Summit Health, Ltd. v. Pinhas, 500 U.S. 322 (1990)

JUSTICE SCALIA, with whom JUSTICE O’CONNOR, JUSTICE KENNEDY, and JUSTICE SOUTER join, dissenting.

The Court treats this case as involving no more than a conspiracy among eye surgeons at Midway Hospital to eliminate one of their competitors. That alone, it concludes, restrains trade or commerce among the several States within the meaning of the Sherman Act. In my judgment, the conspiracy alleged by the complaint, fairly viewed, involved somewhat more than that; but even so, falls far short of what is required for Sherman Act jurisdiction. I respectfully dissent.

I

The Court has

no doubt concerning the power of Congress to regulate a peer review process controlling access to the market for ophthalmological surgery in Los Angeles,

and concludes that "respondent’s claim . . . has a sufficient nexus with interstate commerce to support federal jurisdiction." Ante at 332 and this page. I agree with all that. Unfortunately, however, the question before us is not whether Congress could reach the activity before us here if it wanted to, but whether it has done so via the Sherman Act. That enactment does not prohibit all conspiracies using instrumentalities of commerce that Congress could regulate. Nor does it prohibit all conspiracies that have sufficient constitutional "nexus" to interstate commerce to be regulated. It prohibits only those conspiracies that are "in restraint of trade or commerce among the several States." 15 U.S.C. § 1. This language commands a judicial inquiry into the nature and potential effect of each particular restraint.

The jurisdictional inquiry under general prohibitions . . . like § 1 of the Sherman Act, turning as it does on the circumstances presented in each case and requiring a particularized judicial determination, differs significantly from that required when Congress itself has defined the specific persons and activities that affect commerce, and therefore require federal regulation.

Gulf Oil Corp. v. Copp Paving Co., 419 U.S. 186, 197, n. 12 (1974).

Until 1980, the nature of this jurisdictional inquiry (with respect to alleged restraints not targeted at the very flow of interstate commerce) was clear: the question was whether the restraint at issue, if successful, would have a substantial effect on interstate commercial activity. See Hospital Building Co. v. Rex Hospital Trustees, 425 U.S. 738, 741, 744 (1976); Burke v. Ford, 389 U.S. 320, 321-322 (1967) (per curiam); Mandeville Island Farms, Inc. v. American Crystal Sugar Co., 334 U.S. 219, 237 (1948). See Note, The Interstate Commerce Test for Jurisdiction in Sherman Act Cases and Its Substantive Applications, 15 Ga.L.Rev. 714, 716-717 (1981). As I shall discuss in due course, that criterion would have called for reversal in the present case. See United States v. Oregon Medical Society, 343 U.S. 326 (1952).

Unfortunately, in 1980, the Court seemed to abandon this approach. McLain v. Real Estate Board of New Orleans, Inc., 444 U.S. 232 (1980), appeared to shift the focus of the inquiry away from the effects of the restraint itself, asking instead whether the

[defendants’] activities which allegedly have been infected by a price-fixing conspiracy . . . have a not insubstantial effect on the interstate commerce involved.

Id. at 246 (emphasis added). The result in McLain would have been the same under the prior test, since the subject of the suit was an alleged massive conspiracy by all realtors in the Greater New Orleans area, involving price-fixing, suppression of market information, and other anticompetitive practices. The Court’s resort to the more expansive "infected activity" test was prompted by the belief that focusing upon the effects of the restraint itself would require plaintiffs to prove their case at the jurisdictional stage. See id. at 243. That belief was in error, since the prior approach had simply assumed, rather than required proof of, the success of the conspiracy.

Thus, as a dictum based upon a misconception, the "infected activities" approach was introduced into antitrust law. It was not received with enthusiasm. Most courts simply finessed the language of McLain and said that nothing had changed, i.e., that the ultimate question was still whether the unlawful conduct itself, if successful, would have a substantial effect on interstate commerce. See, e.g., Cordova & Simonpietri Ins. Agency, Inc. v. Chase Manhattan Bank N.A., 649 F.2d 36, 45 (CA1 1981); Furlong v. Long Island College Hospital, 710 F.2d 922, 925-926 (CA2 1983); Sarin v. Samaritan Health Center, 813 F.2d 755, 758-759 (CA6 1987); Seglin v. Esau, 769 F.2d 1274, 1280 (CA7 1985); Hayden v. Bracy, 744 F.2d 1338, 1343, n. 2 (CA8 1984); Crane v. Intermountain Health Care, Inc., 637 F.2d 715, 724 (CA10 1980) (en banc); see also Thompson v. Wise General Hospital, 707 F.Supp. 849, 854-856 (WD Va.1989), aff’d, 896 F.2d 547 (CA4 1990). Others, however, took McLain at face value -- and of course immediately fell into disagreement over the proper application of the new test. With respect to a restraint like the one at issue here, for example, how does one decide which "activities of the defendants" are "infected"? Are they all the activities of the hospital, Weiss v. York Hospital, 745 F.2d 786, 824-825, and n. 66 (CA3 1984)? Only the activities of the eye surgery department, see Mitchell v. Frank R. Howard Memorial Hospital, 853 F.2d 762, 764, n. 1 (CA9 1988)? The entire practice of eye surgeons who use the hospital, El Shahawy v. Harrison, 778 F.2d 636, 641 (CA11 1985)? Or, as the Ninth Circuit apparently found in this case, the peer review process itself?

Today the Court could have cleared up the confusion created by McLain, refocused the inquiry along the lines marked out by our previous cases (and still adhered to by most circuits), and reversed the judgment below. Instead, it compounds the confusion by rejecting the two competing interpretations of McLain and adding yet a third candidate to the field, one that no court or commentator has ever suggested, let alone endorsed. To determine Sherman Act jurisdiction, it looks neither to the effect on commerce of the restraint nor to the effect on commerce of the defendants’ infected activity, but rather, it seems, to the effect on commerce of the activity from which the plaintiff has been excluded. As I understand the Court’s opinion, the test of Sherman Act jurisdiction is whether the entire line of commerce from which Dr. Pinhas has been excluded affects interstate commerce. Since excluding him from eye surgery at Midway Hospital effectively excluded him from the entire Los Angeles market for eye surgery (because no other Los Angeles hospital would accord him practice privileges after Midway rejected him), the jurisdictional question is simply whether that market affects interstate commerce, which of course it does.* This analysis tells us nothing about the substantiality of the impact on interstate commerce generated by the particular conduct at issue here.

Determining the "market" for a product or service, meaning the scope of other products or services against which it must compete, is of course necessary for many purposes of antitrust analysis. But today’s opinion does not identify a relevant "market" in that sense. It declares Los Angeles to be the pertinent "market" only because that is the entire scope of Dr. Pinhas’ exclusion from practice. If the scope of his exclusion had been national, it would have declared the entire United States to be the "market," though it is quite unlikely that all eye surgeons in the United States are in competition. I cannot understand why "market" in the Court’s peculiar sense has any bearing upon this restraint’s impact on interstate commerce, and hence upon Sherman Act jurisdiction. The Court does not even attempt to provide an explanation.

The Court’s focus on the Los Angeles market would make some sense if Midway was attempting to monopolize that market, or conspiring with all (or even most) of the hospitals in Los Angeles to fix prices there, cf. McLain v. Real Estate Board of New Orleans, Inc., 444 U.S. 232 (1980). But the complaint does not mention Section 2 of the Sherman Act, and Dr. Pinhas does not allege a conspiracy to affect eye surgery in the Los Angeles market. He merely alleges a conspiracy to exclude him from that market by a sort of group boycott. Since group boycotts are per se violations (not because they necessarily affect competition in the relevant market, but because they deprive at least some consumers of a preferred supplier, see R. Bork, The Antitrust Paradox 331-332 (1978)), Dr. Pinhas need not prove an effect on competition in the Los Angeles area to prevail, if the Sherman Act applies. But the question before us today is whether the Act does apply, and that must be answered by determining whether, in its practical economic consequences, the boycott substantially affects interstate commerce by restricting competition or, as in Klor’s, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 213 (1959), interrupts the flow of interstate commerce. The Court never comes to grips with that issue. Instead, because a group boycott, like a price-fixing scheme, would be (if the Sherman Act applies) a per se violation, the Court concludes that "the same analysis applies" to this exclusion of a single competitor from the Los Angeles market as was applied in McLain to the fixing of prices by all realtors in the Greater New Orleans market. See ante at 331-332. It seems to me obvious that the two situations are not remotely comparable. The economic effects of a price-fixing scheme are felt throughout the market in which the prices are fixed; the economic effects of "blackballing" a single supplier are not felt throughout the market from which he is theoretically excluded, but, at most, within the subportion of that market in which he was, or could be, doing business. If, for example. the alleged conspirators in the present case had decided to effectuate the ultimate exclusion of Dr. Pinhas, i.e., to have him killed, it would be absurd to think that the world market in eye surgery would thereby be affected. It is undoubtedly true, in the present case, that Dr. Pinhas has been affected throughout the Los Angeles area, but it is rudimentary that the effect of a restraint of trade must be gauged according to its effect on "competition, not competitors," Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962) (emphasis in original). See also, e.g., Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 539, n. 40 (1983); Fishman v. Estate of Wirtz, 807 F.2d 520, 564-568 (CA7 1986) (Easterbrook, J., dissenting in part). The Court’s suggestion that competition in the entire Los Angeles market was affected by this one surgeon’s exclusion from that market simply ignores the "practical economics" of the matter.

II

In any case, it does not seem to me that a correct analysis of this case would treat it as involving a conspiracy to boycott a single physician. Such boycotts rarely exist in a vacuum; they are usually the means of enforcing compliance with larger anticompetitive schemes. H. Hovenkamp, Economics and Federal Antitrust Law 275-276 (1985); R. Posner, Antitrust Law 207 (1976). Cf. Radovich v. National Football League, 352 U.S. 445, 448-449 (1957) (describing black listing pursuant to conspiracy to monopolize professional football). Charitably read, respondent’s complaint alleges just such a scheme, namely, a scheme to fix prices for some of the eye surgery performed at Midway Hospital. Instead of simply agreeing to a supercompetitive price, Midway’s eye surgeons have, contrary to prevailing Los Angeles practice, allegedly "padded" the cost of certain varieties of eye surgery by requiring a useless second surgeon to be present. The so-called "sham contract" was an attempt to compensate the hyperproductive Dr. Pinhas for his participation in the scheme and the concomitant reduction in his output. When that failed, the conspirators eliminated him as a competitor by terminating his medical staff privileges through the peer review process. That termination was not the totality of the conspiracy, but merely the means used to enforce it -- just as, in Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752 (1984), the elimination of the price-cutting Spray-Rite as a distributor of Monsanto’s products (via termination and a boycott) was merely the means of enforcing the alleged price-fixing conspiracy between Monsanto and its other distributors. This case, like Monsanto, involves a "termination . . . pursuant to a conspiracy . . . to set . . . prices," id. at 757-758 (emphasis added), and, for purposes of determining Sherman Act jurisdiction, what counts is the impact of that entire price-fixing conspiracy.

Even when the conspiracy is viewed in this broader fashion, however, the scope of the market affected by it has nothing to do with the scope of Dr. Pinhas’ exclusion from practice. If this had been a naked price-fixing conspiracy, instead of the more subtle one that it is, no one would contend that it affected prices throughout Los Angeles. Pursuant to standard antitrust analysis, the agreement itself would define the extent of the market. The market would be eye surgery at Midway (not "eye surgery in the city where Midway is located"), since the very existence of the agreement implies power over price in that defined market. FTC v. Superior Court Trial Lawyers Assn., 493 U.S. 411, 435, n. 18 (1990) (citing R. Bork, The Antitrust Paradox 269 (1978)). It is irrational to use a different analysis, and to assume the affected market to be all of Los Angeles, simply because this more subtle price-fixing conspiracy led (incidentally) to the exclusion of Dr. Pinhas not only from Midway, but from all hospitals throughout the city.

There is simply no basis for assuming that this alleged conspiracy’s market power -- and its consequent effect upon competition, as opposed to its effect upon Dr. Pinhas -- extended throughout Los Angeles. It has not been alleged that the conspirators have perverted the peer review process in hospitals throughout the city; nor that the peer review process at Midway is the "gateway" to the Los Angeles market in the sense of being the only way (or even one of the few ways) to gain entry. To the contrary, it is acknowledged that every hospital in Los Angeles has its own peer review process, and the complaint itself asserts that, well before the offer of the "sham contract," "nearly all" those hospitals had abolished the featherbedding practice that is the object of this conspiracy. These uncontested facts reveal the truly local nature of the restraint and preclude any inference that the conspiracy at issue here had (or could have) an effect on competition in the Los Angeles market. Cf. Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 31 (1984). Northern Pacific R. Co. v. United States, 356 U.S. 1, 6-7 (1958). Any allegations to the contrary (and there are none) would have to be dismissed as inconsistent with simple economics. See Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 593-595 (1986).

III

In my view, the present case should be decided by applying to the price-fixing conspiracy at Midway Hospital the workable jurisdictional test that our cases had established before McLain confused things. On that basis, I would reverse the Court of Appeals’ judgment that respondent had stated a Sherman Act claim.

The complaint does not begin to suggest that the conspiracy at Midway could have even the most trivial effect on interstate commerce. Cf. Crane v. Intermountain Health Care, Inc., 637 F.2d at 725. It literally alleges nothing more than that Dr. Pinhas, the defendant physicians, Midway Hospital, and Summit Health, Ltd. are "engaged in interstate commerce." Contrary to the Court’s (undocumented) suggestion, ante at ___ and ___, there is no allegation that any out-of-state patients call upon the hospital for eye surgery (or anything else) -- let alone a sufficient number that overcharging them would create a "substantial" effect on commerce among the several States. Respondent does not allege that out-of-state insurance companies or the Federal Government pays for the overcharges, cf. Goldfarb v. Virginia State Bar, 421 U.S. 773, 783 (1975); indeed, it appears on the face of the complaint that the Federal Government has stopped reimbursing featherbedded operations. He does not allege that eye surgery involves the use of implements or equipment purchased out of state, or that the restraint at issue here could have any appreciable effect on such purchases, cf. Hospital Building Co. v. Rex Hospital Trustees, 425 U.S. at 741, 744. Quite simply, the complaint is entirely devoid of any attempt to show a connection between the challenged restraint and "commerce among the several States." Because

it is not sufficient merely to rely on identification of a relevant local activity and to presume an interrelationship with some unspecified aspect of interstate commerce,

McLain, 444 U.S. at 242, I would dismiss the complaint out of hand.

In point of fact, such a dismissal seems compelled by our decision in United States v. Oregon Medical Society, 343 U.S. 326 (1952). There, the state medical society, eight county medical services, and eight individual physicians conspired to restrain the business of providing prepaid medical care by, inter alia, allocating territories to be served by doctor-sponsored plans. The District Court found that the conspiracy did not restrain interstate commerce. On direct appeal, the United States argued that the interstate activities of the private associations sufficed to show the requisite interstate effect. The Court rejected this argument, holding that, in order to prevail, the Government had to show that the restraint itself (the allocation of territories) had a substantial adverse effect on interstate commerce. Such an effect had not been proven, the Court observed, because the activities of the doctor-sponsored plans were "wholly intrastate" id. at 338. It did not matter that the plans had made a few payments to out-of-state patients. Those payments were "few, sporadic, and incidental." Id. at 339. A straightforward application of this same rationale compels reversal in the present case.

* * * *

If it is true, as the complaint alleges, that one hospital will ordinarily not accord privileges to a doctor who has failed the peer review process elsewhere, it may well be that Dr. Pinhas has been the victim of a business tort affecting him throughout Los Angeles -- or perhaps even nationwide. Cf. Hayden v. Bracy, 744 F.2d at 1343-1345 (various torts, in addition to Sherman Act violation, alleged to have arisen out of negative peer review). But the Sherman Act "does not purport to afford remedies for all torts committed by or against persons engaged in interstate commerce," Hunt v. Crumboch, 325 U.S. 821, 826 (1945), unless those torts restrain commerce "among the several States." The short of the matter is that Dr. Pinhas may well have a legitimate grievance, but it is not one redressed by the Sherman Act.

Disputes over the denial of hospital practice privileges are common, and most of the circuits to which they have been presented as federal antitrust claims have rejected them on jurisdictional grounds. Furlong v. Long Island College Hospital, 710 F.2d 922, 925-926 (CA2 1983); Thompson v. Wise General Hospital, 707 F.Supp. 849, 854-856, aff’d, 896 F.2d 547 (CA4 1990); Sarin v. Esau, 769 F.2d 1274, 1283-1284 (CA7 1985); Hayden v. Bracy, 744 F.2d 1338, 1342-1343 (CA8 1984). At least two other Circuits would reach that result on the particular complaint before us here. Cordova & Simonpietri Ins. Agency Inc. v. Chase Manhattan Bank N.A., 649 F.2d 36, 45 (CA1 1981); Crane v. Intermountain Health Care, Inc., 637 F.2d 715, 725 (CA10 1980) (en banc). I think it is a mistake to overturn this view. Federal courts are an attractive forum, and the treble damages of the Clayton Act an attractive remedy. We have today made them available for routine business torts, needlessly destroying a sensible statutory allocation of federal-state responsibility and contributing to the trivialization of the federal courts.

I respectfully dissent.

* Even so, I might note, it is improper for the Court to dispense with the necessary allegations to that effect. See McLain v. Real Estate Board of New Orleans, Inc., 444 U.S. 232, 242 (1980).