In June of 2014, we reported on an Alabama federal district court’s decision not to dismiss a multidistrict class action lawsuit challenging an alleged horizontal market allocation by the Blue Cross and Blue Shield Association (the “Association”) and a number of its member plans. In re Blue Cross Blue Shield Antitrust Litig., 26 F.Supp.3d 1172 (N.D. Ala. 2014).[1] That court recently issued a new decision in which the court determined that a long-standing component of the Association’s business model, the granting of licenses to member plans to use the Blue Cross and Blue Shield trademarks (the “Blue Marks”) in exclusive geographic markets, is per se anticompetitive. In re Blue Cross Blue Shield Antitrust Litig., No. 2:13-CV-200000-RDP, 2018 WL 1640023 (N.D. Ala. April 5, 2018). While the court left for trial the question of whether the Association is a single entity (and therefore not subject to Section 1 of the Sherman Act), this decision (if upheld) represents a significant threat to the fundamental structure of the Association and its members.

Factual Background

The Association is owned and governed by 36 member plans (the “Blue Plans”), each of which is financially and operationally independent. Each Blue Plan has a license agreement with the Association, which specifies an exclusive service area (“ESA”) where that Blue Plan may use the Blue Marks. A Blue Plan is permitted to conduct business outside of its particular ESA, but Blue Plans are generally prohibited from using the Blue Marks outside of the Plan’s ESA. In addition, “best efforts rules” limit the amount of non-branded income that a Blue Plan can generate. A Blue Plan may not earn more than 20% of its health revenue within its ESA from services not offered under the Blue Marks, and may not earn more than 33 1/3% of its national health insurance revenue from non-Blue Mark plans. Association rules also prohibit a Blue Plan from bidding on national accounts headquartered outside of its ESA without the approval of the Blue Plan in whose ESA the account is headquartered, and limit the ability of a Blue Plan to be acquired or controlled by a non-Blue entity.

The plaintiffs consist of a putative class of subscribers and a putative class of providers. Plaintiffs allege that the license agreements and ancillary rules constitute a horizontal conspiracy to allocate geographic markets that prevent the Blue Plans from competing against each other, and that limit competition of non-Blue Mark plans offered by Blue Plans. The plaintiffs contend that this market allocation constitutes a per se violation of Section 1 of the Sherman Act.

The Motions

Section 1 of the Sherman Act does not apply to the actions of a single entity; it only applies to concerted activity between two or more actors, and only prohibits concerted action that unreasonably restrains trade. The rule of reason is the presumptive standard to be applied in determining whether a practice restrains trade in violation of Section 1, and requires a court to consider numerous factors in evaluating the competitive impact of the restraints. However, the competitive effects of some restraints are considered so likely to increase prices and reduce output without a procompetitive effect, that they are deemed per se unlawful without an examination of the actual competitive impact of the restraints. These restraints include price-fixing and horizontal market allocations.

The court’s recent decision addresses the plaintiffs’ motion for partial summary judgment on the defendants’ “single entity” defense, and both parties’ motions for a determination of whether the challenged restraints are to be evaluated under the rule of reason or fall within the per se category of anticompetitive practices.

Issues of Material Fact Preclude Summary Judgment on the Single Entity Defense

Section 1 only applies to concerted conduct. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984). However, when a single entity is controlled by a group of competitors, the courts have not hesitated in finding the requisite concerted activity. American Needle, Inc. v. National Football League, 560 U.S. 183, 195 (2010). In American Needle, the Supreme Court ruled that National Football League Properties (“NFLP”), which had been formed by the NFL to license the NFL brand and individual team marks, was not a single entity and that the NFL and its teams were legally capable of conspiring because the teams were “separate economic actors pursuing separate economic interests.” Id. The plaintiffs claim that the Association is analogous to the NFLP, in that the Association also is controlled by a group of competitors and serves as a vehicle for ongoing concerted activity. The defendants assert that the Association acts as a single entity that controls and protects the value of the Blue Marks. Citing the Supreme Court’s decision in American Needle, the court rejected the defendants’ contention that the Association was a single entity as a matter of law, noting that the Blue Plans were separate, profit-maximizing entities that had distinct economic interests, including their independent use of the Blue Marks. However, the court also refused to grant summary judgment on this issue in the plaintiffs’ favor. The court distinguished American Needle, ruling that the Blue Marks are more analogous to a joint mark (like the NFL brand), and not to the individual team marks that were at issue in American Needle.

The Geographic Market Allocations Are Per Se Unlawful

After determining that issues of fact precluded a determination of whether the Association operates as a single entity in enforcing the Blue Marks, the court turned to the issue of whether the establishment of ESAs is to be evaluated under the rule of reason or the per se standard. The application of the per se standard has been steadily narrowed over the past 40 years, as the courts’ understanding of the economic basis for the antitrust laws has evolved.[2] The per se rule is only to be applied to restraints with which the courts have experience and which “always or almost always tend to restrict competition and decrease output.” Broadcast Music, Inc. v. Columbia Broadcast System, Inc., 441 U.S. 1, 9 (1979) (declining to apply per se standard to joint venture that produced a new product, i.e., blanket licenses to copyrighted musical compositions). However, the courts have continued to subject certain practices, such as price fixing and horizontal market allocation, to per se condemnation.[3]

The application of the per se standard to horizontally-imposed geographic restrictions upon competition dates back to U.S. v. Addyston Pipe & Steel Co., 85 F. 271 (6th Cir. 1898), aff’d, 175 U.S. 211 (1899), and has since been confirmed by the Supreme Court in U.S. v. Sealy, Inc., 388 U.S. 350 (1967), and U.S. v. Topco Associates, Inc., 405 U.S. 596 (1972). See also, Palmer v. BRG of Georgia, Inc., 498 U.S. 46, 49 (1980) (per curiam). The Sealy case involved a licensor that was owned and controlled by a group of mattress manufacturers who agreed not to sell Sealy-branded products outside of their exclusive assigned territory, although they could sell private label mattresses in any market. Sealy also implemented price-fixing protocols for Sealy-branded mattresses. The Supreme Court ruled that the licensees used Sealy to engage in horizontal territorial restraints, which were deemed unlawful per se, “without the necessity for an inquiry in each particular case as to their business or economic justification, their impact in the market place, or their reasonableness.” 388 U.S. at 357-58. In Topco, a group of small and medium-sized supermarket chains formed an association to license private-label goods under the Topco brand in assigned geographic areas. Topco supermarkets had relatively small market shares in their respective geographic markets, ranging from 1.5% to 16%. The Supreme Court held that the territorial restraints were horizontally imposed, and therefore per se unlawful. The Supreme Court refused to consider whether the restraints were anticompetitive under the rule of reason, and specifically rejected the district court’s finding that Topco’s restrictions on intrabrand competition were justified by the benefits provided to interbrand competition. While the holdings in Topco and Sealy have not been directly addressed by the Supreme Court since Palmer, a number of cases have observed that horizontal geographic market allocations continue to be governed by the per se rule.[4]

The district court ruled that as a matter of law, the Association is a licensee-controlled entity, similar to the licensors in Sealy and Topco. The court concluded that the ESAs and the best efforts rules not only allocate markets, they limit the output of non-branded insurance coverage by the Blue Plans. Once the court accepted the plaintiffs’ characterization of the geographic restraints as being horizontally imposed, per se treatment was, as the court observed, a faithful application of Sealy and Topco. In doing so, the court rejected a number of arguments in favor of rule of reason analysis, and concluded that the ESAs were not necessary to facilitate the creation of a new product, because other insurers offer health insurance without allocating markets.

The provider plaintiffs also challenged the Association’s BlueCard program as a horizontal price-fixing conspiracy. Under the BlueCard program, each Blue Plan is required to make its local provider discounts available to all insureds covered by a Blue Plan, regardless of where the insured resides. The court determined that the BlueCard program is analogous to a cooperative purchasing arrangement that creates certain procompetitive benefits, and therefore is subject to the rule of reason. The subscriber plaintiffs also challenged the Association’s “uncoupling” rules, which prohibit a Blue Plan from using a separate trade name that previously had been used in conjunction with a Blue Mark. The court determined that those rules are reasonably intended to protect the strength of the Blue Marks, and therefore are also subject to the rule of reason

Analysis

The number of commercial arrangements governed by the per se standard has been significantly reduced in the past 40 years, but the district court’s rulings that the Association is a licensee-controlled entity and that the ESAs are per se unlawful appear to be the correct conclusions, as long as Sealy and Topco remain the law. A number of antitrust commentators have questioned the status of Sealy and Topco in light of current economic thinking and the movement toward limiting per se condemnation of ancillary restraints.[5] However, the district court properly noted that its role is limited to applying Sealy and Topco, and that it is up to the Supreme Court to determine the continued validity of its precedents.

On the other hand, the district court’s refusal to grant summary judgment in the plaintiffs’ favor on the single entity defense is inconsistent with its application of the per se standard to the ESAs. The court purportedly relied upon American Needle in ruling on the single entity defense, but the Supreme Court in American Needle recognized that Sealy and Topco stand for the proposition that a single entity controlled by a group of competitors is engaged in “ongoing concerted activity.” 560 U.S. at 191. The district court’s conclusion that the Association is an instrumentality of the Blue Plans and that the ESAs are to be evaluated under the per se standard necessarily means that the Association did not act unilaterally. You cannot have a horizontal restraint on trade without an agreement among competitors.

Conclusion

While the district court left open the issue of whether or not the Association and the Blue Plans can conspire, Sealy and Topco make it difficult to envision any scenario where the defendants ultimately will prevail on that issue in the lower court. From an antitrust perspective, this case could eventually present the opportunity for the Supreme Court to reconsider the continued vitality of Sealy and Topco. From a health insurance perspective, this case may significantly alter competition and cooperation among the Blue Plans, and result in substantial changes to the industry’s competitive landscape.