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Sealy and Topco Considered Polestars in Blue Cross Blue Shield Market Allocation Case

Related Lawyers: Megan E. Jones, Swathi Bojedla
Related Practice Areas: Antitrust / Competition
Authors: Megan Jones and Swathi Bojedla*

In In re Blue Cross Blue Shield Antitrust Litigation,[1] a recent decision in the Northern District of Alabama, Judge R. David Proctor ruled on the applicability of the per se versus rule of reason standard of review for a series of allegedly anticompetitive restrictions adopted by the Blue Cross/Blue Shield defendants that the Plaintiffs alleged amounted to a horizontal agreement to allocate markets and limit output. The court conducted a detailed factual analysis and, relying on what it considered binding Supreme Court precedent, found that where a group of separately owned and controlled potentially competing health insurance companies effectively control the entity that created and implemented territorial restrictions along with output limitations, the restrictions should be judged under the per se standard.

The Court was very clear about its respect for Supreme Court precedent: “The Supreme Court has specifically cautioned district courts and appellate courts against reading tea leaves and predicting which antitrust precedents are now disfavored. . . . Today, the court faithfully applied Sealy[2] and Topco[3] to the Rule 56 record before it and determines that, in navigating the antitrust landscape in this case, those decisions and their progeny remain polestars.”[4] On the specific record in front of the court, the court determined that the challenged horizontal restraints fell squarely within the guidance offered by those Supreme Court decisions. Defendants have sought interlocutory appeal of Judge Proctor’s order, and a decision on that request is pending.

Background

Defendants are 35 health insurance companies operating under the Blue Cross and Blue Shield trademarks (commonly referred to as “the Blues”), along with the Blue Cross Blue Shield Association (BCBSA), an entity created by the Blues to license those trademarks to each of them.[5] In its opinion, the district court found that BCBSA was fully owned and controlled by the Blues: BCBSA’s board of directors is comprised of CEOs of the Blues, its license agreements and membership standards are voted on by the Blues, and any particular rule (including the restrictions challenged in the litigation) only can be implemented or repealed by a vote of the Blues.[6]

The court reviewed the long history of the Blue system, and noted that ownership of the trademarks was consolidated into a single entity, BCBSA, in 1982, and BCBSA in turn licensed the trademarks back to the Blues, granting each Blue the right to use those trademarks within an exclusive service area (“ESA”) specified in the license agreement.[7] In general, ESAs do not overlap, although there are exceptions.[8]

Complementary to the ESAs, the Blues adopted a Local Best Efforts “LBE” rule in 1994, and a National Best Efforts (“NBE”) rule in 2005.[9] These rules limited revenue that a Blue can receive from a health insurance business offered under a different brand than the Blue Cross/Blue Shield trademarks. Under the LBE, a Blue’s revenue from such a non-Blue business within its ESA cannot exceed 20% of its total in-ESA revenue, and under the NBE, non-Blue Cross/Blue Shield revenue cannot exceed 33 1/3% of the Blue’s total nationwide revenue.[10]

Plaintiffs are putative classes of subscribers of health insurance from the Blues and providers who accept reimbursement from the Blues. The subscriber Plaintiffs allege that, among other rules, the ESAs inflate premiums and decrease consumer choice, because Blues generally may not compete with each other for subscribers outside of their assigned ESAs. The provider plaintiffs allege that the ESAs, LBEs, and the NBE rules depress payments to providers for medical services, due to the lack of competition among the Blues for provider contracts. Both sets of plaintiffs also challenge the NBEs as a per se unlawful output restriction.

As to the ESAs in particular, the court emphasized:

CEOs of the various Blues have had occasion to address ESAs. For example, a summary of conversations with four Blue CEOs in 1986 recognized that “[t]he major advantage of an exclusive franchise area was seen in the lessening of competition as well as the opportunity to discuss plans and proposals with companies in the same industry knowing that those ideas would not be used against you.” . . . . And in interviews conducted by the Association in which questions about ESAs were asked, Plan CEOs stated that ESAs create “[l]arger market share because other Blues stay out and do not fragment the market” . . . and allow for aggressive bargaining. . . . “In turn, national accounts enjoy local discounts.” . . . . One CEO reported that “Plans benefit from the exclusive service areas because it eliminates competition from other Blue Plans” and that without service areas, “there would be open warfare.”[11]

In summary, the court rejected all of Defendants’ attempts to either disavow or distinguish Sealy and Topco. But the court’s ruling did not apply to the ESAs in isolation; rather, “like Sealy, Plaintiffs have presented evidence of an aggregation of competitive restraints – namely, the adoption of ESAs and, among other things, best efforts rules – which, considered together, constitute a per se violation of the Sherman Act.”[12] Thus, the court found that taken together, the ESAs complemented by the best efforts rules qualified for per se review under the standards elucidated by the Supreme Court in Sealy and Topco.

Application of Supreme Court Precedent in Sealy and Topco

Courts apply the per se standard when “experience with a particular kind of restraint enables the Court to predict with confidence that the rule of reason will condemn it.”[13] The per se standard has been applied to horizontal agreements among competitors to allocate markets as well as horizontal market allocations between competitors to restrict output.[14] The main thrust of Plaintiffs’ request for application of the per se standard was that the challenged restraints fell squarely under binding Supreme Court precedent in Sealy and Topco. Defendants disagreed. arguing first that Sealy and Topco are no longer good law, and second that even if both cases had continued viability, the challenged conduct was distinguishable. The court rejected both of these arguments.

In Sealy, a licensor assigned exclusive territories to its licensees, a group of potentially competing mattress manufacturers.[15] The manufacturer-licensees agreed not to sell Sealy-branded mattresses outside of their assigned territories, but were allowed to sell non-Sealy products in any geographic market.[16] The Supreme Court held that because the manufacturer-licensees effectively controlled the licensor, the licensing scheme amounted to a horizontal agreement to allocate markets subject to per se review.[17] In Topco, a group of small and medium-sized supermarket chains formed an association, Topco, to sell private-label goods under Topco brand names in order to compete with larger, national chains.[18] Topco’s bylaws, like Sealy, essentially provided for exclusive territories for the sale by each owner of Topco branded products, but not other brands, which could be marketed elsewhere. The Supreme Court held, as in Sealy, that the geographic restrictions constituted a per se unlawful horizontal market allocation.[19]

Citing to subsequent Supreme Court precedent from 1990 through 2013, the BCBS district court rejected Defendants’ argument that Sealy and Topco were no longer good law.[20] The court pointed out that the Supreme Court most recently cited both decisions favorably in its 2010 decision in American Needle, which also involved an association of actual and potential competitors, “without in any way indicating that either case had been overruled or abrogated by later developments in antitrust law.”[21]

The district court also rejected Defendants’ argument that BCBSA’s licensing of the trademarks to the Blues makes the licensing scheme vertical rather than horizontal, noting again that the BCBSA is owned by the Blues, its board of directors consists of the CEOs of each potentially competing Blue plus the president of BCBSA, the license agreements are controlled by the Blues, and the by laws are set by vote of the Blues.[22]

In sum, the BCBS court rejected Defendants’ efforts to either disavow or distinguish Sealy and Topco. But the court’s ruling did not apply to the ESAs in isolation; rather, “like Sealy, Plaintiffs have presented evidence of an aggregation of competitive restraints – namely, the adoption of ESAs and, among other things, best efforts rules – which, considered together, constitute a per se violation of the Sherman Act.”[23] Thus, the court found that taken together, the ESAs complemented by the NBE qualified for per se review under the standards elucidated by the Supreme Court in Sealy and Topco.

Defendants also argued that both restraints should be subject to the rule or reason because they are necessary to create a new health insurance product, i.e., a nationwide health insurance network to compete with other nationwide insurers. Defendants compared their nationwide health insurance product to the blanket music licenses approved in the Supreme Court’s BMI decision.[24] But, the district court responded that in BMI, the Supreme Court held that the agreement at issue was necessary to market the applicable product at all.[25] In contrast, the BCBS court declared, Defendants could not claim a “unique product” because “[t]he market allocations at issue are not necessary to market, sell, or product health insurance.”[26]

National Best Efforts as Output Restrictions

 The district court also separately examined the NBEs, and ruled that the NBEs were a horizontal output restriction, also putting it squarely within the per se standard of review. Defendants argued that NBE rule generates “plausible procompetitive benefits”, including collaboration among the Blues to invest in their collective trademarks and prevention of transfer of goodwill associated with the trademarks to other, non-Blue brands.[27] But the court commented that the fact remained that the rule constituted “a limit or a restriction on the volume (output) of a Plan’s non-Blue business, concluding that there was little question that, properly analyzed, the NBE rule was subject to anaysis under the per se standard .[28] The court reiterated that output restrictions, such as the one challenged by the Plaintiffs, are “one of ‘the most important per se categories’ along with naked horizontal price-fixing and market allocation.”[29]

 “Single Entity” Argument As To Trademark Enforcement Sent To Trial

The Blues argued that BCBSA is a single entity with respect to its enforcement of the Blue Cross and Blue Shield trademarks, and a single entity cannot collude with itself, so the ESAs and NBEs are not subject to Section 1 of the Sherman Act.[30] The court rejected this contention, citing to American Needle and other precedent for the proposition that “[c]ompetitors ‘cannot simply get around’ antitrust liability by acting ‘through a third-party intermediary or joint venture.’”[31]

However, Plaintiffs also challenged the validity and enforceability of the underlying trademarks, which would undermine the Blues’ single entity argument, and the court noted a genuine dispute of material fact as to that particular issue.[32] The court concluded that “there remain genuine issues of material fact as to whether Defendants operate as a single entity as to the enforcement of the Blue Marks,” and denied the parties’ cross-motions for summary judgment, reserving that “single entity” issue for trial.[33]

Reservation of Ruling on Local Best Efforts Rule.

Finally, the court ruled: “While Plaintiffs have not pressed the issue in this set of motions, the court notes the existence of the Local Best Efforts rule but does not address whether it is part of the aggregation of trade restraints addressed in this opinion, including the ESAs and the National Best Efforts rule. The court reserves that question of whether the Local Best Efforts rule is a per se Sherman Act violation in isolation.”[34]

Footnotes

[1] Case No. 13-cv-20000-RDP, ECF No. 2063 (N.D. Ala. Apr. 5, 2018 (hereinafter (“BCBS Op.”). Hausfeld LLP represents a group of the plaintiffs in the BCBS case.

[2] United States v. Sealy, Inc., 388 U.S. 350 (1967) (“Sealy”).

[3] United States v. Topco Associates, Inc., 405 U.S. 596 (1972) (“Topco”).

[4] BCBS Op.. at 59.

[5] Id.. at 7, 9.

[6] Id. at 7-8.

[7] Id. at 9.

[8] Id. at 11. Currently, ESAs do overlap in California as well as certain parts of Idaho, New York, Pennsylvania, and Washington. Id.

[9] Id. at 17-18

[10] Id. at 17-18.

[11] Id. at 13.

[12] Id. at 37.

[13] State Oil v. Khan, 522 U.S. 3, 10 (1997) (quoting Arizona v. Maricopa Cty. Med. Soc’y, 457 U.S. 332, 344 (1982)).

[14] BCBS Op. at 24.

[15] Sealy, 388 U.S. at 352.

[16] Id. at 352-53.

[17] Id. at 354-58.

[18] Topco, 405 U.S. 598-99.

[19] Id. at 608.

[20] BCBS Op. at 29-30

[21] Id. at 30.

[22] Id. at 37-38.

[23] Id. at 37.

[24] Broadcast Music, Inc. v. Columbia Broadcasting System, 441 U.S. 1 (1979) (“BMI”).

[25] Id. at 43.

[26] Id.

[27] Id. at 47.

[28] Id.

[29] Id. (quoting Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d 57, 61 (1st Cir. 2004)).

[30] Id. at 32.

[31] Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 202 (2010) (quoting Major League Baseball Properties, Inc. v. Salvino, Inc., 542 F.3d 290, 336 (2d Cir. 2008))

[32] BCBS Op.. at 34.

[33] Id.

[34] Id. at 48 n.16.

*Megan Jones is a partner in the San Francisco office and Swathi Bojedla is an associate in the Washington, DC office. 

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