Motion-Secondary: UFCW & EMPLOYERS BENEFIT TRUST ON BEHALF OF VS. SUTTER HEALTH et al

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                                1    Xavier Becerra
                         Attorney General of California
                    2    Kathleen Foote
                         Senior Assistant Attorney General                                                       ELECTRONICALLY
                    3    Michael Jorgenson
                         Supervising Deputy Attorney General
                                                                                                                    F  I  L   E  D
                                                                                                                 Superior Court of California,
                    4    Cheryl Lee Johnson (SBN 66321)                                                           County of San Francisco
                         Esther La (SBN 160706)                                                                      07/15/2019
                    5    Emilio Varanini (SBN 163952)                                                            Clerk of the Court
                         Deputy Attorneys General                                                                  BY: VANESSA WU
                                                                                                                              Deputy Clerk
                    6    455 Golden Gate Avenue, Suite 11000
                         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.                                                 MEMORANDUM OF POINTS AND
                                                                                      AUTHORITIES IN SUPPORT OF
                   20    Sutter Health, et al.,                                       PLAINTIFFS’ MOTION REQUESTING
                   21                      Defendants.                                DETERMINATION OF ANTITRUST
                                                                                      STANDARDS AS TO EACH OF THEIR
                   22    People of the State of California, ex. rel. Xavier           CAUSES OF ACTION
                         Becerra,
                   23
                                           Plaintiff,                                 Date:            August 6, 2019
                   24                                                                 Time:            10:00 A.M.
                                  vs.                                                 Dept.:           304
                   25
                                                                                      Judge:           Hon. Anne-Christine Massullo
                         Sutter Health,
                   26
                                           Defendant.                                 Action Filed:    April 7, 2014
                   27                                                                 Trial Date:      September 3, 2019

                   28
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1                                               TABLE OF CONTENTS
                    2                                                                                                                    Page
                    3     INTRODUCTION .......................................................................................................................... 5
                          ANTITRUST STANDARDS UNDER THE CARTWRIGHT ACT ............................................. 6
                    4
                          ARGUMENT .................................................................................................................................. 7
                    5              I.       Price Tampering Is a Per Se Claim Under the Cartwright Act. .............................. 7
                    6              II.      Aside from Plaintiffs’ Alternative Tying Theory, the Parties Agree That the
                                            Unreasonable Restraint of Trade Claim Is Subject to the Full Rule of
                    7                       Reason Analysis Under the Cartwright Act. ......................................................... 11
                                   III.     Plaintiffs’ Tying Claim Is a Per Se Claim Under the Cartwright Act................... 11
                    8
                                   IV.      A Structured Rule of Reason Analysis Is Appropriate Under the Cartwright
                    9                       Act for Plaintiffs’ Combination to Monopolize Claim. ........................................ 12
                          CONCLUSION ............................................................................................................................. 15
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1                                             TABLE OF AUTHORITIES
                    2                                                                                                                    Page
                    3     CASES
                    4     Aguilar v. Atlantic Richfield Co.
                               (2001) 25 Cal.4th 826 ...............................................................................................................15
                    5

                    6     Auto Equity Sales, Inc. v. Sup. Ct.
                               (1962) 57 Cal.2d 450 ................................................................................................................11
                    7
                          Cascade Health Solutions v. PeaceHealth
                    8         (9th Cir. 2008) 515 F.3d 883.....................................................................................................12

                    9     Cianci v. Superior Court
                               (1985) 40 Cal.3d. 903 ...............................................................................................................10
                   10
                          Classen v. Weller
                   11
                               (1983) 145 Cal.App.3d 27...................................................................................................11, 12
                   12
                          Clayworth v Pfizer, Inc.
                   13          (2010) 49 Cal.4th 758 ...............................................................................................................10

                   14     Eastman Kodak Co. v. Image Technical Services
                               (1992) 504 U.S. 451 ..................................................................................................................12
                   15
                          In re Cipro Cases I & II
                   16          (2015) 61 Cal.4th 116 ....................................................................................................... passim
                   17
                          In re Polygram Holding Inc. v. FTC
                   18          (D.C. Cir. 2005) 416 F.3d 29 ..........................................................................................6, 13, 14

                   19     Jefferson Parish Hosp. Dist. No. 2 v. Hyde
                               (1984) 466 U.S. 2 ......................................................................................................................12
                   20
                          Kolling v. Dow Jones & Co.
                   21          (1982) 137 Cal.App.3d 709.........................................................................................................9
                   22
                          Leegin v. PSKS Inc.
                   23          (2007) 551 U.S. 877 ............................................................................................................10, 11

                   24     Mailand v. Burckle
                               (1978) 20 Cal.3d 367 ............................................................................................................9, 10
                   25
                          Marin County Bd. of Realtors, Inc. v. Palsson
                   26          (1976) 16 Cal.3d 920 ................................................................................................................11
                   27     Marsh v. Anesthesia Services Medical Group, Inc.
                   28          (2011) 200 Cal.App.4th 480 .......................................................................................................6
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1                                             TABLE OF AUTHORITIES
                                                                             (continued)
                    2                                                                                                                    Page
                    3     Morrison v. Viacom, Inc.
                               (1998) 66 Cal.App.4th 534 .......................................................................................................11
                    4
                          Oakland-Alameda County Builders’ Exch. v. F. P. Lathrop Constr. Co.
                    5
                               (1971) 4 Cal.3d 354 ..................................................................................................5, 7, 8, 9, 15
                    6
                          Pacific Gas & Electric Co. v. County of Stanislaus
                    7          (1997) 16 Cal.4th 1143 ...............................................................................................................9

                    8     People v. Salas
                               (2017) 9 Cal.App.5th 736 .........................................................................................................10
                    9
                          Speegle v. Board of Fire Underwriters
                   10          (1946) 29 Cal.2d 34 ................................................................................................................6, 8
                   11
                          State of California ex rel. Van de Kamp v. Texaco, Inc.
                   12          (1988) 46 Cal.3d 1147 ..............................................................................................................10

                   13     UAS Management, Inc.
                               (2008) 169 Cal.App.4th 357 .....................................................................................................12
                   14
                          United States v. Gasoline Retailers Association, Inc.
                   15          (7th Cir. 1961) 285 F.2d 688.......................................................................................................8
                   16     United States v. Socony-Vacuum Oil Co.
                   17          (1940) 310 U.S. 150 ....................................................................................................................8

                   18     STATUTES

                   19     Bus. & Prof. Code
                               § 16720 ..................................................................................................................................9, 10
                   20          § 16720, subd. (d) .....................................................................................................................10
                               § 16720, subd. (e)(1) .................................................................................................................10
                   21
                              § 16720, subd. (e)(2) .................................................................................................................10
                   22         § 16720, subd. (e)(3) .................................................................................................................10

                   23     Cartwright Act ......................................................................................................................... passim

                   24     Sherman Act ..............................................................................................................................10, 14

                   25

                   26

                   27

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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1                                                    INTRODUCTION

                    2              In this consolidated case, UFCW & Employers Benefit Trust (“UEBT”) and the People of

                    3     the State of California (the “People”) (collectively, “Plaintiffs”) assert identical causes of action

                    4     against Sutter Health (“Sutter”) under the Cartwright Act: (1) price tampering (Count I); (2)

                    5     unreasonable restraint of trade (Count II); and (3) combination to monopolize (Count III).                   The

                    6     legal standards under California law that will be used to determine these claims are as follows: (1)

                    7     price tampering is subject to per se liability; (2) unreasonable restraint of trade is subject to per se

                    8     liability for tying and alternatively is subject to full rule of reason treatment; and (3) combination

                    9     to monopolize is subject to a structured rule of reason under In re Cipro Cases I & II (2015) 61

                   10     Cal.4th 116.    Once the Court determines the applicable standards for each of these claims, the

                   11     parties agree that the elements of these claims under these standards will be addressed as part of

                   12     resolving charging issues regarding the jury instructions—subject to one exception.                   That

                   13     exception is the manner in which the structured rule of reason would be applied as to the

                   14     combination to monopolize cause of action.            Under Plaintiffs’ proposed elements for a structured

                   15     rule of reason, their prima facie burden of proving anticompetitive effects can be satisfied through

                   16     a showing of either (1) supracompetitive pricing or (2) a reduction in the diversity of tiered and

                   17     narrow network products as a result of Sutter’s conduct.

                   18              Plaintiffs’ cause of action for price tampering is vertical, involving the interaction of the

                   19     health plans and Sutter in the health plans’ creation of provider networks that allow consumers

                   20     access to medical services, rather than horizontal, which concerns only the interaction among

                   21     providers.    Plaintiffs explain how the statutory language of the Cartwright Act and case law from

                   22     the California Supreme Court, including Oakland-Alameda County Builders’ Exch. v. F. P.

                   23     Lathrop Constr. Co. (1971) 4 Cal.3d 354, dictate that such vertical price tampering is per se

                   24     illegal.  Furthermore, Plaintiffs’ cause of action for unreasonable restraint of trade rests on two

                   25     alternative theories: (1) full rule of reason and (2) tying.         The parties agree that the full rule of

                   26     reason applies to one version of Plaintiff’s claim and that any issues regarding the elements of

                   27     this theory will be addressed in some manner as part of resolving charging issues on the jury

                   28     instructions.   The parties also agree that tying instructions should be given; however, because
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1     Plaintiffs believe a dispute exists as to whether Plaintiffs are entitled to tying instructions on a per

                    2     se theory, Plaintiffs explain that such instructions are appropriate based on state and federal case

                    3     law and are supported by this Court’s own prior ruling on tying.              Finally, Plaintiffs’ cause of

                    4     action for combination to monopolize warrants structured rule of reason instructions that would

                    5     allow them to prove anticompetitive effects through evidence of supracompetitive pricing or a

                    6     reduction in the diversity of network products to meet their prima facie burden under the rule of

                    7     reason.   Both In re Cipro, which this Court found was not limited to its facts, and In re Polygram

                    8     Holding Inc. v. FTC (D.C. Cir. 2005) 416 F.3d 29, allow for such abbreviated standards of proof

                    9     for antitrust plaintiffs under the rule of reason.

                   10                      ANTITRUST STANDARDS UNDER THE CARTWRIGHT ACT
                   11              The California Supreme Court has stated that the Cartwright Act “[a]t its heart is a

                   12     prohibition against agreements that prevent the growth of healthy, competitive markets for goods

                   13     and services and the establishment of prices through market forces.”               (In re Cipro Cases I & II

                   14     (2015) 61 Cal.4th 116, 136 (“Cipro”) [citing Speegle v. Board of Fire Underwriters (1946) 29

                   15     Cal.2d 34, 44].). Traditionally, courts have employed two analytical approaches to aid in

                   16     determining which agreements fall under this prohibition—per se and rule of reason.                    The per se

                   17     rule applies to “categories of agreements or practices that can be said to always lack redeeming

                   18     value and thus qualify as per se illegal.”       (Cipro, 61 Cal.4th at p. 146 [citations].)        Under this rule,

                   19     “[e]laborate market analysis and case-by-case evaluation are unnecessary . . . because

                   20     the anticompetitive effects of the practice are presumed.”            (Marsh v. Anesthesia Services Medical

                   21     Group, Inc. (2011) 200 Cal.App.4th 480, 494 [citing Big Bear Lodging Assn. v. Snow Summit,

                   22     Inc. (9th Cir. 1999) 182 F.3d 1096, 1101].)          In contrast, the rule of reason “inquiry is limited to

                   23     whether the challenged conduct promotes or suppresses competition.”                  (Cipro, supra, 61 Cal.4th

                   24     at p. 146).   In conducting this analysis, “a court may consider ‘the facts peculiar to the business in

                   25     which the restraint is applied, the nature of the restraint and its effects, and the history of the

                   26     restraint and the reasons for its adoption.’” (Ibid.)        In Cipro, the California Supreme Court,

                   27     recognizing that an analysis of Cartwright Act claims need not be limited solely to these two

                   28     analytical frameworks, adopted a “sliding scale” approach to antitrust analysis with per se on one
                                                                                    6
                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1     end and rule of reason on the other.        In between these two approaches, the court explained that the

                    2     rule of reason analysis may be altered, or “structured,” in such a way as to allow courts to

                    3     “‘devise rules . . . for offering proof, or even presumptions where justified, to make the rule of

                    4     reason a fair and efficient way to prohibit anticompetitive restraints and to promote

                    5     procompetitive ones.’”       (Id. at p. 147.)

                    6                                                       ARGUMENT
                    7     I.     Price Tampering Is a Per Se Claim Under the Cartwright Act.
                    8              This Court has already ruled that price tampering as alleged in Count I is actionable under

                    9     the Cartwright Act.      (March 14, 2019 Order at p. 7.)        Moreover, the Court found that the key case

                   10     of Oakland-Alameda County Builders’ Exch. v. F. P. Lathrop Constr. Co. (1971) 4 Cal.3d 354,

                   11     363 (“Lathrop”), which sets out how price tampering can be a cause of action under the

                   12     Cartwright Act, is not limited to horizontal conduct but also applies equally to vertical conduct

                   13     such as the restraints being challenged by Plaintiffs in this case.           (March 14, 2019 Order at p. 7,

                   14     fn. 3.)  Sutter has never disputed that horizontal price tampering, like horizontal price-fixing, is

                   15     subject to per se liability.    (See, e.g., id. at p. 6.)  Nor has Sutter disputed that vertical price-fixing

                   16     is subject to per se liability under state law.      (See, e.g., id.)   Thus, the only question that remains

                   17     is whether vertical price tampering is also subject to per se liability as opposed to some form of

                   18     rule of reason analysis.     Plaintiffs submit that, as a matter of state law, vertical price tampering,

                   19     like price fixing, is subject to per se liability.

                   20              The California Supreme Court has made it clear that “agreements fixing or tampering

                   21     with prices are illegal per se.”       (Lathrop, supra, 4 Cal.3d at p. 363, emphasis added.)             Lathrop

                   22     itself provides such an example of price tampering in that it involved a scheme where, pursuant to

                   23     the rules of a multi-contractor construction bidding depository, general contractors were forced to

                   24     agree to only accept sealed bids from subcontractors through a lock-box system with pre-set

                   25     bidding periods, but without the ability either to see those bids until the expiration of the bidding

                   26     period or to accept bids from outside the lock-box system.             (Id. at pp. 354-360.)     Although the

                   27     rules did not constitute an agreement between any parties to fix the bid prices, the court held they

                   28     ran afoul of the Cartwright Act because such agreements, “to the extent they raised, lowered, or
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1     stabilized prices[,] they . . . directly interfer[e] with the free play of market forces,” i.e., the

                    2     “‘interplay of the economic forces of supply and demand.’”               (Ibid., quoting United States v.

                    3     Socony-Vacuum Oil (1940) 310 U.S. 150, 218 and Speegle v. Board of Fire Underwriters (1946)

                    4     29 Cal.2d 34, 44.)     The court concluded it was “apparent” that the “secrecy” of the lock-box

                    5     system and the requirement that general contractors accept the lowest bid submitted through the

                    6     system meant that the “economic forces of supply and demand” could have little impact on the

                    7     bids.  (Lathrop, 4 Cal.3d at pp. 363-64.)

                    8              The Lathrop court analogized the price secrecy inherent in the lock-box system to an

                    9     earlier case, United States v. Gasoline Retailers Association, Inc. (7th Cir. 1961) 285 F.2d 688,

                   10     691 where an agreement among gas stations not to advertise their retail prices for gasoline was

                   11     invalidated as unlawful per se even though there was no agreement among them establishing the

                   12     prices they would charge:

                   13            Th[at] court recognized that the purpose and effect of the agreement was to reduce
                                 open price competition among the operators, and was unimpressed with the operators’
                   14            avowed intent of preventing the competitive evil of “gas wars.” In the instant action,
                                 participants in the Depository impose a rule of silence no less stifling to open price
                   15            competition than the agreement not to advertise, and they do so in the guise of
                                 preventing the competitive evil of ‘bid peddling.’ As in Gasoline Retailers, the sellers
                   16            (subcontractors) agree not to publicize their prices (bids), and the buyers (general
                                 contractors) are deprived of the benefit of purchasing at the lowest price available in a
                   17            free enterprise system of open price competition.
                   18     (Lathrop, 4 Cal.3d 354 at p. 364.)        In short, Lathrop stands unequivocally for the proposition that

                   19     agreements tampering with prices, or the structures that establish those prices, interfere with the

                   20     free play of market forces and are thus illegal per se.

                   21              This Court appropriately read Lathrop broadly, in accordance with the statutory language

                   22     of the Cartwright Act, as not resting on or articulating any distinction between horizontal and

                   23     vertical conduct but rather on whether the conduct restrains open price competition.                  (March 14,

                   24     2019 Order at p. 7, fn. 3 [recognizing that the court in Lathrop “did not focus on any distinction

                   25     between horizontal and vertical price competition” but rather on “the fact that one of the central

                   26     purposes of the Cartwright Act is to promote price competition.”].)                In any event, it would be

                   27     improper to limit the holding of Lathrop strictly to horizontal price tampering agreements because

                   28     the per se unlawful conduct at issue in that case had both horizontal and vertical components.
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1     The illegal price tampering could not have occurred if the depository rules had not established a

                    2     vertical agreement between the general contractors and the subcontractors requiring the general

                    3     contractors to accept the lowest bid and preventing them from considering competing bids

                    4     submitted by subcontractors who did not participate in the depository system.                  (Lathrop, supra, 4

                    5     Cal.3d at pp. 359-360; see also id. at p. 362 [noting that the depository rules prevented general

                    6     contractors from obtaining lower subbids outside of the depository and using those lower subbids

                    7     to submit lower general bids to consumers].)

                    8              Indeed, the California Supreme Court has unequivocally stated that it has “interpreted the

                    9     Cartwright Act to prohibit tampering with prices; they must be determined, we have stated, by the

                   10     ‘interplay of the economic forces of supply and demand.’              [Citation]    These rules apply whether

                   11     the price-fixing scheme is horizontal or vertical.”          (Mailand v. Burckle (1978) 20 Cal.3d 367,

                   12     377, emphasis added.)       And at least one Court of Appeal addressing a claim of direct price-fixing,

                   13     with associated non-price conduct, between a supplier and a distributor invoked Lathrop to

                   14     conclude that “price fixing is illegal per se, so that any combination which tampers with price

                   15     structures constitutes an unlawful activity.”         (Kolling v. Dow Jones & Co. (1982) 137 Cal.App.3d

                   16     709, 721-722, emphasis in original; see also id. at p. 722 [the test “‘is whether the agreement, or

                   17     conduct, interferes with the freedom of sellers or traders in such a manner as to prohibit or

                   18     restrain their ability to sell in accordance with their own judgment, and not what the particular

                   19     effect the agreement or conduct, has on the actual prices.’”], quoting Adolph Coors Co. v. F.T.C.

                   20     (10th Cir. 1974) 497 F.2d 1178, 1184.)

                   21              Although an examination of the Cartwright Act’s actual statutory language is not required

                   22     given this precedent, such an analysis supports the conclusion that a vertical price tampering

                   23     claim is per se illegal.    The Cartwright Act broadly prohibits combinations or agreements that

                   24     have the purpose or effect of restricting trade or competition.            (Bus. & Prof. Code, § 16720;

                   25     Pacific Gas & Electric Co. v. County of Stanislaus (1997) 16 Cal.4th 1143, 1147 [“The act

                   26     generally outlaws any combinations or agreements which restrain trade or competition . . . .”],

                   27     citation and internal quotation marks omitted.)          Subdivisions (d), (e)(1), (e)(2) and (e)(3) of

                   28
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1     Section 16720      specifically prohibit agreements that fix prices. 1         But subdivision (e)(4)

                    2     separately makes illegal any agreements “to pool, combine or directly or indirectly unite any

                    3     interests that they may have connected with the sale or transportation of any such article or

                    4     commodity, that its price might in any manner be affected.” (Emphasis added.) In other words,

                    5     the Cartwright Act makes unlawful not only agreements that literally fix prices, but also those

                    6     that distort prices.   (People v. Salas (2017) 9 Cal.App.5th 736, 743 [“‘significance should be

                    7     given, if possible, to every word, phrase, sentence and part of an act” and “[i]nterpretations which

                    8     render any part of a statute superfluous are to be avoided.’”], citations omitted.)              And as the

                    9     California Supreme Court held, nothing about this statutory language distinguishes horizontal

                   10     from vertical agreements.       (Mailand, supra, 20 Cal.3d at p. 377 [“Section 16720 refers to a

                   11     combination of ‘two or more persons’ to fix prices, and its language is not limited to

                   12     combinations among competitors.”].)

                   13              Indeed, vertical arrangements, like horizontal arrangements, have the potential to

                   14     endanger consumer welfare, the protection of which is “a principal, if not the sole, goal of” the

                   15     Cartwright Act (Cianci v. Superior Court (1985) 40 Cal.3d. 903, 918 [applying the Cartwright

                   16     Act, specifically Section 16720, to the medical profession]), 2 and accordingly, the Act should be

                   17     interpreted expansively to advance that goal even if it results in “overdeterrence.”               (See

                   18     Clayworth v Pfizer, Inc. (2010) 49 Cal.4th 758, 783.) 3

                   19
                          1
                            Bus. & Prof. Code, § 16720, subd. (d) [combinations “to fix at any standard or figure”]; Bus.
                   20     Prof. Code, § 16720, subd. (e)(1) [agreements to not sell a commodity below a “fixed value”];
                   21     Bus. & Prof. Code, § 16720, subd. (e)(2) [agreements to keep price “at a fixed or graduated
                          figure”]; Bus. & Prof. Code, § 16720, subd. (e)(3) [agreements to “establish or settle the price of
                   22     any article”].
                          2
                            Cianci was disapproved in State of California ex rel. Van de Kamp v. Texaco, Inc. (1988) 46
                   23
                          Cal.3d 1147, 1154 only as far as Cianci could be construed to hold that for purposes of generally
                   24     interpreting the Cartwright Act that it was patterned after the federal Sherman Act.                 In any event,
                          the California Supreme Court has reaffirmed the “principal goal” of the Cartwright Act as the
                   25     “preservation of consumer welfare.”          (Cipro, supra, 61 Cal.4th at p. 136.)
                          3
                   26       To the extent that Sutter cites federal precedent in arguing that Plaintiffs’ price tampering claim
                          should be subject to the rule of reason rather than per se liability, such a use of federal precedent
                   27     would be inappropriate. Although under the Sherman Act vertical price-fixing claims are no
                          longer subject to the per se rule (Leegin v. PSKS Inc. (2007) 551 U.S. 877), the California
                   28
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                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1     II.    Aside from Plaintiffs’ Alternative Tying Theory, the Parties Agree That the
                                 Unreasonable Restraint of Trade Claim Is Subject to the Full Rule of Reason
                    2            Analysis Under the Cartwright Act.

                    3              The parties agree that Plaintiffs’ unreasonable restraint of trade claim (Count II) is

                    4     properly analyzed under the full rule of reason inquiry under the Cartwright Act.                 The objective of

                    5     the rule of reason is to determine “whether the challenged conduct promotes or suppresses

                    6     competition.”     (Cipro, supra, 61 Cal.4th at p. 136.)        The parties also agree that issues concerning

                    7     Plaintiffs’ burdens of production and proof of anticompetitive effects will be addressed at a later

                    8     date as part of resolving charging issues in connection with jury instructions. 4              Consequently,

                    9     Plaintiffs move on to discuss their alternative tying claim as to Count II.

                   10     III.   Plaintiffs’ Tying Claim Is a Per Se Claim Under the Cartwright Act.

                   11              In its order denying Sutter’s motion for summary judgment, the Court set forth the

                   12      elements of a tying claim under the Cartwright Act: “(1) a tying agreement, arrangement or

                   13      condition [] whereby the sale of the tying product [or service] was linked to the sale of the tied

                   14      product or service; (2) the party had sufficient economic power in the tying market to coerce the

                   15      purchase of the tied product; (3) a substantial amount of sale was effected in the tied product;

                   16      and (4) the complaining party sustained pecuniary loss as a consequence of the unlawful act.

                   17      (Classen v. Weller (1983) 145 Cal.App.3d 27, 37–38, 192 Cal.Rptr. 914; see also Morrison v.

                   18
                          Supreme Court has not come to the same conclusion for claims brought under the Cartwright Act.
                   19     Nor, as set out in the text above, has the California Supreme Court seen fit to narrow per se
                   20     liability for vertical price restraints in the manner that the United States Supreme Court did even
                          prior to Leegin.    (See Amicus Curiae of the California Attorney General, Bahl v. Metabolife
                   21     International Inc., No. D040601 (Apr. 29, 2003) 2003 WL 23154954, *12-*14) [comparing
                          federal with state antitrust law in arguing that vertical restraints on advertised prices (as opposed
                   22     to the actual retail prices in the store) are still per se illegal under state antitrust law].)         This Court
                          must follow our Supreme Court’s holding on state antitrust law notwithstanding any changes in
                   23     federal antitrust law.    (Auto Equity Sales, Inc. v. Sup. Ct. (1962) 57 Cal.2d 450, 455.)
                   24     4
                            To the extent there is a dispute between Plaintiffs and Sutter as to the burden of proof under the
                          rule of reason, Plaintiffs acknowledge that they bear the ultimate burden of showing that the
                   25     anticompetitive effects of Sutter’s restraints outweigh the procompetitive effects (if any).
                   26     However, once Plaintiffs make their initial showing of adverse effects on competition, Sutter is
                          required to make “not only a demonstration that the anticompetitive practice relates to a
                   27     legitimate purpose, but also that it is reasonably necessary to accomplish that purpose and
                          narrowly tailored to do so.”       (Marin County Bd. of Realtors, Inc. v. Palsson (1976) 16 Cal.3d 920,
                   28     939.)
                                                                                    11
                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1      Viacom, Inc., supra, 66 Cal.App.4th at pp. 541–542, 78 Cal.Rptr.2d 133.)” (June 13, 2019 Order

                    2      at p. 5 [citing UAS Management, Inc. (2008) 169 Cal.App.4th 357, 369].)                   As the court in

                    3      Classen stated, these elements set out “an illegal per se tying arrangement.” (Classen, 145

                    4      Cal.App.3d at p. 37.)      And that holding has been affirmed explicitly or implicitly by numerous

                    5      federal and state antitrust cases.      (See e.g., Eastman Kodak Co. v. Image Technical Services

                    6      (1992) 504 U.S. 451, 461-62, 464; Jefferson Parish Hosp. Dist. No. 2 v. Hyde (1984) 466 U.S. 2,

                    7      9-10, 15-18. 26-28; Cascade Health Solutions v. PeaceHealth (9th Cir. 2008) 515 F.3d 883, 912-

                    8      13; UAS Management, 169 Cal.App.4th at p. 369 [citing Classen, supra.].)

                    9              State-court precedent and the Court’s previous finding demonstrate that Plaintiffs’ tying

                   10      claim is subject to the per se standard.       To the extent Sutter has a dispute as to additional

                   11      instructions it would request as to any of the specific elements above (see Sutter’s Proposed Jury

                   12      Instructions and Verdict Form, p. 49), it is Plaintiffs’ understanding that parties have agreed that

                   13      those issues will be addressed at a later date as part of resolving charging issues regarding the

                   14      jury instructions.

                   15     IV.    A Structured Rule of Reason Analysis Is Appropriate Under the Cartwright Act
                                 for Plaintiffs’ Combination to Monopolize Claim.
                   16

                   17              This Court has recognized that the California Supreme Court’s decision in Cipro governs

                   18     Plaintiffs’ combination to monopolize claim.           (See March 14, 2019 Order at p. 12.)          This Court

                   19     has further recognized that Cipro is not solely limited to its facts involving a reverse patent

                   20     settlement.    (See March 14, 2019 Order at p. 13, fn. 8.)         As Plaintiffs explain below, the

                   21     California Supreme Court ultimately applied a structured rule of reason analysis in Cipro

                   22     whereby plaintiffs were allowed to prove anticompetitive effects directly without having to show

                   23     market power.       (See Cipro, supra, 61 Cal.4th at pp. 147-148, 161.)           By analogy to Cipro,

                   24     Plaintiffs submit that they need not show market power and may instead prove anticompetitive

                   25     effects by demonstrating either (1) supracompetitive pricing by Sutter (i.e., pricing above

                   26     competitive levels) or (2) a lack of diversity of tiered and narrow network products in Northern

                   27

                   28
                                                                                    12
                         MEMORANDUM OF POINTS & AUTHORITIES ISO PLAINTIFFS’ MOTION REQUESTING DETERMINATION
                                                      OF ANTITRUST STANDARDS - Case No. CGC 14-538451
                    1     California compared to elsewhere. 5

                    2              In considering whether a “reverse payment” made by a brand-name drug manufacturer to

                    3     a generic manufacturer for purposes of settling the generic’s patent challenge violated the

                    4     Cartwright Act, the Court in Cipro stated that parties “illegally restrain trade when they privately

                    5     agree to substitute consensual monopoly in place of potential competition that would have

                    6     followed a finding of invalidity or noninfringement.”            (Id. at p. 130.)   After finding that “reverse

                    7     payment” patent settlements may violate the Cartwright Act under certain circumstances, the

                    8     Court then turned to the issue of determining which standard should be employed to assess

                    9     whether such settlements unreasonably restrain trade.             (Id. at p. 148.)  Previewing its conclusion,

                   10     the Court explained that “[t]o the extent rule of reason analysis applies . . . we must also consider

                   11     how the analysis should be structured to most efficiently differentiate between reasonable and

                   12     unreasonable restraints of trade in this context.”         (Ibid. [citing California Dental Assn. v. FTC

                   13     (1999) 526 U.S. 756, 781, emphasis added].)

                   14              Focusing on the potential competitive harm arising from reverse payment patent

                   15     settlements—maintenance of monopoly power and elimination of competition—the Cipro Court

                   16     developed a structured rule of reason analysis to analyze the competitive harm of such

                   17     settlements.    (Id. at pp. 151-58.)    On the issue of market power effects, the Court concluded that

                   18     Plaintiffs do not need to prove market power given the presumption that it was imposing.                     (Id. at

                   19     p. 151 [ “the outlined prima facie showing will suffice, without more, to raise a presumption of

                   20     the patentee’s market power.”].)        The Court concluded that “proof of a reverse payment in excess

                   21     of litigation costs and collateral products and services raises a presumption that the settling

                   22     patentee has market power sufficient for the settlement to generate significant anticompetitive

                   23     effects.”   (Ibid.)

                   24              In recognizing that separate proof of market power is unnecessary, the Cipro Court first

                   25     analogized the competitive harm caused by the reverse payment settlement to per se illegal

                   26
                          5
                   27       Under this structured rule of reason, Sutter would still be able to offer evidence that the restraint
                          is in fact procompetitive.      (Cipro, supra, 61 Cal.4th at pp. 157-158; see In re Polygram Holding
                   28     Inc. v. FTC (D.C. Cir. 2005) 416 F.3d 29, 37-38.)
                                                                                    13
                         MEMORANDUM