faculty.washington.edufaculty.washington.edu/djdrake/2009AntiTeam4Memo.d… · Web viewBOSG...

Group 4 MemoCale Ehrlich Britta JohnsonBryce Holzer Jason DeRosaSean Nolan Paul Vercruyssen

New Facts:

BOSG Revenues and Market Structure.

The BOSG orthodontists collect a gross range of from $450,000 to $600,000 in revenue each year. Costs run from 45% to 60% of revenues, so the orthodontists make between $250,000 and $325,000 each. The revenue that they collect from dentist referrals is 70% on average and the revenue that is gathered from patients from other sources (walk-ins) is 30%. Each orthodontist serves anywhere from 110 to 130 patient contracts per year. The "reasonable workload for a competent professional is 110 to 140 contracts per year. And in terms hours worked, nothing is fixed, but all work roughly 1600 hours a year.

It is worth noting that there may be some people in the Bend area who would elect to get braces if prices were less. Still, BOSG prices are in line with charges from other similar towns throughout America. And there is no evidence that their prices are excessive when compared to other markets of the same size and demographics. Between members of BOSG, SSNIP would not have much effect on each orthodontists volume and patients would not go outside of the Bend are for orthodontia. If there was a SSNIP in the price of orthodontia work it would reduce the number of people going to orthodontists generally. For many, braces are an elective purchase based on price. A 10% increase in price would probably trigger up to a 3% drop in volume. As price goes up faster, more would opt out. It has never been tested, but a 20% price increase would likely trigger a 10% volume drop in orthodontia services.

BOSG and Insurance Providers

The BOSG does not contract with any insurance providers for Orthodontic services, as they all handle their own. 36% of the population has general dental insurance 15% of the population has orthodontia insurance coverage. Dental insurance usually covers 60% of price while orthodontia insurance usually covers 20% of price. Patients usually pay for their orthodontic service though a monthly contract payment. Finally, the BOSG does not provide financing plans for its customers.

The BOSG and Joint Purchasing Agreements

Group purchasing of supplies on a select basis is common in the BOSG and many other groups like it. The goal is to negotiate the best deal, but not all members participate in every group purchase opportunity. When a number of the members (usually at least four) want or need to buy the same thing, they will appoint one member to source the item and negotiate the best deal for any in the group who want to participate. This gives them greater leverage with many key vendors. When they carry out these deals, the vendors are aware they are dealing with the BOSG. The BOSG does not share equipment, facilities, fixed costs or services. The meetings include little discussion of coordinating


costs, but they do talk of controlling or cutting costs regularly, particularly when related to a group buying opportunity or some new technology that will cut costs. They mostly discuss some orthodontia best practice but focus on social activities and conversation about the stock market, fishing, and other interests. They all know what each other charge, but seldom talk pricing and they respect each other's right to set his or her prices. There is no formal pricing agreement or arrangement, but everyone is aware of what their fellow BOSG members are charging, and there may react to each other’s pricing informally. Best professional and business practices are also discussed at the meetings.

Basis of Dentist Referral

When a dental patient needs orthodontia, a dentist will refer the patient to one of the ten orthodontists in the BOSG. The basis of the dentist referral to a specific orthodontist revolves around the personal relationships the dentist have with the orthodontist, and sometimes the proximity of the patient to the orthodontist’s office. The motivating factor for the dentists to cooperate with the BOSG is that Dentists always need to work with quality orthodontists. The orthodontists often refer patients to dentists as well, so the relationship is two-way, plus the work of a quality orthodontist referral reflects well on the dentist. There are no direct consequences for dentists that don't refer patients to the BOSG. Any dentist who refers to Larry will still be invited to the gala and there will be no reprisals from the BOSG. Still, good general dentistry requires that dentists have the expertise of quality orthodontists available. General dentists are not set up or trained to do braces and all the other things that orthodontists normally handle. Finally, there is no compensation, finder's fee, or other incentive for dentists that refer patients to BOSG orthodontists.

After Hours Dentists Groups

The dentists are also involved in groups similar to the BOSG. However, the dental profession has several different professional after hour groups, and some dentists belong to more than one group. The groups range from social clubs to organized non-profits. Most of the clubs have little to do with the actual practice of dentistry; they seem to be more social than anything. None of the groups within Bend has any exclusive agreements to refer orthodontia work to only BOSG members.

Newwave Technologies Soundless Drill

Newwave Technologies (“Newwave”) holds the patent to the “Soundless Drill.” Although similar drills are under development, there are currently no drills on the market that are as quiet as Newwave’s. Other soundless drills will not be available for at least two years. Orthodontists use the “Soundless Drill” because it is a quiet comfort for patients and enhances the patient experience. Patients, however, do not know of the drill’s existence and do not choose their orthodontists based on the drill’s use. Nationwide, 29% of orthodontists use the Newwave “Soundless Drill.”


Last year, every member of the Bend Orthodontists Study Group (“BOSG”) acquired the “Soundless Drill” from Newwave as part of a joint purchase agreement. This agreement precluded Newwave from selling or licensing its patented drill to any non-BOSG orthodontist in the Bend area for a period of ten years. The BOSG wanted this exclusive arrangement to ensure that no other orthodontist in Bend could acquire the drill. Newwave agreed to this arrangement because it was getting a big sale and there were no non-BOSG orthodontists in Bend at the time.

Rejection of Larry’s Application

Larry’s application was rejected with a unanimous agreement at meeting with the reason being that they didn't want another member now. Some didn't like Larry's ads and discounting, but there was no elaborate discussion. It was just a summary rejection. Three others have been rejected in last 12 years, plus Larry. Two members of BOSG left from life style reasons. In last 12 years, the three non-members left to develop more lucrative practices in another market. They left because they could not get referrals and because they had too few patients. Their applications were also rejected on the grounds that no new members were need now.

ISSUE STATEMENTS:I – What is the relevant market?II – Is the BOSG engaged in market division in violation of Sherman § 1.III – Is the BOSG engaged in price fixing in violation of Sherman § 1.IV – Is the BOSG violating Sherman § 2 by denying Larry access to an

essential facility?V – Is denying Larry admission to the BOSG an anticompetitive act designed

to maintain monopoly power in violation of Sherman § 2?VI – Is Newwave violating the Sherman Act by contracting not to sell outside

the BOSG?VII – Is the BOSG violating the Sherman Act by obtaining an exclusive

license to purchase the Newwave drill?VIII – Does the dentists failure to refer outside the BOSG constitute a group

boycott in violation of Sherman § 1?

DISCUSSION:The BOSG is engaged in a number of activities that may constitute violations of

Sherman § 1, § 2, or both. After first determining the relevant market, and whether the BOSG has market power, we consider each potential violation in turn.


I – Market Analysis

The market for orthodontic service in Bend is a completely captive market. People do not travel from outside the area to receive services, and people inside the area do not leave the area to receive services. Within this market the Bend Orthodontic Study Group (BOSG) services more than 90% of the market, the only exception being the small number of clients that attend Larry’s practice. As discussed below, although no individual orthodontist has market power, the BOSG as an organization has a monopoly on orthodontic services within the greater Bend area.

The market for orthodontic services in Bend is further subdivided into two markets; 1) the market for dental referrals, and 2) the market for “walk-in” clients. The division is a result of the way clients eventually choose an orthodontist, most taking the advice of their dentists, while others rely on other sources. BOSG is powerful in both sub-markets, but to fully appreciate this power requires an in-depth study of the market for orthodontic services in the greater Bend area.

Consumers of orthodontic services in Bend select their providers predominately based on recommendations from their dentist. Orthodontia is an expensive and medically sophisticated procedure. However, it is generally elective. Most lay people know little to nothing about the intricacies of orthodontics. As such, clients seeking orthodontic services enter the market in a vulnerable state, having no predetermined selection criteria for picking which orthodontist to choose. Potential orthodontic clients will often solicit advice from dentists on whom to see and where to go. Orthodontists in the BOSG derive 70% of their business from these dental referrals (question 22). Approximately 70% of all orthodontic patients go with their dentist’s referral. The other 30% of clients select an orthodontist based on some other source, such as a family connection, recommendation from a friend, or advertisement.

a – Walk-in clients

The market for walk-in clients represents 30% of orthodontic patients in the Bend area. This group of clients is extremely varied. It includes those that select orthodontists for totally arbitrary reasons—like office vicinity to the client’s daily commute. But, it would also include the more sophisticated consumer that conducts research of Bend area orthodontic options—what orthodontist went to the best school, has the most experience,


and charges the least. Therefore, there are almost unlimited possible influences which could sway a consumer in this group toward or away from a particular orthodontist.

The greater Bend area is large and spread out and one of the biggest factors for this group’s selection is likely geography. A potential client can be presumed to want an orthodontist that is nearby, simply for convenience. In fact, a major criterion that dentists use when referring patients is the orthodontist’s proximity to the client. Therefore, regardless what type of consumer is studied under this approach, it is unlikely that a person from 25 miles north of Sisters will go to an orthodontist on the South side of Bend.

Orthodontists in the BOSG are likely powerful in this market by default. Every orthodontist with a practice in the greater Bend area—except Larry Carter—is a member of the BOSG. Before Carter’s arrival in Bend, the BOSG saw 100% of the clients in the area. But, this segment of the market is not likely influenced by standard efforts, like advertising. The BOSG orthodontists do not advertise together. And, there is no indication that Larry Carter’s aggressive ad campaign had a strong impact on his business. It seems that all orthodontists—regardless of BOSG membership—are on approximately equal footing in this sub market. There is certainly an advantage to having an established practice with name recognition and word-of-mouth referrals, but, membership in the BOSG is not a prerequisite to those things.

b - Market for Dental Referrals

The market for dental referrals has profound downstream consequences on an orthodontist’s practice. A 70% of all orthodontia patients in the Bend area select their orthodontist based on a dental referral. Orthodontists in the greater Bend area cannot survive without referrals from dentists. Four previous orthodontists have had to leave the Bend area because they were not getting enough referrals to establish a book of business. (Question 16, Follow-up Questions).

The BOSG has almost complete power in the market for dental referrals. Dentists in the Bend area make referrals based on three factors; 1) personal relationships, 2) who they like, and 3) proximity of the orthodontic office to the patient. (Question 10.f). Any referral a dentist makes reflects on him, therefore he is incentivized to refer to orthodontists that he trusts and feels would be good providers. Certainly, the first two factors (creating personal relationships and gaining trust) will take time develop. Any new orthodontist would face these barriers.


There is no indication the BOSG has used foul play to influence relationships with dentists or to incentivize certain dental referrals. The Gala is the only suspect artifice used by the orthodontists to influence the dentists. This event is seen as an honor in the community of dentists, but participation is not dependant on referrals to the orthodontists of the BOSG. Last year, all 147 dentists in the greater Bend area were invited to the Gala. Although only 97 were in attendance, those not present were ill or had prior engagements. If a dentist was to give a referral to an orthodontist outside the BOSG, he would still be allowed to participate in the Gala.

c - Overall Market Operation and the Importance of the BOSG

The larger market (all orthodontia, regardless of referral) operates in a way that facilitates the aggrandizement of power in the BOSG. Dentists refer patients primarily to BOSG members. When one of the orthodontists “develops an amount of business that exceeds a reasonable workload for a competent professional,” he transfers patients to another orthodontist in the BOSG under the “cover program.” Therefore, the almost the entirety of orthodontia business in Bend begins and remains within the grasp of the BOSG orthodontists.

The market may also be operating at a sub-efficient level. Dentists refer patients based on the above 3 part criteria (1) personal relationships, 2) who they like, and 3) proximity of the orthodontic office to the patient). But, patients, were they knowledgeable on orthodontics, may have different criteria. A patient would likely not care about who their dentist has a good personal relationship with or who the dentist “likes.” Consumers care about quality of care, cost, and convenience (to name a few). Therefore, consumers are not driving consumption in the market, the BOSG is.

II - There is probably not a Market Division Cartel.

The third factor identified by dentists in making referrals to orthodontists—the proximity of the orthodontist’s office to the patient—raises an issue. Have the BOSG orthodontists arrayed themselves within the greater Bend area and geographically divided the market? In other words, do the BOSG orthodontists have “territory” where they aren’t subject to competition? Because there is no contract or agreement that clearly shows a restraint on competition, circumstantial evidence must be used to prove a market division cartel.

The general rule is that competitors cannot divide the market to reduce or eliminate competition with one another. The Supreme Court has visited the issue of market segmentation in relevant cases in the past. In Topco, small and medium sized


supermarkets formed Topco Associates to compete with giant supermarkets. The giant supermarkets were able to price their products at reduced rates because they used house brands, which the small and medium sized supermarkets lacked. Topco Associates made Topco brand products which were sold to Topco member supermarkets. The agreement forming Topco prohibited member supermarkets from selling products in one another’s territory. The Supreme Court held the territorial agreement per se illegal, as a classic example of a naked restraint with no purpose except to stifle competition. United States v. Topco Associates, Inc., 405 U.S. 596 (1972). The member supermarkets were restricting competition with each other.

Topco was the principal authority later relied on when the Court decided Palmer v. BRG of Georgia. Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990). In that case, BRG of Georgia, Inc. had pioneered a popular bar review course in Georgia. Bar/Bri (the nationally known bar review program of Harcourt Brace Janovich) entered the Georgia market on a limited basis and found that BRG was a fierce competitor, selling at a much lower price. Soon thereafter, Harcourt Brace Janovich entered into an agreement giving BRG an exclusive license to market HBJ’s materials in Georgia in exchange for the pledge to not compete in the Georgia market. BRG’s price for its course rose from $150 to $400 each. The Supreme Court held that the agreement had more than an ancillary restraint on competition, and granted summary judgment to the plaintiff.

There are several factors that could be construed as suggesting the orthodontists of the Bend Orthodontic Study Group (BOSG) have created a market division cartel and placed more than an ancillary restraint on trade. The orthodontists of the BOSG are distributed evenly throughout the greater Bend area. They intentionally arrayed their offices this way “to service the local needs of resident.” Dentists give referrals based on the location of an orthodontist’s office. And, most suggestive of an attempt to divide the market, Larry Carter opened his office in the vicinity of two BOSG orthodontists in south Bend. His non-acceptance into the BOSG could be a result of infringing on their territory.

This case differs from the other market division cartel cases in some determinative ways. First, in both Topco and Palmer, the suspect firms were large and had the ability to influence larger markets. In Topco, the defendant firm made house brands for small supermarkets. By dividing up the market into supermarket territory it ensured that member supermarkets would not compete against each other when selling its products. Likewise, in Palmer, the defendant made an agreement with his competitor (Bar/Bri) to protect his own territory. Bar/Bri accepted because it was being beaten by


the defendant, and the agreement would have the effect of promoting its products. Both of these firms had the ability to compete, but chose not to.

In this case, it is not clear that the BOSG orthodontists possessed the ability to compete with one another. Simply put, geography is important in a service like orthodontics. Frequent office visits are required. Because of the age of many of the clients, a parent will have to leave work in order to take their child to the orthodontist, and then return afterwards. This suggests that the nature of orthodontic business requires a local character, independent from other orthodontists. Furthermore, the BOSG footprint is over 50 miles in circumference. It would not be prudent to expect multiple Bend orthodontists to set up in a single area.

Although the BOSG orthodontists readily admit that they established practices geographically separated from one another, this is not likely an impermissible restraint on trade. Because of the reasonable business purposes of this arrangement—serving the community effectively—it is likely that this agreement would be considered only an ancillary restraint that is reasonable in light of the fact the orthodontists are able to provide services across a geographically large area. More than likely, the BOSG is not dividing the market, but the geographical segmentation is a result of the client base and the underlying operation of general orthodontic services.

III – It will be difficult for Larry to establish that the BOSG is fixing prices in violation of Sherman § 1.

There is no explicit agreement between members of the BOSG to fix prices, and they are actually explicitly allowed to set their own prices. This, combined with the fact that the BOSG’s prices are in line with the rest of the nation, makes a per se violation difficult to argue. Larry, however, is pricing his services 15% below the average BOSG orthodontist’s rate. If a business can function at that price in the Bend market it may be evidence that the BOSG is maintaining artificially high prices.

The market data does not support a finding that the BOSG is fixing prices. A 10% increase in price would cause a 3% loss of business and a 20% increase would cause a 10% loss of business. This allows us to estimate the overall demand curve for orthodontia in Bend. Based on this information, the orthodontists are priced well below the profit maximizing price. An increase in price of 17% would result in a loss of only 7.5% of customers. This reduced customer base, paying a higher rate, would increase revenues by 8.22%. A larger increase would shed too many customers, and revenues would begin to fall.


This brief analysis reveals that the BOSG did not set a profit maximizing price which decreases the likelihood of Larry’s Sherman § 1 claim becoming successful. It appears the BOSG is simply comfortable with the status quo and fears a change in the amount of customers they currently have. The effect they are having on the relevant market may still be anticompetitive, but it does not appear to be price fixing.

Of course, it is possible that the BOSG is at their current price because they are too lazy to perform the economic calculations that would allow them to maximize profit, or because they are of the (mistaken) belief they are at the peak of their monopoly power. If there was additional evidence of agreement, it may outweigh the pricing data, but given what is available, Larry cannot show price fixing.

Given that there is no strong evidence of price fixing, it is worth considering whether the board’s practices can generally survive a rule of reason analysis. The rule of reason allows a consideration of the economic effects of what appears to be an anti-competitive behavior. The decision of the BOSG to not provide any business justification beyond the simple fact that they do not need any more orthodontists in Bend puts them in a difficult position, considering the rule of reasons focus on the economic impacts of potentially anti-competitive behavior. To illustrate, In Indiana Federation, a recent decision focusing on a loose combination of behavior among competing dentists, the Supreme Court stated it is not an entitlement of the collaborating competitors to “pre-empt the working of the market by deciding for itself that it customers do not need that which they demand.” The actions of the BOSG denied Bend residents a 15% reduction in the cost of their orthodontia services. Despite that truth, because the economic impacts are not intuitively obvious beyond that discount, the rule of reason should be enacted when Larry’s claim is pursued. This call for an in-depth inquiry into the economic impacts of the collaboration and behavior (California Dental Association v. FTC. 526 U.S. 756 (1999). We want to see if the result of BOSG’s operation is a use of their monopoly power to increase price on the relevant market.

IV – Does the BOSG have a duty to deal with Larry because they control an essential facility?

In order to establish a violation of § 2 of the Sherman Act a plaintiff must show, “(1) The possession of monopoly power in the relevant market and (2) the Willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Grinnell Corp. Several courses of conduct have been identified by the Supreme


Court as sufficient to satisfy the second element of this test including restricting access to essential facilities, forced boycotts, exclusive licenses and long-term leases.

The Supreme Court has held that normally market participants have no “duty to deal” with their competitors. Verizon v. Trinko. However, the Court has carved out an exception to this broad rule with the “essential facility” doctrine and related exclusionary conduct. Though the doctrine has not been clearly articulated the analysis can be roughly divided in to two parts. First, is the BOSG a monopoly? Secondly, does the BOSG control a facility essential to conduct an orthodontics business in the Bend area?

As previously discussed the BOSG has clear market power in the Bend area. BOSG orthodontists are the exclusive recipient of the referrals from the area’s dentists. Because referrals constitute roughly 70% of new orthodontic customers, the BOSG has complete control over the bulk of the customer supply for orthodontics in Bend. Additionally, because of the geographic isolation, the BOSG is insulated from outside competition. The market is captive to the will of the BOSG. As a result, BOSG members service virtually the entire orthodontics market in Bend. Their exclusion of other orthodontists from the group effectively locks-out other competition. No non-BOSG orthodontists have successfully established a practice in Bend since the advent of the BOSG. This evidence combines to illustrate the first element of a Sherman §2 essential facilities claim, the existence of monopoly power for BOSG.

To succeed on an essential facilities claim the burden will fall upon Larry to show that BOSG membership is ‘essential’ to the practice of orthodontics in Bend. The essential facilities doctrine was developed in relation to needed access to physical facilities, such as railroads in U.S. v. Terminal Railroad Assoc., or electric transmission and distribution lines in Ottertail Power Co. v. U.S. The court reasoned that in both of these cases that the nature of the facilities could lead to natural monopolies allowing the owner of these facilities to dictate completely who was able to compete in the market. In the case of the BOSG there is no such tangible facility. An orthodontists association is not physically required to provide orthodontic services. If there was no such association in existence, there would still be a need for orthodontists and presumably orthodontists would exist to fill that need. The essential facilities doctrine in its original form does not apply to the case of BOSG.

Larry might also make the case that the dentist referrals themselves were figuratively an essential facility. If referrals constitute 70% of the business supply for orthodontists then the argument could be made that referrals are essential to the success


of an orthodontics business. The BOSG, as gatekeeper to these referrals was restricting access to the essential facility.

To rebut Larry’s claim the BOSG would point to the ruling in Official Airline Guides, Inc. v. FTC. Most customers located airlines using the guide, just like most customers locate orthodontists based on referrals. Exclusion from the guide presented a significant barrier to the market. In Official Airline Guides the court dismissed the case because the Airline Guide company was not excluding local carriers to aggrandize its own market. Official Airline Guides was in the business of publishing airline schedules and thus did not have any clear interest in excluding commuter airlines from the airline market. Similarly, in the instant case the dentists are not in competition with orthodontists for orthodontic services. Excluding Larry from their orthodontic referrals does not benefit the dentists in any clear economic way and it is unlikely a violation would be found under this analysis.

Larry may also contend that the BOSG has engaged in exclusionary conduct without sufficient justification in violation of the Sherman Act § 2. Aspen Skiing Co. v. Aspen Highlands Skiing Corp. In establishing the BOSG as the only group receiving referrals and then excluding Larry from this course of dealing, the BOSG has effectively excluded a competitor from the market. Though the Court makes clear that Aspen Skiing was not decided on “essential facilities” grounds the analysis shares many characteristics.

In Aspen Skiing a dominant market participant decided to exclude a smaller competitor from a group ticketing scheme which had been in place for a number of years. In the analysis, the court looked very closely at the impact of the exclusion on customers. The court found that by excluding the smaller competitor, customers had received an inferior product, and that the exclusion could not otherwise be justified by any normal business purpose.

Larry may argue that he is a smaller competitor, similar to the smaller competitor in Aspen Skiing. Therefore the BOSG’s refusal to admit Larry into the group is preventing Larry’s superior service from reaching customers. The BOSG has not offered any reasonable justification for excluding Larry from group membership or differentiating his orthodontic services from their own. The group has no clear set of standards or requirements for its membership. Instead, BOSG simply explained when rejecting Larry and other prior applicants that “no new members are needed right now.” The need for new orthodontists should be left up to the market.

Aspen Skiing, however, marks the outer bounds of the duty deal. There are two key differences between this and Aspen Skiing. The Court in Aspen Skiing pointed to the


fact that the monopoly player, “elected to forgo short run benefits because it was more interested in reducing competition in the Aspen market over the long run by harming its smaller competitor.” Also, by restricting the pass from their smaller competitor, Aspen Skiing Co. destroyed an established course of dealing that was clearly preferable to customers and created an inefficiency in the market. While Aspen Skiing Co. may not have had a duty to deal if the multi pass had never existed, once it was established as a preferred course of business, Aspen Skiing was then precluded from restricting access to the product.

In Bend, the BOSG did not revoke an established course of dealing with Larry. Furthermore, it is unclear that the BOSG has forgone any additional business opportunity in order to exclude Larry from the market. These facts weigh towards a finding that there is no duty to deal.

Ultimately even if a claim under Aspen Skiing does not work for Larry, he may have a claim that this is not a simple duty to deal case, but a concerted refusal to deal. This is discussed below.

V – Is the Bend Orthodontist’s Study Group’s refusal to admit Larry an act designed to maintain its monopoly power in violation of Sherman § 2?

As discussed above the Bend Orthodontist’s Study Group (BOSG) has a monopoly on orthodontic services within the greater bend area. However, under Sherman § 2 “big is not bad” unless it is accompanied by bad acts. Finding a violation requires “(1) The possession of monopoly power in the relevant market and (2) the Willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Grinnell. In United States v. Microsoft Corporation (2001), the D.C. District Court laid out a 6 part test to determine whether a company is engaged in exclusionary acts. (1) The conduct must be anti-competitive; it cannot just harm competitors, but must actually harm the competitive process, and thereby harm consumers. (2) The plaintiff has the burden of proving part 1. (3) If the plaintiff establishes anticompetitive effect, the defendant may offer a procompetitive justification for its conduct. (4) If a procompetitive benefit is established, the court must balance the pro and anti competitive effects. And (5) The focus of the inquiry is on the effect of the conduct, not the intent. To determine whether the BOSG is violating Sherman § 2, their conduct must be examined under this test. Following that, I will consider potential defenses the BOSG may offer.

First, the BOSG’s exclusion of Larry had an anticompetitive effect. Membership in the BOSG is a necessity to being able to operate as an Orthodontist in the greater Bend


area. Every orthodontist (excluding Larry) currently operating in the area is a member. The past four people who attempted to establish practices without being members all failed, and were forced to relocate. Dentists rarely refer to orthodontists outside of the BOSG, and the dentists acknowledge that non-BOSG orthodontists are unlikely to receive referrals. Additionally, these referrals constitute 70% of the average orthodontist’s practice, and without them, orthodontists are unable to survive. Given that this has been the state of the market since as far back as anyone can recall (information does not exist before the creation of the BOSG) it is also unreasonable to think that the BOSG is unaware of its influence.

In addition to this power, the BOSG members exercise complete discretion over who may join the group. This discretion is not limited by any guidelines on admission; the members can consider “all factors.” Larry’s membership was summarily rejected without significant discussion. The orthodontists in the Bend area have created a professional society with market power, membership in the society is an absolute necessity to practice orthodontia in Bend, and they denied admission to a potential competitor, denying an additional competitive option to consumers. Under Microsoft, this is prima facie anticompetitive.

The burden now falls on the BOSG to give a procompetitive justification for its actions. On this front, it fails completely. The only explanation offered by the BOSG for rejecting Larry’s membership is that “membership is now full” and suggesting that there may be an opening in 10 years. There is no procompetitive reading of that statement. The BOSG cannot justify rejecting Larry’s application on the grounds that it doesn’t need another orthodontist, because that is equivalent to the BOSG deciding that there are enough orthodontists in Bend. A group like the BOSG “is not entitled to pre-empt the working of the market by deciding for itself that its customers do not need that which they demand.” F.T.C. v. Indiana Federation of Dentists.

The BOSG may argue that it is procompetitive because it allows the member orthodontists to combine their buying power, resulting in greater efficiencies for all, which are passed on to consumers. This is probably true, but it misses the point. The BOSG’s responsibility is not to offer procompetitive justifications for its existence, but for its rejection of Larry’s membership. Its only justification for rejecting Larry, that membership is full, is not procompetitive. The BOSG cannot meet its burden on this point.

Without a procompetitive justification, there is no balancing test to perform. Larry has met his burden under Microsoft, establishing a prima facie case, and the BOSG has


failed to rebut Larry’s case. The BOSG is engaged in anticompetitive conduct in violation of Sherman § 2.

The BOSG may attempt to defend its conduct on the grounds that it is a private organization, and has no duty to deal with Larry, or anyone else. This is generally true. As the Supreme Court laid out in Verizon v. Trinko the general rule is that a monopolist has no duty to deal with anyone. The Court then laid out three exceptions: the monopolist controls an essential facility; the monopolist is inflicting harm on itself to punish a competitor; or the monopolist has created a market, and is now attempting to destroy it.

Whether these exceptions apply here is not important, because this is not properly characterized as a duty to deal case. The BOSG would be correct if its argument was that none of the orthodontists individually had a duty to deal with Larry, but that is not its claim. The BOSG claims that the dentists can selectively combine to create market power, and then exclude competitors from the combination. This is not an individual refusal to deal, but a concerted refusal to deal such as that in Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co. In that case, the Supreme Court said that when a buying cooperative such as the BOSG excludes a competitor, that concerted refusal to deal is subject to a rule of reason analysis. The court when on to say in dicta, however, that a concerted refusal to deal could be found to be a per se violation if the cooperative possesses market power, as is the case here.

Whether this is ultimately considered a rule of reason case, or a per se case is ultimately irrelevant. As a per se case the BOSG loses automatically, and under a rule of reason they are unable to establish a procompetitive justification for excluding Larry.

VI – Newwave Technologies did not violate the Sherman Act by entering into the exclusive arrangement with the BOSG.

As patent holder and only maker of the “Soundless Drill,” or any comparable product, Newwave has monopoly power over the soundless drill market. Newwave agreed to deal only with the BOSG in the Bend market, but this decision does not violate the Sherman Act. As articulated by the Second Circuit, a monopolist can choose how to satisfy its customers and can confer monopoly power onto another engaged in a different line of commerce. “We think that even a monopolist, as long as he has no purpose to restrain competition or to enhance or expand his monopoly, and does not act coercively, retains this right.” Official Airline Guides, Inc. v. FTC. Newwave was not seeking to preserve its own monopoly or secure its position when it entered into the exclusive agreement. Newwave is not part of the Bend orthodontics market, or any orthodontics market for that matter.


If, however, a court does find that Newwave violated the Sherman Act, then Newwave can argue that it has intellectual property rights as patent holder of the “Soundless Drill.” In Image Technical Services, Inc. v. Eastman Kodak, the Ninth Circuit adopted the rebuttable presumption that a monopolist’s “desire to exclude others from its [protected] works is a presumptively valid business justification for any immediate harm to consumers” (quoting Data General Corp. v. Grumman Systems Support Corp.). So long as Newwave’s IP justification is not a pretext to mask anticompetitive conduct, Newwave can prevail.

VII – The BOSG did violate the Sherman Act by entering into the exclusive agreement with Newwave.

Larry has a stronger case against the Bend Orthodontists Study Group. The BOSG likely violated the Sherman Act by entering into the exclusive arrangement with Newwave. The BOSG violated §2 of the Sherman Act because it used its monopoly power to harm competition. “The offense of monopoly under §2 of the Sherman Act has two elements: 1) possession of monopoly power in the relevant market, and 2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” United States v. Grinnell Corp. The BOSG sought to maintain its monopoly power by entering into an agreement that limited the ability of others to compete with it, in violation of § 2. The contract between Newwave and the orthodontists is also a contract in restraint of trade in violation of § 2 of the Sherman Act.

The BOSG has monopoly power over the Bend orthodontics market. It used its group buying power to enter into an exclusive agreement with Newwave. The sole purpose of the exclusivity component was to prevent non-BOSG orthodontists in Bend from obtaining the “Soundless Drill” and enhancing the patient experience. The BOSG willfully sought to shut out its potential competition and secure its own power. The BOSG’s conduct violates the Sherman Act because it does not survive rule of reason analysis. In United States v. Microsoft Corporation, the D.C. Circuit laid out several principles that help establish monopolization under §2 of the Sherman Act. To determine whether a monopolist’s conduct is exclusionary or competitive, a court must first evaluate whether there are any anticompetitive effects. The conduct must harm the competitive process and harm consumers in order for it to be “anticompetitive.” The plaintiff has the burden to prove that the conduct complained of has anticompetitive effect. The monopolist then has the opportunity to offer any procompetitive justifications for its conduct. The plaintiff must show that the anticompetitive effect outweighs the procompetitive justification. The court must ultimately examine the effect


of the monopolist’s conduct, rather than the intent. If the anticompetitive effect(s) outweigh the procompetitive justification(s), then the court may find that the monopolist’s conduct was exclusionary and therefore violates §2 of the Sherman Act. This rule of reason analysis parallels the rule of reason analysis under §1. United States v. Microsoft Corporation (D.C. Cir. 2001).

The anticompetitive effect in this case is that Larry and other non-BOSG orthodontists cannot acquire a “Soundless Drill” and have no reasonable alternatives to turn to. The exclusive arrangement between the BOSG and Newwave keeps the product out of the market and harms consumers by denying them the opportunity to have the quiet comfort of a soundless drill at their orthodontist’s office (if they go to a non-BOSG orthodontist). The BOSG does not appear to have any procompetitive justification for its conduct – it simply wanted to prevent non-BOSG orthodontists from acquiring the drill. Because the BOSG does not have a clear procompetitive justification, a court may find that the BOSG’s exclusive arrangement with Newwave is an exclusionary device in violation of the Sherman Act.

If a monopolist engages in anticompetitive conduct with no other purpose or expected effect than to harm a competitor, then the monopolist’s conduct is considered punishing and violates antitrust law. Lorain Journal Co. v. United States. The BOSG’s decision to enter into the exclusive arrangement with Newwave was not a response to the needs and desires of its patients. Rather, it was a response to the threat of competition. “The use of monopoly power, however lawfully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor, is unlawful.” United States v. Griffith.

The BOSG may attempt to raise the argument that the “Soundless Drill” is not a decision-making factor for patients. Therefore, cutting off non-BOSG orthodontists’ ability to obtain the drill does not harm competition because it does not affect how patients choose which orthodontist to go to. The flaw in this argument is that just because patients do not factor the drill into choosing an orthodontist does not mean that patients do not desire the drill’s use. Patients demand a pleasant and comfortable orthodontic experience. If the “Soundless Drill” enhances their experience, then there is a demand for the drill. The Supreme Court has stated that it is not for private parties to decide what customers want; it is for the market to decide. FTC v. Indiana Federation of Dentists. (“The Federation is not entitled to pre-empt the working of the market by deciding for itself that its customers do not need that which they demand.”)


VIII – Does the dentists’ failure to refer to non-BOSG members amount to a concerted refusal to deal, or group boycott, in violation of Sherman §1.

A retired dentist specifically told Larry that unless he was a member in the BOSG he would not receive any patient referrals from dentist in the community. This situation raises red flags as to a possible concerted refusal of the dentist to deal, or group boycott, of Larry, since he is not a member of the BOSG.

A concerted refusal to deal, also known as a “group boycott,” is an agreement among horizontal competitors to refuse to deal with one or more third parties. The classic group boycott per se offense involves joint efforts to disadvantage competitors by denying them business. Whether this action violates a § 1 of the Sherman Act depends on whether it is adjudged an unreasonable restraint. In determining whether a violation of §1 has occurred in refusal to deal cases the Court stated a “[r]ule of reason analysis guides the inquiry, unless the challenged action falls into the category of agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry….” Northwest Wholesale Stationers, Inc. v. Pacific Stationary & Printing Co., 472 U.S. 284 (1985). The court continued to state that a plaintiff seeking application of the per se violation must present a case that is likely to have predominantly anticompetitive effects. In order to impose liability under a per se analysis a plaintiff’s case must show that the participants in the boycott possess market power or unique access to a business element necessary for effective competition. Absent this showing, a case will be analyzed under a rule of reason analysis. Under this analysis, the courts determine whether the pro-competitive results of the conduct in question, outweigh the anti-competitive effects.

a – Is there an agreement between dentists refusing to make referrals to Larry?

The key to this Sherman §1 claim, is proving that some of the dentists had an agreement, in which they refused to give referrals to any orthodontist who was not a member of the BOSG. In proving this type of agreement exists the court in Interstate Circuit, Inc. v. U.S., 306 U.S. 208 (1939), stated that although a meeting of the minds must take place between parties, express agreements are not necessary, instead parties can give their assent to one another in more subtle ways, such as by tacitly colluding. The court further elaborated in Theatre Enterprises, Inc. v. Paramount Film Distributing Corp., 346 U.S. 537 (1954), that in order to prove a tacit collusion, or conscious parallelism, a plaintiff must allege a conspiracy as well as introduce evidence of a “plus” factor. A “plus” factor can be any fact that makes the inference of collusion stronger than


the inference of independent choice. The Court also made clear in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), that when a plaintiff makes an allegation of parallel conduct a bare assertion of conspiracy will not suffice. A claim instead requires a complaint with enough factual matter to suggest that an agreement was made. In Twombly, telecommunication companies had engaged in parallel conduct. The Court refrained from finding a Sherman §1 violation because the Court characterized the behavior as making business sense.

Larry will need to provide plausible grounds to infer an agreement, in order for his claim to avoid being dismissed. There is no evidence at this time that the dentists have any sort of written or oral express agreement that precludes them from making referrals to anyone outside of the BOSG. Without this evidence, Larry will have to try to make a conscious parallelism argument, showing that dentists have an implied agreement to refer patients to BOSG members only. In order to rebut the likely dentists’ justifications, Larry’s plus factor will need to show that when non-BOSG orthodontists are present in the market, dentists consciously do not make any referrals to the non-BOSG orthodontist, only because they are not in the BOSG. Larry will argue that the lack of referrals to non-BOSG members can be interpreted as an implied agreement or conscious parallelism, amongst the dentists. Larry will argue that this concerted refusal to deal harms him in the orthodontia market, by restraining new orthodontist from effectively competing in the market, and thus reducing the amount of services offered in Bend.

The dentist on the other hand will claim that they make referral choices independently, and not as a group. The dentists’ criteria for referrals to orthodontists revolve around personal relationships as well as the proximity of the patients’ residence to the orthodontist’s office. They will present evidence that shows over the last twelve years there have only been four non-member orthodontists in the market. The dentists will be able to show that these non-members did in fact receive referrals, albeit only a few. The dentists will also claim that there are no incentives for referring patients only to BOSG members, nor are there any repercussions if they decide not to make referrals to a BOSG member. If anything the dentists will state that referrals go to orthodontist’s they trust, because the orthodontists work reflects on them as well. The dentists will ultimately argue that they make sure they refer their patients to the highest quality orthodontist available, and making referrals to orthodontist they know well and trust makes business sense.


Taking all the information at face value it seems that the Larry’s claim of a dentists group boycott will be defeated. Larry will be unable to make a plausible argument on which an agreement exists between the dentists concerning the refusal to deal with non-BOSG orthodontists. His explanation of a conspiracy is no more plausible than the dentists’ claim that they have independent justifications. Without meeting this threshold requirement, Larry’s claim fails.

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