In Re: Delta Dental Antitrust Litigation

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

)

In re Delta Dental ) No. 19 CV 6734

Antitrust litigation )

) MDL No. 2931

)

MEMORANDUM OPINION AND ORDER

Plaintiffs in this multi-district litigation are dental

service providers who claim on behalf of themselves and a class

that defendants — thirty-nine dental service corporations licensed

to use the Delta Dental name (the “Delta Dental State Insurers”),

together with the Delta Dental Plans Association (“DDPA”), and

DDPA’s affiliates and subsidiaries Delta Dental Insurance Company,

DeltaCare USA, and Delta USA Inc. — violated Section 1 of the

Sherman Act, 15 U.S.C. § 1, through a multifaceted conspiracy to

exercise monopsony power and restrain competition in the dental

insurance business. According to the consolidated complaint (“CC,”

or sometimes, for simplicity, “the complaint”), defendants engaged

in three types of concerted, anticompetitive conduct: First, they

agreed to divide the market for dental insurance into thirty-nine

states or territories, allocating exclusive control of each to a

specific Delta Dental State Insurer, and agreeing that none would

sell or attempt to sell dental insurance outside of its own

allocated territory. Second, they allegedly conspired to fix

artificially low reimbursement rates to providers of dental goods

and services, which providers were constrained to accept due to

defendants’ dominant market position. Finally, defendants

allegedly agreed to restrict the amount of revenue that any Delta

Dental State Insurer could derive from selling non-Delta Dental

branded dental insurance. Plaintiffs allege that rather than pass

on to consumers the savings they achieved through their

anticompetitive conduct, defendants paid exorbitant salaries to

their executives and padded their already inflated capital

reserves.

Defendants move to dismiss the consolidated amended complaint

in its entirety pursuant to Fed. R. Civ. P. 12(b)(6). For the

reasons that follow, I deny the motion.

I.

In reviewing the sufficiency of a complaint, I accept all

well-pled facts as true and draw all permissible inferences in

favor of the plaintiff. Agnew v. Nat’l Collegiate Athletic Ass’n,

683 F.3d 328, 334 (7th Cir. 2012). “The Federal Rules of Civil

Procedure require only that a complaint provide the defendant with

‘fair notice of what the ... claim is and the grounds upon which

it rests.’” Id. (quoting Erickson v. Pardus, 551 U.S. 89, 93

(2007)).

Plaintiffs’ claims arise under Section 1 of the Sherman Act,

which prohibits “[e]very contract, combination in the form of trust

or otherwise, or conspiracy, in restraint of trade or commerce

among the several States.” 15 U.S.C. § 1. Plaintiffs assert their

claims pursuant to the Clayton Act, which establishes a private

right of action for injunctive relief (which plaintiffs seek in

Count I) and damages (which they seek in Count II) by persons

threatened or injured by a violation of the antitrust laws.

According to the consolidated complaint, the DDPA is “funded

and controlled by the Delta Dental State Insurers, and acts as a

vehicle for their concerted activity, including via a contract

entered into by each Delta Dental State Insurer with the Delta

Dental Plans Association (the ‘Delta Dental Plan Agreement’).” CC

at ¶ 2. Together, defendants are the “largest providers of

insurance for dental services in the U.S.” Id. at ¶ 3. Plaintiffs

allege that defendants have divided the national market into

thirty-nine exclusive territories, id., with each Delta Dental

State Insurer exercising significant market power in the dental

insurance market of its allotted territory. See CC at ¶¶ 25-63.

Delta Dental’s average market share across the United States was

between 59% and 65% between 2013 and 2017. Id. at ¶ 90.

The cornerstone of defendants’ allegedly anticompetitive

conduct is the “market allocation mechanism.” Plaintiffs state

that:

By carving the 50 U.S. States into 39 exclusive

territories in which Delta Dental State Insurers are

guaranteed to be free from competition from other Delta

Dental State Insurers, the Delta Dental State Insurers

have each secured monopsony power within their assigned

territories, and Defendants as a group have secured

monopsony control over the market for dental insurance

across the U.S.

Id. at ¶ 3. “Absent the monopsony powers and territorial

protections secured” through the market allocation mechanism,

plaintiffs allege, consumers would have greater choice in the

dental insurance they purchase, while dental providers would have

greater choice in the insurance they choose to accept from their

patients. Id.

The complaint goes on to allege that defendants have enhanced

their monopsony control through a second unlawful restraint in the

form of a price-fixing agreement, which defendants carry out by

sharing pricing information to determine, in concert, “the lowest

and most punitive rates of reimbursement” that dental providers

will accept. CC at ¶ 125. Plaintiffs claim that providers have no

choice but to accept defendants’ below-market reimbursement rates

due to defendants’ market dominance. Id. Plaintiffs acknowledge

that defendants’ below-market reimbursement rates could,

theoretically, translate to savings in the premiums paid by their

policyholders; but they assert that rather than passing on any

savings to consumers of dental products and services, defendants

have paid lavish salaries to their executives and bloated their

capital reserves. Id.

Plaintiffs term the third alleged element of defendants’

anticompetitive conspiracy the “revenue restriction mechanism.”

They allege that the Delta Dental Plan Agreement establishes “a

direct cap,” on the amount of non-Delta Dental branded business

the Delta Dental State Insurers may conduct. CC at ¶ 119.

Plaintiffs assert that these restrictions “directly limit the

amount of competition and the number of competitors in the market

in which Delta Dental State Insurers (or their subsidiaries) could

compete for customers,” reducing the insurance options available

to both providers and consumers.

II.

A claim under Section 1 of the Sherman Act comprises three

elements: “(1) a contract, combination, or conspiracy; (2) a

resultant unreasonable restraint of trade in the relevant market;

and (3) an accompanying injury.” Denny’s Marina, Inc. v. Renfro

Prods., Inc., 8 F.3d 1217, 1220 (7th Cir. 1993). Courts employ

three modes of analysis to determine whether conduct alleged to

violate Section 1 has anticompetitive effects: the Rule of Reason,

per se analysis, and the quick-look approach. Agnew v. Nat'l

Collegiate Athletic Ass’n, 683 F.3d 328, 335 (7th Cir. 2012).

“The standard framework for analyzing an action’s

anticompetitive effects on a market is the Rule of Reason.” Id.

Under this mode of analysis, “the plaintiff carries the burden of

showing that an agreement or contract has an anticompetitive effect

on a given market.” Id. In a narrower class of cases, however, the

challenged conduct may be deemed anticompetitive per se, which is

appropriate when a “practice facially appears to be one that would

always or almost always tend to restrict competition and decrease

output.” Id. at 336 (quoting National Collegiate Athletic

Association v. Board of Regents, 468 U.S. 85, 100 (1984) (“NCAA”)).

Yet, “there is often no bright line separating per se from Rule of

Reason analysis. Per se rules may require considerable inquiry

into market conditions before the evidence justifies a presumption

of anticompetitive conduct.” NCAA, 468 U.S. at 104 n. 26. Courts

have also developed a third mode of analysis called the “quick-

look” approach, which is employed where “no elaborate industry

analysis is required to demonstrate the anticompetitive character

of ... an agreement.” Id. This approach asks whether an “observer

with even a rudimentary understanding of economics could conclude

that the arrangements in question would have an anticompetitive

effect.” Id. (quoting NCAA, 468 U.S. at 109, and California Dental

Ass’n v. F.T.C., 526 U.S. 756, 770 (1999)). All of these frameworks

are intended to answer the same question: “whether or not the

challenged restraint enhances competition.” Id. (citations

omitted).

The theory of plaintiffs’ case is that through the market

allocation mechanism, the price-fixing mechanism, and the revenue

restriction mechanism—each of which plaintiffs allege to be

anticompetitive—defendants have formed a buyers’ cartel to exert

monopsony power that is illegal per se under the Sherman Act. See

Vogel v. American Soc. Of Appraisers, 744 F.2d 598, 601 (“buyer

cartels, the object of which is to force the prices that suppliers

charge the members of the cartel below the competitive level, are

illegal per se.”); see also Mandeville Island Farms v. American

Crystal Sugar Co., 334 U.S. 219 (1948) (control of sugar beet

market by conspiracy of buyers violated Sherman Act). Plaintiffs

claim that defendants’ conduct violates the Sherman Act per se,

but that defendants are liable even if the quick-look or Rule of

Reason analyses are employed. CC at ¶¶ 121-22. Defendants

challenge plaintiffs’ claims on numerous legal and factual fronts,

adding up to their view that the complaint does not state an

actionable antitrust claim on any theory. In addition, defendants

raise three independent grounds for dismissal: failure to plead an

antitrust injury, failure to plead concerted action, and exemption

from liability under the McCarran-Ferguson Act.

Per Se Analysis

The core of the alleged conspiracy is the market allocation

mechanism, which defendants acknowledge functions generally in the

manner plaintiffs describe. Each Delta Dental State Insurer is

allocated a defined territory within the United States and agrees

to sell Delta Dental-branded insurance only within that market.

Plaintiffs claim that this mechanism is a so-called “naked”

restraint that is illegal per se under Section 1. See United States

v. Topco Assocs., Inc., 405 U.S. 596, 608, 92 S. Ct. 1126, 1133–

34, 31 L. Ed. 2d 515 (1972) (characterizing horizontal territorial

limitations as “naked restraints of trade with no purpose except

stifling of competition.”). By defendants’ lights, however, the

territorial restrictions in their agreements are lawful ancillary

restraints that are “part of a business structure that improves

economic productivity and increases interbrand competition with

national dental insurers.” Def.’s Mem. at 4 (citing Polk Bros.,

Inc. v. Forest City Enterprises, Inc., 776 F.2d 185, 188 (7th Cir.

1985)). In addition, defendants argue that plaintiffs’ theory of

per se liability fails to appreciate that the dental insurance

market is a “two-sided transaction platform” requiring analysis

under Ohio v. American Express Co., l138 S. Ct. 2274, 2283 (2018),

and their allegations fail to state a claim under that framework.

Plaintiffs ground their view of the market allocation

mechanism in Topco and United States v. Sealy, Inc., 388 U.S. 350

(1967). Sealy involved an agreement among licensees of Sealy-

branded bedding products to sell products under the Sealy trademark

only in each licensee’s exclusive territory. 388 U.S. 350 at 352.

The licensees also agreed to the price at which Sealy products

could be sold. Id. at 355. Although Sealy was the licensor of the

trademark, because the licensees owned substantially all of

Sealy’s stock and controlled the corporate entity’s operations,

the Court considered the territorial exclusivity agreement to be

a horizontal restraint that was unlawful per se, regardless of the

“many other purposes” it may have served. Id. at 356. The Court

held that the restriction’s “connection with the unlawful price-

fixing is enough to require that it be condemned as an unlawful

restraint and that appellee be effectively prevented from its

continued or further use.” Id. at 356–57.

Topco involved a group of independently owned, small and

medium-sized grocery store chains that formed a cooperative to

purchase merchandise to sell under the Topco brand. 405 U.S. at

599. Each member of the cooperative was required to sign an

agreement “designating the territory in which that member may sell

Topco-brand products,” and no member could sell those products

outside of the territory in which it was licensed. Id. at 602. All

of the licenses were either formally or functionally exclusive.

Id. The Court rejected the collective’s asserted justification

that the territorial divisions were necessary “to compete more

effectively with larger national and regional chains,” id. at 599—

an argument defendants echo here, see Def.’s Mem. at 23. Relying

on Sealy, the Court concluded that the territorial divisions were

naked restraints that violated the Sherman Act per se. Id. at 608.

It is true, as defendants point out, that the law has evolved

since Topco and Sealy were decided, and that to the extent these

cases “stand for the proposition that all horizontal restraints

are illegal per se,” the Court’s later cases have narrowed that

holding. See Rothery Storage & Van Co. v. Atlas Van Lines, Inc.,

792 F.2d 210, 226 (D.C. Cir. 1986) (noting that the Court “reformed

the law of horizontal restraints” in Broadcast Music, Inc. v.

Columbia Broadcasting System, 441 U.S. 1 (1979) (“BMI”), and NCAA,

inter alia). But Topco and Sealy need not be interpreted so broadly

to support plaintiffs’ claims at this stage. Both BMI and NCAA

were decided after lengthy trials, and the Court’s decision not to

apply the per se rule in these cases was based on highly fact-

specific analyses that addressed unique features of the markets at

issue and the products resulting from the defendants’

collaboration.

In BMI, the Court upheld the “blanket licenses” commonly used

in the music industry to enable associations of composers to sell

performance rights to radio stations and other performance

outlets. The Court acknowledged that the licenses amounted to

horizontal price fixing in the literal sense, but it declined to

hold them illegal per se, since the practical realities of the

market made it “nearly impossible for each radio station to

negotiate with each copyright holder separate licenses for the

performance of his works on radio.” BMI, 441 U.S. at 6, 20.

In NCAA, the Court declined to apply the per se rule to

horizontal restrictions on the televising of college football

games. The Court recognized that the challenged agreement was an

output limitation of the kind the antitrust laws generally condemn

per se. Yet it applied the Rule of Reason, observing that league

sports are quintessentially a joint activity, and that organized

athletic competition is “an industry in which horizontal

restraints on competition are essential if the product is to be

available at all.” Id. at 101.

It does not appear at this stage that the circumstances

warranting the Court’s departure from the per se mode of analysis

in BMI and NCAA justify the same treatment here. The Supreme Court

and the Seventh Circuit have reiterated since those cases were

decided that territorial restraints and price-fixing among

competitors generally remain subject to per se analysis. Leegin

Creative Leather Prod., Inc. v. PSKS, Inc., 551 U.S. 877, 886

(2007) (“[r]estraints that are per se unlawful include horizontal

agreements among competitors to fix prices...or to divide

markets”) (citations omitted). See also Palmer v. BRG of Georgia,

Inc., 498 U.S. 46, 49 (1990) (“[h]orizontal territorial

limitations ... are naked restraints of trade with no purpose

except stifling of competition.”) (quoting Topco, 405 U.S. at 608);

Gen. Leaseways, Inc. v. Nat’l Truck Leasing Ass’n, 744 F.2d 588,

595 (7th Cir. 1984) (distinguishing BMI and NCAA and holding

territorial restraints by trucking company to be a per se violation

of the Sherman Act). Prior to any factual development, defendants’

argument that their collaboration resulted in a “new and effective

product” does not warrant dismissal of plaintiffs’ per se claim

under BMI or NCAA. Def.’s Mem. at 11. See In re Blue Cross Blue

Shield Antitrust Litig., 308 F. Supp. 3d 1241, 1259 (N.D. Ala.

2018) (health insurance not a “unique product” compelling

dismissal of per se claim).

Nor is dismissal appropriate based on defendants’

characterization of the market allocation mechanism as an

“ancillary restraint.” Defendants rely heavily for this argument

on Polk Bros. v. Forest City Enterprises, F.2d 185, 189 (7th Cir.

1985), in which the Seventh Circuit explained that “[a] restraint

is ancillary when it may contribute to the success of a cooperative

venture that promises greater productivity and output,” and held

that “courts must ask whether an agreement promoted enterprise and

productivity at the time it was adopted. If it arguably did, then

the court must apply the Rule of Reason to make a more

discriminating assessment.” Id. Setting aside the difficulty of

answering this question at the pleadings stage — Polk Bros., too,

was decided after a trial — the Supreme Court has since made clear

that “the ancillary restraints doctrine has no application...where

the business practice being challenged involves the core activity

of the joint venture itself.” Texaco Inc. v. Dagher, 547 U.S. 1,

7 (2006). That certainly appears to be the case here, as the

challenged restrictions govern defendants’ core activity of

selling dental insurance. For at least these reason, Polk Bros.

does not compel application of the Rule of Reason to the market

allocation mechanism.1

1 I note that defendants’ ancillary restraint argument rests

largely on their own view of the facts, not on facts alleged in

the complaint. For example, defendants take for granted that their

cooperation is properly characterized as a “joint venture.” See

id. at 23, 31, 21. As plaintiffs observe, however, defendants’

collaboration is unlike the joint venture in Polk Bros., where the

two entities offered complementary household products and the

agreement to sell them at a single location was likely to increase

the output by each. Here, all of the Delta Dental State Insurers

Ohio v. American Express Co., l138 S. Ct. 2274, 2283 (2018)

(“AmEx”), also does not dispose of plaintiffs’ per se claim as a

matter of law. AmEx involved a challenge to antisteering provisions

that American Express imposed upon merchants as a condition of

participating in its credit card network. The Court explained that

credit card companies like American Express operate a “two-sided

platform,” meaning that they offer “different products or services

to two different groups who both depend on the platform to

intermediate between them.” Id. at 2280. Two-sided platforms

“often exhibit what economists call ‘indirect network effects,’”

which exist when the value of the platform to participants on each

side depends on the number of participants on the other. Id.

Credit card networks, the Court continued, belong to a special

subset of two-sided platforms known as “transaction” platforms.

Id. “The key feature of transaction platforms is that they cannot

make a sale to one side of the platform without simultaneously

making a sale to the other.” Id. Due to the nature of the product

credit card companies offer—transactions that are jointly consumed

by the cardholder and the merchant—credit card networks “exhibit

more pronounced indirect network effects and interconnected

offer the same products. And in Dagher, the Court presumed for

purposes of its decision that the combination at issue was a

“lawful joint venture,” but there is no basis on which to make

that assumption here.

pricing and demand.” Id. at 2286. Accordingly, both sides of the

market had to be considered to determine whether AmEx’s

antisteering provisions had anticompetitive effects. Yet the

plaintiffs in AmEx “stake[d] their entire case on proving that

Amex’s agreements increase merchant fees,” without considering the

agreements’ effects, if any, on the other side of the market. Id.

at 2287. For that reason, and because the plaintiffs also had not

proven that the anti-steering restrictions “increased the cost of

credit-card transactions above a competitive level, reduced the

number of credit-card transactions, or otherwise stifled

competition in the credit-card market,” the Court concluded that

the plaintiffs had not established a violation of federal antitrust

laws. Id.

Defendants argue that dental insurance companies, like credit

card companies, operate two-sided transaction platforms with

dental providers on one side and consumers of dental goods and

services on the other. In their view, this means that the

territorial restraints require a nuanced analysis that considers

indirect network effects and is “fundamentally incompatible with

the per se rule.” Def.’s Mem. at 3. While there are indeed some

similarities between the role credit card companies play in

facilitating transactions between merchants and consumers and the

role dental insurance companies play in facilitating the care

dentists provide patients, defendants overstate the impact of AmEx

on the claims plaintiffs articulate.

At the outset, the parties in AmEx agreed that the plaintiffs’

claim challenged a vertical restraint governed by the Rule of

Reason. Id. at 2284. Accordingly, the Court did not discuss the

per se mode of analysis at all, except to acknowledge that

horizontal restraints, i.e., “restraints imposed by agreement

between competitors” are “[t]ypically” the kind that qualify as

unreasonable per se. Id. (internal quotation marks and citation

omitted). Specifically, the Court did not address the availability

or contours of a per se challenge to a horizontal restraint in a

two-sided market. So even assuming that dental insurers operate in

a two-sided market, AmEx does not necessarily foreclose

plaintiffs’ claim that defendants’ agreement to eliminate

intrabrand competition through territorial divisions is

anticompetitive per se.2

2 Plaintiffs appear to agree that the dental insurance market

operates a two-sided platform: “A dental insurer offering a dental

plan needs at least two things for the plan to succeed:(1) patients

willing to pay the dental insurer’s premiums in exchange for the

terms and coverage offered by the plan, and (2) dental providers

willing to accept patients under that plan given the reimbursement

rates the dental insurer is offering for the good[s] and services

provided to the dental patient. In a free and competitive market,

patients will not accept the plan if the dental insurer’s premiums

are too high, and dental providers will not accept the plan if the

dental insurer’s reimbursement rates are too low.” CC at ¶ 98 n.

5.

Defendants also overreach in their characterization of the

dental insurance market as a two-sided transaction platform.

Indeed, dental insurance lacks the “key feature” of a transaction

platform: simultaneity of the exchange. See 1138 S. Ct. 2280. As

common experience teaches, consumers of dental services typically

pay insurers fixed premiums at regular intervals, regardless of

when or even whether they visit the dentist. And the amount of the

insured’s premium generally depends on the terms and coverage of

her plan, not on the cost of the goods or services she receives on

any particular visit. Yet as plaintiffs allege, insurers reimburse

dental providers based on the goods and services they actually

provide to patients. So a dental provider receives no payments at

all on behalf of an insured who paid her premiums in full but did

not actually receive dental care during the plan year. And

reimbursements paid on behalf of an insured who does receive

covered services during her plan year are untethered in both time

and cost from the insured’s premium payment. In these ways, dental

insurance operates decidedly differently from the “two-sided

transaction platform” in AmEx.

Defendants baldly assert that “[l]ower reimbursement rates

mean lower premiums for employers, groups, and individuals, and

lower copayments and out-of-pocket costs for consumers” and argue

that “[t]o hold an agreement that tends to lower consumer prices

illegal per se, without careful examination of the agreement’s

true economic consequences, would seem at odds with the Sherman

Act’s purpose.” Def.’s Mem. at 28, quoting North Jackson Pharmacy,

Inc. v. Caremark RX, Inc., 385 F. Supp. 2d 740, 750 (N.D. Ill.

2005). But their factual premise is contrary to the complaint,

which alleges that consumers do not benefit from defendants’

artificially low reimbursement rates. Indeed, plaintiffs allege

that defendants could maintain or even reduce their insureds’

premium costs even at higher reimbursement rates by decreasing

their executives’ compensation and/or their flush capital

reserves. In plaintiffs’ view, any indirect network effects that

exist in the market are minimal, so the two-sided market analysis

is inapplicable. See AmEx, 138 S. Ct. at 2286. This is not a

dispute that can be resolved at this stage. For the foregoing

reasons, I conclude that plaintiffs’ allegations describing the

market allocation mechanism articulate a viable per se violation

of the Sherman Act.

With respect to the second and third mechanisms plaintiffs

challenge, defendants do not dispute that horizontal agreements to

fix prices or limit output are anticompetitive per se. But they

claim that plaintiffs’ allegations of “price-fixing” and “revenue

restrictions” are merely empty labels that are factually

insufficient to articulate a Section 1 violation. Defendants are

correct that Rule 8 requires more than mere labels and conclusions,

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007), but wrong in

their assertion that the consolidated complaint does not cross

that threshold.

Contrary to defendants’ characterization, plaintiffs do not

merely incant the words “price fixing” and “revenue restrictions”

without more. With respect to price fixing, plaintiffs allege that

defendants:

draw upon their access to market rates data for dental

goods and services across the U.S. via the records

obtained and held by Delta Dental Plans Association, and

use these to collectively determine the below market

rates they will impose upon the Dental Providers

pursuant to the Delta Dental Provider Agreement.

Defendants coordinate their reimbursement rates through

the Delta Dental Plans Association by, among, other

things, agreeing on the form of the agreements that the

Delta Dental State Insurers enter into with the Delta

Providers, sharing their reimbursement data, and

policing the reimbursement rates of the other Delta

Dental State Insurers.

CC at ¶ 100. This paragraph describes how defendants obtain and

share pricing information, agree collectively upon below-market

reimbursement rates, then police payment of those rates to ensure

uniformity in practice. These allegations give substance to the

label “price fixing” and are sufficient to inform defendants of

the nature of plaintiffs’ claim.3

3 Defendants contend that to survive dismissal, plaintiffs were

required to “plead facts showing the ‘who, what, when, where, and

how’ of the ‘price-fixing mechanism.’” Reply at 6. This formulation

The factual allegations surrounding plaintiffs’ claim that

defendants have agreed to a “direct cap” on revenue derived from

non-Delta Delta business is decidedly less substantial.

Nevertheless, their description of the revenue restrictions

mechanism is sufficient to give defendants “fair notice of what

the ... claim is and the grounds upon which it rests.” Twombly,

550 U.S. at 555 (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)).

“There is no heightened pleading standard for antitrust claims.”

Int’l Outsourcing Servs., LLC v. Blistex, Inc., 420 F. Supp. 2d

860, 862 (N.D. Ill. 2006) (citing Hammes v. AAMCO Transmissions,

33 F.3d 774, 782 (7th Cir. 1994). This means that plaintiffs must

allege only “enough factual matter (taken as true) to suggest that

echoes the one courts in this circuit routinely use to describe

the heightened pleading standard of Rule 9(b). See DiLeo v. Ernst

& Young, 901 F.2d 624, 627 (7th Cir. 1990) (plaintiff alleging

fraud must plead “the who, what, when, where, and how: the first

paragraph of any newspaper story.”). But the Seventh Circuit has

made clear that Rule 8, not Rule 9(b), governs antitrust claims.

Hammes v. AAMCO Transmissions, 33 F.3d 774, 782 (7th Cir. 1994).

And I apply Seventh Circuit law because “[t]he law of the circuit

where the transferee court sits governs questions of federal law

in MDL proceedings.” In re Bridgestone/Firestone, Inc., ATX, ATX

II, 129 F. Supp. 2d 1202, 1204 n. 2 (S.D. Ind. 2001) (citing In re

Korean Air Lines Disaster of September 1, 1983, 829 F.2d 1171,

1176 (D.C.Cir. 1987)). Accordingly, defendants’ reliance on Bay

Area Surgical Mgmt. LLC v. Aetna Life Ins. Co., 166 F. Supp. 3d

988, 995 (N.D. Cal. 2015), which applied the Ninth Circuit standard

articulated in Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1048

(9th Cir. 2008) (complaint claiming Sherman Act conspiracy must

“answer the basic questions: who, did what, to whom (or with whom),

where, and when?”) is not persuasive.

an agreement was made.” Twombly, 550 U.S. at 556. Here, no one

disputes that defendants conducted Delta Dental business by

agreement. If that agreement limited the revenue Delta Dental State

Insurers could derive from other business in a manner that

restricted output as plaintiffs allege, then defendants are

potentially liable under § 1 of the Sherman Act. See In re Blue

Cross Blue Shield Antitrust Litig., 308 F. Supp. 3d 1241, 1272-73

(N.D. Ala. 2018).

Defendants flatly dispute that they have agreed to such

restrictions, noting that the “Delta Dental Plans Association

Membership Standards and Guidelines” (‘Membership Guidelines’)”

“simply do not limit the amount of second-brand business that

Member Companies can generate.” On that ground, they insist that

“the very document” plaintiff cite belies their claim. Def.’s Mem.

at 12, 19. But the consolidated complaint does not refer to the

“Membership Guidelines.” As noted above, plaintiffs cite “a

contract entered into by each Delta Dental State Insurer with the

Delta Dental Plans Association (the ‘Delta Dental Plan

Agreement’).” In their opposition brief, plaintiffs explain that

the “Delta Dental Plan Agreement” comprises not only the Membership

Guidelines but also a number of other documents that collectively

embody defendants’ agreement. Indeed, the Membership Guidelines

refer to numerous additional documents governing the parties’

agreement, including DDPA Bylaws, DeltaUSA Bylaws, the DeltaUSA

Policies and Procedures Manual, Delta’s Interplan Participation

Agreement, the Delta Dental Member Company Rating Factors, the

National Provider File License Agreements, the Policy Governing e-

Business and Technology Requirements, and the DeltaUSA Processing

Policies. Accordingly, that the Membership Guidelines do not

facially establish revenue caps does not dispose of the question

whether defendants have agreed to limit their revenue from non-

Delta Dental business. Although the factual basis for plaintiffs’

belief that defendants have agreed to restrict their non-Delta

Dental branded business is indeed modest,4 they have alleged facts

that, if proven, may entitle them to relief.

Rule of Reason

To state a claim under the Rule of Reason, the consolidated

complaint must allege concerted action with “an anticompetitive

effect on a given market within a given geographic area.” Agnew v.

Nat’l Collegiate Athletic Ass'n, 683 F.3d 328, 335 (7th Cir. 2012).

4 The basis for plaintiffs’ belief that a revenue restriction

agreement exists seems to be largely inferential. Plaintiffs

allege that Delta Dental State Insurers in fact conduct little to

no competing business despite having the wherewithal to do so, CC

at ¶ 108, and they point to “broad language” governing defendants’

relationship that they construe as giving the DDPA the authority

to impose and police the revenue restriction mechanism. Opp. at

10, n. 2. This is perhaps a slim reed on which to base their claim,

but in the context of their allegations as a whole, I conclude

that it is enough to entitle them to discovery.

Accordingly, “a plaintiff’s threshold burden under the Rule of

Reason analysis involves the showing of a precise market

definition....” Id. at 337. Plaintiffs’ obligation to define a

relevant market comprises both product and geographic components.

Brown Shoe Co. v. U.S., 370 U.S. 294, 324 (1962); U.S. v. E.I. du

Pont de Nemours & Co., 351 U.S. 377, 395 (1956). “Because market

definition is a deeply fact-intensive inquiry, courts hesitate to

grant motions to dismiss for failure to plead a relevant product

market.” Todd v. Exxon Corp., 275 F.3d 191, 199–200 (2d Cir. 2001)

(citing cases).

Nevertheless, defendants contend that dismissal is

appropriate because the complaint fails to allege an

anticompetitive effect on the market as a whole, reprising their

argument about dental insurance being a two-sided platform. But as

noted above, no judgment can be made at this stage regarding the

significance of any indirect network effects, which may or may not

require a two-sided market analysis. At all events, plaintiffs

have in fact alleged that the conspiracy is harmful to both sides

of the platform, and they have described the injuries suffered by

each. See CC at, e.g., ¶¶ 5, 6, 9-21, 92, 99 (provider injuries);

¶¶ 3, 6, 92, 99, 130 (consumer injuries). And defendants’

insistence that lower premiums for policyholders are the necessary

corollary of lower reimbursement rates for providers is not only

contrary to plaintiffs’ allegations but is belied by one of the

very cases defendants cite. See Stop & Shop Supermarket Co. v.

Blue Cross & Blue Shield of R.I., 373 F.3d 57, 62 (1st Cir. 2004)

(“Blue Cross might pass the savings [from an exclusive dealing

arrangement subject to the Rule of Reason] on to customers (lower

premiums, smaller co-payments, broader coverage) or keep the

savings itself and pay its executives more (if competition among

health insurers is inadequate and state regulation absent).”).

Defendants’ next argument is that plaintiffs do not allege a

cognizable product market because their complaint refers to both

individual and group insurance and because they “do not explain”

whether the market includes self-funded programs, public programs,

discount programs, and the like. The consolidated complaint

alleges:

The relevant product market includes insurance provided

to dental patients who purchase dental insurance for

themselves, or groups who purchase dental insurance on

behalf of their members, for dental goods and services

including, but not limited to, diagnostic routine

periodic examinations, bitewings, X-rays, cleanings,

fluoride treatments, sealants, space maintainers, minor

emergency procedures, fillings, tooth extractions,

biopsy of oral tissue, frenectomy, non-surgical

periodontics, endodontics, crowns, and dentures.

CC at ¶ 87.

I agree that plaintiffs’ unbounded market definition that

“includes insurance” for a non-exhaustive list of dental goods and

services is ambiguous. At first blush, it seems to identify

“insurance” as the basic product, with a list of goods and services

that may be covered serving to narrow the field of substitute

products. But plaintiffs’ response brief identifies the relevant

product market as “the market for the purchase of dental goods and

services,” which I interpret to mean that the product is not the

“insurance” sold to individuals and groups by insurers such as

defendants, but rather the dental goods and services sold by

plaintiffs to insurers, which they can also sell (assuming a

competitive market) to uninsured individuals paying out-of-pocket,

or to government programs on behalf of their participants. While

that meaning is less than self-evident from plaintiffs’ alleged

market definition, it is consistent with the statement that the

market “includes insurance” in the sense that insurance providers

are among the purchasers in the market for plaintiffs’ goods and

services.

Understood in this way, plaintiffs’ market definition avoids

the under-inclusiveness of the product markets defined in the cases

defendants cite. See, e.g., See Little Rock Cardiology v. Baptist

Health, 591 F.3d 591, 596 (8th Cir. 2009) (rejecting product market

expressly “limited to a single method of payment when there are

other methods of payment that are acceptable to the seller”); Int’l

Equip. Trading, Ltd. v. AB SCIEX LLC, No. 13 C 1129, 2013 WL

4599903, at *3 (N.D. Ill. Aug. 29, 2013) (rejecting product market

limited to a single brand given the existence of competitors, but

noting that courts “are generally hesitant to dismiss a Sherman

Act claim for failure to allege a relevant product because market

definition is a deeply fact-intensive inquiry.”). So while the

product market articulated in the consolidated complaint is not a

model of clarity, it does not appear to suffer from the infirmities

defendants identify and is consistent with their theory that

defendants have combined to form a buyers’ cartel with monopsony

power that makes it difficult for alternative buyers to compete,

thereby depressing the market price for the sale of dental goods

and services.

Corresponding ambiguities in plaintiffs’ alleged geographic

market also do not warrant dismissal. Plaintiffs state that:

The relevant geographic markets for such dental

insurance is the whole United States comprising the

territories that the Defendants have allocated to

themselves pursuant to the Market Allocation Mechanism,

and/or, in the alternative, the territories the

Defendants have allocated to themselves pursuant to the

Market Allocation Mechanism.

CC at ¶ 88. As defendants observe, plaintiffs appear to have

trained their focus on the geographic areas in which defendants

sell dental insurance, rather than on the areas in which plaintiffs

could sell dental goods and services to other buyers, despite the

fact that they identify dental goods and services as the relevant

product. See Def.’s Mem. at 40. In the case of a buyers’ cartel,

“the market is not the market of competing sellers but of competing

buyers. This market is comprised of buyers who are seen by sellers

as being reasonably good substitutes.” Todd, 275 F.3d at 202

(citation omitted). So on plaintiffs’ theory of the case, the issue

is whether defendants’ anticompetitive conduct has diminished the

availability of substitute buyers in the geographic market where

plaintiffs sell their goods and services.

Defendants argue that because plaintiffs are likely to draw

patients primarily from nearby communities, the relevant

geographic market should comprise only the areas surrounding their

respective practices, not the entire territory allocated to the

Delta Dental State Insurer responsible for those areas. But why

should it matter where plaintiffs’ patients live? There is no

obvious link, in the absence of a factual record, between a dental

patient’s place of residence and the dental insurance options

available to her. Indeed, all agree that some of defendants’

competitors (that is, potential substitute purchasers of dental

services) are national insurance companies that insure patients

throughout the United States. Plaintiffs will undoubtedly have to

develop the record to define more precisely the geographic market

that is relevant to their claims, but given that they seek to

represent a nationwide class and claim that defendants insure

patients across the country, their identification of the United

States and the respective territories in which defendants

participate in the market as buyers of dental goods and services

is sufficient at this stage.

Defendants’ final challenge to the complaint under the Rule

of Reason analysis is that it does not allege (or, more precisely,

does not correctly allege) defendants’ market share. This argument

rests almost entirely on defendants’ disagreement with plaintiffs’

statement that defendants have between of 59% and 66% of the

national market, calling those market shares “wildly inaccurate.”

Def.’s Mem. at 41. Obviously, that is not a basis for dismissal.

Defendants’ remaining arguments do not convince me that Rule 8

requires more detailed factual allegations than those plaintiffs

articulate concerning defendants’ market power.

Antitrust Injury

Defendants devote roughly three of the seventy-five pages

comprising their memorandum and reply to the argument that

plaintiffs have not pled an antitrust injury. They are right to

have invested so little in this argument. While it is true as a

general matter that in an antitrust case, “the plaintiff must

allege, not only an injury to himself, but an injury to the market

as well,” Agnew 683 F.328 at 335, “[i]n a buyers’ conspiracy case,

a seller sufficiently alleges antitrust injury by pleading that it

has received excessively low prices from members of the buyers’

cartel,” Omnicare, Inc. v. Unitedhealth Grp., Inc., 524 F. Supp.

2d 1031, 1040 (N.D. Ill. 2007) (citing cases). Accordingly, in a

case such as this, the injury plaintiffs claim to have suffered is

an antitrust injury. In any event, defendants’ argument boils down

to the drumbeat of their insistence that lower reimbursement rates

necessarily mean lower premiums for policyholders. As explained

above, however, that argument is contrary to plaintiffs’

allegations and is not susceptible to resolution as a matter of

law. Accordingly, it does not warrant dismissal regardless of

whether it is asserted to foreclose plaintiffs’ per se claim, to

challenge their market definition, or to argue that they have not

stated an antitrust injury.

Concerted Action

Concerted action is, of course, the sine qua non of any

conspiracy in violation of § 1. See Am. Needle, Inc. v. Nat’l

Football League, 560 U.S. 183, 191 (2010) (“an arrangement must

embody concerted action in order to be a ‘contract, combination

..., or conspiracy’ under § 1.”). In defendants’ view, plaintiffs

cannot prove this essential element because the DDPA – which

defendants assert is the sole owner the Delta Dental trademark —

and the Delta Dental State Insurers — licensees of the mark — must

be considered a single entity in the eyes of the law. Defendants

cite the Supreme Court’s application of this principle in

Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 769 (1984),

where it held that a parent corporation cannot conspire with its

wholly owned subsidiary, and they cite American Needle, Inc. v.

NFL, 538 F.3d 736, 738-739 (7th Cir. 2009), rev’d 560 U.S. 183

(2010), for the observation that later decisions broadened the

principle’s scope beyond the parent-subsidiary relationship to

include other types of corporate and individual affiliation.

Def.’s Mem. at 44-45. These cases do not avail them.

Defendants’ citation to American Needle is puzzling. Although

the Supreme Court left undisturbed the unobjectionable observation

defendants invoke, it reversed the Seventh Circuit’s central

holding. Although the Seventh Circuit had concluded that an

agreement among the NFL’s football teams to centralize the

licensing activities for their separately owned intellectual

property was “immune from antitrust scrutiny” because the teams

acted as a single entity for that purpose, the Supreme Court

disagreed. 560 U.S. at 188, quoting 538 F.3d at 741. The Court

explained that to determine whether formally distinct legal

entities are entitled to single entity treatment requires “a

functional consideration of how the parties involved in the alleged

anticompetitive conduct actually operate.” Id. at 191. The Court

noted that although the separate NFL teams had “common interests

such as promoting the NFL brand, they are still separate, profit-

maximizing entities” with “distinct, potentially competing

interests.” Id. at 198. That is essentially plaintiffs’ view of

the situation here. And while defendants distinguish the Supreme

Court’s American Needle decision on the ground that DDPA, rather

than the individual Delta Dental State Insurers, is and has always

been the sole owner of the Delta Dental trademarks, that argument

relies on facts outside the consolidated complaint. Moreover,

Sealy and Topco illustrate that the fact that the licensor owns

the licensed trademark is not dispositive of whether the licensees

can conspire to use the trademark in a way that violates the

Sherman Act.

McCarran-Ferguson Act

Defendants’ final argument for dismissal is that plaintiffs’

claims are barred by the McCarran-Ferguson Act, 15 U.S.C. § 1011

et seq, which establishes a limited antitrust exemption for the

“business of insurance.” For exemption to apply, the challenged

practice: “(1) must constitute the ‘business of insurance,’ (2)

must be regulated by state law, and (3) must not amount to a

“boycott, coercion, or intimidation.” Union Labor Life Ins. Co. v.

Pireno, 458 U.S. 119, 124 (1982).5 The statute does not grant the

insurance industry a blanket exception to antitrust laws.

5 I note that it would be unusual to resolve the issue of McCarran-

Ferguson exemption on the pleadings, as it is an affirmative

defense on which defendants bear the burden of proof. See Klamath-

Congress’s primary concern in enacting the McCarran-Ferguson

Act was with “[t]he relationship between insurer and insured, the

type of policy which could be issued, its reliability,

interpretation, and enforcement—these were the core of the

‘business of insurance.’” Grp. Life & Health Ins. Co. v. Royal

Drug Co., 440 U.S. 205, 215 (1979)(quoting SEC v. Nat’l Securities,

Inc., 393 U.S. 453, 460 (1969)). To determine whether a practice

constitutes the “business of insurance,” courts analyze three

factors: (1) whether the practice has the effect of transferring

or spreading the policyholders’ risks; (2) whether the practice is

an integral part of the policy relationship between the insurer

and insured; and (3) whether the practice is limited to entities

within the insurance industry. Union Labor Life Insurance Co. v.

Pireno, 458 U.S. 119, 129 (1982).

Defendants focus primarily on the first factor, relying

heavily on Feinstein v. Nettleship Co. of Los Angeles, 714 F.2d

928, 932 (9th Cir. 1983), to argue that the territorial

restrictions in their agreements function as a risk-spreading

mechanism. In Feinstein, the court held that an exclusive agency

agreement between the Los Angeles County Medical Association and

Lake Pharm. Ass’n v. Klamath Med. Serv. Bureau, 701 F.2d 1276,

1281, 1279 (9th Cir. 1983) (resolving the “affirmative defense of

exemption from the antitrust laws under the McCarran-Ferguson Act”

in summary judgment motions brought after “extensive discovery.”)

an insurance agent, in which the agent received exclusivity in

exchange for an agreement to insure all of the association’s

members, was within the scope of the McCarran-Ferguson Act. The

court explained that the agreement was “demonstrably related to

the allocation and spreading of risk,” because its purpose was to

ensure coverage for the association’s members in high-risk

specialties. See id. (“The medical association sought to provide

a single insurance broker for all of its members in order to assure

coverage for certain high-risk specialties, thereby distributing

risk across the membership.”). Defendants assert that the market

allocation mechanism serves the same purpose here; but as the

territorial divisions have no obvious actuarial relevance, there

is no basis at this stage for construing them as essentially a

risk-spreading mechanism. See State of Md. v. Blue Cross & Blue

Shield Ass’n, 620 F. Supp. 907, 917 (D. Md. 1985) (“to meet the

first Pireno requirement the defendants must show the challenged

territorial allocation is related positively to underwriting and

ratemaking; that is, that exclusive geographic territories

directly facilitate risk spreading and transfer through the

provision of insurance.”).

Defendants’ remaining citations are no more compelling. In

UNR Indus., Inc. v. Cont'l Ins. Co., 607 F. Supp. 855, 858 (N.D.

Ill. 1984), for example, the plaintiff was an insured who sought

to assert its right to defense and indemnification against its

insurer. Such claims plainly involve core elements of the “business

of insurance.” And while the plaintiff in Quality Auto Body, Inc.

v. Allstate Ins. Co., 660 F.2d 1195, 1203 (7th Cir. 1981), was not

a policyholder but an auto repair shop that performed work on

vehicles insured by the defendants, its antitrust case “focuse[d]

on the policies and practices of the defendant insurance companies

in processing automobile damage claims” — another essential aspect

of the business of insurance. Id. at 1197.

Defendants devote no meaningful attention to the second

factor — whether the practices plaintiffs challenge are “an

integral part of the policy relationship between the insurer and

insured” — before moving on to the third: state regulation of the

practices. In this connection, they state that “many state

insurance statutes expressly authorize dental service corporations

to work together and share information needed to process

subscribers’ claims,” Def.’s Mem. at 9-10, 50 (citing Oklahoma and

New Jersey statutes). But even assuming that the second statutory

requirement for exemption is not, as defendants submit, “a high

bar,” id. at 50 (quoting Sanger Ins. Agency v. HUB Int’l, Ltd.,

802 F.3d 732, 745 (5th Cir. 2015)), defendant’s generalized

characterization of state statutes is insufficient to satisfy it.

On the whole, this case is more closely akin to Royal Drug

and Pireno than it is to any of defendants’ cited authorities.

Royal Drug involved agreements between insurance companies and

pharmacies for the purchase of goods and services. The Court found

it “next to impossible to assume that Congress could have thought

that agreements (even by insurance companies) which provide for

the purchase of goods and services from third parties at a set

price are within the meaning” of the phrase “business of insurance”

440 U.S. at 230. And in Pireno, the Court concluded that a practice

“that inevitably involves third parties wholly outside the

insurance industry—namely, practicing chiropractors” fell outside

not the “business of insurance.” 458 U.S. at 132. So, too, does it

appear from the consolidated complaint that defendants’ conspiracy

to form a buyers’ cartel to depress reimbursement rates through

the alleged anticompetitive mechanisms falls outside the statutory

meaning of the “business of insurance.”

Til.

For the foregoing reasons, defendants’ motion to dismiss is

denied.

Dated: September 4, 2020 ENTER ORDER:

Lo! btA~

Elaine E. Bucklo

United States District Judge

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