FILED NOT FOR PUBLICATION FEB 12 2018 UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
COLLEEN EASTMAN; CHRISTI CRUZ; No. 16-15793 CARMEN MENDEZ, D.C. No. 3:15-cv-00415-WHO Plaintiffs-Appellants,
v. MEMORANDUM*
QUEST DIAGNOSTICS INCORPORATED,
Defendant-Appellee.
Appeal from the United States District Court for the Northern District of California William Horsley Orrick, District Judge, Presiding
Argued and Submitted November 15, 2017 San Francisco, California
Before: THOMAS, Chief Judge, and W. FLETCHER and PAEZ, Circuit Judges.
Plaintiffs Colleen Eastman, Christi Cruz and Carmen Mendez appeal the
dismissal of their second amended complaint (“SAC”) against Quest Diagnostics.
We have jurisdiction under 28 U.S.C. § 1291. We review de novo a district court’s
* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. grant of a Rule 12(b)(6) motion to dismiss for failure to state a claim. See Edwards
v. Marin Park, Inc., 356 F.3d 1058, 1061 (9th Cir. 2004). We affirm.
1. The district court properly concluded plaintiffs failed to allege a plausible
monopolization claim under § 2 of the Sherman Act. Monopolization has two
elements: “(1) the possession of monopoly power in the relevant market and (2)
the willful acquisition or maintenance of that power as distinguished from growth
or development as a consequence of a superior product, business acumen, or
historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
With respect to the second element, “[t]he test of willful maintenance or
acquisition of monopoly power is whether the acts complained of unreasonably
restrict competition.” Drinkwine v. Federated Publ’ns, Inc., 780 F.2d 735, 739
(9th Cir. 1985). The Sherman Act is not directed “against conduct which is
competitive, even severely so, but against conduct which unfairly tends to destroy
competition itself.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993).
Plaintiffs alleged Quest maintained its market power through three
exclusionary practices: (1) exclusive dealing with medical providers; (2) collusion
with health plans; and (3) acquisition of competitors. The district court considered
each of the alleged exclusionary practices—both in isolation and in
2 combination—and properly concluded plaintiffs failed to establish a plausible
monopolization claim.1
Exclusive dealing with medical providers: Although plaintiffs allege
exclusive dealing in violation of § 2 of the Sherman Act, we may look to the
standard for adjudicating exclusive dealing claims under § 3 of the Clayton Act for
guidance. Twin City Sportservice, Inc. v. Charles O. Finley & Co., 676 F.2d 1291,
1304 n.9 (9th Cir. 1982). An exclusive dealing arrangement does not violate § 3 of
the Clayton Act unless it is “probable that performance of the contract will
foreclose competition in a substantial share of the line of commerce affected.”
Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961). When
addressing exclusive dealing under the Sherman Act, “a greater showing of
anticompetitive effect is required to establish a Sherman Act violation than a
section 3 Clayton Act violation.” Twin City Sportservice v. Charles O. Finley &
Co., 676 F.2d at 1304 n.9. Further,
[t]o determine the substantiality in a given case, it is necessary to weigh the probable effect of the contract on the relevant area of effective competition, taking into
1 Plaintiffs actually allege four exclusionary practices under § 2 of the Sherman Act. However, their allegations of “tying” and “exclusive dealing” with medical providers are essentially the same exclusionary practice for § 2 purposes, and therefore the analysis set forth for exclusive dealing also applies to the tying claim for the purposes of § 2. 3 account the relative strength of the parties, the proportionate volume of commerce involved in relation to the total volume of commerce in the relevant market area, and the probable immediate and future effects which pre- emption of that share of the market might have on effective competition therein. It follows that a mere showing of the contract itself involves a substantial number of dollars is ordinarily of little consequence.
Tampa Elec. Co., 365 U.S. at 329.
The district court did not err by concluding plaintiffs failed to allege facts
from which it could be plausibly inferred that Quest’s alleged exclusive dealing
arrangements with medical providers foreclosed a substantial share of the
plan/outpatient market. To plausibly allege foreclosure of the plan/outpatient
market—in a substantial share or otherwise—plaintiffs at the very least needed to
plead facts sufficient to support the inference that the exclusive dealing
arrangements have some appreciable impact on the market. Although plaintiffs
adequately explained how exclusive dealing arrangements with medical providers
operate, they did not allege how many medical providers have in fact entered
agreements with Quest. Nor did plaintiffs allege how the arrangements actually
agreed upon have impacted other laboratories in the plan/outpatient market. These
omissions are significant because, without such allegations, there are no facts that
4 allow the court to evaluate the effect of the exclusive dealing arrangements in the
plan/outpatient market.
Exclusive dealing/collusion with health plans: The district court properly
held that plaintiffs’ allegations related to exclusive dealing with health
plans—referred to as collusion by the district court—also failed to plausibly
demonstrate foreclosure of a substantial share of the market. As the district court
noted, plaintiffs alleged only that three laboratories were excluded from the Aetna
and Blue Shield networks as a result of agreements with Quest. Plaintiffs did not
allege the market shares of any of these laboratories, what portion of Aetna and
Blue Shield testing is performed out of network, how many laboratories remain in
the Aetna and Blue Shield networks, or even what portion of Aetna and Blue
Shield diagnostic testing is actually performed by Quest. Plaintiffs ultimately did
not allege a sufficient factual basis from which it is possible to infer that any
particular portion of the plan/outpatient market was foreclosed as a result of
exclusive dealing between health plans and Quest.
Acquisition of competitors: In some instances, the merging of competitors
to form a monopoly may violate § 2 of the Sherman Act. See Standard Oil Co. of
New Jersey v. United States, 221 U.S. 1, 77 (1911) (holding Standard Oil’s
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FILED NOT FOR PUBLICATION FEB 12 2018 UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
COLLEEN EASTMAN; CHRISTI CRUZ; No. 16-15793 CARMEN MENDEZ, D.C. No. 3:15-cv-00415-WHO Plaintiffs-Appellants,
v. MEMORANDUM*
QUEST DIAGNOSTICS INCORPORATED,
Defendant-Appellee.
Appeal from the United States District Court for the Northern District of California William Horsley Orrick, District Judge, Presiding
Argued and Submitted November 15, 2017 San Francisco, California
Before: THOMAS, Chief Judge, and W. FLETCHER and PAEZ, Circuit Judges.
Plaintiffs Colleen Eastman, Christi Cruz and Carmen Mendez appeal the
dismissal of their second amended complaint (“SAC”) against Quest Diagnostics.
We have jurisdiction under 28 U.S.C. § 1291. We review de novo a district court’s
* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. grant of a Rule 12(b)(6) motion to dismiss for failure to state a claim. See Edwards
v. Marin Park, Inc., 356 F.3d 1058, 1061 (9th Cir. 2004). We affirm.
1. The district court properly concluded plaintiffs failed to allege a plausible
monopolization claim under § 2 of the Sherman Act. Monopolization has two
elements: “(1) the possession of monopoly power in the relevant market and (2)
the willful acquisition or maintenance of that power as distinguished from growth
or development as a consequence of a superior product, business acumen, or
historic accident.” United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
With respect to the second element, “[t]he test of willful maintenance or
acquisition of monopoly power is whether the acts complained of unreasonably
restrict competition.” Drinkwine v. Federated Publ’ns, Inc., 780 F.2d 735, 739
(9th Cir. 1985). The Sherman Act is not directed “against conduct which is
competitive, even severely so, but against conduct which unfairly tends to destroy
competition itself.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993).
Plaintiffs alleged Quest maintained its market power through three
exclusionary practices: (1) exclusive dealing with medical providers; (2) collusion
with health plans; and (3) acquisition of competitors. The district court considered
each of the alleged exclusionary practices—both in isolation and in
2 combination—and properly concluded plaintiffs failed to establish a plausible
monopolization claim.1
Exclusive dealing with medical providers: Although plaintiffs allege
exclusive dealing in violation of § 2 of the Sherman Act, we may look to the
standard for adjudicating exclusive dealing claims under § 3 of the Clayton Act for
guidance. Twin City Sportservice, Inc. v. Charles O. Finley & Co., 676 F.2d 1291,
1304 n.9 (9th Cir. 1982). An exclusive dealing arrangement does not violate § 3 of
the Clayton Act unless it is “probable that performance of the contract will
foreclose competition in a substantial share of the line of commerce affected.”
Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961). When
addressing exclusive dealing under the Sherman Act, “a greater showing of
anticompetitive effect is required to establish a Sherman Act violation than a
section 3 Clayton Act violation.” Twin City Sportservice v. Charles O. Finley &
Co., 676 F.2d at 1304 n.9. Further,
[t]o determine the substantiality in a given case, it is necessary to weigh the probable effect of the contract on the relevant area of effective competition, taking into
1 Plaintiffs actually allege four exclusionary practices under § 2 of the Sherman Act. However, their allegations of “tying” and “exclusive dealing” with medical providers are essentially the same exclusionary practice for § 2 purposes, and therefore the analysis set forth for exclusive dealing also applies to the tying claim for the purposes of § 2. 3 account the relative strength of the parties, the proportionate volume of commerce involved in relation to the total volume of commerce in the relevant market area, and the probable immediate and future effects which pre- emption of that share of the market might have on effective competition therein. It follows that a mere showing of the contract itself involves a substantial number of dollars is ordinarily of little consequence.
Tampa Elec. Co., 365 U.S. at 329.
The district court did not err by concluding plaintiffs failed to allege facts
from which it could be plausibly inferred that Quest’s alleged exclusive dealing
arrangements with medical providers foreclosed a substantial share of the
plan/outpatient market. To plausibly allege foreclosure of the plan/outpatient
market—in a substantial share or otherwise—plaintiffs at the very least needed to
plead facts sufficient to support the inference that the exclusive dealing
arrangements have some appreciable impact on the market. Although plaintiffs
adequately explained how exclusive dealing arrangements with medical providers
operate, they did not allege how many medical providers have in fact entered
agreements with Quest. Nor did plaintiffs allege how the arrangements actually
agreed upon have impacted other laboratories in the plan/outpatient market. These
omissions are significant because, without such allegations, there are no facts that
4 allow the court to evaluate the effect of the exclusive dealing arrangements in the
plan/outpatient market.
Exclusive dealing/collusion with health plans: The district court properly
held that plaintiffs’ allegations related to exclusive dealing with health
plans—referred to as collusion by the district court—also failed to plausibly
demonstrate foreclosure of a substantial share of the market. As the district court
noted, plaintiffs alleged only that three laboratories were excluded from the Aetna
and Blue Shield networks as a result of agreements with Quest. Plaintiffs did not
allege the market shares of any of these laboratories, what portion of Aetna and
Blue Shield testing is performed out of network, how many laboratories remain in
the Aetna and Blue Shield networks, or even what portion of Aetna and Blue
Shield diagnostic testing is actually performed by Quest. Plaintiffs ultimately did
not allege a sufficient factual basis from which it is possible to infer that any
particular portion of the plan/outpatient market was foreclosed as a result of
exclusive dealing between health plans and Quest.
Acquisition of competitors: In some instances, the merging of competitors
to form a monopoly may violate § 2 of the Sherman Act. See Standard Oil Co. of
New Jersey v. United States, 221 U.S. 1, 77 (1911) (holding Standard Oil’s
acquisitions resulted in “absolute control” over refined oil products, which
5 established monopolization under § 2); Grinnell, 384 U.S. at 576 (holding a series
of three acquisitions “eliminated any possibility of an outbreak of competition” and
thereby “perfected the monopoly power to exclude competitors and fix prices.”).
To establish a § 2 violation, however, plaintiffs must still demonstrate how the
acquisitions unreasonably restricted competition. Drinkwine, 780 F.2d at 739.
The district court properly concluded Quest’s acquisitions of three
competitors failed to plausibly establish a § 2 violation. Quest’s acquisition of
Unilab was not the typical merger of competitors because, as a result of the
divestiture of Quest assets to LabCorp, which the FTC required before approving
the acquisition, a new significant competitor entered the physician billing market.
Plaintiffs’ own allegations explain how the physician billing market is linked to the
plan/outpatient market. Thus, the addition of a significant competitor to the
physician billing market would entail an increase in competition in the
plan/outpatient market. Furthermore, the acquisitions of Berkeley HeartLab and
Dignity Health were both relatively insubstantial, increasing Quest’s market share
by only 6.6 percent. Plaintiffs never made allegations related to the remaining
competitors in the relevant market.
Plaintiffs’ exclusive dealing and collusion claims do not allege sufficient
facts to support the drawing of any inferences about foreclosure of competition in
6 the plan/outpatient market. Plaintiffs’ acquisition claim does not, on its own,
establish an unreasonable restriction of competition. Thus, plaintiffs’ allegations,
considered in combination, do not establish a plausible monopolization claim.2
2. The district court properly held the plaintiffs failed to plausibly establish
per se tying under § 1 of the Sherman Act. Tying occurs when a “seller conditions
the sale of one product (the tying product) on the buyer’s purchase of a second
product (the tied product).” Rick-Mik Enters., Inc. v. Equilon Enters. LLC, 532
F.3d 963, 971 (9th Cir. 2008) (internal quotation marks omitted). “The essential
characteristic of an invalid tying arrangement lies in the seller’s exploitation of its
control over the tying product to force the buyer into the purchase of a tied product
that the buyer either did not want at all, or might have preferred to purchase
elsewhere on different terms.” Eastman Kodak Co. v. Image Tech. Servs., Inc., 504
U.S. 451, 464 n.9 (1992) (internal quotation marks and alterations omitted).
A plaintiff must prove three elements to establish per se tying under § 1 of
the Sherman Act: “(1) that there exist two distinct products or services in different
markets whose sales are tied together; (2) that the seller possesses appreciable
2 Plaintiffs also allege violations of the California Unfair Competition Law and the California Cartwright Act. The California Cartwright Act mirrors the Sherman Act and the California Unfair Competition Law claim was derivative of the monopolization claim. Therefore, we affirm the district court’s dismissal of these claims as well. 7 economic power in the tying product market sufficient to coerce acceptance of the
tied product; and (3) that the tying arrangement affects a ‘not insubstantial volume
of commerce’ in the tied product market.” Paladin Assocs., Inc. v. Montana Power
Co., 328 F.3d 1145, 1159 (9th Cir. 2003) (citing Kodak, 504 U.S. at 461-62). In
this instance, plaintiffs failed to adequately plead coercion. Although plaintiffs
alleged medical providers’ “only viable economic option” was to accept the
alleged Quest tying, plaintiffs did not allege facts to make this conclusion
plausible. For example, as the district court noted, plaintiffs did not allege “the
difference in pricing between capitated testing agreements with medical providers
who do refer their fee-for-service testing to Quest, and capitated testing agreements
with medical providers who do not.” Nor did plaintiffs allege the extent to which
medical providers have actually entered into discounted capitated agreements
based on their referral of fee-for-service business.
AFFIRMED.