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CONTINENTAL ORTHOPEDIC APP. v. HEALTH INS. PLAN

January 15, 1999

CONTINENTAL ORTHOPEDIC APPLIANCES, INC., NEW YORK ORTHOPEDIC, STAHL SURGICAL SUPPLY INC., UNITED ORTHOPAEDIC APPLIANCES, INC., A-1 SURGICAL AND MEDICAL SUPPLIES, INC., ARCHFAME, INC., ORTHO SURGICAL, J.C. ORTHOPEDIC CO., INC., DAY DRUG & ORTHOPEDIC TREATMENT FACILITY, ORTHOTIC CONSULTANTS, INC., JAMES CASE ENTERPRISES, INC., CERTIFIED ORTHOPEDIC, PROTHOTIC LABS, ELMONT PHARMACY & SURGICAL, FOOT MOLDS, INC., AND A PERSONAL TOUCH GARMENT CORPORATION, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
HEALTH INSURANCE PLAN OF GREATER NEW YORK, INC., ADVANCED ORTHOPAEDIC TECHNOLOGIES, INC., A WHOLLY OWNED SUBSIDIARY OF NOVACARE PROSTHETICS AND ORTHOTICS, INC., NOVACARE PROSTHETIC AND ORTHOTICS, INC., AND ARIMED ORTHOTICS, PROSTHETICS, AND PEDORTHICS INC., ANDREW H. MEYERS, MATTHEW MIRONIS, STEVEN MIRONIS, BERNARD NEECK AND ANTHONY L. WATSON, DEFENDANTS.



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

MEMORANDUM OF DECISION AND ORDER

This putative class action seeks redress for alleged violations of the federal and state antitrust laws arising from the defendants' alleged unlawful and conspiratorial bid-rigging, price fixing, and termination and exclusion of all orthotic and prosthetic ("O & P") providers within the five boroughs of New York City and the surrounding six Counties of Nassau, Suffolk, Westchester, Rockland, Orange and Putnam (the "11 Counties"), by the defendants Health Insurance Plan of Greater New York, Inc. ("HIP"), Advanced Orthopedic Technologies, Inc. ("Advanced"), Novacare Orthotics and Prosthetics, Inc. ("Novacare"), Arimed Orthotics, Prosthetics and Pedorthics, Inc. ("Arimed"), and five individual officers and executives of the corporate defendants, beginning on or about July 31, 1995, and continuing to date. Presently before the Court are the motions of the defendants to dismiss the plaintiffs' Second Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief can be granted.

I. BACKGROUND

A. Factual background

This lawsuit arises from a decision made by HIP, a health management organization ("HMO"), to enter into certain exclusive contracts for O & P service with Advanced and Arimed, which became effective on August 1, 1995 and February 13, 1997. On or about November, 1996, Novacare, through a wholly-owned subsidiary, purchased all the assets of Advanced and the surviving corporation allegedly agreed to assume all of Advanced's liabilities. Accordingly, the plaintiffs submit that Novacare is liable for any wrongful activities committed by Advanced as alleged in the Second Amended Complaint. Therefore, this Opinion will refer to Advanced as "Advanced/Novacare," unless specifically referring separately to either "Advanced" or "Novacare."

Orthotics is the design, fabrication, fitting, and supervised use of custom-made braces and other devices that provide external support to treat musculoskeletal disorders. Prosthetics is the design, fabrication, and fitting of custom-made artificial limbs for patients who have lost limbs as a result of traumatic injuries, diabetes, cancer, mastectomy, vascular disease, or congenital disorders. The facts set forth below are taken from the Second Amended Complaint.

The first part of the conspiracy is alleged to have commenced on or about July 31, 1995 when Advanced and Arimed contracted to become HIP's exclusive "preferred providers" in regard to O & P services provided to HIP's customers in the Counties of Staten Island, Brooklyn, Queens, Nassau, and Suffolk (collectively, the "Five County Region" or the "Lower County Region"), notwithstanding that these providers, combined, had at most six outlets in these five counties. As a result of these contracts, the former O & P providers, including the plaintiffs, no longer will be the recipient of HIP's business in the Lower County Region. Simultaneously, each and every O & P provider who had previously attempted to become a HIP provider was foreclosed from becoming a member in the HIP network comprising of the Lower County Region.

HIP allegedly did not notify any of the O & P providers or the affected enrollees of the changes. However, apparently some time later, HIP provided the following memorandum, which it delivered to each terminated provider who inquired as to its termination:

  The Health Insurance Plan of Greater New York (HIP)
  has recently entered into agreements with Advanced
  Orthopedic Technology and Arimed whereby these two
  vendors will be preferred providers of O & P services
  for HIP members in the Queens-Long Island/Brooklyn
  and Staten Island Regions.
  Any cases which have already been referred to your
  company will continue to be monitored by the HIP
  Alternate Care Utilization Management Department.
  However, any new cases as of August 1, 1995 will be
  referred to one of the preferred providers. [I]f you
  have any questions or issues with regard to the above
  change[,] please feel free to contact the HIP
  Alternate Care Utilization Management Department at
  (212) 630-8203.
  HIP would like to thank you for your past service to
  HIP Members and appreciates your anticipated
  cooperation with this transition.

Second Amended Complaint ("2d.Am.Compl.") ¶ 102.

The plaintiffs allege that their termination and exclusion occurred despite their background, experience, training, competence, adherence to the ethics of the profession, good reputation, and the ability to work with others. All plaintiffs were Board-certified pursuant to the American O & P Association ("AOPA") and the New York State O & P Association ("NYOPA"). Nevertheless, only one entity among the plaintiffs was allegedly afforded an opportunity to submit bids to HIP prior to their termination.

On or about February 13, 1997, the plaintiffs allege the second part of the conspiracy materialized when HIP disclosed that it had "extended" exclusive contracts to Advanced/Novacare and Arimed to provide O & P services for "all HIP New York members" in the Counties of New York (i.e., Manhattan), Bronx, Westchester, Orange, Rockland, and Putnam (collectively, the "Upper County Region"). These territories were conferred to Advanced/Novacare and Arimed even though in most counties comprising the Lower and Upper County Regions, Advanced/Novacare and Arimed allegedly had only one or two sites, and in some counties, had no O & P sites to service HIP's customers.

As a result of these contracts, the former O & P providers, including the plaintiffs, would no longer be the recipient of HIP's business in the Upper County Region. Simultaneously, each and every O & P provider who had previously attempted to become a HIP provider was foreclosed from becoming a member in the HIP network in the Upper County Region.

The plaintiffs allege that HIP did not timely notify any of the affected O & P providers or the affected enrollees of the changes. Rather, HIP prepared a memorandum dated February 13, 1997, which mirrored the language of the July 31, 1995 termination letter, stating that HIP had "recently extended" its "agreements" with Advanced/Novacare and Arimed "whereby these two vendors will be preferred providers of orthotic and prosthetic services for all HIP New York Members." 2d. Am. Compl. ¶ 108. In a later memorandum dated March 15, 1997, which was provided only to HIP personnel on a distribution list, HIP detailed the partitioning of the Upper County Region among Advanced/Novacare and Arimed. HIP allegedly gave no explanation to its personnel for the sudden "extension" of coverage of the Upper County Region to Advanced/Novacare and Arimed. Id. None of the plaintiffs were allegedly afforded an opportunity to submit bids to HIP prior to their termination.

The plaintiffs allege that the conduct outlined above constitutes an illegal conspiracy among HIP, Advanced/Novacare, and Arimed, in restraint of trade of health care delivery in the United States and the State of New York. In support of this contention, the plaintiffs assert that during the relevant time periods of their complaint, HIP possessed over 20% of the Health Maintenance Organization ("HMO") market in the eleven County region, and approximately 50% of all O & P patients in that region who used an HMO. As a result, and crucial to the outcome of this motion, the plaintiffs claim that the defendants restrained trade in two separate relevant product markets: (1) The market for O & P health care services to HIP's HMO patients in the eleven Counties; and (2) The market for O & P health care services to HMO patients in the eleven County region.

The plaintiffs' Second Amended Complaint alleges that the essence of the agreement by the defendants seeks to: (1) sharply reduce and/or virtually eliminate the furnishing of O & P services to HIP's captive O & P patient population, thereby allowing HIP to avoid its contractual obligation to pay for O & P services incurred by its patients; (2) channel HIP's captive O & P patients exclusively to defendants Advanced/Novacare and Arimed, and, in return, it is alleged that Advanced/Novacare and Arimed agreed to provide minimal substandard O & P services to HIP patients, and/or withhold services outright from such patients; (3) engage in an unlawful and illegal bid rigging scheme under which the defendants exclude qualified providers from participating in the bidding process for the purpose of awarding O & P contracts solely to Advanced/Novacare and Arimed; (4) unlawfully fix prices for O & P services by HIP, Advanced/Novacare and Arimed in conjunction with their exclusive contractual arrangement to severely limit O & P services to HIP's captive O & P patient population; and (5) financially weaken and/or drive out competing O & P providers so that Advanced/Novacare and Arimed would dominate the HMO market for O & P services in the eleven County area.

The Second Amended Complaint sets forth four antitrust claims, two based on federal law and two based on state law. The first and second claims allege structural and tacit conspiracies, respectively, in violation of section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1. The third and fourth claims allege companion antitrust conspiracy claims based on the New York State Donnelly Act, N.Y. Gen. Bus. Law § 340, et seq.

B. Procedural history

The plaintiffs' original complaint alleged structural and tacit conspiracies and monopolization pursuant to federal and state law. By a Memorandum Decision and Order dated February 26, 1997, the Court dismissed with prejudice all claims of monopolization and dismissed the complaint without prejudice, as to the plaintiffs United Orthopaedic Appliances, Inc., Stahl Surgical Supply, Inc., Archfame, Inc., J.C. Orthopedics Co., Inc., and James Case Enterprises, Inc., based on lack of standing. Continental Orthopedic Appliances, Inc. v. Health Insurance Plan of Greater New York, 956 F. Supp. 367 (E.D.N.Y. 1997) ("Continental I"). In addition, the Court dismissed without prejudice, the federal and state law conspiracy claims, finding the conspiracy allegations insufficient to state a claim. The Court held that the plaintiffs had successfully pleaded all elements of a section 1 violation of the Sherman Antitrust Act, 15 U.S.C. § 1, except the allegations of a conspiracy. The Court stated that the complaint asserted


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