U.S. Healthcare, Inc. v. Blue Cross Of Greater Philadelphia

U.S. Healthcare, Inc. and its subsidiaries, United States Health Care Systems of Pennsylvania, Inc. and Health Maintenance Organization of New Jersey, Inc. (collectively, "U.S. Healthcare"), appeal from the district court's post-trial entry of judgment in favor of Blue Cross of Philadelphia, its president David Markson, and Pennsylvania Blue Shield (collectively, "Blue Cross/Blue Shield"), directed under Fed.R.Civ.P. 50(b) on U.S. Healthcare's federal and pendent state law claims alleging violations of Sec. 43(a) of the Lanham Act, 15 U.S.C. Sec. 1125(a) (1982), commercial disparagement, defamation and tortious interference with contractual relations. Blue Cross/Blue Shield, in turn, appeals from the entry of judgment on the verdict in favor of U.S. Healthcare on Blue Cross/Blue Shield's counterclaims alleging the same causes of action brought by U.S. Healthcare. Additionally, Blue Cross/Blue Shield appeals the pre-trial dismissal of the abuse of process counts in its counterclaims. We will reverse the grant of the Rule 50(b) motions, the judgment on the verdict in favor of U.S. Healthcare on Blue Cross/Blue Shield's counterclaims and the dismissal of the counts on abuse of process.

These cross appeals arise from a comparative advertising war between giants of the health care industry in the Delaware Valley--U.S. Healthcare on the one side and Blue Cross/Blue Shield on the other. The thrust of these claims is that each side asserts the other's advertising misrepresented both parties' products.

For over fifty years, Blue Cross/Blue Shield operated as the largest health insurer in Southeastern Pennsylvania by offering "traditional" medical insurance coverage.1 Traditional insurance protects the subscriber from "major" medical expenses, with the insurer paying a negotiated amount based upon the services rendered, and the subscriber generally paying a deductible or some other amount. The subscriber has freedom in choosing hospitals and health care providers (i.e., doctors).

In the early 1970's, U.S. Healthcare began providing an alternative to traditional insurance in the form of a health maintenance organization, generically known as an "HMO." An HMO acts as both an insurer and a provider of specified services that are more comprehensive than those offered by traditional insurance. Generally, HMO subscribers choose a primary health care provider from the HMO network who coordinates their health care services and determines when hospital admission or treatment from a specialist is required. Usually, subscribers are not covered for services obtained without this permission or from providers outside this network. By 1986, U.S. Healthcare was the largest HMO in the area, claiming almost 600,000 members.2 During the same period, Blue Cross/Blue Shield experienced a loss in enrollment of over 1% per year, with a large number of those subscribers choosing HMO coverage over traditional insurance, and a majority of those defectors choosing a U.S. Healthcare company.

Blue Cross/Blue Shield considered a number of strategies to regain its market position, including the acquisition of its own HMO.3 In late 1985, in an admitted attempt to compete with HMO, Blue Cross/Blue Shield introduced a new product that it called "Personal Choice," known generically as a preferred provider organization or "PPO." PPO insurance provides subscribers with a "network" of health care providers and hospitals, and generally "covers" subscribers only for services obtained from the network providers and administered at the network hospitals. Subscribers must obtain permission to receive treatment from providers outside the network, and in such instances receive at most only partial coverage.

Thereafter, Blue Cross/Blue Shield consulted with two separate advertising agencies before arriving at a marketing strategy for its new product.4 In July 1986, Blue Cross/Blue Shield launched what it termed a deliberately "aggressive and provocative" comparative advertising campaign calculated "to introduce and increase the attractiveness of its products"--in particular, Personal Choice--at the expense of HMO products. Blue Cross/Blue Shield's campaign, which included direct mailings, as well as television, radio and print advertisements, ran for about six months at a total cost of approximately $2.175 million. According to a Blue Cross memorandum that purported to reflect the directions of Markson, the campaign was designed specifically to "reduce the attractiveness of [HMO]."

The Blue Cross/Blue Shield advertising campaign consisted of eight different advertisements for the print media, seven different advertisements for television, three different advertisements for radio, and a direct mailing including a folding brochure. The eight print advertisements compare the features of HMO and Personal Choice. Seven of the eight represent that with HMO, the subscriber selects a "primary care physician" who, in turn, must give permission before HMO will provide coverage for examination by a specialist. (The eighth print advertisement simply states that with Personal Choice, the subscriber may be examined by a specialist whenever he chooses, without "permission.") After describing HMO's referral procedure, however, three of the eight print advertisements--as well as the brochure--say the following:

You should also know that through a series of financial incentives, HMO encourages this doctor to handle as many patients as possible without referring to a specialist. When an HMO doctor does make a specialist referral, it could take money directly out of his pocket. Make too many referrals, and he could find himself in trouble with HMO.5

One of the print advertisements and the brochure also feature a senior citizen under the banner heading "Your money or your life," juxtaposed with Blue Cross/Blue Shield's description of "The high cost of HMO Medicare."

Of the seven television advertisements run by Blue Cross/Blue Shield, four are innocuous, mentioning HMO only in the closing slogan common to all seven of the ads: "Personal Choice. Better than HMO. So good, it's Blue Cross and Blue Shield." The fifth features an indignant every man, who simply states "I resent having to ask my HMO doctor for permission to see a specialist," before a spokesperson extols the benefits of Personal Choice without reference to HMO until, again, the closing slogan. The sixth features a cab driver who says, "I don't like those HMO health plans. You get one doctor, no choice of hospitals," before a shopper tells him about the virtues of Personal Choice--again, without reference to HMO until the closing slogan. The seventh television advertisement used by Blue Cross/Blue Shield, while following the same general format, seems to us a dramatic departure from the others in that it appears consciously designed to play upon the fears of the consuming public. The commercial features a grief-stricken woman who says, "The hospital my HMO sent me to just wasn't enough. It's my fault." The implication of the advertisement is that some tragedy has befallen the woman because of her choice of health care.

The three radio advertisements of Blue Cross/Blue Shield compare the features of HMO and Personal Choice. All represent that HMO limits choice of hospitals and physicians and requires plan permission to see a specialist, but that Personal Choice provides unlimited choice of network hospitals and physicians and affords unrestricted access to specialists.

U.S. Healthcare responded immediately to Blue Cross/Blue Shield's promotional campaign. Within a week, U.S. Healthcare filed suit in Philadelphia County Court of Common Pleas alleging commercial disparagement, defamation and tortious interference with contractual relations. U.S. Healthcare also issued concurrent press releases describing the basis of the litigation. In addition, the company embarked upon its own aggressive, comparative advertising blitz.

The responsive advertising campaign, which began sometime after the Blue Cross/Blue Shield campaign and ran until late February 1987, cost $1.255 million. U.S. Healthcare's campaign consisted of five different advertisements for the print media, four different television advertisements, and two different radio advertisements. Of these, two advertisements were adapted for all three media as a response to Blue Cross/Blue Shield's most serious criticisms.

The first of these multi-media advertisements--apparently attempting to counteract the Blue Cross/Blue Shield message that HMO doctors sacrificed quality of care for higher profit--emphasizes the length to which U.S. Healthcare will go to provide its subscribers with the best treatment available. It features an HMO doctor with a little girl who, it quickly becomes apparent, is both very healthy and a former HMO patient. While the exact text varies according to the medium, all versions feature the HMO doctor saying that this girl, who required a unique wrist operation, was sent to Baltimore to be operated on by "the best [surgeon] in the country" rather than one of HMO's fine surgeons.

The second multi-media advertisement addresses HMO's practice of allowing examination by specialists only when the subscriber is referred by his primary care physician. The advertisement features just such a physician, explaining that the purpose of a primary care physician is to help the subscriber decide what type of specialist should be consulted, so that the subscriber can be sure of receiving the treatment he needs. Neither multi-media advertisement makes any reference to Blue Cross/Blue Shield.

U.S. Healthcare's responsive campaign did not just highlight the positive characteristics in its own product, but also featured "anti-Blue Cross" advertisements. Of the three remaining print advertisements, one simply shows a comparative list of the features available under HMO and Personal Choice, with a banner heading that reads "It's your choice." The other two explain that under Personal Choice, the number of hospitals available to the subscriber is limited and, moreover, that many Personal Choice doctors do not have admitting privileges at even those few. One of these advertisements ran under a banner heading of "When it Comes to Being Admitted to a Hospital, There's Something Personal Choice May Not Be Willing to Admit"; the other ran under a banner heading of "If You Really Look Into 'Personal Choice,' You Might Have a Better Name For It."

One of the two remaining television advertisements shows a person flipping through the Hospitals and Physicians Directory of Personal Choice, pointing out the "gray area" of physicians without admitting privileges--essentially making the same point as the two print advertisements. The final television commercial was U.S. Healthcare's own attempt to play upon the fears of the consuming public. As solemn music plays, the narrator lists the shortcomings of Personal Choice while the camera pans from a Personal Choice brochure resting on the pillow of a hospital bed to distraught family members standing at bedside. The advertisement closes with a pair of hands pulling a sheet over the Personal Choice brochure.

Thereafter, U.S. Healthcare re-filed its state claims in federal court in the Eastern District of Pennsylvania, adding its Sec. 43(a) Lanham Act claim.6 Federal subject matter jurisdiction was premised on the assertion of a federal question, 28 U.S.C. Sec. 1331 (1982), and on claims of unfair competition, 28 U.S.C. Sec. 1338(a) (1982). Pendant jurisdiction was exercised over the state law claims. Blue Cross/Blue Shield counterclaimed on the same theories of liability, while also alleging abuse of process and malicious use of process. Before trial, the district court dismissed the abuse of process and malicious use of process counts in Blue Cross/Blue Shield's counterclaims.

After a fourteen-day trial, followed by eight days of deliberations, the jury announced it was deadlocked on all issues of liability and damages. The district court declared a mistrial and then, before excusing the jurors, invited them to share their thoughts on the case for the benefit of the lawyers. It became apparent that, with regard to the counterclaims, the jurors were not far from unanimity. Consequently, the district court sent the jury back to deliberate whether Blue Cross/Blue Shield could recover damages on its counterclaims. Only then did the jury return a verdict against Blue Cross/Blue Shield on its counterclaims. The district court thereafter entered judgment for U.S. Healthcare on the counterclaims and scheduled a new trial on U.S. Healthcare's own claims.

The case was never retried. Instead, Blue Cross/Blue Shield filed a motion under Fed.R.Civ.P. 50(b) requesting the court to direct entry of judgment in its favor, on the grounds that the advertisements were entitled to heightened constitutional protection under the First Amendment, and that U.S. Healthcare had not met the applicable standard of proof, set forth in New York Times Co. v. Sullivan, 376 U.S. 254, 84 S.Ct. 710, 11 L.Ed.2d 686 (1964), et seq. The district court granted the motion. U.S. Healthcare, Inc. v. Blue Cross, No. 86-6452, 1988 WL 21830 (E.D.Pa. Mar. 7, 1988). The court held that because the objects of the advertisements are "public figures," and because the matters in the advertisements are "community health issues of public concern," heightened constitutional protections attach to this speech. The court reasoned that the First Amendment limited the power of the state and of Congress to award damages resulting from the allegedly false and misleading advertisements. Accordingly, the district court held that in order to prevail on their respective claims of Lanham Act violation, commercial disparagement, defamation and tortious interference with contract, both parties were required to prove each claim by clear and convincing evidence: (1) that the other side published the advertisements with knowledge or with reckless disregard of their falsity, and (2) that the advertisements were false. Applying this standard of proof, the court concluded that "[a]lthough the jury could reasonably have concluded that both sides had proven falsity and actual malice by a preponderance of the evidence, neither side has presented clear and convincing evidence [of this]."

This appeal followed.

THE ACTIONABLE CLAIMS AND COUNTERCLAIMS UNDER APPLICABLE

We note initially that federal law governs the substantive issues of the parties' Lanham Act claims, while Pennsylvania law governs the commercial disparagement, defamation and tortious interference with contract claims. Although the district court granted the Rule 50(b) motions on constitutional grounds, we must first determine whether the statements are actionable under the substantive law governing the case before addressing whether the First Amendment prohibits the imposition of liability, since a determination of the former may obviate the need to examine the latter. See McDowell v. Paiewonsky, 769 F.2d 942, 945 (3d Cir.1985); Avins v. White, 627 F.2d 637, 642 (3d Cir.), cert. denied, 449 U.S. 982, 101 S.Ct. 398, 66 L.Ed.2d 244 (1980); Steaks Unlimited, Inc. v. Deaner, 623 F.2d 264, 270 (3d Cir.1980). Furthermore, Blue Cross/Blue Shield argues that the "challenged advertisements are not actionable regardless of the standard of proof."7 Therefore, we turn to the federal and state substantive law governing the parties' claims to determine whether there might exist a genuine issue of material fact.

A. Applicable Federal and Pennsylvania Common Law.

As a threshold matter, we note that the burden of proof for the applicable substantive law is a preponderance of the evidence. On appeal, the parties contest the burden of proof on the Lanham Act claim only. Unless New York Times applies, the burden of proof here is a preponderance of the evidence.

1. Section 43(a) of The Lanham Act.

Section 43(a) of the Lanham Act, 15 U.S.C. Sec. 1125(a) (1988), which was recently amended, creates a cause of action for any false description or representation of a product.8 This proscription extends to misleading descriptions or representations. Id.; see Ames Publishing Co. v. Walker-Davis Publications, Inc., 372 F.Supp. 1, 11 (E.D.Pa.1974); see also McNeilab, Inc. v. Bristol-Myers Co., 656 F.Supp. 88, 90 (E.D.Pa.1986). "While it has been stated that a failure to disclose facts is not actionable under Sec. 43(a), it is equally true that a statement is actionable under Sec. 43(a) if it is affirmatively misleading, partially incorrect, or untrue as a result of failure to disclose a material fact." 2 J. McCarthy, Trademarks and Unfair Competition Sec. 27:7B (2d ed. 1984).

The pre-amendment version, which controlled when the district court considered the matter, applied only to statements made by a defendant about its own products, not to statements about the plaintiff's products. Eden Toys, Inc. v. Florelee Undergarment Co., 697 F.2d 27, 37 (2d Cir.1982); Bernard Food Indus., Inc. v. Dietene Co., 415 F.2d 1279, 1283 (7th Cir.1969), cert. denied, 397 U.S. 912, 90 S.Ct. 911, 25 L.Ed.2d 92 (1970). As amended, however, Sec. 43(a) encompasses statements made by a defendant about "his or her or another person's " products. 15 U.S.C.1125(a) (emphasis added).9

When analyzing a challenged advertisement, the court first determines what message is conveyed. Plough, Inc. v. Johnson & Johnson Baby Prods. Co., 532 F.Supp. 714, 717 (D.Del.1982); McCarthy Sec. 27:7B. Sometimes this determination may be made from the advertisement on its face. Stiffel Co. v. Westwood Lighting Group, 658 F.Supp. 1103, 1110 (D.N.J.1987); e.g., Ames Publishing, 372 F.Supp. at 12. Nonetheless, "[c]ontext can often be important in discerning the message conveyed." Plough, 532 F.Supp. at 717.

After determining the message conveyed, the court must decide whether it is false or misleading. Stiffel, 658 F.Supp. at 1110; McCarthy Sec. 27:7B; see Plough, 532 F.Supp. at 717. Mere puffing, advertising " 'that is not deceptive for no one would rely on its exaggerated claims,' " is not actionable under Sec. 43(a). Toro Co. v. Textron, Inc., 499 F.Supp. 241, 253 n. 23 (D.Del.1980) (quoting 1 R. Callmann, Unfair Competition, Trademarks and Monopolies Sec. 19.2(b)(2) (3d ed. 1967 & 1979 Supp.)). If the advertisement is literally true, the plaintiff "must persuade the court that the persons 'to whom the advertisement is addressed' would find that the message received left a false impression about the product." Id. at 251 (citation omitted); see Stiffel, 658 F.Supp. at 1110. Finally, establishing lack of substantiation of defendant's claim is insufficient without also establishing falsity or deception. Toro, 499 F.Supp. at 253.

The plaintiff must also show that defendant's misrepresentation is " 'material, in that it is likely to influence the purchasing decision.' " Id. at 251 (citation omitted); see McCarthy Sec. 27:4D. However, "there is no requirement that the falsification occur wilfully and with intent to deceive." Parkway Baking Co. v. Freihofer Baking Co., 255 F.2d 641, 648 (3d Cir.1958).

Next, Sec. 43(a) requires that the defendant use the false or misleading description or representation "in commerce." 15 U.S.C. Sec. 1125(a); see SK & F, Co. v. Premo Pharmaceutical Laboratories, Inc., 625 F.2d 1055, 1065 (3d Cir.1980). The commerce requirement has been broadly interpreted. McCarthy Sec. 27:6C.

Finally, Sec. 43(a) provides a remedy to one who "is or is likely to be damaged by [the false or misleading description or representation]." 15 U.S.C. Sec. 1125(a). To recover damages, a plaintiff must show that the "falsification [or misrepresentation] actually deceives a portion of the buying public." Parkway Baking, 255 F.2d at 648; Walker-Davis Publications, Inc. v. Penton/IPC, Inc., 509 F.Supp. 430, 435 (E.D.Pa.1981) (citing Parkway Baking ). "This does not place upon the plaintiff a burden of proving detailed individualization of loss of sales. Such proof goes to quantum of damages and not to the very right to recover." Parkway Baking, 255 F.2d at 648.

Judge Pollak has summarized well this area of the law in the following test:

1) that the defendant has made false or misleading statements as to his own product [or another's]; 2) that there is actual deception or at least a tendency to deceive a substantial portion of the intended audience; 3) that the deception is material in that it is likely to influence purchasing decisions; 4) that the advertised goods travelled in interstate commerce; and 5) that there is a likelihood of injury to the plaintiff in terms of declining sales, loss of good will, etc.

Max Daetwyler Corp. v. Input Graphics, Inc., 545 F.Supp. 165, 171 (E.D.Pa.1982) (citing American Home Prods. Corp. v. Johnson & Johnson, 577 F.2d 160, 165-66 (2d Cir.1978)).

2. Defamation.

Under Pennsylvania law, a defamatory statement is one that " 'tends so to harm the reputation of another as to lower him in the estimation of the community or to deter third persons from associating or dealing with him.' " Birl v. Philadelphia Elec. Co., 402 Pa. 297, 303, 167 A.2d 472 (1960) (quoting Restatement of Torts Sec. 559 (1938)); accord Thomas Merton Center v. Rockwell Int'l Corp., 497 Pa. 460, 464, 442 A.2d 213 (1981), cert. denied, 457 U.S. 1134, 102 S.Ct. 2961, 73 L.Ed.2d 1351 (1982). It is for the court to determine, in the first instance, whether the statement of which the plaintiff complained is capable of a defamatory meaning; if the court decides that it is capable of a defamatory meaning, then it is for the jury to decide if the statement was so understood by the reader or listener. Corabi v. Curtis Publishing Co., 441 Pa. 432, 442, 273 A.2d 899 (1971). To ascertain the meaning of an allegedly defamatory statement, the statement must be examined in context. Baker v. Lafayette College, 516 Pa. 291, 296, 532 A.2d 399 (1987).

The test is the effect the [statement] is fairly calculated to produce, the impression it would naturally engender, in the minds of the average persons among whom it is intended to circulate. The words must be given by judges and juries the same signification that other people are likely to attribute to them.

Corabi, 441 Pa. at 447, 273 A.2d 899 (citation omitted). Opinion that fails to imply underlying defamatory facts cannot support the cause of action. Baker, 516 Pa. at 297, 532 A.2d 399.

In an action for defamation, the plaintiff has the burden of proving 1) the defamatory character of the communication; 2) its publication by the defendant; 3) its application to the plaintiff; 4) an understanding by the reader or listener of its defamatory meaning; and 5) an understanding by the reader or listener of an intent by the defendant that the statement refer to the plaintiff. 42 Pa. Cons. Stat. Sec. 8343(a)(1)-(5) (1988). Additionally, in order to recover damages, the plaintiff must demonstrate that the statement results from fault, amounting at least to negligence, on the part of the defendant. Geyer v. Steinbronn, 351 Pa.Super. 536, 554-55, 506 A.2d 901 (1986); Rutt v. Bethlehems' Globe Publishing Co., 335 Pa.Super. 163, 186, 484 A.2d 72 (1984); 42 Pa. Cons. Stat. Sec. 8344 (1988). Finally, the plaintiff has the burden of proving any special harm resulting from the statement. 42 Pa. Cons. Stat. Sec. 8343(a)(6) (1988); see Restatement of Torts Sec. 575 comment b (defining special harm).

The defendant, in turn, can defend against a defamation action by proving the truth of the statement,10 that the subject matter of the statement was of public concern, or that the occasion on which the statement was made or published was of privileged character.11 Spain v. Vicente, 315 Pa.Super. 135, 140, 461 A.2d 833 (1983); 42 Pa. Cons. Stat. Sec. 8343(b) (1988); cf. Corabi, 441 Pa. at 450 n. 6, 273 A.2d 899. When the last of these defenses is raised, the burden shifts to the plaintiff to show abuse of the conditionally privileged occasion. Baird v. Dun & Bradstreet, Inc., 446 Pa. 266, 275, 285 A.2d 166 (1971); Rutt, 335 Pa.Super. at 186-87, 484 A.2d 72; 42 Pa. Cons. Stat. Sec. 8343(a)(7) (1988).

3. Commercial Disparagement.

A commercially disparaging statement--in contrast to a defamatory statement--is one "which is intended by its publisher to be understood or which is reasonably understood to cast doubt upon the existence or extent of another's property in land, chattels or intangible things, or upon their quality, ... if the matter is so understood by its recipient." Menefee v. Columbia Broadcasting Sys., Inc., 458 Pa. 46, 54, 329 A.2d 216 (1974) (quoting Restatement of Torts Sec. 629 (1938)). In order to maintain an action for disparagement, the plaintiff must prove 1) that the disparaging statement of fact is untrue or that the disparaging statement of opinion is incorrect; 2) that no privilege attaches to the statement; and 3) that the plaintiff suffered a direct pecuniary loss as the result of the disparagement. See Menefee, 458 Pa. at 53, 329 A.2d 216 (quoting Restatement of Torts introductory note to Chapter 28).

The distinction between actions for defamation and disparagement turns on the harm towards which each is directed. An action for commercial disparagement is meant to compensate a vendor for pecuniary loss suffered because statements attacking the quality of his goods have reduced their marketability, while defamation is meant protect an entity's interest in character and reputation. In Menefee, the Pennsylvania Supreme Court made the following observation:

One of the most important purposes for which liability for the publication of matter derogatory to another's personal reputation is imposed is to enable the person defamed to force his accuser into open court so that the accusation, if untrue, may be branded as false by the verdict of a jury. The action for disparagement has no such purpose and cannot be used merely to vindicate one's title to or the quality of one's possessions....

Id. (quoting Restatement of Torts introductory note to Chapter 28).

Given the similar elements of the two torts, deciding which cause of action lies in a given situation can be difficult. The Court of Appeals for the Eighth Circuit gave the following time-honored explanation of when impugnation of the quality of goods crosses the line from disparagement of products to defamation of vendors:

[W]here the publication on its face is directed against the goods or product of a corporate vendor or manufacturer, it will not be held libelous per se as to the corporation, unless by fair construction and without the aid of extrinsic evidence it imputes to the corporation fraud, deceit, dishonesty, or reprehensible conduct in its business in relation to said goods or product.

National Ref. Co. v. Benzo Gas Motor Fuel Co., 20 F.2d 763, 771 (8th Cir.), cert. denied, 275 U.S. 570, 48 S.Ct. 157, 72 L.Ed. 431 (1927).

An examination of state court decisions indicates that Pennsylvania law tracks the National Refining distinction. See, e.g., Cosgrove Studio and Camera Shop, Inc. v. Pane, 408 Pa. 314, 319, 182 A.2d 751 (1962) (defamation action lay when competitor's advertisement accused plaintiff of using unnecessary haste and unskilled workmanship in development of customers' film, resulting in its ruin, and implied plaintiff was dishonest in its business practice by inflating prices); Will v. Press Publishing Co., 309 Pa. 539, 544, 164 A. 621 (1932) (defamation action lay for accusation that plaintiff did not pay accounts of his business, as words implied dishonesty); Pfeifly v. Henry, 269 Pa. 533, 535, 112 A. 768 (1921) (defamation action lay for statement that plaintiff miller dishonestly weighed flour he sold); see also Steaks Unlimited, Inc. v. Deaner, 623 F.2d 264, 271 (3d Cir.1980) (news report that plaintiff