HOSPITAL BLDG. CO. v. REX HOSPITAL TRUSTEES

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Argument of John K. Train Iii

Chief Justice Warren E. Burger: We will hear arguments first this morning, a number 74-1452, Hospital Building Company against the Trustees of Rex Hospital.

Mr. Train, you may proceed whenever you are ready.

Mr. John K. Train Iii: Mr. Chief Justice and may it please the Court.

The question of law presented here in this case is whether a conspiracy between two business competitors to take over and dominate a market to the exclusion of the third competitor is actionable under the Sherman Act.

Specifically, whether the traditional interstate commerce test for Sherman Act jurisdiction are met by the allegations of the complaint.

The business in question is the delivery of hospital services.

The geographical market in question is Wake County, Raleigh, North Carolina.

Petitioner Hospital Building Co. or HBC owns and operates Mary Elizabeth Hospital in Raleigh.

The named conspirators are essentially the two competing hospitals in Raleigh, Rex Hospital and Wake Hospital, and various persons associated with or acting for them.

The conspiracy alleged is that these two competitors and the other conspirators which have been referred to in our brief as the Raleigh Group have conspired to allocate the market for hospital services in terms of customers and of output in Raleigh to fix prices for hospital services and to foreclose effective competition by HBC in that market.

This, we submit to the Court is no second rate conspiracy as the Fourth Circuit majority opinion appeared to assume.

In order to accomplish the purposes of the conspiracy, the Raleigh Group has undertaken among other actions to prevent expansion through relocation and construction of an entirely new facility by HBC from an old 49 bed hospital to a new 149 bed hospital, a tripling of capacity and ability to compete.

Unknown Speaker: But it still compares to small hospital?

Mr. John K. Train Iii: Your Honor, there is no evidence in the record as to its size in comparison with other hospitals.

We have before us only the allegations of the complaint and the size of the market is not in the record, may it please the Court.

The basic issue before this Court--

Unknown Speaker: You say, tripling the number of beds. If it had 2, it would want 6, that is still triple, would that be tripling?

Mr. John K. Train Iii: That, I understand that Your Honor.

The basic issue before this Court is whether the complaint alleges facts sufficient to meet either or both of the two test for jurisdiction under the Sherman Act.

The in-commerce test and the affecting commerce test.

The competition restrained by the conspiracy is real.

Hospitals, whether government owned, nonprofit or proprietary profit making such as HBC, compete to serve patients who pay for treatment there or for whom payment is made by third parties.

This is what the complaint refers to as paid hospital business.

Such competition is of the price and price equivalent variety such as lower rates and charges, the inclusion of additional services in basic rates and also of the non --priced variety.

More modern and pleasant facilities, larger stance, more extensive and modern equipment, just as in other businesses, hospitals compete by offering better services and facilities, lower prices or both.

The provision of hospital services, the business of operating a hospital, involves much more than placing a bed in a building and hiring a staff.

The hospital business is not just a local business.

Hospital services cannot be provided by HBC or by any hospital without a continuing and substantial flow of drugs, equipment and supplies.

Unknown Speaker: Mr. Train, let me ask you, perhaps the record clearly discloses this.

Your client is a profit hospital, for profit hospital?

Mr. John K. Train Iii: That is correct.

Unknown Speaker: Is it owned by a group of physicians at all?

Mr. John K. Train Iii: No, the record show that it is owned by Chartered Medical Corporation which is a regional group or chain if you will, of hospitals and nursing homes located in Macon, Georgia.

Unknown Speaker: Is this restricted to specified physicians?

Mr. John K. Train Iii: Your Honor, again I emphasize, we are dealing solely with the complaint since the case was dismissed on a motion under 12 (b) (6).

There is nothing in the record to indicate that, I am sure it has stay of rules and regulations like so many of them do.

Unknown Speaker: Well, you were speaking of the three hospitals competing and then usually a profit hospital is restricted in its admission policies to patients of those physicians who own it.

Mr. John K. Train Iii: Your Honor --

Unknown Speaker: Whether your complaint shows this.

Mr. John K. Train Iii: Your Honor, physicians do not own this hospital.

This is owned by a profit making corporation.

I do not believe that the patients who are subject to admission to a profit making hospital are necessarily restricted to those of the physicians who own it.

I believe and again I am talking outside the record because we do not have a record.

But I believe their limitation is that they must be admitted by members of a staff there and I believe that typically the staff is wider than just those paid physicians who might own it.

In any event, as I say, this hospital is not owned by physicians and there is no evidence of any restrictions on admissions to this particular hospital or for that matter, the other two hospitals insofar as this record shows.

Hospitals, of course, as we have stated that do not exist in vacuum, they have to purchase goods and supplies just like any other business.

It is alleged in the complaint that a substantial amount of HBC's purchases of these supplies are purchased from out-of-state vendors.

And further, that 80% of the supplies of HBC are purchased pursuant to nationwide supply contracts which are negotiated by HBC's out-of-state parent corporation, Charter Medical in Macon, Georgia.

A hospital, likewise, cannot function without management and administration.

HBC purchases and receives management services from its out-of-state parent.

Hospital services cannot be furnished unless they are paid for and today, that means receipts of payments from third party payors, both private insurance carriers and governmental programs.

Almost 95% of HBC's billings are to third party payors and the source of such payments in a substantial number of cases is located outside the State of North Carolina.

In short, interstate commerce is at the heart of the operation of any hospital.

And in particular, is at the heart of the operation of Mary Elizabeth by HBC.

Drugs, supplies, equipment and other goods are purchased in the interstate commerce as ingredients of the ultimate product, hospital services, which is purchased by patients, the consumers.

In turn, bills are rendered to and payments received from out-of-state financial sources.

HBC as the operator of the hospital and the furnisher of hospital services is at the center of, and is an integral and essential connector between these flows of goods and payments in interstate commerce.

In these circumstances, we submit that any conspiracy to restrain competition by HBC in a limited market where there are only three competitors, HBC being one.

In the furnishing of hospital services is actionable in Federal Courts under both the effects commerce test and the in commerce test for jurisdiction under the Sherman Act.

We will discuss first, the effects commerce test.

We respectfully submit that a conclusion adverse to that of the Fourth Circuit is compelled by this Court's consistent application of the effects commerce test to find jurisdiction under the Sherman Act with respect to so called local conspiracies.

In such cases as Southeastern Underwriters, Women's Sports Wear and most recently Goldfarb, this Court has made clear that the designation of a particular business as local or intrastate does not answer the question of whether or not that business or conspiracy to restrain it is subject to the Sherman Act.

Southeastern Underwriters in particular teaches us that the distinction between what has been called local and what intrastate is a type of mechanical criterion which this Court has not deemed controlling in the measurement of Federal power.

Not withstanding this admonition, the Fourth Circuit majority like the District Court in the St. Bernard Parish case cited in our brief which was reversed by the Fifth Circuit dealing with the same issue.

The Fourth Circuit was mesmerized by its focus on the supposedly local nature of the hospital business.

As already noted, this characterization is a misconception.

The essence of the hospital business is the interstate flow to, through and from it, of goods, bills and payments.

Unknown Speaker: Mr. Train, somewhere you comment on the Oregon Medical Society cases as you go along--

Mr. John K. Train Iii: I would be pleased to comment on that case right now Your Honor in the Supreme Court opinion.

The reference is to the few contacts with interstate commerce as consisting of payments made from the Oregon Medical Society Association arrangement of the insurance for hospital payments from Oregon to other States where patients covered by the Oregon arrangements had gone to other States.

The Supreme Court characterized those I believe as fortuitous and sporadic, I believe was another word that the Supreme Court there used.

Unknown Speaker: We have changed since 25 years -- since that case was decided?

Mr. John K. Train Iii: Well, I believe, I can state my place that I think they have, I do not believe that case is authority in support of the Fourth Circuits opinion here since as I say in that case, the Supreme Court in commenting on the interstate commerce involvement made it clear that it was not substantial.

There was not a substantial effect on interstate Commerce.

Here, and as opposed to sporadic and infrequent payments across state lines, we allege a continuing flow of such payments.

I am referring if Your Honor please, to the Supreme Court opinion in that case and not to the District Court opinion.

The question is not of characterization of something as local or intrastate, the question is whether interstate commerce is affected.

As Mr. Justice Jackson said in Women's Sports Wear, it is interstate commerce that feels the pinch, it does not matter how locally operation which applies the squeeze.

Unknown Speaker: Well, Mr. Justice Jackson wrote the Oregon Medical Society a decision too, did he not?

Mr. John K. Train Iii: He did indeed Your Honor and as I have just said, I think that can be squarely rationalized with our position here.

Unknown Speaker: Well, why would you not say in the Oregon Medical Society case if you are right that although admittedly they were not many interstate context, there were some and if interstate commerce feels the effect, it does not make any difference if the conspiracy charged is local?

Mr. John K. Train Iii: Because our position is not, Your Honor that every conspiracy or every effect on interstate commerce is actionable.

I think the cases have made it clear that the effect must be what the case is being substantial.

This Court has measured that quantitatively, it has measured it qualitatively.

In the Oregon Medical Society case, I think we have a case where according to the opinion written by Mr. Justice Jackson, there were just no substantial effects on interstate commerce.

The Fourth Circuit's majority opinion, may it please the Court, states the effect on commerce test, and the words that have been used before by this Court and others.

But then it reads it out of existence as we see it by engrafting upon it three additional conditions not previously deemed to be a part of that test.

First, according to the Fourth Circuit majority opinion, the aim or object of the conspiracy whether it is "directed at" a supposedly local activity is an element in determining the substantiality of the effect on commerce.

Jurisdiction under the Sherman Act is not, we submit, a function of intent, but rather a function of impact.

Intent maybe relevant in a limited sense to show the probable effect of an Act, but where the effect is clear, intent, we submit, is not relevant to determine the substantiality of that effect under the Sherman Act.

In addition, we respectfully submit to this Court that the allegations of the complaint described a conspiracy directed not just at HBC, not just at an expansion of the hospital but at an entire market.

The goal of the conspirators being to control and allocate all of the paid hospital business in the Raleigh area.

This does not just keep HBC from competing, we respectfully submit, it keeps everyone from competing.

It denies entry to all potential interest.

Second, the Fourth Circuit's majority opinion, finds the complaint defective for purposes of jurisdiction under the Sherman Act, because there is no showing that out of State suppliers or payors will go out of business.

We submit that the question is whether there is an effect on the flow of commerce, not whether there is an effect on out of State links or originatives of that flow.

In Goldfarb for example, this Court rejected the argument that there was no showing that purchasers were discouraged and no showing that somehow the out of State lenders were affected anti-competitively by the conspiracy there found to be actionable.

Finally, in seeking to verbalize a formula for application of the Sherman Act, the Fourth Circuit majority, engrafted a monopoly power requirement on the essential jurisdictional allegations.

Section 1 of the Sherman Act of course, is designed to reach restraint prior to the development of monopoly power.

This Court has never required the existence of any competitive power sufficient to drive a competitor out of business before finding the Sherman Act applicable or rather Section 1 of the Sherman Act applicable.

Section 2 of course, deals with monopolies.

Again may it please the Court, even accepting the Fourth Circuit vision of the true test here.

The power alleged on the part of the conspirators here, the power to allocate the market among themselves, the power to fix prices, and crucially the power to exclude HBC from the market, represents precisely the danger Congress sought to guard against in its enactment of the Sherman Act.

Substantiality is a requirement which this Court has found to be satisfied both quantitatively and qualitatively.

It is certainly satisfied quantitatively if a not insubstantial amount of interstate commerce is affected.

The quantitative standard, may it please the Court, is satisfied in this case.

The conspiracy here has operated to restrain a tripling in size of a business through its relocation and reconstruction in a new facility, and perhaps Mr. Justice Blackmun, this gets to your question as to the size of the quantity of what is involved here.

In 1972, this business purchased approximately $112,000.00 in supplies and equipment on a regular and continuing, not a time basis.

And a substantial amount of that was purchased from out of State sources.

Such purchases, it is alleged in the complaint, would increase substantially after expansion.

HBC purchased $36,000.00 worth of management services from its out of State parent.

That payment is based on a gross revenues formula and likewise these purchases of management services would increase substantially upon expansion.

A substantial flow of capital, at least 4 million dollars, communications and services in interstate commerce will result from the relocation and the reconstruction in a new facility of Mary Elizabeth.

Finally, revenues are received in substantial amounts by HBC from out of State payment sources.

More patients would be served by relocated and expanded hospital and thus, more revenues received from out of State payment sources.

The quantitative effects on Interstate commerce here are both present and potential.

But equally as real in each case, present effects lie in the immediate prevention of an expansion of the flow of commerce.

The goods and the services which would have been purchased by an expanded and relocated HBC, the capital and additional revenues which would have flowed to HBC from out of State; the potential effect is the terminal choking off of all activity of the conspiracy's ultimate goal, the exclusion of HBC from the market is achieved.

Perhaps one of the problems, we have had in articulating the effect on commerce of the conspiracy is due to the fact that the conspiracy has blocked an attempt to expand, relocate and thus, trouble the capacity of HBC.

We are therefore forced to talk about what might have been and we hope what will be in the future.

In these circumstances, the fact that this action unquestionably falls within the line for Sherman Act jurisdiction that has been drawn by this Court as best demonstrated perhaps by turning the situation around.

If this case alleged the existence of a 149 bed hospital and had the defendants combined and conspired to eliminate that hospital as a competitor for hospital services in the Raleigh area, and to reduce by two thirds, its ability to do business, and if the reduction in HBC's business resulted then in a significant decrease, a measurable decrease, in the flow of goods, supplies, credit, reimbursements and so on from out of State to HBC, then I think the Lower Courts would have had less difficulty in seeing that this substantially effects commerce test for application of the Sherman Act had been met.

We submit that it is clear that there is no functional or legal difference for purposes of application of the Sherman Act between a conspiracy which prevents expansion and entry of a business competitor and one which results in contraction.

Therefore, the effect on interstate commerce being both obvious and we believe substantial, the conspiracy causing these effects is actionable under the Sherman Act.

The quantity or extent of the flow of interstate commerce is not alone determinative as to whether there has been a substantial effect on interstate commerce.

This Court has observed just last term in the Goldfarb case that where there is an effect on interstate commerce, no specific magnitude of the effect need be proven.

As we have discussed, the impact here is sufficiently certain of measurement as to satisfy the quantitative requirements of the effects commerce test.

In addition, the activities here in question without regard to the specific magnitude of interstate commerce affected by them have effects which the Congress surely must have intended to prevent by enactment of the Sherman Act.

The allegations of that complaint present a picture of perhaps the classic restraint of trade.

Two competitors undertake to control and divide a market to the exclusion of the third.

The third infused with management and capital by an out of State source undertakes to become an effective competitor.

By the actions taken pursuant to a non competitive arrangement, this initiative is thwarted.

In this case we submit, what we have is not only the stifling of existing competition, the stifling of an existing competitor, but what we have is the denial of effective entry to a new entrant into the market through the erection of artificial barriers around that market.

In such a case, purchasers and consumers in that market are denied and deprived of the advantages of free competition and the Sherman Act maybe invoked against the conspirators.

We believe the jurisdiction is also present here under the in- commerce test.

HBC operates in the flow of interstate commerce and any competitive restraints on its activities thus impact directly on interstate commerce.

In the American Building Maintenance Industries decision in 1975, this Court has stated that to be in-commerce, a corporation must itself be directly engaged in the production, distribution or acquisition of goods or services in interstate commerce.

HBC as a purchaser of a substantial amount of goods and services in interstate commerce; management services essential to the functioning of HBC and of its provision of hospital services come from outside the State of North Carolina.

The goods and management services purchased by HBC for its operations which are essential part of those operations are purchased on a continuing and regularly recurring basis.

In all cases, these goods, these services, purchased in interstate commerce originating outside the State of North Carolina are essential ingredients of the product; medical, surgical hospital services which has been purchased by the consumer.

We have touched previously upon the interstate system of payments, what we refer to as the nationwide payment system which today exist for the purchase of health care in general and hospital services in particular.

In determining whether HBC as an interstate commerce, it is particularly appropriate to consider this developing nationwide system.

The existence, we respectfully submit, of a nationwide payment system establishes that those participating in it are in interstate commerce.

Finally, the series of Federal Statutes which by their own terms or through decisions of this Court have specific application to hospitals, demonstrates the strong federal interest in the furnishing of hospital services in this country today.

We do not argue that jurisdiction under the Sherman Act is conclusively presumed if the activities in question are regulated under Federal Statutes.

We do say however, that to the extent that the activities in question are the subject of other federal regulation, their supposedly local character is diminished.

The pervasive regulation of health care services in this country today demonstrates the major federal concern in this area and offers a strong indication that delivery of health care services is not solely a matter of local concern.

Certainly, the pervasive federal regulation of delivery of hospital services is inconsistent with the finding below that as a matter of law the provision of hospital services are a purely local activity.

Justice William H. Rehnquist: What was the basis of Congress' exercise of its jurisdiction to adopt this pervasive regulation of the delivery of hospital services?

Mr. John K. Train Iii: Its power under the Commerce Clause Your Honor.

And as the Courts have pointed out when the Congress undertakes to regulate pursuant to its power under the Commerce Clause, it leaves, it has one of two ways in which to go in which to determine whether specific activities are subject to the regulatory system set up.

One is where Congress itself makes the finding.

The other is where Congress leaves it to the Court to make a finding.

And the Sherman Act of course, is the latter type of Statute.

Unknown Speaker: Mr. Train, for pure curiosity; are there many fore profit hospitals in the southeast? Do you know?

Mr. John K. Train Iii: I think there are a fair number.

Our client owns several and I do know of other companies in that area there.

There is a substantial number of fore profit, I would suppose perhaps as many in the southeast since that is a newly developing part of the country as almost anywhere.

Unknown Speaker: Are they increasing in number or decreasing?

Mr. John K. Train Iii: I believe they, in fairness I could say they are increasing a little bit but I believe it is probably also fair to say the economy has been such that nobody is doing much anything right now.

Justice William H. Rehnquist: When you talked about pervasive regulation of the health care, are you relying primarily on the Social Security Act provisions --

Mr. John K. Train Iii: We are not talking so much about health care as such although we are relying on Social Security, we are also --

Justice William H. Rehnquist: That does not depend on the Commerce Clause.

Mr. John K. Train Iii: Excuse me, I mean, I do not mean to say the Commerce Clause.

Justice William H. Rehnquist: I was asking you a moment ago --

Mr. John K. Train Iii: I was thinking of Fair Labor Standards Act.

I was thinking of Occupational Safety and Health Act.

I was thinking of the Wage Acts.

I was not thinking of Hill Burton nor was I thinking of the Social Security--

Justice William H. Rehnquist: All of those depend on the commerce --

Mr. John K. Train Iii: It is the General Welfare Clause but again, we think the point is that the enactment of such laws under any source of power for the Congress demonstrates there is a strong federal interest in the provision of hospital services and --

Justice Lewis F. Powell: You know what?

I do not see that bears on your case at all.

I can see that you have an argument of the Fair Labor Standards Act or under the Occupational Health and Safety Act, but the spending power does not depend on interstate commerce.

Congress can expand for whatever purpose it chooses regardless whether it bases any jurisdiction on commerce.

And the fact that it may choose to spend, I would not think it does not advance or detract the contention of its jurisdiction--

Mr. John K. Train Iii: We certainly do not rely on that, for the argument we make.

I would like to make that very clear, Mr. Justice Powell.

Unknown Speaker: I was wondering whether you, you think in view of the arguments you make that the Sherman Act has substantially the same coverage with respect to in commerce and effect on commerce that the Fair Labor Standards Act has.

Or putting it differently, can you think of any business, any local business that would not be covered by the Sherman Act on your argument.

Mr. John K. Train Iii: Your Honor--

Unknown Speaker: Try to think of one Fair Labor Standards Act, window washers of an office building are for example.

Mr. John K. Train Iii: You say are?

Unknown Speaker: They are.

They have been so (Voice Overlap)

Mr. John K. Train Iii: Your Honor, I think you would, I think our position is you would have to have an analysis of the market and see what sort of facts were being alleged with respect to a particular occupation, for example, with respect to window washers it seems to me that if you had a case involving a Sherman Act complaint respecting a conspiracy window washers just like you had complaints in which Courts have upheld with respect to employing plasterers and with respect to journeymen or rather wholesale plumbers, you would have to see whether there was a substantial effect on interstate commerce.

Unknown Speaker: They would be covered?

Mr. John K. Train Iii: Absolutely.

If the allegations with respect to substantial effect were there.

Unknown Speaker: If you had a small town with three restaurants in it and two of them decided they were going to fix prices to put them out of business, they would clearly be covered--

Mr. John K. Train Iii: No, not necessarily clearly.

I think you would have to again make an analysis as the Ninth Circuit Court, for example, did in Paige versus Worke (ph) and you would have to find what was the nature of the interstate commerce purchases, how important they were, whether they were a continuing part of the business of this business and so forth.

Unknown Speaker: Let us assume that the restaurants in question, instead of purchasing $112,000.00 in interstate commerce, purchased $12,000.00.

Mr. John K. Train Iii: As I recall that the lowest amount that I recall seeing with respect to quantitative, the quantitative aspect of purchases as the recent Seventh Circuit decision as to which certiorari was earlier denied the finest P. Ernst case where there were some statement that this contractor who had been, I believe indicted under the Sherman Act, had purchased some $10,000.00 or rather have received some $10,000.00 from HUD in connection with the building project.

Unknown Speaker: (Inaudible) and upon how large percentage the $12,000.00 was of the restaurants total purchases?

Mr. John K. Train Iii: Of the restaurant's total purchases and also of the total purchases with respect to the market.

Unknown Speaker: Not only -- no bright land but no land at all.

Mr. John K. Train Iii: I believe that is certainly true in particularized case by case determination based on a pragmatic economic judgment and we believe that here the pragmatic judgment is the congress would have intended to protect a market from the elimination of one out of three competitors.

Argument of Ray S. Bolze

Mr. Ray S. Bolze: Mr. Chief Justice, may it please the Court.

I submit that in the Sherman Act jurisdictional issue, we should again look at the facts of this case.

My client is Rex Hospital, a non --profit public hospital in Raleigh North Carolina as alleged in the complaint.

The product market here is the provision of hospital services in Raleigh and that is also the geographic market, Raleigh North Carolina.

The provision of hospital services as I think almost everyone knows is essentially such things as the provision of a hospital room, the provision of nurses' services, the provision of an operating room, a place where the doctor can come and serve the patient, provision of meals to you while you are in the hospital, provisions of linens on your bed, all these various factors.

And it is true that at one time or other, the bed that you are lying as a patient for a week in the hospital may have come from interstate commerce.

The surgical equipment used by the doctor when he operates upon you may at one time have been purchased in interstate commerce or from a local wholesaler who purchased it in interstate commerce.

And that the medicines and drugs administered to you in the hospital, may at one time have come from a manufacturer or a shipper in interstate commerce.

But we submit in virtually every walk of life, this is the case indeed, I would submit that in virtually every interstate transaction, it is eventually consummated in a local purchase or a local delivery of a service.

That does not mean that since you are the ultimate recipient on that chain, you become a part of interstate commerce for Sherman Act regulations.

Unknown Speaker: Suppose you know there is provision on the Robinson Patman act that exempts hospital or at least has a different provision with respect to the purchase of products by not for profit hospitals.

Does it not necessarily imply that the hospital is engaged in interstate commerce when the purchases drugs at a lower price than perhaps a wholesaler pays?

Mr. Ray S. Bolze: Your Honor, my first answer to that of course is number one, we are not dealing with the Robinson Patman Act but the Sherman Act and it is--

Unknown Speaker: I realize that but I am suggesting Congress in enacting that must have made some assumption with respect to the transactions engaged in that hospital.

Mr. Ray S. Bolze: Your Honor, I would submit that and I have not checked the legislative history of that part of the Robinson Patman Act but I would submit and we do not contend here that hospitals could not conspire in such a way as to common in the Sherman Act and petitioner makes the argument here that this is a constitutional question.

Can hospitals ever come in under Sherman Act and we do not argue that, we take the same position as was Stated in the Goldfarb case and was Stated in the Yellow Cab case that there maybe occasions when legal services or Taxicab services that local activities could be of such a nature that they could restrain trade under the Sherman Act and I would submit that in Congress in running a Robinson Patman Act and putting that Statement in was not saying that hospitals are always into the Sherman Act, you have to look at the individual restraint, which is what we are doing here.

So I do not think that that does get to our question.

Unknown Speaker: The only one the drugs come from out-of-state but --

Mr. Ray S. Bolze: Or, or Your Honor if the hospital as is in most of these supreme Court cases, if the hospital conspires with the out of State drug company, such as to Frankfurt Distilleries case, such that you have a restraint on that interstate flow of goods, not a indirect restraint, a direct restraint and the Eight Circuit and the Bensinger case talked about the amount of money that was exact issue.

I think there was only several thousand dollars involved but it was a piece of machinery coming from out of State to be installed in a local restaurant but the restraint was on the price of that piece of machinery.

Clearly was interstate transaction and the restraint applied to therefore was Sherman Act.

We do not here have an alleged conspiracy between the defendants here enrollee and these out-of-state suppliers' drugs.

So it I think that is the question we must deal with the restraint here alleged and whether or not it is sufficient to be considered a restraint of interstate competition as an --

Unknown Speaker: There must be an out of State conspirator

Mr. Ray S. Bolze: Your Honor I do not think your perhaps --

(Voice Overlap)

Mr. Ray S. Bolze: Excuse me.

Unknown Speaker: You do not have to have an out of State conspirator.

Mr. Ray S. Bolze: No Your Honor, you do not need to have one but I think if you do not have one as in Goldfarb, this local activity being restrained must be an intrical and necessary part of this Interstate commerce and I submit ours is not that case and that is what I would like to get to now because these local activities such as the purchase of goods and drugs by Rex Hospital, the receipt of -- not by Rex Hospital by plaintiff and the receipt of a products used at the hospital.

These are not like Goldfarb; these are not the dominant ingredients of hospital services.

I submit that anyone who has been to a hospital will tell you that the dominant ingredient is the doctors and the nurses.

Those facilities provided to the patient, the dominant ingredient is not the drugs which came in at one time or the bed that you are lying upon.

Now this is the distinction between this and Goldfarb.

Justice Thurgood Marshall: (Inaudible) would it not?

Mr. Ray S. Bolze: Yes it would be Your Honor.

Justice Thurgood Marshall: It came in the interstate commerce did it not?

Mr. Ray S. Bolze: At one time, yes it did.

And the book--

Justice Thurgood Marshall: The replacements come in interstate commerce, do they not?

Mr. Ray S. Bolze: Yes Your Honor.

And the chair you are sitting at one time may have come in into interstate commerce.

I mean this every walk of life has this connection Your Honor.

Justice William H. Rehnquist: But with respect to drugs, is it not more or less of a kind of continuous flow which would distinguish it from the initial purchase of a bed and then replacing it 15 years later or replacing a chair in the same way.

Mr. Ray S. Bolze: Certainly, it is a legislature.

There are so many thousand dollars worth of drugs that are purchased each year and come in to the hospital.

Whether they are purchased from an out-of-state supplier or from local supplier is not clear.

I submit it does not make any difference.

The Solicitor General's brief says they all came from out-of-state.

That is not correct but yes there would a flow of drugs every year to the hospital.

There is a flow of food every year to the hospital which comes in out of State but we say these are incidental and the Yellow Cab case, there was Taxicabs, 3000 Taxicabs did not come from Chicago.

But yet that the one alleged restraint there was considered to be intrastate and Oregon Medical, it was found in the Lower Court and by the Supreme Court that there were complete conspiracy of this Oregon statewide insurance, medical insurance and a conspiracy that the statewide insurance plan would not compete with the local County Insurance Plan.

This was I think was Count Three, the only count that the District Court went off and then said there was no interstate commerce and it was found in the Lower Court and in the supreme Court by Justice Jackson that these Statewide Insurance Plans did not make payments on their policies across State lines because they had patients who belonged to this insurance plan going to other States and getting medical care so there was a continuous flow of there also.

That that --

Unknown Speaker: Mr. Bolze, is not that difference between the Oregon Medical case in this, that as a matter of fact, there was a finding of no adverse effect on interstate commerce.

Mr. Ray S. Bolze: Exactly.

Unknown Speaker: Whereas here we have a complaint with no trial yet being held and there is an allegation of an adverse effect namely that there would be a lesser flow of goods and there would be if the hospitals were permitted to expand.

Mr. Ray S. Bolze: That is the allegation here Your Honor but we are taking that allegation as true that that restraint is not sufficient and I submit Your Honor--

Unknown Speaker: I understand that, I just go in to the question of whether Oregon Medical controls.

There you have as a matter of fact found and decided by the Supreme Court not to be clearly erroneous.

No adverse effect.

Here you have an allegation of adverse effect, so are not the cases different.

Unknown Speaker: The allegation that must be taking as true in the present posture of this case.

Mr. Ray S. Bolze: Yes, but an adverse effect on a delay and expansion of a hospital by four months, by 91 beds and therefore there would be some delay in drugs coming in to that --

Unknown Speaker: That is the different, are you saying that adverse effect is not sufficient.

I am just directing my question to the point that Oregon Medical does not really disposed at this case.

We have question that whether these allegation are sufficient I understand your argument here.

Mr. Ray S. Bolze: Yes, but I would say Your Honor on count three in Oregon Medical which one I am discussing, the first two counts the District Court found, there was no restraint or trait on the facts.

So we do not get interstate commerce on the third count, the District Court found that it was not sufficient for interstate purposes and that Supreme Court upheld it on that finding.

Unknown Speaker: The reason it was not sufficient was that there was no evidence according to the findings of any adverse effect at all.

Mr. Ray S. Bolze: The Supreme Court said that these flow of goods across State lines which would be restrain, was not sufficient, it was sporadic and incidental.

My point there Your Honor is --

Chief Justice Warren E. Burger: What I do understood fully what you have in mind when you said that one of the patient goes to a hospital, the dominant, I think was the word you used, that dominant relationship is a personal one with doctors and nurses.

Now when a person consults and therefore these other peripheral matters such as bandages, sheets and bill of cases are presumably not pretty very relevant.

Now, when a person goes to a lawyer is the relationship between the client and the lawyer less a personal relationship than with the doctor?

Mr. Ray S. Bolze: No, Your Honor.

Your Honor I would refer to your Statement in Goldfarb at the end where you said that this is not a finding that every legal service might or might not come in under Sherman Act.

We deal here with the facts in that case which was that the price fixing on legal fees for a title search was an intrical part of an interstate transaction between mortgagees, 55% of which were in the DC.

Chief Justice Warren E. Burger: It would usually involve financing, that was the link was it not?

Mr. Ray S. Bolze: Yes Your Honor and 55% of the mortgages in that case came from DC in the Fairfax County which is substantial and this Court found that without that, the mortgagees said we will not grant the mortgage unless the title search is made on the title search of what was being price fixed.

So it is a direct link and it is an intrical part.

I think that is in line with the Frankfort with the Mandeville Farms case, direct link.

Chief Justice Warren E. Burger: The dominant relationship in parallel that you were making or that I am making, the dominant relationship is still a very personal one between a client and lawyer to whether he is dealing with title search, whether without the connection with financing of the purchase.

I am just a little puzzled why you put some of some emphasis on personal relationship aspect.

Mr. Ray S. Bolze: If I put that much emphasis on the personal relationship, I am talking about the provision of hospital services which includes I mean the primary service you get in a hospital, I think it is a service provided the room, the nurses, the doctors, the use of that operating room.

It is not the same effect as what you get when you are going to a drugstore to buy drugs.

You are not going into a hospital primarily to buy drugs; you are going primarily for hospital service.

I am not -- I will be the first to admit there is no fine line in this Court has said it many times.

But I think this is primarily a local service we dealing with here and the restraint we are talking about is a restraint on local competition.

This Court recognized in Yellow Cab, interstate commerce is not intensely practical concept drawn from a normal and accepted course of business.

You must look at the common understanding in the community to determine whether or not the facts alleged, the restrain alleged is interstate or intrastate commerce.

I would just like to point out on these insurance payments, the revenues that come across State line.

Petitioner's hospital does receive its income as it is alleged in the complaint, over 56% of it from insurance companies, primarily Bluecross and also from Medicare and Medicaid.

Solicitor General's brief states, that therefore that makes 95% of revenues and they all come across State lines.

That is not the case.

That is an error in that brief.

Number one, Bluecross payments to petitioner's hospital, the vast majority in their own hospital comes from Bluecross in North Carolina just like most States, they have their own intrastate Bluecross.

So it is not an interstate transaction.

I am sure they receive some payments from insurance companies across State lines but not majority.

Secondly, as the Medicaid and Medicare, Solicitor General's brief is misread.

There also as it is clear from the federation of American Hospital brief filed and in our brief.

Medicaid and Medicare is federal funding, it is paid through a carriers and intermediaries and in the State North Carolina, it is paid through Bluecross of North Carolina when petitioner's hospital has treated a patient that qualifies for, Medicare payment.

The hospital submits its Statement to Bluecross in North Carolina, the intermediary and that is where they get their payment for Medicare, they do not make a direct submission to Washington DC.

Here again, this is the distinction again between Goldfarb which has a direct relationship from outside the State into the State, we do not have that here.

Unknown Speaker: Would it make any difference if the payment were made by travelers on the rolling?

Unknown Speaker: Why you are putting an emphasis on Bluecross in North Carolina?

Mr. Ray S. Bolze: No, only because Bluecross in North Carolina is the intermediary for Medicare, if it was some other insurance company in North Caroline, I do not think it would make any difference.

My argument is still the same, it is not a direct link between the hospitals in Washington DC.

I would not care who made it, it so happens that intermediary is Bluecross, and it could be travelers.

Unknown Speaker: What is that that some of us said in this Solicitor General's brief is just factually inaccurate?

Mr. Ray S. Bolze: Yes, the allegations in the complaint and both petitioner itself, it is -- they just make the Statement, they have these receipts of payments on Medicare and Bluecross but it so happens they do not come across State lines.

Unknown Speaker: (Voice Overlap).

Mr. Ray S. Bolze: They received some insurance payments in interstate but the vast majority did not.

Furthermore, in this Medicaid and Medicare, it is federal funding on a general welfare clause and we are concerned about this argument because first of all, in that statute, setting up Medicaid and Medicare, the amendment of the Social Security Act.

The Act specifically States that nothing in this sub-chapter shall be construed to authorize any federal officer or employee to exercise any supervision or control over the practice in medicine or the manner in which medical services are provided, stated in 42USC section 1395, yet what petition would argue here by all these connections with Medicaid and Medicare is that since they receive this federal funding and had communication involving the federal funding.

We should take these contacts with the federal government on a general welfare clause and use those to we submit expenditures to extend the Sherman Act under the commerce clause.

Now, I submit that is far reaching and furthermore it was -- I noticed in the federal list papers, Madison's papers number 41 and 45, it discusses the General Welfare clause and the argument that was made by opponents to the constitution that the grant in the first clause about general welfare and the common defense.

People were saying that that meant federal government could do virtually anything.

And Madison specifically said there that that language, the same language that was in the articles of confederation that they could provide for the general welfare and certainly did mean they could do anything.

In fact and as it says there, the clauses following thereafter, the specific grants of power, such as the power to regulate interstate and foreign commerce specifically qualify the powers of General Welfare.

Unknown Speaker: The Madison's view was rejected by this Court in Butler against the United States in favor of Hamilton's view I think was not it?

Mr. Ray S. Bolze: I do not it was rejected on this question to the general welfare clause Your Honor, clearly you cannot expand and I think it is clear that this Court has never interpreted the grant of power under the commerce clause to congress as being as broad as their power of funding on a general welfare clause which is what is being argued here.

Unknown Speaker: I thought you were saying that this general welfare clause is limited to the areas in which congress had an independent source of jurisdiction.

Mr. Ray S. Bolze: No Your Honor.

I am saying that he makes very clear that in reading the power to the federal congress, you cannot say that the general welfare clause gives them power to do anything, to regulate commerce.

You have to look at the specific grants.

Unknown Speaker: But it does give them the power to spend for any --

Mr. Ray S. Bolze: Yes.

Unknown Speaker: But it is not specifically limited --

Mr. Ray S. Bolze: But not to control intrastate Commerce.

Yes Your Honor.

Unknown Speaker: We go back again to this business of Medicare payments.

Mr. Ray S. Bolze: Yes Your Honor.

Unknown Speaker: I think the complaint alleges that a substantial number of persons hospitalized in Nevada area come from outside the State.

If then they get their Medicare payments to North Carolina Bluecross, is there any aspect of interstate commerce with respect to those patients?

Mr. Ray S. Bolze: Your Honor, first there is some allegation of, some treatment of patients from outside the State and this brief before the supreme Court petitioner apparently has dropped that as one of its arguments but be that is not may -- I am sure their hospital treats some patients from outside the State and they might received Medicare.

I would submit Your Honor that however -- whatever the number those inpatients are and even if they do use Medicaid or Medicare, that still is an incidental contact, it certainly would not be nearly as substantial connection as in Yellow Cab where you have the transfer of interstate travelers to their local homes.

So I would submit even though they treat some patients that came from outside that State.

Number one, petitioner is essentially in this Court dropped that argument and secondly I submit under the case under the case law --.

Unknown Speaker: That is the argument but it is still in the complaint, is it not?

I read a substantial number of persons coming to the Raleigh area for treatment of the medical of surgical hospital there, reside in the States other than the State of North Carolina.

Mr. Ray S. Bolze: Yes Your Honor, still on the complaint.

And I am willing to go with that that they do treat patients coming from outside the State and I am submitting under the case law, that is not considered as sufficient restraint because the restraint we are alleging here and that is what I want to get to next, what is the language in the Apex Hosiery.

We are not talking about a dollar amount, we are talking about whether or not a local restraint.

Restraints interstate Commercial competition, we are not talking about the dollar amount, we are talking about the effect.

And this is pointed out nowhere more clearly than the Apex Hosiery decision which -- and I would like to just quote a couple lines from in this.

"It was in this sense a preventing restraint on commercial competition that Congress exercised all the power it possessed in the Sherman Act."

Further quoting on Justice Stone opinion, "the Supreme Court has never applied the Sherman Act in any case whether or not involving labor organization unless the Court was of the opinion of there was some form of restraint upon commercial competition in the marketing of goods and services."

Restraints upon commercial competition have been condemn only when their purpose or effect was to raise or fix market price, it is this sense that it is said, that the restraints actual or intended prohibited by the Sherman Act are only those which are so substantial as to affect market prices.

I submit Your Honor that is what the test of the substantiality in interstate area is.

Not a measure of dollars or cents but a measure -- this I think what the Judge Craven in his majority opinion was talking about below that does the local intrastate restraint have an effect of restraining commercial competition in interstate commerce, not whether it delayed $10,000.00 worth of goods coming into the State.

Unknown Speaker: Well, if the dollar amount is irrelevant.

I wonder what your view is on Third Circuit case involving the Philadelphia Hospitals which I recall involve the curtailment of the number of hospitals in the market.

Would you say that their case was correctly decided?

If so how do you reconcile that would with the argument you just made?

Mr. Ray S. Bolze: You Honor your reconcile it.

I reconcile the same way that the Judge Craven did below when talking there as you were in Doctors Hospital case with the restraint which would effectively close down 100 hospitals in two State area.

You are talking about interstate commerce I do not even think that is an effect test, that is an inflow test.

I think it was clearly distinguish by Judge Craven.

I think it is a certainly not this case.

Unknown Speaker: There are two differences, one there are more hospitals and two, you close down instead of preventing expansion?

Mr. Ray S. Bolze: Well, there is one third of very important, when those hospitals alleged and restrained, were in two State, Philadelphia and Denver or Pennsylvania and Denver.

Unknown Speaker: If were in one state, you would say the case would have been decided differently?

Mr. Ray S. Bolze: No, Sir I do not say because we are a 100 hospitals involved.

Here we talking --

Unknown Speaker: Then you do not rely on two State points.

The points you rely on are, one the difference in the number of the hospitals and two the difference between expansion and curtailment?

Mr. Ray S. Bolze: Your Honor, I would not rely on all three.

I submit under the language of this Court.

The test in each Sherman Act cases one of degree.

You have to look at there.

I would look all three of those issues.

Unknown Speaker: You know 100 hundred hospital, what effect on interstate commerce is relevant, other than purchases of supply across State line?

Mr. Ray S. Bolze: Well, I think closing 100 hundred hospitals compared to a four month delay in the expansion of 91 bed hospital is just vastly different, as to its effect it could have on the commercial competition.

Unknown Speaker: The difference is entirely in the dollar value of the two situations?

Mr. Ray S. Bolze: I say you can look at the dollar value Your Honor to say whether or not it would have substantial effect on competition.

But I say you cannot just look and say what is the dollar amount.

Unknown Speaker: It is not competition in the providing of hospital services --

Mr. Ray S. Bolze: No, That is correct.

Unknown Speaker: Rather the completion in selling goods and services to hospital?

Mr. Ray S. Bolze: Yes, Your Honor.

Unknown Speaker: You say there is a deminimous effect here, and there is a significant there.

That is your difference?

Mr. Ray S. Bolze: I say that the effect could be such as to cause a suppression in the commercial competition with those goods and services because there are so many coming in.

So, it is yes, you can look at the dollar amount and cannot object

Unknown Speaker: I want to be sure I understand your theory.

The differences between the substantial effect there and the deminimous effect here.

You do not contend no effect here?

Mr. Ray S. Bolze: I contend there be some effect on the flow of goods, I contend there to be no effect on as far as restraining trade.

Unknown Speaker: Well, but the only effect in other cases is an effect on flow of goods.

That it seems to me you have acknowledged that, if that effect is substantial than the Sherman Act jurisdiction and the difference, as I understand you is that here you are contending the effect is deminimous.

Where is there something I am missing?

Mr. Ray S. Bolze: No, I guess there is -- I feel the fact that the defendant there was operating in a two State market and it was confirmed with 100 hospitals.

Unknown Speaker: We is this your position again?

Mr. Ray S. Bolze: Well, I do not think I am Your Honor with all do respect.

Unknown Speaker: Is it not critical that there were two State involve there.

I do not think you can have it both ways. Either it is critical or it is not?

Mr. Ray S. Bolze: You Honor, I would submit that it is a question of degree in each case and I think there it was critical.

I would have to look at three tests there.

I do not think you can look at just the dollar amount.

Your Honor I did want to get into this comparison to other statutes, Fair Labor Standard Act and National Labor Relation Act.

I would submit first as Justice Frankfurter Stated in Banty Brothers translation of an implication drawn from the special aspects of one statute to a totally difference statute as treacherous business.

Now, there is no doubt about it.

Fair Labor Standard Act, Civil Right Act, National Labor Relations Act were drawn up as this Court has found in numerous cases including Marilyn V. Worts (ph) Fair Labor Standard Act was drawn up those statutes in such a way that Congress made a decision that as class of activities, these payments of substandard wages and class of activities could as a whole have an effect in interstate commerce.

The Congress did not find that in the Sherman Act.

The Sherman Act does not State that it applies to any local restraint, if the parties involved have some connection with the interstate commerce.

The restraint itself must be on interstate commerce.

Justice Powell, I think put it very clearly in (Inaudible), the jurisdictional inquiry under the general prohibitions like these acts and Section one of the Sherman Act turning as it does on circumstances presented in each case requiring a particularized judicial determination, differ significantly from that requirement.

The Congress itself has defined the specific persons and activities that effect commerce, and therefore required federal regulation comparing Yellow Cab to the FLSA cases.

Of course, the language of this statute does vary too which is in our brief.

I would submit under Civil Rights Act.

If you so much just treat one interstate patients, you come under that statue.

That is not the test under Sherman Act.

Finally, I would get back to the quotes in Yellow Cab and Goldfarb, we are not arguing that a hospital can in no way conspire such as the restraint interstate State trade.

We are saying in facts of this particular case and Sherman Act must be looked at in each case, there is not restraint of interstate competition.

Now, this does not leave petitioner without some relief.

North Carolina like most States has a mini Sherman Act.

In fact, its language is identical to the Sherman Act except that is says restraints of North Carolina trade rather than restrains of interstate trade.

It has a trouble damage provision providing people with suits.

They can go into State Court.

So they are not left without a recourse.

Now referring or keeping in mind, the tremendous increase in antitrust cases in the Federal Courts, I think there were 457 antitrust cases in the Federal Courts in 1963 and 1400 in 67 and 1975 of which 1375 were non-government civil cases like these.

Keeping that in mind and the fact that the States Courts and State statutes are there and are being used for more and more each day and the ABA antitrust general each year puts out all the State cases.

Chief Justice Warren E. Burger: If these cases are not from afar, and perhaps even below increases in lot of other areas I am not sure how important it is?

Mr. Ray S. Bolze: That I do not know Your Honor, just because of that, there in fact, there are State statutes very similar to there.

I refer back to the language of Chief Justice Hughes in Jones and Laughlin.

Undoubtedly, the scope of this power must be considered in light of our dual system of government, it may not be extended so as to embrace effects upon interstate commerce.

So, indirect and remote and to embrace them, if you have a complex society which would obliterate and set up a completely centralized government.

The question is necessarily one of degree and there is a question of degree in this case.

I would submit also in South East underwriters case which is quoted quite a bit.

Justice Black after he referred to the fact that in enacting the Sherman Act, Congress went to its entire reach on the constitutional powers, stated right there after about our dual system of State federal and referred to a quote by Senator Sherman in enacting the Sherman Act as fallows; it is to arm the Federal Courts with the limits of their constitutional power that they may cooperate with the State Courts in checking, curbing and controlling the most dangerous combination that now threaten the business property and treat the people of United States.

In conclusion, we submit the subject matter test under the Sherman Act is one of degree, based on each fact in each case.

There is no clear line we, submit in such an area, the Lower Court must make that initial decision and if it makes that decision based on the guidelines set down by this Court, we submit that the Lower Court here did.

In his decision--

Unknown Speaker: Your reference to Justice Black I think he dissented in the Oregon Medical case.

Mr. Ray S. Bolze: He may have Your Honor.

I am not sure if he dissented on all three accounts, Yes.

Chief Justice Warren E. Burger: But ambiguously he did not indicate whether he thought the findings of fact were erroneous or whether he thought the evaluation of the legal aspects were erroneous.

Mr. Ray S. Bolze: Yes Your Honor, but in concludes we do fear on these type of cases unless -- since no clear line and no clear rule can be laid down.

You must put some control in the hands of the Lower Court.

It applies the rules correctly as we think it did here.

Applied the guidelines, unless it clearly erroneous, it should be upheld.

It was upheld here by the Fourth Circuit and also by Fourth Circuit en banc decision which we feel applied your rules correctly under your cases and it should be upheld.

Unknown Speaker: Can we read Justice Black's opinion in the the --

Mr. Ray S. Bolze: Yes, Your Honor.

Unknown Speaker: -- in the Oregon case in full in two lines.

Mr. Justice Black is of the opinion of the judgment below is clearly erroneous.

The judgment below is clearly erroneous and should be reversed.

Mr. Ray S. Bolze: Yes, Your Honor I take it, as I said, I was quoting South East underwriters because it is a strong case for Sherman Act enforcement does have this Statement.

It still has dual system and it does quote from Senator Sherman about the dual system, and that is the purpose that I was quoting.

Thank you Your Honor.

Chief Justice Warren E. Burger: Thank you gentlemen.

The case is submitted.