December 2013

There’s enough of interest in the North Carolina Court of Appeals’ decision this week in GE Betz, Inc. v. Conrad for five posts. It’s got a couple of good rulings on covenants not to compete, a few points about trade secrets issues, and an interesting matter of a violation of a protective order.  The opinion, a unanimous sixty-four pager written by Judge Robert C. Hunter, is worth reading.

The attorneys’ fee aspect of the case was the most interesting part of the opinion to me.  The trial court awarded $5.77 million in fees to GE Betz, a General Electric subsidiary.  GE Betz had been successful, after trial, on its claims that the Defendants violated G.S. §75-1.1 and misappropriated trade secrets.

Over $3 million of the fees were billed by GE Betz’s prestigious New York-based law firm — Paul Hastings.  The hourly rate of Paul Hasting’s lead counsel ranged from $633.25 to $675.75 during the course of the litigation.  The North Carolina firm that tried the case — Ward & Smith — charged significantly less, at rates between $270 and $390 an hour.  The trial court said that Ward & Smith was "a highly capable and qualified law firm."  Op. 51.

A trial court must make findings regarding the reasonableness of the fees in making an award.  A key factor to be considered is the "customary fees for like work."

The COA recognized that the question whether local rates should be a benchmark for reasonableness was one of first impression.  Judge Hunter said:

our appellate courts have not had occasion to decide whether fees must be awarded in light of the rates typically charged in the geographic region where the litigation takes place.

Op. 48.  He looked to a Fourth Circuit decision which "held that the community where the court sits is “the appropriate starting point for selecting the proper rate.” Nat’l Wildlife Fed’n v. Hanson, 859 F.2d 313, 317 (4th Cir.1988).

Judge Hunter refused to weigh in on whether it was reasonable for GE to hire its out-of-state counsel.  He held:

we decline to adopt a test that forces courts to assess the reasonableness of a litigant’s decision to hire counsel generally.  Parties, including GE, are free to hire as counsel whomever they wish at whatever rates they are willing to pay. The issue is whether the fees awarded against an adverse party are reasonable, not whether it was reasonable for those fees to be incurred by the prevailing party.

Op. 50.

On the issue of the reasonableness of the fees, Judge Hunter observed that "[i]t appears that much of the work performed by Paul Hastings’ attorneys could have just as effectively been performed by local counsel at local rates.  The trial court did not attempt to make this distinction."  Op. 52.  He gave this example:

in April 2007, associate attorneys at Paul Hastings charged $500.00 per hour – double the $250.00 fee charged by attorneys at Ward and Smith – for “factual investigation and development; obtaining and analyzing [c]lient documents; [and] interview[ing] witnesses”. These duties clearly did not require a prior relationship or intimate knowledge of GE’s employment contracts [which was part of GE’s argument as to the reasonableness of the fees], because GE paid the attorneys at Ward and Smith to perform almost identical work during the same time period.

Op. 52-53.

In the end, the COA ruled that it was unreasonable to force the unsuccessful Defendants to pay a fee "that includes rates double those billed in the community where the litigation took place for work that seemingly did not require such a premium."  Op. 53. 

It gently chided GE for its excess, saying that " [u]ltimately, GE’s willingness to pay significantly higher rates for work that they could have procured for much less does not necessitate a finding that those fees are reasonable when awarded against" the Defendants.  Id. 

The case was remanded to the trial court for further findings.


I can think of only three reasons why you might want to know about the Business Court’s decision in Sykes v. Health Network Solutions, 2013 NCBC 53:

  • You are a chiropractor or you live with one.
  • You are fascinated by the subject of the management of health care costs.
  • You are interested in antitrust law.

If you don’t fit those qualifications but are still willing to continue reading, the case is about Plaintiff Sykes’ claim that Defendant HSN violated antitrust laws by fixing prices for chiropractic services through its operation of an "independent practice association" of chiropractors.

If you are already asleep, skip to near the end of this post, under the heading "Why The Injunction Was Denied."

Some Medical Terminology

To start, you’ll need to know some healthcare terminology.  HSN is an IPA (an independent practice association).  Independent chiropractors each enter into a PPA (practitioner participation agreement) with HNS.  HNS negotiates with Payors (insurance companies like Blue Cross/Blue Shield and other third party purchasers of chiropractic services) to establish reimbursement rates for its members.  The chiropractors who are members of the network agree to be reimbursed by the negotiated rates.

HNS follows a QMI (Quality Management and Improvement Plan) to ensure that the services provided by its members are delivered in "the most effective and cost-efficient manner."  Op. Par. 20.

HNS established a maximum allowable average cost per patient for its providers (the chiropractors) of 151% of the HNS network average.  A provider exceeding this benchmark following review per the QMI faces probation, then termination by the network. 

The Antitrust Issues

Sykes contended this practice of controlling chiropractic costs was anti-competitive and illegal.  The illegality argument rested on North Carolina’s insurance laws, which say that a review of a medical provider’s costs must be based solely upon "medical necessity" and performed by a licensed entity.

The Court observed that of the 1,667 chiropractors licensed in North Carolina, 1,006 were HSN members.  Op. ¶16.  Though the Plaintiff’s alleged that HSN had monopoly power, Judge Gale did not reach that issue.

He did rule, however, that the Plaintiffs did not present a case of per se violations, but that he would rule on a future motion to dismiss through a rule of reason analysis.   Op.  ¶57. 

If it has been thirty years since you took antitrust law in law school, here’s q quick refresher.  Some categories of anti-competitive behavior are conclusively presumed to be violations of the antitrust laws, and are known as per se violations. A rule of reason analysis looks at all the surrounding circumstances of the alleged violation to determine whether the practice promotes or represses competition.

Judge Gale held:

[t]he mere presence of price related agreements in the various contracts at issue or exclusion of Plaintiffs from the HNS network do not necessarily lead to anticompetitive findings or per se violations.  Certain price related agreements may be appropriate when necessary to achieve efficiencies that achieve procompetitive effects for consumers.  Others may be so egregious and unaccompanied by other provisions so as to lead to illegality.  But, in appropriate circumstances pricing related agreements may also be a necessary component of a more comprehensive set of undertakings that on the whole lead to beneficial and procompetitive efficiencies.

Op. ¶58.

Judge Gale did not need to plow new ground on whether to follow a rule of reason analysis for the matter before him.  The Federal Trade Commission has taken the position since 2009 that IPAs should be evaluated on a case by case basis, taking into account an array of factors, like:

a definition of the market to which the analysis will be applied, the competitive nature of and the allocation of power within that market, whether the network under attack is an exclusive provider, the degree of sharing of financial risk by network participants, the degree of practice integration to achieve efficiencies or that are instead barriers to efficiencies, and other evidence of other anticompetitive purpose.

Op. ¶61 (quoting U.S. Dep’t of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in Health Care, Statement 8: Enforcement Policy on Physician Network Joint Ventures §B(1)(known as "Policy Statement 8")

The Court ruled that the record before it was not fully developed enough for it to follow the four-step process recommended by Policy Statement 8 in determining the anti-competitive effect of the HSN procedures.  Those steps involve "defining the market; evaluating the competitive effects of the physician joint venture; evaluating the impact of procompetitive efficiencies; and examining collateral agreements.


Why The Injunction Was Denied

One of the Plaintiffs, another chiropractor, was facing termination of his membership in HSN and was seeking an injunction barring his termination.  Since the Complaint of Sykes’ co-Plaintiff, Dr. Lynn, requested money damages, you don’t need to understand antitrust law to see why Judge Gale denied the motion.  He held:

If Dr. Lynn is able to prove that he has suffered a compensable loss, he may be compensated with money damages; indeed, his requested relief is for money damages. (Am. Compl. ¶¶ 169, 174, 179.)While his damages might ultimately be difficult to calculate, the court does not conclude that they are of such a “peculiar nature that compensation in money cannot atone for it.” Hodge , 137 N.C. App. 247, 252, 528 S.E.2d 22, 26 (2000).

Op. ¶66.

Congratulations to my partner Jennifer Van Zant, a renowned antitrust lawyer, for her representation of the Defendants.  Also involved from Brooks Pierce were Ben Norman and Mike Dowling.