Bundled discounts: the Ninth Circuit and the Third Circuit are on separate LePage's: Cascade Health Solutions v. PeaceHealth.

• Author: Markus, Blake I.

1. INTRODUCTION

   Most courts and commentators agree that the ultimate goal of antitrust is efficiency. Accordingly, an antitrust aim is to guarantee competitive markets, which both increases output and lowers prices to the benefit of consumers. Bundled discounts, packages of goods put together by a seller that are sold at a lower price than if each good were purchased separately, may provide a means of enhancing competition. Such bundles are prevalent in nearly every market including fast food value meals, season tickets to sporting events, and buy one, get one half-price schemes.

   Sellers provide bundled discounts for a variety of reasons including the reduction of transaction costs, engendering customer loyalty, or sometimes in response to pressure from large, diversified buyers. (2) These discounts often result in increased output and decreased prices, which are consumer welfare increasing outcomes. However, it is possible for a seller who has multiple products to use bundled discounts to exclude an efficient competitor who only sells one product. (3) This exclusionary conduct is exactly what antitrust laws are meant to discourage. However, because bundled discounts are so pervasive and are often procompetitive, any liability rules governing their legality should be narrowly drawn to avoid chilling such a desirable practice. (4)

   In 2003, the Third Circuit decided a case, LePage's, Inc. v. 3M, involving a plaintiff that claimed the defendant's bundled discount was exclusionary. (5) The Third Circuit held the bundling practices of office supply manufacturer 3M to be in violation of antitrust laws. (6) However, in doing so, the court failed to set an effective standard to evaluate the anticompetitive nature of bundled discounts. In a recent decision, Cascade Health Solutions v. PeaceHealth, the Ninth Circuit strayed from the approach set forth in the LePage's decision and set a cost-based standard to be used in the analysis of bundled discounts. (7) While the standard set in Peacehealth is a positive step in analyzing bundled discounts, the Ninth Circuit may not have reached far enough. Because bundled discounting is typically a procompetitive practice, the court should fashion as narrow a rule as possible. It is possible to theorize a situation where, under the Ninth Circuit's standard, a competitor could bring a successful lawsuit against a bundled discounter even though the competitor could offer an equally competitive bundle if it collaborated with another firm. Therefore, the standard set forth by the Ninth Circuit falls short by ignoring the possibility of rival competitors collaborating to compete with a bundled discounter.

2. FACTS AND HOLDING

   The primary actors in Cascade Health Solutions v. PeaceHealth are McKenzie-Willamette Hospital (8) (McKenzie) and PeaceHealth. McKenzie and PeaceHealth are the sole providers of hospital care in Lane County, Oregon. (9) McKenzie operates one hospital in Lane County with 114 beds, while PeaceHealth operates three facilities with a combined 464 beds. (10) McKenzie and PeaceHealth both offer primary and secondary care, (11) but PeaceHealth offers tertiary care as well. (12) McKenzie brought a claim of attempted monopolization against PeaceHealth contending the healthcare provider was predatorily pricing them out of the market by offering discounts to insurers if they used PeaceHealth as their exclusive provider of hospital care. (13)

   In 2001, PeaceHealth was the only preferred provider of hospital care for Regence BlueCross BlueShield of Oregon (Regence). (14) Later that year, McKenzie requested to participate in the Regence preferred provider plan (PPP) and offered Regence a ten percent discount off its standard rates. (15) As Regence's contract with PeaceHealth approached its annual renewal, Regence solicited two proposals from PeaceHealth (one with PeaceHealth remaining as the exclusive provider and another including McKenzie). (16) PeaceHealth offered a reimbursement rate of 90% if McKenzie was included in the PPP and 85% if they remained the exclusive provider. (17) Regence then declined McKenzie's offer to be included in the PPP. (18)

   Also in 2001, McKenzie requested admission into the preferred plan offered by Providence Health Plan (Providence) and was accepted. (19) After McKenzie's admission to the plan, PeaceHealth increased its reimbursement rate with Providence from 90% to 93% for the following year. (20)

   Contending that PeaceHealth was tying its primary and secondary services with its tertiary services in order to obtain market power and exclude competitors, McKenzie filed a claim in the Ninth Circuit district court. (21) The evidence produced at trial showed that insurers who used PeaceHealth exclusively for primary, secondary, and tertiary services paid lower reimbursement rates than insurers who purchased primary and secondary services from McKenzie and only tertiary services from PeaceHealth. (22) This bundling of services in order to offer a discount was the main issue in the attempted monopolization claim.

   The district court applied a jury instruction similar to the Third Circuit's decision (23) in LePage's Inc. v. 3M.24 The jury was instructed that McKenzie was contending PeaceHealth bundled price discounts for its primary, secondary, and tertiary services, and "[b]undled price discounts may be anticompetitive if they are offered by a monopolist and substantially foreclose portions of the market to a competitor who does not provide an equally diverse group of services and who, therefore, cannot make a comparable offer." (25) The jury returned a verdict in favor of McKenzie. (26)

   On appeal, however, the Ninth Circuit decided to part ways with the Third Circuit's decision in LePage's by adopting a cost-based standard to be applied in bundled discounting cases known as the "discount attribution" standard, instead of a formula that allows a firm to prove injury causally linked to an illegal presence in the market. (27) Under this standard, the entire amount by which the bundle is discounted is allocated to each of the competitive product or products. (28) If the price of the competitive product or products is below the defendant's incremental cost to produce them, the trier of fact may find the bundle exclusionary for purposes of section 2 of the Sherman Act. (29) This allows for a trier of fact to determine if an equally or more efficient producer of a similar good can be excluded from the market by a competitor who makes a more diverse line of products. (30) Furthermore, in determining the incremental cost in the cost-based standard, the Ninth Circuit decided the use of average variable cost was an appropriate measure. (31) Therefore, the Ninth Circuit held that when a claim for attempted monopolization is brought with regard to bundled discounting practices, the court will apply a discount attribution standard to determine anticompetitive activity and utilize average variable cost in determining the incremental cost at issue. (32)

3. LEGAL BACKGROUND

   The starting point for any analysis of bundled discounts generally is Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., in which the Supreme Court set forth general standards for antitrust liability based on price cuts. (33) In that case, a cigarette manufacturer brought an antitrust action against its competitor for offering volume rebates that it claimed drove the price of its cigarettes below its cost. (34) Liggett, (35) a manufacturer of generic cigarettes, offered a variety of different products sold at a deep discount and with little or no advertising. (36) These generics accounted for approximately 4% of the cigarette industry's total sales. (37) One of Liggett's competitors, Brown & Williamson, saw a decline in its cigarette sales as Liggett's generics became more popular. (38) In response to declining sales, Brown & Williamson decided to enter the generics market with similar products. (39) Brown & Williamson's products were so similar to Liggett's that retailers had little incentive to carry both brands. (40) Therefore, although the cigarettes were priced similarly at the retail level, Brown & Williamson offered volume rebates to many wholesalers in order to carry its products over Liggett's. (41) After a short price war, Liggett claimed its competitor was selling its generics below its costs in an attempt to pressure Liggett to raise...