Sykes v. Health Network Solutions, Inc.

Sykes v. Health Network Solutions, Inc., 2013 NCBC 55.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
COUNTY OF FORSYTH 13 CVS 2595

SUSAN SYKES d/b/a ADVANCED )
CHIROPRACTIC AND HEALTH )
CENTER; DAWN PATRICK; TROY )
LYNN; LIFEWORKS ON LAKE )
NORMAN, PLLC; BRENT BOST; and )
BOST CHIROPRACTIC CLINIC, P.A., )
)
Plaintiffs, )
)
v. )
)
HEALTH NETWORK SOLUTIONS, )
INC. f/k/a CHIROPRACTIC ) ORDER ON MOTION TO DISMISS
NETWORK OF THE CAROLINAS, )
INC.; MICHAEL BINDER; STEVEN )
BINDER; ROBERT STROUD, JR.; )
LARRY GROSMAN; MATTHEW )
SCHMID; RALPH RANSONE; )
JEFFREY K. BALDWIN; IRA RUBIN; )
RICHARD ARMSTRONG; BRAD )
BATCHELOR; JOHN SMITH; RICK )
JACKSON; and MARK HOOPER, )
)
Defendants. )
)

{1} THIS MATTER is before the court on Defendants’ Motion to Dismiss
Plaintiffs’ Amended Complaint (“Motion”) pursuant to Rule 12(b)(1) and Rule
12(b)(6) of the North Carolina Rules of Civil Procedure (“Rule(s)”). The Motion is
DENIED, subject to the limitations expressed below.

Oak City Law, LLP, by Robert E. Fields III and Samuel Piñero II, Doughton
Rich Blancato PLLC by William A. Blancato, and Wells, Jenkins, Lucas &
Jenkins, PLLC, by Leon E. Porter and Ellis B. Drew III, for Plaintiffs.

Brooks, Pierce, McLendon, Humphrey & Leonard, LLP, by Jennifer K. Van
Zant, Benjamin R. Norman, and W. Michael Dowling for Defendants.

Gale, Judge.
{2} On October 29, 2013, the court heard consolidated oral argument on
Plaintiffs’ Motion for Preliminary Injunction and Defendants’ Motion to Dismiss.
On November 25, 2013, the court entered its Order denying Plaintiffs’ Motion for
Preliminary Injunction, finding that Plaintiffs had not demonstrated a likelihood of
success on their claims. The current Motion to Dismiss is determined on a standard
more favorable to Plaintiffs. In determining whether Plaintiffs have adequately
pleaded their claims, the court accepts their allegations as true and draws
inferences in their favor. See, e.g., Sutton v. Duke, 277 N.C. 94, 98, 176 S.E.2d 161,
164 (1970); Crouse v. Mineo, 189 N.C. App. 232, 237, 658 S.E.2d 33, 36 (2008). The
Motion does not turn on the strength of the claims, but only on whether the
allegations are sufficient to state any claim. Concrete Serv. Corp. v. Investors Grp.,
Inc.,79 N.C. App. 678, 681, 340 S.E.2d 755, 758 (1986). In considering the Motion to
Dismiss, the court restricts its inquiry to the Amended Complaint and other
documents which are specifically referred to or adopted by the pleadings. Oberlin
Capital, L.P. v. Slavin, 147 N.C. App. 52, 60–61, 554 S.E.2d 840, 847 (2001).
{3} The court provided a detailed factual summary of Plaintiffs’ claims in
its November 25, 2013 Order. The court does not now repeat that summary, but is
mindful that the facts recited there included matters raised in defense of the
injunction request which are not properly considered when ruling on the Motion to
Dismiss. Particular facts important to this Motion are noted.
{4} Accepting all of Plaintiffs’ allegations as true, as it must for the
present Motion, the court concludes that Plaintiffs have adequately alleged the
essential elements for the claims in the Amended Complaint, and the Amended
Complaint therefore withstands the initial Motion to Dismiss. 1 The court has

1 The court does not believe this initial conclusion depends on whether Plaintiffs’ asserted violations

are per se violations of competition statutes or are instead violations that must be assessed by a rule
of reason analysis. Admittedly, under the rule of reason, the party asserting the restraint’s illegality
bears the burden of proving its unreasonableness. Rose v. Vulcan Materials Co., 282 N.C. 643, 658,
194 S.E.2d 521, 531 (1973). The plaintiff must show: (1) facts peculiar to the business restrained; (2)
the business’s condition before and after the restraint was imposed; and (3) the nature and probable
effect of the restraint. Id. Questions may remain as to whether Plaintiffs will ultimately sustain
their proof, however, their broad allegations are adequate to withstand a Rule 12(b)(6) motion.
separately considered Defendants’ standing argument, as it is cast, in part, as a
challenge to the court’s subject matter jurisdiction. The court concludes that
Plaintiffs’ have properly invoked the court’s jurisdiction and the litigation may
proceed toward a more detailed fact inquiry. That inquiry may include a
reexamination of the arguments underlying the Rule 12(b)(1) motion.
{5} While the court allows the Amended Complaint to survive the Motion,
it further concludes that the imprecision of Plaintiffs’ allegations, particularly as to
the “market” within which Defendants are alleged to have acted, do not justify the
typical full range of discovery before the contentions are refined with greater
precision. The need for further clarification of the market may inform not just the
competition claims, for other claims interrelate common facts. This clarification
may be essential to inform determinations necessary for the resolution of any claim,
including, for example, the issue of whether a class or subclasses should be certified
and, if so, who would be a proper representative, and the standard or lens through
which damage claims should be discovered and determined.
{6} Accordingly, the court denies the Motion to Dismiss but will undertake
to implement appropriate procedures to conform efficient discovery and
consideration of other necessary pre-trial issues
{7} It appears that Plaintiffs’ Second Claim and Third Claim are the most
critical, for the First, Fourth and Fifth Claims are substantially or totally
dependent on them. The court refers to the Second and Third Claims collectively as
the “competition claims,” although the Third Claim further extends the claim of
unfair and deceptive acts or trade practices. The First Claim essentially casts the
remaining claims in the form of declaratory judgment. The Fifth Claim is a
derivative claim for punitive damages.
{8} The Second Claim sets forth the alleged anti-competitive conduct of
which Plaintiffs complain and is premised on N.C. Gen. Stat. §§ 75-1, 75-2 and 75-
2.1. The claim is labeled as “price fixing, monopsony and monopoly,” but it also
includes allegations of conspiracy and attempt to monopolize or monopsonize. The
Amended Complaint does not assert a separate independent conspiracy claim, but
the court has depended on the conspiracy allegations in allowing claims to continue
at this time against the Individual Defendants. A definition of the “market” and
“market power” is essential to the monopoly, monopsony, and attempt theories of
the Second Claim. See R.J. Reynolds Tobacco Co. v. Philip Morris, 199 F. Supp. 2d
362, 394 (M.D.N.C. 2002); In re Se. Milk Antitrust Litig., 801 F. Supp. 2d 705, 724
(E.D. Tenn. 2011); Powderly v. Blue Cross & Blue Shield of N.C., 3:08-cv-00109-W,
2008 U.S. Dist. Lexis 89406, at *4 (W.D.N.C. Sept. 4, 2008).2
{9} The Third Claim is premised on N.C. Gen. Stat. § 75-1.1, but draws
heavily from the same underlying facts anchoring the Second Claim. Adding to the
competition claims, the Third Claim adds alleged violations of the Insurance Code
as unfair and deceptive acts, most particularly that HNS (1) should be licensed, but
is not and (2) should but does not include considerations of medical necessity when
assessing efficiencies which govern a provider’s ability to remain in the Network.
Plaintiffs additionally allege that HNS unfairly represents its functions and
benefits to its members and unfairly retains a percentage of fees resulting from
member chiropractic services.
{10} Assuming first without deciding at this time that Plaintiffs can ground
their private cause of action on the insurance statutes they invoke, the court makes
no present determination whether the insurance-related claims can stand
independently if the completion claims fail. But, as presently alleged, the claims
are interrelated so as to suggest further critical inquiry at the same time under a
more fully developed record.
{11} Plaintiffs ground their claims solely in state law. But in the absence of
guiding state precedent, the court properly looks to federal approaches to similar
issues for guidance. As indicated in its November 25, 2013 Order, the court finds
the federal enforcement policy regarding IPAs to be instructive as to the record

2 In addressing those issues, this court is not bound by federal precedent, but it properly considers

federal decisions as potential persuasive authority. Rose, 282 N.C. at 655, 194 S.E.2d at 530.
necessary to assess the claims.3 Although the factors necessary to the record vary
in accord with the nature of the agreements under attack, any meaningful analysis
must be governed by an understanding of the “market” impacted by the claims and
the allocation of power within that market.
{12} Before discussing further how that record might be developed, the
court turns to Defendants’ challenge to the court’s subject matter jurisdiction.
Defendants assert the court has no such jurisdiction because Plaintiffs have not and
cannot assert “antitrust standing,” and therefore cannot pursue competition claims
under Section 75-1, 75-2 or 75-2.1 and cannot pursue a private cause of action based
on the insurance laws because of the exclusive enforcement authority of the
Insurance Commissioner.
{13} Standing arguments can be presented under both Rule 12(b)(1) and
Rule 12(b)(6), as Defendants have done here. See Teague v. Bayer, 195 N.C. App.
18, 21-–22, 671 S.E.2d 550, 554 (2009); Meadows v. Iredell County, 187 N.C. App.
785, 787, 653 S.E.2d 925, 928 (2007). The concepts underlying the rules and the
standards of review are not necessarily the same. As a jurisdictional matter, a Rule
12(b)(1) motion may draw upon and depend upon a more complete record than just
the pleading upon which the Rule 12(b)(6) motion turns. The Rule 12(b)(1) motion
is in the nature of determining whether there is a concrete controversy suitable for
judicial resolution and inquires whether the plaintiff has suffered an actual
concrete injury that is not speculative, conjectural, or hypothetical. Meadows, 187
N.C. App. at 21–22, 671 S.E.2d at 554 (quoting Neuse River Found., Inc. v.
Smithfield Foods, Inc., 166 N.C. App. 110, 114, 574 S.E.2d 4 8, 52 (2009), disc. rev.
denied, 356 N.C. 675, 577 S.E.2d 628 (2003)). Standing arguments brought under
Rule 12(b)(6) inquire whether the alleged facts fall within the scope and ambit of
the underlying substantive claims.

3 Sykes v. Health Network Solutions, Inc., 2013 NCBC 53, ¶ 59 (N.C. Super. Ct. Nov. 25, 2013),
(citing Joint Statement of the U.S. Department of Justice and the Federal Trade Commission
(“Policy Statement 8”)), http://www.ncbusinesscourt.net/opinions/2013_NCBC_53.pdf.
{14} Accepting Plaintiffs’ allegations as true, the court concludes that
Plaintiffs have alleged injuries sufficiently concrete and particularized to present a
justiciable claim over which the court has present subject matter jurisdiction. To
the extent that later proceedings warrant a reexamination of subject matter
jurisdiction, ruling on a defect in subject matter jurisdiction has not been waived or
foreclosed. Wood v. Guilford Cnty., 355 N.C. 161, 164, 558 S.E.2d 490, 493 (2002).
{15} The court believes that that challenge to standing for lack of “antitrust
injury” is more properly a Rule 12(b)(6) inquiry. Plaintiffs and Defendants agree
that there is no North Carolina case that has expressly recognized the concept of
“antitrust injury” in the context of a Chapter 75 claim, although the concept
appears well developed in federal precedent and has received substantial traction in
several state courts. See, e.g., Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429
U.S. 477, 489 (1977); see also Roberts v. Whitfill, 191 S.W.3d 348, 354 (Tex. App.
Waco 2006); Princeton Ins. Agency, Inc. v. Erie Ins. Co., 225 W. Va. 178, 183 (W. Va.
2009); Kanne v. Visa U.S.A. Inc., 272 Neb. 489 (Neb. 2006). Plaintiffs argue that
the liberality with which the courts have approached standing for Section 75-1.1
claims necessarily predicts the same liberality for claims under other provisions of
Chapter 75. See Johnson v. Phoenix Mutual Life Ins. Co., 300 N.C. 247, 262, 266
S.E.2d 610, 620 (1980) (finding that Section 75-1.1, modeled after the FTC Act
should be construed more broadly than the Sherman Act or Clayton Act).
{16} The court is not yet persuaded that standing under Section 75-1.1 is
necessarily coextensive with standing under Section 75-1, Section 75-2 or Section
75-2.1. It does not now conclude that the Court of Appeals decisions in Teague and
Hyde v. Abbott Labs., Inc., 123 N.C. App. 572, 575, 473 S.E.2d 680, 682 (1996)
mandate this conclusion. Drawing upon decisions arising under Section 75-1.1,
Plaintiffs attempt to reduce the standing issue to a simple proposition that, “[t]he
only thing required to have standing is a violation of any of the provisions of
Chapter 75 and a resulting injury.” (Opp. to Mot. to Dismiss 6-7.) It may instead
prove that the appellate courts will take a different approach to standing matched
to a different scope of the various provisions of Chapter 75. For example, in Teague,
Judge McGee noted that “[a]ntitrust laws were intended to protect competition and,
thus, standing is generally limited to consumers or competitors.” Teague, 195 N.C.
App. at 26, 671 S.E.2d at 556–67. She cautioned against making that analysis
solely on a review of a complaint, stated that “[a] trial court will be better suited to
assess whether Plaintiff will be able to prove causation based on that alleged
antitrust violation at the class certification and summary judgment stages.” Id.
In Hyde, Judge Wynn determined that a purchaser suffering antitrust damages
should not be foreclosed from standing simply because his injury was indirect,
electing not to follow federal precedent to the contrary. Hyde, 123 N.C. App. at 581,
473 S.Ed.2d at 686. That conclusion, however, does not altogether resolve whether
the plaintiff must show a causal connection between the type of injury presented
and the scope and purposes of the state’s competition statutes.
{17} As to the lack of standing to invoke claims premised on insurance laws,
Defendants argue that the claims should be dismissed at this early stage because of
its holding that there can be no private right of action when the statute on which it
is premised reflects that the General Assembly did not intend to create such a cause
of action. See Baars v. Campbell University, 148 N.C. App. 408, 422, 558 S.E.2d
871, 879 (2009). Plaintiffs in turn assert that the insurance laws on which they rely
“were designed to protect the consuming public,” thereby making a Section 75-1.1
claim appropriate. See Gray v. North Carolina Ins. Underwriting Ass’n, 352 N.C.
61, 70-71, 529 S.E.2d 676, 682 (2000); see also Stanley v. Moore, 339 N.C. 717, 723,
454 S.E.2d 225, 228 (1995).4 The court again concludes that the standing
determination should await a more developed record.
{18} In sum, the court concludes that it has subject matter jurisdiction to
proceed toward a more developed record, that Plaintiffs’ have demonstrated

4 Defendants further contend that any Section 75-1.1 claim would be barred by the exemption for

professional services, citing Cameron v. New Hanover Mem’l Hosp., Inc., 58 N.C. App. 414, 446, 293
S.E.2d 901, 920 (1982). In their brief, Plaintiffs argue that their claims do not arise from the
practice of chiropractic, yet the Third Claim presenting the Section 75-1.1 claim begins with the
recitation that “Defendants all practice chiropractic and are competitors with Class Members.” (Am.
Compl. ¶ 171.) As with other matters, the court believes that the application of the professional
services exemption is interrelated to other matters on which a fuller record is necessary to any final
determination.
standing adequate to withstand an initial Rule 12(b)(6) inquiry, that the question of
whether the claims fall within the scope of the various sections of Chapter 75 should
await a better developed record, and that the nature of the case deserves careful
management in how that record is developed. The court now returns to that issue
of case management.
{19} In denying the Motion to Dismiss, the court has been liberal in its
acceptance of Plaintiffs’ allegation that Defendants have requisite power in an
appropriate market.5 However, the breadth and imprecision of those allegations,
coupled with the interrelation of the competition and other claims, prompt the court
to exercise its case management discretion under Rules 16 and 26.
{20} Plaintiffs refer to the “relevant market” in at least three different ways
in the Amended Complaint, supporting brief for the Motion for Preliminary
Injunction, and the Opposition to Defendants’ Motion to Dismiss. First, on at least
six different occasions, Plaintiffs refer to a market of “insured chiropractic services
in North Carolina.” (Am. Compl. ¶ 125;) see also (Am. Compl. ¶ 146;) (Mem. in
Supp. of Mot. for Prelim. Inj. 11;) (Opp. to Mot. to Dismiss 15, 16, and 17.) Second,
Plaintiffs refer to a market more loosely defined as the “market for chiropractic
services in North Carolina.” (Am. Compl. ¶ 143;) see also (Am. Compl. ¶¶ 126, 146,
162(g);) (Opp. to Mot to Dismiss 5, 17. (referring to the trade restrained as
“chiropractic care,” and “practice of chiropractic in North Carolina”) Third,
Plaintiffs refer to a market of “in-network chiropractic care,” presumably in North
Carolina. (Opp to Mot. to Dismiss 3, 5–6, 7–8, 10, 23.)
{21} Plaintiffs are equally imprecise in alleging the allocation of power
within their alleged market. For example, in the Amended Complaint, Plaintiffs

5 The present case is a good example of the potential impact of differences in approach occasioned by

the state Rule 12(b)(6) standard that adheres to Sutton v. Duke, and the more recent federal
plausibility standard enunciated in Ashcroft v. Iqbal, 556 U.S. 662 (2009). For example, Plaintiffs
have alleged that Defendants have set prices for chiropractic services so that the number of visits by
a provider’s patient population is the sole determinant of a provider’s average cost per patient. (Opp.
to Mot. to Dismiss 3.) The logic may be correct if there is a single fixed price for those services. But
the same logical conclusion may not follow if a provider is free to lower her charge in order to achieve
the low average cost per patient necessary to remain in the HNS Network. While the provider may
have suffered an income loss, there may not have been injury to competition.
quantify HNS’s market power as a “vast majority” of the relevant market, a
“considerable majority” of the relevant market, a “large share” of the relevant
market, and a “monopsony or monopoly” share of the market (Am. Compl. ¶¶ 125,
126, 143.) In their Opposition to Defendant’s Motion to Dismiss, Plaintiffs are only
slightly more specific, stating that HNS controls “substantially more than 50% of
the market” by virtue of its relationship with Insurers, one of whom alone has
“more than 50% of the relevant market.” (Opp. to Mot. to Dismiss 3, 16.)
{22} There is also some lack of precision in the allegation of whether
Defendants have control because their network is exclusive. (Am. Compl. ¶ 60.)
For purposes of the present Motion, the court has accepted Plaintiffs’ assertion that
HNS has effective exclusivity even if the contracts do not expressly provide for such
exclusivity. (Opp. to Mot. to Dismiss 2, 16–17.) The court has not yet accepted
Defendants’ invitation to rely instead on the absence of language in the underlying
contracts representing any such exclusivity.
{23} The court will then convene a status conference and discovery will be
held in abeyance until that conference. Subject to its consideration of further
presentations by the Parties, the court is inclined to order that initial discovery and
proceedings be limited to that necessary to greater define the “market” by which
Plaintiffs’ claims are to be measured. The court invites discussion on whether
there is reasonable discovery on other claims that should not be delayed. The court
further invites consideration of any approaches appropriate to better defining the
market, such as, for example, whether to pursue a separate proceeding which may
include evidentiary presentations and fact finding pursuant to Rule 42, or
alternatively whether some procedure such as the use of a special master or a court-
appointed expert would be appropriate. See David F. Herr, Annotated Manual for
Complex Litigation (Fourth) at § 30.1 (West 2013) (supplement to Charles Alan
Wright & Arthur R. Miller, Federal Practice and Procedure (1969-2013)).
{24} In advance of the status conference, the Parties should confer on these
topics and be prepared to present joint or separate proposals for a further case
management order. At a minimum, they should be prepared to propose a plan that
addresses: (1) what fact and expert discovery is necessary to define the “market”;
(2) the nature and timing of further proceedings to determine the market that
should define the resolution of claims; and (3) whether discovery on claims other
than the competition claims should be held in abeyance pending efforts directed at
the market definition.

CONCLUSION

{25} For the foregoing reasons, Defendants’ Motion to Dismiss Plaintiffs’
Amended Complaint is DENIED without prejudice to reexamine Plaintiffs’ claims
upon a more developed factual record;
{26} The Parties are directed to coordinate with the court to schedule a
status conference at a mutually convenient time on or after January 13, 2014;
{27} In addition to the matters for consideration the court has noted, the
Parties may within five days of the status conference propose additional items that
should be placed on an agenda for the status conference.
{28} Discovery shall be held in abeyance pending the status conference.

IT IS SO ORDERED, this the 5th day of December, 2013.