City of New York v. Group Health Inc., et al., No. 10-2286 (2d Cir. 2011)
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The City of New York sued defendants under federal and New York State antitrust laws, seeking to prevent the companies from merging. The city appealed from a judgment of the district court granting summary judgment to defendants and dismissing the city's complaint without leave to amend. The court agreed with the district court that the alleged relevant market definition, as the "low-cost municipal health benefits market[,]" was legally deficient and concluded that the district court's denial of leave to amend was not an abuse of discretion. Accordingly, the court affirmed the judgement of the district court.
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10-2286-cv City of New York v. Group Health Inc. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term 2010 (Argued: May 4, 2011 Decided: August 18, 2011) Docket No. 10-2286-cv -----------------------------------------------------x CITY OF NEW YORK, Plaintiff-Appellant, -- v. -GROUP HEALTH INCORPORATED, HIP FOUNDATION, INC., and HEALTH INSURANCE PLAN OF GREATER NEW YORK, Defendants-Appellees. -----------------------------------------------------x B e f o r e : MINER, WALKER, and WESLEY, Circuit Judges. 27 Appeal from a judgment of the United States District Court for 28 the Southern District of New York (Richard J. Sullivan, Judge) 29 granting summary judgment to Defendants-Appellees and dismissing 30 the complaint. The City of New York argues that the district court 31 erred by concluding that the market pled in its antitrust complaint 32 is legally insufficient and by denying the City s motion to amend 33 its complaint. 34 and that it was within the district court s discretion to deny 35 leave to amend. 36 court. We conclude that summary judgment was appropriate We therefore AFFIRM the judgment of the district 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ALAN H. KLEINMAN, Assistant Corporation Counsel (Michael A. Cardozo, Corporation Counsel of the City of New York, June R. Buch, John R. Low-Beer, Richard J. Costa, Assistant Corporation Counsel, on the brief), New York, N.Y., for Plaintiff-Appellant City of New York. STEPHEN M. AXINN (Michael L. Keeley, on the brief), Axinn, Veltrop & Harkrider LLP, New York, N.Y., for Defendant-Appellee Group Health Incorporated. BRUCE H. SCHNEIDER (Derek I.A. Silverman, on the brief), Stroock & Stroock & Lavan LLP, New York, N.Y., for Defendants-Appellees Health Insurance Plan of Greater New York and HIP Foundation, Inc. JOHN M. WALKER, JR., Circuit Judge: 26 Plaintiff-Appellant City of New York appeals from a judgment 27 of the United States District Court for the Southern District of 28 New York (Richard J. Sullivan, Judge) granting summary judgment to 29 Defendants-Appellees 30 Foundation, Inc., and Health Insurance Plan of Greater New York 31 (together, HIP ), and dismissing the City s antitrust complaint 32 without leave to amend. Group Health Incorporated ( GHI ), HIP 33 The City sued health insurance providers GHI and HIP under 34 federal and New York State antitrust laws, seeking to prevent the 35 companies 36 judgment to GHI and HIP, holding that the market definition the 37 City alleged as the basis of its claims is legally deficient. from merging. The district 2 court granted summary It 1 also denied the City s motion to amend its complaint to allege a 2 new market definition. 3 appeal. The City challenges these conclusions on 4 We agree with the district court that the alleged relevant 5 market is legally deficient, and conclude that its denial of leave 6 to amend was not an abuse of discretion. 7 district court s judgment. 8 9 10 We therefore AFFIRM the BACKGROUND I. New York City's Health Benefits Program and the Proposed Merger 11 The City and several related entities obtain health insurance 12 for their employees and their employees dependents through the 13 City's 14 individuals are insured through the Program. 15 Labor Relations administers the Program jointly with the Municipal 16 Labor Committee, an association of about 50 unions that represent 17 the employees. Health Benefits Program. Approximately 1.2 million The City's Office of 18 As a result of collective bargaining agreements and municipal 19 law requirements, the City offers its employees several types of 20 health insurance plans. 21 Health Maintenance Organization ("HMO") plan, a Participating 22 Provider Organization ("PPO") plan, or a Point of Service ("POS") 23 plan. Employees can select coverage through a 24 3 1 The City periodically issues Requests for Proposals ("RFPs") 2 inviting insurers to propose plan designs and associated premiums. 3 Insurance providers compete to be selected during each procurement 4 round. 5 Employees choose among the plans that the City selects. 6 Those who do not receive Medicare benefits can choose among 7 thirteen plans, and Medicare participants can choose among fifteen. 8 GHI and HIP offer the two least expensive and most popular 9 plans. GHI offers a PPO plan and HIP offers an HMO plan. of City employees and non-Medicare retirees The 10 majority select 11 coverage from GHI's or HIP s plan, with only a small minority 12 choosing the plan with the third largest share of enrollment. 13 Under municipal law and by agreement between the City and the 14 Municipal Labor Committee, the City pays the entire premium for 15 employees who enroll in either the HIP plan or the GHI plan. 16 Employees who select more expensive coverage from another carrier 17 must pay any excess in the cost of that coverage over the cost of 18 the HIP plan. 19 In September 2005, GHI and HIP announced their intent to merge 20 and to convert from non-profit to for-profit status. 21 States Department of Justice and the New York State Attorney 22 General investigated the antitrust implications of the proposed 23 merger and decided not to challenge it. 24 Departments of Health and Insurance granted approval for GHI and 4 The United The New York State 1 HIP to combine their operations as an interim step pending approval 2 of an acceptable plan of conversion to a publicly owned company 3 and, thereafter, a formal merger. 4 II. 5 Procedural History On November 13, 2006, the City filed this action seeking an 6 injunction to block the merger. 7 merger under § 7 of the Clayton Act, 15 U.S.C. § 18, §§ 1 and 2 of 8 the Sherman Act, 15 U.S.C. §§ 1-2, and the Donnelly Act, N.Y. Gen. 9 Bus. L. § 340(1), New York's antitrust law. It alleges that 10 because majority 11 employees in the City's Health Benefits Program, the merger of the 12 carriers will substantially reduce competition, and will result in 13 monopolization of the relevant market and an increase in the 14 premiums that the City is required to pay. 15 the relevant market as the "low-cost municipal health benefits 16 market." 17 inexpensive and that the City selects for inclusion in the Health 18 Benefits Program.1 GHI's and HIP's plans The complaint challenges the cover a vast of the The complaint defines This market includes only those insurance plans that are 19 1 2 3 4 5 6 7 8 9 1 The complaint alleges that this relevant market also includes the health insurance program that the New York City Transit Authority administers. Because the parties did not address this aspect of the alleged market in their briefing before the district court, the district court did not consider it in resolving the summary judgment motions. See City of New York v. Group Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246, at *3 n.3 (S.D.N.Y. May 11, 2010). The parties do not raise this aspect of the alleged market on appeal. 5 1 When the City filed its complaint, it moved for a temporary 2 restraining order blocking the merger. 3 case was initially assigned, denied the motion. 4 there 5 analysis that the plaintiff has adopted here. 6 focused on what the City is paying for, and not so much on the 7 market of insurance coverage. . . . 8 the same, whether they're offered to the City or they're offered to 9 a private large employer. are substantial questions Judge Karas, to whom the about the He explained that market definition It appears to be I think the products . . . are 10 On December 4, 2009, after several years of discovery, GHI and 11 HIP moved for summary judgment dismissing the City's complaint. 12 They argued (1) that the market the City alleged in its complaint 13 is insufficient as a matter of law because it is based on the 14 City's preferences and ignores the market of insurance providers 15 that compete for the City's business, and (2) that the City could 16 not demonstrate a relevant antitrust injury because any increased 17 premiums would result from GHI's and HIP's conversion to for-profit 18 entities, not from their merger. 19 On January 20, 2010, nine days before its opposition papers 20 were due, the City sought leave to file a motion to amend its 21 complaint to add alternative market definitions. 22 to add two alternative markets: (1) all insurance plans the City 23 selected for inclusion in the Health Benefits Program, not only the 24 inexpensive plans; and (2) the market for all commercial medical 6 The City sought 1 benefits in downstate New York. 2 claim on the "Upward Pricing Pressure" test, which analyzes the 3 effect of a merger on the merged firm s pricing incentives. 4 City 5 establish the anticompetitive effect of the merger without the need 6 to define a relevant market. 7 contended that the The City also sought to base its Upward Pricing Pressure test The could The district court granted GHI and HIP's summary judgment 8 motion and denied the City's motion to amend. 9 Group Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246, at *7 City of New York v. 10 (S.D.N.Y. May 11, 2010). 11 alleged in its complaint is legally insufficient because it was 12 defined by the preferences of a single purchaser: the City. Id. at 13 *4-5. Judge Sullivan, to whom the case had been reassigned, denied 14 the City's motion to amend on the basis that (1) the City exhibited 15 undue delay because it was on notice of its potentially deficient 16 market definition at least as early as Judge Karas's denial of its 17 request for a temporary restraining order more than three years 18 earlier, and (2) the amendments would prejudice GHI and HIP by 19 forcing them to conduct substantial additional discovery after 20 three and a half years of defending a lawsuit premised on the 21 City's narrow market definition. 22 It concluded that the market the City Id. at *5-7. The City appealed. 23 24 7 1 2 DISCUSSION I. Sufficiency of the Alleged Market 3 We review an award of summary judgment de novo, affirming 4 "only if there is no genuine issue as to any material fact, and if 5 the moving party is entitled to a judgment as a matter of law." 6 Allianz Ins. Co. v. Lerner, 416 F.3d 109, 113 (2d Cir. 2005). 7 To state a claim under § 7 of the Clayton Act, §§ 1 or 2 of 8 the Sherman Act, or New York s Donnelly Act, a plaintiff must 9 allege a plausible relevant market in which competition will be 10 impaired. See, e.g., United States v. E.I. du Pont de Nemours & 11 Co., 353 U.S. 586, 593 (1957) ( Determination of the relevant 12 market is a necessary predicate to a finding of a violation of the 13 Clayton Act because the threatened monopoly must be one which will 14 substantially lessen competition within the area of effective 15 competition. (internal quotation marks omitted)); Chapman v. New 16 York State Div. for Youth, 546 F.3d 230, 238 (2d Cir. 2008) 17 (Sherman Act); Benjamin of Forest Hills Realty, Inc. v. Austin 18 Sheppard Realty, Inc., 823 N.Y.S.2d 79, 83 (App. Div. 2006) 19 (Donnelly Act). 20 products reasonably interchangeable by consumers for the same 21 purposes, 22 substitute restrains a firm s ability to raise prices above the 23 competitive level. 24 386 F.3d 485, 496 (2d Cir. 2004) (quoting E.I. du Pont de Nemours The relevant market must be defined as all because the ability of consumers to switch to a Geneva Pharm. Tech. Corp. v. Barr Labs. Inc., 8 1 & Co., 351 U.S. at 395). 2 its 3 reasonable interchangeability and cross-elasticity of demand, or 4 alleges a proposed relevant market that clearly does not encompass 5 all interchangeable substitute products even when all factual 6 inferences are granted in plaintiff's favor, the relevant market is 7 legally insufficient." 8 City Pizza, Inc. v. Domino s Pizza, Inc., 124 F.3d 430, 436 (3d 9 Cir. 1997)). proposed relevant "[W]here the plaintiff fails to define market with reference to the rule of Chapman, 546 F.3d at 238 (quoting Queen 10 Here, the district court correctly concluded that the market 11 alleged in the City s complaint is legally insufficient because it 12 is defined by the City s preferences, not according to the rule of 13 reasonable interchangeability and cross-elasticity of demand. 14 market alleged in the City s complaint ignores the competition 15 existing among insurance providers for the City s business, as well 16 as the health insurance market for other large employers in the 17 region. 18 insurance companies other than those it selects for the Health 19 Benefits Program from proposing competitive products should the 20 merged firm raise its premiums to supracompetitive prices. The The City does not allege any factor that would prevent 21 The arguments the City raises on appeal are unavailing. 22 City first argues that the insurance plans it approves constitute 23 a unique market because they reflect the City's "sound policy 24 choices." A single purchaser's preferences, however, cannot define 9 The 1 a market. We faced a similar argument in Hack v. President and 2 Fellows of Yale College, in which the plaintiffs complained that 3 Yale was illegally tying dormitory housing to their education and 4 alleged that Yale, because of its uniqueness, constituted its own 5 market for education. 237 F.3d 81, 86-87 (2d Cir. 2000), abrogated 6 on other grounds by Swierkiewicz v. Sorema N.A., 534 U.S. 506 7 (2002). 8 is "unique, . . . in a collegiate sense," it does not constitute 9 its own tying market because "there are many institutions of higher We rejected this contention, holding that, although Yale 10 learning providing superb educational opportunities." Id. at 86. 11 Here, have 12 particularly suitable to the City's needs, the City does not allege 13 any reason why other similar insurance plans are unsuitable or why 14 the numerous insurance providers in the area could not or would not 15 design suitable plans to compete with those that the City selected. 16 The City next argues that its proposed market is distinct from 17 a "single-purchaser market" because the employees who select their 18 insurance 19 employees choose health coverage only from the plans that the City 20 has already selected for inclusion in the Health Benefits Program. 21 The employees ability to choose among the plans in the Health 22 Benefits Program does not change the fact that the competition 23 among insurance providers for the business of the City and other 24 large employers would constrain the ability of the merged firm to although the coverage approved also insurance constitute 10 plans purchasers. may However, been the 1 set its premium above a competitive price. It thus cannot save the 2 City s artificially narrow market definition. 3 Finally, the City argues that the district court erred in 4 failing to consider its expert report, which, it argues, 5 establishes the harm to competition that would result from the 6 merger. 7 the basis that the alleged relevant market is legally insufficient. 8 The City's expert report was thus irrelevant. 9 II. The district court, however, granted summary judgment on Denial of the City s Motion to Amend 10 "[W]e review a district court's denial of a motion to amend 11 under the abuse of discretion standard." Gorman v. Consol. Edison 12 Corp., 488 F.3d 586, 592 (2d Cir. 2007). A district court abuses 13 its discretion when it bases its ruling on an incorrect legal 14 standard or on a clearly erroneous assessment of the facts. Bronx 15 Household of Faith v. Bd. of Educ., 331 F.3d 342, 348 (2d Cir. 16 2003). 17 Rule 15(a)(2) of the Federal Rules of Civil Procedure provides 18 that [t]he court should freely give leave [to amend the complaint] 19 when justice so requires. 20 party to amend its complaint unless the nonmovant demonstrates 21 prejudice or bad faith. 22 of Am., N.A., 626 F.3d 699, 725 (2d Cir. 2010) (citing Block v. 23 First Blood Assocs., 988 F.2d 344, 350 (2d Cir. 1993)). The rule in our circuit is to allow a AEP Energy Servs. Gas Holding Co. v. Bank 24 11 1 During the course of briefing on GHI and HIP s summary 2 judgment motion, the City moved to amend its complaint. 3 to add two additional market definitions: first, all insurance 4 providers participating in the City s Health Benefits Program, not 5 just 6 commercial medical benefits in downstate New York. 7 to add an alternative basis for its antitrust claims, the Upward 8 Pricing Pressure Test, which, the City explains, predicts the 9 likely competitive impact of a proposed merger based on how a 10 merger is likely to alter the merged firm s pricing incentives. 2 11 The City argues that the Upward Pricing Pressure test can be used 12 instead of the traditional approach of defining relevant markets. 13 In denying the City s motion to amend, the district court held 14 that the City had exhibited undue delay and that the proposed 15 amendment would prejudice GHI and HIP. 16 Health Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246, at *5-7 17 (S.D.N.Y. May 11, 2010). 18 was aware of the flaws in its complaint at least since Judge Karas 19 questioned the City s market definition in denying its motion for 1 2 3 4 5 6 7 8 9 10 11 2 the low-cost providers, and, second, all It sought providers of It also sought City of New York v. Group The district court noted that the City The City explains that the Upward Pricing Pressure test measures the effect of two opposing forces resulting from a merger. First, the upward pricing pressure induced by the merger is measured by the diversion ratio, the sales that would otherwise be lost by a price increase, but that get[] recaptured by the diversion of those sales to the larger, merged entity. The second, countervailing downward price pressure is measured by efficiencies that would reduce the merged firm s marginal cost. 12 1 a temporary restraining order more than three years earlier. 2 at *6. In addition, the district court explained that allowing the 3 amendment would unduly prejudice GHI and HIP by requiring them to 4 conduct substantial additional discovery on a different and much 5 broader market. 6 Pricing Pressure Test. 7 revealed a single decision of a federal court adopting this test, 8 which, [i]n light of the case law s clear requirement that a 9 [p]laintiff allege a particular product market in which competition 10 Id. Id. The district court also rejected the Upward It noted that its research has not will be impaired, . . . is hardly surprising. Id. at *6 n.6. 11 The City argues that the district court abused its discretion 12 by misapplying the standards that govern a motion to amend. First, 13 it argues that its addition of the market comprising all insurance 14 providers in the Health Benefits Program does not require an 15 amendment because that market represents only a slight change 16 from the market pled in the City s initial complaint. 17 not the City s addition of a market consisting of all insurance 18 providers 19 amendment, this market suffers from the same legal deficiency as 20 the market in the City s initial complaint. 21 market 22 Benefits Program is not -- as is required -- defined by the rule of 23 reasonable interchangeability and cross-elasticity of demand. 24 ignores the market of health insurance providers in downstate New in limited the to Health the Benefits providers 13 Program Whether or requires a formal As discussed above, a participating in the Health It 1 York that compete for the business of the City and other large 2 employers. 3 claims and its addition to the complaint would be futile. 4 Energy Servs. Gas Holding Co., 626 F.3d at 726 ( Leave to amend may 5 be denied on grounds of futility if the proposed amendment fails to 6 state a legally cognizable claim. ). It thus cannot form the basis of the City s antitrust See AEP 7 The City next argues that GHI and HIP did not demonstrate 8 undue prejudice because they did not show that the amendment would 9 require them to redo, or discard, discovery already conducted. The 10 need to redo or discard discovery, however, is not the only form of 11 undue prejudice we have recognized. 12 prejudicial when, among other things, it would require the opponent 13 to expend significant additional resources to conduct discovery and 14 prepare for trial or significantly delay the resolution of the 15 dispute. 16 (internal quotation marks omitted). 17 would, at a minimum, require additional discovery from large 18 employers other than the City in the downstate New York area and 19 from 20 business. 21 conclude that the need to obtain this discovery would delay 22 proceedings and require substantial additional expense. the An [a]mendment may be AEP Energy Servs. Gas Holding Co., 626 F.3d at 725-26 health insurance Here, the City s amendment providers that compete for their It was not clearly erroneous for the district court to 23 In addition, as the district court explained, the City waited 24 more than three years to seek an amendment, and did so only after 14 1 confronted with a motion for summary judgment challenging its 2 market definition. 3 the delay because GHI and HIP went along with discovery, also 4 waiting more than three years to challenge the City s market 5 definition. 6 City s complaint earlier in the litigation, their failure to do so 7 does not necessarily mitigate the City s delay. 8 City s delay in seeking amendment may not be evidence of bad faith, 9 we do not think it was an abuse of discretion for the district 10 court to find that this delay, together with the prejudice that 11 would result from the amendment, warranted denial of the City s 12 motion to amend. The City argues that it cannot be faulted for While GHI and HIP could have sought dismissal of the Although the 13 Finally, we find no error or abuse of discretion in the 14 district court s rejection of the Upward Pricing Pressure test. As 15 the district court explained, and as we discussed above, the 16 applicable case law requires plaintiffs asserting a claim under the 17 Sherman Act, the Clayton Act, or the Donnelly Act to allege a 18 market in which the challenged merger will impair competition. 19 While 20 usefulness in assessing the impact of a merger, it does not explain 21 how the test can substitute for a definition of the relevant market 22 in the pleadings. Cf. Carl Shapiro, Deputy Ass t Attorney Gen. for 23 Economics, Antitrust Division, U.S. Dep t of Justice, Update from 24 the the City Antitrust explains the Division, Upward at 15 15 Pricing (Nov. Pressure 18, test s 2010), 1 http://www.justice.gov/atr/public/speeches/264295.pdf (recognizing 2 need 3 Whether or not the Upward Pricing Pressure test -- and its results 4 in this case as explained by the City s expert -- would, as the 5 City argues, be admissible as evidence of impaired competition is 6 not relevant to the adequacy of the pleadings. 7 8 to define 11 market in any antitrust challenge). As such, we find no abuse of discretion and affirm the district court s denial of the City s motion to amend. 9 10 relevant CONCLUSION For the foregoing reasons, we AFFIRM the judgment of the district court. 12 16
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