Brokerage Concepts v. US Healthcare Inc (Part I)

Opinions of the United

1998 Decisions States Court of Appeals

for the Third Circuit

4-2-1998

Brokerage Concepts v. US Healthcare Inc (Part I)

Precedential or Non-Precedential:

Docket 96-1891,96-1922,96-1923,96-1892,97-1013,97-1014

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Volume 1 of 2

Filed April 2, 1998

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

NOS. 96-1891, 96-1892, 96-1922, 96-1923

97-1013, and 97-1014

BROKERAGE CONCEPTS, INC.

v.

U.S. HEALTHCARE, INC.; CORPORATE HEALTH

ADMINISTRATORS, INC.; UNITED STATES HEALTH CARE

SYSTEMS OF PENNSYLVANIA, INC., d/b/a THE HEALTH

MAINTENANCE ORGANIZATION OF PENNSYLVANIA;

RICHARD WOLFSON; SCOTT MURPHY;

WILLIAM BROWNSTEIN

Richard Wolfson, Scott Murphy and William Brownstein,

Appellants in No. 96-1891

U.S. Healthcare, Inc.; United States Health Care Systems

of Pennsylvania, Inc., d/b/a The Health Maintenance

Organization of Pennsylvania and Corporate Health

Administrators, Inc.

Appellants in No. 96-1892

U.S. Healthcare, Inc.; Corporate Health Administrators, Inc.;

United States Health Care Systems of Pennsylvania, Inc.,

d/b/a The Health Maintenance Organization of

Pennsylvania; Richard Wolfson; Scott Murphy; William

Brownstein,

Appellants in No. 96-1922

Brokerage Concepts, Inc.,

Appellant in No. 96-1923

U.S. Healthcare, Inc.; United States Health Care Systems of

Pennsylvania, Inc., d/b/a The Health Maintenance

Organization of Pennsylvania and Corporate Health

Administrators, Inc.,

Appellants in No. 97-1013

Richard Wolfson; Scott Murphy; and William Brownstein,

Appellants in No. 97-1014

On Appeal From the United States District Court

For the Eastern District of Pennsylvania

(D.C. Civ. No. 95-cv-01698)

Argued: July 22, 1997

Before: BECKER, MANSMANN, and ROSENN,

Circuit Judges.

(Filed April 2, 1998)

DAVID H. MARION, ESQUIRE

FRANCIS P. NEWELL, ESQUIRE

HOWARD J. BASHMAN, ESQUIRE

PATRICK T. RYAN, III, ESQUIRE

Montgomery, McCracken, Walker &

Rhoads, LLP

123 So. Broad Street

Philadelphia, PA 19106

Counsel for Richard Wolfson, Scott

Murphy and William Brownstein

PATRICK W. KITTREDGE, ESQUIRE

LISA G. MILLER, ESQUIRE

Kittredge, Donley, Elson,

Fullem & Embick, LLP

421 Chestnut Street, 5th Floor

Philadelphia, PA 19109

2

ROBERT E. BLOCH, ESQUIRE

ROY T. ENGLERT, JR., ESQUIRE

(ARGUED)

DONALD M. FALK, ESQUIRE

ROBERT L. BRONSTON, ESQUIRE

Mayer, Brown & Platt

2000 Pennsylvania Avenue,

NW

Washington, DC 20006-1882

Counsel for U.S. Healthcare, Inc.,

Corporate Health Administrators,

United States Health Care Systems

of Pennsylvania, Inc. d/b/a The

Health Maintenance Organization of

Pennsylvania

RICHARD L. BAZELON, ESQUIRE

(ARGUED)

A. RICHARD FELDMAN, ESQUIRE

Bazelon & Lees

1515 Market Street, 7th Floor

Philadelphia, PA 19102

Counsel for Brokerage Concepts, Inc.

OPINION OF THE COURT

BECKER,* Chief Circuit Judge.

_________________________________________________________________

* Honorable Edward R. Becker, United States Circuit Judge for the

Third Circuit, assumed Chief Judge status on February 1, 1998.

3

TABLE OF CONTENTS

I. INTRODUCTION 5

II. FACTS & PROCEDURAL HISTORY 11

A. The Parties 11

B. Gary's Decision to Self-insure 12

C. Gary's Switch to CHA/U.S. Healthcare 16

D. Economic Evidence 19

1. Impact on Gary's 19

2. Knowlton's Survey 20

3. Interaction Between U.S. Healthcare and

Other Pharmacy Operations 20

4. The Setting of Reimbursement Prices 21

E. The Jury Verdict 22

III. THE ANTITRUST ISSUES 23

A. Introduction -- Characterization of BCI's Claim 23

B. Per se Liability 27

1. Defining the Relevant Market 28

a. The Product Market 29

b. The Geographic Market 32

2. U.S. Healthcare's Power in the Tying Market 33

a. Evidence of Market Share 34

b. Other Factors Bearing on Market Power 37

C. The Rule of Reason Claim 40

D. Conclusion 42

IV. CIVIL RICO 42

A. Introduction 42

B. RICO Standing 43

C. Predicate Acts of BCI's RICO Claim 45

1. Extortion under the Hobbs Act 45

a. The Definition of "wrongful". 48

b. Lawful Versus Unlawful Claims to Property 51

c. Evidence of Other Unlawful Objectives 56

2. Commercial Bribery 58

3. Mail and Wire Fraud 60

4. The Travel Act 61

D. Conclusion 61

4

V. TORTIOUS INTERFERENCE 62

VI. CONCLUSION 73

I. INTRODUCTION:

The revolutionary changes in the health care field over

the past decade have spawned many novel market

arrangements. Perhaps the most significant development is

the ascendency of managed-care driven health maintenance

organizations ("HMOs"), whose hold over a large number of

subscribers has permitted them to wield considerable

economic power over health care providers. This antitrust,

civil RICO, and state law tortious interference case against

defendant U.S. Healthcare, one of the nation's largest

HMO's, two of its wholly-owned subsidiaries, and three of

its top officers, is an exemplar of the legal fallout from this

development.

This appeal presents several quite difficult and important

first impression questions for us, including: (1) whether the

defendants' use of economic fear in the context of hard

business bargaining constitutes wrongful conduct

amounting to extortion for civil RICO purposes; (2) whether

the inability of the plaintiff to prevail on antitrust and

extortion-based civil RICO claims forecloses a successful

state law tortious interference claim based on the same

facts; and (3) whether the defendants' hard bargai ning

constituted "wrongful means" so as to forfeit the defense of

privileged business competition to a tortious interference

claim.

The lawsuit emanates from U.S. Healthcare's refusal to

approve the application of a new Abington, Pennsylvania

store of "I Got It at Gary's" ("Gary's"), a small southeastern

Pennsylvania pharmacy, health and beauty aid chain, for

membership in U.S. Healthcare's network of medical

prescription providers. U.S. Healthcare conditioned

membership in its provider network on Gary's agreement to

discontinue its contractual relationship with plaintiff

Brokerage Concepts, Inc. ("BCI"), a health care consulting

firm whose specialty is serving as a Third Party

Administrator ("TPA") for health benefit self-insurers (such

5

as Gary's), and to give its TPA business to a U.S. Healthcare

subsidiary, Corporate Health Administrators ("CHA").

U.S. Healthcare also applied pressure on Gary's in other

ways -- through "hard-ball" negotiation tactics, which

deliberately left Gary's "hanging" as to whether its new

application would be approved, and a seemingly vindictive

audit of Gary's generic prescription drug dispensing policy

at one of its stores that was already part of the

U.S. Healthcare network. Since U.S. Healthcare subscribers

constituted a significant portion of its customer base,

Gary's understandably yielded to the pressure and gave its

TPA business to CHA. BCI thereupon sued in federal

district court asserting Sherman Act and civil RICO claims,

as well as a claim of tortious interference with contractual

relations under Pennsylvania law. BCI sought

compensatory and treble damages, injunctive relief, and

counsel fees on its antitrust and civil RICO claims, and

compensatory and punitive damages on its state law

tortious interference claim. Gary's is not a party to the

lawsuit.

The case proceeded to trial before a jury, which rendered

a verdict finding U.S. Healthcare and its officers liable to

BCI on all of BCI's claims, and awarding compensatory and

punitive damages. On post-trial motions, the district court

upheld the verdict but ruled that: (1) BCI must elect

between the punitive damages awarded on its state law

claim and the treble damages awarded on its federal claims

(i.e., that it cannot recover both); and (2) if it elects the

state law remedies, BCI cannot also collect the attorney's

fees that are available under its RICO and antitrust claims.

The defendants' appeal of the district court's denial of its

post-verdict motion for judgment as a matter of law or, in

the alternative, for a new trial, attacks the jury verdict on

all fronts, asserting that the verdict is tainted by erroneous

evidentiary rulings and jury instructions, and also that

there is insufficient evidence to sustain any of the claims

under proper instructions. BCI cross-appeals, contending

that, under Fineman v. Armstrong World Indus., Inc., 980

F.2d 171, 218-19 (3d Cir. 1992), the district court erred in

requiring BCI to elect which remedies it will recover, and

also in refusing to award injunctive relief to BCI under

either RICO or the antitrust laws.

6

Because all three of BCI's claims are grounded upon

U.S. Healthcare's leveraging of its economic power, and

because, under the jury instructions given by the district

court, the RICO and state law claims may depend on the

existence of a viable antitrust claim, the threshold doctrinal

battleground has been over antitrust law. This aspect of the

case is quite complex, not because of the need for

sophisticated economic analysis or the resolution of any

close or cutting-edge trade regulation issue, but rather

because of the difficulty of attempting to shoehorn into the

traditional antitrust model a claim that resists such

characterization.

The matter was presented to the district court primarily

as a tying case, under which a plaintiff can assert both a

per se and a "rule of reason" claim. In a typical tying case,

a seller leverages its market power in the market for the

tying product to require the buyer of the product to

purchase an unwanted product in the tied market, thereby

(unlawfully) foreclosing competition in that market. But

Gary's, the party who has been "put upon," is a seller, not

a buyer, in the tying product market: when U.S. Healthcare

accepts Gary's into its network of providers, what Gary's

gains is the opportunity to sell drugs to U.S. Healthcare

subscribers. The defendants, in contrast, contend that the

case is better viewed as one of reciprocal dealing which,

they submit, carries with it less stringent antitrust

standards.

As will appear, our disposition of BCI's antitrust claim

will take us through a number of layers of analysis, dealing

with both its per se and rule of reason claims, and in the

course thereof treating such matters as product market

definition (and the applicability vel non of the decision in

Eastman Kodak Co. v. Images Technical Servs., 504 U.S.

451 (1992)); geographic market definition (and the lack of

utility of a flawed market survey in identifying the market);

and above all, with the sufficiency of the record evidence

(including the inferences which can be drawn therefrom) to

support a legally viable antitrust claim. In the end, we

conclude that, since the record before us does not support

a finding that U.S. Healthcare exercised appreciable market

power in a properly defined tying market, or that the

7

arrangement at issue harmed competition in the tied

market, the antitrust jury verdicts on both the per se and

the rule of reason claims must be set aside.

In support of its civil RICO claim, BCI alleges a variety of

predicate acts, as a civil RICO claim requires. Although we

deal with all of the predicate acts invoked, rejecting

defendants' contention that BCI lacks RICO standing, the

only acts that arguably could come within RICO's ambit are

alleged extortionate acts by the defendants. Under the

Hobbs Act, 18 U.S.C. S 1951, "[e]xtortion" is defined as "the

obtaining of property from another, with his consent,

induced by wrongful use of actual or threatened force,

violence, or fear." 18 U.S.C. S 1951(b)(2). The "fear" may be

of economic loss as well as of physical harm. See United

States v. Addonizio, 451 F.2d 49, 72 (3d Cir. 1972). In this

case, the evidence is clear that U.S. Healthcare employed

economic leverage in an effort to force Gary's to chose CHA

as its TPA. However, while BCI contends that this conduct

amounts to extortion through the wrongful use of the fear

of economic loss, defendants assert that the conduct is

merely hard business bargaining that cannot be made to fit

within the statutory framework of Hobbs Act extortion.

As will be shown, resolution of BCI's extortion claim

turns on whether the defendants' use of economic fear in

the context of hard business bargaining was legally

wrongful, an issue with which we have not previously had

occasion to deal. We conclude that the "claim of right"

defense to extortion (i.e., a defense based on a lawful claim

to the property obtained by the allegedly extortionate acts)

formulated by the Supreme Court in United States v.

Enmons, 410 U.S. 396 (1973), is applicable in cases, such

as this one, which involve solely the allegation of the use of

economic fear in a transaction between two private parties.

In so concluding, we are mindful of, and address, those

cases that reject the broad application of Enmons outside of

the labor context in which it arose for fear that it would

"effectively repeal the Hobbs Act." See United States v.

Agnes, 753 F.2d 293 (3d Cir. 1985).

Having determined that the claim of right defense is

available to the defendants in this case, we address the

difficult problem of separating out lawful from unlawful

8

claims to property. We make no effort to announce any

broad principles in this difficult area. Drawing instruction

from Enmons and Viacom Int'l v. Icahn, 747 F. Supp. 205

(S.D.N.Y. 1990), we make a rule only for a very narrow

subset of the potential universe of extortion cases: one

involving the accusation of the wrongful use of economic

fear where two private parties have engaged in a mutually

beneficial exchange of property. We conclude that BCI's

extortion claim can only survive if Gary's had a right to

pursue its business interests free of the fear that it would

be excluded from U.S. Healthcare's provider network. Albeit

with misgivings, we find that since Pennsylvania, unlike

other states, has no "Any Willing Provider" law that compels

HMOs to allow all interested and minimally qualified

providers into their network, BCI had no such right. If such

a law was in force, Gary's would have had a legal

entitlement to be a member of the provider network and

thus to be free of the fear that it would be excluded from

that network if it did not switch TPA providers. Having

determined that BCI did not present a sustainable case of

extortion, or establish any of the other predicate acts

alleged, we set aside the jury verdict as to the civil RICO

count.

That BCI's federal claims have fallen is not, however, the

end of its case. BCI also alleges the defendants unlawfully

and improperly interfered with its existing and prospective

contractual relations with Gary's in violation of

Pennsylvania tort law. While BCI must prove a number of

things to prevail on a tortious interference claim under

Pennsylvania law, only one is in serious dispute here. The

battleground is over Restatement (Second) of Torts S 768

which sets forth a competitors privilege, and in fact over

only one facet of that section, S 768(1)(d), which withdraws

immunity from liability if the competitor employs "wrongful

means." The Pennsylvania Supreme Court has yet to define

that term and hence we must predict how it would do so to

resolve this case.

The parties' debate in this area was focused primarily on

whether Pennsylvania would limit wrongful means to

conduct that is independently actionable. While the parties

have ably briefed that point, the disposition of BCI's claim

9

does not require us to resolve it. Rather, we conclude,

based upon a passage from S 768 comment (e), that even if

the Pennsylvania Supreme Court were to require

independently actionable means, it would not apply that

requirement in cases, such as this one, where the

defendant exerted "economic pressure" or "a superior

power" in a market unrelated to the competitive market.

Here, BCI proffered ample evidence from which a jury could

conclude that U.S. Healthcare attempted to acquire Gary's

TPA business by threatening Gary's with withdrawal of

membership in the U.S. Healthcare provider network, an

unrelated market. BCI also adduced evidence of heavy-

handed tactics by U.S. Healthcare in that market for

pharmacy customers.

In addition to our analysis of the substance of

Pennsylvania tort law, we address defendants' more

fundamental argument that tort liability is not appropriate

here. The crux of that argument is that BCI's tort claims

are predicated on the same conduct that underlie its federal

claims, and that the law should therefore not permit BCI to

repackage these failed claims as tortious interference. As

will be shown, in our view, BCI has attempted just the

opposite. That is, it has taken conduct that constitutes

tortious interference with contractual relations and has

attempted to turn it into a violation of both federal antitrust

and racketeering laws. While these attempts have been

frustrated on this appeal, that result does not foreclose

BCI's state law claim. BCI's tortious interference claim does

not require proof of criminal conduct as does its extortion

claim, nor is it anchored in the same kind of market based

considerations as is its antitrust claim. We see no need for

congruence between federal antitrust law, which is

designed to protect competition and free access to markets,

and state business tort law, which is designed to protect

competitors.

Notwithstanding this conclusion, the tortious interference

verdict cannot stand, and a new trial on the tort claims is

necessary, because the jury instructions permitted the jury

to find tortious interference based on antitrust and/or civil

RICO violations which, we have concluded, did not exist.

Hence, while we reverse outright on the antitrust and civil

10

RICO claims, we will remand the tortious interference

claims for a new trial. We intimate no view on the question

whether defendants' behavior was outrageous enough to

justify an award of punitive damages under Pennsylvania

law; that will be for determination on remand. Since the

antitrust and RICO claims are out of the case, we also need

not address the question of the propriety of injunctive relief

for either RICO or antitrust claims, or the interesting issues

posed by the cross-appeal.

II. FACTS & PROCEDURAL HISTORY

A. The Parties

BCI serves as a TPA for employers who wish to self-

insure for their health benefits and other insurance needs.

In this capacity, BCI designs the employer's self-insured

benefit plan and usually recommends a health services

provider network. The providers in the network then supply

the health care, and BCI reviews and processes the

resulting claims for the employer. In addition, BCI typically

helps the employer purchase "stop-loss" insurance policies

that cap the employers' exposure for large individual and

aggregate claims. BCI also serves as an insurance broker

for employees who choose to purchase fully-insured

policies.

U.S. Healthcare develops, owns, operates, and markets

HMOs in many states in the eastern United States,

including Pennsylvania and New Jersey. These HMOs are

operated by wholly owned subsidiaries, including defendant

United States Healthcare Systems of Pennsylvania, Inc.,

d/b/a The Health Maintenance Organization of

Pennsylvania ("HMO PA"), which operates as

U.S. Healthcare's HMO for Pennsylvania. As of December

31, 1994, U.S. Healthcare and its subsidiaries had

approximately 1,695,000 subscribers enrolled in its insured

plans.

CHA is also a wholly owned subsidiary of

U.S. Healthcare. It is a TPA, and provides the same type of

services for self-insured employers as does BCI. In the

geographic areas in which U.S. Healthcare operates an

11

HMO, CHA utilizes only the U.S. Healthcare network of

doctors and hospitals. Similarly, U.S. Healthcare bars all

TPAs other than CHA access to its network. At all times

relevant to the present dispute, defendant Richard Wolfson

was the Director of Pharmacy Programs and the Chairman

of the Board of U.S. Healthcare, defendant William

Brownstein served as the Regional Pharmacy Director for

Pennsylvania, and defendant Scott Murphy was the Senior

Vice President of U.S. Healthcare, and the senior marketing

executive for CHA. We will at times refer to U.S. Healthcare,

CHA, and HMO PA collectively as the "corporate

defendants," and Wolfson, Brownstein and Murphy

collectively as the "individual defendants."

B. Gary's Decision to Self-insure

U.S. Healthcare has established a network of health care

providers which includes doctors, hospitals, and

pharmacies in various geographic regions. Under the

U.S. Healthcare prescription purchase program, individuals

who enroll as subscribers in U.S. Healthcare's HMOs select

one pharmacy from the network of providers at which they

will purchase prescription drugs. Subscribers can change

their pharmacy designation by filling out a form. Under this

program, subscribers can purchase their prescription drugs

for a small co-payment (such as $5.00), with the rest of the

cost of the prescription reimbursed to the pharmacy by

U.S. Healthcare. In addition, U.S. Healthcare pays the

pharmacies that serve the prescription purchase plan a set

monthly amount based on the number of U.S. Healthcare

subscribers designating that pharmacy, without regard to

the actual purchases of drugs from that pharmacy.

Because subscribers seldom purchase prescription drugs

from pharmacies other than those within the network,

membership in the U.S. Healthcare network is highly

coveted.

In 1991, Eagleville Pharmacy, Incorporated, d/b/a/ I Got

It At Gary's ("Gary's") was a pharmacy chain of four stores

in suburban Philadelphia. All four stores served as

approved providers in the U.S. Healthcare pharmacy

network. At this time, Gary's offered its full-time employees

two options for their health insurance coverage: a Blue

12

Cross/Blue Shield plan and a U.S. Healthcare HMO.

Approximately 35 Gary's employees enrolled as

U.S. Healthcare members. In 1991, to save costs, Gary's

decided to terminate its relationship with Blue Cross/Blue

Shield and U.S. Healthcare, and to self-insure.

In need of a TPA to process its claims, Gary's evaluated

several contenders, and then entered a written contract

with BCI, terminable upon 30 days prior written notice.

Sandra Chen, the benefits manager at Gary's, sent

termination letters to Blue Cross/Blue Shield and

U.S. Healthcare.1 In response to the letter, Chen testified

that she received an angry and verbally abusive phone call

from an unidentified U.S. Healthcare marketing executive.2

So began the wrath of U.S. Healthcare. Upon receipt of

Gary's letter terminating its insurance contract, David

Rocchino, one of U.S. Healthcare's sales vice-presidents,

telephoned Wolfson to inform him of the new development

and expressed his displeasure. Wolfson became "upset"

that Gary's had decided to self-insure, and knowing that

Gary's was approved to serve as a pharmacy for

U.S. Healthcare subscribers, promptly ordered an internal

"quality assurance" review of the generic utilization rates of

Gary's stores. Wolfson admitted at trial that his only reason

for ordering such a review was that Gary's had terminated

U.S. Healthcare coverage for its employees, but he testified

that ordering a retaliatory review was not inappropriate.3

_________________________________________________________________

1. The letter to U.S. Healthcare read:

Dear Sirs:

This letter is to advise U.S. Healthcare that effective June

30th,

1991, . . . Gary's will discontinue its medical insurance

coverage

with your organization. Please adjust your records to reflect

this

upcoming change and advise me of any information you may need

to finalize our relationship.

2. In contrast, Chen testified to the receipt of a polite and professional

phone call from a Blue Cross/Blue Shield representative, inquiring if

they could accommodate Gary's needs in anyway and as to the reason

behind Gary's decision to cancel their health care contract.

3. When asked by BCI's counsel whether he ordered the review of Gary's

in response to Gary's decision to terminate with U.S. Healthcare, Wolfson

responded:

13

In August 1993, Gary's opened its fifth store, in

Abington, Pennsylvania. Gary's applied for admission of the

new store to U.S. Healthcare's pharmacy network. Wolfson,

acting as director of U.S. Healthcare's pharmacy program,

advised Brownstein not to process the application.

U.S. Healthcare's executives acknowledged in their

testimony that their motivation in refusing to process

Gary's application was retaliatory, based on a belief that

Gary's did not deserve U.S. Healthcare's business once

Gary's had terminated U.S. Healthcare's contract in a

manner that Wolfson and Brownstein found to be offensive.

In compliance with Wolfson's instructions, Brownstein did

not process the application. However, at this time, no one

at U.S. Healthcare told Gary's of the decision to refuse to

process the application. Instead, Gary's was informed that

the application would be processed in due course. As

Wolfson conceded at trial, the plan was to "let [Gary's] hang

. . . until they did something."

At the same time that Gary's Abington store applied for

membership in the pharmacy network, U.S. Healthcare, at

the instruction of Brownstein, performed a two-day, on-site

audit of the utilization of generic drugs at Gary's store in

Eagleville, Pennsylvania. The audit measured the

pharmacy's compliance with the requirement of

U.S. Healthcare's provider agreement that generic drugs be

used whenever possible to contain costs. The audit results

suggested that Gary's dispensed brand-name drugs instead

of generic drugs at a rate higher than the median of the

U.S. Healthcare provider, and lacked complete

documentation of prescription requests. Brownstein's audit

also demonstrated that the average cost-per-prescription to

U.S. Healthcare at the Eagleville pharmacy was in line with

the network median, so that the store's prescriptions were

not costing U.S. Healthcare more on average than other

_________________________________________________________________

Well, I didn't think it was appropriate with an account that we

had

a relationship with just to send a "dear sir" letter [of

termination] to

a post office box . . . . I didn't feel that they were giving us

due

consideration and if they were operating in that fashion, I

wanted to

look to see if in fact there were any other issues related to the

I Got

It At Gary's Pharmacies.

14

pharmacies. Brownstein forwarded the audit results to the

Quality Assurance Committee, which referred the matter to

the Peer Review Committee. The Peer Review Committee,

consisting of three outside pharmacists, had the power to

recommend sanctions to Wolfson, who would then decide

whether or not to impose them.

On November 16, 1993, the Peer Review Committee

recommended that Gary's Eagleville store be put on"freeze"

for three-months. The freeze was implemented and, as a

result, U.S. Healthcare removed the Eagleville store from

the list of approved pharmacies, and new U.S. Healthcare

subscribers could not designate that store as their location

for purchasing prescription drugs. In contrast to the

treatment of Gary's, other pharmacies with generic drug

utilization rates lower than the Eagleville pharmacy and

less complete documentation of prescription requests, had

not been "frozen," and instead had received lesser or no

sanctions. In fact, the parties stipulated that out of the

approximately 1300 pharmacies in the U.S. Healthcare

network for southeastern Pennsylvania and southern New

Jersey, the freeze sanction had been imposed for generic

utilization reasons only four times (including its use against

Gary's) in all of 1993 and 1994.

Although the extent to which Wolfson and Brownstein

were involved in the implementation of the freeze sanction

is unclear, both had participated regularly in Quality

Assurance and Peer Review Committee meetings.

Brownstein later cited the results of the audit on the

Eagleville store as the reason for the delay in processing the

Abington store's application for membership in the

pharmacy network, stating that U.S. Healthcare had

concerns about Gary's dispensing too many brand-name

drugs at its stores.

Faced with a freeze on its Eagleville store and no

movement on the Abington store's application for

membership in the pharmacy network, Gary's President,

Gary Wolf, set up a meeting with U.S. Healthcare officials,

including Wolfson and marketing executive Scott Murphy,

for December 1, 1993. Among the issues discussed were

Gary's generic drug use and the admission of the Abington

store to the U.S. Healthcare provider network.

15

U.S. Healthcare expressed its displeasure with Gary's

termination of U.S. Healthcare coverage in 1991, and

Wolfson commented that "we like to do business with

people who do business with us." At the same meeting,

U.S. Healthcare requested and received permission to bid

on Gary's TPA business for the next annual contract period.

C. Gary's Switch to CHA/U.S. Healthcare

Following the meeting with U.S. Healthcare, Wolf

instructed his sister, Robin Risler, the Director of Human

Resources at Gary's, to "take a look at" switching to the

TPA services offered by CHA at the anniversary date of

Gary's contract with BCI (at which time the contract could

be terminated with 30 days advance notice.) Concurrently,

Wolf sent a letter to Wolfson (dated December 6, 1993)

expressing, among other things, his "commitment that we

will do everything possible to afford [U.S. Healthcare/CHA]

the opportunity to service our company's needs as long as

the programs are mutually beneficial", and requesting that

U.S. Healthcare consider acting on the pending application

for Gary's Abington store.

When the December 6 letter failed to produce any

movement on the Abington store, Wolf explained to Chen

that, in order to get the Abington store approved, Gary's

needed to "appease" U.S. Healthcare, and instructed her to

write a further letter to U.S. Healthcare assuring them that

Gary's would consider CHA's bid for its TPA services. This

letter, dated January 3, 1994, and addressed to Murphy,

was more explicit then the December 6 letter. It stated:

As you requested, I am writing you to acknowledge the

agreement made between I got it at Gary's and

U.S. Healthcare. We agree that as long as there are no

additional cost[s] to the plan or reduction in service,

US Healthcare will assume the role of TPA for our self

insured medical plan on July 1, 1994.

* * *

We also understand that in anticipation of our

strengthening relationship, US Healthcare will release

the provider number for our pharmacy in Abington, PA.

16

Chen testified that once this letter was written, it was a

"foregone conclusion" that, as long as CHA's bid was

comparable and for the same services, Gary's would switch

to CHA. As of this time, CHA had not yet submitted a

formal proposal to Gary's.

In January 1994, within weeks of Chen's letter,

U.S. Healthcare had inspected the Abington pharmacy, and,

without further ado, approved its participation in the

provider network. Brownstein testified that he was informed

that Gary's had agreed to switch TPAs to CHA, and "on the

basis of that," was instructed to enroll Gary's Abington

store in the provider network. U.S. Healthcare acted with

such speed in approving the Abington store's application for

membership in the provider network that it failed to follow

its own standard approval procedures, and did not present

the store's application to the Membership Application

Credentials Committee until after the pharmacy was

already participating as a provider.

In February 1994, U.S. Healthcare lifted the freeze on the

Eagleville store. Similarly, Gary's sixth pharmacy in Aston,

Pennsylvania, was accepted into the provider network

without delay. At approximately this same time, Robin

Risler, who testified that, ultimately, the selection of a TPA

was her responsibility, hired an insurance broker to assist

her in evaluating the competing TPAs. In early June 1994,

both BCI and CHA submitted bids for Gary's TPA business,

but CHA was given the opportunity to review BCI's bid

before submitting its final proposal. In May 1994, even

before Gary's had received a proposal from U.S. Healthcare,

Risler told Lori Manley, the BCI customer service

representative, that Gary's would be switching to

CHA/U.S. Healthcare. Manley testified that Risler confided

that she felt she was being "strongarmed" by

U.S. Healthcare, that "she herself did not want to leave BCI"

and that the decision "was out of her control." Two other

BCI employees similarly testified that in the spring of 1994,

Risler denied having any real choice in the decision to give

Gary's TPA business to CHA in light of the loss of

U.S. Healthcare's business that Gary's would suffer if it

failed to switch TPAs. The testimony with respect to Risler

of Manley and the two additional BCI employees was

17

admitted over U.S. Healthcare's objection as state of mind

evidence. See infra note 31.

As the time for Gary's formal switch to CHA drew near,

U.S. Healthcare scheduled another on-site "quality

assurance" audit, this time of Gary's Lansdale store for

June 16, 1994. In the second week of June, Risler officially

informed BCI of Gary's decision to give its TPA business to

CHA. After Gary's decision was officially announced, the

audit of the Lansdale store uncovered no problems.

Moreover, there were no further audits of Gary's

pharmacies.

The reasons behind Risler's decision to switch to CHA are

in dispute. BCI's TPA expert, Carlton Harker, testified that

for the one year period of 1994-95, the BCI proposal would

have saved Gary's approximately $64,000, or 14%,

compared to the proposal submitted by CHA. Harker

further testified that he did not perceive any significant

differences in the services provided under the respective

plans that would explain the cost differential. Risler

testified that, in making the decision to give Gary's TPA

business to CHA, she was motivated by non-price, quality

of service reasons. She also acknowledged, however, that

she had been satisfied with BCI's services. At all events, the

results of the decision are clear -- BCI lost its contract with

Gary's.

In March 1995, BCI filed the present suit challenging the

defendants' actions that preceded Gary's decision to

terminate its TPA contract with BCI. BCI proceeded at trial

against defendants on four counts. Count I alleged that

U.S. Healthcare, HMO PA, and CHA violated Section 1 of

the Sherman Act, 15 U.S.C. S 1, by tying the participation

by Gary's in the U.S. Healthcare pharmacy network to the

purchase of CHA's TPA services for Gary's employees. In

Count II, BCI alleged that all defendants violated the

Racketeer-Influenced and Corrupt Organizations Act

("RICO"), 18 U.S.C. S 1961 et seq., by engaging in or

conspiring to commit at least two acts of racketeering

activities, among them extortion, bribery, mail and wire

fraud, and violations of the Travel Act.

In a Count III, BCI also contended that, to the extent that

defendants Wolfson, Murphy, and Brownstein were not

18

principal wrongdoers, they are liable for aiding and abetting

under RICO. Finally, in Count IV, BCI alleged that all

defendants tortiously interfered with its existing or

prospective contractual relationship with Gary's in violation

of state law. BCI sought treble damages and attorneys fees

under its federal law claims. It also sought punitive

damages from each defendant in connection with its state

law claim.

D. Economic Evidence

1. Impact on Gary's

BCI argued at trial that Gary's ability to operate

profitably depended on the business of U.S. Healthcare

subscribers. As evidence, BCI pointed to the parties'

stipulation that, as of December 1993, when Wolfson told

Gary Wolf that U.S. Healthcare likes to do business with

people "who do business with us," 9,178 U.S. Healthcare

subscribers had designated Gary's as their provider

pharmacy, and that in 1993, Gary's subscribers purchased

$1.66 million of prescription drugs. BCI's expert Dr. Calvin

Knowlton, who is an associate professor and Chair of the

Department of Pharmacy Practice and Pharmacy

Administration at the Philadelphia College of Pharmacy and

Science, and the President of the American Pharmaceutical

Association, testified that, based on the stipulated

information and Gary's Sales Reports, in 1993,

U.S. Healthcare members accounted for between 3-15% of

Gary's prescription drug sales, and, by 1995, for 20% of

prescription drug sales in Gary's Montgomery County

stores.

If Gary's operated as an unapproved pharmacy, any

U.S. Healthcare subscriber who wanted to fill his or her

prescription at Gary's would have to pay full price, instead

of a small co-payment. Additionally, Gary's head

pharmacist testified that prescription drug purchasers are

valuable consumers because they typically purchase other

items in addition to their prescription drugs. BCI also

presented evidence that the prescription drug business of

pharmacies is a low-margin business that depends on high

volume in order to operate profitably. In order to maximize

19

their sales, pharmacies typically become members of as

many prescription drug plans as possible. Out of

approximately 1300 participating pharmacies in

southeastern Pennsylvania and southern New Jersey, only

four pharmacies left the U.S. Healthcare pharmacy network

in the period from January 1, 1993 to October 1, 1995 for

reasons other than going out of business.

2. Knowlton's Survey

At trial, BCI presented a telephone survey of the market

areas surrounding several of Gary's pharmacies, performed

by Dr. Knowlton, which was admitted over objection. In this

survey, pharmacy students telephoned six to eight

pharmacies in the vicinity of three arbitrarily selected

Gary's store locations and asked them a series of questions.

Knowlton drew conclusions regarding U.S. Healthcare's

market power based only on the responses of those stores

that listed U.S. Healthcare as their primary HMO customer.

He testified that based on this survey U.S. Healthcare's

market share of prescription drug sales for the market

areas served by the two largest Gary's pharmacies and the

new Abington pharmacy was approximately 25%. Knowlton

further testified that other sources of information indicated

that his survey conclusions as to market share would apply

generally in Montgomery County.

3. Interaction Between U.S. Healthcare and Other

Pharmacy Operations

The jury also heard evidence of the interaction between

U.S. Healthcare and Rite-Aid, Shop-Rite, Food Circus,

Walmart, Phar-mor and Weis Markets. With respect to the

pharmacy operation in each of these chains,

U.S. Healthcare conditioned participation in the provider

network upon their making U.S. Healthcare insurance

available to their employees. Despite initial resistance, Rite-

Aid, Phar-Mor and Weis Markets ultimately agreed to offer

their employees U.S. Healthcare insurance products. There

was, however, an absence of supporting evidence on the

point, and it is not clear that these large companies made

U.S. Healthcare a part of their benefits package in response

to economic pressure rather than for legitimate business

reasons.

20

Shop-Rite and Food Circus responded by filing

complaints with the New Jersey Department of Insurance.4

After the Department of Insurance took action,

U.S. Healthcare agreed to accept the stores into its provider

network notwithstanding their refusal to offer

U.S. Healthcare coverage. The Walmart stores also resisted

U.S. Healthcare's policy, choosing instead to forgo

membership in the provider network. U.S. Healthcare did

approve the Walmart stores in Massachusetts, where an

Any Willing Provider statute was in force. Defendants'

experts testified that linkage of network membership and

purchase of TPA services was normal business behavior

and was not anti-competitive.

4. The Setting of Reimbursement Prices

BCI also presented evidence of how U.S. Healthcare

exercised its market power to set reimbursement prices. In

January 1996, it effected a drastic reduction in the

reimbursements it paid to participating pharmacies for

prescription drugs dispensed to U.S. Healthcare

subscribers. Dr. Knowlton testified that this reduction,

when considered with the fact that U.S. Healthcare does not

pay pharmacies a dispensing fee, made U.S. Healthcare's

overall compensation to pharmacies the lowest of any third-

party payor in the southeastern Pennsylvania region. Yet,

notwithstanding the major reimbursement price reduction,

only two pharmacies out of approximately 8000 in 12 or 13

states discontinued their participation in the

U.S. Healthcare provider network.

Dr. Knowlton testified that, based on this evidence, and

the evidence of U.S. Healthcare's successful dominance of

other pharmacies, exclusion from the U.S. Healthcare

provider network could threaten Gary's survival. As a

result, he testified that Gary's had no choice but to accept

U.S. Healthcare's arrangement.

_________________________________________________________________

4. The record does not develop the extent to which these complaints may

have been facilitated by New Jersey's enactment, in July 1994, of an Any

Willing Provider statute which provides that a pharmacy cannot be

excluded from an HMO if it "accepts the terms" of the HMO. N.J. Stat.

Ann. S 26:2J-4.7(a)(2) (West 1996).

21

E. The Jury Verdict

After 17 days of trial, the case was submitted to the jury

on special interrogatories. The jury returned a verdict for

BCI on all counts and awarded BCI $200,000 in

compensatory damages.5 The jury also awarded BCI

$1,000,000 in punitive damages in connection with its

tortious interference claim. That award was apportioned as

follows: $400,000 against U.S. Healthcare, $200,000

against CHA, $100,000 against HMO PA, $200,000 against

Wolfson, $75,000 against Murphy, and $25,000 against

Brownstein.

At the close of BCI's case, and again at the close of all

evidence, the defendants moved, pursuant to Fed. R. Civ. P.

50(a), for judgment as a matter of law. These motions were

denied. Following the verdict, defendants renewed their

motion for judgment as a matter of law pursuant to Fed. R.

Civ. P. 50(b). Concurrently, defendants filed an alternative

motion for a new trial pursuant to Fed. R. Civ. P. 59. The

district court denied these motions in all respects. On

appeal, defendants challenge the denial of these motions.

The majority of the issues before us arise from the district

court's denial of defendants' renewed motion for judgment

as a matter of law, and, as to these issues, our review is

plenary. See Stelwagon Mfg. Co. v. Tarmac Roofing, 63 F.3d

1267, 1270-71 (3d Cir. 1995) ("The legal foundation for the

jury's verdict is reviewed de novo while the factual findings

are reviewed to determine whether the evidence and

justifiable inferences most favorable to the prevailing party

afford any rational basis for the verdict."). Where a different

standard of review is implicated, it will be noted in the text.

_________________________________________________________________

5. The district court's initial order of judgment made it unclear whether

BCI was to receive $200,000 in total compensatory damages, or to

recover that amount separately on each of its three legal theories (thus

allowing a total recovery of $600,000 in compensatory damages). In

response to defendants' motion, pursuant to Fed. R. Civ. P. Rule 59(e),

to alter or amend the order of judgment, the district court subsequently

amended its order to make clear that BCI may recover only once the

$200,000 in compensatory damages that it was awarded. BCI does not

dispute this point on appeal.

22

III. THE ANTITRUST ISSUES

A. Introduction -- Characterization of BCI's Claim

BCI's antitrust claim arises from U.S. Healthcare's

decision to use the leverage acquired by virtue of its ability

to provide Gary's access to thousands of potential

pharmacy customers to pressure Gary's into selection of its

subsidiary, CHA, as its TPA. BCI claims that this

arrangement was an illegal tie in violation S 1 of the

Sherman Act, 15 U.S.C. S 1, which generally outlaws

"[e]very contract . . . in restraint of [interstate or

international] trade or commerce." Defendants submit that

their conduct was simply hard bargaining that is well

within the mainstream of business conduct and does not

form the basis of a cognizable antitrust claim.

At trial, BCI's theory of the case prevailed. The jury found

that U.S. Healthcare's practices were illegal under both per

se and rule of reason theories of antitrust liability. On

appeal, defendants challenge the characterization of the

arrangement at issue as a tying arrangement. They contend

that the arrangement was one of reciprocal dealing and not

tying, and that as a result the per se test for antitrust

liability is inapplicable. Before turning to a review of the

jury verdict, which the defendants challenge, we will

consider the characterization question.

Tying exists where a seller conditions the sale of one good

(the tying product) on the buyer also purchasing another,

separate good (the tied product). See Town Sound & Custom

Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468, 475 (3d

Cir. 1992) (in banc). The antitrust concern over tying

arrangements arises when the seller can exploit its market

power in the tying market to force buyers to purchase the

tied product which they otherwise would not, thereby

restraining competition in the tied product market.6 See

_________________________________________________________________

6. Of course, not all tying arrangements have anti-competitive effects in

violation of the Sherman Act. The Supreme Court has twice made use of

the following as an example of a tie that is not a concern of the

antitrust

laws: "[I]f one of a dozen food stores in a community were to refuse to

sell flour unless the buyer also took sugar it would hardly tend to

23

Allen-Myland, Inc. v. International Bus. Mach. Corp., 33 F.3d

194, 200 (3d Cir. 1994); Jefferson Parish Hosp. Dist. No. 2

v. Hyde, 466 U.S. 2, 12 (1984).

Unlike tying -- where one party is only a seller and the

other only a buyer -- reciprocal dealing exists where "two

parties face each other as both buyer and seller. One party

offers to buy the other party's goods, but only if the second

party buys other goods from the first party." Spartan Grain

& Mill Co. v. Ayers, 581 F.2d 419, 424 (5th Cir. 1978). More

colloquially, reciprocal dealing exists when one party tells

the other: "I'll buy from you, if you buy from me." Again,

like tying, not all reciprocal dealing arrangements are anti-

competitive. The Sherman Act is concerned with what has

been termed "coercive" reciprocal dealing, where a party

uses its economic power as a purchaser in one market in

order to restrict competition in another market where it is

a seller. See Betaseed, Inc. v. U & I, Inc., 681 F.2d 1203,

1216 (9th Cir. 1982).7

BCI argued, and the jury found, that U.S. Healthcare and

CHA tied the purchase of CHA's TPA services to the right to

continued participation in the U.S. Healthcare pharmacy

network. In order to characterize this arrangement as a tie,

U.S. Healthcare must be deemed to have "sold" Gary's the

ability to participate in its pharmacy network, but only if

Gary's also purchased CHA's TPA services. Defendants

contend that BCI's characterization is not correct since

U.S. Healthcare did not "sell" Gary's the ability to

participate in the pharmacy network as participation in

that network is free. In fact, the ultimate result of the

_________________________________________________________________

restrain competition if its competitors were ready and able to sell flour

by itself." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12

(1984) (quoting Northern Pac. R. Co. v. United States, 356 U.S. 1 (1958)).

Indeed package sales such as those noted in the foregoing example may

be used by a seller as a means of competing, and may be desired by

buyers. The Sherman Act is not designed to preclude such

arrangements. See id.

7. This is distinguished from "mutual" reciprocal dealing which occurs

"when both parties stand on equal footing with respect to purchasing

power, yet they agree to purchase from one another." Betaseed, 681 F.2d

at 1216.

24

contract was that money flowed in the opposite direction --

from U.S. Healthcare to Gary's in exchange for prescription

drugs purchased by U.S. Healthcare members that

designated one of Gary's stores as their network pharmacy.

Thus, defendants argue, the arrangement is more

accurately labeled as reciprocal dealing where

U.S. Healthcare conditioned its agreement to purchase

prescription drugs from Gary's on Gary's agreement to

purchase TPA services from CHA.

We agree that the arrangement is not tying. While there

is force to defendants' broader argument, we do not believe

that the relationship between Gary's and U.S. Healthcare

can be neatly squeezed into the purchase/sale paradigm.

As a result, we are hesitant to conclude that the

arrangement was reciprocal dealing, but instead believe

that the true character of the arrangement lies somewhere

between the two practices. Fortunately, resolution of the

antitrust issue presented in this appeal does not require us

to wedge the facts into either doctrinal box, for we conclude

that there was insufficient evidence to support liability

under the Sherman Act regardless of the label placed on

the challenged arrangement.

The law is well developed as to when tying arrangements

should give rise to liability under the Sherman Act. Such

arrangements can be deemed illegal per se or be found to

violate the rule of reason. Per se liability exists where the

defendant is found to have appreciable market power in the

tying market. In such cases, the ability to leverage this

power to restrain trade in the tied market is presumed and

no inquiry need be made into the actual prevailing market

conditions in that market. See Jefferson Parish, 466 U.S. at

15-18 & n. 25; Town Sound, 959 F.2d at 477. Where

appreciable tying market power cannot be shown, inquiry

into the tied product market cannot be avoided, and the

plaintiff therefore has the more difficult burden of showing

that the arrangement violated the rule of reason because it

unreasonably restrained competition in the tied product

market. See Jefferson Parish, 466 U.S. at 29.

In contrast to tying arrangements, reciprocal dealing has

not been the subject of extensive case law development.

Indeed, this Court has yet to set forth a test for determining

25

when a reciprocal dealing arrangement runs afoul of the

Sherman Act.8 Defendants seek to persuade us to fill this

vacuum by holding that reciprocal dealing arrangements

cannot be found illegal per se, but instead should be judged

only under the less rigorous rule of reason test.9 This

position has not been adopted by any of our sister circuits.

All those that have examined the relationship between tying

and reciprocal dealing have determined that each practice

_________________________________________________________________

8. Defendants suggest that we set forth a rule for judging reciprocal

dealing arrangements in W.L. Gore & Assocs., Inc. v. Carlisle Corp., 529

F.2d 614, 624 (3d Cir. 1976) where we stated that:

[T]he use of substantial purchasing power in one product market

to

coerce a supplier into a reciprocating purchase in another market

may be an illegal restraint of trade if the user's purchasing

power is

sufficiently substantial and its use results in substantial

foreclosure

of competition in the other weaker product market.

In Gore, the owner of two patents brought an action for infringement.

The defendant's answer denied the validity of the patents, asserted that

one of the patents was unenforceable because of fraud in its

procurement, and counterclaimed for damages alleging a violation of the

Sherman Act. After trial, the district court entered a judgment holding

one of the patents valid and infringed and the other patent invalid,

granting the plaintiff an injunction restraining the defendant from

infringing the valid patent, and determining that plaintiff had violated

the Sherman Act. Both parties appealed from the judgment. In

determining that we had jurisdiction to review the injunction, we

expressly stated that we had no jurisdiction in an interlocutory appeal

over the antitrust counterclaim of the defendant. See id. at 618. Thus,

the statement in Gore regarding reciprocal dealing was dicta, and does

not establish a rule.

9. In support of this view, defendants primarily rely on Phillip E. Areeda

et al., Antitrust Law, a leading treatise. Areeda argues that "forced

reciprocal exchanges are . . . legally distinct from ties and need not

receive the same antitrust treatment." X Areeda, Antitrust Law P 1750c,

at 268 (1996). He believes that reciprocal trading should not be illegal

per se, and that such a claim should instead be judged solely under the

rule of reason test. See Id. P 1778, at 460-61. Professor Areeda's view

may be colored by his belief that tying arrangements also should not be

illegal per se, a view that is contrary to current law. See IX Areeda,

Antitrust Law P 1730, at 406 14 (1991).

26

should be evaluated under both the per se and rule of

reason tests.10

This position is logical since both practices implicate the

same antitrust concern -- the unlawful extension of

economic power in one market to another market. However,

we decline to resolve this conflict here since the amorphous

and idiosyncratic nature of this case does not provide an

appropriate framework in which to fully flesh out the need

for a separate test for reciprocal dealing arrangements.

Further, we need not reach this issue in order to resolve

the present appeal since we find that BCI failed to set forth

either a valid per se or rule of reason antitrust claim -- a

finding fatal to both a tying claim and a reciprocal dealing

claim under any test we might devise.

B. Per se Liability

Since our jurisprudence regarding both per se and rule of

reason liability has developed in the context of tying cases,

we will use the terms "tying" product market and "tied"

product market to describe the two markets at issue

despite our belief that the arrangement in this case lies

somewhere between tying and reciprocal dealing. The per se

test is used in cases where exploitation of leverage in the

market for the tying product is "probable". See Jefferson

Parish, 466 U.S. at 15; Town Sound, 959 F.2d. at 476-77.

The elements of a per se claim are (1) the defendant seller

_________________________________________________________________

10. See, e.g., Betaseed, Inc. v. U&I, Inc., 681 F.2d 1203, 1221 (9th Cir.

1982) ("The similarity between coercive reciprocity and tying

arrangements, both in form and in anti-competitive consequences, leads

to the conclusion that the two practices should be judged by similar

standards."); Spartan Grain & Mill Co. v. Ayers, 581 F.2d 419, 425 (5th

Cir. 1978) (holding that label of tying and reciprocal dealing was

immaterial, and that the per se standard should be applied in both); E.T.

Barwick Indus. v. Walter E. Heller & Co., 692 F. Supp. 1331 (N.D. Ga.

1987) (same legal standards apply to reciprocal dealing as tying), aff'd

891 F.2d 906 (11th Cir. 1989). See also II Earl W. Kintner, Federal

Antitrust Law S 10.67, at 264-65 (1980) ("[T]he very presence of the

element of coercion indicates that such reciprocal dealings are only anti-

competitive in effect. It is widely agreed that coercive reciprocality,

like

tying arrangements, should be considered a per se violation of Section 1

of the Sherman Act.").

27

must sell two distinct products; (2) the seller mu st possess

market power in the tying product market; and (3) a

substantial amount of interstate commerce must be

affected. See id. at 477. Where such elements are shown,

the defendant's tying practices are condemned without

further proof of anti-competitive effect. See id. Principally at

issue in this appeal is whether BCI met its burden of

proving the second element of this test: that

U.S. Healthcare exercised market power in the tying market.11

The jury determined that U.S. Healthcare exercised

sufficient market power in the tying market to constitute a

per se violation of the Sherman Act. The viability of that

finding, however, depends on the correctness of the market

definition sent to the jury. Defendants maintain that the

definition was incorrect as a matter of law, and that

U.S. Healthcare could not exercise sufficient power in a

properly defined tying market to sustain a per se claim.

1. Defining the Relevant Market

Before we can evaluate the extent to which

U.S. Healthcare exercises power in the tying market, that

market must be properly defined. A market has two

components, product and geographic. See Brown Shoe Co.

v. United States, 370 U.S. 294, 325-28 (1962). The burden

is on the plaintiff to define both components of the relevant

market. See Queen City Pizza, Inc. v. Domino's Pizza, Inc.,

124 F.3d 430, 436 (3d Cir. 1997); Pastore v. Bell Telephone

Co., 24 F.3d 508, 512 (3d Cir. 1994); Tunis Bros Co., Inc. v.

Ford Motor Co., 952 F.2d 715, 726 (3d Cir. 1991). The tying

market definition asserted by BCI and adopted by the jury

was: "U.S. Healthcare members with prescription drug

benefits in the areas surrounding . . . Gary's pharmacies in

suburban Philadelphia." Defendants contend that this

definition contains both a flawed product market --

U.S. Healthcare members with prescription drug benefits--

and a flawed geographic market -- the areas surrounding

Gary's pharmacies in suburban Philadelphia. They submit

_________________________________________________________________

11. The other issues have not been briefed by the parties. The third

element is plainly not disputed. While arguably there is an implicit

challenge to the first element, it would involve the characterization

question, and we need not reach it.

28

instead that the relevant tying market consists of "all

purchasers of prescription drugs in the greater Philadelphia

area."

We agree that BCI failed to meet its burden of presenting

sufficient evidence to support the product and geographic

markets adopted by the jury. However, while the evidence

enables us to determine that the proper product market

consists of all purchasers of prescription drugs, it is more

difficult to determine the relevant geographic market on the

basis of the record. Fortunately, as will be shown,

delineation of the exact contours of the geographic market

is not necessary to an evaluation of the merit of plaintiff's

per se claim. We turn first to the product market issue.

a. The Product Market

BCI has posited a single brand market consisting solely

of U.S. Healthcare members with prescription drug benefits.

Should we accept this market definition our inquiry would

be at an end, for U.S. Healthcare must, by definition,

control 100% of this product market regardless of the

geographic market. BCI seeks to support this product

market by arguing that no products are "reasonably

interchangeable" with U.S. Healthcare members, and that it

is compelled by the Supreme Court's decision in Eastman

Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451

(1992). Examining each of these contentions in turn, we

conclude that this narrow market definition cannot stand

as a matter of law.

The outer boundaries of a product market are determined

by evaluating which products would be reasonably

interchangeable by consumers for the same purpose. See

Allen-Myland, 33 F.3d at 201 n.8; Town Sound, 959 F.2d at

480. "Interchangeability implies that one product is roughly

equivalent to another for the use to which it is put; while

there might be some degree of preference for the one over

the other, either would work effectively." Allen Myland, 33

F.3d at 206. One measure of interchangeability is "cross

elasticity of demand between the product itself and

substitutes for it." Queen City Pizza, 124 F.3d at 437

(quoting Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (1962)).

29

When there is cross-elasticity of demand between products

in a market, "the rise in the price of a good within [the]

relevant market would tend to create a greater demand for

other like goods in that market." Tunis Brothers, 952 F.2d

at 722.

Thus the issue is which products, if any, Gary's, the

consumer, would find to be reasonably interchangeable

with, or substitutable for, U.S. Healthcare members who

purchase prescription drugs. Defendants argue that no

evidence in the record contradicts the logical assumption

that Gary's considers members of other prescription plans,

or uninsured persons, completely interchangeable with

U.S. Healthcare members. We agree.

The only evidence to which BCI directs us to support its

argument that there are no products reasonably

interchangeable with U.S. Healthcare customers is that

when U.S. Healthcare lowered the prices it would pay to

pharmacies for the purchase of prescription drugs by

U.S. Healthcare members, none of the pharmacies dropped

out of the U.S. Healthcare network. BCI asserts that this

shows that there is no cross-elasticity of demand between

U.S. Healthcare members and other purchasers of

prescription drugs since, if there were, then the lowering of

prices would have caused pharmacies to stop doing

business with U.S. Healthcare customers in favor of other

customers who paid more.

This evidence does not support BCI's market definition.

The fact that participating pharmacies do not drop out of

the U.S. Healthcare network when it lowers its payment

schedule does not prove that U.S. Healthcare's action failed

to increase the pharmacies demand for customers who are

not members of U.S. Healthcare. Even though pharmacies

undoubtedly desire higher profit customers, it would not be

necessary for them to drop out of the U.S. Healthcare

network in order to pursue, or acquire, these customers.

Nor would it be economically rational to do so since

pharmacies, like most businesses, seek as many customers

as they can find.12

_________________________________________________________________

12. We assume that membership in the U.S. Healthcare network

remained profitable after U.S. Healthcare lowered its payment schedule.

30

Moreover, to the extent that BCI is arguing that

U.S. Healthcare customers are not interchangeable with

other customers because the market for prescription

customers is so competitive that U.S. Healthcare members

are difficult to replace, this argument also does not support

its product market definition. Product market definition

turns on the existence of close substitutes for a particular

product, not on the ability of any particular consumer to

switch effortlessly to such substitutes. It is true that when

Gary's loses a supply of customers it must compete for

other customers to make up lost sales; however, this does

not mean that those new customers, when found, would

not be interchangeable with U.S. Healthcare members from

Gary's standpoint.

BCI also seeks to support its single brand market by

reference to the Supreme Court's opinion in Kodak. That

case, however, is inapposite. In Kodak, independent service

organizations brought suit alleging that Kodak had tied

replacement parts for its copiers to Kodak repair service.

See 504 U.S. at 459. Although Kodak exercised complete

control over the market for the tying product --

replacement parts for its copiers -- since they were unique,

see id. at 456-57, it argued that it could not, as a matter

of law, have sufficient market power in that derivative

aftermarket to restrain trade because the primary market

for new copiers was competitive. According to Kodak, any

attempt to exercise market power in the derivative market

for copier parts would raise the "life cycle" cost of owning a

Kodak copier, and customers would buy fewer Kodak

copiers, making the attempt unprofitable. See id. at 470.

The Supreme Court declined to let Kodak's economic

theory prevail on summary judgment, holding that, under

certain circumstances, the buyer of a Kodak copier could

be "locked in" to the Kodak parts market by virtue of the

_________________________________________________________________

To the extent that BCI is arguing that pharmacies stayed in the

U.S. Healthcare network despite the fact that it became unprofitable to

do so, this argument renders their overall claim a non sequitur.

U.S. Healthcare cannot exercise control over pharmacies via access to its

network where membership in that network causes pharmacies to lose

money.

31

high "switching costs" of purchasing a new copier from

another manufacturer. See id. at 476. In such a situation,

Kodak copier owners would be forced to purchase copier

parts from Kodak since there were no reasonable

substitutes for such parts. Thus, Kodak establishes that a

single brand market may be considered the relevant market

where a legitimate class of consumers is locked in to

purchasing a non-interchangeable tying product in a

derivative market due to high switching costs in the

primary market. See Queen City Pizza, 124 F.3d at 439-40.

BCI directs us to no evidence introduced at trial to

support a conclusion that Kodak is applicable to this case.

On appeal, they argue that U.S. Healthcare members are

"locked in" to U.S. Healthcare and, by extension, to the

pharmacies in its provider network. We doubt that this

argument is factually correct, for we find no evidence

suggesting that U.S. Healthcare members who wish to

switch HMOs face switching costs significant enough to

constitute a lock in. But even if it is, the argument is

misplaced since Kodak is concerned with the situation

where the victims of the alleged tie -- in that case, the

purchasers of Kodak copiers -- are faced with high

switching costs and thus are "locked in" to the market for

the tying product. Under BCI's theory of the case, Gary's is

the purchaser of the tying product which is U.S. Healthcare

members who purchase prescription drugs. Thus in order

to fall within Kodak's concept of lock in, BCI needed to, at

a minimum, provide evidence that Gary's -- not

U.S. Healthcare members -- was locked into the

U.S. Healthcare network. That it did not do.

b. The Geographic Market

BCI proposed a non-contiguous, gerrymandered

geographic market consisting solely of the areas

surrounding Gary's pharmacies in suburban Philadelphia.

To meet its burden of proving the relevant geographic

market, see Tunis Brothers Co., 952 F.2d at 726, BCI was

required to show that the geographic market it proposed

was "the area in which a potential buyer may rationally

look for the goods or services he or she seeks." See id.

32

(quoting Pennsylvania Dental Ass'n v. Medical Serv. Ass'n of

Pa., 745 F.2d 248, 260 (3d Cir. 1984)).

The only evidence that BCI offered to support its

geographic market was testimony from Dr. Knowlton that

the area from which Gary's stores, or any pharmacies, draw

their customers is made up of primary and secondary

trading areas surroundings its stores. Knowlton defines a

primary trading area is the geographic area surrounding a

pharmacy from which it draws 50% of its clientele, and a

secondary trading area as the geographic area from which

it draws 90% of its clientele.

We believe that Knowlton is undoubtedly correct to the

extent that the jury could reasonably find that pharmacy

customers generally use pharmacies near their home. Thus

we reject defendants' argument that the relevant geographic

market should be the greater Philadelphia area.13 However,

mere invocation of the common-sense precept that

customers use pharmacies near their homes does not

satisfy BCI's burden of showing that the particular

geographic market chosen fairly represents "the area in

which a potential buyer may rationally look for the goods or

services he or she seeks." In this case, where BCI

introduced no evidence to support such a conclusion, an

amorphous and gerrymandered geographic market cannot

stand as a matter of law. See id. at 727 ("The mere

delineation of a geographical area, without reference to a

market as perceived by consumers and suppliers, fails to

meet the legal standard necessary for the relevant

geographic market.").

2. U.S. Healthcare's Power in the Tying Market

Having determined that the market definition adopted by

the jury was erroneous as a matter of law, we are now

faced with the task of assessing U.S. Healthcare's market

_________________________________________________________________

13. Defendants rely primarily on evidence that Gary's advertised in the

greater Philadelphia area to support their expansive conception of the

geographic market. This reliance is misplaced since "the geographic

market is not comprised of the region in which the seller attempts to sell

its product, but rather is comprised of the area where his customers

would look to buy such a product." Tunis Bros., 952 F.2d at 726.

33

power in a properly defined market on the basis of the trial

record. Our task is made more difficult by the fact that the

record does not contain sufficient evidence to enable us to

clearly define the relevant geographic market. In most

instances, the proper course in the face of such

circumstances would be to remand the case for a new trial;

however, our review of the record indicates that it is simply

not possible for U.S. Healthcare to have exercised sufficient

market power in the properly defined product market to

constitute a per se violation in any plausible geographic

market.

In order to impose per se antitrust liability, it must be

shown that the defendant had "appreciable economic power

in the tying market." Kodak, 504 U.S. at 464 (emphasis

added). "Market power is defined as the ability`to raise

prices or to require purchasers to accept burdensome terms

that could not be exacted in a completely competitive

market.' " Allen-Myland, 33 F.3d at 200 (quoting United

States Steel Corp. v. Fortner Enters., Inc. (Fortner II), 429

U.S. 610, 620 (1977)). Since "[t]he existence of such power

ordinarily is inferred from the seller's possession of a

predominant share of the market," Kodak, 504 U.S. at 464

(citations omitted), we turn first to an inquiry into

U.S. Healthcare's share of the market for drug prescription

customers. In so doing, we are mindful of the fact that

"[m]arket share, of course, is only one type of evidence that

may prove the defendant has sufficient market power to

impose per se antitrust liability." Allen-Myland, 33 F.3d at

209.

a. Evidence of Market Share

At trial, BCI's sole evidence of market share derived from

a survey conducted by Dr. Knowlton. His survey concluded

that U.S. Healthcare members purchased twenty to twenty-

five percent of the prescriptions at the surveyed

pharmacies. Defendants argue that this market share is

insufficient as a matter of law to serve as the basis for a

finding of a per se violation. We agree.14 The highest

(Text continued on page 36)

_________________________________________________________________

14. Defendants also argue that the district court abused its discretion in

admitting the survey. We also agree with this contention; however, since

34

we conclude that even if the survey were admitted, it would not help

BCI, we address the methodological errors that should have barred its

admission only briefly.

Survey results offered as proof of the matter asserted are hearsay, and

thus the results of a survey, and any testimony based on those results,

cannot be admitted into evidence unless the survey falls into a

recognized class exception to the hearsay rule or into the residual

exception contained in Fed. R. Evid. 803(24). See Pittsburgh Press Club

v. United States, 579 F.2d 751, 755-58 (3d Cir. 1978). In this case none

of the class exceptions are present, so we examine whether the survey

contains the "circumstantial guarantees of trustworthiness" required for

admissibility under Rule 803(24).

In Pittsburgh Press, we stated that "the circumstantial guarantees of

trustworthiness are for the most part satisfied if the poll is conducted

in

accordance with generally accepted survey principles." Id. at 758. We

then discussed several factors which must be examined in determining

whether a poll meets generally accepted survey principles

A proper universe must be examined and a representative sample

must be chosen; the persons conducting the survey must be

experts; the data must be properly gathered and accurately

reported. It is essential that the sample design, the

questionnaires

and the manner of interviewing meet the standards of objective

surveying and statistical techniques.

Id.

The proponent of the evidence has the burden of establishing these

elements of admissibility. See id. In this case, we find that this burden

was not met and that the methodology of the survey was so flawed that

the district court's decision to admit it was not consistent with the

exercise of sound discretion.

Knowlton's survey was designed to determine U.S. Healthcare's market

share in the region close to three of Gary's six pharmacy locations. To

determine market share, he had pharmacy students call six to eight to

pharmacies within varying distances of each of the three pharmacies

(resulting in a total universe of twenty pharmacies). The pharmacists at

these pharmacies were then asked to name the HMO with which they

did the majority of their business, and to report the percentage of their

prescription business for which that HMO was responsible.

This methodology is flawed in several respects. We identify two

particularly significant errors. First, the survey questions used were not

objective. For example, pharmacists were asked:

35

estimate of U.S. Healthcare's market share resulting from

Knowlton's survey -- which, in addition to the

methodological errors set out in note 14, used the improper

geographic market discussed at pp. 32-33, supra -- was

twenty five percent. Even were we to accept this percentage

as accurate, it is insufficient in itself to impose per se

antitrust liability. See Jefferson Parish, 466 U.S. at 27

(defendant hospital's 30 percent share of market showed

that it lacked the "kind of dominant market position that

obviates the need for further inquiry into competitive

conditions."); see also Times-Picayune Pub. Co. v. United

States, 345 U.S. 594, 612-13 (1953) (defendants share of

33-40 percent of advertising market insufficient to invoke

per se rule). In fact, since Jefferson Parish no court has

inferred substantial market power from a market share

_________________________________________________________________

You provide services for people with prescription cards, like PCS

and

Paid, et cetera. You also provide services for people on specific

HMO

plans like Keystone, U.S. Healthcare, et cetera. What's the name

of

the HMO with which you did the most prescription business . . .?

This question improperly slants the response by highlighting respondent

to U.S. Healthcare's market presence. People responding to a survey tend

to react to the framing of a question. See, e.g. J.R. Eiser, Social

Psychology 219-20 (1986). In addition, this question specifically excluded

large institutional, non-HMO purchasers of prescription drugs such as

PCS and PAID. As a result, it narrowed the product market from

"purchasers of prescription drugs" to "HMO purchasers of prescription

drugs".

Second, while Knowlton surveyed 20 pharmacies, he only used the

data obtained from 14 of those pharmacies in tabulating his results.

This decision resulted from the fact that only fourteen of the twenty

pharmacies surveyed named U.S. Healthcare as their largest HMO

customer. Knowlton simply ignored the other six pharmacies whose data

presumably stated a lower estimate of U.S. Healthcare's market share.

This type of selective analysis violates the requirement that, in order

for

survey results to be admissible, the "data must be properly gathered and

accurately reported".

We conclude that the cumulative effect of these, and other,

methodological errors render it impossible to say that this survey was

"conducted in accordance with generally accepted survey principles," and

thus it should not have been admitted.

36

below 30 percent. See, e.g. Town Sound, 959 F.2d at 481

(affirming summary judgment for defendant with control of

10-12% of tying product market); Marts v. Xerox, 77 F.3d

1109, 1113 n.6 (8th Cir. 1996) (18% share of one portion

of photocopier market too small for unlawful tying);

Continental Trend Resources, Inc. v. OXY USA, Inc., 44 F.3d

1465, 1482 (10th Cir. 1995) (affirming grant of summary

judgment for defendants where defendants controlled less

than 10% of relevant market, since "plaintiffs failed to

establish defendants had sufficient strength in the relevant

market."), vacated on other grounds and remanded, 116

S. Ct. 1843 (1996); Breaux Bros. Farms, Inc. v. Teche Sugar

Co., Inc, 21 F.3d 83, 87-88 (5th Cir. 1994) (17.5 percent

share of relevant market for tying product "is not normally

sufficient to satisfy the requirements of the per se rule.").

Because U.S. Healthcare's true market share in a

properly defined geographic area could be no higher than

25 percent, plaintiff's cannot rely solely on market share to

establish a per se antitrust violation.15

b. Other Factors Bearing on Market Power

Factors other than market share can establish that

U.S. Healthcare exercised appreciable power in the market

for pharmaceutical customers. See Allen-Myland, 33 F.3d at

209. BCI contends that in this case market power can be

inferred from the numerosity of the ties imposed by the

defendants, and by "market realities" which indicate that

the figures for prescription drug sales understate the

importance of U.S. Healthcare members to a pharmacy's

bottom line.

In order to demonstrate tying market power through

evidence of the widespread acceptance of a tie, the plaintiff

must show that the tie was accepted by an appreciable

number of buyers within that market, and that there is an

_________________________________________________________________

15. We note that evidence produced at trial showed that 16% of the

residents of the greater Philadelphia area belong to a U.S. Healthcare

plan. We assume, therefore, that U.S. Healthcare's market share in the

relevant geographic market lies somewhere between 16%, its share in an

impermissibly broad geographic market, and 25%, its share in an

impermissibly narrow one.

37

"absence of other explanations for the[ir] willingness . . . to

purchase the package." See Fortner II, 429 U.S. 610, 618

n.10 (1977); see also Grappone, Inc v. Subaru of New

England, Inc., 858 F.2d 792, 797-98 (1st Cir. 1988)

(widespread acceptance of tie not evidence of market power

where there are plausible business reasons for accepting

tie). In this case, BCI has failed to meet its burden.

At trial, the only evidence offered by BCI concerning other

ties by defendants was that, with respect to six large chains

-- Rite-Aid, Shop-Rite, Food Circus, Walmart, Phar-mor

and Weis Markets -- defendants attempted to tie approval

of additional pharmacies for participation in the

U.S. Healthcare network to each chain agreeing to offer

CHA and/or U.S. Healthcare to its employees. Of these

purported tying attempts, only three -- those involving Rite-

Aid, Phar-Mor and Weis Markets -- were deemed

"successful" by the plaintiff. However, as we have already

observed, BCI failed to demonstrate that these large

companies did not base their decision to make

U.S. Healthcare a part of their benefits package on

plausible business reasons, see supra pp. 20-21. Without

some such showing, the evidence of other tie-ins is

insufficient to constitute proof of appreciable market power.16

BCI also argues that market power can be inferred from

the fact that exclusion from the U.S. Healthcare pharmacy

network would have a major adverse impact on a

pharmacy, to the point of threatening that pharmacy's

survival. BCI submits that since the prescription drug

business is a low-margin business that depends on high

volume, large purchasers such as U.S. Healthcare exert

considerable market power. As an example of this market

power, BCI again directs us to the evidence that

U.S. Healthcare was able to lower its payment schedule to

_________________________________________________________________

16. We further note that while it is apparent that Rite-Aid, Phar-Mor and

Weis Markets are large chains, pharmacies are only a part of their

business and BCI has offered no specific evidence that the number of

pharmacies affected by the alleged tie-ins constituted "an appreciable

number of buyers within the market."

38

pharmacies without loss of pharmacy participation in its

network.17

This argument has two flaws. In the first instance, it

proves too much. The evidence at trial showed that Gary's

was a member of forty or more networks that provided

access to pharmaceutical customers. There is no evidence,

and no reason to believe, that the customers that

U.S. Healthcare delivers are any more desirable than those

delivered by other networks. Thus, if we accept the logic of

BCI's argument, each of these networks exercises sufficient

market power to violate the per se rule of antitrust liability.

Yet, it would pervert the antitrust notion of market power

to find that each of over forty organizations, delivering the

same product, has sufficient market power over a

pharmacy such as Gary's to generate a per se violation of

the antitrust laws.

BCI's argument also runs counter to the purpose of the

antitrust laws. "The purpose of the Sherman Act `is not to

protect businesses from the working of the market; it is to

protect the public from the failure of the market.' " Queen

City Pizza, 124 F.3d at 441 (quoting Spectrum Sports, Inc.

v. McQuillan, 506 U.S. 447, 458 (1993)); see also Town

Sound, 959 F.2d at 494 (it is "no concern of the antitrust

laws" that a practice may consign even an entire "class of

competitors . . . to competitive oblivion," unless "consumers

[a]re also hurt because of diminished competition."); United

States v. Syufy Enterprises, 903 F.2d 659, 668 (9th Cir.

1990) ("[i]t can't be said often enough that the antitrust

laws protect competition, not competitors."). If we were to

accept BCI's argument that a showing of appreciable

market power can be based solely on a pharmacy's "need"

for customers, we would in effect outlaw the agglomeration

of pharmacy customers -- a result that provides benefits to

individual consumers -- in order to protect pharmacies.

This result would stand antitrust jurisprudence on its

head, and establish a precedent whereby the antitrust laws

would protect competitors rather than competition and

consumers.

_________________________________________________________________

17. See supra p. 21.

39

C. The Rule of Reason Claim

The jury also found that defendants were liable under the

rule of reason standard for antitrust violations. Unlike a per

se case where a showing that the defendant had market

power in the tying market leads to a presumption that it is

using that power to expand into the tied market, to succeed

on a rule of reason claim the plaintiff must prove that the

alleged tie "unreasonably restrained competition." Jefferson

Parish, 466 U.S. at 29; see also Town Sound, 959 F.2d at

495 (in order to support a rule of reason claim, plaintiff

must prove that the tie in question caused an "injury to

competition"). This burden "necessarily involves an inquiry

into the actual effect of the [challenged conduct] on

competition [in the tied market]." 466 U.S. at 29.18

_________________________________________________________________

18. BCI contends that by failing to specifically challenge the sufficiency

of the evidence of anti-competitive effects in the tied market in their

pre-

verdict motions for judgment as a matter of law made pursuant to Fed.

R. Civ. P. 50(a), defendants waived their right to raise that specific

argument in their post-trial Rule 50 motions, or thereafter. In their pre-

trial motions, made both at the conclusion of plaintiff's case and at the

conclusion of all evidence, the defendants' challenge to the sufficiency

of

the evidence on the rule of reason claim read:

The evidence is insufficient to support a finding or sustain a

verdict

that U.S. Healthcare's practices constituted an unreasonable

restraint of trade in light of all the circumstances of the case.

Plaintiff has offered no such evidence.

Under Rule 50(a), a pre-verdict motion for judgment as a matter of law

"shall specify the judgment sought and the law and the facts on which

the moving party is entitled to the judgment." Further, a post-trial

motion for judgment as a matter of law made pursuant to Rule 50(b)

"must be preceded by a Rule 50(a) motion sufficiently specific to afford

the party against whom the motion is directed with an opportunity to

cure possible defects in proof which otherwise might make its case

legally insufficient." Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153,

1173 (3d Cir. 1993) (quoting Acosta v. Honda Motor Co., 717 F.2d 828,

831-32 (3d Cir. 1983)); see also Fineman v. Armstrong World Indus., Inc.,

980 F.2d 171, 183-84 (3d Cir. 1992) (compliance with Rule 50(a)

"ensures that the party bearing the burden of proof will have an

opportunity to buttress its case before it goes to the jury and the moving

party will not gain unfair advantage through surprise.").

While the text of the Rule 50(a) motion quoted above is far from a

model of completeness or clarity, we do not measure its sufficiency by

40

Before we can determine whether there was harm to

competition in the tied market, that market must be

defined. BCI had the burden of defining the tied market,

but made no attempt to do so at trial. On appeal, BCI

contends that the tied market consists of the market for the

provision of health insurance and benefits -- a market that

includes HMOs and personal choice plans in addition to

TPAs. We find no support for this broad market definition.

Instead, we believe, on the basis of the record, that the

proper tied market consists solely of the market for TPA

services. BCI is a TPA provider and the harm alleged to

have occurred as result of the tying arrangement took place

in the market for TPA services.

In that market, the only evidence of harm to competition

was that BCI failed to renew one contract, its contract with

Gary's. That showing is insufficient as a matter of law since

it fails to show competitive harm to the tied market as a

whole. See Town Sound, 959 F.2d at 493 (requiring

foreclosure of a "substantial portion" of the tied market to

hurt competition.); see also Virtual Maintenance, Inc. v.

Prime Computer, Inc., 957 F.2d 1318, 1330 (6th Cir.) ("[t]he

foreclosure of 400 computer systems out of the thousands

of systems [in the tied market] is insignificant as a matter

of law"), vacated, 506 U.S. 910 (1992), reinstated in

pertinent part, 11 F.3d 660, 663-64 (6th Cir. 1993).

Moreover, even if we accepted the broad market which

BCI proposed, it still failed to provide sufficient evidence of

competitive harm. The only evidence offered to show that

competition was adversely affected in this broad market

_________________________________________________________________

the text alone, but against the background, as reflected in the record, of

what the party now claiming waiver understood as to the tenor of the

Rule 50 movant's position and theory. See Acosta, 717 F.2d at 832

("[T]he communicative content, `specificity' and notice giving function of

an assertion [in a rule 50(a) motion] should be judged in context.") In

Fineman, for example, we held that a general motion for a directed

verdict contesting the sufficiency of the evidence with respect to

"coercion" preserved defendant's challenge to the sufficiency of the

evidence with respect to the tortious interference claim, because

"plaintiffs' counsel was clearly on notice of the legal rubric under which

[defendants] planned to proceed." 980 F.2d at 184. We think that is the

case here, and hence find no waiver.

41

consisted of the previously mentioned studies of several

large pharmacy chains which faced pressure to offer their

employees membership in the U.S. Healthcare HMO. These

studies do not provide any evidence of market foreclosure

or harm to competition since those pharmacies that were

"forced" to offer their employees U.S. Healthcare coverage

did so in addition to, rather than instead of, other health

insurance plans. Further, even if this evidence did show

harm to competition, BCI has introduced no evidence in

which to evaluate the extent to which such foreclosure

harmed competition in the broad market for health

insurance services generally.

D. Conclusion

Since the record before us does not support a finding

that U.S. Healthcare exercised appreciable market power in

a properly defined tying market or that the arrangement at

issue harmed competition in the tied market, the antitrust

jury verdicts on both the per se and the rule of reason

claims must be set aside.19

IV. CIVIL RICO

A. Introduction

The jury found that U.S. Healthcare's business practices

constituted a pattern of racketeering activity in violation of

18 U.S.C. SS 1962(c) and (d). Section 1962(c) prohibits any

person employed by or associated with an enterprise from

conducting or participating in the conduct of that

enterprise's affairs through a pattern of racketeering

activity. A pattern of racketeering activity "requires at least

two acts of racketeering activity", 18 U.S.C.S 1961(5).

Racketeering activity is defined as an act or threat

chargeable as one of a variety of state felonies or any act

which is "indictable" under specifically listed federal

criminal statutes, see 18 U.S.C. S 1961(A)-(B). Section

1962(d) outlaws any conspiracy to violate the other

_________________________________________________________________

19. Since we find that the jury verdict must be set aside, we need not

address defendants challenge to the rule of reason jury instructions.

42

subsections of S 1962, including, as is relevant to this case,

S 1962(c).

U.S. Healthcare challenges the jury verdict on two

primary grounds, asserting that (1) BCI failed to establish

its standing to recover for any offenses allegedly committed

against Gary's; and (2) BCI failed to present a su stainable

case that the defendants committed any of the alleged

predicate acts. We address each argument in turn.

B. RICO Standing

The section of RICO allowing private parties such as BCI

to pursue a civil action provides that:

[a]ny person injured in his business by reason of a

violation of section 1962 of this chapter may sue

therefor in any appropriate United States district court

and shall recover threefold the damages he sustains

and the cost of the suit, including a reasonable

attorney's fee.

18 U.S.C. S 1964(c)

The Supreme Court examined the standing requirement

of this statutory provision in Holmes v. Securities Investor

Protection Corp., 503 U.S. 258 (1992). The Court noted that

Congress modeled S 1964(c) on the Clayton Act, and found

that a plaintiff's right to sue under RICO, as under the

federal antitrust laws, requires a showing that the alleged

violation was the proximate cause of the plaintiff's injury.

See id. at 267-68. The Court looked to the common law for

guidance in defining the proximate cause requirement. In

so doing, it focused primarily on one element of proximate

cause: the directness of the relationship "between the

injury asserted and the injurious conduct alleged." Id. at

268. This requirement of a direct relation was held to

generally preclude recovery by "a plaintiff who complained

of harm flowing merely from the misfortunes visited upon a

third person by the defendant's acts." Id. at 268-69.

On the facts presented in Holmes, the Court held that the

plaintiff, Securities and Investor Protection Corporation

("SIPC"), had not met the proximate cause requirement and

thus had no standing to bring suit under RICO . SIPC is a

43

private nonprofit corporation, created pursuant to the

Securities Investors Act, which most broker-dealers are

required by law to join and which has a statutory duty to

advance funds to reimburse the customers of member

broker-dealers that are unable to meet their obligations.

See id. at 261. SIPC brought a civil RICO action alleging

that Holmes, and other former members of a brokerage

firm, conspired in a stock manipulation scheme that

prevented two broker-dealers from meeting their

obligations, thereby requiring SIPC to advance nearly $13

million to cover claims by the customers of the affected

broker-dealers. SIPC sought standing under S 1964(c) by

arguing, inter alia, that it was subrogated to the rights of

those customers of the broker-dealers who did not

purchase the manipulated securities but incurred loses

when the broker-dealers failed and could no longer meet

their obligations. See id. at 270.

The Court assumed, for the sake of argument, that SIPC

was entitled to stand in the shoes of the non-purchasing

customers, but held that the defendants' conduct was not

the proximate cause of those customers' injuries. The Court

held that "the link is too remote between the stock

manipulation alleged and the customers' harm, being

purely contingent on the harm suffered by the broker

dealers . . . [t]he broker-dealers simply cannot pay their

bills, and only that intervening insolvency connects the

conspirators' acts to the losses suffered by the non-

purchasing customers and general creditors." Id. at 271.

Defendants' argue that, under Holmes, BCI lacks

standing in this case. They assert that since BCI is alleging

that Gary's has been a victim of the RICO predicate acts,

BCI exemplifies the "plaintiff who complain[s] of harm

flowing merely from the misfortunes visited upon a third

person." Id. at 268. We disagree. The injury proved by BCI,

the loss of its TPA contract with Gary's, is not derivative of

any losses suffered by Gary's. Unlike the injuries suffered

by the non-purchasing customers in Holmes, BCI's injury

was not contingent upon any injury to Gary's, nor is it

more appropriately attributable to an intervening cause

that was not a predicate act under RICO. Here, BCI's TPA

relationship with Gary's was a direct target of the alleged

44

scheme -- indeed, interference with that relationship may

well be deemed the linchpin of the scheme's success.

Accordingly, we conclude that BCI had standing to pursue

its civil RICO claim.20

C. Predicate Acts of BCI's RICO Claim

In its special verdict form, the jury found that each

defendant had committed one or more types of the

predicate acts of: (1) extortion under the Hobbs Act, 18

U.S.C. S 1951; (2) violation of Pennsylvania's commercial

bribery statute, 18 Pa. Cons. Stat. S 4108(b); (3) mail fraud,

18 U.S.C. S 1341; (4) wire fraud, 18 U.S.C. S 1343; and

(5) violation of the Travel Act, 18 U.S.C. S 1952. Defendants

challenge the verdict on the ground that BCI has failed to

prove that defendants' conduct violated any of these laws.

Defendants contend that this failure to prove any predicate

acts, and a fortiori to show a pattern of racketeering

activity, entitles them to judgment as a matter of law on the

RICO claims. In their submission, the conduct underlying

each of the alleged predicate acts was at its bottom no more

than aggressive business bargaining and, just as BCI

cannot convert aggressive business tactics into antitrust

violations, it cannot shoehorn such tactics into the

definitions of the predicate acts at issue here. We shall

devote the bulk of our time to the important and difficult

issue of whether the defendants' conduct amounted to

Hobbs Act extortion. The others alleged predicate acts are

disposed of easily .

1. Extortion under the Hobbs Act

The Hobbs Act imposes criminal penalties on "[w]hoever

in any way or degree obstructs, delays, or affects commerce

or the movement of any article or commodity in commerce,

by robbery or extortion or attempts or conspires to do so."

_________________________________________________________________

20. We note, however, that BCI's RICO standing is limited to injuries

arising from its competition with U.S. Healthcare for Gary's TPA

business. BCI does not have RICO standing to recover for any injuries

suffered by other pharmacies as a result of their relations with

U.S. Healthcare since there is no evidence that these relations directly

injured BCI.

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18 U.S.C. S 1951. "Extortion" is defined in the Act as "the

obtaining of property from another, with his consent,

induced by wrongful use of actual or threatened force,

violence, or fear, or under color of official right." 18 U.S.C.

S 1951(b)(2). The term "fear" includes the fear of economic

loss. See United States v. Addonizio, 451 F.2d 49, 72 (3d

Cir. 1972); United States v. Capo, 817 F.2d 947, 951 (2d

Cir. 1987) (in banc).

BCI alleges that the defendants extorted Gary's health

benefits business by conditioning access to the

U.S. Healthcare provider network on Gary's agreement to

switch to CHA as its TPA. According to BCI, this conduct

amounts to extortion through the wrongful use of the fear

of economic loss. Defendants respond that the use of

economic leverage in this manner cannot be made tofit

within the statutory framework of Hobbs Act extortion.

They reason that any fear of economic loss felt by Gary's

was the result of the give and take of bargaining between

U.S. Healthcare and Gary's in a business setting in which

both parties offered and received something of value. They

contend that the use of this economic fear to extract

concessions from Gary's was not wrongful, as required by

the Hobbs Act, but is instead part and parcel of normal

business negotiations.

As will appear, we conclude that plaintiff's theory, which

is quite ingenious, does not state a viable claim of extortion

because the defendants' use of the fear of economic loss in

the context of hard business bargaining was not (legally)

wrongful. While this decision may seem compelled by

common sense, it is not easily derived from our precedent.

This Court has not had prior occasion to address the line

separating the legitimate use of economic fear to acquire

property in a business setting (i.e., hard bargaining) from

the wrongful use of such fear (i.e., extortion). Accordingly,

we turn for guidance to the decisions of those few courts

that have previously faced the issue. Because it looms so

large on the Hobbs Act landscape, we must first, however,

consider the Supreme Court's decision in United States v.

Enmons, 410 U.S. 396 (1973), which construes the

meaning of the term "wrongful" under the Act.

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