Appeals Court Relaxes Restrictions on Bundled Discounts

Lane County, Ore., is not exactly a Mecca of consumer choice. When it comes to health care, for instance, the county's 323,000 residents have only two hospital providers to choose from--PeaceHealth and Cascade Health Solutions. And for acute care, Lane County has only one provider--PeaceHealth.

When PeaceHealth began offering insurance companies substantial discounts on acute care services if they made the hospital operator its preferred carrier for basic and secondary hospital services, Cascade wasn't happy. It sued, alleging PeaceHealth's conduct excluded Cascade from the market for basic and secondary care in violation of the antitrust laws. A federal District Court jury agreed, awarding Cascade $16.2 million in damages.

As the case made its way to the 9th Circuit Court of Appeals, it piqued the interest of antitrust practitioners nationwide as an important guidepost for how courts will evaluate bundled discounts--price reductions for customers that purchase more than one product or service from a company--under the antitrust laws.

The 9th Circuit's September decision in Cascade Health Solutions v. PeaceHealth didn't disappoint. The court vacated the judgment, ruling that the District Court had applied the wrong standard for evaluating whether the bundled discount was anticompetitive.

In the process it offered much-needed guidance on an important and evolving area of law. "Bundling is a large part of how companies price their products--every type of company from McDonald's to telecommunications and cable providers uses it," says Alicia Batts, a partner in the antitrust practice at Proskauer Rose in Washington, D.C. "But businesses need clear guidance on how these discounts will be evaluated under the antitrust laws."

Clearer Standard
The District Court had instructed the jury that it could find PeaceHealth liable for antitrust violations if the "bundled price discounts ... substantially foreclose portions of the market to a competitor who does not provide an equally diverse group of services and therefore cannot make a comparable offer."

In essence PeaceHealth was liable under that standard because Cascade didn't offer acute care services, and thus couldn't compete with the package of discounts PeaceHealth offered on the three levels of hospital care.

The District Court based that instruction on the 3rd Circuit's 2003 decision in LePage's Inc. v. 3M, which at the time was the only federal appellate court ruling on the issue of bundled discount. The 9th Circuit expressed concern that the 3rd Circuit standard was too restrictive and might actually foreclose companies from engaging in pro-competitive conduct that benefits consumers.

"We should not be too quick to condemn price-reducing bundled discounts as anticompetitive, lest we end up with a rule that discourages price competition," Judge Ronald Gould wrote for the majority.

The 9th Circuit thus added an additional step to the analysis, holding that a bundled discount only violates the antitrust laws if it results in the firm selling its goods or services at a price below the costs it incurred to produce the products.

This is the approach the Antitrust Modernization Commission endorsed in its recent recommendations for improving U.S. antitrust law. "It is a more objective test than the 3rd Circuit provided," says Robert Hayes, chair of Cozen O'Connor's antitrust practice group. "It makes the defendants' prices the benchmark, which enables a company to evaluate a proposed discount with a greater degree of certainty."

Circuit Conflict
While the 9th Circuit standard offers some clarity, companies still have to contend with potential liability under the 3rd Circuit's more restrictive standard if they are sued outside the 9th Circuit. The circuit split may ultimately limit the utility of the PeaceHealth decision for companies seeking to evaluate their antitrust liabilities.

"For national companies, the difference in approach between the 3rd Circuit and the 9th Circuit leads to mixed signals," says Andy Klevorn, a partner at Chicago-based Eimer Stahl Klevorn & Solberg. "As a result, lawyers will likely be forced to counsel to the higher standard, which appears to be LePage's, and which also appears to be less clear."

As a result of the conflicting standards, the Supreme Court will likely address the issue of bundled discounts in the near future, although most practitioners predict it will give more circuit courts an opportunity to weigh in on the issue before it does so. The good news is that when the Supreme Court does consider the issue, there's reason to believe it will adopt a more business-friendly standard than the 3rd Circuit.

"[The 3rd Circuit's] standard is open to the criticism that it provides little guidance to the trier of fact," Klevorn points out. "How is it that price discounting, which is usually considered a good thing for consumers, led to anticompetitive effects? When the en banc 3rd Circuit adopted its LePage's opinion, Judge (now Justice) Alito dissented in part on such grounds."

Adele Nicholas

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