A divided federal appeals panel has breathed new life into a $411 million class action lawsuit against Sutter Health, tossing out a jury verdict that would have ended the antitrust litigation accusing the northern California health and hospital system of allegedly using their market dominance to jack up the rates charged to employer health plans administered through major health insurers, allegedly resulting in higher premiums for employers and their workers,
A dissenting judge, however, sharply criticized the ruling, saying his colleagues have essentially upended longstanding rules of how judges and juries should interpret antitrust law and have given plaintiffs a powerful new legal weapon to dictate to judges what evidence juries must consider at trial.
U.S. Ninth Circuit Court of Appeals Judge Patrick Bumatay
| Federalist Society
The majority decision was authored by Ninth Circuit Judge Lucy H. Koh, joined by Ninth Circuit Judge Roopali H. Desai. Both Koh and Desai were appointed to the Ninth Circuit by President Joe Biden, in 2021 and 2022, respectively.
Ninth Circuit Judge Patrick Bumatay authored the dissent. Bumatay was appointed to the Ninth Circuit by former President Donald Trump in 2019.
On its face, the decision marked a victory for a group of plaintiffs, including individuals and businesses, suing Sutter Health over the health system's alleged anticompetitive practices.
The lawsuit was filed in 2012 by attorney Azra Z. Mehdi, of The Mehdi Firm, of San Francisco. The action was later joined by attorneys Matthew L. Cantor, Jean Kim and Rosa M. Morales, of the firm of Constantine Cannon LLP, of New York.
Named plaintiffs in the action include Djeneba Sidibe, of Marin County, and formerly of Alameda and San Mateo counties; Jerry Jankowski, of San Francisco County; Susan Hansen, of San Francisco County; David Herman, of San Francisco County; Caroline Stewart, of San Fransico County; Johnson Pool & Spa, of Windsor; and Optimum Graphics, of San Anselmo.
Sacramento-based Sutter Health operates 24 hospitals and dozens of other health care clinics and offices across the San Francisco Bay Area, Sacramento and more than 100 communities in northern California.
The lawsuit accuses Sutter Health of allegedly using its strong market position to force a group of large health insurers - including Aetna, Anthem Blue Cross, Blue Shield of California, Health Net and United Healthcare - to agree to so-called "tying arrangements."
Under such alleged "all-or-nothing" arrangements, Sutter essentially has forced the insurers, who by law must provide in-network coverage in certain so-called hospital service areas (HSAs), to include in-network coverage in certain other HSAs dominated by Sutter.
The lawsuit asserts this has resulted in substantially higher premiums charged to insured customers, including individuals and employers.
The lawsuit claims these practices violated federal and California state antitrust laws.
After a decade in San Francisco federal court, the case went to trial, where a jury delivered a verdict in favor of Sutter Health, appearing to end the case. In that verdict, the jury simply found Sutter did not force the health plans "to agree to contracts that had terms that prevented the plans from steering patients to lower-cost non-Sutter hospitals within the plan network."
The plaintiffs appealed the verdict, and the two-judge majority sided with the plaintiffs.
In the ruling, Judges Koh and Desai said the jury verdict was based on "legal error" by the judge presiding in the trial. Specifically, Koh and Desai said they believed the judge abused her discretion by excluding any evidence beyond the five years preceding the filing of the lawsuit, which would have been outside the statute of limitations for class claims.
Among other items, Koh and Desai noted the allegedly improper exclusions included company communications from the 1990s concerning "increased leverage" Sutter could exert over insurers to achieve "vastly better results" and "better pricing." The list of allegedly improperly excluded evidence also included a 2006 memo, which included statements from a future Sutter CEO saying Sutter does "force them to pay us more ... and they don't like us," and "we pushed them because we could."
"Evidence that Sutter’s intent in implementing systemwide contracting was to use those contracts as a vehicle to engage in tying or other anticompetitive behavior is therefore relevant to Plaintiffs’ legal theory, even if systemwide contracting itself is not unlawful," Koh wrote in the majority opinion.
They further noted the judge excluded evidence of the health insurers' objections to the alleged anticompetitive practices before 2006, which they said could have established corroboration of the plaintiffs' claims of illegal "tying."
Koh and Desai acknowledged the judge had a legitimate interest in attempting to prevent the plaintiffs from burying the jury under a mound of "cumulative" and "redundant" evidence. But the majority said the trial judge erred by simply ruling to exclude all pre-2006 evidence on the basis of the passage of time.
In dissent, Bumatay blasted his colleagues for all but rewriting the rules under which such antitrust trials can be conducted.
He asserted the decision will now serve as precedent that trial lawyers will use to limit the ability of trial judges to set limits on the ability of plaintiffs to bury juries under "every piece of evidence from the inception of time."
"Today, we limit the discretion that district courts enjoy in managing trials and second guess their ability to set reasonable evidentiary limits," Bumatay wrote. "We reverse the jury verdict because we don’t like the district court’s choice of five years.
"But we offer no other guiding principles. Instead, according to the majority, district courts may no longer exclude historical evidence from trial whenever 'history' is relevant. This applies not only in every antitrust case - but potentially countless others. Thus, after our ruling, litigants - not judges- get to choose how far back in time they want to present evidence.
"This is a mistake."
But Bumatay and his colleagues particularly clashed on another key aspect of the Sutter jury trial and antitrust proceedings, in general:
How much weight judges and juries can apply to both anticompetitive effect and anticompetitive purpose.
The majority said it is not enough that the jury determined Sutter's "systemwide contracting" forced insurers to accept their higher prices. Rather, they said the trial judge erred by purportedly not instructing them to also consider Sutter's alleged anticompetitive purpose, a factor which could have been reinforced by the allegedly wrongly excluded evidence and which they said is required under California Supreme Court interpretations of the state's antitrust law, the Cartwright Act.
They said they believed the emphasis on anticompetitive purpose as a factor that can be considered by courts is shared under federal antitrust law, as well.
Bumatay, in dissent, said that holding conflicts not only with the trial judge's discretion under court precedent and rules, but also with the so-called "rule of reason," a legal principle requiring judges to consider each case on its own merits.
He said the majority's holding essentially creates new law, all but requiring federal courts in California and beyond to add "anticompetitive purpose" to the list of factors that are considered "essential" when evaluating antitrust claims.
"... The majority can point to no Supreme Court case holding that anticompetitive purpose must be considered in every rule-of-reason case," wrote Bumatay. "The reason for that is simple. No such rule exists and adopting it contravenes a century’s worth of cases saying otherwise.
"So based on the shakiest of foundations, the majority crafts a new rule that alters the direction of antitrust law."
The majority, however, shot back, saying Bumatay was "mistaken," concerning both their reasoning and "the district court's error."
They said the decision merely reinforces the "widespread consensus that consideration of anticompetitive purpose is an essential aspect of the rule of reason analysis" for evaluating antitrust lawsuits.
"As a means of determining anticompetitive effect, however, anticompetitive purpose is one of several relevant factors that a trier of fact may consider," Koh wrote. "The trier of fact is not required to rely on any one factor, but it must have the option of considering that factor, which is only possible if properly instructed that the factor exists. Here, the jury was not instructed that it could consider anticompetitive purpose.
"This was error."
The decision reversed the jury verdict and sent the case back to the U.S. District Court for the Northern District of California for further proceedings, including a potential new trial.
Sutter Health was represented in the action by attorneys Craig E. Stewart, David C. Kiernan, Matthew J. Silveira, Jeffrey A. LeVee, of the firm of Jones Day, of San Francisco and Los Angeles; and Robert H. Bunzel, Oliver Q. Dunlap and Patrick M. Ryan, of Bartko LLP, of San Francisco.
Plaintiffs were represented before the Ninth Circuit by attorneys Matthew L. Cantor, Jean Kim, James J. Kovacs and J. Wyatt Fore, of Constantine Cannon LLP, of New York and Washington, D.C.; Azra Z. Mehdi, of The Mehdi Firm PC, of San Francisco; David C. Brownstein and David M. Goldstein, of Farmer Brownstein Jaeger Goldstein Klein & Siegel LLP, of San Francisco; Allan Steyer, D. Scott Macrae, and Suneel Jain, of Steyer Lowenthal Boodrookas Alvarez & Smith LLP, of San Francisco; and Jill Manning, of Pearson Simon & Warshaw LLP, of San Francisco.