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November 12, 1991


The opinion of the court was delivered by: Sprizzo, District Judge:


Plaintiff Empire State Pharmaceutical Society, Inc. ("Empire State") brings this action against Empire Blue Cross and Blue Shield ("Blue Cross"), and certain of its officers, directors, and employees (the "individual defendants") for violations of the antitrust laws because Blue Cross charged plaintiff a higher rate for major medical insurance coverage for its members than that charged to one of its competitors, Long Island Pharmaceutical Company ("Long Island"). Plaintiff's amended complaint alleges that Blue Cross violated the Robinson-Patman Act, 15 U.S.C. § 13 (1988), and engaged in a combination and conspiracy in restraint of interstate commerce in violation of the Clayton Act, 15 U.S.C. § 12 (1988), and the Sherman Act, 15 U.S.C. § 1 (1988).

On September 25, 1987, after hearing Oral Argument, the Court dismissed the Robinson-Patman and Clayton Act claims,*fn1 but concluded that plaintiff's complaint adequately alleged a conspiracy in violation of the Sherman Act. See 15 U.S.C. § 1 (1988). Upon completion of discovery, all defendants moved for summary judgment on the Sherman Act claims, and for sanctions. On January 12, 1990, after hearing Oral Argument, the Court granted the defendants' motion for summary judgment, but ordered additional briefing and argument on the question of whether sanctions should be imposed pursuant to Fed.R.Civ.P. 11. For the reasons that follow, the Court concludes that Rule 11 sanctions are appropriate.


Empire State purchased group major medical health insurance coverage from Blue Cross in December, 1984, which became effective January 1, 1985.*fn4 At that time, insurance premiums for group major medical insurance were set based upon one of two possible classifications: "experience-rated" or "community-rated." Experience-rated groups paid premiums based upon the cost of coverage to the individual members of the group, see Deposition of Ronald D. Zammit ("Zammit Dep.") at 6; Defendants' Rule 3(g) Statement at ¶ 5, whereas the community-rated groups premiums were calculated based upon the costs of providing coverage to the community as a whole. See Defendants' Rule 3(g) Statement at ¶ 5. It is undisputed that the community-rated premiums were significantly less expensive than experience-rated premiums. See, e.g., Plaintiff's Complaint at ¶ 11(c); Plaintiff's Amended Complaint at ¶ 11(c); Letter of Jerome Sager to Erwin L. Werner (October 2, 1984); Letter of Jerome Sager to Erwin L. Werner (December 26, 1985); Wagner Dep. at ¶ 5.

During the years from 1978 to 1986, underwriting guidelines for purchases of group major medical coverage provided that if a group contained less than 100 subscribers, community-rated premiums were charged whereas experience-rated premiums were charged to groups with 100 or more subscribers. See Deposition of Harry Nicholsen ("Nicholsen Dep.") at 33; Zammit Dep. at 61; Deposition of Adrienne Rosenbluth ("Rosenbluth Dep.") at 14. Moreover, subdividing experience-rated groups into smaller groups for the sole purpose of avoiding the unfavorable experience-rating and qualifying for the community-rating was prohibited both by Blue Cross' underwriting regulations, see Blue Cross Blue Shield Underwriting Manual ¶ 1.6 at 25; Zammit Dep. at 67, and New York state law. See 11 N.Y.C.R.R. § 52.40(c)(2)(vii) (1984); See also Deposition of Leslie Strassberg ("Strassberg Dep.") at 75.

Therefore, when Empire State applied for group major medical insurance its representatives were told that since it was applying on behalf of a group consisting of more than 100 members the premium would be based on the experience-rating method, see Fisher Aff. at ¶ 4; Wagner Aff. at ¶ 4; Sager Dep. at 126, and that Empire State could not meet the requirements for a community-rating by grouping its members in smaller segments. See Wagner Aff. ¶ 5; Affidavit of Harry Nicholsen ("Nicholsen Aff.") at ¶ 3; Sager Dep. at 153; Strassberg Dep. at 81. Empire State objected to paying the higher rate because it claimed that its rival, Long Island, was accorded community-rating for similar coverage. See Wagner Aff. at ¶ 5; Sager Dep. at 127, 140, 152; Nicholsen Dep. at 50. Nevertheless, Empire State entered into major medical insurance coverage with Blue Cross for the years 1985, 1986, and 1987. See Sager Dep. at 121.

The evidence indicates that Long Island received its community-rating in the following manner. Individual pharmacies or groups of pharmacies who were members of Long Island had begun contacting Blue Cross by telephone in 1978 to secure major medical coverage, well before Empire State sought similar coverage. See Rosenbluth Dep. at 30-33, 36-38, 77, 82; Zammit Dep. at 45-57, 61-62, 65-66, 70-71, 77; Strassberg Dep. at 58, 64; Affidavit of Lucy McCarthy ("McCarthy Aff.") at ¶¶ 2, 4; see also Affidavit of James J. Sabella, Esq. ("Sabella Aff.") at Exhibit 12. These telephone enrollments were followed by the later submission of completed enrollment forms by each group. See McCarthy Aff. at ¶ 2. Since these individual or groups of pharmacies consisted of fewer than 100 members, they were given a community-rating.*fn5 See Rosenbluth Dep. at 30-33, 36-38, 77, 82; Zammit Dep. at 27-28, 35-39, 45-46, 61-62, 65; Nicholsen Dep. at 32-34, 64-65, 88; Strassberg Dep. at 58, 64.

Ultimately, twenty-nine separate groups of Long Island-member pharmacies, each comprised of less than 100 members, applied for and received major medical coverage from Blue Cross. Although the total number in these twenty-nine groups exceeded 100 members, see Rosenbluth Dep. at 83; Nicholsen Dep. at 58, these groups were treated as separate entities even though all had the same group administrator and the same billing address. See Strassberg Dep. at 69, 79; Nicholsen Dep. at 51; Sager Dep. at 128; Exhibit 12. However, the evidence established that at the time of their enrollment Blue Cross did not know of an affiliation among the groups, and that Blue Cross did not inquire into any possible affiliation among the groups. See Affidavit of Ronald D. Zammit ("Zammit Aff.") at ¶¶ 3, 4; McCarthy Aff. at ¶¶ 2, 4; Defendant's Rule 3(g) Statement at ¶ 17. There was some evidence, however, that at a later time Blue Cross became aware of further information bearing upon Long Island's eligibility for the community rating.*fn6

When Empire State was refused the community-rating, it registered repeated complaints with representatives of Blue Cross concerning the disparity of treatment between itself and Long Island, see Nicholsen Dep. at 45, 50, 60; Deposition of Jonathan Haley ("Haley Dep.") at 33, and sent letters of complaint to Erwin L. Werner, Chairman of the Board of Blue Cross (Exhibits L, M). Empire State also complained to the New York State Insurance Department alleging, inter alia, that Blue Cross engaged in a "discriminatory practice" when it refused to apply to Empire State the same type of rate used for Long Island. See Exhibits 14, 16. However, after considering Blue Cross' responses to these allegations, the New York State Insurance Department took no action on the matter.


The aforesaid facts have been recited in some detail so that the application of Rule 11 sanctions may be placed in proper perspective. These facts demonstrate that even after being offered the benefit of full discovery, plaintiff was not able to elicit any facts which support a plausible inference that the difference in rates charged Empire State and Long Island was the result of a conspiracy between Long Island and Blue Cross to restrain trade, or injure competition, or indeed to deprive Empire State of the ability to compete with its rivals. Certainly neither Blue Cross nor its employees had any ...

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