Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: Lab test monopoly claims rejected for final time, (Apr 27, 2016)

By Greg Hammond, J.D.

Consumers have failed for a third time to allege sufficient facts to establish that they were injured by a provider of clinical laboratory services for allegedly exploiting its dominant market share to foreclose competition and charge supra-competitive prices on the sale of routine diagnostic tests, the federal district court in San Francisco has determined. The provider’s motion to dismiss was therefore granted with prejudice (Eastman v. Quest Diagnostics Inc., April 26, 2016, Orrick, W.).

Quest Diagnostics Inc. is the largest provider of clinical laboratory services to hospitals, clinics, physicians, and patients in the United States. In January 2015, consumers who paid Quest for routine diagnostic testing services filed a complaint, alleging that Quest used its dominant market power to charge supra-competitive prices on the sales of routine diagnostic tests that are billed directly to health plans and out-of-network patients in violation of Section 2 of the Sherman Act, California’s Cartwright Act, and California’s Unfair Competition Law (UCL).

The complaint was dismissed in June 2015, and the amended complaint was dismissed in November 2015. Quest sought dismissal of the second amended complaint.

In support of their monopolization claim, the consumers identified four exclusionary practices: (1) a collusion theory, based on Quest’s alleged dealing arrangements with Aetna and Blue Shield; (2) an acquisition theory concerning Quest’s acquisitions of Unilab, Berkeley HeartLab, and Dignity Health; (3) illegal tying, based on a theory that Quest sells capitated testing in the physician billing market at very low rates (often below costs) on the condition that medical providers also purchase its fee-for-service testing sold in the separate plan/outpatient market; and (4) an exclusive dealing practices theory, based on Quest excluding competition throughout the plan/outpatient market with economic arrangements with medical providers.

Monopolization, exclusive dealing theory. The exclusive dealing theory was merely a repackaging of the kickback/leveraging theory that was previously dismissed, the court determined. The motion to dismiss was granted for the same reasons identified in the first and second dismissal orders, because the consumers still failed to change their allegations concerning Quest’s monopolistic overcharging in the plan/outpatient market and failed to materially change their allegations concerning Quest’s substantial economies of scale and large cost advantages or explain why these factors indicated that Quest underprices its competitors in that market.

In addition, the consumers’ re-characterization of Quest’s economic inducements in the physician billing market as exclusive dealing arrangements highlighted another flaw in the allegations, the court found. The consumers 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. In particular, the consumers did not identify the approximate number of medical providers that entered into such arrangements with Quest, the approximate number and/or characteristics of the other laboratories operating the physician billing and plan/outpatient markets, or what competing labs have been adversely affected by the arrangements or the extent to which they were affected.

Monopolization, collusion theory. Similar to their previously-dismissed complaints, the consumers still identified only three particular competing laboratories in the relevant market that were harmed as a result of the arrangements, but failed to describe the prior market shares of the three labs. These allegations were not sufficient to plausibly establish that Quest’s exclusive dealing arrangements with Aetna and Blue Shield foreclosed a substantial share of the plan/outpatient market, the court concluded. The collusion theory allegations amounted at most to alleged harm to three particular competitors, not to competition.

Monopolization, acquisition theory. The consumers’ acquisition theory—that Quest’s acquisition of three laboratories unreasonably restricted competition—did not change materially since the first amended complaint, according to the court. In dismissing this theory, the court reasoned that the consumers could not rely on the fact of the acquisitions alone because the acquisitions did not establish the willful acquisition or maintenance of monopoly power in the relevant market.

Tying claims. The consumers also brought a separate cause of action, accusing Quest of tying fee-for-service sales sold to medical providers in the relevant market for plan/outpatient billing to its sales of separately sold capitated testing in the physician billing relevant market. The court rejected this claim, however, finding that the consumers failed to adequately allege coercion. Specifically, the consumer’s only stated basis for a finding of coercion was that medical providers’ only viable economic option was to purchase capitated testing at the discounted rates offered to those medical providers who also refer their fee-for-service testing to Quest. However, the consumers provided no facts to show how this was the case, according to the court. Merely alleging the existence of a discount on capitated testing for those medical providers who also refer their fee-for-service testing to Quest, without also stating facts indicating how this discount leaves medical providers with no rational economic choice but to commit to Quest for both capitated and fee-for-service testing, does not plausibly establish coercion, the court concluded.

The case is No. 15-cv-00415-WHO.

Attorneys: Robert Stephen Berry (Berry Law, PLLC) for Colleen Eastman. Allison Winifred Reimann (Sidley Austin LLP) for Quest Diagnostics Inc.

Companies: Quest Diagnostics Inc.

Cases: Antitrust CaliforniaNews