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  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
  • UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al ANTITRUST/UNFAIR COMPETITION document preview
						
                                

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1 Xavier Becerra Attorney General of California 2 Kathleen Foote Senior Assistant Attorney General ELECTRONICALLY 3 Michael Jorgenson F I L E D Supervising Deputy Attorney General Superior Court of California, 4 Cheryl Lee Johnson (SBN 66321) County of San Francisco Esther La (SBN 160706) 08/22/2019 5 Emilio Varanini (SBN 163952) Clerk of the Court Deputy Attorneys General BY: JUDITH NUNEZ 6 455 Golden Gate Avenue, Suite 11000 Deputy Clerk San Francisco, CA 94102-7004 7 Tel 415.510.3541 / Fax 415.703.5480 E-mail: Emilio.Varanini@doj.ca.gov 8 Attorneys for Plaintiff, People of the State of California 9 Richard L. Grossman (SBN 112841) 10 Philip L. Pillsbury Jr. (SBN 072261) Pillsbury & Coleman, LLP 11 600 Montgomery Street, 31st Floor San Francisco, CA 94111 12 Tel 415.433.8000 / Fax 415.433.4816 Email: UEBT@pillsburycoleman.com 13 Lead Counsel for Plaintiff UFCW & Employers Benefit Trust and the Class (Additional Counsel not 14 listed SUPERIOR COURT OF THE STATE OF CALIFORNIA 15 COUNTY OF SAN FRANCISCO 16 UFCW & Employers Benefit Trust, on behalf of Case No. CGC 14-538451 17 itself and all others similarly situated Consolidated with Case No. CGC-18-565398 18 Plaintiffs, 19 vs. PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS 20 Sutter Health, et al., 21 Defendants. Dept.: 304 22 Judge: Hon. Anne-Christine Massullo People of the State of California, ex. rel. Xavier Becerra, 23 Action Filed: April 7, 2014 Plaintiff, Trial Date: September 3, 2019 24 vs. 25 Sutter Health, 26 Defendant. 27 28 1 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 ARGUMENT 2 I. PLAINTIFFS MAY PROVE ANTICOMPETITIVE EFFECTS DIRECTLY WITHOUT SHOWING THAT SUTTER HAS MARKET POWER IN 3 SPECIFIC GEOGRAPHIC MARKETS 4 The parties’ disagreement with respect to the role of market definition and market power 5 boils down to the question of whether the jury should be instructed that Plaintiffs may 6 alternatively prove that Sutter’s restraints had anticompetitive effects through “[d]irect evidence” 7 that “Sutter’s conduct caused inflated prices, reduced output, or reduced consumer choice in 8 Northern California.” Plaintiffs’ Special Instruction No. 1. As a matter of law and logic, such 9 proof must be sufficient: the purpose of the rule of reason inquiry is “to distinguis[h] between 10 restraints with anticompetitive effect that are harmful to the consumer and restraints stimulating 11 competition that are in the consumer’s best interest.” Ohio v. American Express Co., 138 S. Ct. 12 2274, 2284 (2018) (internal quotation marks omitted; alteration in original); see In re Cipro Cases 13 I & II, 61 Cal. 4th 116, 146 (2015). Inflated prices, reduced output, and/or reduced consumer 14 choice are all direct evidence of consumer harm. And the very case that Sutter cites says 15 expressly—in the context of evaluating a vertical exclusive dealing restraint under the Cartwright 16 Act—that “[e]vidence of restricted output and supracompetitive prices” provides the evidence of 17 harm sufficient to satisfy a plaintiff’s prima facie case. Theme Productions, Inc. v. News Am. 18 Mktg. FSI, 546 F.3d 991, 1001 (9th Cir. 2015).1 As the Supreme Court has made clear, market 19 power is but a “surrogate for detrimental effects.” FTC v. Indiana Federation of Dentists, 476 20 U.S. 447, 461 (1986). To say that evidence of market power in specific geographic markets is 21 1 Sutter attempts to distinguish Theme Productions by arguing that the case suggests that 22 proof of both supracompetitive prices and reduced output is necessary to establish direct evidence of harm to competition. However, this case in no way indicates that both are required for a direct 23 effects case nor has any other case. And California courts have recognized the law of supply and demand: if prices are elevated, output is reduced. See Cellular Plus, Inc. v. Superior Court, 14 24 Cal. App. 4th 1224, 1235 & n.4 (1993); see also California Dental Ass’n v. FTC, 526 U.S. 756, 777 (1999) (“If firms raise price, the market’s demand for their product will fall, so the amount 25 supplied will fall too – in other words, output will be restricted.”). Here the reduced output is the distortion of the mix of services that would otherwise be provided by Sutter versus its competitors 26 in a market unfettered by Sutter’s restraints. Because inflated prices “directly and inherently” reduce output, sufficient evidence of elevated price carries with it the necessary implication that 27 output has been reduced. In any event, evidence that health plans were restricted in their ability to create narrow and tiered networks as a result of Sutter’s practices provides that direct evidence of 28 reduced output and consumer choice. 2 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 required even if plaintiffs provide sufficiently reliable evidence of supracompetitive prices across 2 entire lines of products and across all of the geographies in which the defendant does business 3 misunderstands the purpose of the market-power inquiry: that inquiry is not an end in itself but 4 instead is how the trier of fact distinguishes those restraints that harm consumers from those that 5 are beneficial. In re Cipro Cases I & II, 61 Cal. App. 4th at 147. 6 Sutter relies primarily on the decision of the Court of Appeal in Exxon Corp. v. Superior 7 Court of Santa Clara County, 51 Cal. App. 4th 1672 (1997) and the decision of the United States 8 Supreme Court in American Express for the proposition that, in a case involving vertical restraints 9 (here, between Sutter and health plans), proof of market power in a relevant market is a sine qua 10 non for establishing liability. But as Plaintiffs pointed out in their opening brief, neither case 11 stands for so categorical a proposition, and in any event the Supreme Court’s decision in In re 12 Cipro Cases I & II refutes it. In Exxon, disagreement over product market definition was crucial 13 because “the parties are agreed that Exxon does not own a dominating share of the petroleum 14 market and therefore is not in a position to monopolize or dominate that market.” 51 Cal. App. 15 4th at 1677. Because—as we have recognized—anticompetitive effects are possible only if 16 “Sutter plays enough of a role in the market to impair competition significantly,” Pl. Br. at 6 17 (quoting Order re Antitrust Standards at 12), rigorous evidence of such effects necessarily implies 18 that Sutter has market power, such that separate proof is not required. And in American Express, 19 product market definition was again crucial because the parties disputed whether an increase in 20 merchant fees (paid by merchants when a consumer uses a credit card) reflected any increase in 21 the price of the relevant product (credit card transactions). The United States Supreme Court 22 affirmed the Second Circuit’s finding that, because consumers also pay an effective (negative) 23 price for the use of a credit card, an increase in one part of the price of a product did not say 24 anything about whether relevant prices had increased at all.2 Here, there is no dispute that 25 2 The Supreme Court stated, in a footnote, that vertical restraints “often pose no risk to competition unless the entity imposing them has market power, which cannot be evaluated unless 26 the Court first defines the relevant market.” 138 S. Ct. at 2285 n.7 (emphasis added). The dissent read this footnote to suggest that a plaintiff cannot establish that vertical restraints are 27 unreasonable through proof of direct effects, see 138 S. Ct. at 2296-97 (Breyer, J., dissenting). But that reading renders most of the majority’s opinion superfluous given that opinion looks 28 3 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 Plaintiffs’ expert has evaluated the relevant prices of inpatient and outpatient services. And, as 2 Plaintiffs’ expert will explain, there is no need to define specific geographic markets for this 3 purpose, because he has compared prices of all relevant providers for all inpatient and outpatient 4 services across geographic markets. Plaintiffs will thus, through valid econometric methods, 5 show what Sutter claims is necessary—that “Sutter’s prices are supracompetitive . . . by offering 6 evidence of what competitive price levels . . . would be.” Sutter Br. at 9.3 7 Sutter suggests that demanding proof of market power in a formally defined market is 8 required in cases involving vertical restraints to prevent false positives (since they claim vertical 9 restraints are common and often benign). See Sutter Br. at 8. But the In re Cipro Cases I & II 10 Court was at pains to emphasize that “the circumstances, details, and logic of a particular restraint 11 . . . dictat[e] how the courts that confront that restraint should analyze it.” 61 Cal. 4th at 147. 12 Nowhere does In re Cipro distinguish one class of restraints from another or suggest that certain 13 classes of restraints should be subject to a different full rule of reason analysis than others. Here, 14 pursuant to the meticulous proof that Plaintiffs will offer at trial, Sutter has used its market power 15 in Northern California to impose restraints that have the effect of insulating its providers 16 throughout Northern California from effective price competition, leading to higher prices for 17 inpatient and outpatient services than would be present in a competitive market. Such evidence 18 that “the price of [healthcare services were] higher than the price one would expect to find in a 19 20 extensively to whether there was direct evidence of supracompetitive prices. See 138 S. Ct. at 2287-89. It was the absence of such evidence that doomed the government’s case. The majority 21 hardly “exempt[ed] vertical restraints from . . . ordinary ‘rule of reason’ analysis,” id. at 2297 (Breyer, J., dissenting) and to read American Express as nonetheless obviating this long-standing 22 rule in a passing footnote would be to violate the maxim that the Court does not “hide elephants in mouseholes” (Whitman v. American Trucking Associations, Inc., 531 U.S. 457, 468 (2001)). In 23 any event, if the dissent were correct in its reading of the majority opinion in American Express, that would raise a second issue as to the applicability of footnote seven to this case. The dissent 24 notes the only authority supporting what it characterizes as the holding of footnote seven is Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877 (2007) that stated vertical price- 25 fixing restraints were subject to the rule of reason. See 138 S.Ct. at 2297 (Breyer, J., dissenting). However, vertical price-fixing restraints are still subject to the per se rule in California. Order re 26 Antitrust Standards 4 (Aug. 12, 2019). To apply Sutter’s interpretation of American Express would thus be to apply a rule that rests on an aspect of federal law differing from state law. 27 3 This Court has recognized the possibility that the ability to charge supracompetitive prices is “evidence of market power.” Order re Antitrust Standards at 12 n.7. Even if not 28 “conclusive,” the jury could rely on such evidence. 4 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 competitive market,” American Express, 138 S. Ct. at 2288, is precisely the type of evidence of 2 anticompetitive harm that satisfies the rule of reason. 3 II. SUTTER’S PROPOSED INSTRUCTIONS ARE INCONSISTENT WITH THE ELEMENTS OF A PER SE TYING CLAIM 4 5 Sutter’s efforts to modify the elements of a per se tying claim are unsupported. See 6 Sutter’s Proposed Instruction No. 3420. 7 First, Sutter cannot defend its effort to convert a per se tying claim into a rule-of-reason 8 tying claim by requiring Plaintiffs not merely to prove that Sutter has conditioned access to its 9 “must-have” providers on the health plans’ agreement to include other providers in their networks 10 but also to prove that the anticompetitive effects of tying outweigh any procompetitive benefits. 11 The cases that Sutter cites stand for a quite different proposition—namely, that before subjecting 12 a supposed tying arrangement to per se condemnation, a court must consider the possibility that 13 the arrangement should not be treated as a tying arrangement at all because “the reasons for the 14 relatively categorical condemnation of tie-ins” do not “apply to the challenged arrangements.” 15 Mozart Co. v. Mercedes-Benz of North Am., Inc., 833 F.2d 1342, 1348 n.5 (9th Cir. 1987)4; 16 Northern v. McGraw-Edison Co., 542 F.2d 1336, 1347 (8th Cir. 1976) (rejecting argument that 17 any justification took the arrangement outside the scope of the per se rule); see also Jefferson 18 Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 11 (1984) (“not every refusal to sell two products 19 separately can be said to restrain competition”).5 For example, while many franchise 20 4 Revealingly, the Mozart court cited BMI v. CBS, 441 U.S. 1 (1979), which held that a 21 blanket license—even though it involved price-setting among competitors—should not be treated as per se unlawful price-fixing, but should instead be evaluated under the rule of reason. BMI 22 obviously cannot be read to eliminate the per se rule against price-fixing just because it carved out an exception for legitimate joint ventures; nor can Mozart be read to state that the per se rule 23 against tying has been generally abrogated just because it carved out an exception for franchise agreements 24 5 Any cases (like PSI Repair Services, Inc. v. Honeywell, Inc., 104 F.3d 811, 814, fn. 2 (9th Cir. 1997) and Red Lion Medical Safety, Inc. v. Ohmeda, Inc., 63 F. Supp. 2d 1218, 1237 fn. 25 15 (E.D. Cal. 1999)) stating that “tying’s per se rule provides for an inquiry into whether the defendant’s conduct has procompetitive effects are footnote dicta that appear not to have involved 26 any actual issue in the case and that are in any event based on a plain misreading of Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992). See Areso v. CarMax, Inc., 27 145 Cal. App. 4th 996, 1005-06 (2011) (supplementary or explanatory comments, or mere observations, by appellate courts are dicta and not binding; even California Supreme Court dicta 28 5 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 arrangements can be characterized as involving tying (since the franchisee may be required to 2 purchase many different products from the franchisor), the need to preserve product quality and 3 brand identity might provide a justification for the arrangement that would mean that the per se 4 rule against tying should not apply at all. See Mozart Co., 833 F.2d at 1349. This is very 5 different from saying that, even if the per se rule applies, consideration of procompetitive effects 6 is permitted. If Plaintiffs have established the basis for instructing the jury on the elements of per 7 se tying Plaintiffs are entitled to the irrebuttable presumption that the arrangement harms 8 competition—as we have explained, that is the nature of a per se rule. See In re Cipro Cases I & 9 II, 61 Cal. 4th at 862; see also Datagate, Inc. v. Hewlett-Packard Co., 60 F.3d 1421, 1428 (9th 10 Cir. 1995) (“[I]f HP’s [tying] conduct was per se illegal, it was also per se anticompetitive.”); 11 UAS Mgmt, Inc. v. Mater Misericordiae Hosp., 169 Cal. App. 4th 357, 369 (2008) (“Where such 12 a [tying] arrangement is found, it is illegal per se; that is, the seller’s justifications for the 13 arrangement are not measured by a rule of reasonableness.”). 14 Second, Sutter cites no case that justifies requiring Plaintiffs to prove that Sutter offered 15 below-cost discounts as an element of their tying claim. We have explained why, under the 16 particular facts of Collins Inkjet Corp., coercion could not be proven absent proof of below-cost 17 pricing, because competitors otherwise could effectively offer economical alternatives. And 18 Sutter admits that Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008), does 19 not support its position. See Sutter Br. at 12; see also Pl. Br. at 8 (explaining why PeaceHealth is 20 can be disregarded unless it reflects “compelling logic”). In the United States Supreme Court 21 case of Eastman Kodak, the defendant argued that it was entitled to a presumption of lack of market power in the “after-market” for brand-specific replacement parts because permitting actual 22 inquiry into market power would deter a procompetitive strategy of setting low prices for equipment (in which the defendant admittedly had no market power) and higher prices for 23 replacement parts. The Supreme Court held that such a consideration did not justify “a legal presumption” of lack of market power. The Eastman Kodak Court never questioned that the per 24 se rule against tying precludes an inquiry into potential procompetitive benefits, and certainly did not purport to overrule its prior holding in Jefferson Parish. Compare Jefferson Parish, 466 U.S. 25 at 9 (“It is far too late in the history of our antitrust jurisprudence to question the proposition that certain tying arrangements pose an unacceptable risk of stifling competition and therefore are 26 unreasonable ‘per se.’”) with Eastman Kodak, 504 U.S. at 462-66 (citing Jefferson Parish at several points in that opinion without ever suggesting that the majority was overruling Jefferson 27 Parish’s per se rule against tying). Indeed, the dissent in Eastman Kodak understood that the majority was applying a per se rule in which consideration of procompetitive effects was 28 inappropriate. Eastman Kodak, 504 U.S. at 486-87 (Scalia, J., dissenting). 6 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 at odds with Sutter’s argument). In the end, below-cost discounting is simply not the issue here: 2 what is an issue is that Sutter engages in tying behavior through both its contracting practices of 3 negotiating and terminating contracts as a system and through its non-par provisions. Together, 4 these practices prevent the exclusion of some Sutter providers without incurring the loss of other 5 must-have Sutter providers or the requirement that a punitive rate be paid for their being out-of- 6 network. As a result of these contracting provisions, Sutter can force the health plans to include 7 all of its providers in order for the health plans to obtain access to its must-have providers. This 8 conduct is quintessential per se tying. See Jefferson Parish, 466 U.S. at 12 (“Our cases have 9 concluded that the essential characteristic of an invalid tying arrangement lies in the seller's 10 exploitation of its control over the tying product to force the buyer into the purchase of a tied 11 product that the buyer either did not want at all, or might have preferred to purchase elsewhere on 12 different terms”). 13 III. UNDER THE RULE OF REASON, THE JURY MUST DECIDE WHETHER TO CREDIT SUTTER’S EVIDENCE OF PROCOMPETITIVE EFFECTS AND 14 IT SHOULD BE INSTRUCTED TO DO SO ACCORDINGLY 15 As Plaintiffs stated in their opening brief, their proposed jury instructions do not seek to 16 impose on Sutter a burden of persuasion. See Pl. Br. at 10. In fact, the parties appear to be in 17 agreement that, as part of a rule of reason analysis, Sutter instead bears a burden of producing 18 evidence showing the procompetitive benefits of its challenged conduct. The parties, however, 19 disagree on who determines whether Sutter has met its evidentiary burden and how the parties’ 20 burdens should be assessed by the factfinder under the rule of reason. Relying on inapposite 21 non-antitrust cases, Sutter claims that the Court, not the jury, should evaluate the sufficiency of 22 Sutter’s evidence—presumably in the context of a motion for a directed verdict. Sutter’s position 23 simply is an inaccurate statement of the law for antitrust cases and improperly denies the jury of 24 its ability to assess the credibility of Sutter’s proffered evidence and arguments. 25 By arguing that the Court should reject Plaintiffs’ proposed jury instructions, Sutter 26 ignores—and attempts to strip away—a critical jury function. The California Supreme Court has 27 unequivocally stated that the jury, as factfinder, “is the sole judge of the credibility of the 28 witnesses and is free to disbelieve them even though they are uncontradicted if there is any 7 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 rational ground for doing so.” Blank v. Coffin, 20 Cal. 2d 457, 461 (1942) (internal citations 2 omitted). For antitrust cases, the jury’s role in assessing witness credibility is crucial in the 3 burden-shifting framework employed under the rule of reason analysis. As one court explained: 4 Although the evidence was sufficient for [the defendant] to meet its burden, the jury as factfinder was entitled not to credit [the defendant’s] witnesses or 5 arguments and conclude that the procompetitive benefits were not substantial or would have existed even without the restraints at issue. If the jury determined that 6 [the defendant] did not meet its burden of proving a procompetitive effect, the inquiry under the rule of reason would have ceased at this step, supporting 7 the jury's finding that the challenged restraints caused harm in the relevant market. 8 US Airways Inc. v. Sabre Holdings Corp., No. 11-Civ-2725 LGS, 2017 WL 1064709, at *15 9 (S.D.N.Y. Mar. 21, 2017) (citations omitted) (emphasis added). 6 Sutter states that it will offer 10 evidence of procompetitive effects at trial; but contrary to Sutter’s argument, the jury, not the 11 Court, must decide whether to give any credit to that evidence. Should the jury choose not to 12 credit Sutter’s evidence, then the rule of reason analysis ends—Plaintiffs’ proposed instructions 13 lay this out for the jury while Sutter’s interpretation of the rule of reason analysis improperly 14 seeks to deprive the jury of its exclusive role. 15 16 Dated: August 22, 2019 Respectfully Submitted, 17 CALIFORNIA ATTORNEY GENERAL 18 By: /s/ Emilio Varanini 19 Emilio Varanini Attorneys for The People of the State of California 20 21 6 Sutter relies on a single criminal law case and two cases discussing the burden shifting framework used for employment discrimination claims. See Sutter’s Brief at 14. These cases are 22 irrelevant in this context. Sutter cherry-picks language from People v. Adrian, 135 Cal. App. 3d 335 (1982) without any explanation for why the court’s analysis of a since-repealed penal statute 23 (Penal Code §1105) involving whether a criminal defendant could present an affirmative defense on which he would have had the burden of proof is applicable to antitrust cases. Similarly, Sutter 24 fails to explain why federal employment discrimination cases preclude the Court from instructing the jury on burden shifting under state antitrust law. Notably, the court in Caldwell v. Paramount 25 Unified School Dist., 41 Cal. App. 4th 189 (1995) explained that “the first two prongs of the three-part McDonnell Douglas test, that is, whether the plaintiff has stated a prima facie case of 26 discrimination and whether the employer has rebutted that prima facie showing, will be tested prior to trial” via a dispositive motion. Id. at 202. There is no comparable authority under state 27 antitrust law that divests the jury of responsibility as the trier of fact to determine if an antitrust defendant has met its burden of producing credible evidence as to procompetitive justifications 28 that flow from the restraints. 8 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451 1 PILLSBURY & COLEMAN, LLP 2 By: /s/ Richard Grossman 3 Richard L. Grossman 4 Attorneys for Plaintiff Class 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 9 PLAINTIFFS’ RESPONSIVE BRIEF RE ANTITRUST JURY INSTRUCTIONS - Case No. CGC 14-538451