Ninth Circuit Adopts Clear Cost-Based Standards to Evaluate Antitrust Liability of 'Bundled Discounts'

On September 4, 2007, the Ninth Circuit issued its opinion in Cascade Health Solutions (f/k/a McKenzie-Willamette Hospital) v. PeaceHealth1, ruling that bundled discounts violate antitrust law only if the discounts results in below-cost pricing. PeaceHealth involved the controversial issue of whether a dominant player's bundled discounts constitute attempted monopolization that violates Section 2 of the Sherman Act. PeaceHealth is significant because it rejected the ambiguous approach adopted by the Third Circuit in LePage's Inc. v. 3M2. The Court instead endorsed a cost-based test to determine when bundled discounts constitute attempted monopolization, an analysis recently set forth in the report of the Antitrust Modernization Commission.

Background

PeaceHealth was an appeal from a final award of $16.2 million by the district court in favor of plaintiff McKenzie and against defendant PeaceHealth.

PeaceHealth and McKenzie are the only two hospital care providers operating hospitals in Lane County, Oregon. PeaceHealth provides basic care and more advanced "tertiary care" services whereas McKenzie only provided basic care service. PeaceHealth has a market share of more than 90% for the advanced service and 75% for the basic service in Lane County.

McKenzie sued PeaceHealth for violating Section 2 of the Sherman Act by offering bundled discounts. McKenzie alleged, among others, that PeaceHealth offered insurers 35% to 40% discount on tertiary care if the insurers made PeaceHealth their exclusive preferred provider for all hospital care services. McKenzie further alleged that it could provide basic care services at a lower cost than PeaceHealth but because of the bundled discounts offered by PeaceHealth, McKenzie was driven out of the market for those services. After a trial, the district court instructed the jury that "[b]undled price discounts may be anticompetitive if they are offered by a monopolist and substantially foreclose portions of the market to a competitor who does not provide an equally diverse group of services and who therefore cannot make a comparable offer."

As a result, the jury rendered a $5.4 million award in favor of McKenzie, which the district court trebled for a final award of $16.2 million.

The Ninth Circuit's Opinion

The Ninth Circuit first addressed the issue of when a bundled discount can constitute attempted monopolization, noting that bundled discounts generally benefit buyers because the discounts allow buyers to...