May 25, 1994 UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT
No. 93-1988
TONY LEE, ET AL.,
Plaintiffs, Appellants,
v.
THE LIFE INSURANCE COMPANY OF NORTH AMERICA,
Defendants, Appellees.
ERRATA SHEET
The opinion of this Court issued on May 4, 1994, is amended as follows:
Cover sheet:
Jay S. Goodman for The University of Rhode Island, et al.
William P. Devereaux and McGovern, Noel & Benik, Inc. on
brief for The Life Insurance Company of North America.
Phillip A. Proger, with whom Gregory A. Castanias and Jones,
Day, Reavis & Pogue were on brief for The Life Insurance
Company of North America, and for all appellees on antitrust issues.
UNITED STATES COURT OF APPEALS FOR THE FIRST CIRCUIT
THE LIFE INSURANCE COMPANY OF NORTH AMERICA, ET AL.,
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Raymond J. Pettine, Senior U.S. District Judge]
Before
Torruella, Circuit Judge,
Aldrich, Senior Circuit Judge,
and Cyr, Circuit Judge.
Company of North America, and for all appellees on antitrust issues.
May 4, 1994
CYR, Circuit Judge. Three University of Rhode Island CYR, Circuit Judge.
("URI") students appeal from a district court order dismissing
their federal antitrust, equal protection, and due process claims
against URI, its Board of Governors, three URI officials, and
URI's student-health insurer, Life Insurance Company of North
America ("LINA"). Finding no error, we affirm the district court
judgment.
I
BACKGROUND
As a precondition to reregistering each semester, URI
requires all full-time undergraduate students to pay a fixed fee
for the right to use URI's on-campus, walk-in medical clinic,
University Health Services ("UHS").1 All students who pay the
UHS clinic fee must also carry supplemental health insurance
coverage for certain medical services, such as x-rays, lab tests
and gynecological tests, that are available through UHS. Two
supplemental insurance options are available. First, the student
may obtain supplemental insurance through LINA, a private health
care underwriter which URI sponsors as its "default" insurer.
LINA purportedly "dovetails" its supplemental coverage so that
the insured student pays an annual premium that minimizes dupli-
cative coverage; that is, it lessens the risk that the LINA
premium and the UHS clinic fee will reflect redundant coverage
1Graduate students are not required to pay the UHS clinic fee, provided they have health insurance coverage that meets URI's requirements.
for the same medical procedures.2 As a second option, students
may secure "comparable [supplemental] coverage" from an off-
campus health care insurer of their choice, except that URI does
not consider either Rhode Island Blue Cross or Rhode Island-based
HMOs "comparable coverage." Students who do not opt out of the
LINA "default" coverage by a specified deadline are automatically
billed for the annual LINA premium, and cannot reregister for the
following semester until the LINA premium has been paid. The
automatic "default" scheme notwithstanding, only about 40% of the
students who pay the UHS clinic fee insure through LINA.
Appellants initiated this class action in federal
district court against URI and LINA in January 1992. The amended
complaint alleges that the practice of conditioning continued
matriculation at URI on payment of the UHS clinic fee and/or the
LINA supplemental insurance premium violates the Sherman Anti-
trust Act, 15 U.S.C. 1 (1993), as well as the equal protection
and due process guarantees under the United States Constitution.
Following minimal discovery, URI and LINA moved to dismiss
pursuant to Fed. R. Civ. P. 12(b)(6),3 and the district court
dismissed all claims. Lee v. Life Ins. Co. of N.A., 829 F. Supp.
2LINA coverage requires the student to present for treatment at UHS in the first instance, pending possible referral to an
outside health care provider.
3Appellants' motion for class certification was stayed pending disposition of appellees' motions to dismiss.
529 (D.R.I. 1993).4
II
DISCUSSION
A. The Antitrust "Tying" Claim
Appellants challenge the dismissal of their claim that
the URI health care-insurance scheme is an impermissible "tying"
arrangement in violation of the Sherman Act, 15 U.S.C. 1 (1993)
("Every contract . . . in restraint of trade or commerce . . . is
hereby declared to be illegal."). See Eastman Kodak Co. v. Image
Technical Servs., Inc., 112 S.Ct. 2072 (1992) ("Kodak"). "A
tying arrangement is 'an agreement by a party to sell one product
but only on the condition that the buyer also purchases a differ-
ent (or tied) product, or at least agrees that he will not
purchase that product from any other supplier.'" Id. at 2079
(quoting Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6
(1958)). Generally speaking, an impermissible "tie-in" occurs if
a seller (viz., URI) enjoys either a monopoly or "appreciable
economic power" ("AEP") in the "tying" product (or service)
market, and uses its considerable market leverage to "coerce" a
buyer already intent on purchasing the tying product from the
seller into buying a second, "tied" product that the buyer
would not have bought based solely on the quality or price of the
tied product itself. See Fortner Enters., Inc. v. United States
4At the same time, the district court declined to exercise jurisdiction over several pendent state-law claims, see 28 U.S.C.
1367(c)(3) (1993). Cf. infra note 11.
Steel Corp., 394 U.S. 495, 503 (1969); see generally Grappone,
Inc. v. Subaru of New England, Inc., 858 F.2d 792, 794-96 (1st
Cir. 1988) (describing procompetitive policy interests animating
per se tying analysis).5 Since many product "ties" may not
prove anti-competitive, notwithstanding their somewhat misleading
epithet, "per se" tie-ins may require a "fairly subtle antitrust
analysis" of "market power," a fact-intensive inquiry aimed at
winnowing out only those ties most likely to threaten anti-
competitive harm. Id. at 795.
Appellants claim three "product" tie-ins: (1) between
a university education (URI) and health insurance coverage
(LINA); (2) between health care services (UHS) and health insur-
ance coverage (LINA); and (3) between a university education
(URI) and health care services (UHS).6 We agree with the
5The tie-in must also affect a substantial volume of com- merce in the tied market, see Kodak, 112 S. Ct. at 2079, a factor
not at issue in this case. Further, we assume, without deciding,
that URI is a participant in the insurance "market," for anti- trust purposes, simply because it receives a one-time $10 processing fee for each LINA policy sold to a URI student.
6Notwithstanding certain misgivings, we further assume, without deciding, that the amended complaint adequately pleads
two other essential "tying" claim elements. These assumptions merely facilitate clearer focus on the core deficiency in appel- lants' antitrust claim. First, we presume that the products at issue are distinct, i.e., that each is distinguishable by consum-
ers in the relevant market, and that there would be sufficient consumer demand for each individual product, and not merely as
part of an integrated product "package." See Jefferson Parish
Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 21-22 (1984). But see id.
at 39 (O'Connor, J., concurring) (noting obvious policy limits of "two product" rule, since almost every product could be broken down into smaller constituent parts that might be sold separate- ly); Lee, 829 F. Supp. at 537 ("I do not believe plaintiffs have
adequately alleged that this arrangement involved two separate products."). Second, we accept, arguendo, the questionable
district court however, that appellants failed to allege any
"tie-in" claim upon which relief could be granted. In particu-
lar, appellants failed to advance a colorable claim as to an
indispensable element: that URI had AEP in the relevant tying
markets (university education and health care services). AEP or
"market power" is the demonstrated ability of a seller "to force
a purchaser to do something that he would not do in a competitive
market." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2,
14 (1984); see also Grappone, 858 F.2d at 794. AEP may be
demonstrated, for example, if the seller holds a monopoly in the
tying product (e.g., a patented product), controls a very large
share of sales in the tying product market, see id. at 796 (AEP
"means significant market power" over an "'appreciable' number of
buyers") (emphasis in original) (citation omitted), or produces a
"unique" tying product, and therefore faces no significant
competition from functionally similar products or services, see
Jefferson Parish, 466 U.S. at 37-38 n.7 (O'Connor, J., concur-
ring) (market must be defined to include "all reasonable substi-
tutes for the product"); Grappone, 858 F.2d at 796 (market
encompasses all "readily available substitutes").
Appellants can assert no colorable claim that URI holds
AEP either in the "tying" market for a university education or in
the "tying" market for health care services. URI competes for
new undergraduate and graduate students on a regional and nation-
contention that URI students are "coerced" financially into buying LINA coverage because only LINA insurance "dovetails" with UHS clinic fee services.
al level with dozens of universities and colleges.7 Although
URI obviously is a "unique" institution in a colloquial sense,
appellants cannot claim that other institutions of higher educa-
tion do not or cannot provide "functionally similar" educational
offerings to potential URI applicants. Cf. id. at 798 (brand
name alone does not establish product "uniqueness" necessary for
AEP). And, of course, absent AEP in the university-education
market it is a virtual given that URI cannot enjoy AEP in the
student health care business.
Appellants attempt to circumvent URI's evident lack of
AEP in the two relevant tying markets by contriving a so-called
Kodak "lock-in." Kodak involved distinct products: Kodak
copiers (the "lock-in" product), Kodak copier replacement parts
(the tying product), and Kodak copier servicing and repair (the
tied product). In 1985, Kodak began to confine sales of Kodak
copier parts to Kodak copier owners who contracted to have their
copiers serviced by Kodak, rather than by Kodak's servicing
competitors ("ISOs"). Kodak, 112 S.Ct. at 2077-78. Significant-
ly, only Kodak parts would fit Kodak copiers. Id. at 2077. The
ISOs initiated an antitrust action against Kodak under section 1
of the Sherman Act. After truncated discovery, the district
court granted summary judgment for Kodak. Id. at 2078. The
Ninth Circuit reversed, Kodak, 903 F.2d 612, 617 (9th Cir. 1990),
and the Supreme Court affirmed, Kodak, 112 S. Ct. at 2092.
7As of 1991, for example, Rhode Island residents comprised only 56% of the URI student body.
By reason of Kodak's very small market share in copier
sales, the parties had stipulated that Kodak had no AEP in the
copier market (assuming copier sales to be the relevant "tying"
market), and hence, no unlawful "tie" could exist between Kodak
copiers and Kodak parts-servicing. Id. at 2081 n.10. The
Supreme Court accordingly focused on whether an unlawful tie-in
nonetheless existed between Kodak parts and Kodak servicing. Id.
Kodak argued for the view that, either presumptively or as a
matter of law, vigorous competition in the copier market would
prevent Kodak from raising its parts and servicing contract
prices above competitive levels, because any such price increases
in these "derivative aftermarkets" would become known to copier-
equipment consumers, and eventually cause Kodak to lose ground to
its competitors in copier sales. Id. at 2081-82, 2083.
The Court rejected Kodak's per se "cross-elasticity of
demand" theory, identifying two different fact patterns which, if
borne out by the evidence, might support a reasonable inference
that parts and servicing contract price increases would not
necessarily cause Kodak to lose copier sales. Under the first
scenario, the evidence might demonstrate that a substantial
number of consumers, at the time of their original copier pur-
chases, would not enjoy cost-efficient8 access to the difficult-
to-acquire pricing information needed to evaluate the total
8The Court noted that even assuming readily available price information, consumers rationally might decide not to investigate life-cycle costs if investigation would prove more costly than the potential savings. Id. at 2086.
"life-cycle" cost of the entire Kodak "package" namely, the
price of the copier, likely replacement parts, and product-
lifetime servicing. Id. at 2085-87. Under the second scenario,
the Court postulated that, in a market for complex durable goods
like copiers, current Kodak-copier owners might tolerate even
uncompetitive price increases in Kodak parts and servicing as
long as the increases did not exceed the costs of abandoning
their original investment in the Kodak copier and switching, for
example, to a Canon or Xerox copier. Id. at 2087-88. Since
Kodak's servicing competitors had produced some evidence of "very
high" switching costs for Kodak copier owners, the Court opined
that such "lock-ins" attendant as they are to the original
copier purchase could conceivably enable the plaintiff ISOs to
establish Kodak's AEP in the derivative "tying" aftermarket for
Kodak parts. The Court accordingly concluded that the undeter-
mined "information costs" and "switching costs" represented
material issues of fact, and if in genuine dispute, would pre-
clude summary judgment, even though Kodak lacked AEP in the
"lock-in" product market for copiers. Id. at 2086-87.
Appellants attempt to shoehorn their allegations into
this Kodak "derivative aftermarket" mold, by proposing the
following comparative model: first-semester matriculation at URI
serves as the "lock-in" product, as did the Kodak copier; subse-
quent semesters at URI serve as the tying product, as did Kodak
replacement parts; and health clinic services and health insur-
ance coverage represent the tied products. Of course, URI, like
Kodak, might contend, on summary judgment or at trial, that its
lack of AEP in the locked-in product market ("sales" of first-
semester university education) creates a "cross-elasticity of
demand," which would prevent health clinic fees and LINA supple-
mental insurance premiums from being increased to uncompetitive
levels. Nevertheless, because Kodak was a summary judgment case,
rather than a Rule 12(b)(6) case, appellants argue that they did
enough to withstand URI's motion to dismiss simply by alleging
the existence of unspecified "information" and "switching" costs,
which must be credited for Rule 12(b)(6) purposes. See Rumford
Pharmacy, Inc. v. City of East Providence, 970 F.2d 996, 997 (1st
Cir. 1992) (review of Rule 12(b)(6) dismissal is de novo, credit-
ing all allegations in the complaint and drawing all reasonable
inferences favorable to plaintiff).
Appellants challenge the district court ruling that
their "information cost" allegations were insufficient to defeat
the motion to dismiss. First, appellants argue that URI cannot
posit a "cross-elasticity of demand" in the present context
because the prices charged for health clinic services and insur-
ance premiums are too insignificant in relation to tuition and
other university-education costs to be considered a meaningful
factor in determining whether potential applicants for admission
will attend URI or some other university. Alternatively, appel-
lants argue that URI would bear the burden of proof on this issue
at trial, and that on appeal it has not pointed to supportive
evidence of consumer "sophistication."
Appellants exaggerate the role that summary-judgment
burden shifting played in the Kodak analysis. Kodak simply
pointed out that summary judgment was not yet in order on Kodak's
"cross-elasticity of demand" theory (1) in light of the plaintiff
ISOs' proffer on "information costs" i.e., readily inferable
expenses associated with accumulating technical information
relating to the costs of equipment, parts, and servicing over the
lifetime of a "complex durable goods" item, and (2) in the
absence of any conclusive evidence from Kodak that a substantial
number of purchasers actually make accurate prepurchase assess-
ments of the life-cycle "package" price of their Kodak copiers.
Thus, the Court neither discussed any reallocation of burdens of
proof at trial, nor in any way intimated a shift in the eviden-
tiary burden of proof on the factual issues of "information
costs" and "lock-in." See, e.g., Jefferson Parish, 466 U.S. at
13-14 (assuming burden of proof rests with plaintiff to show AEP
in tying-product market); Town Sound and Custom Tops, Inc. v.
Chrysler Motors Corp., 959 F.2d 468, 479 n.12 (3d Cir.) (plain-
tiff bears burden of proof on "tying market" definition), cert
denied, 113 S. Ct. 196 (1992). In order to withstand URI's
motion to dismiss for failure to state a claim, therefore, it was
appellants' burden (absent any colorable claim that URI had AEP
in the locked-in product markets for university education and
student health services) to allege "information costs" which
would prevent a substantial number of URI students from accurate-
ly assessing the total costs of a URI education, including health
clinic fees and insurance premiums, in determining whether to
matriculate at URI.
Second, appellants argue that it is impossible to
allege "information costs" because potential URI applicants
cannot know or predict their future URI health clinic fees and
LINA insurance premiums with any precision, since URI and LINA
reserve the right to increase these charges each year. But
appellants mistake the focus of the Court's concerns about the
"information costs" in Kodak.
In Kodak, the information required by the customer
pertained to the life-cycle pricing of a Kodak copier "package,"
information so patently "difficult and costly" to come by that it
spontaneously gave rise to a reasonable inference that unsoph-
isticated consumers would not have the information needed to
evaluate their options at the time they made their decision to
purchase a Kodak copier. Kodak, 112 S. Ct. at 2085.9 By con-
9The Kodak Court elaborated on the complexity of the "infor-
mation" needed to make an informed investment:
In order to arrive at an accurate price, a consumer must acquire a substantial amount of raw data and undertake sophisticated analysis. The necessary infor- mation would include data on price, quality, and avail- ability of products needed to operate, upgrade, or enhance the initial equipment, as well as service and repair costs, including estimates of breakdown frequen- cy, nature of repairs, price of service and parts, length of "down-time" and losses incurred from down- time. Much of this information is difficult some of it is impossible to acquire at the time of pur- chase. During the life of a product, companies may change the service and parts prices, and develop prod- ucts with more advanced features, a decreased need for repair, or new warranties. In addition, the informa-
trast, before signing up for their first semester at URI, stu-
dents are informed that their continued matriculation at URI is
conditioned, inter alia, on their "purchase" of health clinic
services at a stated annual fee, subject to historically predict-
able annual increases, and on their purchase of supplemental
insurance coverage.10 See Philip E. Areeda & Herbert Hoven-
kamp, Antitrust Law 1709.2, at 1174 (Supp. 1993) (Kodak does
not focus on potential exploitation of the "irrational or fool-
ish" purchaser, but the purchaser who makes the rational decision
that comparative-shopping costs would outweigh any savings from a
fully informed purchase; "the [Kodak] context was confined to
hard-to-obtain information") (emphasis added); cf. id. at 1174
("[R]elevant information need not be so comprehensive as a
binding future price schedule . . . ."); see also supra note 8.
tion is likely to be customer specific; lifecycle costs will vary from customer to customer with the type of equipment, degrees of equipment use, and costs of down- time.
Kodak, 112 S.Ct. at 2085-86.
10Considering the recent hyperinflationary trends in the health care industry as a whole, UHS clinic fees have increased at fairly predictable increments since 1987: 1987-88 ($179); 1988-89 ($188); 1989-90 ($200.50); 1990-91 ($227); 1991-92 ($248); 1992-93 ($312). LINA premiums have increased comparably over the same period, from $158 in 1987-88 to $369 in 1992-93. The record contains no evidence that prospective URI applicants would have great difficulty gaining access to this information from any number of reliable sources (e.g., URI application
materials, URI admissions officials, past or current URI stu- dents, college entrance source books). Nor do appellants suggest that URI had any incentive to conceal the scope of past price increases. On the billing invoices it mails to students, URI routinely individualizes its charges for registration, tuition, UHS fees, LINA premiums, and taxes.
Appellants have made no allegations sufficient to give rise to a
reasonable inference that the health-care and insurance-cost
information needed to make an informed decision whether to accept
the preconditions to continued matriculation at URI is either
difficult or expensive to obtain or correlate.
The district court further ruled that appellants failed
to state an actionable claim that they were "locked in"; that is,
they failed to plead actual costs associated with switching from
URI after their first semester. Although appellants now assert
that they can amend their complaint to allege such costs, we
conclude that further amendment to allege specific "switching
costs" would be futile. See University of Rhode Island v. A.W.
Chesterton Co., 2 F.3d 1200, 1219 n. 20 (1993).
First, there is an important distinction between Kodak
and the present case. Kodak was a "derivative aftermarket" case
involving "complex durable goods." Unlike the copier parts in
Kodak, subsequent URI semesters are not "derivative aftermarket"
components upon which the buyer's initial investment absolutely
depends. As the Supreme Court noted, Kodak copiers are "expen-
sive when new," incompatible with replacement parts used in other
copiers, and retain "little resale value" presumably because
complex durable goods depreciate so rapidly. Kodak, 112 S.Ct. at
2077. The "lock-in" would occur provided it could be shown that
Kodak copier owners must either purchase replacement parts from
Kodak or abandon their initial, unamortized investment in their
Kodak copier. In contrast, a completed first semester at univer-
sity is discretely priced students do not pay for their entire
four-year stint in advance and the "college credit" value of
the first semester is neither nontransferable nor without econom-
ic or educational value in the future even if the student does
not remain at URI. Thus, appellants' attempt to extend Kodak,
beyond the "derivative aftermarket" context to the educational
context, is problematic at best.
Second, the timing of the "lock-in" at issue in Kodak
was central to the Supreme Court's decision. Unsophisticated
Kodak copier owners were destined for "lock-in" from the moment
they purchased their Kodak copiers. At the time current Kodak
copier owners bought their copiers, Kodak had not yet conditioned
its sale of replacement parts on the purchase of Kodak servicing,
and its later-announced policy to that effect was made applicable
both to prospective and existing Kodak copier owners. Had
previous customers known, at the time they bought their Kodak
copiers, that Kodak would implement its restrictive parts-servic-
ing policy, Kodak's "market power," i.e., its leverage to induce
customers to purchase Kodak servicing, could only have been as
significant as its AEP in the copier market, which was stipulated
to be inconsequential or nonexistent. See Kodak, 112 S.Ct. at
2095-96 (Scalia, J., dissenting) (noting that even the Kodak
majority probably would have found no "lock-in" had Kodak an-
nounced its parts-service "tie" at the time of its market entry);
see generally Philip E. Areeda, supra, 1709.2, at 1164-68
(same). In the instant case, however, students know before their
matriculation that they are buying a URI "package" that includes
at least two "tied" products a URI education and on-campus
health care services and insurance. As appellants failed to
assert a colorable claim that URI had AEP in the primary (univer-
sity education) market, no Kodak-type "lock-in" could have
occurred in subsequent semesters, and even the most detailed
allegations of "switching costs" would be wholly unavailing.
B. The "Due Process" and "Equal Protection" Claims
Appellants attempt to raise two vaguely articulated
constitutional challenges to the URI health services-insurance
scheme. First, they argue that URI's conditioning of continued
matriculation on the payment of a health clinic fee violates
their constitutional right to procedural due process, by depriv-
ing them of a property interest (fees and premiums), and a
liberty-privacy interest (the alleged right to retain a physician
of one's choice). Unsurprisingly, appellants cite no case
authority for either contention, nor have we found any.11
Appellants purchased a "product"-"service" from URI with full
knowledge from the outset that health care fees and supplemental
11The district court interpreted appellants' complaint as alleging claims based on substantive due process and the right to contract. Appellants concede that their "cumbersome briefing" contributed to this understanding, yet did not move for recon- sideration. See Vanhaaren v. State Farm Mut. Auto. Ins. Co., 989
F.2d 1, 4-5 (1st Cir. 1993) (issues raised for the first time on appeal are deemed waived). Unfortunately, the procedural due process claim asserted on appeal is no less unwieldy. Inexplicably, appellants continue to urge that Rhode Island law disempowered URI from entering the "business" of health care and insurance, and that the LINA policies were merely a fraud or sham affording students no actual coverage. Although these allegations might be material to appellants' ultra vires claim
under state law, which the district court dismissed without prejudice, cf. Boston Envtl. Sanitation Inspectors Ass'n v. City
of Boston, 794 F.2d 12, 13 (1st Cir. 1986) (noting that state
actor's "[m]ere violation of state statutory requirements does not offend federal constitutional due process"), or conceivably may have served as a basis for some sort of consumer protection claim, appellants do not explain how URI's mere refusal to continue selling them a service (i.e., education) would
constitute an actionable "deprivation" of their "property rights" for federal due process purposes. Cf. id. (noting that "an
alleged breach of contract [by a state actor] does not amount to a deprivation of property without due process"); Jimenez v.
Almodovar, 650 F.2d 363, 370 (1st Cir. 1981) (same).
insurance premiums were a required component of the cost. We
perceive no procedural infirmity.
Second, appellants argue that the URI "package" in-
fringes their constitutional right to equal protection of the
laws because male and female students matriculating at URI must
pay the same health care fees, even though male students will not
utilize the UHS gynecological services. The district court aptly
found that appellants failed to allege that URI imposed this
unitary scheme with any discriminatory animus aimed at male
students. See Nieves v. University of Puerto Rico, 7 F.3d 270,
276 (1993) (plaintiff contesting classification-neutral statutes
on equal protection grounds must proffer not only evidence of
disparate effect, but evidence that enactment resulted "because
of," rather than "in spite of," classification) (citing Personnel
Adm'r of Massachusetts v. Feeney, 442 U.S. 256, 278-80 (1979));
Lipsett v. University of Puerto Rico, 864 F.2d 881, 896 (1st Cir.
1988). Appellants advance no curative allegations for relieving
this infirmity.
Affirmed.