SMILECARE DENTAL GROUP, Plaintiff-Appellant, v. DELTA DENTAL PLAN OF CALIFORNIA, INC., Defendant-Appellee.
No. 94-56191.
United States Court of Appeals, Ninth Circuit.
Decided July 5, 1996.
88 F.3d 780
Argued and Submitted March 4, 1996.
C. Condition Precedent
Dixson argues the contract was conditioned upon his “immediate operation and control” of Diego‘s, which included the immediate ability to sell liquor. Because it was against ABC regulations for Dixson to sell liquor without a license, the condition went unfulfilled and, he contends, this justified his repudiation of the contract.
We agree with the bankruptcy court that Dixson‘s immediate ability to sell liquor was not a condition precedent to the contract. At the hearing when the bankruptcy court authorized the sale of Diego‘s to Dixson, the court informed him it was incapable of ordering a transfer of the liquor license. Dixson knew at that time the license would not be immediately available, and he would have to seek ABC approval for a transfer of the license or obtain a temporary operating permit. He did not object or try to withdraw his offer. To the contrary, he sought a “somewhat open” time for the escrow closing date to enable him to make the necessary applications.
AFFIRMED.
Maxwell M. Blecher, Blecher & Collins, Los Angeles, California, for plaintiff-appellant.
Matthew L. Larrabee, Heller, Ehrman, White & McAuliffe, San Francisco, California, for defendant-appellee.
Befоre PREGERSON and T.G. NELSON, Circuit Judges, and LYNCH,* District Judge.
T.G. NELSON, Circuit Judge:
SmileCare Dental Group (“SmileCare“) and Delta Dental Plan of California, Inc. (“Delta Dental“) are dental insurers offering health care plans to employers, labor unions, and individuals. Delta Dental offers a copayment plan under which it pays participating dentists a portion of their fee and requires them in return to collect the remainder, or co-payment, from their patients at the time of service. SmileCare offers a supplemental plan which provides coverage for the co-payment. Delta Dental does not recognize co-payments made by supplemental in-
SmileCare appeals the district court‘s dismissal for failure to state a claim, alleging that Delta Dental‘s policy violates Section 2 of the Sherman Act,
FACTS AND PROCEDURAL HISTORY
Both parties are dental insurers offering a variety of health care plans to employers, labor unions and individuals. According to SmileCare, sixty percent of all California residents with dental insurance are covered by Delta Dental. Ninety-five percent of California dentists are enrolled, on a nonexclusive basis, as Delta Dental service providers. Delta Dental offers a full coverage plan, but covers most of its insureds through its co-payment plans, which are considerably cheaper. Under the co-payment plan, Delta Dental pays participating dentists a portion of their fee and requires that the dentists recover the remainder directly from the patient as a co-payment. Dentists set their own fees, subject to approval by Delta Dental, and Delta Dental determines the amount of co-payment required according to the type of treatment performed. Delta Dental‘s contract with its service providers prohibits them from waiving the co-payment.
SmileCare offers a variety of dental health plans, but its primary business is a coverage plan called “SmileCare Coverage Plus,” which is designed to supplement co-payment plans such as Delta Dental‘s. By paying participating dentists the co-payment, or an agreed-upon portion of the co-payment, Coverage Plus purports to fulfill the patient‘s payment obligations to the dentist. Coverage Plus subscribers are thereby provided with full dental coverage. According to SmileCare, Delta Dental has acted to thwart SmileCare and injure the consumer by refusing to accept co-payments from supplemental insurers. Delta Dental providers who accept SmileCare payments in lieu of patient co-payments are deemed by Delta Dental to be in breach of contract, and are allegedly penalized with reduced fee payments, threats of termination, and, in some cases, actual termination.1
SmileCare filed its first complaint against Delta Dental on September 8, 1993, alleging a violation of Section 2 of the Sherman Act. The complaint also alleged various causes of action under state law, which, as noted above, are not at issue on appeal. The district court granted Delta Dental‘s motion to dismiss with leave to amend. SmileCare‘s amended complaint, filed February 25, 1994, alleged virtually the same factual predicate as the first complaint, but also characterized Delta Dental‘s conduct as a “group boycott.” On July 25, the district court dismissed SmileCare‘s federal claims with prejudice under
ANALYSIS
Standard of review.
Dismissal pursuant to
Whether specific conduct is anti-competitive is a question of law reviewed de novo. Oahu Gas Serv., Inc. v. Pacific Resources, Inc., 838 F.2d 360, 368 (9th Cir.), cert. denied, 488 U.S. 870, 109 S.Ct. 180, 102 L.Ed.2d 149 (1988). Dismissal for failure to stаte a claim is appropriate where “the complaint states no set of facts which, if true, would constitute an antitrust offense, notwithstanding its conclusory language regarding the elimination of competition and improper purpose.” Rutman Wine Co. v. E. & J. Gallo Winery, 829 F.2d 729, 735 (9th Cir.1987) (quotations and alteration omitted).
I
Section 2 of the Sherman Act provides: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other persons, to monopolize any part of the trade or commerce ... shall be deemed guilty of a felony....”
The briefs of both parties and amici devote a great deal of space to evaluating the competitive merits of insurance co-payment plans. However, the legality of co-payment plans and waiver prohibition clauses is neither at issue nor seriously in question. In Davidowitz v. Delta Dental Plan of California, Inc., 946 F.2d 1476, 1479 (9th Cir.1991), we adopted the Seventh Circuit‘s reasoning in Kеnnedy v. Connecticut Gen. Life Ins. Co., 924 F.2d 698 (7th Cir.1991), approving an insurer‘s prohibition on providers’ waiver of patient co-payments because “waivers annul the benefits of the co-payment system.” 924 F.2d at 699. Davidowitz extended Kennedy to uphold Delta Dental‘s non-assignment policy barring beneficiaries from assigning benefits to nonparticipating providers. 946 F.2d at 1481. The non-assignment clause prevented nonparticipating dentists from asking their patients to assign the dentists their rights to receive Delta Dental‘s checks, typically in exchange for waiver of the co-payment. Id. at 1477 n. 1.
Notwithstanding its lengthy forays into the questionablе market benefits of insurance co-payment plans, SmileCare repeatedly asserts that it is not challenging Delta Dental‘s co-payment scheme per se. Nor is it questioning Delta Dental‘s right to insist that providers not waive the co-payment. Rather, it is challenging Delta Dental‘s behavior in refusing to honor supplemental insurers’ coverage of the patient‘s co-payment because it deems such coverage as tantamount to waiver of the co-payment. The key issue, then, is whether Delta Den-
The district court responded to this question after visiting the merits of co-payment plans themselves. Smilecare, 858 F.Supp. at 1038-39. The court opined that insurance creates a “moral hazard” because it desensitizes patients to cost and induces them to seek inordinate amounts of care; co-payments offset this hazard by forcing patients to reflect upon the cost of services and moderate their demands for treatment. Id. at 1038 (citing Ball Memorial Hosp., Inc., 784 F.2d at 1332; Kennedy, 924 F.2d at 699-701, and Davidowitz, 946 F.2d at 1479). The district court denied as a matter of law SmileCare‘s contention that “supplemental plans are not waivers of co-payments, but rather are merely substitutes for them,” based on its finding that supplemental plans create the same “moral hazard” as waivers because they render patients insensitive to cost. Id. at 1039.
We need not adopt the “moral hazard” theory or reach a conclusion as to the relative market advantage of co-paymеnt plans to decide the instant case. As we stated in Davidowitz, “[we are] not called upon to weigh the wisdom or the public policy of payment assignability. That is the function of Congress. We merely hold the non-assignment clause is legal and is not prohibited by Congress.” 946 F.2d at 1481. See also Kennedy, 924 F.2d at 702 (“Whether full indemnity is preferable to a co-payment system is a question for the marketplace. The answer in this health plan is co-payments, and its terms will be enforced.“)
The Kennedy court explained that,
[the defendant insurer‘s] policy require[s] co-payments in order to maintain incentives that hold down the cost of medical care. We cоuld not break the circle in favor of reimbursement without abrogating the co-payment requirement-a requirement that [defendant] had every legal entitlement to create.... If [a provider] wishes to receive payment under a plan that requires co-payments, then he must collect those co-payments-or at least leave the patient legally responsible for them.
Id. The court added this instructive note: “[Plaintiff] observes that the patient‘s rich aunt or best friend may pay the 20% and asks rhetorically: Why can‘t the doctor pay? The answer is contraсtual: Because the plan and policy say that the physician must create a legal obligation in the employee or dependent.” Id.
The same reasoning applies here. Delta Dental concedes that if SmileCare paid the patient the co-payment, and the patient then paid the dentist, it would have no objection or cause to find its providers in breach of contract. This would mirror the scenario with the rich aunt. However, because SmileCare pays the dentist, the legal obligation required of the insured is eliminated, distorting the aсtuarial basis for Delta Dental‘s co-payment plan.4
The district court denied as a matter of law SmileCare‘s argument that “Delta Dental‘s conduct is anticompetitive because it stamps out supplemental plans,” based on its
SmileCare maintains that it is competing with Delta Dental because its supplemental plan threatens Delta Dental‘s business and provides the consumer with a better product at a lower cost. It cites Syufy for the proposition that competition exists where parties impose “an essential discipline [on one another] to provide the consumer with a better product at a lower cost.” United States v. Syufy Enters., 903 F.2d 659, 663 (9th Cir.1990). However, SmileCare‘s plan does not put pressure on Delta Dental to reduce the price of its co-payment plan. To the contrary, by eliminating the patient‘s contribution for each service, the supplemental plan eliminates thе anticipated benefit of reduced demand for services. The supplemental plan thus has the potential to increase Delta Dental‘s costs, pressuring it to raise the cost of co-payment plans or eliminate them altogether, to the ultimate detriment of the consumer.
Instead of competing with Delta Dental directly, SmileCare would “discipline” Delta Dental by encroaching upon its method of disciplining its insureds. We therefore agree with the district court‘s conclusion that SmileCare and Delta Dental are not true competitors. Rather, SmilеCare has found a niche in the coverage “gap” created by Delta Dental‘s co-payment plan, and now seeks to impose on Delta Dental its own way of doing business.6 SmileCare fails to cite any provision under the antitrust laws that would require Delta Dental to modify a legitimate way of doing business in order to allow SmileCare to sell its plan.
Even assuming arguendo that the parties were competitors, SmileCare‘s claims that Delta Dental‘s conduct amounted to “group boycott” or “refusal to deal” in violation of the antitrust laws are not persuasive. SmileCare addressed these claims at greater length before the district court than on appeal. There SmileCare argued that “Delta Dental has used its dominant position in the market to coerce or induce third parties-dentists-to ‘boycott’ SmileCare supplemental coverage patients and plans,” 858 F.Supp. at 1040, and that “Delta Dental has improperly refused to deal with [SmileCare‘s supplemental plan].” Id. at 1041. SmileCare does not take issue with the court‘s characterization of its claims.
On appeal, SmileCare cites Klor‘s Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959), and Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 105 S.Ct. 2847, 86 L.Ed.2d 467 (1985), in support of its group boycott and refusal to deal claims.7 In Klor‘s, the Su-
In Aspen, the Supreme Court considered a decision by a ski resort to back out of a ticket-sharing arrangement it had long held with a smaller competitor. The Court held that because the larger resort‘s decision “to change the character of the market” was not based on efficiency or any other legitimate business reason, its conduct was in violation of Section 2 of the Sherman Act. 472 U.S. at 604-10. We agree with the district court that this case, too, is inapposite. Unlike the defendant skiing company in Aspen, Delta Dental did not discontinue a marketing arrangement with SmileCare. Delta Dental‘s co-payment plan pre-existed SmileCare‘s supplemental plan and the parties have never co-operated to supply the market with a new or better product. Nor did Delta Dental impose the prohibition against waiver of the co-payment as a response to SmileCarе‘s plan.
Furthermore, as the district court observed, it is well-established that competitors do not have a general duty to deal with one another. Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 483 n. 32, 112 S.Ct. 2072, 2091 n. 32, 119 L.Ed.2d 265 (1992) (“as a general matter a firm can refuse to deal with its competitors. But such a right is not absolute; it exists only if there are legitimate competitive reasons for the refusal.“) (citing Aspen Skiing Co., 472 U.S. 585, 602-605 (1985)); Oahu, 838 F.2d at 368 (duty to deal with competitors “arise[s] only when there is no justification for refusing to aid a competitor. Where a monopolist‘s refusal to aid a competitor is based partially on а desire to restrict competition, we determine antitrust liability by asking whether there was a legitimate business justification for the monopolist‘s conduct.“).
While the existence of valid business reasons is ordinarily a question of fact, in the case before us it is a foregone conclusion requiring no further analysis: The validity of Delta Dental‘s business reasons for requiring its dentists to collect the co-payment directly from the patient has already been established by our decision in Davidowitz. We therefore agree with the district court that Delta Dental‘s policy is supported as a matter of law by a legitimate business justification-its interest in protecting the disciplinary effect of its co-payment plan. Davidowitz, 946 F.2d at 1479-81; see also Kennedy, 924 F.2d at 699-701.
Because Delta Dental‘s co-payment plan is concededly legitimate, and because SmileCare has failed to allege that Delta Dental‘s enforcement of its no-waiver clause has any anticompetitive effects, we affirm the district court.
AFFIRMED.
Because I believe that certain acts allegedly committed by Delta Dental, if proved, could constitute anticompetitive and predatory conduct within the meаning of the antitrust laws, I dissent.
The majority opinion holds that Delta‘s conduct forcing SmileCare and other supplemental plans out of the dental insurance market cannot be interpreted as anticompetitive because Delta and SmileCare are not true competitors and because the business policy by which Delta justifies its allegedly anticompetitive conduct is legitimate. Based on the procedural posture of this appeal, I disagree.
On a motion to dismiss for failure to state a claim under
Both the district court‘s finding and the majority opinion‘s conclusion that Delta Dental‘s policy results in no impermissible anticompetitive effects rest on cases interpreting ERISA rather than the Sherman Act. See maj. op. at 784, 785; Smilecare, 858 F.Supp. at 1038-39 (citing Davidowitz v. Delta Dеntal Plan of Cal., Inc., 946 F.2d 1476, 1479 (9th Cir.1991) and Kennedy v. Connecticut Gen. Life Ins. Co., 924 F.2d 698 (7th Cir.1991)). The purpose of ERISA is to protect employee benefits. By contrast, the purpose of the Sherman Act is to protect competition. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224, 113 S.Ct. 2578, 2588, 125 L.Ed.2d 168 (1993). The issue in Davidowitz, whether a non-assignment clause is barred by ERISA, is an entirely different question from the issue in this case. The issue here is whether, under the Sherman Act, Delta Dental‘s actions in refusing to allow participating dentists to accept a co-payment from a supplemental insurer rather than the patient are lawful.
To decide whether Delta and SmileCare are competitors, the district court must first conduct a factual inquiry into the definition of the relevant market. See Thurman Industries, Inc. v. Pay ‘N Pak Stores, Inc., 875 F.2d 1369, 1374 (9th Cir.1989). Defining the product market involves identification of the field of competition: the group or groups of sellers or producers who have actual or potential ability to deprive each other of significant levels of business. Because a factual inquiry is necessary to determine this issue, id., it was improper for the district court to decide it on a motion to dismiss.
The majority opinion thеn states that, assuming Delta and SmileCare were competitors, the key question is whether Delta‘s refusal to accept SmileCare supplemental payments in lieu of patients’ co-payments has anticompetitive effects. The majority opinion holds that Delta‘s conduct is not anticompetitive because Delta has a legitimate business justification for its refusal to accept SmileCare‘s supplemental payments. This misguided analysis, however, puts the cart before the horse.
A business justification is a defense to allegations of anticompetitive conduct. Phonetele, Inc. v. American Tel. and Tel., 664 F.2d 716, 739 (9th Cir.1981), modified, 1982 WL 11277 (1982), and cert. denied, 459 U.S. 1145, 103 S.Ct. 785, 74 L.Ed.2d 992 (1983). But to reach the business justification issue, a court must first decide whether the conduct is anticompetitive. If the court finds that the conduct is anticompetitive, the defendant must then affirmatively show that there was a valid business reason for the conduct. Id. Furthermore, whether a valid business reason justifies a monopolist‘s conduct is a question of fact. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 604-05, 105 S.Ct. 2847, 2858-59, 86 L.Ed.2d 467 (1985). It is therefore improper for a court to decide on a motion to dismiss whether a business justification exists.
In deciding this issue, what the district court has really done is to ignore the rule that on a motion to dismiss facts alleged by the nonmoving party are presumed true.
Because SmileCare has alleged facts which, if proved, could entitle it to relief under the antitrust laws, see Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957), this case should have survived a motion to dismiss. I would therefore reverse.
Notes
According to SmileCare, the statute “forbids Delta Dental from reducing the level of payments to supplemental plan dentists.” Delta Dental responds that its actions were prompted by providers’ breach of contract, and not “solely” on their рarticipation in another health care plan. The district court dismissed SmileCare‘s state law claims, including the statutory claim, without prejudice. The state law claims are not at issue on appeal.reduce the level of payment to a provider based solely on the allegation that the provider has entered into a contract with any other licensed health care service plan for participation in a benefit plan that has been approved by the commissioner.