Supreme Court Issues Landmark Ruling in Hospital Merger Case on Scope of State Action Immunity

20 February 2013 Publication
Authors: H. Holden Brooks Benjamin R. Dryden Alan D. Rutenberg J. Mark Waxman

Legal News Alert: Antitrust

On February 19, 2013, the U.S. Supreme Court unanimously ruled that a local hospital authority’s acquisition of a hospital in Georgia was not immunized from the antitrust laws under the state action doctrine. In doing so, the Supreme Court overturned decisions by a federal district court and the Eleventh Circuit that would have allowed the transaction to proceed, despite allegations that the merger would have substantially lessened competition. The case, FTC v. Phoebe Putney Health System, Inc., has direct ramifications for the estimated 20 percent of hospitals in the United States that are owned by states and local governments, as well as for all industries in which states and local governments are involved.

The Facts of the Case

In 1941, the state of Georgia passed a Hospital Authorities Law to enable cities and counties to create local hospital authorities to meet the acute-care needs of their citizens. Among the powers given to these local hospital authorities is the power to acquire area hospitals. Pursuant to the Georgia statute, a hospital authority was established for Dougherty County, Georgia, and this Authority acquired the only hospital then operating in the county, Phoebe Putney Memorial.

In 1990, the Authority established a private non-profit company to operate Phoebe Putney Memorial. Under this arrangement, the Authority gave the non-profit a 40-year lease of the hospital for one dollar per year. The non-profit was also given exclusive authority to set rates for Phoebe Putney, subject to certain conditions to ensure the provision of indigent care and to limit the non-profit’s overall rate of return.

Meanwhile, in 1971, a competing hospital called Palmyra Park was established two miles away from Phoebe Putney. Palmyra Park was privately owned and operated. To this day, Phoebe Putney and Palmyra Park remain the only hospitals in Dougherty County, and together they allegedly provide 86 percent of the acute-care hospital services for the surrounding six-county region.

In 2010, the non-profit negotiated a contract to purchase Palmyra Park for approximately $195 million. Purportedly because the parties were aware of the significant antitrust risks of the transaction, the deal was structured so that the local hospital authority would purchase Palmyra Park using funds provided by the non-profit; and then the non-profit would be granted a 40-year lease of Palmyra Park for one dollar per year. The Authority allegedly had no involvement in the negotiations, but after a cursory meeting the Authority duly ratified the proposed plan. Accordingly, the only two competing hospitals in Dougherty County, Georgia, were set to become operated by the same private entity.

The FTC’s Merger Challenge

The FTC and the state of Georgia both challenged the proposed transaction. In parallel with an administrative complaint filed by the FTC, the FTC and Georgia also jointly petitioned the U.S. District Court for the Middle District of Georgia for a preliminary injunction to block the transaction. The court denied the petition, however, and dismissed the complaint on grounds that, as local government actors, the parties to the transaction were immune from federal antitrust liability under the state action doctrine.

The FTC appealed the trial court’s decision to the Eleventh Circuit, which affirmed the dismissal of the case. While the Eleventh Circuit agreed that “on the facts alleged, the joint operation of Memorial and Palmyra would substantially lessen competition,” the court nevertheless found that the transaction constituted state action and, as such, was immune from antitrust review. The Eleventh Circuit emphasized the provision in the Georgia Hospital Authorities Law that gives local hospital authorities the power to acquire hospitals; based on this power, the Eleventh Circuit concluded that the state of Georgia had adopted a policy that envisioned local authorities using acquisitions to create benevolent monopolies. In the Eleventh Circuit’s view, “[i]t defies imagination to suppose the legislature could have believed that every geographic market in Georgia was so replete with hospitals that authorizing acquisitions by the authorities could have no serious anticompetitive consequences.”

Following its decision in favor of the parties to the transaction, the Eleventh Circuit dissolved the injunction that barred the transaction from closing pending appeal. The parties closed the transaction shortly thereafter. Concerned about the broad policy issues the case raised, and a split in the circuits with respect to how Circuit Courts of Appeal might address the same set of facts, the FTC appealed to the Supreme Court. Twenty states filed a joint amicus brief urging the Court to reverse the Eleventh Circuit’s decision, citing a concern that the unintended consequences that could flow from the decision would undermine, rather than advance, the policy decisions of state legislatures.

The Supreme Court’s Decision

The Supreme Court accepted the case with two questions in mind: whether the Georgia Hospital Authorities Law clearly articulates a state policy to displace competition in the market for hospital services; and, if so, whether state-action immunity could otherwise be defeated here in light of the local Authority’s “minimal” involvement in the proposed transaction. Because the Court found that the Georgia Hospital Authorities Law does not clearly articulate a state policy to displace competition, there was no need to address the second issue. The action will now return to the District Court where the FTC will likely seek to unwind the entire transaction.

Writing for a unanimous court, Justice Sotomayor explained the legal standard for evaluating claims of state-action immunity by local government authorities. Under the Supreme Court’s formulation, “immunity will only attach to the activities of local governmental entities if they are undertaken pursuant to a clearly articulated and affirmatively expressed state policy to displace competition.” To pass this “clear articulation” test, a legislature need not affirmatively state in the statutory text that it intends to displace competition by means of a given law; instead, “state-action immunity applies if the anticompetitive effect was the foreseeable result of what the State authorized.”

Turning to the case before it, the Supreme Court held that the Georgia Hospital Authorities Law did not satisfy the “clear articulation” test. While the Court noted that the law authorizes local hospital authorities to acquire hospitals, the Court analogized such a provision to “general corporate powers routinely conferred by state law upon private corporations.” Accordingly, the Court held that merely conferring a local hospital authority with general powers such as the power to acquire hospitals does not, without more, signify that the local hospital authority has the power to acquire hospitals in a manner inconsistent with federal antitrust laws. Stated succinctly, Justice Sotomayor wrote, “simple permission to play in a market” is insufficient to establish state-action immunity.

More broadly, the Supreme Court’s decision stands for the proposition that even where a legislature has granted broad authority to a governmental entity, the application of state-action immunity to the conduct of private entities acting under the authority of that entity is a limited exception, and one that is strongly disfavored absent a clear legislative indication that there was a desire to supplant a competitive marketplace.

The Significance of the Case

The Supreme Court’s decision is notable for a number of reasons, both within the context of hospital mergers and for antitrust law generally. First, as the case represents the Supreme Court’s first major decision in the area of state-action immunity since FTC v. Ticor Insurance Co., 504 U.S. 621 (1992) more than 20 years ago, Phoebe Putney provides guidance in an important area of antitrust law.

Second, the case has broad ramifications for hospitals and other health care providers that are owned and operated by state and local governmental authorities. According to the FTC, approximately 20 percent of the hospitals in the United States are owned by such governmental authorities, and the Supreme Court’s decision should prompt many of them to consider whether they enjoy antitrust immunity. One particular area for consideration is whether such entities may qualify for antitrust immunity for certain authorized activities, but not for others. For example, during oral arguments, counsel for the FTC conceded that the Georgia Hospital Authorities Law’s provisions that authorize the use of tax revenues to subsidize hospital care might give local authorities immunity to set prices for hospital services that would be deemed predatory in other contexts. Thus, under this view (which the Court did not address in its decision), a hospital authority in Georgia might enjoy antitrust immunity for monopolistic pricing decisions but not for monopolistic mergers. Such determinations will require careful judgments by experienced counsel on a case-by-case basis.

Third, the decision may pose practical risks for local authorities that seek to enter into similar transactions in the future. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18A, pre-merger notification and report filings are not required for transfers of assets or securities “to or from . . . a State or political subdivision thereof.” Thus, a consequence of the Supreme Court’s decision is that transactions involving local authorities may be exempt from making a Hart-Scott-Rodino filing, but might still be subject to challenges under the federal antitrust laws. In such cases, parties will have to proceed cautiously, balancing the risks of an unnecessary upfront merger investigation against the risks of facing a merger challenge months or years after the deal has already closed. Indeed, this is quite likely the fate that will befall the parties in this case, as they now likely face FTC efforts to unwind a transaction that has already closed.

Conclusion

The Supreme Court’s decision defines the circumstances under which federal antitrust laws apply to local governmental authorities and the entities they own and operate. Such entities are immune from the federal antitrust laws if and only if state law “clearly articulates” an intention to displace competition through alternative regulatory means. A statute that merely gives local entities powers that are akin to general corporate powers does not meet this standard.

While the Court’s decision provides important guidance to local government entities, a number of practical questions still remain such that it will be interesting to see how lower courts interpret the Phoebe Putney decision in the years ahead.


Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Holden Brooks
Senior Counsel 
Milwaukee, Wisconsin
414.297.5711
hbrooks@foley.com

Benjamin Dryden
Associate 
Washington, D.C.
202.945.6128
bdryden@foley.com

Alan Rutenberg
Chair, Antitrust Practice
Washington, D.C.
202.672.5491
arutenberg@foley.com

David Simon
Partner
Milwaukee, Wisconsin
414.297.5519
dsimon@foley.com

Mark Waxman
Partner
Boston, Massachusetts
617.342.4055
mwaxman@foley.com

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