiffs also allege violations of the California Unfair Competition Law
and the California Cartwright Act. The California Cartwright Act mirrors the
Sherman Act and the California Unfair Competition Law claim was derivative of
the monopolization claim. Therefore, we affirm the district court’s dismissal of
these claims as well.
                                            7
economic power in the tying product market sufficient to coerce acceptance of the

tied product; and (3) that the tying arrangement affects a ‘not insubstantial volume

of commerce’ in the tied product market.” Paladin Assocs., Inc. v. Montana Power

Co., 328 F.3d 1145, 1159 (9th Cir. 2003) (citing Kodak, 504 U.S. at 461-62). In

this instance, plaintiffs failed to adequately plead coercion. Although plaintiffs

alleged medical providers’ “only viable economic option” was to accept the

alleged Quest tying, plaintiffs did not allege facts to make this conclusion

plausible. For example, as the district court noted, plaintiffs did not allege “the

difference in pricing between capitated testing agreements with medical providers

who do refer their fee-for-service testing to Quest, and capitated testing agreements

with medical providers who do not.” Nor did plaintiffs allege the extent to which

medical providers have actually entered into discounted capitated agreements

based on their referral of fee-for-service business.

      AFFIRMED.

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