Background
Plaintiffs filed suit in 2012 alleging that Sutter violated the Sherman Act, California’s antitrust law, the Cartwright Act, and California's Unfair Competition Law by abusing its market power. Plaintiffs argued that this conduct resulted in supracompetitive pricing to the health plans that was passed onto the plan subscribers in turn. Plaintiffs alleged that Sutter sought to use its market power in certain regions that lacked competition to increase prices in more competitive regions. They relied on evidence from late 1990s that showed that Sutter believed that systemwide contracting would give Sutter leverage and increase their profits by nearly $200M a year. And Sutter was able to institute this systemwide contracting over the objections of insurers which resulted in supracompetitive pricing. Plaintiffs asserted two causes of action. First, they alleged that Sutter engaged in illegal tying by requiring Sutter’s providers to participate in “uncompetitive or ‘tying’ markets.” Plaintiffs’ theory was that Sutter conditioned the “health plans’ willingness to purchase a product they did not want or on terms they did not want (either in-network participation of or supracompetitive out of network rates for Sutter's providers in more competitive or “tied” markets).” Second, Plaintiffs alleged that Sutter engaged in an unreasonable course of conduct that resulted in supracompetitive pricing (i.e. conduct that violated the rule of reason) in violation of the Cartwright act. This included allegations that Sutter forced health plans to accept contract terms that prevented steering to lower-cost providers. The case proceeded to trial on Plaintiffs’ Cartwright Act claims based on a stipulation by the parties. The parties conducted a four-week jury trial, and the jury returned a complete defense verdict for Sutter.
The appeal challenged certain pretrial and evidentiary rulings. Based on dispositive motion practice in the case, plaintiffs’ damages period began on January 1, 2011. The district court excluded certain evidence in motions in limine, including: 1) past merger challenges; 2) evidence related to Sutter’s practices before January 1, 2006; and 3) a 2006 memorandum. After plaintiffs attempted to introduce 23 specific pre-2006 documents at trial, the district court excluded such documents under Federal Rule of Evidence 403.
The Parties also submitted competing jury instructions on the unreasonable course of conduct claim. Plaintiffs requested an instruction that required the plaintiff to establish that, inter alia, the “purpose or effect” of defendant’s conduct was to restrain competition. On the other hand, defendant requested that the word “purpose” be removed from the jury instruction. The district court agreed with Sutter. It instructed the jury that plaintiffs had the burden to prove that the “effect” of Sutter’s conduct was to “restrain competition” and the jury should consider whether Sutter’s challenged restraint had an anticompetitive or beneficial effect on competition.”
Ninth Circuit Decision
The Ninth Circuit examined California’s model judicial instructions on unreasonable restraints of trade adjudicated under the rule of reason. Judge Lucy Koh acknowledged that such instructions are generally treated as “helpful” but are not “dispositive” The court noted that the model instructions at issue reference the “purpose or effect” of the restraints. But the district court rejected this approach and only referenced “anticompetitive effect.”
The court noted that while jury instructions are reviewed under an abuse of discretion standard, an appellate court does not need to defer to the trial court on whether the instructions accurately stated the applicable law. If the jury was improperly instructed, then an appellate court can only affirm a verdict if the error was harmless. The court examined California antitrust law and recognized that requiring the jury to consider the “purpose or effect” of a restraint directly stems from the Cartwright Act and California case law interpreting the statute. The court noted that while the California Supreme Court no longer treats the Cartwright Act as “coextensive” with the federal Sherman Act, federal law and federal model jury instructions also recognize that anticompetitive purpose is a relevant factor in a rule of reason analysis. The court also found support in well-established antitrust case law, including Bd. of Trade of Chi. v. United States, 246 U.S. 231, 238 (1918) and United States v. Topco Assocs., Inc., 405 U.S. 596, 607 (1972). These seminal antitrust cases discuss the need to examine the purpose behind why a restraint is adopted.
While Sutter argued that examining anticompetitive “purpose” was not required as part of the rule of reason analysis, the district court referenced the Supreme Court’s decision in Ohio v. American Express, 585 U.S. 529, 541 (2018), in which the Court emphasized that rule of reason analysis is “flexible” and ultimately requires a “fact-specific assessment of market power and market structure.” Based on this state and federal precedent, the court held that the trial court had improperly instructed the jury on California law.
The court held that, because legal error was established, prejudice is presumed, and Sutter had the burden of showing harmless error. Sutter argued that because the jury had found for Sutter with respect to other questions on the rule of reason analysis, an instruction related to purpose would not have changed the outcome. The court rejected this argument because it held that consideration of Sutter’s alleged “anticompetitive purpose” may have impacted the jury’s decision with respect to other portions of the rule of reason inquiry. The court took a broad approach to the role of intent in this analysis, recognizing that “consideration of a party’s motives often shapes interpretation of that parties’ action” under the rule of reason’s fact-specific analysis. Thus, Sutter’s motivations for seeking certain contractual changes could have been relevant to the issue of whether Sutter “forced” health plans to agree to certain anti-steering provisions.
The second issue on appeal was whether the district court had erred in excluding pre-2006 evidence. The appellate court sided with plaintiffs on this issue. The court found that such evidence was relevant to plaintiffs trying and unreasonable course of conduct claims. Plaintiffs had attempted to introduce a significant amount of pre-2006 evidence, including past admissions by Sutter, its switch to systemwide contracting, and 1999 merger litigation related to a past Sutter transaction. Plaintiffs also attempted to introduced 23 specific pre-2006 documents at trial, which defendant objected to and which the court ultimately excluded.
The majority and dissent disagreed about the importance of such evidence to a tying claim. While a tying claim is a per se violation of the Cartwright Act, the majority held that whether the defendant “intended to link the sales of its tying and tied products or intended to exercise market power in the tying market, therefore, is probative of whether the defendant in fact engaged in either conduct—even if the specific evidence predates the class period.” The court went through the excluded evidence and found that it was relevant to both of plaintiffs’ underlying claims. The pre-2006 evidence provided insight into how Sutter moved toward system-wide contracting over the objections of health plans. Additionally, it held that the trial court could have taken a less restrictive approach to the complete exclusion of evidence of the 1999 merger by admitting only specific relevant portions of that past trial.
The Ninth Circuit held that the district court abused its discretion because the blanket exclusion of pre-2006 evidence was “arbitrary because it deprived plaintiffs of the evidence essential to proving their allegations” and thus was not harmless error. It was quick to point out that nothing in the decision “prevents district courts from setting reasonable limits on the introduction of evidence or from conducting the proper balancing test under Rule 403.” It also rejected the argument that pre-2006 evidence was simply cumulative, noting that “evidence is not cumulative simply because it is probative of duration.” The court was hesitant to speculate the jury would have reached the same conclusion if the excluded evidence was introduced, and thus a new trial was warranted.
Dissent
The dissenting opinion expressed significant concern that majority opinion would undermine trial court’s discretion in managing complex trials. Judge Patrick Bumatay noted that antitrust cases often have a long history, and the court of appeals should not “second guess” trial courts in setting reasonable evidentiary limits. The dissent argued that existing precedent did not require the jury to consider anticompetitive intent, and nonetheless, nothing in the jury instruction prevented such consideration. It also argued that even if the jury had found anticompetitive intent, it would not have changed the verdict. Judge Bamatay also minimized the impact of the excluded pre-2006 evidence, noting that certain pre-2006 was permitted to be introduced. Nonetheless, he noted that any error was harmless because the jury’s other findings would have resulted in a defense verdict given that the jury found that Sutter had not “forced” health plans to agree to contracts with anti-steering provisions during the damages period. The dissent also argued that anticompetitive intent was of minimal relevance to a tying claim, given that it is a per se violation of the Cartwright Act.
Impact on Future Cases
The Ninth Circuit carefully scrutinized the district court’s evidentiary rulings and reversed a jury verdict in a blockbuster antitrust case. The court found that examining the anticompetitive purpose behind a restraint has been an important part of antitrust law for over a century. And anticompetitive intent is not just something that a jury should consider—it needs to be scrutinized in adjudicating antitrust claims. The holding may lead to district courts adopting a more expansive approach to relevance in both per se and rule of reason cases. Whether certain evidence reflects anticompetitive intent is a broad inquiry, and there will inevitably be significant disagreement about whether certain evidence constitutes an anticompetitive intent as opposed to a legal business strategy. In light of the Ninth Circuit’s reversal of the jury verdict, district courts may be more flexible in allowing the admission of evidence that is arguably relevant to the issue of intent. The case also emphasizes that adjudicating rule of reason claims requires a broad and flexible inquiry in antitrust cases. The Sutter decision is thus a strong precedent in favor of a broader approach to the admission of evidence of anticompetitive intent in antitrust trials and requiring juries to consider such evidence before reaching a verdict.
The Sutter decision may also impact how trial courts manage the use of evidence cut-offs in antitrust cases. Because some restraints of trade may be long-standing commercial practices, courts may allow older evidence that is relevant to the formation of intent. This could increase the length of trials, as additional older evidence will be introduced, with the accompanying challenges that come with admitting such evidence. The dissent recognized that issue in Sutter, as certain evidence involved conduct from the late 1990s. However, it is important to recognize that the Ninth Circuit stressed that district courts retain discretion in limiting the introduction of cumulative evidence, acknowledging the district court’s desire “to avoid showing the jury every single systemwide contract that ever included an equal treatment or tiered products clause was prudent.” The court also noted that this was not a case in which the “[p]laintiff sought to introduce thousands of redundant documents spanning a course of decades.” The court went into detail on the 23 specific pre-2006 documents that the plaintiffs sought to be admitted shortly before trial. While the decision may impact the admission of older evidence, the opinion also makes clear that trial courts retain discretion to ensure that juries are not inundated with voluminous documents that ultimately constitute cumulative evidence. Thus, while the decision generally favors the admission of evidence relevant to the purpose underlying a restraint, the court emphasized the trial court had abused its discretion through its “blanket exclusion” of relevant evidence rather than a more limited exclusion under Rule 403.
