Merck-Medco v. Rite Aid Corporation ( 1999 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
MERCK-MEDCO MANAGED CARE,
LLC,
Plaintiff-Appellant,
v.
RITE AID CORPORATION; EAGLE
MANAGED CARE CORPORATION, a
Subsidiary of Rite Aid Corporation;
No. 98-2847
GIANT FOOD, INC.; EPIC PHARMACY
NETWORK, INCORPORATED;
NEIGHBORCARE PHARMACIES,
INCORPORATED,
Defendants-Appellees,
NATIONAL PRESCRIPTION
ADMINISTRATORS, INCORPORATED,
Movant.
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Benson E. Legg, District Judge.
(CA-96-499-L)
Argued: June 8, 1999
Decided: September 7, 1999
Before MICHAEL, Circuit Judge,
HOWARD, United States District Judge for the
Eastern District of North Carolina, sitting by designation,
and FRIEDMAN, United States District Judge
for the Eastern District of Virginia, sitting by designation.
_________________________________________________________________
Affirmed by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: James Patrick Tallon, SHEARMAN & STERLING, New
York, New York, for Appellant. Lewis A. Noonberg, PIPER & MAR-
BURY, L.L.P., Washington, D.C.; Glenn Alfredo Mitchell, STEIN,
MITCHELL & MEZINES, Washington, D.C., for Appellees. ON
BRIEF: Kenneth M. Kramer, Daniel D. Edelman, SHEARMAN &
STERLING, New York, New York; Thomas M. Wilson, III, John B.
Isbister, Scott Patrick Burns, TYDINGS & ROSENBERG, L.L.P.,
Baltimore, Maryland, for Appellant. Leonard L. Gordon, Kenneth G.
Starling, Susan H. Pope, PIPER & MARBURY, L.L.P., Washington,
D.C., for Appellees Rite Aid and Eagle; David U. Fierst, Andrew
Beato, STEIN, MITCHELL & MEZINES, Washington, D.C., for
Appellee Giant Food; Michael F. Brockmeyer, Jay I. Morstein,
PIPER & MARBURY, L.L.P., Baltimore, Maryland, for Appellee
Epic; Ward B. Coe, III, Pamela M. Conover, WHITEFORD, TAY-
LOR & PRESTON, L.L.P., Baltimore, Maryland, for Appellee
NeighborCare.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
The managed health care industry has drastically changed the way
medical and pharmaceutical services are dispensed in this country.
Where individuals once stopped at their local drug store to fill a pre-
scription, people now shop almost exclusively in those stores which
service the health benefit plans provided by their employers. Compe-
tition is keen over what company will administer an employer's
health plan.
2
In September 1995, the State of Maryland awarded to the appellant,
Merck-Medco Managed Care, Inc. ("Medco"), a contract to manage
the prescription drug benefits program for State employees and retir-
ees (the "Maryland Plan" or the "Plan"). Under the terms of the
award, Medco was required to assemble an extensive statewide net-
work of pharmacies which would agree to fill prescriptions at a
steeply discounted rate.
The Maryland Plan was scheduled to go "live" on January 1, 1996.
By mid-December 1995, the State had grown concerned about
Medco's ability to put together a satisfactory network in time. On
December 20, 1995, the State issued an ultimatum to Medco, requir-
ing Medco to submit a certified list of participating pharmacies within
three days. Because Medco failed to assemble a network satisfactory
to the State, the State terminated Medco's contract on December 27,
1995. Ultimately, the State rebid the contract and awarded it to one
of Medco's competitors.
The appellees own or represent approximately one-half of the retail
pharmacies in Maryland. Four of the appellees were engaged in the
retail pharmacy business in 1995. Rite Aid operated 180 pharmacies
in Maryland. Giant, a supermarket, had 76 stores in Maryland and
each included a pharmacy. NeighborCare operated 20 pharmacies in
Maryland, all of which were located in hospitals or medical centers.
EPIC is an umbrella organization that represented the interests of over
200 independently owned pharmacies. The fifth appellee, Eagle, is a
wholly owned subsidiary of Rite Aid and a direct competitor of
Medco. In partnership with EPIC, Eagle was an unsuccessful bidder
for the Maryland contract.
Both Eagle and Medco are Pharmacy Benefits Managers ("PBM").
PBMs were created in response to the rising costs of pharmaceutical
products. They seek to keep prices down by pooling claims. A PBM
will contract with a plan sponsor, such as the State of Maryland, and
for a fee, will manage the drug benefits program for the sponsor's
employees. The PBMs put together a network of participating phar-
macies. To be included in the network, the pharmacies must agree to
dispense drugs at a discount. For each prescription filled, the PBM
reimburses the pharmacy under a formula based on the drug's average
wholesale price ("AWP") less a percentage, plus a dispensing fee. For
3
the Maryland Plan, the network pharmacies were to be reimbursed at
a rate of AWP minus 15% plus $2.00. The PBM that can offer the
greatest price discount gains an advantage in winning the contracts of
large employers.
Pharmacies can decide to either join or not join a network and
numerous factors influence their decision. These factors include the
number of people covered by the plan, the pharmacy's market share,
the PBM's reputation for prompt payment and whether a particular
network is "open" or "closed." "Open" networks permit any pharmacy
to enter or exit at any time. "Closed" networks fix the membership at
a certain date and no other pharmacies can join afterwards. Pharma-
cies are more willing to accept deep discounts in a"closed" network
because they are more certain of their market share. The incentive to
join an "open" network comes from an increase in volume of custom-
ers to the pharmacy who typically buy other incidental items for sale
at the pharmacy, like magazines and non-prescription drugs.
Increased volume is difficult to measure.
Some PBMs, like Medco, fill prescriptions by mail and, therefore,
are not only administering the network but are also directly competing
with the pharmacies in the network. Medco, as a subsidiary of Merck,
a very large drug manufacturer, has a substantial advantage in dis-
counting the price of prescription drugs. This practice by drug manu-
facturers has prompted retail pharmacies to file a suit in federal court
in Chicago alleging pricefixing, conspiracy and other antitrust viola-
tions. Hundreds of similar lawsuits from around the country have
been consolidated before the United States District Court for the
Northern District of Illinois.
During the time leading up to the filing of this lawsuit, the retail
pharmacies in Maryland were not only attempting to determine if they
should become part of Medco's network, but they were also attempt-
ing to have fair pricing laws enacted and attempting to carve out phar-
macy benefits from a transfer of the state Medicare population into
managed care.
After receiving bids from PBMs, the State awarded the contract to
Medco on September 13, 1995, based on its representation that over
800 pharmacies would be members of the open network. Medco made
4
this prediction without contacting any of the pharmacies and provided
a list to the State of the pharmacies Medco expected to be in the net-
work. This list included all appellees except NeighborCare. The con-
tract required Medco to assemble participation by 86.3% of
Maryland's pharmacies by January 1, 1996. Medco was unsuccessful
in assembling the network because over half of Maryland's pharma-
cies refused to participate in the plan. Medco accused Rite Aid of
leading a conspiracy to sabotage Medco's network.
On February 20, 1996, Medco filed the instant suit against appel-
lees, alleging that they jointly agreed to sabotage the Plan by boycott-
ing Medco's network and that appellees' actions constituted a
violation of § 1 of the Sherman Antitrust Act and the Maryland Anti-
trust Act. Section 1 of the Sherman Act prohibits any conspiracy the
object of which is to restrain trade or commerce.
After extensive discovery, the parties filed cross-motions for sum-
mary judgment, and after holding four hearings, the district court
granted the appellees' motion for summary judgment on the antitrust
claims and granted the appellant's motion for summary judgment as
to some ancillary claims. In an 83-page decision, the district court
concluded that Medco's evidence did not tend to exclude the possibil-
ity of independent conduct on the part of the appellees and the evi-
dence was, therefore, insufficient to support a reasonable inference of
a conspiracy to violate the antitrust laws.
Medco alleges that numerous actions by appellees indicate a con-
spiracy, such as: an advertisement placed in the Baltimore Sun and
Washington Post by Rite Aid on December 21, 1995; various confer-
ence calls between the different pharmacies; denials of communica-
tion; statements by corporate officers; and, reactions of appellees.
Medco catalogs over 450 instances of contact between defendants and
others from September 11, 1995, to December 27, 1995.
In its answer, Rite Aid alleged that its Vice President of Govern-
ment and Trade Relations, Jim Krahulec, did not discuss the Mary-
land Plan with any of the other appellees. In an unrelated case,
Krahulec signed a Federal Trade Commission consent decree promis-
ing that he would not attend a formal or informal meeting of represen-
tatives of pharmacy firms that he expects, or reasonably should
5
expect, will facilitate communications concerning the firms' partici-
pation in managed care benefit plans. Medco produced evidence that
Krahulec participated in conversations with other pharmacies in
which discussion of the Maryland plan occurred.
Discovery produced evidence that on September 15, 1995, Rite
Aid's Senior Vice President, Joel Feldman, called Giant's Assistant
Director of Managed Care Programs, Gary Wirth, and informed him
that Medco received the contract. There was also a conference call on
September 15 between EPIC and Rite Aid and another on September
17 involving Rite Aid, NeighborCare and others. Other conference
calls occurred on September 18 involving Krahulec (Rite Aid), Giant,
NeighborCare and representatives from the National Association of
Chain Drug Stores; on September 19 involving Krahulec and Neigh-
borCare; and, on September 20 involving Rite Aid and Giant.
I. STANDARD OF REVIEW
The court reviews a summary judgment motion by a district court
de novo. Summary judgment is appropriate when there exists no gen-
uine issue of material fact and the moving party is entitled to judg-
ment as a matter of law. See Fed. R. Civ. P. 56(c); Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). Defendants bear the
burden of initially coming forward and demonstrating the absence of
a genuine issue of material fact. See Celotex Corp. v. Catrett, 477
U.S. 317 (1986); Ross v. Communications Satellite Corp., 759 F.2d
355, 364 (4th Cir. 1985). When making the summary judgment deter-
mination, the facts and all reasonable inferences must be viewed in
the light most favorable to the nonmoving party. See Anderson, 477
U.S. at 255. Defendants can bear their burden either by presenting
affirmative evidence, or by demonstrating that Medco's evidence is
insufficient to establish its claim. See Celotex Corp., 477 U.S. at 331(Brennan, J., dissenting).
Once defendants have met their burden, Medco must then affirma-
tively demonstrate that there is a genuine issue of material fact which
requires trial. See Matsushita Elec. Indus. Co. Ltd. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986). There is no issue for trial unless
there is sufficient evidence favoring Medco for a jury to return a ver-
dict for it. See Anderson, 477 U.S. at 250.
6
The standard for summary judgment therefore mirrors the standard
for judgment as a matter of law under Fed. R. Civ. P. 50(a), viz. a trial
court must grant a judgment if, under the governing law, there can be
but one reasonable conclusion as to the verdict. See Anderson, 477
U.S. at 250. A trial judge faced with a summary judgment motion
"must ask himself not whether he thinks the evidence unmistakenly
favors one side or the other, but whether a fair-minded jury could
return a verdict for the plaintiff on the evidence presented." Id. at 252.
In opposing summary judgment, the non-moving party must "set
forth such facts as would be admissible in evidence." Fed. R. Civ. P.
56(e). Inadmissible hearsay cannot be used to oppose summary judg-
ment. See Greensboro Prof. Fire Fighters Ass'n v. Greensboro, 64
F.3d 962, 967 (4th Cir. 1995).
At oral argument, counsel for Medco succinctly stated the issues in
this appeal -- what is Medco's burden under the summary judgment
standard and did Medco meet its burden?
II. SUMMARY JUDGMENT IN ANTITRUST CASES
While the summary judgment standard of Fed. R. Civ. P. 56 for an
antitrust suit is the same as that for any other action, the application
of Rule 56 to antitrust cases is somewhat unique. The inferences to
be drawn from underlying facts on summary judgment must be
viewed in a light most favorable to Medco. See Matsushita, 475 U.S.
at 587. "But antitrust law limits the range of permissible inferences
from ambiguous evidence in a § 1 case . . . conduct as consistent with
permissible competition as with illegal conspiracy does not, standing
alone, support an inference of antitrust conspiracy." Id. (citing
Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984)); see
also Thompson Everett, Inc. v. National Cable Advertising, L.P., 57
F.3d 1317, 1323 (4th Cir. 1995) ("[I]nferences which may be drawn
vary from one substantive area of the law to another. . . .").
Section 1 of the Sherman Antitrust Act states in relevant part:
Every contract, combination in the form of trust or other-
wise, or conspiracy, in restraint of trade or commerce
7
among the several States, or with foreign nations, is hereby
declared illegal.
15 U.S.C. § 1 (West 1997). To prove a violation of this statute,
Medco must establish: first, that there are at least two persons acting
in concert and, second, that the restraint complained of constitutes an
unreasonable restraint on trade or commerce. See Estate Constr. Co.
v. Miller & Smith Holding Co., Inc., 14 F.3d 213, 220 (4th Cir. 1994).
A. Unreasonable Restraint on Trade
Medco must establish that an agreement among appellees not to
participate in Medco's plan would be an unreasonable restraint on
trade.
Certain restraints on trade are per se violations "which presume[ ]
that the questionable conduct has anticompetitive effects without
comprehensive inquiry into whether the concerted action produced
adverse, anticompetitive effects." In re Baby Food Antitrust
Litigation, 166 F.3d 112, 118 (3rd Cir. 1999); see also Oksanen v.
Page Memorial Hospital, 945 F.2d 696, 708 (4th Cir. 1991) ("Certain
forms of agreements, such as varieties of group boycotts, have been
classified as per se violations."). Medco asserts a per se violation of
§ 1 and appellees do not contest this characterization.1
Because Medco has alleged a per se violation of § 1, it is unneces-
sary for the court to evaluate appellees' conduct under the rule of rea-
son which involves a case-by-case determination of whether the
methods are anticompetitive and should be prohibited. See id.; see
also Oksanen, 945 F.2d at 709 (discussing rule of reason test).
_________________________________________________________________
1 We believe that the characterization of appellees' alleged conduct as
a per se violation of § 1 is appropriate. Most boycotts have been consid-
ered per se violations of § 1. Only boycotts having valid business justifi-
cations and procompetitive effects may possibly be considered under a
rule of reason analysis. See, e.g., Jefferson Parish Hosp. Dist. No. 2 v.
Hyde, 466 U.S. 2 (1984). If appellees committed the acts alleged, the
state's cost for administering the Plan would have increased and compe-
tition among PBMs would have been adversely affected, thereby result-
ing in an unfair restraint of trade.
8
B. Conspiracy
A plaintiff alleging conspiracy must demonstrate a"conscious
commitment to a common scheme designed to achieve an unlawful
objective." Thompson Everett, Inc. v. National Cable Advertising,
L.P., 57 F.3d 1317, 1324 (4th Cir. 1995) (quoting Monsanto, 465 U.S.
at 764). Monsanto requires "something more" than independent
action, and must rise to the level of "a unity of purpose or a common
design and understanding, or a meeting of minds." Parkway Gallery
Furniture, Inc. v. Kittinger/Pennsylvania House Group, Inc., 878 F.2d
801, 805 (4th Cir. 1989) (quoting Monsanto, 465 U.S. at 764).
A party may demonstrate an agreement by direct evidence or cir-
cumstantial evidence. When relying upon circumstantial evidence, the
range of permissible inferences that the court may draw from the evi-
dence is limited by the "plausibility of the plaintiff's theory and the
danger associated with such inferences." In re Baby Food, 166 F.3d
at 124. A plaintiff may have a plausible theory, but the danger to the
market or innocent participants in the market may be so great as to
warrant a limitation of the inferences available to the plaintiff. Conse-
quently, "conduct as consistent with permissible competition as with
illegal conspiracy does not, standing alone, support an inference of
antitrust conspiracy." Matsushita, 475 U.S. at 588 (citing Monsanto,
465 U.S. at 764).
Therefore, to withstand a motion for summary judgment, "a plain-
tiff seeking damages for a violation of § 1 must present evidence that
tends to exclude the possibility that the alleged competitors acted
independently." Id. The heart of this case is to what degree Medco
must produce evidence tending to exclude independent action by
defendants and whether Medco has presented such evidence. The
standards for summary judgment and the limits on inferences in anti-
trust lawsuits are often quoted but not universally agreed upon. The
Supreme Court has considered numerous antitrust appeals and
through Matsushita, Monsanto and Eastman Kodak v. Image Techni-
cal Services, 504 U.S. 451 (1992), has established a framework within
which to analyze antitrust summary judgment motions.
9
1. Matsushita and Monsanto
Matsushita involved a suit filed by American TV manufacturers
alleging a 20-year conspiracy by Japanese TV manufacturers to
unfairly price their products in America in violation of the Sherman
Antitrust Act. The American manufacturers alleged that the intent of
the conspiracy was to force the Americans out of business by fixing
prices below the market level in the United States. The losses sus-
tained in the American market were offset by monopoly profits in the
Japanese markets.2 The Supreme Court concluded that "to survive a
motion for summary judgment or for a directed verdict, a plaintiff
seeking damages for a violation of § 1 must present evidence `that
tends to exclude the possibility' that the alleged conspirators acted
independently." Id. at 588. The Supreme Court borrowed the "tends
to exclude the possibility" language from the Court's earlier
Monsanto decision.
Monsanto was a vertical antitrust case. The plaintiff, Spray-Rite,
alleged that Monsanto, an agricultural herbicide manufacturer, along
with its distributors, fixed the price of herbicide and unfairly preju-
diced the plaintiff, a former distributor of Monsanto's products. The
case went to trial and Spray-Rite won a $10 million judgment that
was upheld on appeal. The Supreme Court affirmed the judgment but
on different grounds than those of the district or appellate courts. The
Supreme Court held that "something more than evidence of com-
plaints [about price fixing] is needed. There must be evidence that
tends to exclude the possibility that the manufacturer and nonter-
minated distributors were acting independently." Monsanto, 465 U.S.
at 764.
Appellant attempts to distinguish Monsanto and Matsushita on the
grounds that one was a vertical antitrust case and the other was a hori-
zontal antitrust case.3 We do not agree that the cases turned on this
_________________________________________________________________
2 This agreement by Japanese manufacturers is called a horizontal anti-
trust claim because it deals with manufacturers banding together to
unlawfully control a price.
3 By making this distinction, appellant attempts to convince the court
that because Monsanto was a vertical antitrust case, it does not apply to
horizontal antitrust cases. Therefore, we cannot rely on it to analyze the
horizontal antitrust dispute between Medco and appellees.
10
distinction because the Supreme Court in Matsushita, decided after
Monsanto, specifically held that in the absence of direct evidence of
a conspiracy, "to survive a motion for summary judgment or for a
directed verdict, a plaintiff seeking damages for a violation of § 1
must present evidence `that tends to exclude the possibility' that the
alleged conspirators acted independently." Matsushita, 475 at 588.
The Court later stated that "conduct as consistent with permissible
competition as with illegal conspiracy does not, standing alone, sup-
port an inference of antitrust conspiracy." Id.
2. Eastman Kodak Company v. Image Technical Services
Eastman Kodak did not involve a conspiracy claim under § 1 of the
antitrust act as did Monsanto and Matsushita. In Eastman Kodak, the
Court considered whether Eastman Kodak's market power was suffi-
cient to find it guilty of "tying." Tying deals with the ability of a mar-
ket participant to condition the sale of product A on the purchase of
product B. A market participant can violate § 1 of the Sherman Anti-
trust Act "if the seller has `appreciable economic power' in the tying
product market and if the arrangement affects a substantial volume of
commerce in the tied market." Eastman Kodak , 504 U.S. at 462 (quot-
ing Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S.
495 (1969)).
Kodak did not dispute that it began a program to condition the sale
of replacement parts for its copiers on the use of Kodak service and
repair programs. This policy adversely affected the independent ser-
vicers of Kodak equipment. Kodak also did not deny that its arrange-
ment affected a substantial volume of commerce. However, Kodak
denied that its practices were an unlawful tying arrangement. Kodak
asserted that competition in a market foreclosed the finding of
monopoly power in certain instances. Kodak further argued that the
court's failure to adopt its view would deter procompetitive behavior.
See id. at 467.
Kodak relied on Matsushita in attempting to convince the court that
if Kodak had a plausible economic theory, then the plaintiffs' claims
could not make sense; thus, entitling Kodak to summary judgment. In
discussing Kodak's summary judgment burden, the Court rejected
Kodak's proposed presumption that "equipment competition pre-
11
cludes any finding of monopoly power in derivative aftermarkets."4
Id. at 466. The Court explained:
The . . . requirement in Matsushita that the plaintiffs' claims
make economic sense did not introduce a special burden on
plaintiffs facing summary judgment in antitrust cases. The
Court did not hold that if the moving party enunciates any
economic theory supporting its behavior, regardless of its
accuracy in reflecting the actual market, it is entitled to sum-
mary judgment. Matsushita demands only that the nonmov-
ing party's inferences be reasonable in order to reach the
jury . . . .
Id. at 468.
Because of the Court's response to Kodak's argument, Medco
relies on Eastman Kodak to dismiss its requirement under Monsanto
and Matsushita to produce evidence that tends to exclude that the
defendants acted independently. However, we do not read Eastman
Kodak as reaching that far. The Court was not dealing with a § 1 con-
spiracy in Eastman Kodak as it was in Monsanto and Matsushita. It
was dealing with monopoly power under § 2 of the Antitrust Act. The
Court did not overrule Monsanto and Matsushita with this statement,
and it would be a mistake to dismiss the requirements imposed on
Medco due to the inherent dangers to the market and innocent parties
associated with a conspiracy case.
Our conclusion that Eastman Kodak did not overrule or modify the
requirements explained in Matsushita and Monsanto is further bol-
stered by Fourth Circuit precedent. In Thompson Everett, this court
recognized that "on summary judgment motions in antitrust cases, the
Supreme Court instructed that when there is evidence of conduct that
is consistent with both legitimate competition and an illegal conspir-
acy, courts may not infer that an illegal conspiracy has occurred with-
out other evidence." 57 F.3d at 1323; see also Blomkest Fertilizer,
Inc. v. Potash Corporation of Saskatchewan, Inc., 176 F.3d 1055,
1074 (8th Cir. 1999), vacated, reh'g en banc granted ("Eastman
_________________________________________________________________
4 Kodak presented no statistical evidence in support of its economic
theory.
12
Kodak was not concerned with the sufficiency of the evidence of con-
spiratorial acts") (Beam, J., dissenting); Super Sulky, Inc. v. United
States Trotting Ass'n, 174 F.3d 733 (6th Cir. 1999) (relying on
Matsushita to grant summary judgment in § 1 case without discussing
Eastman Kodak); RE/MAX International, Inc. v. Realty One, Inc.,
Nos. 96-3362, 96-3469 and 96-3470, 1999 WL 184350, ___ F.3d ___
(6th Cir. April 6, 1999) (relying on principles of Matsushita and
Monsanto to reverse district court's grant of summary judgment on
§ 1 claim); In re Baby Food Antitrust Litigation, 166 F.3d 112 (same
as Super Sulky).
Therefore, Medco must forecast evidence which tips the balance in
favor of a conspiracy. If it is as likely that the conduct was lawful as
it was conspirational, it is improper to let the case proceed to trial.
In Laurel Sand & Gravel, Inc. v. CSX Transportation, Inc., 924
F.2d 539 (4th Cir. 1990), we described the antitrust summary judg-
ment procedure. When there is no direct evidence of antitrust activity,
"an agreement to restrain trade may be inferred from other conduct."
Id. at 542.
There are two possible judicial interpretations when the conduct to
restrain trade is ambiguous. The first interpretation is that the "sus-
pected agreement may be found consistent with the independent con-
duct or a legitimate business purpose." Id. The second interpretation
is that the agreement may be consistent with an illegal agreement. "To
prove a violation through ambiguous conduct, proof must be offered
that tends to exclude the first interpretation." Id. We concluded,
[g]iven the Monsanto/Matsushita standard, [plaintiffs] must
discharge a twofold evidentiary burden. First, they must
establish that [defendants] had a "conscious commitment to
a common scheme designed to achieve an unlawful objec-
tive." Second, [plaintiffs] must bring forward evidence that
excludes the possibility that the alleged coconspirators acted
independently or based upon legitimate business purpose.
Id. at 543.
13
The district court correctly noted that the quantum of evidence
required to exclude the possibility of independent action or legitimate
business purposes is directly related to the plausibility of the plain-
tiff's theory. Compare Matsushita, 475 U.S. 574, and Super Sulky,
174 F.3d 733, with Monsanto, 465 U.S. 752, and Petruzzi's IGA
Supermarkets v. Darling-Delaware Co., 998 F.2d 1224, 1242-43 (3d
Cir.), cert. denied, 510 U.S. 994 (1993). If the plaintiff advances a
strong, plausible theory then the quantum of evidence tending to
exclude independent action is not as great as if the plaintiff advances
a weak or implausible theory. Likewise, when there is a risk that the
threat of antitrust liability will chill legitimate, procompetitive con-
duct by market participants, the quantum of evidence is also high.
C. Conscious Parallelism
An agreement to boycott may be inferred from the business con-
duct of the parties. This pattern of uniform business practices is com-
monly referred to as "conscious parallelism." See ABA Section of
Antitrust Law, Antitrust Law Developments, p. 8 (4th ed. 1997). The
Court of Appeals for the Third Circuit has explained that courts may
find consciously parallel behavior where a plaintiff shows: "(1) that
the defendants' behavior was parallel; [and] (2) that the defendants
were conscious of each other's conduct and that this awareness was
an element in their decision-making process." Id. n.39 (quoting
Petruzzi's IGA, 998 F.2d at 1242-43).
There is no doubt that conscious parallelism was at work in appel-
lees' business conduct. Through newspaper articles and trade organi-
zation meetings, Rite Aid, EPIC, NeighborCare and Giant were each
aware that the other had not participated in the Maryland Plan. Each
also knew that if not enough pharmacies participated, the State would
likely cancel the contract with Medco and award the contract to
another pharmaceutical benefits manager that would offer better terms
than Medco. However, it has long been recognized that parallel
behavior alone is not enough to prove a conspiracy. See Theatre
Enterprises v. Paramount Film Distributing Corp., 346 U.S. 537, 540
(1954) ("[T]his Court has never held that proof of parallel business
behavior conclusively establishes agreement or, phrased differently,
that such behavior itself constitutes a Sherman Act offense.").
14
In order to infer a conspiracy, conscious parallelism must be
accompanied by "plus factors." While the Supreme Court has not
recounted a list of plus factors, numerous plus factors, such as "mo-
tive to conspire," "opportunity to conspire," "high level of interfirm
communications," irrational acts or acts contrary to a defendant's eco-
nomic interest, but rational if the alleged agreement existed, and
departure from normal business practices, have been considered by
other circuits. See City of Tuscaloosa v. Harcros Chemicals, Inc., 158
F.3d 548, 571 n.35 (11th Cir. 1998); Apex Oil Co. v. DiMauro, 822
F.2d 246, 253-54 (2d Cir.), cert. denied, 484 U.S. 977 (1987).
If a party establishes the existence of plus factors, a rebuttable pre-
sumption of conspiracy arises. See In re Baby Food, 166 F.3d at 122;
Todorov v. DCH Healthcare Authority, 921 F.2d 1438, 1456 n.30
(11th Cir. 1991). Viewing all the evidence and taking the plus factors
into consideration, the court must then determine if the evidence tends
to exclude the possibility that the alleged coconspirators acted inde-
pendently or based upon legitimate business purposes.
III. APPLICATION OF THE STANDARD FOR ANTITRUST
CASES TO MEDCO'S FORECAST OF EVIDENCE
In order to survive summary judgment, Medco must first forecast
evidence of a conspiracy to restrain trade. If successful, Medco must
then demonstrate evidence that tends to exclude independent action
by the defendants.
A. Conscious Commitment to a Common Scheme
Medco has asserted a plausible theory of conspiracy. If the alleged
conspiracy succeeded, the State would rescind the contract with
Medco and the conspirators would likely receive more lucrative reim-
bursements from the next pharmaceutical benefits manager. If the
conspiracy failed, the conspirators could merely join Medco's net-
work after the plan went live.
While Medco's theory is plausible, it also creates a danger of chill-
ing legitimate, procompetitive activity by other pharmaceutical ser-
vice providers. A low quantum of proof tending to exclude
15
independent action in cases such as this would threaten pharmacies
with antitrust litigation when they have legitimate, procompetitive
reasons for not joining a plan. Incentives to negotiate, to hold out for
better terms and ultimately to not participate would have to be
weighed in the light of a possible lawsuit if other pharmacies engaged
in the same activities.
As discussed above, Medco has presented sufficient evidence that
conscious parallelism occurred among appellees during the fall of
1995. Therefore, the court must examine the plus factors in order to
determine if a conspiracy may be inferred from appellees' con-
sciously parallel behavior.
1. Motive to Conspire
Rite Aid, Giant, NeighborCare and EPIC owned or controlled 50%
of the pharmacies in Maryland. Medco's plan proposed deep cuts in
profits from the pharmacies' previous plan. Additionally, Rite Aid
had been sanctioned by the United States Justice Department for anti-
trust actions in New York where they conspired to boycott a Medco
plan. Thus, construing all reasonable inferences in Medco's favor, it
appears that the defendants had a motive to conspire against the
Medco plan.
2. Opportunity to Conspire and High Level of
Inter-Firm Contacts
Medco presented voluminous evidence of inter-firm contacts
between the parties providing ample opportunity to conspire. The
inter-firm contacts occurred between high level corporate officers.
Reasonable inferences from this evidence establishes opportunity to
conspire and high level of inter-firm contacts.
3. Acts Contrary to Economic Interest
Evidence of acts contrary to an alleged conspirator's economic
interest is perhaps the strongest plus factor indicative of a conspiracy.
Having reviewed the record, we conclude that rejecting the Medco
plan was consistent with the pharmacies' economic interests. Particu-
16
larly, NeighborCare's involvement would have been directly contrary
to its economic interest. Ninety-eight percent of NeighborCare's busi-
ness consisted of prescriptions. They did not sell ancillary items that
Medco promised would make up for the lower reimbursement rate.
Also, it was in each company's best interest to hold out as long as
possible in an effort to attain a better deal with Medco. Due to the
plan's "open" nature, if the company did not receive better terms, it
could merely join at a later date. Medco presents no evidence of price
sharing among appellees. All indications from the evidence point to
independent negotiations by Giant, NeighborCare and EPIC with
Medco concerning the rate of reimbursement. Consequently, there are
no acts by appellees inconsistent with their economic best interests.
4. Departure From Normal Business Practices
Medco has not asserted a departure from normal business practices.
In fact, Medco concedes that both Giant and Rite Aid had a history
of holding out until the last minute and negotiating for a better reim-
bursement rate. NeighborCare had never joined a plan with a reim-
bursement rate as low as the one offered by Medco. Only EPIC
departed from the normal business practice of binding all 200 inde-
pendent pharmacies at the Medco rate.
B. Appellees' Evidence Rebutting the Inference of Conspiracy
Medco's establishment of two plus factors requires appellees to
rebut the resulting inference of conspiracy. The district court pains-
takingly reviewed the evidence presented by Rite Aid, Giant, EPIC
and NeighborCare offered to rebut the inference of conspiracy.5
_________________________________________________________________
5 The district court relied in part on the Noerr-Pennington doctrine.
Medco assigned error to the district court's reliance on this doctrine
because defendants had not affirmatively raised it in their pleadings.
Under this doctrine, horizontal competitors may join together to lobby
the government. The First Amendment shields this joint lobbying from
antitrust liability, even when the competitors are seeking governmental
action that would eliminate competition or exclude competitors. We do
not believe it is necessary to invoke the Noerr-Pennington doctrine to
affirm the district court's decision.
17
1. Rite Aid
Eagle, Rite Aid's subsidiary, submitted an unsuccessful bid for the
Maryland Plan. As a result of the unsuccessful bid, Eagle and EPIC
launched a bid protest on September 18, 1995. Eagle and EPIC con-
tended that the State's failure to verify the accuracy of Medco's pro-
posal amounted to an arbitrary and capricious award of the contract
to Medco. As evidence of Medco's inaccurate proposal, Eagle relied
on Medco's representation to the State that Rite Aid would join
Medco's network.6 Rite Aid asserts that becoming a member of
Medco's network while Eagle was protesting the award of the con-
tract would undercut Eagle's appeal.
Rite Aid also presented evidence that part of its business practice
was to initially decline participation in a plan and bargain for the best
terms they could;7 particularly when the plan was open and there was
no risk that they would be shut out if they did not join before the plan
went live.
According to Rite Aid, the low reimbursement rate offered by
Medco did not attract Rite Aid. Rite Aid presented evidence that its
decision to join a plan at such a low reimbursement rate was governed
by how large the plan was, Rite Aid's market share, whether the plan
was open or closed and the prominence of the plan's sponsor. Rite
Aid asserts that due to Rite Aid's prominent market share in Maryland,8
it was not quick to sacrifice prescription profits for unproven ancillary
income.
2. Giant
Giant presented evidence that they had forecasted a loss of over $1
million if they joined Medco's network at the offered reimbursement
_________________________________________________________________
6 Medco contends this is normal business practice in the industry.
7 Medco representatives admitted that Rite Aid typically held out
before joining a plan and that Rite Aid's Joel Feldman was "a great nego-
tiator."
8 In 1995, Rite Aid had 180 pharmacies in the State of Maryland.
18
rate. Since the beginning of 1995, Giant had been in the process of
abandoning plans9 with rates similar to those Medco offered.
Evidence presented by Giant indicates that Giant was deeply con-
cerned about Medco's mail order program. According to Giant, their
participation in another plan administered by Medco caused a loss of
225,485 prescriptions per year to Medco's mail order program, valued
at over $10 million. Giant engaged in negotiations with Medco
through December 1995, attempting to bargain for"reasonable" reim-
bursement rates.
3. EPIC
EPIC asserts that its board chose not to participate in the Maryland
Plan because of the low reimbursement rate and because of slow pay-
ments by Medco in other plans in which EPIC was involved. Medco
requested to address EPIC's board two times in an attempt to con-
vince them to join Medco's network. The board offered to participate
in a plan with a rate of AWP minus 12% plus $2.00, but Medco and
EPIC were unable to reach an agreement. However, EPIC allowed
Medco to directly solicit the independent pharmacies over which
EPIC had contractual binding authority. Medco's solicitation yielded
the participation of 100 independent pharmacies.
Additionally, EPIC was involved in the bid protest along with
Eagle, and EPIC contends that until their protest was denied in late
November 1995, they had absolutely no incentive to join Medco's
network.
4. NeighborCare
NeighborCare had never participated in a plan with a reimburse-
ment rate as low as the one offered by Medco. NeighborCare's two
owners had a longstanding policy to reject any networks offering
reimbursement rates which fell below their profitability threshold.
_________________________________________________________________
9 Giant had dropped out of nine plans due to the reimbursement rate.
Eight of the nine plans had rates greater than or equal to Medco's rate.
19
NeighborCare also did not engage in the sale of ancillary items to
which an increase in customer flow would contribute. Ninety-eight
percent of NeighborCare's profits came from prescriptions.
Based on the evidence presented by Rite Aid, Giant, EPIC and
NeighborCare, we are convinced that they have rebutted Medco's
inference of conspiracy. Medco may still survive summary judgment
if it carries its ultimate burden and forecasts proof which tends to
exclude independent action or legitimate business decisions by appel-
lees.
C. Medco's Evidence Tending to Exclude Independent Action or
Legitimate Business Purpose
Medco does not forecast direct evidence of a conspiracy to restrain
trade, but relies on circumstantial evidence. It advances at least seven
factual arguments that purportedly demonstrate a conspiracy and
exclude independent action: (1) appellees' reaction as soon as Mary-
land announced its plan; (2) the reaction of EPIC which had histori-
cally joined a plan at the price offered by Medco; (3) the actions of
Rite Aid's Jim Krahulec; (4) the statement on September 29 by
EPIC's representative that the plan would "kill us" if it went into
effect; (5) Rite Aid's advertisement; (6) conversations between high
level officers within appellees' companies; and (7) statements by
EPIC and Giant on December 7, 1995.
1. Appellees' Reaction to Announcement of Award of
Contract to Medco
No pharmacy reacted with joy to the news that Maryland had
awarded Medco the pharmacy plan. The deep discount Medco
attempted to achieve in its pricing forecasted large losses to some
appellees.10 The offset to this deep discount was intended to be an
increased flow of patrons to the pharmacies, but for pharmacies like
NeighborCare, which derived 98% of profits from prescriptions, an
increase in the sale of incidentals like magazines and candy could not
make up for the loss in prescription dollars.
_________________________________________________________________
10 Giant predicted that it would lose in excess of $700,000 per year by
joining the Plan at Medco's rate.
20
After learning on September 11, 1995, of the State's intention to
award the contract to Medco at a Board of Public Works meeting on
September 13, Rite Aid's Joel Feldman testified that"we were really
focused on developing a strategy to somehow influence the process
politically" comparable to a "red alert." (A. 451) The "red alert" was
implemented by "get[ting] on the telephone and . . . call[ing] as many
people as you can who you think will have some role in influencing
the decision of the Board of Public Works." Id.As indicated by the flurry of activity after the announcement, most
pharmacies,11 not just appellees, attempted to address concerns raised
by the award of the Plan to Medco. The thrust of these activities
appears to be influencing the governor and state representatives to
rethink some of the details of the Plan.
2. EPIC's Reaction to the Plan
Medco asserts EPIC's reaction to the plan creates an inference of
conspiracy. EPIC was "up in arms" over the contract price Medco was
offering even though they had always accepted contracts for similar
prices in the past.
EPIC counters that it needed to accept low reimbursement rates in
the past in order to prove that it could deliver on the participation of
its 200 independent pharmacies. Now that EPIC had established that
their pharmacies would honor contracts entered into on their behalf
by EPIC, the board felt that it was time to seek higher rates of reim-
bursement. EPIC's board voted not to participate after brief negotia-
tions with Medco due to the low rate and delays in payments by
Medco on other contracts. If EPIC's board had voted to accept the
contract, all 200 independent pharmacies would be bound by their
decision. Rather than accept the rate, EPIC gave Medco permission
to directly solicit the individual pharmacies.
_________________________________________________________________
11 As indicated by conference call participation, not only did appellees
take part in the lobbying effort, but so did Safeway Inc., Thrift Drug,
Inc., Revco D.S. Inc., CVS and the National Association of Chain Drug
Stores.
21
3. Actions of Rite Aid's Jim Krahulec
Medco contends that the presence of Jim Krahulec at trade organi-
zation meetings and conference calls raises an inference of conspiracy
given Krahulec's past activity. Krahulec entered into a consent judg-
ment with the Federal Trade Commission ("FTC") whereby the FTC
ordered him not attend "a formal or informal meeting of representa-
tives of pharmacy firms that [he] expects or reasonably should expect
will facilitate communications . . . concerning one or more firms'
intentions or decisions with respect to entering into, refusing to enter
into, threatening to refuse to enter into . . . any existing or proposed
participation agreement . . ." (A.57).
4. EPIC's Statement that the Plan "Would Kill Us"
Jim Miller, EPIC's representative at a September 29 meeting of the
Maryland Association of Chain Drug Stores, stated that he did not
"know why we're having a meeting to discuss the Medicaid waiver
considering that if the Maryland deal went through it would kill us."
EPIC negotiated with Medco until mid-December, giving Medco's
representative numerous opportunities to address the board concern-
ing the merits of Medco's plan. Even after rejecting Medco's plan,
EPIC permitted direct solicitation of the independent pharmacies
resulting in participation by half of them in Medco's network.
5. Rite Aid's Advertisement
Medco also contends that the advertisement that Rite Aid ran in the
Baltimore Sun and the Washington Post is evidence of a conspiracy.
When Rite Aid ran the ad, none of the other retailers gave Rite Aid
permission to include their names, and none of them protested that
their names were included.
As justification for its actions, Rite Aid relies on a December 19,
1995, article in the Baltimore Sun announcing that"three large chains
and a network of independent pharmacies said yesterday that they are
refusing to participate in the state employee's drug plan." (A. 60) Rite
Aid allegedly ran the advertisement on December 21, because it felt
22
that it should explain to its customers why it was not participating and
wanted to make a public statement concerning the State's award of
the contract to Medco. The advertisement asked State employees to
contact the governor or their union to seek a change in the Plan and
listed other pharmacies that had refused to participate in the Plan.
6. Conversations Between High Level Corporate Officers
As a forecast of evidence from which a reasonable inference of
conspiracy may be drawn, Medco also relies on telephone conversa-
tions and September 15, 17, 18, 19 and 20 conference calls, and the
appellees' failure to remember these conversations. In their answer to
Medco's complaint, appellees denied having ever talked to each
other. Later, in deposition testimony, representatives of Rite Aid,
EPIC and NeighborCare testified under oath that they had not com-
municated with their competitors regarding the Maryland Plan. When
new evidence surfaced, appellees admitted talking about the plan but
submitted that they were only lobbying or that they had simply for-
gotten their prior conversations.
It challenges logic to assert that individuals concerned about the
loss of millions of dollars to a new pharmacy plan would simply for-
get conversations about the plan. Evidence of these forgotten conver-
sations is Medco's strongest argument for reversal of the district
court's summary judgment order. This evidence must be viewed in
light of all the evidence in determining if Medco has carried its ulti-
mate burden of establishing a reasonable inference of a conspiracy.
7. Statements by EPIC and Giant on December 7, 1995
Finally, Medco asserts that statements made by NeighborCare and
Giant on December 7, 1995, that Medco "would not have a network,"
excludes the possibility of independent action. This statement, along
with the selective memories of appellees' corporate officers regarding
their telephone conversations, does not meet the quantum of proof
required to establish lack of independent action.
8. Evidence as a Whole
"[A] court should not tightly compartmentalize the evidence put
forward by the nonmovant, but instead should analyze it as a whole
23
to see if together it supports an inference of concerted action."
Petruzzi, 998 F.2d at 1230. Taking all of the evidence together, the
court is not convinced that Medco has presented evidence to support
an inference of concerted action. Two examples of an inference of
conspiracy presented by Medco, fail under closer review.
The district court concluded that to infer improper restraint of trade
from the advertisement was pure speculation, and we agree. There
was no reason for the other retailers to object to Rite Aid's justifica-
tion for their collective failure to join the network.
Medco contends that EPIC's failure to join the network was not a
mere coincidence, but that EPIC's actions indicate a conspiracy.
However, the court does not believe that a conspirator would permit
Medco to essentially invalidate its decision not to participate by
allowing Medco to directly solicit its independent pharmacies. A con-
spiracy based on EPIC's actions is not a reasonable inference from
the facts.
We must avoid the danger of an inevitable competition chilling
result that would occur should a low quantum of proof be required
before a party may harness the power of the Sherman Antitrust Act
against facially legitimate, procompetitive business practices. View-
ing all the plus factors presented by Medco, the rebuttal by appellees
and the additional evidence Medco asserts tends to exclude indepen-
dent action, we conclude that Medco has not met the threshold of
forecasting the quantum of proof required for its claims to survive
summary judgment. All of the evidence viewed together does not
create a reasonable inference of conspiracy.
Had Medco been able to forecast evidence of activity that was
completely outside of normal business practices in negotiating for
healthcare networks, actions not in the best economic interests of the
appellees or an utter failure to negotiate with Medco along with the
record of appellees' communications, this likely would be a different
case.
Medco has failed to establish that the evidence is more consistent
with conspiracy than with independent action. Medco's forecast of
evidence does not tend to exclude the possibility that the pharmacies'
24
decisions were independent or were made for legitimate business rea-
sons. Thus, viewing the facts in a light most favorable to appellant,
Medco has failed to present material issues of disputed fact necessitat-
ing a trial.
IV. CONCLUSION
For the reasons stated above, we conclude that the district court
properly ruled that no genuine issue of material fact exists on the
issue of Medco's claim that the defendants conspired to boycott the
Maryland Plan. The district court correctly found that Medco failed
to forecast sufficient evidence tending to exclude independent con-
duct by the defendants. Therefore, the ruling of the district court is
AFFIRMED.
25