| |
UNITED STATES DISTRICT COURT
FOR
THE DISTRICT OF DELAWARE
| ______________________________________ |
| | ) | | | | ) | | | UNITED STATES OF
AMERICA, | ) | CA 98-475 JJF
| | | ) | | |
Plaintiff, | ) | | | | ) | | |
vs. | ) | | |
| ) |
| | FEDERATION OF PHYSICIANS AND
| ) |
| | DENTISTS, INC., | ) |
| | | ) |
| |
Defendant. | ) |
| | | ) |
| | ______________________________________ | ) | |
BRIEF IN SUPPORT OF PLAINTIFF'S
MOTION TO COMPEL
PRODUCTION
OF DOCUMENTS FROM FIRST STATE ORTHOPAEDICS
Dated: January 21, 1999
COUNSEL FOR PLAINTIFF
UNITED STATES OF
AMERICA
RICHARD G. ANDREWS
UNITED STATES ATTORNEY
| |
By: Virginia Gibson-Mason (DSB # 3699)
Assistant United States Attorney
1201 Market Street, Suite 1100
Wilmington, DE 19801
Tel.: (302)573-6277
Facsimile: (302) 573-6220
Melvin A. Schwarz
Special Counsel for Enforcement
U.S. Department of Justice
Antitrust Division
601 D Street, N.W.
Washington, D.C. 20530
Tel.: (202) 305-1210
Facsimile: (202) 514-1629
| Steven Kramer
Richard S. Martin
Denise E. Biehn
Michael D. Farber
Heather H. Howard
Jean Lin
Attorneys
U.S. Department of Justice
Antitrust Division
325 Seventh Street, N.W.
Washington, D.C. 20530
Tel.: (202) 307-0997
Facsimile: (202) 514-1517
|
TABLE OF CONTENTS
TABLE OF
CONTENTS.............................................................................................................i
TABLE OF
AUTHORITIES.......................................................................................................ii
I. STATEMENT OF THE NATURE AND STAGE OF THE
PROCEEDING............................1
II. SUMMARY OF
ARGUMENT..............................................................................................1
III. STATEMENT OF
FACTS....................................................................................................2
IV.
ARGUMENT........................................................................................................................4
A.
Rule 26(b)(1) Authorizes Broad Pretrial Discovery......................................................4
B.
First State's Revenue and Expense Data are Relevant to this Antitrust Action on
Several
Grounds..........................................................................................................5
1. First State's Revenues and Expenses are Relevant to Assessing the
Likelihood
that First State's
Termination of its Blue Cross Contract was Part of a
Collusive Scheme by Federation
Members............................................................. 6
2. The Documents Sought are Relevant to Assessing Defendant's Claim
that Each
of its Members
Acted Independently, Based on the Same Perception that Blue
Cross's Proposed
Fees were Too Low..............................................................7
3. Practice Cost Information is Relevant to Assessing Defendant's
Implicit Claim
that its Members
Have Similar Cost Structures.................................................8
4. First State's Revenues and Costs in 1997 are Relevant to an
Assessment of
Defendant's
Standard of Care Claim.................................................................9
C.
Contrary to First State's Objections, Request No. 7 is Neither Harassing, Vexatious,
nor Calculated to Cause
Embarrassment....................................................................10
V. CONCLUSION
..................................................................................................................11
.
Page ii
TABLE OF AUTHORITIES
Cases
Alvord-Polk, v. F. Schumacher & Co., 37 F.3d 996 (3d Cir.
1994)..............................................9
Big Apple BMW, Inc. v. BMW of North America, Inc., 974 F.2d 1358 (3d Cir.
1992)................9
Bogosian v. Gulf Oil Corp., 561 F.2d 434 (3d Cir.
1978).............................................................6
Fragale & Sons Beverage Co. v. Dill, 760 F.2d 469 (3d Cir.
1985).........................................9,10
In re ML-LEE ACQUISITION FUND II, 151 F.R.D. 37 (D. Del.
1993).............................2,5,12
Kellam Energy, Inc. v. Duncan, 616 F. Supp. 215 (D. Del.
1985)............................................5,10
Krehl v. Baskin-Robbins Ice Cream Co., 664 F 2d 1348 n. 22 (9th Cir.
1981)...............................8
La Chemise Lacoste v. Alligator Co., Inc., 60 F.R.D. 164 (D. Del.
1973)................................5,12
Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340
(1978)............................................................5
Pennwalt Corp. v. Plough, Inc., 58 F.R.D. 257 (D. Del.
1979)................................................5,11
Scovill Manufacturing Co. v. Sunbeam Corp., 61 F.R.D. 598 (D. Del.
1973)...............................5
United States v. Howard, 360 F.2d 373 (3d Cir.
1966)..............................................................10
Weit v. Continental Illinois Nat'l Bank and Trust Co., 641 F.2d 457 (7th
Cir. 1981).....................9
Rules
D. Del. LR.
26.2........................................................................................................................11
Fed. R. Civ. P.
26(b)(1)............................................................................................................4,5
Page 1
I. STATEMENT OF THE NATURE AND STAGE OF THE
PROCEEDING
On August 12, 1998, the United States filed its
complaint (D.I. 1) against defendant,
the Federation of Physicians and
Dentists ("the Federation"), seeking equitable and other
relief to enjoin defendant's and its
orthopedic surgeon members' violation of Section 1 of the
Sherman Act. The complaint
alleges that defendant, in coordination with its 44 member
orthopedic surgeons located in
Delaware, including 10 members of the largest orthopedic
group in Delaware, First State
Orthopaedics ("First State"), organized and became the hub of
a price-fixing conspiracy to oppose
and prevent proposed reductions in payments for
orthopedic services by Blue Cross
and Blue Shield of Delaware ("Blue Cross").
On October 29, 1998, at the beginning of discovery in the case, the
United States
served a subpoena duces tecum on
First State. First State has refused to produce documents in
response to one request seeking
documents sufficient to show First State's revenues and
expenses in 1997. As explained in
detail below, the United States has consulted in good faith
with counsel for First State without
success, and, therefore, now moves the Court for an order
compelling First State's production
of responsive documents.
II. SUMMARY OF ARGUMENT
Documents showing First State's 1997 revenues and expenses easily
meet the liberal
standard of relevance for pretrial
discovery in this antitrust case. Plaintiff's Complaint
explains in some detail the
numerous documents demonstrating the concerted activity.
Nevertheless, defendant continues
to deny that it occurred. The requested information is
clearly relevant to, and highly likely
to lead to the discovery of, admissible evidence
Page 2
concerning the issue that is "clearly
at the heart of th[is] litigation:"1 whether defendant's
members acted in concert or, as
defendant claims, each acted independently. Specifically, the
requested information is relevant to
a determination of whether defendant's members' actions
were against their independent
self-interest and, accordingly, can be explained only by the fact
that they were acting in concert. It
also bears directly on defendant's affirmative allegations
that each of its members acted
independently based on concerns that Blue Cross's proposed
fees were unprofitably low and
threatened to erode the standard of care provided to their
patients. In view of these grounds,
an order compelling First State to produce information
demonstrably relevant to
establishing concerted action and to analysis of defendant's contrary
claims is amply warranted here.
Moreover, the manifest relevance of the information sought
refutes First State's groundless
contention that the request in dispute was propounded to
harass and embarrass First
State.
III. STATEMENT OF FACTS
The crucial factual issue in this case is whether defendant's challenged
conduct
involves concerted action with its
member orthopedic surgeons in Delaware. The Complaint
alleges that,
Defendant and its co-conspirators have engaged in a combination
and
conspiracy . . . consist[ing] of an understanding and concert of action
among
Defendant and its co-conspirators that Federation members would
negotiate
their contractual fees with Blue Cross only through the Federation's
executive
director, Mr. Seddon, for the purpose of collusively resisting any
reductions in
fees paid by Blue Cross for their provision of medical services to its
plan
members.
Page 3
Complaint (D.I. 1) at
¶¶ 52 and 53. The Complaint further alleges that, in effectuating this
conspiracy, defendant and its
members, "[t]hrough Mr. Seddon, jointly rejected Blue Cross's
fee proposals and ultimately
terminate their contracts with Blue Cross." Id. at ¶ 54(d).
Despite overwhelming evidence supporting these allegations, cited in
the Complaint
from defendant's and its orthopedic
surgeon members' own documents, defendant has flatly
denied that it and its members acted
in concert. Amended Answer (D.I. 11) at ¶¶ 52-54.
Rather, defendant claims that every
one of the Federation members acted independently in
resisting Blue Cross's proposed fee
reductions, allegedly viewing the reductions as "so
unreasonable that no individual
physician or group turned out to be willing to accept them."
Id. at ¶ 72. Indeed,
defendant goes so far as to claim that its "members felt they were not
capable of providing and/or
maintaining the standard of care necessary to their patients at the
rates [Blue Cross] sought to
impose" and, thus, "chose not to deal with Blue Cross." Id. at ¶
76.
In view of defendant's denial of concerted action, the United States
subpoenaed
documents from First State and
other orthopedic surgical groups who have been members of
the Federation during the relevant
period. The document requests focus, in part, on obtaining
financial information that is relevant
to proving the concerted nature of defendant's and its
member surgeons' price fixing and
boycott activities and to refuting the rationalizations that
defendant has advanced to cloak
those activities with its claim of independent action. Request
No. 7, the one at issue here, simply
seeks:
Documents sufficient to show your practice's revenues and expenses
(including all physician salaries and benefits) in 1997.
.
Page 4
On November 12, 1998, First State filed numerous general and specific
objections to
the subpoena, including the
following specific objections to Request No. 7:
Request No. 7 is objectionable on the additional ground that it seeks
purely private information that is not relevant and not reasonably
calculated to lead to the discovery of admissible evidence, and
instead
is harassing and vexatious and reasonably calculated to cause
needless
embarrassment.
(D.I. 21). Counsel for plaintiff
promptly sought to resolve First State's numerous general and
specific objections to the subpoena,
and, during a telephone conversation on November 19,
1998, both parties resolved all of
First State's objections with the exception of its objections
to Request No. 7.
Following the parties' initial productive discussion, on November 25, in
a further
attempt to resolve First State's
objections to Request No. 7, counsel for plaintiff explained at
length to counsel for First State the
several grounds on which plaintiff believes the documents
sought by Request No. 7 are
relevant. But First State maintained its refusal to comply, and its
production of subpoenaed
documents, which was delivered to plaintiff on December 24, 1998,
omits documents responsive to
Request No. 7. Consequently, plaintiff was left with no
alternative other than to file its
motion to compel First State to produce documents responsive
to subpoena Request No. 7.
IV. ARGUMENT
A. Rule 26(b)(1) Authorizes Broad Pretrial Discovery
Fed. R. Civ. P. 26(b)(1) provides, in part:
"Parties may obtain discovery of any matter,
not privileged, which is relevant to
the subject matter involved in the pending action, whether
it relates to the claim or defense of
the party seeking discovery or to the claim or defense of
Page 5
any other party." "The key phrase in
this definition--‘relevant to the subject matter involved
in the pending action'--has been
construed broadly to encompass any matter that bears on, or
that reasonably could lead to other
matter that could bear on, any issue that is or may be in the
case." Oppenheimer Fund, Inc.
v. Sanders, 437 U.S. 340, 351 (1978); accord v. Plough, Inc., 58 F.R.D. 257,
259 (D. Del. 1979) ("[t]his language has been given a very
broad reading"); Scovill
Manufacturing Co. v. Sunbeam Corp., 61 F.R.D. 598, 602 (D. Del.
1973) ("connotation of ‘relevancy'
is extremely liberal with respect to pre-trial discovery").
Accordingly, this Court has recognized that " ‘discovery should
ordinarily be allowed
under the concept of relevancy
unless it is clear that the information sought can have no
possible bearing upon the subject
matter of the action.' " FUND II, 151 F.R.D. at 39
(quotingLa Chemise Lacoste v. Alligator Co., Inc., 60 F.R.D. 164,
171 (D. Del. 1973)). Moreover, this
Court has observed "that there is a general policy of
allowing liberal discovery in
antitrust cases." Kellam Energy, Inc. v. Duncan, 616 F. Supp.
215, 217 (D. Del. 1985).
"Particularly where allegations of conspiracy or monopolization are
involved, as in the instant case,
broad discovery may be needed to uncover evidence of
invidious design, pattern or intent."
Id. Thus, in this antitrust conspiracy case, where
defendant has alleged that its
members acted independently for similar reasons, the Court
should allow broad discovery of
documents relevant to these alleged reasons.
B. First State's Revenue and
Expense Data are Relevant to this Antitrust
Action on Several Grounds
The following four subsections discuss in detail the various claims and
defenses to
which First State's withheld
revenue and expense documents are relevant under Rule 26(b)(1).
Page 6
Any one of these grounds warrant
an order compelling production of those documents.
Cumulatively, they unequivocally
establish the documents' relevance and the merits of
plaintiff's motion.
1. First State's Revenues and Expenses are
Relevant to Assessing the
Likelihood that First State's Termination of its Blue Cross
Contract was Part of a Collusive Scheme by Federation Members
Defendant's claim that each of its member
orthopedic groups independently
terminated their respective Blue
Cross agreements implies that each group was prepared to
run the risk of losing its Blue
Cross-insured patients to other, competing groups that might, in
the absence of collusion, continue
doing business with Blue Cross. The evidence will
demonstrate that defendant's
members were aware, through numerous communications and
meetings, that competing orthopedic
groups would also be terminating their Blue Cross
contracts. Consequently, Federation
members were assured that they could terminate their
respective Blue Cross contracts yet
continue to be paid for treating Blue Cross patients at their
higher billed rates because Blue
Cross patients would have no good alternative for orthopedic
surgery in Delaware. Despite the
overwhelming evidence of this concerted behavior,
defendant continues to deny such
behavior. Consequently, plaintiff must seek all
circumstantial, as well as direct,
evidence of this concerted activity to meet its burden of proof
at trial.
One circumstantial means to prove concerted action is to demonstrate
that the
Federation members' "parallel
conduct was against the self-interest of each conspirator if they
were acting alone." Bogosian v.
Gulf Oil Corp., 561 F.2d 434, 446 (3d Cir. 1978). The
documents responsive to Request
No. 7 will enable plaintiff to determine the percentage of
Page 7
each member orthopedic group's
revenues and costs that is attributable to Blue Cross (and the
consequent extent that income
would be lost). That information is relevant to determining
whether, in terminating their
respective Blue Cross contracts, each of defendant's member
groups (including First State) acted
consistently with its own financial interests. For example,
it is far less likely that an orthopedic
group would independently terminate its Blue Cross
contract in response to the proposed
fee reduction if the group, in view of its marginal costs,
could profitably continue to treat
Blue Cross patients at the lower fee levels. The United
States, therefore, is surely entitled to
the requested documents to test whether First State's
revenue and cost factors are
consistent with plaintiff's, or defendant's, view of what happened
and why.
2. The Documents Sought are Relevant to
Assessing Defendant's
Claim
that Each of its Members Acted Independently, Based on the
Same Perception that Blue Cross's Proposed Fees were Too Low
As discussed above, the Federation's principal
defense is that its members acted
independently in rejecting Blue
Cross's fee proposal. Defendant's contention rests on the
subsidiary allegation that the fees
Blue Cross proposed were too low for any orthopedic
surgeon to accept. Indeed,
defendant argues that Blue Cross was "exercising [its] monopsony
power in the marketplace . . . to
impose noncompetitive price decreases for providers."
Amended Answer (D.I. 11) at
¶ 59. Ultimately, defendant is claiming that every one of its
member physicians independently
considered it unprofitable to serve Blue Cross patients at
the proposed fee levels.
Information about First State's revenues and expenses is patently
relevant to any
assessment of this claim because it
will allow plaintiff to evaluate First State's costs and the
Page 8
profitability of it providing services
to Blue Cross patients at the reduced fee levels offered by
Blue Cross. For example, if First
State physician-salary levels demonstrate it was a highly
profitable group practice and,
indeed, paid salaries well above median levels for orthopedic
surgeons, such information would
cast doubt on a claim that First State physicians viewed the
provision of their services at Blue
Cross's proposed, reduced fee levels as an unprofitable
endeavor. Access to First State's
and other orthopedic groups' expense figures, particularly
the information about physicians'
salaries and benefits--the major item of expense to a
physician practice--will also permit
an assessment of the ability of First State and competing
orthopedic practices to have
tightened their cost structures to maintain their profitability,
while accepting Blue Cross's
reduced fees. Without revenue and cost data from First State
and other major practice groups in
Delaware, the United States will obviously be severely
hamstrung in its efforts to refute the
Federation's assertion that the proposed Blue Cross rates
were a money-losing proposition for
all Federation members.
3. Practice Cost Information is Relevant to
Assessing Defendant's
Implicit Claim that its Members Have Similar Cost Structures
In denying the existence of concerted action,
defendant affirmatively asserts that its
orthopedic surgeon members'
parallel actions reflect merely the independent recognition by
each group practice that Blue
Cross's proposed fees were unreasonable. Such an argument
presupposes that defendant's
member orthopedic surgeons have similar practice costs
"because similar costs would
necessarily require somewhat similar prices." Robbins Ice Cream Co., 664
F.2d 1348, 1357 n. 22 (9th Cir. 1982). First State's costs for
1997--along with those for other
Delaware orthopedic groups--are therefore directly relevant
Page 9
to defendant's claim. If discovery
demonstrates that there were substantially different costs
among defendant's Delaware
orthopedic members' practices--including the physician-salary
and benefits component of the
practices' costs at each practice--such evidence would be
consistent with plaintiff's claim that
the Federation members' rejection of Blue Cross's
proposed fee reductions was the
result of collusion. See Bank and Trust Co., 641 F.2d
457, 463 (7th Cir. 1981) (mere showing of parallel pricing
behavior does not provide a basis
for inference of price fixing conspiracy where each
defendant faced "parallel costs").
Federation member orthopedic groups with lower cost
structures would likely be more
receptive to the proposed, reduced fees.
4. First State's Revenues and Costs in 1997 are
Relevant to an
Assessment of Defendant's Standard of Care Claim
First State's withheld financial documents will
also help illuminate the invalidity of
defendant's claim that each of its
members independently rejected Blue Cross's proposal out
of a concern for its alleged,
perceived effects on the standard of patient care. The United
States intends to expose this claim
as merely a pretext for the Federation's and its members'
concerted effort to avoid any
lowering of physician fee income. In assessing assertions of
purported motives for independent
action, courts routinely evaluate whether the reason
advanced is pretextual.
E.g., Fragale & Sons Beverage Co. v. Dill, 760 F.2d 469, 474 (3d Cir.
1985) (evidence of pretext, if
believed by a jury, would disprove likelihood of independent
action); Alvord-Polk v.
Schumacher & Co., 37 F.3d 996, 1012-1013 (3d Cir. 1994)
(defendant's advancing of pretextual
reasons for its actions "would tend to support an
inference that it acted as part of a
conspiracy"); America, Inc., 974 F.2d 1358,
1363 (3d Cir. 1992) (reversing summary judgment because
plaintiff set forth sufficient evidence
of concerted action and further produced evidence
tending to show that defendant's
alleged independent reasons for actions were pretextual).
Thus, discovery of First State's 1997 revenue and cost information is
clearly relevant
to an evaluation of the alleged
impact, if any, that Blue Cross's proposed fee reductions were
likely to have on the standard of
care provided by First State. A comparison of First State's
costs, including physicians' salaries,
with industry norms will assist in assessing defendant's
standard of care argument because,
if First State's physician salaries exceed industry norms,
First State could have reduced its
costs without causing any decrease in the standard of care it
provides. The withheld
information, therefore, sheds light on whether defendant's allegation
that each of its members were
independently concerned about erosion of their standard of care
is simply a cover for their true
motive and concerted opposition to Blue Cross's proposal.
See, e.g.,
Fragale, 760 F.2d at 474; seealsoKellam Energy, 616 F.
Supp. at 217.
C. Contrary to
First State's Objections, Request No. 7 is Neither Harassing,
Vexatious, nor Calculated to Cause
Embarrassment
For the reasons explained above, the
information sought in Request No. 7 is
reasonably calculated to lead to the
discovery of admissible evidence relevant to several issues
directly related to the key issue of
concerted action. The clear relevance of the material sought
should, in and of itself, negate any
argument that Request 7 is harassing or vexatious.
CompareUnited
States v. Howard, 360 F.2d 373, 381 (3d Cir. 1966) (upholding order that
United States did not have to
answer interrogatories where review showed "their lack of utility
save as an harassment to the United
States"). Moreover, First State has not claimed, and
Page 11
indeed cannot claim, that production
of the requested documents would be burdensome.
This leaves only First State's argument that compliance with Request
No. 7 would
cause "needless embarrassment."
But any concern about potential embarrassment can be
appropriately accommodated by
entry of plaintiff's proposed protective order (D.I. 35), filed
with the Court on December 30,
1998. That proposed order restricts pretrial disclosure of
information designated confidential,
such as First State's revenue and expense information.2
Moreover, First State's protestation that the information would cause
"embarrassment"
appears to prove plaintiff's point:
The information could be "embarrassing" only if the
practice's physician incomes
significantly exceed industry norms. To the extent that First
State's concern about
embarrassment arises from its physicians' high income levels, they
would disprove some of defendant's
claims made in support of each member's purported,
independent actions.
V. CONCLUSION
The information that the United States seeks from First State is clearly
relevant not
only to defendant's denial of
concerted action but also to defendant's affirmative allegations
that each of its member groups
acted independently. In view of defendant's denial and its
affirmative claims, no reasonable
view of the withheld information permits a conclusion "
‘that the information sought can
have no possible bearing upon the subject matter of the
action.' " In re ML-LEE
ACQUISITION FUND II, 151 F.R.D. at 39 (quoting Lacoste v. Alligator Co., Inc.,
60 F.R.D. 164, 171 (D. Del. 1973)). The Court should
consequently order its prompt
production.
Respectfully
submitted,
COUNSEL FOR PLAINTIFF
UNITED STATES OF
AMERICA
RICHARD G. ANDREWS
UNITED STATES ATTORNEY
| |
____________/s/______________
By: Virginia Gibson-Mason (DSB # 3699)
Assistant United States Attorney
1201 Market Street, Suite 1100
Wilmington, DE 19801
Tel.: (302)573-6277
Facsimile: (302) 573-6220
____________/s/______________
Melvin A. Schwarz
Special Counsel for Enforcement
U.S. Department of Justice
Antitrust Division
601 D Street, N.W.
Washington, D.C. 20530
Tel.: (202) 305-1210
Facsimile: (202) 514-1629
| ____________/s/______________
Steven Kramer
Richard S. Martin
Denise E. Biehn
Michael D. Farber
Heather H. Howard
Jean Lin
Attorneys
U.S. Department of Justice
Antitrust Division
325 Seventh Street, N.W.
Washington, D.C. 20530
Tel.: (202) 307-0997
Facsimile: (202) 514-1517
|
Dated: January 21, 1999
FOOTNOTES
1 In re ML-LEE
ACQUISITION FUND II, 151 F.R.D. 37, 39 (D. Del. 1993).
2 Indeed, even
before the Court's entry of a protective order, First State's confidentiality concerns are
protected pursuant to D. Del. LR 26.2 (restricting disclosure of confidential documents
in the absence of a protective order to counsel). Therefore, upon this Court's determination of
relevance, the documents sought should be produced promptly--as First State has produced
other confidential, subpoenaed documents, relying on D. Del. LR 26.2. |