On February 19, in a highly-anticipated decision, the Supreme Court awarded the Federal Trade Commission (FTC) a major victory in its case challenging a now-consummated hospital merger in Georgia. The unanimous opinion of the Court, authored by Justice Sotomayor, held that the state-action doctrine, which affords states immunity from the federal antitrust laws, did not shield a Georgia hospital merger from federal antirust scrutiny.
The Supreme Court, in its first antitrust merger case in nearly 30 years, reversed the lower courts' dismissal on state-action grounds of an FTC suit against a merger between the only two hospitals located in Dougherty County, Georgia. The decision allows the FTC to proceed in its suit. Notably, the Court's decision clarifies and arguably narrows the scope of antitrust immunity provided by the state-action doctrine by explaining that to be afforded immunity, states must "clearly articulate" and "affirmatively contemplate" that they are permitting anticompetitive conduct.
The Supreme Court's decision is the latest in a series of victories for both the FTC and the Department of Justice (DOJ) in their increased efforts to challenge mergers they believe threaten competition.
Background
In 1941, the State of Georgia enacted the Hospital Authorities Law. The law created a hospital authority for each major city and county in Georgia and gave those authorities general corporate powers to purchase, sell, lease, and operate hospitals to ensure that medical services are available to the poor in otherwise underserved areas on a nonprofit basis. Subsequently, the Hospital Authority of Albany-Dougherty County (Authority) acquired Phoebe Putney Memorial Hospital (Memorial), which it then leased to its subsidiary Phoebe Putney Health System. In 2010, with the Authority's approval, Phoebe Putney Health System sought to acquire Palmyra Medical Center (Palmyra), the only significant hospital competitor to Memorial in the Dougherty County area. Together, Memorial and Palmyra account for 86 percent of the market for acute-care hospital services in the area.
On April 20, 2011, the FTC issued an administrative complaint and, along with the State of Georgia, filed a federal antitrust lawsuit seeking to enjoin the transaction, alleging that the proposed acquisition would substantially lessen competition in the market for acute-care hospital services. The District Court for the Middle District of Georgia determined that the merger was immune from antitrust liability under the state-action doctrine and dismissed the FTC's complaint.1
State-action immunity insulates states from federal antitrust liability. The immunity extends to an instrumentality of the state (e.g., a municipality, state agency or political subdivision) if it can demonstrate that the state has both generally authorized it to engage in the challenged action, and "clearly articulated" a state policy displacing competition in favor of other values. To clearly articulate a state policy displacing competition, a state need not "expressly state in a statute or its legislative history that the legislature intends for the delegated action to have anticompetitive effects."2 Instead, the Supreme Court has held that state-action immunity applies if the anticompetitive effect was the "foreseeable result" of the state legislation.3
Although the 11th Circuit agreed with the FTC's claim that the hospital merger would result in a monopoly, the court held that the acquisition was protected by the state-action doctrine. The court reasoned that in granting the power to hospital authorities to acquire hospitals, the legislature had expressed a clear intent to displace competition in hospital services because it "must have anticipated" that such acquisitions could result in monopoly power or other anticompetitive effects. Accordingly, the court held that the challenged anticompetitive conduct was the "foreseeable result"4 of Georgia's Hospital Authorities Law, and thus immune from antitrust liability under the state-action doctrine. The FTC, joined by the Antitrust Division of the DOJ, petitioned the Supreme Court to hear the case.
The Supreme Court's Decision
The Supreme Court ruled that state-action antitrust immunity does not apply to the Georgia hospital merger because the State of Georgia has not "clearly articulated" and "affirmatively expressed" a policy allowing hospital authorities to make acquisitions that substantially lessen competition.
The Court determined that Georgia's Hospital Authorities Law failed the "clear-articulation" test because there was "no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership." Although the Authority's powers, including its acquisition and leasing powers, are similar to general powers routinely conferred by state law on private corporations, the Court said that state-law authority to act is insufficient to establish state-action antitrust immunity. Rather, the Court explained that the Authority must show that it has been delegated power not just to act, but to "act or regulate anticompetitively."
Further, the Court did not accept the argument that because hospital authorities are granted unique powers and responsibilities to fulfill Georgia's objective of providing access to adequate and affordable healthcare, it was foreseeable that the Authority would determine that the best way to serve the community was to acquire an existing local hospital, instead of incurring the additional expense and regulatory burden of expanding or constructing a new hospital. In rejecting this argument, the Court found that nothing in Georgia's Hospital Authorities Law or any other state-law provision clearly articulates a policy allowing authorities to exercise their general corporate powers without regard to anticompetitive effects. Although the Court did not go so far as to require state legislatures to state expressly their intention to replace competition with regulation, the Court did clarify that to be afforded immunity, states must "affirmatively contemplate" the possibility that they are permitting anticompetitive conduct. The Court further explained that a reasonable legislature's ability to anticipate the potentially undesirable possibility of anticompetitive behavior "falls well short of clearly articulating an affirmative state policy to displace competition with a regulatory alternative."
In reaching its decision, the Court stated that the 11th Circuit applied "too loosely" the concept of "foreseeability." The Court explained that "a state policy to displace federal antitrust law was sufficiently expressed where the displacement of competition was the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature." As the Court further noted, "[i]n that scenario, the State must have foreseen and implicitly endorsed the anticompetitive effects as consistent with its policy goals."
Implications
The Supreme Court's unanimous decision is a major win for the FTC and will likely further bolster its active enforcement efforts in the healthcare area. The decision marks yet another hospital merger victory for the FTC, following on its recent successful challenges to hospital mergers (e.g., ProMedica Health System/St. Luke's Hospital5 and OSF Healthcare System/Rockford Health System).6 By narrowing the scope of state-action antitrust immunity, the Court's opinion may also have broader implications. For example, it may affect the agencies' review of state initiatives to facilitate consolidation among healthcare providers and networks to form accountable care organizations in an effort to reduce costs under the new healthcare law. More broadly, outside of the healthcare context, the decision gives both states and parties contemplating public/private collaborations more guidance on the applicability of the state-action doctrine and the antitrust immunity it affords.
Footnotes
1 FTC v. Phoebe Putney Health System, Inc., 793 F. Supp. 2d 1356 (M.D. Ga. 2011).
2 Hallie v. Eau Claire, 471 U.S. 34, 43 (1985).
3 Id. at 42.
4 FTC v. Phoebe Putney Health System, Inc., 663 F.3d 1369, 1375 (11th Cir. 2011).
5 In March 2011, the FTC obtained a preliminary injunction in federal district court to stop ProMedica Health System, Inc. from continuing its post-closing integration of St. Luke's hospital. FTC v. ProMedica Health System, Inc., No. 3:11-cv-00047 (N.D. Oh., 2011). The preliminary injunction halted the transaction pending a full trial on the merits before the FTC's Administrative Law Judge (ALJ). After a full administrative hearing, the ALJ ruled that the merger was anticompetitive and ordered ProMedica to divest St. Luke's Hospital. Initial Decision, ProMedica Health Sys., Inc., No. 9346 (FTC 2011), available at http://www.ftc.gov/os/adjpro/d9346/120105promedicadecision.pdf. The Commission affirmed the ALJ's decision and divestiture order. Op. of the Commission, In the Matter of ProMedica Health Sys., Inc., FTC Docket No. 9346 (2012), available at http://www.ftc.gov/os/adjpro/d9346/120328promedicabrillopinion.pdf. The case is currently on appeal before the 6th Circuit Court of Appeals. ProMedica Health Sys., Inc. v. FTC, No. 12-3583 (6th Cir. 2012).
6 In April 2012, a federal district court granted the FTC's request for a preliminary injunction to stop OSF Healthcare System's proposed acquisition of Rockford Health System. Mem. Op. and Order, FTC v. OSF Healthcare Sys., No. 11-cv-50344 (N.D. Ill. 2012). Subsequently, the parties abandoned the transaction.
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