UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term 2010
August 18, 2011
CITY OF NEW YORK, PLAINTIFF-APPELLANT,
GROUP HEALTH INCORPORATED, HIP FOUNDATION, INC., AND HEALTH INSURANCE PLAN OF GREATER NEW YORK, DEFENDANTS-APPELLEES.
Appeal from a judgment of the United States District Court for the Southern District of New York (Richard J. Sullivan, Judge) granting summary judgment to Defendants-Appellees and dismissing the complaint. The City of New York argues that the district court erred by concluding that the market pled in its antitrust complaint is legally insufficient and by denying the City's motion to amend its complaint. We conclude that summary judgment was appropriate and that it was within the district court's discretion to deny leave to amend. We therefore AFFIRM the judgment of the district court.
The opinion of the court was delivered by: John M. Walker, Jr., Circuit Judge:
City of New York v. Group Health Inc.
Argued: May 4, 2011
Before : MINER, WALKER, and WESLEY, Circuit Judges.
Plaintiff-Appellant City of New York appeals from a judgment 27 of the United States District Court for the Southern District of 28 New York (Richard J. Sullivan, Judge) granting summary judgment to 29 Defendants-Appellees Group Health Incorporated ("GHI"), HIP 30 Foundation, Inc., and Health Insurance Plan of Greater New York 31 (together, "HIP"), and dismissing the City's antitrust complaint 32 without leave to amend.
33 The City sued health insurance providers GHI and HIP under 34 federal and New York State antitrust laws, seeking to prevent the 35 companies from merging. The district court granted summary 36 judgment to GHI and HIP, holding that the market definition the 37 City alleged as the basis of its claims is legally deficient. It also denied the City's motion to amend its complaint to allege a 2 new market definition. The City challenges these conclusions on 3 appeal.
4 We agree with the district court that the alleged relevant 5 market is legally deficient, and conclude that its denial of leave 6 to amend was not an abuse of discretion. We therefore AFFIRM the 7 district court's judgment.
I. New York City's Health Benefits Program and the
The City and several related entities obtain health insurance 12 for their employees and their employees' dependents through the 13 City's Health Benefits Program. Approximately 1.2 million 14 individuals are insured through the Program. The City's Office of 15 Labor Relations administers the Program jointly with the Municipal 16 Labor Committee, an association of about 50 unions that represent 17 the employees.
18 As a result of collective bargaining agreements and municipal 19 law requirements, the City offers its employees several types of 20 health insurance plans. Employees can select coverage through a 21 Health Maintenance Organization ("HMO") plan, a Participating 22 Provider Organization ("PPO") plan, or a Point of Service ("POS") 23 plan.
The City periodically issues Requests for Proposals ("RFPs") 2 inviting insurers to propose plan designs and associated premiums.
3 Insurance providers compete to be selected during each procurement 4 round.
Employees choose among the plans that the City selects.
Those who do not receive Medicare benefits can choose
thirteen plans, and Medicare participants can choose among
GHI and HIP offer the two least expensive and most popular 9 plans. GHI offers a PPO plan and HIP offers an HMO plan.
The 10 majority of City employees and non-Medicare retirees select 11 coverage from GHI's or HIP's plan, with only a small minority 12 choosing the plan with the third largest share of enrollment.
13 Under municipal law and by agreement between the City and the 14 Municipal Labor Committee, the City pays the entire premium for 15 employees who enroll in either the HIP plan or the GHI plan. 16 Employees who select more expensive coverage from another carrier 17 must pay any excess in the cost of that coverage over the cost of 18 the HIP plan.
19 In September 2005, GHI and HIP announced their intent to
20 and to convert from non-profit to for-profit status. The
21 States Department of Justice and the New York State
22 General investigated the antitrust implications of the
23 merger and decided not to challenge it. The New York
24 Departments of Health and Insurance granted approval for GHI
HIP to combine their operations as an interim step pending
2 of an acceptable plan of conversion to a publicly owned
3 and, thereafter, a formal merger.
II. Procedural History
On November 13, 2006, the City filed this action seeking an 6 injunction to block the merger. The complaint challenges the 7 merger under § 7 of the Clayton Act, 15 U.S.C. § 18, §§ 1 and 2 of 8 the Sherman Act, 15 U.S.C. §§ 1-2, and the Donnelly Act, N.Y. Gen. 9 Bus. L. § 340(1), New York's antitrust law. It alleges that 10 because GHI's and HIP's plans cover a vast majority of the 11 employees in the City's Health Benefits Program, the merger of the 12 carriers will substantially reduce competition, and will result in 13 monopolization of the relevant market and an increase in the 14 premiums that the City is required to pay. The complaint defines 15 the relevant market as the "low-cost municipal health benefits 16 market." This market includes only those insurance plans that are 17 inexpensive and that the City selects for inclusion in the Health 18 Benefits Program.*fn1
When the City filed its complaint, it moved for a temporary 2 restraining order blocking the merger. Judge Karas, to whom the 3 case was initially assigned, denied the motion. He explained that 4 "there are substantial questions about the market definition 5 analysis that the plaintiff has adopted here. It appears to be 6 focused on what the City is paying for, and not so much on the 7 market of insurance coverage. . . . I think the products . . . are 8 the same, whether they're offered to the City or they're offered to 9 a private large employer."
10 On December 4, 2009, after several years of discovery, GHI and 11 HIP moved for summary judgment dismissing the City's complaint. 12 They argued (1) that the market the City alleged in its complaint 13 is insufficient as a matter of law because it is based on the 14 City's preferences and ignores the market of insurance providers 15 that compete for the City's business, and (2) that the City could 16 not demonstrate a relevant antitrust injury because any increased 17 premiums would result from GHI's and HIP's conversion to for-profit 18 entities, not from their merger.
19 On January 20, 2010, nine days before its opposition papers 20 were due, the City sought leave to file a motion to amend its 21 complaint to add alternative market definitions. The City sought 22 to add two alternative markets: (1) all insurance plans the City 23 selected for inclusion in the Health Benefits Program, not only the 24 inexpensive plans; and (2) the market for all commercial medical 1 benefits in downstate New York. The City also sought to base its 2 claim on the "Upward Pricing Pressure" test, which analyzes the 3 effect of a merger on the merged firm's pricing incentives. The 4 City contended that the Upward Pricing Pressure test could 5 establish the anticompetitive effect of the merger without the need 6 to define a relevant market.
7 The district court granted GHI and HIP's summary judgment 8 motion and denied the City's motion to amend. City of New York v. 9 Group Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246, at *7 10 (S.D.N.Y. May 11, 2010). It concluded that the market the City 11 alleged in its complaint is legally insufficient because it was 12 defined by the preferences of a single purchaser: the City. Id. at 13 *4-5. Judge Sullivan, to whom the case had been reassigned, denied 14 the City's motion to amend on the basis that (1) the City exhibited 15 undue delay because it was on notice of its potentially deficient 16 market definition at least as early as Judge Karas's denial of its 17 request for a temporary restraining order more than three years 18 earlier, and (2) the amendments would prejudice GHI and HIP by 19 forcing them to conduct substantial additional discovery after 20 three and a half years of defending a lawsuit premised on the 21 City's narrow market definition. Id. at *5-7.
The City appealed.
I. Sufficiency of the Alleged Market
We review an award of summary judgment de novo, affirming 4 "only if there is no genuine issue as to any material fact, and if 5 the moving party is entitled to a judgment as a matter of law."
Allianz Ins. Co. v. Lerner, 416 F.3d 109, 113 (2d Cir. 2005).
To state a claim under § 7 of the Clayton Act, §§ 1 or 2 of 8 the Sherman Act, or New York's Donnelly Act, a plaintiff must 9 allege a plausible relevant market in which competition will be 10 impaired. See, e.g., United States v. E.I. du Pont de Nemours & 11 Co., 353 U.S. 586, 593 (1957) ("Determination of the relevant 12 market is a necessary predicate to a finding of a violation of the 13 Clayton Act because the threatened monopoly must be one which will 14 substantially lessen competition within the area of effective 15 competition." (internal quotation marks omitted)); Chapman v. New 16 York State Div. for Youth, 546 F.3d 230, 238 (2d Cir. 2008) 17 (Sherman Act); Benjamin of Forest Hills Realty, Inc. v. Austin 18 Sheppard Realty, Inc., 823 N.Y.S.2d 79, 83 (App. Div. 2006) 19 (Donnelly Act). The relevant market must be defined "as all 20 products 'reasonably interchangeable by consumers for the same 21 purposes,' because the ability of consumers to switch to a 22 substitute restrains a firm's ability to raise prices above the 23 competitive level." Geneva Pharm. Tech. Corp. v. Barr Labs. Inc., 24 386 F.3d 485, 496 (2d Cir. 2004) (quoting E.I. du Pont de Nemours 1 & Co., 351 U.S. at 395). "[W]here the plaintiff fails to define 2 its proposed relevant market with reference to the rule of 3 reasonable interchangeability and cross-elasticity of demand, or 4 alleges a proposed relevant market that clearly does not encompass 5 all interchangeable substitute products even when all factual 6 inferences are granted in plaintiff's favor, the relevant market is 7 legally insufficient." Chapman, 546 F.3d at 238 (quoting Queen 8 City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 436 (3d 9 Cir. 1997)).
10 Here, the district court correctly concluded that the market 11 alleged in the City's complaint is legally insufficient because it 12 is defined by the City's preferences, not according to the rule of 13 reasonable interchangeability and cross-elasticity of demand. The 14 market alleged in the City's complaint ignores the competition 15 existing among insurance providers for the City's business, as well 16 as the health insurance market for other large employers in the 17 region. The City does not allege any factor that would prevent 18 insurance companies other than those it selects for the Health 19 Benefits Program from proposing competitive products should the 20 merged firm raise its premiums to supracompetitive prices.
21 The arguments the City raises on appeal are unavailing. The 22 City first argues that the insurance plans it approves constitute 23 a unique market because they reflect the City's "sound policy 24 choices." A single purchaser's preferences, however, cannot define 1 a market. We faced a similar argument in Hack v. President and 2 Fellows of Yale College, in which the plaintiffs complained that 3 Yale was illegally tying dormitory housing to their education and 4 alleged that Yale, because of its uniqueness, constituted its own 5 market for education. 237 F.3d 81, 86-87 (2d Cir. 2000), abrogated 6 on other grounds by Swierkiewicz v. Sorema N.A., 534 U.S. 506 7 (2002). We rejected this contention, holding that, although Yale 8 is "unique, . . . in a collegiate sense," it does not constitute 9 its own tying market because "there are many institutions of higher 10 learning providing superb educational opportunities." Id. at 86.
11 Here, although the approved insurance plans may have been 12 particularly suitable to the City's needs, the City does not allege 13 any reason why other similar insurance plans are unsuitable or why 14 the numerous insurance providers in the area could not or would not 15 design suitable plans to compete with those that the City selected.
16 The City next argues that its proposed market is distinct from 17 a "single-purchaser market" because the employees who select their 18 insurance coverage also constitute purchasers. However, the 19 employees choose health coverage only from the plans that the City 20 has already selected for inclusion in the Health Benefits Program.
21 The employees' ability to choose among the plans in the Health 22 Benefits Program does not change the fact that the competition 23 among insurance providers for the business of the City and other 24 large employers would constrain the ability of the merged firm to set its premium above a competitive price. It thus cannot save the 2 City's artificially narrow market definition.
3 Finally, the City argues that the district court erred in 4 failing to consider its expert report, which, it argues, 5 establishes the harm to competition that would result from the 6 merger. The district court, however, granted summary judgment on 7 the basis that the alleged relevant market is legally insufficient.
The City's expert report was thus irrelevant.
II. Denial of the City's Motion to Amend
"[W]e review a district court's denial of a motion to amend 11 under the abuse of discretion standard." Gorman v. Consol. Edison 12 Corp., 488 F.3d 586, 592 (2d Cir. 2007). A district court abuses 13 its discretion when it "bases its ruling on an incorrect legal 14 standard or on a clearly erroneous assessment of the facts." Bronx 15 Household of Faith v. Bd. of Educ., 331 F.3d 342, 348 (2d Cir. 16 2003).
17 Rule 15(a)(2) of the Federal Rules of Civil Procedure provides 18 that "[t]he court should freely give leave [to amend the complaint] 19 when justice so requires." The rule in our circuit is to allow a 20 party to amend its complaint unless the non-movant demonstrates 21 prejudice or bad faith. AEP Energy Servs. Gas Holding Co. v. Bank 22 of Am., N.A., 626 F.3d 699, 725 (2d Cir. 2010) (citing Block v. 23 First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993)).
During the course of briefing on GHI and HIP's summary 2 judgment motion, the City moved to amend its complaint. It sought 3 to add two additional market definitions: first, all insurance 4 providers participating in the City's Health Benefits Program, not 5 just the low-cost providers, and, second, all providers of 6 commercial medical benefits in downstate New York. It also sought 7 to add an alternative basis for its antitrust claims, the Upward 8 Pricing Pressure Test, which, the City explains, "predicts the 9 likely competitive impact of a proposed merger based on how a 10 merger is likely to alter the merged firm's pricing incentives."*fn2
11 The City argues that the Upward Pricing Pressure test can be used 12 instead of "the traditional approach of defining relevant markets."
13 In denying the City's motion to amend, the district court
14 that the City had exhibited undue delay and that the
15 amendment would prejudice GHI and HIP. City of New York v.
16 Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246, at
17 (S.D.N.Y. May 11, 2010). The district court noted that the
18 was aware of the flaws in its complaint at least since Judge
19 questioned the City's market definition in denying its motion
a temporary restraining order more than three years earlier.
2 at *6. In addition, the district court explained that allowing
3 amendment would unduly prejudice GHI and HIP by requiring them
4 conduct substantial additional discovery on a different and
5 broader market. Id. The district court also rejected the
6 Pricing Pressure Test. It noted that "its research has
7 revealed a single decision of a federal court adopting this
8 which, "[i]n light of the case law's clear requirement
9 [p]laintiff allege a particular product market in which
10 will be impaired, . . . is hardly surprising." Id. at *6
11 The City argues that the district court abused its discretion 12 by misapplying the standards that govern a motion to amend. First, 13 it argues that its addition of the market comprising all insurance 14 providers in the Health Benefits Program does not require an 15 amendment because that market represents only a "slight change" 16 from the market pled in the City's initial complaint. Whether or 17 not the City's addition of a market consisting of all insurance 18 providers in the Health Benefits Program requires a formal 19 amendment, this market suffers from the same legal deficiency as 20 the market in the City's initial complaint. As discussed above, a 21 market limited to the providers participating in the Health 22 Benefits Program is not -- as is required -- defined by the rule of 23 reasonable interchangeability and cross-elasticity of demand. It 24 ignores the market of health insurance providers in downstate New York that compete for the business of the City and other large 2 employers. It thus cannot form the basis of the City's antitrust 3 claims and its addition to the complaint would be futile. See AEP 4 Energy Servs. Gas Holding Co., 626 F.3d at 726 ("Leave to amend may 5 be denied on grounds of futility if the proposed amendment fails to 6 state a legally cognizable claim.").
7 The City next argues that GHI and HIP did not demonstrate 8 undue prejudice because they did not show that the amendment would 9 require them to redo, or discard, discovery already conducted. The 10 need to redo or discard discovery, however, is not the only form of 11 undue prejudice we have recognized. An "[a]mendment may be 12 prejudicial when, among other things, it would require the opponent 13 to expend significant additional resources to conduct discovery and 14 prepare for trial or significantly delay the resolution of the 15 dispute." AEP Energy Servs. Gas Holding Co., 626 F.3d at 725-26 16 (internal quotation marks omitted). Here, the City's amendment 17 would, at a minimum, require additional discovery from large 18 employers other than the City in the downstate New York area and 19 from the health insurance providers that compete for their 20 business. It was not clearly erroneous for the district court to 21 conclude that the need to obtain this discovery would delay 22 proceedings and require substantial additional expense.
In addition, as the district court explained, the City waited 24 more than three years to seek an amendment, and did so only after 1 confronted with a motion for summary judgment challenging its 2 market definition. The City argues that it cannot be faulted for 3 the delay because GHI and HIP went along with discovery, also 4 waiting more than three years to challenge the City's market 5 definition. While GHI and HIP could have sought dismissal of the 6 City's complaint earlier in the litigation, their failure to do so 7 does not necessarily mitigate the City's delay. Although the 8 City's delay in seeking amendment may not be evidence of bad faith, 9 we do not think it was an abuse of discretion for the district 10 court to find that this delay, together with the prejudice that 11 would result from the amendment, warranted denial of the City's 12 motion to amend.
13 Finally, we find no error or abuse of discretion in the 14 district court's rejection of the Upward Pricing Pressure test. As 15 the district court explained, and as we discussed above, the 16 applicable case law requires plaintiffs asserting a claim under the 17 Sherman Act, the Clayton Act, or the Donnelly Act to allege a 18 market in which the challenged merger will impair competition.
19 While the City explains the Upward Pricing Pressure
20 usefulness in assessing the impact of a merger, it does not
21 how the test can substitute for a definition of the relevant
22 in the pleadings. Cf. Carl Shapiro, Deputy Ass't Attorney Gen.
23 Economics, Antitrust Division, U.S. Dep't of Justice, Update
24 the Antitrust Division, at 15 (Nov. 18,
2 need to define relevant market in any antitrust
3 Whether or not the Upward Pricing Pressure test -- and its results 4 in this case as explained by the City's expert -- would, as the 5 City argues, be admissible as evidence of impaired competition is 6 not relevant to the adequacy of the pleadings.
7 As such, we find no abuse of discretion and affirm the 8 district court's denial of the City's motion to amend.
For the foregoing reasons, we AFFIRM the judgment of