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Winter, 2008
Health Law Bulletin

Recent Ninth Circuit PeaceHealth Decision Provides Guidance on Bundled Discounting Practices
By Eric D. Beal, Esq.

A bundled discount occurs when a company sells a number of goods or services together for a lower price than it charges for the same goods or services purchased individually. On September 4, 2007, the Ninth Circuit Court of Appeals issued its opinion in the case of Cascade Health Solutions (f.k.a. McKenzie-Willamette-Hospital) v. PeaceHealth) which will help businesses to better assess which bundled pricing practices are permissible under the antitrust laws.

Background

PeaceHealth and McKenzie are the only two hospital care providers in Lane County, Oregon. PeaceHealth offers primary, secondary and tertiary care services and McKenzie provides only primary and secondary care services. The evidence at trial suggested that PeaceHealth had a market share of more than 90% for tertiary care services and 75% for primary and secondary care services. McKenzie claimed that PeaceHealth had violated § 2 of the Sherman Act by “bundling” its tertiary services, which faced little competition, with primary and secondary health services and offering that bundle of services to insurers at a steep discount. The jury found against PeaceHealth for attempted monopolization and awarded $16 million in damages.

A New Bundling Standard

On appeal, the Court noted that bundled sales are common and usually are good for consumers because they offer lower prices. The Court departed from other appellate courts’ treatments of bundled discounts, which have been criticized as vague and potentially harmful to bundling arrangements that enhance consumer welfare. Instead, the Ninth Circuit concluded that a bundled discount would be unlawful only when “the discounts result in prices that are below an appropriate measure of the defendant’s costs.” To determine costs, the Court adopted the so-called “discount attribution” standard, which posits that “the full amount of the discounts given by the defendant on the bundle are allocated to the competitive product or products. If the resulting price of the competitive product or products is below the defendant’s incremental cost to produce them, the trier of fact may find that the bundled discount is exclusionary for the purpose of § 2.”

Since the jury had been instructed under a different standard, the Court vacated the verdict and judgment and remanded for further proceedings. The plaintiff has filed a petition for a rehearing by the full Ninth Circuit Court. Even if the Ninth Circuit reviews the case en banc, however, its approach to bundled discounts is likely to remain at odds with the other analyses. Many observers believe that the U.S. Supreme Court may ultimately step in to resolve this issue.

 

Eric Beal is an associate and works primarily in the firm’s Springfield office. You can contact Eric at (413) 272-6217 or ebeal@bulkley.com.