Brief in Support of Plaintiff's Motion to Compel Production of Documents from FirstState Orthopaedics

               UNITED STATES DISTRICT COURT
               FOR THE DISTRICT OF DELAWARE
 

        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
 

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 (9^th 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 (7^th Cir. 1981).....................9
 

Rules
 

D. Del. LR. 26.2........................................................................................................................11
 

Fed. R. Civ. P. 26(b)(1)............................................................................................................4,5
 

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  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

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  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.
 

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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--喪elevant 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 喪elevancy' is extremely liberal with respect to pre-trial discovery").
    Accordingly, this Court has recognized that " 租iscovery 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 (9^th 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 (7^th 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 "
  å¥hat 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
 

Dated: January 21, 1999
 

FOOTNOTES

1In 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.