Summit Health Ltd v. J Pinhas/Opinion of the Court

by John Paul Stevens

The question presented is whether the interstate commerce requirement of antitrust jurisdiction is satisfied by allegations that petitioners conspired to exclude respondent, a duly licensed and practicing physician and surgeon, from the market for ophthalmological services in Los Angeles because he refused to follow an unnecessarily costly surgical procedure.

In 1987, respondent Dr. Simon J. Pinhas filed a complaint in District Court alleging that petitioners Summit Health, Ltd. (Summit), Midway Hospital Medical Center (Midway), its medical staff, and others, had entered into a conspiracy to drive him out of business "so that other ophthalmologists and eye physicians [including four of the petitioners] will have a greater share of the eye care and ophthalmic surgery in Los Angeles." App. 39. Among his allegations was a claim that the conspiracy violated § 1 of the Sherman Act. ^[1] The District Court granted defendants' (now petitioners') motion to dismiss the First Amended Complaint (complaint) without leave to amend, App. 315, but the United States Court of Appeals for the Ninth Circuit reinstated the antitrust claim. 894 F.2d 1024 (1989). ^[2] We granted certiorari, 496 U.S. ----, 110 S.Ct. 3212, 110 L.Ed.2d 660 (1990), to consider petitioners' contention that the complaint fails to satisfy the jurisdictional requirements of the Sherman Act, as interpreted in McLain v. Real Estate Bd. of New Orleans, Inc., 444 U.S. 232, 100 ,S.Ct. 502, 62 L.Ed.2d 441 (1980), because it does not describe a factual nexus between the alleged boycott and interstate commerce.

* Because this case comes before us from the granting of a motion to dismiss on the pleadings, we must assume the truth of the material facts as alleged in the complaint. Respondent, a diplomat of the American Board of Ophthalmology, has earned a national and international reputation as a specialist in corneal eye problems. App. 7. Since October 1981, he has been a member of the staff of Midway in Los Angeles, and because of his special skills, has performed more eye surgical procedures, including cornea transplants and cataract removals, than any other surgeon at the hospital. Ibid. ^[3]

Prior to 1986, most eye surgeries in Los Angeles were performed by a primary surgeon with the assistance of a second surgeon. Id., at 8. This practice significantly increased the cost of eye surgery. In February of that year, the administrators of the Medicare program announced that they would no longer reimburse physicians for the services of assistants, and most hospitals in southern California abolished the assistant surgeon requirement. Respondent, and certain other ophthalmologists, asked Midway to abandon the requirement, but the medical staff refused to do so. Ibid. Respondent explained that because Medicare reimbursement was no longer available, the requirement would cost him about $60,000 per year in payments to competing surgeons for assistance that he did not need. Id., at 9. Although respondent expressed a desire to maintain the preponderance of his practice at Midway, he nevertheless advised the hospital that he would leave if the assistant surgeon requirement were not eliminated. Ibid.

Petitioners responded to respondent's request to forgo an assistant in two ways. First, Midway and its corporate parent offered respondent a "sham" contract that provided for payments of $36,000 per year (later increased by oral offer to $60,000) for services that he would not be asked to perform. Ibid. Second, when respondent refused to sign or return the "sham" contract, petitioners initiated peer-review proceedings against him and summarily suspended, and subsequently terminated, his medical staff privileges. ^[4] Id., at 10. The proceedings were conducted in an unfair manner by biased decisionmakers, and ultimately resulted in an order upholding one of seven charges against respondent, and imposing severe restrictions on his practice. ^[5] When this action was commenced, petitioners were preparing to distribute an adverse report ^[6] about respondent that would "preclude him from continued competition in the market place, not only at defendant Midway Hospital [but also] . . . in California, if not the United States." Id., at 40. The defendants allegedly planned to disseminate the report "to all hospitals which Dr. Pinhas is a member, and to all hospitals to which he may apply so as to secure similar actions by those hospitals, thus effectuating a boycott of Dr. Pinhas." Ibid.

The complaint alleges that petitioner Summit owns and operates 19 hospitals, including Midway, and 49 other health care facilities in California, six other States, and Saudia Arabia. Id., at 3. Summit, Midway, and each of the four ophthalmic surgeons named as individual defendants, as well as respondent, are all allegedly engaged in interstate commerce. The provision of ophthalmological services affects interstate commerce because both physicians and hospitals serve nonresident patients and receive reimbursement through Medicare payments. Reports concerning peer-review proceedings are routinely distributed across state lines and affect doctors' employment opportunities throughout the Nation.

In the Court of Appeals, petitioners defended the District Court's dismissal of the complaint on the ground that there was no allegation that interstate commerce would be affected by respondent's removal from the Midway medical staff. The Court of Appeals rejected this argument because " 'as a matter of practical economics' " the hospital's "peer review process in general" obviously affected interstate commerce. 894 F.2d, at 1032 (citation omitted). The court added:

"Pinhas need not, as appellees apparently believe, make the more particularized showing of the effect on interstate commerce caused by the alleged conspiracy to keep him from working. [McLain v. Real Estate Bd. of New Orleans, Inc., 444 U.S., 232] at 242-243 [100 S.Ct. 502, 509, 62 L.Ed.2d 441 (1980) ]. He need only prove that peer-review proceedings have an effect on interstate commerce, a fact that can hardly be disputed. The proceedings affect the entire staff at Midway and thus affect the hospital's interstate commerce. Appellees' contention that Pinhas failed to allege a nexus with interstate commerce because the absence of Pinhas's services will not drastically affect the interstate commerce of Midway therefore misses the mark and must be rejected." Ibid.

Congress enacted the Sherman Act in 1890. ^[7] During the past century, as the dimensions and complexity of our economy have grown, the federal power over commerce, and the concomitant coverage of the Sherman Act, have experienced similar expansion. ^[8] This history has been recounted before, ^[9] and we need not reiterate it today. ^[10]

We therefore begin by noting certain propositions that are undisputed in this case. Petitioner Summit, the parent of Midway as well as of several other general hospitals, is unquestionably engaged in interstate commerce. Moreover, although Midway's primary activity is the provision of health care services in a local market, it also engages in interstate commerce. A conspiracy to prevent Midway from expanding would be covered by the Sherman Act, even though any actual impact on interstate commerce would be " 'indirect' " and " 'fortuitous.' " Hospital Bldg. Co. v. Rex Hospital Trustees, 425 U.S. 738, 744, 96 S.Ct. 1848, 1852, 48 L.Ed.2d 338 (1976). No specific purpose to restrain interstate commerce is required. Id., at 745, 96 S.Ct., at 1852. As a "matter of practical economics," ibid., the effect of such a conspiracy on the hospital's "purchases of out-of-state medicines and supplies as well as its revenues from out-of-state insurance companies," id., at 744, 96 S.Ct., at 1852, would establish the necessary interstate nexus.

This case does not involve the full range of activities conducted at a general hospital. Rather, this case involves the provision of ophthalmological services. It seems clear, however, that these services are regularly performed for outof-state patients and generate revenues from out-of-state sources; their importance as part of the entire operation of the hospital is evident from the allegations of the complaint. A conspiracy to eliminate the entire ophthalmological department of the hospital, like a conspiracy to destroy the hospital itself, would unquestionably affect interstate commerce. Petitioners contend, however, that a boycott of a single surgeon has no such obvious effect because the complaint does not deny the existence of an adequate supply of other surgeons to perform all of the services that respondent's current and future patients may ever require. Petitioners argue that respondent's complaint is insufficient because there is no factual nexus between the restraint on this one surgeon's practice and interstate commerce.

There are two flaws in petitioners' argument. First, because the essence of any violation of § 1 is the illegal agreement itself-rather than the overt acts performed in furtherance of it, see United States v. Kissel, 218 U.S. 601, 31 S.Ct. 124, 54 L.Ed. 1168 (1910)-proper analysis focuses, not upon actual consequences, but rather upon the potential harm that would ensue if the conspiracy were successful. As we explained in McLain v. Real Estate Bd. of New Orleans, Inc., 444 U.S. 232, 100 S.Ct. 502, 62 L.Ed.2d 441 (1980):

"If establishing jurisdiction required a showing that the unlawful conduct itself had an effect on interstate commerce, jurisdiction would be defeated by a demonstration that the alleged restraint failed to have its intended anticompetitive effect. This is not the rule of our cases. See American Tobacco Co. v. United States, 328 U.S. 781, 811 [66 S.Ct. 1125, 1139, 90 L.Ed. 1575] (1946); United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 225, n. 59 [60 S.Ct. 811, 845, n. 59, 84 L.Ed. 1129] (1940). A violation may still be found in such circumstances because in a civil action under the Sherman Act, liability may be established by proof of either an unlawful purpose or an anticompetitive effect. United States v. United States Gypsum Co., 438 U.S. 422, 436, n. 13 [98 S.Ct. 2864, 2873, n. 13, 57 L.Ed.2d 854] (1978); see United States v. Container Corp., 393 U.S. 333, 337 [89 S.Ct. 510, 512, 21 L.Ed.2d 526] (1969); United States v. National Assn. of Real Estate Boards, 339 U.S. 485, 489 [70 S.Ct. 711, 714, 94 L.Ed. 1007] (1950); United States v. Socony-Vacuum Oil Co., supra, [310 U.S.,] at 224-225, n. 59 [60 S.Ct., at 845, n. 59]." Id., [444 U.S.,] at 243 [100 S.Ct., at 509].

Thus, respondent need not allege, or prove, an actual effect on interstate commerce to support federal jurisdiction. ^[11]

Second, if the conspiracy alleged in the complaint is successful, " 'as a matter of practical economics' " there will be a reduction in the provision of ophthalmological services in the Los Angeles market. McLain, 444 U.S., at 246, 100 S.Ct., at 511 (quoting Hospital Building Co. v. Rex Hospital Trustees, 425 U.S., at 745, 96 S.Ct., at 1852). In cases involving horizontal agreements to fix prices or allocate territories within a single State, we have based jurisdiction on a general conclusion that the defendants' agreement "almost surely" had a market-wide impact and therefore an effect on interstate commerce, Burke v. Ford, 389 U.S. 320, 322, 88 S.Ct. 443, 444, 19 L.Ed.2d 554 (1967) (per curiam ), or that the agreement "necessarily affect[ed]" the volume of residential sales and therefore the demand for financing and title insurance provided by out-of-state concerns. McLain, 444 U.S., at 246, 100 S.Ct., at 511. In the latter, we explained:

"To establish the jurisdictional element of a Sherman Act violation it would be sufficient for petitioners to demonstrate a substantial effect on interstate commerce generated by respondents' brokerage activity. Petitioners need not make the more particularized showing of an effect on interstate commerce caused by the alleged conspiracy to fix commission rates, or by those other aspects of respondents' activity that are alleged to be unlawful." Id., at 242-243, 100 S.Ct., at 509.

Although plaintiffs in McLain were consumers of the conspirators' real estate brokerage services, and plaintiff in this case is a competing surgeon whose complaint identifies only himself as the victim of the alleged boycott, the same analysis applies. For if a violation of the Sherman Act occurred, the case is necessarily more significant than the fate of "just one merchant whose business is so small that his destruction makes little difference to the economy." Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207, 213, 79 S.Ct. 705, 710, 3 L.Ed.2d 741 (1959) (footnote omitted). The case involves an alleged restraint on the practice of ophthalmological services. The restraint was accomplished by an alleged misuse of a congressionally regulated peer-review process, ^[12] which respondent characterizes as the gateway that controls access to the market for his services. The gateway was closed to respondent, both at Midway and at other hospitals, because petitioners insisted upon adhering to an unnecessarily costly procedure. The competitive significance of respondent's exclusion from the market must be measured, not just by a particularized evaluation of his own practice, but rather, by a general evaluation of the impact of the restraint on other participants and potential participants in the market from which he has been excluded.

We have no doubt concerning the power of Congress to regulate a peer-review process controlling access to the market for ophthalmological surgery in Los Angeles. Thus, respondent's claim that members of the peer-review committee conspired with others to abuse that process and thereby deny respondent access to the market for ophthalmological services provided by general hospitals in Los Angeles has a sufficient nexus with interstate commerce to support federal jurisdiction.

The judgment of the Court of Appeals is affirmed.

It is so ordered.

Justice SCALIA, with whom Justice O'CONNOR, Justice KENNEDY, and Justice SOUTER join, dissenting.

Notes

1. Section 1 of the Sherman Act, 26 Stat. 209, as amended, provides in relevant part:
2. Although the complaint alleged five claims, only the "Fourth Claim for Relief," the antitrust claim, is before us now.
3. "One of the reasons for his success is the rapidity with which he, as distinguished from his competitors, can perform such surgeries. The speed with which such surgery can be completed benefits the patient because the exposure of cut eye tissue is drastically reduced. Some of Dr. Pinhas' competitors regularly require, on the average, six times the length of surgical time to complete the same procedures as Dr. Pinhas." App. 7.
4. Respondent was notified, by a letter dated April 13, 1987, that such actions were the result of a "Medical Staff review of [his] medical records, with consideration as to the questions raised regarding: indications for surgery; appropriateness of surgical procedures in light of patient's medical condition; adequacy of documentation in medical records; and ongoing pattern of identified problems." Id., at 93.
5. After the Governing Board of Midway affirmed the decision of the peer-review committee, but imposed even more stringent conditions on respondent than the committee had imposed, respondent filed a petition for writ of mandate, pursuant to Cal.Civ.Proc.Code Ann. § 1094.5 (West Supp.1991). 894 F.2d 1024, 1027 (CA9 1989). On May 17, 1989, the Superior Court of California denied respondent's request for further relief. App. to Pet. for Cert. A30-A35.
6. Petitioners had already distributed the report, a Business and Professions Code 805 Report, to Cedars-Sinai Medical Center in Los Angeles, which then denied respondent medical staff privileges there. App. to Brief for Respondent A-3. Cedars-Sinai, like Midway, had refused to abolish the assistant surgeon requirement. App. 8.
7. Act of July 2, 1890, ch. 647, § 1, 26 Stat. 209. The floor debates on the Sherman Act reveal, in Senator Sherman's words, an intent to "g[o] as far as the Constitution permits Congress to go. . . ." 20 Cong.Rec. 1167 (1889). For views of the enacting Congress toward the Sherman Act, see 21 Cong.Rec. 2456 (1890); see also United States v. South-Eastern Underwriters Association, 322 U.S. 533, 555-560, 64 S.Ct. 1162, 1174-1178, 88 L.Ed. 1440 (1944); Apex Hosiery Co. v. Leader, 310 U.S. 469, 493, n. 15, 60 S.Ct. 982, 992, n. 15, 84 L.Ed. 1311 (1940).
8. The Court's decisions have long "permitted the reach of the Sherman Act to expand along with expanding notions of congressional power. See Gulf Oil Corp. v. Copp Paving Co., 419 U.S. [186,] 201-202 [95 S.Ct. 392, 401-402, 42 L.Ed.2d 378 (1974) ]." Hospital Bldg. Co. v. Rex Hospital Trustees, 425 U.S. 738, 743, n. 2, 96 S.Ct. 1848, 1852, n. 2, 48 L.Ed.2d 338 (1976).
9. See, e.g., Mandeville Island Farms, Inc. v. American Crystal Sugar Co., 334 U.S. 219, 229-235, 68 S.Ct. 996, 1002-1006, 92 L.Ed. 1328 (1948).
10. It is firmly settled that when Congress passed the Sherman Act, it "left no area of its constitutional power [over commerce] unoccupied." United States v. Frankfort Distilleries, Inc., 324 U.S. 293, 298, 65 S.Ct. 661, 664, 89 L.Ed. 951 (1945). Congress "meant to deal comprehensively and effectively with the evils resulting from contracts, combinations and conspiracies in restraint of trade, and to that end to exercise all the power it possessed." Atlantic Cleaners & Dyers, Inc. v. United States, 286 U.S. 427, 435, 52 S.Ct. 607, 609, 76 L.Ed. 1204 (1932).
11. Cf. United States v. Staszcuk, 517 F.2d 53, 60, n. 17 (CA7 1975) (en banc) ("The federal power to protect the free market may be exercised to punish conduct which threatens to impair competition even when no actual harm results"), cert. denied, 423 U.S. 837, 96 S.Ct. 65, 46 L.Ed.2d 56 (1975).
12. See Health Care Quality Improvement Act of 1986, 100 Stat. 3784, 42 U.S.C. § 11101 et seq. The statute provides for immunity from antitrust, and other, actions if the peer-review process proceeds in accordance with § 11112. Respondent alleges that the process did not conform with the requirements set forth in § 11112, such as adequate notice, representation by an attorney, access to a transcript of the proceedings, and the right to cross-examine witnesses. According to the House sponsor of the bill, "[t]he immunity provisions [were] restricted so as not to protect illegitimate actions taken under the guise of furthering the quality of health care. Actions . . . that are really taken for anticompetitive purposes will not be protected under this bill." 132 Cong.Rec. H9957 (Oct. 14, 1986) (remarks of Rep. Waxman).