Plaintiff United States' Redacted Reply Brief to Non-Party First State Orthopaedics,P.A.'s and Defendant's Answering Briefs in Opposition to Plaintiff's Motion to Compel FirstState's Production of Subpoenaed Documents

               UNITED STATES DISTRICT COURT
               FOR THE DISTRICT OF DELAWARE
 

  PLAINTIFF UNITED STATES' REDACTED REPLY BRIEF TO NON-PARTY
  FIRST STATE ORTHOPAEDICS, P.A.'S AND DEFENDANT'S ANSWERING
   BRIEFS IN OPPOSITION TO PLAINTIFF'S MOTION TO COMPEL
    FIRST STATE'S PRODUCTION OF SUBPOENAED DOCUMENTS
 

Dated: February 12, 1999
 

COUNSEL FOR PLAINTIFF
UNITED STATES OF AMERICA
 

RICHARD G. ANDREWS
UNITED STATES ATTORNEY
 

Page i.      

                   TABLE OF CONTENTS
 

TABLE OF CONTENTS...................................................................... .......................................i
 

TABLE OF AUTHORITIES................................................................... ...................................ii
 

I.  SUMMARY OF ARGUMENT...................................................................... ................1
 

II.   ARGUMENT.................................................. ....................................................... .........2
 

   A. The Relevance of the Information Sought Arises from Defendant's and
      First State's Own Denials and Affirmative Contentions...........................................2
 

   B. First State's Arguments Entirely Misstate the Substance of Plaintiff's
      Arguments While, Ironically, Highlighting the Relevance of
      First State's 1997 Revenue and Expense Information..............................................3
 

   C. The Request is Neither Overly Intrusive Nor Otherwise Inappropriate....................6

III.  CONCLUSION................................................ ....................................................... ........9
 

APPENDIX

.

Page ii.      

                TABLE OF AUTHORITIES
 

Cases
 

Alvord-Polk v. Schumacher & Co., 37 F.3d 996 (3^rd Cir. 1994), cert. denied, 514 U.S. 1063
(1995)........................................................................ ...............................................................4,6
 

Kellam Energy, Inc. v. Duncan, 616 F. Supp. 215 (D.Del. 1985)..............................................3
 

Krehl v. Baskin Robbins Ice Cream Co., 664 F.2d 1348 (9^th Cir. 1982)....................................4
 

SEC v. Saul, 133 F.R.D. 115 (N.D. Ill. 1990)......................................................................... ...7
 

Weit v. Continental Illinois Nat'l Bank and Trust Co., 641 F.2d 457 (7^th Cir. 1981),
cert. denied, 455 U.S. 988 (1982)........................................................................ .......................4
 

Rules
 

Fed. R. Civ. P. 26(b)(2)...................................................................... ......................................7,9
 

D. Del. LR 26.2.......................................................................... .................................................8
 

Page 1.      

I.  SUMMARY OF ARGUMENT
   1.  By the pending motion to compel discovery from non-party First State
Orthopaedics ("First State"), the United States seeks one or more documents sufficient to
show First State's 1997 revenues and expenses. That document or (documents) is sought
because First State's appointed negotiating agent, the defendant Federation, has pleaded as its
principal defense that each of its member orthopedic groups, including First State, acted
independently in rejecting Blue Cross Blue Shield of Delaware's ("Blue Cross") proposed
reduction in fees that was to become effective on November 1, 1997. As a related, purported
defense, the Federation also claims that its members acted, independently, out of concern for
the alleged, negative effects on the quality of care that would have resulted from the rate
reductions sought by Blue Cross. Plaintiff's motion stems from the need to refute the
Federation's allegations, rather than, as First State suggests, some voyeuristic desire to review
First State's income and cost data.
   2.  First State has not even attempted to refute the several grounds upon which the
United States has demonstrated why the withheld information is relevant. Rather, it raises
entirely straw arguments and then, ironically, attempts to prove the baselessness of its own
straw arguments by staking out factual positions that only confirm the importance of the
information sought. Indeed, First State lapses into justifying its refusal to produce its revenue
and expense information by making allegations to support the Federation's defenses that are
based directly on the withheld information. First State's argument serves only to highlight the
United State' clear right to explore the validity of the Federation's claims and First State's
supporting allegations.

Page 2..      

   3.  First State's post hoc attempts to portray plaintiff's request for the withheld
information as improper are based on exaggerations concerning the "personal" nature of the
business information sought and the burden of producing it. The plaintiff seeks information
related only to First State's revenue and expenses--not the personal income of individual
physicians or how those physicians spend their income. Moreover, that data can and will be
protected from public disclosure under the proposed confidentiality agreement. Finally, there
is no burden created by this production. Doubtless First State has this information readily
available in a revenue and expense statement prepared in the regular course of business. It
should be promptly produced.

II.   ARGUMENT
A.         The Relevance of the Information Sought Arises from Defendant's and
        First State's Own Denials and Affirmative Contentions
 

   First State attempts to portray itself as an innocent bystander to this action, but, as the
Complaint describes, the defendant Federation acted as the hub of a price-fixing and boycott
conspiracy among competing Delaware orthopedic surgical groups, including First State, the
largest orthopedic group in Delaware. Complaint (D.I. 1) at ¶¶ 1-4, 28-51. With the
Federation's leadership, First State and other competing groups reached an understanding to
deal with Blue Cross only through the Federation for the purpose of maintaining their existing
fee levels. Through letters sent by the Federation, First State and the other Federation
orthopedic members ultimately terminated their Blue Cross contracts when Blue Cross would
not negotiate with their agent, the Federation. Id. The Complaint also alleges that First
State's co-founder, Dr. William Newcomb, played an important role in organizing and
implementing the challenged price-fixing and boycott activities. Id. at ¶¶ 17, 19-20, 30, 34,42.

Page 3..      

   In view of First State's active participation with defendant and other orthopedists in
the challenged conduct, their 1997 revenue and expense information is directly relevant to an
assessment of whether--as the Federation claims--(1) Blue Cross's fees were too low to be
acceptable to each practice, and (2) First State's and other members' acceptance of Blue
Cross's reduced fees would have adversely affected the standard of care delivered to patients.
See Defendant's Amended Answer (D.I. 11) at ¶¶ 72, 76.
   These points should put to rest First State's baseless claim that plaintiff's request for
the withheld information "seems like a deliberate effort to penalize [First State] for and deter
it from union membership and legitimate organizational activities."1 Plaintiff's request for
this information has nothing to do with First State's membership perse in the Federation or
with legitimate union activities--activities that are neither the basis for the claim alleged nor a
subject of restriction in the relief requested in the Complaint. Rather, plaintiff's need for the
withheld information derives directly from defendant's--and now First State's--denial of
concerted action and allegation that each practice, including First State, acted independently
to protect patient care.2

B.         First State's Arguments Entirely Misstate the Substance of Plaintiff's
        Arguments, While, Ironically, Highlighting the Relevance of First State's
        1997 Revenue and Expense Information
    According to First State, the United States "mistakenly assumes that earning a
minimal profit from [Blue Cross]'s proposal should have been enough to lead First State to
accept a business deal, and if it did not, that there was a boycott."3 But the United States
makes no such assumption. Rather, in the face of the Federation's and First State's contention
that First State (and each other member group) independently rejected Blue Cross's proposal

Page 4...      

because Blue Cross's proposed fees were too low--resulting in "minimal profit," according to
First State-- plaintiff must be able to assess the degree of profitability that Blue Cross's
proposed fee reduction would have afforded First State (and the other groups). Such an
assessment obviously cannot occur without discovery of First State's 1997 revenue and
expense information.
   Equally important, First State's own allegation that Blue Cross's proposal would have
resulted in "minimal profit," cries out for factual support. Disclosure of First State's 1997
financial information will illuminate what First State means by "minimal profit." It is entirely
plausible that different orthopedic groups with differing costs would have different levels of
profitability and differing views about what level of profit was acceptable. Moreover,
knowing that in a competitive environment at least some groups would have likely accepted
Blue Cross's proposal, the need for concerted (illegal) action to keep prices high was clear.
Consequently, First State and other orthopedic groups, because of--and in spite of--their
different economic circumstances, sought to require Blue Cross to negotiate through the
Federation to achieve their collective goal of higher fees4

Page 5      

   Similarly, the truth of First State's allegation that its decision to terminate its Blue
Cross relationship was reached independently because the " 措Blue Cross] contract
represented but a small part of [First State]'s revenues,' " can be assessed only with
knowledge of the very information that the United States seeks here.5
First State's Answering Brief at 9. Id. At 11. Thus, First State's
arguments necessarily--if inadvertently--demonstrate that First State's revenue and expense
information is relevant to assess whether its physicians acted in concert with the Federation
and other member physicians in rejecting Blue Cross's proposed fee reductions. Without
discovery of the withheld information, the United States, and ultimately the Court, will be left
with First State's simple claim that "it is so." But the Federal Rules of Civil Procedure are
designed for the very purpose of permitting litigants to discover the underlying facts to
determine the truth of such unsupported allegations.
   Finally, while asserting to this Court that "patient care is the bottom line,"6 First State
simultaneously, and surprisingly, argues that the United States' effort to assess the
Federation's claim that its member physicians acted out of concern over the impact that Blue

Page 6..      

Cross's proposed fee reductions would have on the standard of care provided is "pointless"
because First State "did not conduct such an evaluation prior to rejecting the proposed
changes in [Blue Cross]'s reimbursement rates."7 But the Federation's Amended Answer
(D.I. 11) alleges, without excluding First State, that its members were concerned about the
effect of Blue Cross's fee reduction on their standard of care.8 Indeed, Mr. Seddon of the
Federation, writing expressly on behalf of First State (and identically for other Federation
members as alleged in Paragraphs 36 and 37 of the Complaint (D.I. 1)), advised Blue Cross in
an October 10, 1997, letter that the nine First State physicians listed in the letter "are
concerned with the proposed fee schedules to be enacted on November 1, 1997; and, the
negative impact such change will have in regard to maintaining office standards and quality
care."9 The United States, like any other plaintiff, is surely entitled to assess the pretextual
nature of these purported concerns. First State's claim here that it did not evaluate the impact
that Blue Cross's proposed fees would have on its standard of care serves to enhance the
probability that discovery will expose the pretextual nature of the Federation's claim.
Evidence of such a pretext "would tend to support an inference that [defendant and First State
physicians] acted as part of a conspiracy." Alvord-Polk v. Schumacher & Co., 37 F.3d 996,
1012-13 (3rd Cir. 1994), cert. denied, 514 U.S. 1063 (1995).

C.         The Request is Neither Overly Intrusive Nor Otherwise Inappropriate
   Having no way to deny the relevance of the withheld information, First State resorts to
exaggeration or obfuscation of the issue. The United States seeks documents sufficient to
show only First State's revenues and expenses, including First State's expenses attributable to
its physicians' salaries and benefits, a major component of any medical group's expenses and

Page 7..      

a crucial factor in assessing the claims the Federation and First State have raised. Contrary to
First State's assertions, the request seeks no financial information directly from any First State
physician, and, other than First State's total expenses for physician salaries and benefits, the
request seeks no information relating to any particular physician's "personal financial
information."10 Also, contrary to First State's argument, there is simply no request
whatsoever for "private details of one's life" or the "personal lives of First State and its
doctors."11
   First State's invocation of Fed. R. Civ. P. 26(b)(2) is totally misplaced. The requested
document (or documents) is neither cumulative nor burdensome to produce. First State was
not asked during the investigation to produce any document containing the information now
sought by Document Request No. 7, and, indeed, First State did not produce any such
document. Moreover, if the United States already had the withheld information, there would
obviously be no incentive to devote time better spent on other efforts and incur the expense of
prosecuting this motion; nor, presumably, would First State have any incentive to incur the
costs of fighting about producing information that it had already produced.12

Page 8.      

   First State's related suggestion that the information has already been obtained in
investigative depositions is simply not true. The information obtained during those
depositions, which First State chose to raise with the Court, involves only rough
approximations of its gross physician salary expenses, compared with all other expenses.
Those very limited, rough approximations afford neither a complete nor reliable picture of
First State's 1997 revenues and expenses; nor does the available information allow for any
reliable analysis of First State's profitability or any comparison of cost structures across the
practices of Federation orthopedic members.
   In view of D. Del. LR 26.2, which limits disclosure of confidential information to
counsel in the absence of a protective order, it appears First State chose not to file the relevant
deposition excerpts under seal with the Court only because it knows that the transcripts would
expose not only the lack of any prior disclosure of the information needed but also the
substantive baselessness of its, and the Federation's, defenses.

        [REDACTED CONFIDENTIAL BUSINESS INFORMATION]
 

Page 9..      

III.  CONCLUSION
   The Federation's, and now First State's, denial of, and alleged affirmative defenses to,
plaintiff's claim of concerted action, the issue at the heart of this case, have put First State's
1997 revenue and expense information at issue in this case. First State has made no real
attempt to take issue with plaintiff's demonstration on several grounds of the information's
relevance. Instead, First State has characterized the substance of the withheld information in
an attempt to show what defendant will prove in support of its claims. That
(mis)characterization itself justifies an order compelling production of the data by First State.
When First State's claims are coupled with those pleaded by the Federation, the United
States' need for and right to see this information becomes overwhelming.
 

                            Respectfully submitted,


COUNSEL FOR PLAINTIFF
UNITED STATES OF AMERICA
 

RICHARD G. ANDREWS
UNITED STATES ATTORNEY
 

Dated: February 12, 1999

FOOTNOTES

2 This Court has recognized that antitrust plaintiffs should be allowed to discover such evidence to prove the existence of a conspiracy. Kellam Energy, Inc. v. Duncan, 616 F. Supp. 215, 217 (D.Del. 1985).

3 First State's Answering Brief (D.I. 58) at 10-11.

4 On this point, First State glibly denigrates plaintiff's citation to Krehl v. Baskin Robbins Ice Cream Co., 664 F.2d 1348 (9^th Cir. 1982), and Weit v. Continental Illinois Nat'l Bank and Trust Co., 641 F.2d 457 (7^th Cir. 1981), cert. denied, 455 U.S. 988 (1982), but does not even question the validity of the underlying, substantive rule for which plaintiff cited those cases: Competitors' cost structures are relevant to a determination of whether their parallel pricing behavior resulted from concerted action. Here, plaintiff seeks to test defendant's claim, in part, through analysis and comparison of each practice's cost structure.

5 These points also expose the invalidity of First State's two related straw arguments accusing plaintiff of "attempting to function improperly as the omnipotent manager of First State and to unilaterally decree what is and is not an acceptable contract"13 or to "second guess their business judgment." First State's Answering Brief (D.I. 58) at 9, 11.14 These arguments transmogrify the purpose of plaintiff's attempt to obtain information that will simply allow it and this Court to assess the validity of defendant's and First State's allegations that First State and each other orthopedic member independently viewed Blue Cross's fee proposal as unacceptably low.

6 First State's Answering Brief (D.I. 58) at 10.

7Id. at 10 n. 5.

8 Amended Answer (D.I. 11) at ¶ 76.

9 See Appendix at C1.

10 First State's Answering Brief (D.I. 58) at 6.

11Id.

12 First State's additional argument that the information could have been obtained by civil investigative demand fails to bolster its argument. For obvious reasons, the United States is not required to obtain everything from persons involved in a potential violation of the antitrust laws during an investigation, and is authorized by the Federal Rules, when litigation ensues, to conduct discovery in the civil action itself that will enable it to prepare for a trial. This is particularly the case when the discovery sought is intended to rebut a purported affirmative defense asserted in the litigation. Cf. SEC v. Saul, 133 F.R.D. 115 (N.D. Ill. 1990) (permitting the SEC to re-depose witnesses after case was filed even though the witnesses were "examined thoroughly" during a pre-complaint investigation because SEC's motives and concerns in the investigative setting of whether or not to press charges "are sufficiently different to merit further discovery once the charges have been made and the parties are at issue").

13 First State's Answering Brief at 9.

14Id. At 11.