On February 19, 2013, the United States Supreme Court in Federal Trade Commission v. Phoebe Putney Health System, Inc., et al., unanimously rejected a Georgia state-sanctioned hospital authority’s claim that its acquisition of a competing hospital was immune from antitrust scrutiny under the state-action doctrine, which the Supreme Court recognized in Parker v. Brown back in the 1940s. Under this doctrine, where a local government entity acts pursuant to a clearly articulated and affirmatively expressed state policy to displace competition, such action is exempt from the antitrust laws. The Court held that the hospital authority, a local government entity and a lesser political subdivision of the state, could not claim immunity because Georgia’s Hospital Authorities Act did not clearly and affirmatively express an intent to displace the antitrust laws and allow anticompetitive hospital mergers. The Court reached this conclusion because anticompetitive consequences were not the “foreseeable result” flowing inherently, logically, or ordinarily from the general authority conferred by the state legislature on hospital authorities to acquire hospital facilities and related assets.

Background and Supreme Court Opinion

Two hospitals operate in Dougherty County, Georgia: Palmyra Medical Center (“Palmyra”), a private hospital, and Phoebe Putney Memorial Hospital (“Memorial”), a private nonprofit hospital owned by a local government hospital authority, Albany-Dougherty Hospital Authority (“Authority”). The two hospitals are located just two miles apart and together they allegedly account for 86 percent of the market for acute-care hospital services provided to commercial health care plans and their customers in a six-county radius. In the 1990s, the Authority formed a private non-profit subsidiary, Phoebe Putney Health System, Inc., (“PPHS”), to manage and operate Memorial. Under the arrangement with PPHS, the Authority leased Memorial to PPHS for $1 per year for 40 years. In 2010, PPHS entered into discussions with a private for profit hospital corporation, Hospital Corporation of America (“HCA”), about acquiring its subsidiary, Palmyra. After negotiating a deal with HCA, PPHS presented the Authority with a plan calling for the Authority to purchase Palmyra with PPHS-controlled funds and then lease Palmyra to a PPHS subsidiary for $1 per year under PPHS’s present Memorial lease agreement with the Authority.

In response to this proposed acquisition, the Federal Trade Commission (“FTC”) issued an administrative complaint, alleging that the transaction would create a virtual monopoly, and would substantially reduce competition in the market for acute-care hospital services, in violation of § 5 of the FTC Act. Shortly thereafter, the FTC and the State of Georgia filed suit against the Authority, PPHS, Palmyra, and HCA seeking to enjoin the transaction pending administrative proceedings. The Defendants filed a motion to dismiss, arguing that they had made the acquisition pursuant to powers granted to the Authority in its authorizing statute, and therefore qualified for immunity from antitrust scrutiny under the state-action doctrine. The FTC claimed that state-action doctrine did not apply, and further claimed that the transaction was actually an acquisition of a hospital from a private company, by a private company, and that the Authority was merely a “strawman” used solely to evade antitrust liability.

The United States District Court of the Middle District of Georgia granted the defendants’ motion to dismiss, agreeing that the defendants were immune from antitrust liability under the state-action doctrine. The Eleventh Circuit affirmed. Although the Court of Appeals agreed with the FTC that the transaction would create a virtual monopoly, it affirmed the district court’s conclusion that the state-action doctrine immunized the parties, because the Hospital Authorities Act expressly authorizes hospital authorities in Georgia to acquire hospitals, and that the legislature that passed the Act could have reasonably foreseen that certain acquisitions might narrow or even eliminate competition entirely in certain markets within Georgia. Because the Court dismissed the FTC’s case at the motion to dismiss stage, the lower courts made no findings about whether the acquisition actually would lessen competition.

The Supreme Court’s opinion holds that the state-action doctrine does not apply to a hospital authority’s acquisition of a competing hospital under the Hospital Authorities Law. The Court based this holding on its ruling that the Hospital Authorities Law did not “clearly articulate” and “affirmatively express” a state policy to displace competition in the market for hospital services. The Court applied its two-prong test articulated in California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc.: that the challenged conduct must (1) be clearly articulated and affirmatively expressed as state policy, and (2) be actively supervised by the State. Local government actors, such as the Authority, generally do not need to satisfy the active supervision prong of the Midcal test. But they still need to satisfy the “clear articulation” prong to establish state-action immunity. While the legislature does not need to state explicitly in a statute or its legislative history that it intends or expects the authorized activity to have anticompetitive effects, such effects must be the “foreseeable result” of whatever action the state authorized.

The Court concluded that while the Hospital Authorities Act authorizes the Authority to acquire other hospitals, it does not clearly articulate and affirmatively express a state policy empowering the Authority to engage in merger and acquisition activities that will substantially lessen competition. Unlike a state authority, a local governmental entity, like the Authority, must show that it has been delegated authority to act in an anticompetitive manner. Mere authority to act on its own is insufficient. The Court held that the Act did not delegate such authority to the Authority expressly, and that the anticompetitive effect of the Palmyra acquisition was not foreseeable. The Court analogized it to state statutes conferring general power on private corporations, which unquestionably do not extend state-action protection over any and all acts by a private corporation. The Court concluded that a general grant of authority to acquire other hospitals did not mean anticompetitive effects were the foreseeable result of such acquisition because “only a relatively small subset of the conduct permitted as a matter of state law . . . has the potential to negatively affect competition.”

The Court remanded the case back to the lower courts for further proceedings.

Analysis

This case represents a significant victory for the FTC in two areas it has prioritized: the relaunch of its hospital enforcement efforts in the last few years, following a long absence after a series of significant defeats in the 1990s, and its efforts to narrow the scope of state-action immunity. In an October 2012 speech, former FTC Commissioner J. Thomas Rosch noted that the agency believed that state-action immunity had been impermissibly expanded due to federal courts applying the doctrine in circumstances where a state did not have a “deliberate and intended policy” to curtail competition in a particular area. Presumably, the FTC’s victory here will lead the agency to take a more aggressive stance on hospital acquisitions, which have increased in anticipation of the Affordable Care Act.

The Supreme Court’s decision cuts back on state-action protection for political subdivisions of states. Prior to this decision, state action arguably would extend to any conduct authorized by the state if anticompetitive acts were “reasonably foreseeable.” But according to the Court, “a reasonable legislature’s ability to anticipate that (potentially undesirable) possibility falls well short of clearly articulating an affirmative state policy to displace competition with a regulatory alternative.” Pointing to its earlier state-action decisions, the Court suggested that, in the absence of an express articulation, a state espouses a policy to displace competition in favor of regulation only if anticompetitive consequences are the “inherent, logical, or ordinary result of the exercise of [the] authority delegated by the state legislature.”

Unfortunately, the Court provided little guidance on how to determine whether anticompetitive consequences would inherently, logically, or ordinarily follow from authorized conduct. The opinion provides no practical approach for judging foreseeability. The cases cited in the decision to provide examples of situations meeting the foreseeability requirement do not help much in drawing a line between foreseeable and unforeseeable consequences. The Court, in essence, has set out a “we know it when we see it” approach.

The opinion suggests that merely anticipating some anticompetitive consequences in a small portion of events will not be enough to establish foreseeability. The Court seems to be steering towards a quantitative approach, which would require not just that authorized conduct was likely to result in anticompetitive consequences, but that it would do so in a substantial number of all cases. The ambiguity that remains regarding how to identify the circumstances in which anticompetitive effects would logically result from the authorized conduct will create uncertainty in circumstances in which a state does not expressly state its policy.

One thing is certain – the decision will make it more difficult for both local government actors and private parties to establish entitlement to state-action immunity.

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