UNITED STATES DISTRICT COURT

DISTRICT OF RHODE ISLAND

)

UNITED STATES OF AMERICA,	)

)

Plaintiff, ) Civil Action No. 96-113B

)

vs. )

)

DELTA DENTAL OF RHODE ISLAND,	)

)

Defendant. )

___________________________________)

MEMORANDUM OF THE UNITED STATES IN OPPOSITION TO

DEFENDANT'S OBJECTIONS TO REPORTS AND RECOMMENDATION

Steven Kramer

Mark J. Botti

William E. Berlin

Michael S. Spector

Attorneys

Antitrust Division

U.S. Department of Justice

Antitrust Division

325 7th Street, N.W.

Washington, D.C. 20530

(202) 307-0997

Sheldon Whitehouse

United States Attorney

Anthony DiGioia

Assistant United States Attorney

District of Rhode Island

10 Dorrance Street

Providence, RI 02903

(401) 528-5477

August 13, 1996

TABLE OF CONTENTS

PAGE

I.	PROCEDURAL HISTORY AND STATUS	2

II.	THE ALLEGATIONS OF THE COMPLAINT MUST

BE ACCECPTED AS TRUE	5

III.	STATEMENT OF THE CLAIM	5

IV.	ARGUMENT	12

A.	The Complaint Adequately Alleges That Delta's MFN	Clause Unreasonably Restrains Trade In Violation of	Section 1	13

1.	Delta's Agreements with Dentists, Which Incorporate the MFN Clause, Constitute the Requisite Concerted Action and Have Caused

the Anticompetitive Effects Alleged in the Complaint	13

2.	The Complaint Easily Establishes Unreasonable Anticompetitive Effects that Violate

Section 1	17

B.	The Opinions of the First Circuit in Kartell

and of this Court and the First Circuit in

Ocean State Pose No Legal Bar	to this Challenge to Delta's MFN Clause	20

1.	Delta Misreads Kartell and Ocean State .	21

a.	Kartell is Inapposite to this Case and	Undermines Delta's Argument	22

b.	Ocean State Does Not Require Dismissal of this Case	25

(1)	Ocean State Resolved a Narrow Issue.	26

(2)	Construed in Context, Ocean State Resolved the Same Narrow Issue

Resolved in Kartell	29

(3)	Delta's Interpretation of Ocean State	Conflicts with Long-standing

Section 1 Doctrine	30

2.	Net Anticompetitive Effects Were Not Established	by the Plaintiffs in Ocean State But Are Clearly	Alleged Here, Sharply Distinguishing the Two

Cases	32

3.	The Other MFN Cases Do Not Support Delta's	Claim.	34

C.	The Court Should Proceed to the Merits of the Case	35

V.	CONCLUSION	37

TABLE OF CASES

PAGE

Addyston Pipe & Steel Co. v. United States,

175 U.S. 211 (1899)	13, 14

Air Courier Conference of America v. American Postal

Workers Union, 498 U.S. 517 (1991)	26

Aspen Skiing Co. v. Aspen Highlands Skiing Co.,

472 U.S. 585 (1985)	31

Blue Cross and Blue Shield of Michigan v. Michigan

Association of Psychotherapy Clinics,

1980-2 Trade Cas. ¶ 63,351 (E.D. Mich. 1980)	14, 34

Blue Cross and Blue Shield of Ohio v. Bingaman,

Case No. 1:94 CV2297 (N.D. Ohio 1966)	34

Blue Cross & Blue Shield United of Wisconsin v.

Marshfield Clinic, 65 F.3d 1406 (7th Cir. 1995)	34

Business Electronics Corp. v. Sharp Electronics Corp.,

485 U.S. 717 (1988)	12, 17

Chicago Bd. of Trade v. United States,

246 U.S. 231 (1918)	31

Cintech Industrial Coatings, Inc. v. Bennett Industries,

Inc.,85 F.3d 1198 (6th Cir. 1996)	17

Connell Construction Company, Inc. v. Plumbers and

Steamfitters Local Union No. 100, 421 U.S. 616 (1975)	17

Continental T.V., Inc. v. GTE Sylvania, Inc.,

433 U.S. 36 (1977)	31

Eastman Kodak Co. v. Image Tech. Serv., Inc.,

504 U.S. 451 (1992)	passim

FTC v. Indiana Federation of Dentists,

476 U.S. 447 (1986)	19

Garita Hotel Limited Partnership, Etc. v. Ponce Federal

Bank, F.S.B., 958 F.2d 15, 17 (1st Cir. 1992)	5

In Re Chicken Antitrust Litigation, 560 F. Supp. 943

(N.D. Ga. 1979)	17

Kartell v. Blue Shield of Massachusetts, 749 F.2d 922

(1st Cir. 1984), cert. denied, 471 U.S. 1029 (1985) . . .	passim

Kitsap Physicians Service v. Washington Dental Service,

671 F.Supp. 1267 (W.D. Wash. 1987)	35

Maple Flooring Ass'n v. United States,

268 U.S. 563 (1925)	34

Mich. Assn. of Psychotherapy Clinics v. Blue Cross

and Blue Shield of Mich.

118 Mich. App. 505, 325 N.W.2d 471 (1982)	14

Monahan's Marine, Inc. v. Boston Whaler, Inc.,

866 F.2d 525 (1st Cir. 1989)	24

Monsanto Co. v. Spray-Rite Serv. Corp.,

465 U.S. 752 (1984)	15

National Soc'y of Professional Engineers v. United States,

435 U.S. 679 (1978)	12, 17

NCAA v. Bd. of Regents of Univ. of Okla.,

468 U.S. 85 (1984)	18, 19

Ocean State Physicians Health Plan v. Blue Cross & Blue

Shield of Rhode Island, 692 F. Supp. 52 (D.R.I. 1988),

aff'd, 883 F. 2d 110 (1st Cir. 1989), cert. denied,

494 U.S. 1027 (1990)	passim

Reiter v. Sonatone Corp., 442 U.S. 330 (1979),	35

Reazin v. Blue Cross and Blue Shield of Kansas,

899 F.2d 951 (10th Cir.), cert. denied,

497 U.S. 1027 (1990)	17, 34

Scully Signal Co. v. Joyal, 881 F. Supp. 727 (D.R.I. 1995)	4

Standard Oil Co. v. United States, 221 U.S. 1 (1911)	14

Times-Picayune Publishing Co. v. United States,

345 U.S. 594 (1953)	15, 17

United Mine Workers v. Pennington, 381 U.S. 657 (1965)	17

U.S. Healthcare v. Healthsource, Inc.,

986 F.2d 589 (1st Cir. 1993)	14, 31

United States v. E.I. duPont de Nemours & Co.,

351 U.S. 377 (1956)	34, 36

United States v. Container Corp. of Am.,

393 U.S. 33 (1969)	15, 17

United States v. Paramount Pictures, Inc.,

334 U.S. 131 (1948)	36

Williamette Dental Group, P.C. v. Oregon Dental

Service Corporation, 882 P.2d 637 (Or. App. 1994)	34

UNITED STATES DISTRICT COURT

DISTRICT OF RHODE ISLAND

)

UNITED STATES OF AMERICA,	)

)

Plaintiff, ) Civil Action No. 96-113P

)

vs. )

)

DELTA DENTAL OF RHODE ISLAND,	)

)

Defendant. )

___________________________________)

MEMORANDUM OF THE UNITED STATES IN OPPOSITION TO

DEFENDANT'S OBJECTIONS TO REPORT AND RECOMMENDATION

The United States brought this injunctive action to challenge the continuing anticompetitive effects resulting from a Most Favored Nation ("MFN") clause incorporated in contracts between defendant Delta Dental of Rhode Island ("Delta") and about 90% of all Rhode Island dentists. Under the MFN clause, contracting dentists agree that Delta may limit its payments to them to the lowest price that they charge to any other purchaser. As the Complaint alleges, Delta's MFN clause has deterred Rhode Island dentists from discounting their fees, below levels paid by Delta, to rival dental plans and other purchasers of dental services. The MFN clause has consequently excluded or retarded the expansion of low-cost dental plans, substantially increased the costs of dental insurance and dental services, and thus reduced the range of meaningful choices available to consumers, all in alleged violation of Section 1 of the Sherman Act.	This Court's determination of Delta's objections to United States Magistrate Judge Robert W. Lovegreen's Report and Recommendation will resolve whether--in Delta's ironic phrasing-- a "unique," rule of the First Circuit requires dismissal of the Complaint, which otherwise indisputably states a straightforward claim under Section 1 case law. Based on a thorough analysis of the issues raised by Delta's Rule 12(b)(6) motion, the Magistrate Judge's Report determined that First Circuit precedent does not require dismissal and that the Complaint states a Section 1 claim. The Report consequently recommended "that defendant's motion to dismiss be denied." Magistrate Judge's Report and Recommendation ("MJR&R") at 28. The United States urges this Court to accept the Magistrate Judge's Report and Recommendation and to approve his recommendation to deny Delta's motion.

I.	PROCEDURAL HISTORY AND STATUS

The United States filed the Complaint on February 29, 1996. Delta responded on March 21, 1996, pursuant to Fed.R.Civ.P. 12(b)(6) with its motion to dismiss for failure to state a claim. Delta's motion and supporting memorandum raised two grounds for dismissal, emphasizing an argument that MFN clauses are legal under the Sherman Act regardless of their anticompetitive effects unless they result in predatory pricing. Delta asserts that its argument is supported by the First Circuit's decision in Kartell v. Blue Shield of Massachusetts, and the decisions of this Court and the First Circuit in Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island. Delta's motion also claimed that the Complaint fails to allege concerted action. Delta's motion and supporting brief notably did not argue that the Complaint fails to allege sufficient anticompetitive effects to state a claim under otherwise governing Section 1 case law.

By an order dated April 15, 1996, then presiding Senior U.S. District Judge Boyle referred Delta's motion to a Magistrate Judge for a Report and Recommendation. Magistrate Judge Lovegreen heard oral arguments at a hearing on June 5, 1996.

The Magistrate Judge issued his Report and Recommendation on July 12, 1996. The Report initially rejects Delta's argument that the Complaint fails to allege an agreement, concluding that "the requisite concerted action has clearly been alleged." MJR&R at 10. The Report proceeds to analyze Delta's chief contention that Kartell and Ocean State stand for the proposition that MFN clauses, absent pricing that is predatory or below incremental cost, are competitive as a matter of law. Based on a careful analysis of those cases, the Report rejects Delta's argument, concluding that,

Despite Kartell and Ocean State's broad language, these decisions properly construed, fail to establish a per se validation of MFN clauses in all cases where pricing is not predatory or below incremental cost. Such a blanket condonation of MFN clauses would ignore the context Kartell and Ocean State were decided in, run counter to the Sherman Act's preference for fact-specific inquiries, implausibly reject the premise that MFN clauses produce substantial anticompetitive effects in particular circumstances and contradict the Sherman Act's animating concern for low consumer prices.

MJR&R at 20. Determining that the Complaint's allegations are sufficient to state a claim under Section 1 of the Sherman Act, id. at 26-28, the Report recommends that Delta's motion to dismiss be denied. Id. at 28.

Delta served its objections to the Report and Recommendation and supporting memorandum ("Def. Mem.") on July 25, 1996. Delta's objections largely reargue variations on the two grounds that the Magistrate Judge rejected, as is epitomized by Delta's primary objection that, "The Magistrate Judge improperly refused to apply" its interpretation of Ocean State. Delta's Objections to Report and Recommendation at 2. Though Delta's memorandum expounds at length, its arguments are wholly without merit.

In considering Delta's objections, this Court is required to make a "de novo determination" of those portions of the Report and Recommendation to which objection is made. 28 U.S.C.

§ 636(b)(1); Fed. R. Civ. P. 72(b). The Court may "accept, reject, or modify the recommended decision." Id.; See Scully Signal Co. v. Joyal, 881 F. Supp. 727, 731-32 (D.R.I. 1995).

II.	THE ALLEGATIONS OF THE COMPLAINT MUST BE ACCEPTED AS TRUE

The standard for deciding a motion to dismiss under Rule 12(b)(6) is well settled: "[A] court 'may dismiss for failure to state a claim only if it clearly appears, according to the facts alleged, that plaintiff cannot recover on any viable theory.'" Garita Hotel Limited Partnership, Etc. v. Ponce Federal Bank, F.S.B., 958 F.2d 15, 17 (1st Cir. 1992). The allegations of the Complaint must be read "as a whole, in the light most favorable to the plaintiff." Id. at 18. The Court must "take the factual averments contained in the complaint as true, indulging in every reasonable inference helpful to the plaintiff's cause." Id. at 17. In ruling on a Rule 12(b)(6) motion, the Court must exclude from consideration factual allegations extraneous to the Complaint. Id.

Delta's appraisal of the Complaint's allegations, and particularly its several premature arguments based on unsupported facts outside the Complaint's allegations, reveal that Delta's supporting memorandum has at times observed these principles in the breach.

III.	STATEMENT OF THE CLAIM

Delta insures or administers plans providing dental insurance to about 35-45% of persons in Rhode Island covered by dental insurance, which is a greater number than any other insurer. Complaint, ¶ 8. Delta seeks to offer its enrollees the broadest possible panel of dentists, and thus contracts with about 90% of Rhode Island dentists to provide services to Delta patients. Id. Each Delta participating dentist agrees to comply with Delta's Participating Dentist's Agreement (the "Agreement"), and with Delta's Rules and Regulations, which the Agreement incorporates by reference. Id., ¶ 12. The MFN clause challenged in this case appears as Rule 10 of Delta's Rules and Regulations. Id. Rule 7 gives Delta the additional contractual right to audit dentists' records to determine whether they are complying with the MFN clause. Id., ¶ 14. Thus, 90% of Rhode Island dentists are, by agreement, subject to Delta's MFN clause. Id., ¶¶ 8, 12. The Complaint challenges the anticompetitive effects of the MFN clause in these agreements.

In contrast to Delta's inclusive approach to contracting with dentists, some managed care plans such as preferred provider organizations ("PPOs") and dental health maintenance organizations ("HMOs") contract selectively with a limited panel of dentists. Id., ¶¶ 8, 16, 18, 19, 26. Selective contracting may help a managed care plan lower the cost of, and improve the efficiency in, the delivery of dental services to their enrollees. Id., ¶ 11. Inclusion in the panel of a managed care plan offers a dentist the opportunity to gain new patients or keep patients the dentist would otherwise lose. PPOs, for example, provide financial incentives to their enrollees to use panel dentists. Id., ¶¶ 19, 20. HMOs often do not cover the services of dentists not on their panels. This steering of patients to panel dentists gives a managed care plan the ability to pay lower prices to dentists than Delta, which depends on not limiting its panel. Accordingly, these managed care plans are able to offer patients lower premiums and out-of-pocket costs.

The MFN clause in Delta's Participating Dentist's Agreement has deterred some dentists from giving such managed care plans the lower fees that these dentists would otherwise accept in response to the plans' selective contracting with them. Id., ¶¶ 16-18. Pursuant to that Agreement, Delta has the right to lower its fees to the lowest fees that dentist charges to other plans or any individual patient. Id., ¶ 17. Because Delta patients are a significant portion of the practice of Rhode Island dentists, Delta's MFN clause imposes a large financial penalty on dentists who would otherwise be willing to offer services to some individual patients and reduced-fee plans at fees significantly lower than those paid by Delta. Id., ¶¶ 8-9, 12, 17, 22.

Faced with enforcement of Delta's MFN clause and the prospect of substantially lower payments for all of their Delta patients if they participate in a lower-cost plan, Delta participating dentists have either withdrawn from--or refused to join--lower-cost dental plans, or insisted as a condition of their participation that payments be increased to Delta's levels. Id., ¶ 18. With 90% of Rhode Island dentists agreeing to comply with Delta's MFN clause and inhibited in discounting below Delta's fee level, the MFN clause has prevented lower-cost plans from contracting with enough dentists to serve their subscribers in Rhode Island, depriving consumers of the benefits of increased competition. Id., ¶¶ 8, 18.

The Complaint details several examples of Delta's MFN clause's anticompetitive blocking of the entry of low-cost plans. For example, Delta's MFN clause caused dentists to withdraw from Dental Blue PPO--a low-cost preferred provider organization established in the fall of 1993 by Blue Cross and Blue Shield of Massachusetts to serve Raytheon employees and their dependents, including the approximately 1,000 employees and their dependents at Raytheon's facility in Portsmouth, Rhode Island. Id., ¶¶ 19, 23-24. Dental Blue PPO had initially succeeded in contracting with a number of Rhode Island dentists at substantially discounted rates--rates, by Delta's calculations, 14% lower than Delta's. Id., ¶¶ 19, 20. These PPO savings would have significantly reduced or eliminated Raytheon plan members' co- payments. Id., ¶ 19.

Identifying Dental Blue PPO as a long-run competitive threat, Delta's senior management pursued several related tactics, including: (1) contacting the former chairman of the Rhode Island Dental Association ("RIDA")'s Council on Dental Programs, a supporter of Delta's MFN clause because he believes it functions to set a floor on dentists' fees, who sent RIDA's members a letter warning dentists of the "severe financial penalties" from Delta's MFN clause if they were to enroll in the Dental Blue PPO, id., ¶ 22; and (2) informing the Rhode Island dentists, who Delta knew were participating in the Dental Blue PPO, of its intent to apply its MFN clause and of the new, reduced payment levels they would receive from Delta as a result of their participation in the Dental Blue PPO. Id., ¶ 23.

By the end of January, 1994, the dental community had received Delta's "message." Id. ¶ 24. All of the Rhode Island dentists contacted by Delta withdrew from Dental Blue PPO, some of them making clear to Delta at the time that their reason for withdrawal was Delta's decision to apply its MFN clause, and requesting that Delta raise back their payment levels to reflect their withdrawal from Dental Blue PPO. Id., ¶ 24. Raytheon employees were thus denied the opportunity to lower or eliminate their co-payments for dental care, and Rhode Island was denied the entry of a low-cost dental insurance plan as a direct result of the MFN embodied in Delta's agreement with Rhode Island dentists. Id., ¶ 25.

Nor is the experience of Dental Blue PPO the only example of how Delta's MFN clause has hindered entry or expansion of low- cost dental plans. It also has caused dentists to refuse to contract, at fees below levels paid by Delta, with at least two other low-cost plans. In one instance, U.S. Healthcare attempted to establish a plan in Rhode Island (as it had in other states) that would have paid dentists at fee levels lower than Delta's, but dentists uniformly refused to contract with U.S. Healthcare because they feared that Delta would apply its MFN clause and lower their rates for all of their Delta patients. Id., ¶ 29. Similarly, participating Delta dentists refused, because of Delta's MFN clause, to contract with Dental Benefit Providers ("DBP") at fee levels below Delta's, forcing DBP to pay dentists at Delta's higher rates to enter the market and depriving consumers of a low-cost alternative. Id., ¶ 28.

Delta's MFN clause has also prevented two other organizations--a self-insured employee group and an uninsured retiree group--from recruiting additional dentists, at fee levels substantially below Delta's, to their limited networks of dentists, despite their preference for more Rhode Island dentists to serve their members. Id., ¶ 27. Both have limited panels of dentists in Rhode Island who have agreed to fees substantially below Delta's; both have thus far avoided the application of Delta's MFN clause--despite Delta's commitment to enforce the clause--because Delta had been unaware of their operation. But both have also refrained from recruiting additional dentists to serve their members because of their well grounded concern that such recruitment efforts would draw attention to their panels and trigger Delta's enforcement of its MFN clause against their existing panel dentists, causing them to disaffiliate. Id. As a result, some of their members have been denied more accessible, lower-cost dental care that would have been available in the absence of the MFN clause. Id. They will also likely lose their existing low-cost panels if Delta enforces its MFN clause against the participating dentists. Id.

Delta also applies its MFN clause, although limited on its face to lower fees obtained by rival plans, when dentists have lowered their fees to uninsured patients. Complaint, ¶ 15. Thus, Delta's MFN clause has raised the prices, and reduced the availability, of dental services to some of Rhode Island's most vulnerable consumers. Id.

In contrast to the MFN clause's actual anticompetitive effects, the clause, by Delta's own admissions, has not generated any meaningful savings or other procompetitive benefits. Id.,

¶ 32. Far from saving consumers money, Delta's MFN clause, in fact, has essentially eliminated discounting by dentists below Delta's fees, and--as recognized by the former chairman of the RIDA's Council on Dental Programs--has set a floor on dental fees, thus raising the costs of dental services and dental insurance for Rhode Island consumers. Id., ¶ 22.

IV.	ARGUMENT

Section 1 of the Sherman Act prohibits any "contract, combination . . . or conspiracy" unreasonably in restraint of trade. Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723 (1988); Nat'l Soc'y of Professional Engineers v. United States, 435 U.S. 679, 687-92 (1978). Delta did not argue to the Magistrate Judge, and does not suggest in its Objections, that the facts alleged in the Complaint are insufficient to show anticompetitive effects under settled Supreme Court precedent. Instead, it argues that (1) the Complaint does not allege "conspiratorial action" sufficient to state a claim under Section 1 of the Sherman Act; and (2) rulings of this Court and the First Circuit require holding Delta's MFN clause legal under the antitrust laws. Neither argument is sustainable.

A.	The Complaint Adequately Alleges That Delta's MFN Clause Unreasonably Restrains Trade In Violation of Section 1

1.	Delta's Agreements with Dentists, Which Incorporate the MFN Clause, Constitute the Requisite Concerted Action And Have Caused the Anticompetitive Effects Alleged in the Complaint

The Magistrate Judge concluded, based on long-settled precedent, that the Complaint's challenge to the MFN clause in contracts between Delta and its participating dentists satisfies the concerted action requirement of Section 1. MJR&R at 9, citing Addyston Pipe & Steel Co. v. United States, 175 U.S. 211, 213-18 (1899). He proceeded to reject Delta's additional arguments that these agreements were not "unlawful" agreements, finding that the Complaint adequately alleges that they unreasonably restrain trade. Id.

Delta's specific objection to this part of the Magistrate Judge's Report ignores the import of each participating dentist's agreement to comply with Delta's MFN clause. Delta argues that the MFN clause in its contracts is "a unilateral policy adopted by Delta" that is "not sufficient to satisfy the 'concerted action' requirement of Section 1." Objection No. 6. According to Delta, the Magistrate Judge's conclusion that this contractual clause satisfies the concerted action requirement "would effectively outlaw the entire body of private contract law." Id.

Delta's objection is fundamentally misconceived. It is precisely because an "express agreement" readily satisfies Section 1's concerted action requirement, Addyston Pipe, 175 U.S. at 213-18, that the Supreme Court--observing that "read literally, § 1 would outlaw the entire body of private contract law"--has construed Section 1 to prohibit only contracts that are "'unreasonably restrictive of competitive conditions.'" Nat'l Soc'y of Professional Engineers, 435 U.S. at 687-88 (footnote omitted); Standard Oil Co. v. United States, 221 U.S. 1, 69-70 (1911). In other words, under Section 1, only concerted action that unreasonably restrains trade is unlawful, but every contract constitutes concerted action.

In its brief, Delta does not attempt to defend its objection that the MFN clause in its contracts is "a unilateral policy" (Objection No. 6) but argues instead that despite its agreement with the dentists, the anticompetitive effects alleged in the Complaint result from "unilateral action by each dentist." Def. Mem. at 61. The "unilateral action" that Delta cites is dentists' decisions to disaffiliate from, or refuse to contract with, reduced-fee plans. Id.

Contrary to Delta's contentions, Section 1 prohibits contracts that cause anticompetitive effects even when the agreement does not explicitly impose those anticompetitive effects. See Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 615 and n.35 (1953). See also United States v. Container Corp. of Am., 393 U.S. 333, 336-37 (1969) (condemning competitors' agreement to exchange price information because the exchange "chill[ed] vigorous price competition" by stabilizing prices, even though the price stabilization resulted from competitors' unilateral decisions, made in light of the information exchanged).

Delta acknowledges that the Court must assume, for purposes of deciding Delta's motion, the Complaint's allegations that Delta's agreements with dentists, which incorporate the MFN clause, are the cause of the anticompetitive effects alleged. Def. Mem. at 35 n.**. The Complaint details the sequence of events, starting with Delta's invocation of its MFN contractual rights and including the subsequent resignation of dentists from the Dental Blue PPO, that underlies the Complaint's allegation that the MFN clause incorporated in all of Delta's Participating Dentists' Agreements has caused significant anticompetitive effects. Complaint, ¶¶ 19-25. The Complaint, as the Magistrate Judge recognized, also alleges with specificity the manner in which Delta's MFN clause causes the anticompetitive effect. Complaint, ¶¶ 17-18; MJR&R at 4, 23-24. Under Times- Picayune and Container Corp., the Complaint need allege no more to establish unlawful concerted action.

2.	The Complaint Easily Establishes Unreasonable

Anticompetitive Effects that Violate Section 1

In determining whether, under Section 1, Delta's MFN clause imposes an unreasonable restraint on competition, application of the rule of reason is appropriate. See Business Electronics Corp., 485 U.S. at 723. The rule "focuses directly on a challenged restraint's impact on competitive conditions." Nat'l Soc'y of Professional Engineers, 435 U.S. at 688. "[T]he inquiry mandated . . . is whether the restraint imposed is one that promotes competition or one that suppresses competition." Id. at 691. To determine the answer, courts weigh a restraint's anticompetitive effects against any offsetting procompetitive benefits. See Eastman Kodak Co. v. Image Tech. Serv., Inc., 504 U.S. 451, 478 (1992).

In view of the actual anticompetitive effects of Delta's MFN clause alleged in the Complaint, "[t]he anticompetitive consequences of this arrangement are apparent." NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85, 106 (1984). Specifically, the effects (Complaint, ¶ 35) of Delta's challenged "conduct--higher [dental] service prices and market foreclosure [of low-cost dental plans] is facially anticompetitive and exactly the harm that antitrust laws aim to prevent." Eastman Kodak, 504 U.S. at 478. The Complaint (¶¶ 16-18, 35) further alleges that, as a consequence of Delta's MFN clause, "[p]rice is higher and output lower than they would otherwise be, and both are unresponsive to consumer preference." NCAA, 468 U.S. at 107. Indeed, the effects are exacerbated because,"[a]ccording to Delta, the dental insurance market in Rhode Island 'is being driven entirely by [consumers' preference for low] price[s].'" Complaint, ¶ 10. "A restraint that has the effect of reducing the importance of consumer preference in setting price and output is not consistent with [the] fundamental goal of antitrust law" as a "consumer welfare prescription." NCAA, 468 U.S. at 107. In short, Delta's MFN clause's substantial net anticompetitive effects demonstrate a clear Section 1 violation.

The Magistrate Judge concluded that the Complaint alleges a claim under Section 1:

Moreover, the government contends that the application of Delta's MFN clause has resulted in no discernible, monetary savings to Delta. In contrast, the application and mere threat of application of Delta's MFN clause has sustained or increased consumer prices for dental services by preventing participating Delta dentists from discounting fees. More concretely, because most participating dentists are unwilling to contract with other plans at reduced fees due to the MFN clause, existing competing plans have not expanded into lower price options and new reduced-fee plans have been precluded from entering the market, thereby adversely impacting the consumer. The net effect is an alleged detrimental impact on the dental market without any discernible competitive benefits.

MJR&R at 27 (emphasis in the original) (citation omitted). This analysis by the Magistrate Judge in support of his conclusion that the Complaint states a claim manifestly comports with established Section 1 case law. NCAA, 468 at 107.

B.	The Opinions of the First Circuit in Kartell and of this Court and the First Circuit in Ocean State Pose

No Legal Bar to this Challenge to Delta's MFN Clause

Alluding to Kartell and Ocean State, Delta objects foremost that, "The Magistrate Judge improperly refused to apply the well- settled law of this District and Circuit that the [MFN] clause Delta Dental uses in its contracts with dentists does not violate the antitrust laws in the absence of predatory pricing." Objection No. 2 (emphasis added). This objection grossly distorts the sense of the Magistrate Judge's Report. Far from "improperly refus[ing] to apply well-settled law," the Magistrate Judge determined that Kartell and Ocean State embody no such "well-settled law," concluding that "these decisions, properly construed, fail to establish a per se validation of MFN clauses in all cases where pricing is not predatory." MJR&R at 20. Having determined Kartell and Ocean State did not establish Delta's purported, "well-settled" rule, the Magistrate Judge cannot be faulted for "improperly refus[ing] to apply" them as Delta urges.

As the Report recognizes, Kartell and Ocean State fail for several reasons to support Delta's position. MJR&R at 20. First, Kartell, to which Delta points as the genesis of its purported governing rule, is not only inapplicable, but tends, upon analysis, to refute Delta's position rather than support it. Second, the First Circuit's actual holding in Ocean State is quite narrow and does not govern this case. Third, the courts' analyses in Kartell and Ocean State focused on challenges to conduct that resulted in lower prices, rather than conduct resulting in higher prices, as is the case here. Finally, Delta's unprecedented per se legal theory, ostensibly derived from Kartell and Ocean State, would conflict with "well settled" Section 1 jurisprudence. MJR&R at 20.

1.	Delta Misreads Kartell and Ocean State

In arguing that Ocean State requires dismissal of this action, Delta claims that the First Circuit "held that [an MFN] policy of a purchaser with market power - unaccompanied by predatory purchasing conduct - as a matter of law - is not 'exclusionary' and does not violate the antitrust laws." Def. Mem. 20 (emphasis in original). In so characterizing the First Circuit's decision, Delta has distorted the court's narrow evidentiary holding in Ocean State into a broad rule that would effectively preclude Section 1 condemnation of MFN clauses that have had actual anticompetitive effects--such as the one challenged here, which has caused higher prices and reduced consumer choice. Neither Kartell nor Ocean State supports such a rule.

a.	Kartell is Inapposite to this

Case and Undermines Delta's Argument

The First Circuit's opinion in Kartell concerned a challenge by physicians to Blue Shield of Massachusetts's ban on physicians' balance billing, under which participating physicians had to agree not to bill Blue Shield subscribers for amounts in excess of Blue Shield's set payments. The trial court found that this payment system, in view of Blue Shield's buying power, had interfered "with the doctors' freedom to set higher prices for more expensive services." Kartell, 749 F.2d at 924.

On appeal, the First Circuit reversed. Viewing Blue Shield "as itself the purchaser of the doctors' services" on behalf of its subscribers, id. at 924-25, the court then ruled that "any buyer of goods or services [--even a monopolist--] is lawfully entitled to bargain with its providers for the best [nonpredatory] price it can get." Id. at 928-29.

The First Circuit's holding in Kartell is inapplicable to this case for two reasons. First, in Kartell, "[p]articipating in Blue Shield's program [did] not stop doctors from taking other patients or from charging those other [non-Blue Shield] patients what they like[d]." Id. at 927 (emphasis added). The Kartell court expressly distinguished this situation from one raising antitrust concern:

To find an unlawful restraint, one would have to look at Blue Shield as if it were a 'third force,' intervening in the marketplace in a manner that prevents willing buyers and sellers from independently coming together to strike price/quality bargains. Antitrust law typically frowns upon behavior that impedes the striking of such independent bargains.

Id. at 924.

In contrast to the situation in Kartell, Delta's MFN clause is an intervening "third force" on dentists' charges to non-Delta plans and patients, preventing dentists and low-cost dental plans or uninsured patients from "coming together to strike [low-cost] price/quality bargains." Id. Unlike the First Circuit's observation in Kartell, "[p]articipating in [Delta's] program does . . . stop [dentists] from . . . charging those other [non- Delta] patients what they like." Id. at 927. Thus, the "seminal case on point," according to Delta, actually supports this challenge to the substantial anticompetitive effects of Delta's MFN clause.

The second principal distinction between Kartell and this case arises from the Kartell court's observation that the claim was against "low prices, not high prices." Id. at 930. The court accordingly proceeded cautiously in assessing the claim because "the Congress that enacted the Sherman Act saw it as a way of protecting consumers against prices that were too high, not too low." Id. at 931 (emphasis in original). The court observed that "the relevant economic considerations may be very different when low prices, rather than high prices, are at issue." Id. In such cases, the "courts' task is to develop rules that will discourage predatory pricing but allow 'desirable price-cutting activity.'" Monahan's Marine, 866 F.2d at 527.

But the alleged effects of Delta's MFN clause is, precisely, to discourage "desirable price-cutting activity," id., by deterring discounting. The result--"higher [dental] service prices and market foreclosure [of reduced-fee plans]--is facially anticompetitive and exactly the harm that antitrust laws aim to prevent." Eastman Kodak, 504 U.S. at 478. It would stand Kartell on its head to draw from it a rule insulating MFNs resulting, as alleged here, in higher prices and market foreclosure from antitrust scrutiny.. Kartell, 749 F.2d at 931.

b.	Ocean State Does Not

Require Dismissal of this Case

Equally unfounded is Delta's claim that in Ocean State the First Circuit held broadly that an MFN clause "unaccompanied by predatory purchasing conduct - as a matter of law - is not 'exclusionary' and does not violate the antitrust laws." Def. Mem. at 20.

(1)	Ocean State Resolved a Narrow Issue

The source of Delta's claim that Ocean State limits condemnation of MFN clauses to those involving predatory pricing is the First Circuit's statement that "a policy of insisting on a supplier's lowest price--assuming that the price is not 'predatory' or below the supplier's incremental cost--tends to further competition on the merits and, as a matter of law, is not exclusionary." Ocean State, 833 F. 2d at 1110. This statement can be interpreted as Delta advocates only if read in isolation from its context. But, it should go without saying that, "[t]his statement like all others in . . . opinions, must be taken in the context in which it was made." Air Courier Conference of America v. American Postal Workers Union, 498 U.S. 517, 529 (1991).

As the Magistrate Judge recognized, "Ocean State's pronouncement about the validity of Blue Cross's MFN clause was made in a specific factual context under a legal provision [Section 2] not at issue here." MJR&R at 22. On appeal from this Court's grant of judgment notwithstanding the verdict, the plaintiffs, Ocean State Physicians Health Plan and a certified class of Ocean State participating physicians, claimed that Blue Cross violated Section 2 because it instituted [its MFN] policy with anticompetitive intent, that is, "not in order to save money, but rather to induce physicians to resign from Ocean State." Id. at 1104. Similarly, the plaintiffs also claimed that Blue Cross applied its MFN policy with the anticompetitive intent of "destroying Ocean State, rather than at the legitimate goal of lowering costs." Id. at 1112. Thus, the First Circuit, as had this Court, focused on the validity of Blue Cross's business reasons. Id.; 692 F.Supp. at 61. The First Circuit's assessment of these claims was limited to determining whether it was clear from the evidence presented that "as a matter of law, no conclusion but one can be drawn." Ocean State, 883 F.2d at 1105.

Evaluating the record on the issue of whether "Blue Cross instituted [its MFN] policy not in order to save money, but rather to induce physicians to resign from Ocean State," id. at 1104, the First Circuit determined that "the record amply supports Blue Cross's view that Prudent Buyer was a bona fide policy." Id. at 1110. In explaining its conclusion that Blue Cross's institution of its MFN policy was bona fide, the First Circuit examined the MFN policy itself and considered the narrow issue of the competitive merits "of insisting on a supplier's lowest price" "as a naked proposition" or "as written." Id. at 1110, 1112.

In this context, the First Circuit's statement that "such a policy of insisting on a supplier's lowest price--assuming that the price is not 'predatory' or below the supplier's incremental cost--tends to further competition on the merits and, as a matter of law, is not exclusionary," id. at 1110, appears in a very different light than Delta has advocated. In the context of the the plaintiffs' argument that the MFN policy was necessarily exclusionary and thus a violation of section 2, the competitive merits "of insisting on a supplier's lowest non-predatory price" "as a naked proposition" or "as written" was evidence that Blue Cross had instituted a bona fide policy. Thus, the sweeping rule of law Delta attempts to read in Ocean State in fact amounts to nothing more than a narrow holding that an MFN policy, "as a naked proposition," is not necessarily exclusionary under Section 2..Defendant's Memorandum at 30. Id. at 1110, 1112. The Ocean State court merely rejected the plaintiffs' argument that Blue Cross's MFN policy served no purpose other than to destroy competition.

Ocean State's holding, therefore, would govern the result of this case only if the Complaint were challenging Delta's MFN clause "as written" without regard to its effects. Of course, the Complaint here challenges Delta's MFN clause precisely because of its anticompetitive effects. Consequently, there is no connection between the rule, upon which Delta relies, upholding the facial validity of the MFN policy at issue in Ocean State and the challenge in this case of an MFN clause that is alleged to have caused substantial anticompetitive effects.

(2)	Construed in Context, Ocean State Resolved the Same Narrow Issue

Resolved in Kartell

As Delta itself notes, the First Circuit in Ocean State concluded that Kartell "compelled" its conclusion that Blue Cross's MFN policy, as written, was not exclusionary. Ocean State, 883 F.2d at 1110-11. Kartell, as explained above, was a case in which (1) Blue Shield's conduct did not operate as a "'third force,' intervening in the marketplace in a manner that prevents willing buyers and sellers from independently coming together to strike price/quality bargains," 749 F.2d at 924; and (2) the gravamen of the plaintiffs' antitrust claim was that prices were too low. The Ocean State court's reasoning that Kartell "compelled" its holding underscores the First Circuit's focus on Blue Cross's MFN policy "as written," which did not impair the opportunities of rivals and obtained lower prices.

Contrary to Delta's claims, therefore, the First Circuit neither addressed nor purported to rule on the legality of an MFN clause shown to have caused higher prices--and for good reason: the only evidence of the Blue Cross policy's effects, cited as anticompetitive by the plaintiffs there, was estimated savings of $1.9 million, obtained through lower prices. Ocean State, 883 F.2d at 1110. These circumstances are in stark contrast to the effects challenged here: Delta's MFN clause has caused other plans to pay higher prices to dentists, resulting in higher prices for consumers, without achieving meaningful savings for Delta. Consequently, Ocean State's reliance on Kartell serves only to demonstrate that Ocean State cannot be construed to foreclose this Section 1 challenge to Delta's MFN clause.

(3)	Delta's Interpretation of Ocean State Conflicts with Long-standing Section 1 Doctrine

Delta's attempt to expand Ocean State's holding to a broad rule validating Delta's MFN clause would, in effect, establish a rule of per se legality for MFN clauses, when predatory pricing is not alleged. Such a rule would be unprecedented in antitrust jurisprudence. As the Magistrate Judge's Report recognizes, "The per se rule Delta urges would cut a wide swath through the heart of § 1's case by case rule of reason analysis ignoring the Supreme Court's admonition that	Legal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law."

MJR&R at 22 (quoting Eastman Kodak, 504 U.S. at 467-68). The Supreme Court "has preferred to resolve antitrust claims on a case-by-case basis, focusing on the 'particular facts disclosed by the record.'" Eastman Kodak, 504 U.S. at 467-68.

There is nothing in the Ocean State opinion that suggests the First Circuit intended any such dramatic departure from established antitrust precedent prescribing case-by-case analysis. Indeed, the First Circuit--as had this Court, 692 F.Supp. at 70--enunciated and applied Professor Areeda's formulation that Section 2 prohibits a monopolist's "'exclusionary' conduct . . . that not only (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way.'" Ocean State, 883 F.2d at 1110. In view of the court's express articulation of a conventional Section 2 standard and the narrow issues argued by the Ocean State plaintiffs, Delta's argument that the First Circuit adopted a rule of per se legality in Ocean State--without comment or discussion--is simply implausible.

2.	Net Anticompetitive Effects Were Not Established by the Plaintiffs in Ocean State But Are Clearly Alleged Here, Sharply Distinguishing the Two Cases

Delta argues that the MFN policy in Ocean State had anticompetitive effects far stronger than those alleged here. This argument, however, is without legal foundation (once Ocean State is properly interpreted) and without factual support (in view of the courts' appraisal of the effects in Ocean State). In making this argument, Delta ignores the absence of evidence establishing net anticompetitive effects in the Ocean State case. Indeed, the absence of evidence establishing net anticompetitive effects undoubtedly explains why the plaintiffs tried, unsuccessfully, to focus the issues on Blue Cross's allegedly bad purpose.

Two facts suggest why the plaintiffs in Ocean State appear not to have pressed an argument that Blue Cross's MFN policy caused net anticompetitive effects. First, 850, or over 70%, of Ocean State's physicians remained on its panel despite the MFN policy. See 883 F.2d at 1104. Unlike the allegations here that Delta's MFN clause has rendered the Dental Blue PPO unmarketable by causing dentists to disaffiliate from it and has impeded the entry of other lower-cost plans, in Ocean State, according to this Court, "[t]here was no evidence that [Blue Cross's MFN policy] resulted in any anticompetitive effect or impaired Ocean State's competitive opportunities." 692 F.Supp. at 71. Second, Blue Cross achieved savings estimated at $1.9 million, 692 F.Supp. at 61; 883 F.2d at 1110. In contrast, as the Complaint alleges, Delta concedes it has achieved no meaningful savings.

Thus, the Court in Ocean State was not presented with persuasive evidence or argument that the MFN policy challenged there harmed competition in the health insurance market, while, on the other hand, it found substantial savings. In contrast, the Complaint here alleges that Delta's MFN clause has deprived Rhode Island consumers of lower-priced dental service and dental insurance options, while providing Delta with no meaningful savings. Thus, even if--as Delta argues incorrectly--Ocean State ruled on the sufficiency of the effects in that case, the lack of anticompetitive effects there would in no way require dismissal here.. See also Armour & Co. v. Wantock, 323 U.S. 126, 132-33 (1944):

[W]ords of ... opinions are to be read in light of the facts of the case under discussion. To keep opinions within reasonable bounds precludes writing into them every limitation or variation which might be suggested by the circumstances of cases not before the Court.

3.	The Other MFN Cases

Do Not Support Delta's Claim

Delta complains that the Magistrate Judge's Report "fails to disclose" other cases that Delta suggests have held that any anticompetitive effects of MFN clauses are beyond the reach of the antitrust laws unless accomplished by predatory pricing. Objection No. 4; Def. Mem. at 51. This charge is without foundation because no other case remotely supports that proposition. Indeed, five of the cases Delta cites recognize that MFN clauses may violate the antitrust laws if the clauses have anticompetitive effects, without limiting illegality to circumstances where predatory pricing accompanies the MFN clause. Blue Cross and Blue Shield of Ohio v. Bingaman, Case No. 1:94 CV 2297, slip op. at 12 (N.D. Ohio 1996); Blue Cross & Blue Shield United of Wisconsin v. Marshfield Clinic, 65 F.3d 1406, 1415 (7th Cir. 1995), cert. denied, 116 S.Ct. 1288 (1996); Reazin v. Blue Cross and Blue Shield of Kansas, 899 F.2d 951, 971 (10th Cir.), cert. denied, 497 U.S. 1027 (1990); Blue Cross and Blue Shield of Michigan v. Michigan Association of Psychotherapy Clinics, 1980-2 Trade Cas. ¶ 63,351 at 75,794-95 (E.D. Mich. 1980); Williamette Dental Group, P.C. v. Oregon Dental Service Corporation, 882 P.2d 637, 639, 642 (Or. App. 1994).

Delta's criticism of the Magistrate Judge's failure to cite these cases is therefore unfounded because those cases tend to undermine, rather than support, Delta's interpretation of Ocean State, which Delta properly recognizes would result in a "unique rule." Def. Mem. at 6. Moreover, Delta cannot tenably contend, and does not, that if Ocean State does not insulate its MFN clause's anticompetitive effects from challenge, these cases would somehow lead to that result and supersede the Supreme Court cases, cited above, that support the claim here under Section 1.

C.	The Court Should Proceed to the Merits of the Case

The Sherman Act is "a 'consumer welfare prescription.'" Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979). The ongoing effect of Delta's challenged "conduct--higher [dental] service prices and market foreclosure [of lower-cost dental plans]--is facially anticompetitive and exactly the harm that antitrust laws aim to prevent." Eastman Kodak, 504 U.S. at 478. But Delta would have this Court (based on a claim of "fairness" to Delta) turn a blind eye to the anticompetitive conduct of Rhode Island's largest dental insurer and leave Teamster retirees, Raytheon employees, their families, and other Rhode Island consumers (both uninsured and insured) subject to higher dental fees, reduced choice of dental plans, and reduced dental care. Rewarding Delta's misinterpretation of Ocean State by granting its motion to dismiss would undermine Section 1's goal of protecting consumers from anticompetitive conduct.

Interpreted correctly and in context, Ocean State's Rule 50(b) holding, given the narrow issue resolved, provides no basis for Delta to maintain in its contracts with dentists an MFN clause that deprives consumers of lower-cost dental options. Delta implicitly urges this Court to ignore controlling Supreme Court Section 1 decisions that eschew Delta's rigid, formalistic interpretation of Ocean State in favor of a case-by-case analysis. See, e.g., du Pont, 351 U.S. at 395 n.22.

"But the policy of the anti-trust laws is not qualified or conditioned by the convenience of those whose conduct is regulated." United States v. Paramount Pictures, Inc., 334 U.S. 131, 159 (1948). The anticompetitive harm to consumers alleged here and the Complaint's uncontested grounding in conventional Section 1 precedent require that this litigation proceed without unnecessary delay. In short, antitrust policy and equity dictate that this Court proceed to the merits of the violation alleged in the Complaint.

V.	CONCLUSION

The Complaint states a claim under Section 1 of the Sherman Act and neither Kartell nor the opinions in Ocean State bar this action. For these reasons, discussed more fully above, this Court should accept the Magistrate Judge's Report and Recommendation and Delta's motion to dismiss the Complaint pursuant to Rule 12(b)(6) should be denied.

Dated: August 13, 1996

Respectfully submitted,

________/s/________________________

Steven Kramer

Mark J. Botti

Michael S. Spector

William E. Berlin

Attorneys

U.S. Department of Justice

Antitrust Division

325 7th Street, N.W.

Washington, D.C. 20530

(202) 307-0997

Sheldon Whitehouse

United States Attorney

District of Rhode Island

________/s/________________________

By: Anthony DiGioia

Assistant United States Attorney

District of Rhode Island

10 Dorrance Street

Providene, RI 02903

(401) 528-5477

Bar #2495

CERTIFICATE OF SERVICE

I hereby certify that on August 13,1996, copies of the foregoing MEMORANDUM OF THE UNITED STATES IN OPPOSITION TO DEFENDANT's OBJECTIONS TO REPORT AND RECOMMENDATION were served by prepaid mail to:

William R. Landry

Blish & Cabanagh

30 Exchange Terrace

Providence, Rhode Island 02903

William G. Kopit

Epstein, Becker & Green, P.C.

1227 25th Street, N.W.

Washington, D.C. 20037-1156

___________________

Linda Mazmanian