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Medical Arts Pharmacy of Stamford Inc. v. Cross

decided: April 1, 1982.

MEDICAL ARTS PHARMACY OF STAMFORD, INC., ET AL.
v.
BLUE CROSS & BLUE SHIELD OF CONNECTICUT, INC.



Appeal from a judgement of the U.S. District Court for the District of Connecticut

Before Lumbard, Oakes and Van Graafeiland, Circuit Judges.

Author: Per Curiam

Plaintiff Medical Arts Pharmacy of Stamford, Inc. ("Medical Arts"), on behalf of itself and a class of approximately 650 Connecticut retail pharmacies, appeals from a judgment of the United States District Court for the District of Connecticut, Warren W. Eginton, Judge, denying its motion for summary judgment on its claim that defendant Blue Cross & Blue Shield, Inc. ("Blue Cross") violated section 1 of the Sherman Act, 15 U.S.C. § 1, and granting Blue Cross's cross-motion for summary judgment. We affirm.

FACTS

The following facts of this case, which are set forth more fully in the thorough and well-reasoned opinion below, 518 F. Supp. 1100 (D.Conn.1981), are undisputed. Under Blue Cross's prescription-drug program, subscribers, representing approximately 9% of Connecticut's population, can obtain prescription drugs from licensed pharmacies at little or no cost beyond the prepayment of premiums. A contract between Blue Cross and its individual subscribers (the "subscriber contract") determines the level of benefits for each insured, and a second contract, entitled the "Prepaid Prescription Drug Agreement by and between Blue Cross & Blue Shield of Connecticut, Inc. and Participating Pharmacy" (the "pharmacy agreement"), sets forth the terms under which a participating pharmacy will provide prescription drugs to Blue Cross's subscribers.

The subscriber contract permits the insured to obtain prescription drugs from either a participating or a nonparticipating pharmacy. If the subscriber purchases the drugs from a nonparticipating pharmacy, he pays the full price charged by the pharmacy and then obtains reimbursement from Blue Cross in an amount no greater than that which Blue Cross would reimburse a participating pharmacy.*fn1 If, on the other hand, a subscriber selects a participating pharmacy, he generally receives the needed drug at no out-of-pocket expense.*fn2 Blue Cross then reimburses the pharmacy at a rate established in the pharmacy agreement.

The pharmacy agreement, which Blue Cross unilaterally instituted and offered to all Connecticut pharmacies, provides for a "maximum billable amount" method of reimbursement. Blue Cross determines the maximum it will reimburse participating pharmacies for any drug by reference either to Blue Cross's own separate price lists or, in the case of infrequently dispensed drugs, by reference to "Red Book" average wholesale price rates. Participating pharmacies are also paid a predetermined professional fee to provide for overhead and profit. All but two Connecticut pharmacies participate in Blue Cross's prescription drug program.

Medical Arts charged in its complaint that the pharmacy agreements are price-fixing arrangements proscribed by section 1 of the Sherman Act, 15 U.S.C. § 1. On its motion for summary judgment Medical Arts asserted that because the agreements fix prices for prescription drugs, they are per se illegal under section 1. Blue Cross asserted in its cross-motion that even under a rule of reason analysis the agreements did not violate the Sherman Act. The district court denied Medical Arts' motion, holding the per se rule of illegality inapplicable to the Blue Cross pharmacy agreements, and granted the cross-motion for summary judgment upon a finding that Medical Arts' pleadings had failed to allege the anticompetitive effect necessary to hold the pharmacy agreements impermissible under a rule of reason analysis.*fn3

Discussion

I. Medical Arts Motion for Summary Judgment

Section 1 of the Sherman Act makes unlawful "(e)very contract, combination ..., or conspiracy, in restraint of trade or commerce among the several States...." 15 U.S.C. § 1. Per se rules of illegality under section 1 are applicable only to restrictive agreements that are "manifestly anticompetitive," Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49-50, 97 S. Ct. 2549, 2557, 53 L. Ed. 2d 568 (1977); Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S. Ct. 514, 518, 2 L. Ed. 2d 545 (1958). See also Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643, 649, 100 S. Ct. 1925, 1928, 64 L. Ed. 2d 580 (1980) ("when a particular concerted activity entails an obvious risk of anticompetitive impact with no apparent potentially redeeming value, the fact that a practice may turn out to be harmless in a particular set of circumstances will not prevent its being declared unlawful per se "). Otherwise, challenged conduct must be analyzed under the rule of reason, which requires the factfinder to determine whether, under all of the circumstances of the case, including the facts peculiar to the business and the history of, reasons for, and market impact of the restraint, the restrictive practice imposes an unreasonable restraint on competition. See National Society of Professional Engineers v. United States, 435 U.S. 679, 687-92, 98 S. Ct. 1355, 1363-65, 55 L. Ed. 2d 637 (1978).

Medical Arts urges application of a per se rule of illegality, arguing that the pharmacy agreements, which establish the maximum price Blue Cross will pay participating pharmacies for prescription drugs, are analogous to the maximum price restraints struck down in Albrecht v. Herald Co., 390 U.S. 145, 88 S. Ct. 869, 19 L. Ed. 2d 998 (1968) (publisher's establishment of maximum resale price of newspapers sold by carriers held per se violation of section 1), and Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, Inc., 340 U.S. 211, 71 S. Ct. 259, 95 L. Ed. 219 (1951) (distillers' agreement on maximum resale price of liquor sold by distributors held per se violation of section 1). Cf. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 223, 60 S. Ct. 811, 844, 84 L. Ed. 1129 (1940) ("a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se "). The Supreme Court left open this question in Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 210 & n.5, 99 S. Ct. 1067, 1072 & n.5, 59 L. Ed. 2d 261 (1979), which held that similar insurer-pharmacy agreements were not exempt from examination under the antitrust laws.

The district court properly declined to apply the per se rule. Rejecting Medical Arts' argument that the pharmacy agreements were comparable to maximum resale price maintenance or to horizontal price fixing, the court held that Blue Cross was the purchaser of the prescribed drugs, and therefore its establishment of the maximum price it would pay participating pharmacies for the drugs was not price fixing within the scope of the per se prohibition of section 1. 518 F. Supp. at 1107 (citing Sitkin Smelting & Refining Co. v. FMC Corp., 575 F.2d 440, 446 (3d Cir.), cert. denied, 439 U.S. 866, 99 S. Ct. 191, 58 L. Ed. 2d 176 (1978) (the per se rule applies to "an agreement to fix the price to be charged in transactions with third parties, not between the contracting parties themselves")). As the Supreme Court observed in Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. at 214, 99 S. Ct. at 1074, "(t)he Pharmacy Agreements ... are merely arrangements for the purchase of goods and services by Blue Shield." See also Note, Prepaid Prescription Drug Plans Under Antitrust Scrutiny: A Stern Challenge to Health Care Cost Containment, 75 Nw.L.Rev. 506, 513-14 (1980) ("The insurers are simply buyers who partially reimburse the pharmacies for each sale of a prescription drug. In effect, the pharmacies make one sale to a two-sided buyer composed of the insurer and the subscriber") (emphasis in original).

Medical Arts asserts that only the subscriber is the purchaser of prescription drugs under the Blue Cross program, and cites in support of its argument various provisions of the Uniform Commercial Code which we do not consider relevant to deciding the antitrust issue. But even if Blue Cross cannot be characterized as the purchaser for the purposes of antitrust analysis, we consider the pharmacy agreements to be sufficiently different from the maximum price-fixing agreements struck down in Albrecht and Kiefer-Stewart to preclude application of the per se rule. In Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1, 99 S. Ct. 1551, 60 L. Ed. 2d 1 (1979), the Supreme Court declined to apply the per se rule against price-fixing to Broadcast Music's decision to market its inventory of copyrighted musical compositions only in the form of blanket licensing agreements and to charge a single price for its entire musical inventory regardless of actual usage. Emphasizing that not all "price fixing" as such is "plainly anticompetitive," id. at 9, 99 S. Ct. at 1556, the Court analyzed the general commercial background of this arrangement before concluding that it was not a naked restraint on competition, id. at 20, 99 S. Ct. at 1562, but rather was ancillary to the integration of sales promotion and of copyright enforcement, which in fact contributed to competition and efficiency, id. at 20-23, 99 S. Ct. at 1562-64. See also United States v. Topco Associates, Inc., 405 U.S. 596, 607-08, 92 S. Ct. 1126, 1133, 31 L. Ed. 2d 515 (1972) ("It is only after considerable experience with certain business relationships that courts classify them as per se violations of the Sherman Act"); Copy-Data Systems, Inc. v. Toshiba America, Inc., 663 F.2d 405, 411 (2nd Cir. 1981) (per se rule should not be lightly applied to business relationships with potential for enhancing competition). We agree with the courts and commentaries that have found that, like the price-fixing practice upheld in Broadcast Music, Inc., Blue Cross pharmacy ...


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