Summary
noting near unanimity in applying cluster market concept to inpatient care in hospital merger cases
Summary of this case from California v. Sutter Health SystemOpinion
No. C93 20613 RMW.
September 6, 1995
MICHAEL A. DUNCHEON, JOEL S. GOLDMAN, MICHAEL B. McNAUGHTON, LISA K. PUNTILLO, HANSON, BRIDGETT, MARCUS, VLAHOS RUDY, San Francisco, California, Attorney for Plaintiffs.
MICHAEL L. SPIEGEL, CHARLES M. KAGAY, San Francisco, CA.
J. THOMAS ROSCH, PETER K. HUSTON, San Francisco, California, Attorneys for Defendants.
Plaintiffs Santa Cruz Medical Clinic and Derjjan Associates, Inc.'s ("Santa Cruz") motion for summary judgment/partial summary judgment and defendant Dominican Santa Cruz Hospital's ("Dominican") cross-motion for partial summary judgment came on for hearing on September 1, 1995. The court has read the moving and responding papers and heard the oral arguments of counsel. For the reasons set forth below, the court denies plaintiffs' motion for partial summary judgment and grants in part and denies in part defendant's cross-motion for partial summary judgment.
I. Background
This case involves antitrust claims arising from Dominican's acquisition of AMI Community Hospital of Santa Cruz ("Community"). Plaintiff Santa Cruz is a partnership of physicians and other medical practitioners, and plaintiff Derjjan is a corporation that manages and provides some non-physician personnel services to the Clinic. Dominican is operated by a non-profit religious corporation of the same name, based in Santa Cruz. In March 1990, Dominican acquired Community. Within 90 days of the acquisition, Dominican ceased to operate Community as a general acute care hospital. It is now used for the provision of sub-acute health care services such as rehabilitation.
Plaintiffs filled suit against defendants for violation of section 1 and section 2 of the Sherman Act ( 15 U.S.C. §§ 1 and 2) and section 7 of the Clayton Act ( 15 U.S.C. § 18). Plaintiffs seek injunctive relief under Section 16 of the Clayton Act ( 25 U.S.C. § 26) for Dominican's alleged post-acquisition exclusionary conduct. Plaintiffs also allege violations of California state law (sections 16720 and 17200 of the Business Professions Code.)
On August 3, 1995 plaintiffs moved for summary judgment/partial summary judgment against Dominican on the grounds that Dominican's acquisition of Community violated: (1) section 7 of the Clayton Act; (2) section 1 of the Sherman Act; and (3) section 2 of the Sherman Act. In the alternative, plaintiffs request partial summary judgment on the basis that (1) the relevant product market for assessing the Acquisition is the cluster of services known as acute care inpatient hospital services and (2) that the relevant geographic market for assessing the Acquisition is the area described in Exhibit 2 to the Declaration of Glenn A. Melnick ("Melnick") consisting of all zip codes in Santa Cruz County. Plaintiffs also request, in the alternative, summary adjudication on the grounds that the Acquisition is likely to create or enhance Dominican's market power or facilitate its exercise. In addition, plaintiffs request, in the alternative, partial summary judgment on the grounds that Dominican, by acquiring Community, willfully acquired monopoly power.
On August 4, 1995, defendant moved for partial summary judgment on plaintiffs' claims of: (1) attempted tying in connection with Secure Horizons (Complaint ¶ 24(f)); (2) channeling (or "monopoly leveraging") of patients to allegedly affiliated companies (Complaint 24(d)); and (3) threatened exclusive dealing with respect to TakeCare's cardiac patients (Complaint ¶ 24(b)). Defendant correctly contends that, if these claims fail to survive summary judgment, plaintiffs' state law claims must also fail.
Plaintiffs have agreed to the dismissal of their channeling claim in light of the law in this circuit on "monopoly leveraging" set forth in Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536, 546-49 (9th Cir. 1991) that requires plaintiffs to demonstrate monopoly power in the ancillary services market.
B. Legal Standards
1. Summary Judgment
Summary judgment is proper when the "pleadings, depositions, answer to interrogatories, and admissions on file, together with the affidavits, if any show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). There is a "genuine" issue of material fact only when there is sufficient evidence such that a reasonable juror could find for the party opposing the motion. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986). Entry of summary judgment is mandated against a party if, after adequate time for discovery and upon motion, the party fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The court, however, must draw all justifiable inferences in favor of the nonmoving parties, including questions of credibility and of the weight to be accorded particular evidence. Masson v. New Yorker Magazine, 501 U.S. 496, 520 (1991).
2. Merger Analysis
The focal point in analyzing mergers is section 7 of the Clayton Act, which prohibits "acquisition[s]" whose "effect . . . may be substantially to lessen competition or to tend to create a monopoly." "[T]he current understanding of section 7 is that it forbids mergers that are likely to `hurt consumers, as by making it easier for the firms in the market to collude, expressly or tacitly, and thereby force price [sic] above or farther above the competitive level.'" United States v. Rockford Memorial Corp., 898 F.2d 1278, 1282-83 (7th Cir. 1990) cert. denied 498 U.S. 920 (1990) quoting Hospital Corporation of America v. FTC, 807 F.2d 1381, 1386 (7th Cir. 1986) cert. denied 481 U.S. 1038 (1987). A merger with such effects would also violate section 1 of the Sherman Act, which proscribes acquisitions which constitute a "contract, combination . . . or conspiracy . . . in restraint of trade." Id. at 1283. Once the market structure in an industry reaches monopoly or near-monopoly status, section 2 of the Sherman Act applies. Standard Oil Co. v. United States, 221 U.S. 1 (1911).
An analysis of an alleged section 7 violation requires a determination of the relevant "line of commerce," or product market, in which competition is to be allegedly lessened and the appropriate geographic market. United States v. Rockford Memorial Corp., 717 F. Supp. 1251, 1258 (N.D.Ill. 1989) aff'd 898 F.2d 1278 (7th Cir. 1990). Once the product and geographic markets have been defined, the next steps are to identify the firms in competition with the merging firms, compare pre- and post-merger concentration in the market and analyze other factors bearing on the likelihood of market power and collusion. United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 362 (1963).
Whether particular concerted conduct unreasonably restrains competition in violation of Section 1 of the Sherman Act is determined under a "rule of reason" analysis, which is a case-by-case study in which "the fact finder weighs all of the circumstances of a case." Continental T.V. v. GTE Sylvania, 433 U.S. 36, 49 (1977). The Supreme Court has identified certain discrete categories of restraints so manifestly anticompetitive in nature that they are illegal per se, dispensing with the need for case-by-case evaluation. Id. at 50. Acquisitions are not a per se violation. In analyzing a rule of reason claim under section 1 of the Sherman Act, plaintiff must initially prove: (1) an agreement or conspiracy among two or more persons or distinct business entities; (2) by which the persons or entities intend to harm or restrain competition; and (3) which actually injures competition. Oltz v. Saint Peter's Community Hosp., 861 F.2d 1440, 1445 (9th Cir. 1988). Proving injury to competition in a rule of reason case requires a claimant to prove the relevant market and to show the effects upon competition within that market. Twin City Sportservice, Inc. v. Charles O. Finley Co., 676 F.2d 1291, 1300 (9th Cir. 1982) cert. denied 459 U.S. 1009-1010 (1982).
The offense of monopolization under Section 2 of the Sherman Act 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 historical accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966). Monopoly power is the "power to control prices or exclude competition . . . (footnote omitted)" in the relevant market, United States v. E.I. Du Pont de Nemours Co., 351 U.S. 377, 391 (1956), and exists whenever prices can be raised above the competitive market levels.Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 27 n. 46 (1984). In order to determine whether defendant possesses monopoly power, the trier of fact must first determine the relevant market. Los Angeles Memorial Coliseum Comm'n v. National Football League, 726 F.2d 1381, 1392 (9th Cir. 1984), cert. denied 469 U.S. 990 (1984). A determination of the relevant market typically requires an inquiry into the nature of the product and the geographical area of effective competition. Oahu Gas Service, Inc. v. Pacific Resources, Inc., 838 F.2d 360, 364 (9th Cir. 1988), cert. denied, 488 U.S. 870 (1988). Market power may be demonstrated by direct evidence of the injurious exercise of market power or circumstantially. Rebel Oil v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995.) To demonstrate market power circumstantially, a plaintiff must: (1) define the relevant market, (2) show that the defendant owns a dominant share of that market, and (3) show that there are significant barriers to entry and to expansion. Id.
C. Analysis
1. Product Market
In Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962), the Supreme Court described the process of product market definition:
The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. (footnote omitted).
"The process of defining the `outer boundaries' of a product market remains more of an art than science, despite the increasing economic sophistication reflected in the documents such as the 1992 Horizontal Merger Guidelines . . ., the 1993 and 1994 Statements of Enforcement Policy relating to health care . . . the 1993 Horizontal Guidelines . . . and the economic formulas. . . ." B. Reeves and L. Blumkin, Acquisitions and Mergers, 890 Practising Law Institute/Corporations 473 (1995). "`For antitrust purposes, defining the product market involves the identification of the field of competition: the group or groups of sellers or producers who have actual or potential ability to deprive each other of significant levels of business. (citations omitted)." Morgan, Strand, Wheeler Biggs v. Radiology, Ltd., 924 F.2d 1484, 1489 (9th Cir. 1991).
The Department of Justice has set forth merger guidelines to assist the courts in establishing unifying principles. The merger guidelines examine the effect of a small, hypothetical, nontransitory price increase above prevailing or future price levels to determine relevant product market. (1992 Merger Guidelines § 1.11.) Generally the test employed is a five percent price increase that would persist for the foreseeable future. If buyers would switch to another product and defeat the price increase, that other product is added to the market. In this regard, the "market" is defined "solely on demand substitution factors i.e., possible consumer responses." (1992 Merger Guidelines § 1.0.) The merger guidelines are not binding on the courts. FTC v. PPG Industries, Inc., 798 F.2d 1500, 1503 n. 4 (D.C. Cir. 1986) (the Department of Justice merger guidelines "are by no means to be considered binding on the court").
One commentator argues that the difficulty in measuring market definition in health care cases is attributable to the structure and nature of the health care market and the dynamic changes that the health care market today is undergoing. He believes that the third-party payor system has made market definition difficult because it has eliminated both seller and buyer responsiveness to price, that the health care market lumps together a wide variety of services, some of which compete with each other and some of which do not, and that market definition must be based on historical data, but that, given the dynamic changes taking place in health care, the historical data often is not probative. Sylvia H. Walbolt, William McD. Miller III, Jeffrey Cross, Phillip A. Proger, Problems of Access to Health Facilities and Equipment-New Competition for Limited Resources, 55 Antitrust L.J. 599, 613-621 (1986) (comments by panelist Phillip A. Proger).
Plaintiffs contend that the relevant product market is "general acute care inpatient services." (Declaration of Glenn A. Melnick, ¶ 3). Plaintiffs argue that the cluster of inpatient hospital services is a unique product and that non-hospital services are not substitutes. Plaintiffs' expert opines that outpatient services and long-term care services such as the care provided by nursing homes, behavioral medicine programs, home health agencies, and rehabilitation programs are not a reasonable substitute for inpatient hospital service. Plaintiffs rely on the declaration of Dr. Walter Alexander ("Alexander"), a member of the medical staff at Dominican, who states that "certain hospital services, affecting a substantial number of patients now and for the foreseeable future, can only be provided on an inpatient basis" and "he is unaware of any physician or hospital that treats" on an outpatient basis "non-surgical conditions [such] as heart attacks, acute strokes, diabetic acidosis and sepsis as well as illnesses and conditions requiring major surgical procedures such as those within the abdomen and thorax, to include heart, lung and intestinal surgery as well as major joint replacement and correction of peripheral vascular diseases." (Alexander Declaration ¶ 4).
Defendant contends that the relevant product market is "both inpatient and outpatient hospital services, including at least general acute care hospitals, all types of outpatient surgery centers, birthing centers and home health care companies." (Declaration of Thomas R. McCarthy, ¶ 19). Defendant's expert opines that outpatient hospital services, surgery centers, birthing centers and home health care companies can substitute for hospital services either through a direct supply response or by supply-side substitution. Defendant also relies on the declaration of Dr. Robert B. Keet ("Keet"), a practicing internist with privileges at Dominican, who states that "many conditions that previously required admission to a hospital can now be treated on an outpatient basis or in other alternative settings such as skilled nursing facilities." Keet points to "ophthalmic procedures" and procedures that utilize "endoscopic technology . . . such as gallbladder removals." (Keet Declaration, ¶ 3).
In assessing a possible product market of general acute-care inpatient hospital services, the focus is on the substitutability of alternative services that are competitive with inpatient care. According to economists, this question is divided into two inquiries. The first is to ask whether the consumers of inpatient care can easily turn to other services in lieu of inpatient care. If they can, then there is "demand substitution"; i.e., "inpatient care" is too narrow a definition, and the relevant product definition should embrace the substitute service. The second inquiry is whether suppliers of services other than inpatient care could easily modify their activities to provide inpatient care. If so, then there is "supply substitution" and these suppliers should also be counted as competitors in the market because, even if they do not currently supply the relevant product, they would if the price rose slightly. William J. Lynk, Antitrust Analysis and Hospital Certificate-of-Need Policy, The Antitrust Bulletin 61, 63-64 (Spring 1987).
The reported hospital merger decisions employ an approach to product market definition that relies on the Supreme Court's "cluster of services" paradigm. The first cluster market was defined by the Court in United States v. Philadelphia Nat'l Bank, 374 U.S. 321, 356-57 (1963). In contrast with all previous product markets defined by the Court, the goods and services clustered into the commercial banking market in Philadelphia National Bank were neither demand nor supply substitutes. The cluster market concept is to date the uniform approach to product market definition of the hospital merger case law. See Gloria J. Bazzoli, David Marx Jr., Richard J. Arnold, Larry Manheim, Federal Antitrust Merger Enforcement Standards: A Good Fit for the Hospital Industry, 20 J. Health Pol. Pol'y L. 137 (1995); J.R. Baker The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry, 51(2) Law and Contemp. Probs. 93 (1989). The relevant product market for hospitals has been described almost uniformly by the courts and enforcement agencies in previous merger cases as the "cluster of services" focused on inpatient care. American Medicorp, Inc v. Humana, Inc., 445 F. Supp. 589, 605 (E.D. Pa. 1977) ("short term acute care hospital services); United States v. Rockford Memorial Corp., 898 F.2d 1278 (7th Cir. 1990) cert. denied 498 U.S. 920 (1990) ("provision of inpatient services by acute-care hospitals);Hospital Corp. of America v. FTC, 807 F.2d 1381 (7th Cir. 1986)cert. denied 481 U.S. 1038 (1987); ("general acute care hospital services," excluding outpatient substitutes for the individual services comprising the cluster); FTC v. University Health, Inc., 938 F.2d 1206 (11th Cir. 1991) ("in-patient services by acute-care hospitals"). An exception to this product market definition occurred in United States v. Carilion Health System, 707 F. Supp. 840 (W.D. Va. 1989) aff'd without op., 892 F.2d 1042 (4th Cir. 1989), a case in which the court defined the market more expansively to include outpatient services. However, the Fourth Circuit affirmed the district court's decision in an unpublished opinion.
In United States v. Grinnell Corp., 384 U.S. 563, 573 (1966), decided under Sherman Act § 2, the Court defined a cluster market of central station protective services. Grinnell established that the cluster approach is not limited to market definition under the Clayton Act, the statute enforced inPhiladelphia National Bank. The protective service clusters inGrinnell are supply substitutes although they are not demand substitutes. Jonathan B. Baker, The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry, 51 SPG Law Contemp. Probs. 93, n. 159 (1989).
In Rockford, supra, 898 F.2d at 1284, Judge Posner considered and rejected defendant's argument that the market should include non-hospital providers:
The defendants point out correctly that a growing number of services provided by acute-care hospitals are also available from nonhospital providers. But the force of the point eludes us . . . For many services provided by acute-care hospitals, there is no competition from other sorts of providers. If you need a kidney transplant, or a mastectomy, or if you have a stroke or a heart attack or a gunshot wound, you will go (or be taken) to an acute-care hospital for inpatient treatment. The fact that for other services you have a choice between inpatient care at such a hospital and outpatient care elsewhere places no check on the prices of the services we have listed, for their prices are not linked to the prices of services that are not substitutes or complements . . . The defendants do not argue for the broader market on the basis of substitutability in supply-that is, the ability of a provider of outpatient services to switch to inpatient services should the price of the latter rise as a result of collusive pricing, making such services more profitable.
In the instant case, defendant acknowledges that it cannot justify a broader market on the basis of demand substitutability, but defendant does argue for a broader market based on substitutability in supply. Defendant's expert opines that while a patient may not be willing to trade a hernia operation for a hysterectomy, a hospital can easily shift its facilities from the production of one service to the other. He also submits that outpatient surgery facilities and physician's offices provide direct competition through supply-side substitution for a large share of a general acute care hospital's business and that alternative providers have significantly affected the economic behavior of general acute care hospitals and will continue to do so. (McCarthy Declaration ¶ 14). He points to Dominican and Community's addition of cardiovascular surgery in the late-1980s as evidence of the ease with which a general acute care hospital can add or subtract service lines. He also states that five outpatient facilities in the Santa Cruz-Watsonville area are now capable of performing many of the services which even recently were only performed as inpatient surgery and that California has no binding Certificate-of-Need law, which generally requires significant regulatory approval before entry into new services is allowed. (McCarthy Declaration ¶ 14).
Summary judgment is disfavored in antitrust cases.Christofferson Dairy, Inc. v. MMM Sales, Inc., 849 F.2d 1168, 1171 (9th Cir. 1988). The process of defining the relevant market is a factual question that depends on the particular characteristics of the industry involved. Oahu Gas, supra, 838 F.2d at 363. The product market definition "can be determined only after a factual inquiry into the `commercial realities' faced by consumers." Eastman Kodak Co. v. Image Technical Servs., 504 U.S. 451, 482 (1992) citing Grinnell, supra, 384 U.S. at 572.
Plaintiffs recognize that the reported hospital merger decisions do not resolve the issue of product market on summary judgment. However, they rely on the court's statement in Rebel Oil, supra, 51 F.3d at 1436 that summary judgment is proper in the face of conflicting expert declarations when economic factors dictate a particular result or when undisputed record facts contradict or render an expert opinion unreasonable. In urging the court to grant partial summary judgment in the instant case, plaintiffs echo Judge Posner's reasoning. They contend that economic factors dictate the conclusion that there is a core of inpatient hospital services that are not reasonably interchangeable. (Alexander Decl. ¶ 4).
Defendant does not dispute the existence of such a core of services that can only be performed on an inpatient basis. However, defendant contends that this fact is not dispositive of the issue of relevant product market. Defendant argues that inpatient services that are unique to a hospital cannot be viewed as a discrete entity but are, in fact, inseparable from other surgical procedures because hospital services are not priced on a malady by malady basis but in broadly inclusive categories such as "medical/surgical", "ICU/CCU" and "TCU." (Supplemental Declaration of McCarthy listing rates of compensation) Therefore, defendant contends, the entire category of medical/surgical is impacted by the supply-side substitution of surgical procedures that are now increasingly performed at free-standing surgical clinics or other outpatient facilities. As a result, defendant argues, the fact that a patient has a "choice between inpatient care at . . . a hospital and outpatient care elsewhere [for many surgical procedures] places . . . a check on the prices of . . . [inpatient services because] their prices are . . . linked to the prices of services that are not substitutes or complements." Rockford, supra, 898 F.2d at 1278.
Defendant also contends that the court should not rely on hospital merger decisions from the last decade because these cases fail to take into account the dramatic technological advances in the field of medicine in the last ten years. Defendant bolsters its argument with American Hospital Association statistics that show an increase in outpatient surgery from 24 percent to 55.3 percent between 1983 and 1993. (McCarthy Decl. ¶ 151). Therefore, defendant argues, outpatient facilities and surgi-centers have the actual and potential ability to deprive hospitals of significant levels of business and, because of the historical pricing structure of hospitals in the area, these facilities can have a dramatic impact on the price of all services in the medical/surgical category.
Eight years ago, a commentator wrote that "most economists who study the hospital industry consider inpatient acute care the product definition most relevant for analysis of hospital competition . . ." and that the exclusion of freestanding ambulatory surgical centers and similar facilities are "a practical concession to lack of data and an empirical judgment that such facilities are currently of minor quantitative importance." W. Link, Antitrust Analysis and Hospital Certificate-of-Need Policy, 32 Antitrust Bulletin 63, 75 (Spring 1987). Today, there is evidence that the technological landscape has changed dramatically in the medical field. There is a genuine issue of material fact as to whether services that can be performed at a hospital or an alternative facility place a check on the prices of the core of inpatient services, whether the price of inpatient services at Dominican is linked to the price of services that are not substitutes and whether the supply-side substitution of alternative providers has a significant effect on the economic behavior of hospitals.
2. Geographic Market
The geographic market of a product is determined by an examination of the geographic area in which competing companies sell their products. The geographic area is the region in which "`the seller operates, and to which the purchaser can practicably turn for supplies.' (citations omitted)." Philadelphia Nat'l Bank, supra, 374 U.S. 321, 359 (1963). Factors such as transportation costs, the availability of alternative suppliers, industry recognition, commercial realities of the industry and consumer convenience and preference are also relevant. The farther apart two hospitals are located, the more probable it is that they belong to different geographical markets. Rockford, supra, 898 F.2d at 1285 ("People want to be hospitalized near their families and homes, in hospitals in which their own — local — doctors have hospital privileges.") To determine relevant geographic market, "a pragmatic factual approach," not a "formal legalistic one" should be enlisted. Brown Shoe, supra, 370 U.S. at 336. The relevant "section of the country" should "`correspond to the commercial realities' (footnote omitted)" of the industry and should be "economically significant." Id. at 336-37.
According to one commentator, the most important factor limiting the geographic scope of markets for the services offered by hospitals is the unwillingness of patients to patronize hospitals far from their residences. The longer the distance a patient must travel, the farther his or her friends and relatives must also travel to visit him and the farther his or her physicians must travel. Long distances between home and hospital are disfavored because a patient may be forced by physical affiliations to switch doctors if he or she wishes to select a distant hospital. Physician preferences and affiliation are likely to count strongly in the patient's decision. Third party payers may also create financial incentives for patients to favor hospitals in a narrow geographic area. Jonathan B. Baker, The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry, 51-SPG Law Contemp. Probs. 93 (Spring 1988).
The Merger Guidelines hypothesize a "small but significant and nontransitory" price increase imposed by a hypothetical monopolist of the relevant product at the location of the merging parties. (1992 Horizontal Merger Guidelines § 1.21.) If enough buyers would switch to alternative sellers, so as to make the hypothetical price increase unprofitable, the location of the alternative sellers would be included in the geographic market. The process is designed to identify a region within which such a hypothetical monopolist could profitably impose at least a "small but significant and nontransitory" increase in price.
Plaintiffs argue that the relevant geographic market is a market consisting of all zip codes in Santa Cruz. Defendant contends that the relevant geographic market includes Santa Cruz County, Santa Clara County and Northern Monterey County.
Plaintiffs rely on a study of patient origin and destination data known as the Elzinga-Hogarty test and on testimony from local purchasers. In a hospital context, the Elzinga-Hogarty test focuses on patient travel. U.S. v. Rockford Memorial Corp., 717 F. Supp. 1251, 1266 (N.D.Ill. 1989) aff'd. 898 F.2d 1278 (7th Cir. 1990). The test consists of two separate measurements — Lifo and Lofi. A Lofi or "little out from the inside" statistic signifies the percentage of patients in an area's hospitals who reside in the area (rather than outside the area). A substantial number of patients from outside the area that travel into an area for hospitalization could act as a check on the exercise of market power by hospitals inside the area. A "Lifo" or "little in from out" statistic signifies the percentage of hospital patients from a particular area who remain in that area for hospital services. This statistic is useful in determining whether patients in a particular area make substantial use of hospitals outside the area. If so, that implies that hospitals outside the area could act as a check on the exercise of market power inside the area. Ideally, an area should be defined where few patients leave an area and few patients enter an area to obtain hospital services. "In other words, the Lofi and Lifo figures should ideally yield at least percentages of 90% or greater." U.S. v. Rockford Memorial Corp., 717 F. Supp. 1251, 1267 (N.D.Ill. 1989) aff'd. 898 F.2d 1278 (7th Cir. 1990). Lifo and Lofi figures equal to, or greater than, 90% represent a "strong" market while a 75% figure represents a "weak" market. Id. The authors of the Elzinga-Hogarty test conclude that the "strong" standard is most appropriate for identification of the relevant market. Elzinga Hogarty, "The Problems of Geographic Market Delineation Revisited: the Case of Coal," 23 Antitrust Bulletin 1 (1978).
Plaintiffs' expert applied the Elzinga-Hogarty test to the proposed Santa Cruz County market. His results show a LOFI percentage of 92.9% (percentage of patients in the market who reside in the market) and a Lifo percentage of 84.8% (percentage of patients who reside in the market and receive their care in the market. The results indicate approximately 16% outmigration. Plaintiffs contend that these figures indicate a highly self-contained market with almost no immigration and relatively little outmigration. Defendant cites the fact that approximately one in six patients have chosen to obtain their hospital care in one of the many hospitals located in Santa Clara County or North Monterey County as proof that plaintiffs' proposed market is too small.
"[T]he . . . underlying question is whether the other hospitals that the immigrating patients turn to can effectively discipline or constrain the merging hospitals by offering . . . [16%] of the defendant's inpatient base an alternative. If this is the case, then the . . . market is too small." U.S. v. Rockford Memorial Corp., 717 F. Supp. 1251, 1264 (N.D.Ill. 1989) aff'd 898 F.2d 1278 (7th Cir. 1990). Although the Elzinga-Hogarty test is a useful tool "for eliminating certain geographic areas from consideration as relevant markets. . . . [it is not] an infallible guide to resolve the market . . ." U.S. v. Rockford Memorial Corp., 717 F. Supp. 1251, 1271-1272 (N.D.Ill. 1989)aff'd 898 F.2d 1278 (7th Cir. 1990). Other evidence is also relevant. If the reason for outmigration is "lack of adequate hospitals in the surrounding area, the smaller Lifo-Lofi cutoff (i.e. less than 90%) may be appropriate since the very reason the patients are immigrating into an area proves that the surrounding firms are not relevant competition with the ability to constrain an exercise of market power by the market participants." Id. at 1272.
One commentator explains why the Elzinga Hogarty percentage should be adjusted for overinclusiveness:
[M]arkets based on patient flows [the Elzinga Hogarty approach] may overstate the geographic markets relevant to antitrust merger analysis when the product market includes hospital services that are not perfect substitutes. In this case, those patients with strong preferences for obtaining services at distant hospitals such as many tertiary care patients . . . [may be willing to travel] even if most patients are unwilling to travel. A hospital market that includes these distant institutions will therefore encompass a region larger than the smallest region in which a hospital cartel could successfully collude . . . Distant hospitals can be excluded from the market even if a fraction of patients from the market obtain care there, so long as those patients traveling long distances obtain quantitatively different services from the services available nearby.
Jonathan B. Baker, The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry, 51-ZPG Law Contemp. Probs. 93 (Spring 1988).
Plaintiffs contend that hospitals outside Santa Cruz County should be excluded from the market because some of the outmigration is attributable to tertiary or specialty care not available in Santa Cruz or reasons of perceived quality. Defendant counters that almost all of the outmigration is for care that is available locally. As discussed below, the parties offer conflicting evidence as to whether the outmigration is attributable to services not available at Dominican and to perceived quality differences.
Tertiary care involves complex and specialized treatments, such as complex surgery or the treatment of severe illnesses. It is usually provided by teaching hospitals. Sylvia H. Walbolt, William McD. Miller III, Jeffrey Cross, Phillip A. Proger,Problems of Access to Health Facilities and Equipment-New Competition for Limited Resources, 55 Antitrust L.J. 599, 616 (1986) (comments by panelist Phillip A. Proger) 55 Antitrust L.J. 599, 616 (1986).
Plaintiffs rely on the deposition testimony of John Petersdorf, Dominican's Chief Financial Officer, to support their contention that some of the outmigration is attributable to specialist care or reasons of perceived quality. (Petersdorf Depo., 27:12-14; 233:24-235:8; Puntillo Decl. Exhibit A.) In addition, plaintiffs' expert opines that the dispersal of outmigration among many hospitals, including the more distant specialized teaching hospitals of Stanford Medical Center and University of California at San Francisco, suggests substantial outmigration for specialty care not available at Dominican or for reasons of perceived quality. (Melnick Decl. ¶ 11.) Defendant counters with statistical evidence that ninety-seven percent of the outmigration is for treatment that was available locally and that over 11 percent of the patients residing in Santa Cruz County chose to use four Santa Clara County hospitals: Stanford, Kaiser-Santa Clara, Good Samaritan and O'Connor Hospital. (McCarthy Decl., ¶¶ 2-28.)
Plaintiffs argue that it is extremely unlikely that patients will switch to hospitals outside the Santa Cruz area in sufficient numbers in response to price because there is little or no overlap in the medical staff of Dominican and the staff of hospitals outside the relevant market. Defendant counters that 12 percent of physicians (41 in number) who have privileges at Dominican also have privileges at hospitals in Santa Clara or Monterey County. (McNaughton's Decl. ¶ 3, Exhibit B, Dominican's Answers to Interrogatories Nos. 8-18). Defendant also relies on the affidavit of Dr. Keet. Dr. Keet states that the fact that "most physicians who hold privileges at Dominican Hospital do not also hold privileges at other hospitals does not prevent physicians from referring patients to those hospitals" because "in many, if not most, instances the physicians who diagnose an illness or condition for which inpatient care is an alternative is [sic] a general practitioner or internist who is not the surgeon or other specialist providing inpatient care." (Keet Declaration ¶ 4).
Plaintiffs also offer the deposition testimony and declarations of representatives of large purchasers of inpatient services in Santa Cruz County who state that they have no alternative but to offer a health plan that includes Dominican to employees. Gregory Dougherty, Senior Vice President of Human Resources for Santa Cruz Operations, Incorporated testified at deposition:
Q. . . . And if Dominican Hospital were to . . . increase its prices by five percent, what would SCO's options be?
A. Ultimately we'd have to comply with the price increase.
Q. What if they raise their prices by 10 percent, would your answer be the same?
See eg. Dougherty Depo. 14:13-17, Puntillo Decl., Exhibit D ("Q. For the Santa Cruz employees and their dependents . . . would you offer a plan that would not include Dominican Santa Cruz Hospital? A. I cannot conceive of that.)
A. Probably.
Q. Fifteen percent?
A. Probably the same.
(Dougherty Depo. 16:12-22, Puntillo Decl. Exhibit D.)
Defendant counters with a declaration by Norman Lezin ("Lezin"), Chairman of Salz Leathers Corporation, that "in the event that Dominican Hospital were to impose a significant non-transitory price increase upon us, we could and would take steps to shift our employees from Dominican Hospital to Watsonville Hospital, Santa Clara County Hospitals, Salinas Valley Hospital, and/or Natividad Medical Center." (Lezin Decl. ¶ 4). The steps he identifies are: (1) encouraging employees to use those alternatives; (2) providing more liberal co-payments or deductibles; or (3) omitting Dominican Hospital as an option to employers. Id. Plaintiffs contend that this declaration is not "worth a grain of salt" even on summary judgment because Lezin is on the Board of Directors of Dominican. However, this argument fails because the court may not weigh evidence or judge witness credibility on summary judgment. Syufy Enterprises v. American Multicinema, Inc., 793 F.2d 990, 994 (9th Cir. 1986) cert. denied 479 U.S. 1031 (1987). Plaintiffs also contend that the declaration does not create a triable issue of fact because Lezin does not dispute the evidence that Dominican has the power to raise prices, and he does not define a significant non-transitory price increase. This argument also does not dictate that the declaration be ignored. Although Lezin does not dispute the testimony that Dominican has the power to raise prices, he does testify that he would shift to a hospital outside the area in response to a price increase by Dominican. The fact that he fails to define a significant non-transitory price increase goes to the weight of the evidence.
Defendant also points to Santa Cruz Medical Clinic's own policy of referring cardiac patients to Good Samaritan Hospital rather than Dominican, the higher-priced provider, and to deposition testimony by Barbara Lovero ("Lovero"), TakeCare's Contract Manager, that TakeCare required Santa Cruz County members to get non-emergency cardiac care at Good Samaritan Hospital as evidence that purchasers have the ability to meet a price increase with incentives that will push subscribers to alternative providers. (Lovero Depo., 141:19-24, Ulmer Declaration ("Q. Where did TakeCare members from Santa Cruz County get their non-emergency cardiac inpatient care during that three-year period [1990-1993]?. . . . A. They had to go to Good Sam.")) Plaintiffs counter that defendant's argument commits the Cellophane fallacy. Plaintiffs contend that Dominican has already exercised monopoly power and raised its prices so that Santa Cruz Medical Center and TakeCare regard a Santa Clara hospital, Good Samaritan, as a good substitute. According to plaintiffs, a market that includes Santa Clara County would be overinclusive and lead to an understatement of Dominican's market power. However, plaintiffs' argument is unavailing in the summary judgment context because there is a genuine issue of material fact as to its factual premise: Dominican's supracompetitive pricing. Dominican's expert opines that there is no evidence of monopoly pricing by Dominican and that Dominican has consistently been within the mainstream of hospital pricing, both before and after the Acquisition. He bases his opinion on price and profitability studies of a group of approximately 75 urban and small urban hospitals in central and northern California. (McCarthy Declaration ¶¶ 69-75.) In contrast, Lovero states that Dominican's rates are generally higher than the rates that TakeCare was able to negotiate with other comparable hospitals in the San Francisco/San Jose metropolitan area in 1993. (Lovero Declaration ¶ 5). Moreover, the court cannot examine the performance of the entire market until it has defined a geographic market. In the instant case, there is a genuine issue of material fact as to the definition of the relevant geographic market.
The Cellophane Fallacy is described in a law review article:
[T]he prevailing price for cellophane [in United States v. E.I. du Pont Nemours Co., 351 U.S. 377 (1956)] was arguably supra-competitive and . . . at that price consumers regarded a number of other flexible wrapping materials as good substitutes for cellophane . . . If consumers regarded these other products as good substitutes for cellophane at the prevailing, supra-competitive prices, then they probably would not have regarded them as good substitutes if cellophane were priced competitively. By charging a supra-competitive price, then, du Pont (the producer of cellophane) had already exercised most or all of its market power, i.e., it had raised the price of cellophane until other flexible wrapping materials were regarded as good substitutes. . . . The Court, then mistakenly interpreted du Pont's inability to raise its prices further as an indication that du Pont had no market power at all, rather than as an indication that du Pont had already exhausted its market power.
Gene C. Schaerr, The Cellophane Fallacy and the Justice Department's Guidelines for Horizontal Mergers, 94 Yale Law Journal 670, 677-78 n. 52 (1984-85).
Schaerr argues that a monopoly price enlarges the geographic market because it expands the geographic area from which other sellers of the product and its substitutes could profitably transport their goods to customers of the merging firms. He explains:
Suppose, for example, that widgets are produced in cities A, B, and C, and are sold for $1 in all three cities. Suppose also that it costs $1 to transport one widget from any city to any other, and that at prevailing prices it is not profitable for any producer to sell outside the city in which its widget plant is located. In this situation, each city is a separate geographical market. Now suppose that producers in city B form a cartel and in so doing raise the prices of widgets to $2.01. This makes it profitable for producers in cities A and C to transport widgets to city B, so that any market including producers in city B also includes producers in cities A and C. If producers in city B now merge, the relevant market will include cities A and C as well as city B.
Schaerr, Cellophane Fallacy, supra, at 676, n. 42. Schaerr contends that "such overstatement of the size of the market leads to understatement of the market power of the merging firms, and therefore to understatement of the anti-competitive consequences of the merger. (footnote omitted)" Id. at 677.
The Cellophane fallacy is not without its critics. Judge Posner of the U.S. Court of Appeals for the Seventh Circuit has rejected this theory. See R. Posner, Antitrust Law: An Economic Perspective 128-29 (1976).
Defendant also contends that the court must assess commercial realities such as the trading connections and the actual distance between Santa Cruz and Santa Clara Counties. Defendant's expert opines that there are connections between San Jose and Santa Cruz on the basis that inter alia "[t]he travel distance is well within reach despite the topographic feature of a mountain range between Santa Cruz and San Jose [because it] is 31 miles between the cities and only 45 miles to Stanford University Medical Center . . . [and] Good Samaritan and O'Connor are less than 30 miles away. . . ." and "[a]s evidence that the distance is not too great, 17,693 residents of Santa Cruz County commute to their jobs in Santa Clara County." (McCarthy Declaration, ¶ 43) Although geographic proximity is a relevant factor, the distance itself is not dispositive of the issue because of the effect that the "topographic feature of a mountain range" and the commute may have on the perception of Santa Cruz residents in the context of health care.
The court finds that there are genuine issues of material fact as to the relevant geographic market.
4. Concentration
In order to quantify market concentration, it is necessary to calculate market shares, assess the degree of concentration in the market after the merger and examine the extent to which the merger increased the level of concentration. In hospital cases, two measures of hospital market share are typically used: (1) hospital share of total inpatient discharges and (2) hospital share of beds. A statistical index, the Herfindahl-Hirschmann Index ("HHI") is then used to calculate market concentration. The HHI is calculated by squaring the market share of each firm in the market and then adding the squares. A market is highly concentrated if the HHI is above 1800, moderately concentrated if it is between 1000 and 1800, and unconcentrated if it is below 1000. Other factors are also relevant. The most important is ease of entry into the relevant market. "One reason concentration in the relevant market may not inherently lead to collusive or anti-competitive behavior is when existing competitors or new competitors could easily enter the market and provide enough capacity to defeat an exercise of market power."U.S. v. Rockford Memorial Corp., 717 F. Supp. 1251, 1281 (N.D. Ill. 1989) aff'd. 898 F.2d 1278 (7th Cir. 1990). Factors that suggest the likelihood of collusion or the profitability of the market are also considered.
Given a product market of inpatient services and a geographic market of Santa Cruz County, plaintiffs' data indicates that Dominican had a market share in excess of 45% prior to acquisition and that, post-acquisition, Dominican controls approximately 70% of the market. The HHI prior to the transaction was in excess of 3500 and after the acquisition, the HHI value is in excess of 6400. (Melnick Declaration ¶¶ 13 14). Defendant's relevant product market of hospital and non-hospital providers and geographic market of Santa Cruz, Northern Monterey and Santa Clara Counties produces an HHI index in the 1200 to 1300 range. (McCarthy Decl. ¶ 59.)
The court has found that there is a genuine issue of material fact as to the definition of the relevant geographic market. Having so concluded, the court does not reach the issue of market share or market concentration. Absent a relevant geographic market, market share and market concentration cannot be calculated. In addition, the court need not decide the viability of defendant's efficiencies or failing firm defense.
D. Tying
Plaintiffs contend that, with the Secure Horizons Health Plan, Dominican has exploited its monopoly power by tying the sale or price of inpatient hospital services to the purchase of physician services from Dominican's affiliated group of doctors, Physicians Medical Group of Santa Cruz ("PMG."). Plaintiffs argue that this pattern and practice harms them because it interferes with the competitive processes in the physician services' market in which plaintiffs compete, and denies them the opportunity to compete fairly and freely with PMG for managed care contracts, now and in the future. Defendant counters that plaintiffs have failed to present any evidence to show the existence of a tie — that is, Dominican's refusal to sell its hospital services unless the purchasers also agree to buy physician services from PMG. Defendant contends that the "alleged" tie is a pricing provision that does not require the health plans to use PMG, but gives favorable pricing if they do. Defendant argues that, as a matter of law, such a provision cannot establish a tie.
In its opposition to defendant's motion for partial summary judgment, plaintiffs have, for the first time, alleged tying arrangements with health plans other than Secure Horizons. Defendants object on the basis that, after discovery is closed and in the middle of dispositive motions, plaintiffs should not be permitted to throw in any surprise theories they choose. Plaintiffs claim that the "including but not limited to" language in the complaint permits them to allege tying arrangements with other health plans. Defendant counters that the language relates to other forms of monopoly exploitation, not to tying arrangements with other health plans. Paragraph 24 of the complaint provides: "After the Acquisition, DOMINICAN has engaged in willful acts to maintain, extend and exploit its monopoly power, acts which include, but are not limited to, the following. . . ." Plaintiffs proceed to enumerate six forms of monopoly exploitation. Paragraph 24(f), the only paragraph that refers to tying, provides: "attempting to leverage its monopoly power in the acute care market by negotiating an agreement with a Medicare HMO, Secure Horizons, tying the purchase of hospital services to the purchase of exclusive physician services from PSI [PMG]." The court sustains defendant's objection to the new allegations. It is unfair to defendants to permit plaintiffs, on the eve of trial, to allege tying arrangements with health plans other than Secure Horizons without having sought leave to amend their complaint. The court expresses no opinion as to whether Dominican has exploited its monopoly power by tying the sale of Dominican's services to the purchase of physicians' services from PMG with respect to PruCare, LifeGuard or any health plan other than Secure Horizons.
A tying arrangement is "`an agreement by a party to sell one product but only on the condition that the buyer also purchase a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier.'" Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992) quoting Northern P.R. Co. v. United States, 356 U.S. 1, 5-6 (1958). Tying arrangements have long been considered per se unlawful under section 1 of the Sherman Act. Northern P.R. Co. v. United States, 356 U.S. 1, 5 (1958). To prove an illegal tie, a party must show: (1) a tying of two distinct products or services; (2) sufficient economic power in the tying product market to affect the tied market; and (3) an effect on a not insubstantial amount of commerce in the tied market. Bhan v. NME Hosp. Inc., 929 F.2d 1404, 1411 (9th Cir.) cert. denied, 502 U.S. 994 (1991). "Some modicum" of involuntariness or coercion is an . . . essential to the existence of a per se illegal tie-in." Foremost ProColor, Inc. v. Eastman Kodak Co., 703 F.2d 534, 540 (9th Cir. 1983)cert. denied 465 U.S. 1038 (1984). In addition, "the seller of the tying product must have an economic interest in the tied product for there to be per se illegality." Robert's Waikiki U-Drive, Inc. v. Budget Rent-A-Car Systems, Inc., 732 F.2d 1403, 1407 (9th Cir. 1984). When these prerequisites are met, tying arrangements are illegal without any requirement of unreasonable competitive effect. Id. Conduct which does not meet the requirements of the per se prohibition may still constitute a violation of section 1 of the Sherman Act under the "rule of reason" test. Id.
Typically, an express refusal to sell the tying product without the tied product is the basis for an illegal tying arrangement.See Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). It is clear that Dominican's pricing provision in the Secure Horizon contract is not an express, contractual tying arrangement because purchasers are not explicitly required to purchase one service, PMG, in order to purchase another service, Dominican. "[W]here the buyer is free to take either product by itself there is no tying problem even though the seller may also offer the two items as a unit at a single price." Northern P.R. Co. v. United States, 356 U.S. 1, 6 n. 4 (1958). If the desirable, tying product "is truly available without the condition that other products be purchased with it, its alternative sale as part of a package cannot logically be a device to force the purchase of the `tied' products." Ways Means, Inc. v. Ivac Corp., 506 F. Supp. 697, 701 (N.D. Cal. 1979) aff'd 638 F.2d 143 (9th Cir. 1981) cert. denied 454 U.S. 895 (1981). In the instant case, Dominican offered its service without PMG.
The provision at issue states:
C. PacificCare [Secure Horizons] agrees that the cost of all medical and hospital services provided to Secure Horizons members who have selected Physician [sic] Medical Group of Santa Cruz will amount to at least eighty-six percent (86%) of premium through 1994, 85% in 1995, 84% in 1996 and 1997 . . . In the event the cost of medical and hospital services does not amount to the above percentages, the excess will be paid to Physicians Medical Group of Santa Cruz.
. . . . . . . . . . . . . . . . . . . . . . . . .
E. PacificCare and Hospital agree that the reimbursement provisions contained in this Attachment A apply only to Secure Horizons members who select Physicians Medical Group of Santa Cruz. Hospital agrees to consider other physician entities in the future based upon separate compensation provisions.
(McNaughton Declaration, Exhibit I).
Although the provision deals generally with the cost of services, there is no evidence of the actual effect of the provision. Plaintiffs fail to explain whether this requirement provides a substantial cost saving to Secure Horizons when its members select PMG, and if so, by how much the cost for members who do not select PMG exceeds the cost for members who select PMG. In any event, both parties characterize the provision as a pricing concession, and neither party disputes the fact that Dominican may be purchased separately from PMG.
Separate availability will not preclude antitrust liability where a defendant has established its pricing in such a way that "the only viable economic option is to purchase the tying and tied products in a single package." Ways Means, supra, 506 F. Supp. at 701. In United States v. Loew's Inc., 371 U.S. 38, 54-55 (1962), the district court found movie distributors guilty of conditioning licenses for popular films upon acceptance of a package containing inferior releases. The judgment enjoined defendants from "[e]ntering into any agreement . . . in which the differential between the price or fee for such feature film when sold or licensed alone and the price or fee for the same film when sold or licensed with one or more other film [sic] has the effect of conditioning the sale or license of such film upon the sale or license of one or more other films." Id. at 43. The Supreme Court affirmed.
Subsequent cases have recognized that antitrust liability may be predicated on pricing policies in which the only viable economic option is to purchase the tying product with the tied product. In Ways Means, supra 506 F. Supp. at 699, IVAC introduced a new marketing approach called the "Temperature System Program," or "TSP." Under TSP, IVAC users agreed to purchase probe covers and thermometers at a package price; however, IVAC never refused to sell thermometers separately outside the TSP program. Id. The court granted summary judgment in favor of defendants. The court reasoned that separate purchase of thermometers and probe covers was a viable alternative because approximately 25% of all purchases of electronic thermometers were made outside the TSP program. Id. at 702.
In the instant case, plaintiff has also failed to allege and adequately demonstrate the existence of, or threat of, an illegal tying arrangement because the evidence submitted in no way indicates that the purchase of physicians' services from Santa Cruz Medical Clinic was considered unfeasible or was not seriously contemplated. In fact, there is evidence that PacificCare had a full contract with Santa Cruz from 1989 through 1994, that Santa Cruz terminated the full contract for "business purposes" in favor of an agreement limited to employees of a single employer, and that Pacific Care wished to continue to contract with Santa Cruz. (Boss Depo 43:24 — 45:13, Rosch Decl., Exhibit 4.) Therefore, plaintiff has failed to demonstrate that Santa Cruz was not a viable option.
In deposition testimony, Wayne Boss, plaintiffs' Rule 30(b)(6) spokesperson on the subject of plaintiffs' tying claim, stated that Health Net "had a much better penetration of patient enrollees in the major employers in Northern California than Pacific Care [sic] did, [and] we felt it was appropriate to pursue the Health Net relationship for the commercial product, and entered into agreements with both Health Net and TakeCare to establish a Medicare at risk program through their plans rather than through Secure Horizons." (Boss Depo. 60:10-17, Rosch Decl., Exhibit 4.)
The court finds that, as a matter of law, Dominican's contract with Secure Horizons does not constitute an unlawful tying arrangement. Having so concluded, the court need not decide whether Dominican had sufficient power in the tying product market of inpatient hospital services to affect a substantial amount of trade in the tied product market of physician services or whether Dominican has an economic interest in PMG.
Plaintiffs rely only on a per se tying theory and do not attempt to prove their theory on a rule of reason basis.
E. Exclusive Dealing
An exclusive dealing contract involves a commitment by a buyer to deal only with a particular seller. Exclusive dealing arrangements are unlawful only if they violate the rule of reason. Morgan, Strand, Wheeler Biggs v. Radiology, Ltd., 924 F.2d 1484, 1488-90 (9th Cir. 1991). Plaintiffs allege that Dominican is "threatening to require TakeCare to require SANTA CRUZ to refer all cardiac patients to Dominican." (Complaint, ¶ 24(b)). Plaintiffs base this allegation on a contract provision that states:
In exchange for cardiac per diems, PMG [Santa Cruz Medical Clinic] agrees to refer all cardiac cases to Hospital [Dominican], as their preferred hospital, for which Dominican has clinical capability to provide services.
Both parties recognize that the term PMG is used in the contract provision not to refer to Physicians Medical Group of Santa Cruz, but rather as an abbreviation for the generic term "physicians medical group." The specific PMG referred to here is Santa Cruz Medical Clinic.
(Lovero Decl., Exhibit 2)
The provision at issue is a term in a bilateral contract between TakeCare and Dominican. Although the original contract was proposed as a trilateral one to which Santa Medical Clinic would be a signatory, (Lovero Decl., Exhibit 1), Dominican signed a bilateral contract with TakeCare. Defendant argues that the provision has no legal effect because the contract does not bind Santa Cruz Medical Clinic. Plaintiffs counter that the provision requires TakeCare to require Santa Cruz to deal exclusively with Dominican. Lovero states that she "would not have agreed to the paragraph [at issue] . . . but for the fact that TakeCare had no competitive alternative available to it in SantaCruz and because it was necessary that TakeCare have a contract with DOMINICAN" (Lovero Decl. ¶ 6). Plaintiffs contend that the provision must have meaning because Dominican has never felt it necessary to rescind or delete it. Defendant counters that it has never rescinded or deleted the provision because the provision had no meaning. To withstand summary judgment, plaintiffs must show a genuine factual issue as to whether Dominican and TakeCare had an agreement to restrain competition in a relevant market.
A contract must be interpreted as to give effect to "the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful. (citations omitted)." Pacific Gas Electric Co. v. G.W. Thomas Drayage Rigging Co., 69 Cal. 2d 33, 38, n. 5 (1968). The meaning of a writing can only be found by "interpretation in the light of all the circumstances that reveal the sense in which the writer used the words. (citations omitted)." Pacific Gas, supra, 69 Cal.2d at 38-9. If the court decides, after considering this evidence, "that the language of a contract, in the light of all the circumstances, is `fairly susceptible of either one of the two interpretations contended for . . .,' extrinsic evidence relevant to prove either of such meanings is admissible. (citations omitted.)" Pacific Gas, supra, 69 Cal.2d at 40.
In the instant case, the meaning of the provision is unclear, and it is reasonably susceptible of either of the two interpretations contended for. The provision may be a remnant of a trilateral contract that was intended to have no legal effect. On the other hand, the provision may have been retained in the bilateral contract because it was intended as an obligation on the part of TakeCare to require Santa Cruz Medical Clinic to refer all cardiac patients to Dominican. Therefore, extrinsic evidence relevant to prove either of such meanings is admissible. There are a number of factual issues to resolve with respect to the actual negotiation of the provision and the intent of the parties at the time of contracting. As a result, there is a genuine issue of material fact as to whether the provision constituted an agreement to restrain competition. Even if the court could decide, as a matter of law, that the interpretation of the provision urged by plaintiff is the only one to which the language is reasonably susceptible, there is a genuine issue of material fact as to the relevant market. Therefore, the court cannot decide, on a summary judgment motion, whether the alleged exclusive dealing arrangement could impair competition in a defined relevant market.
Neither party argues that TakeCare or Dominican is currently requiring Santa Cruz Medical Clinic to refer all cardiac patients to Dominican. It is undisputed that it is Santa Cruz Medical Clinic's policy to refer cardiac patients to Good Samaritan Hospital except in emergencies. Santa Cruz contends that Dominican has refrained from enforcing the provision because of the instant lawsuit. Dominican maintains that the provision is unenforceable because Santa Cruz is not a party to the contract.
D. Conclusion
The court denies plaintiffs' summary judgment and partial summary judgment motions. The court grants defendant's partial summary judgment motion on the tying and channeling claims and denies the motion on the exclusive dealing and concomitant state law claims.