Tag: FTC v Phoebe Putney Health System

Supreme Court Clarifies Antitrust Immunity For State-Sanctioned Conduct

Bracewell & Giuliani Logo

On February 19, 2013, the U.S. Supreme Court, in a unanimous decision, found that a merger of two Georgia hospitals was not immune from federal antitrust laws under the “state-action” exemption, reversing a decision of the Eleventh Circuit Court of Appeals. The Supreme Court’s ruling has implications for activities of local governmental entities, such as counties and municipalities, as well as private actors exercising authority delegated by a state.

In this case, Federal Trade Commission v. Phoebe Putney Health System, Inc.,1 the Hospital Authority of Albany-Dougherty County (Authority), a non-profit entity formed by the city of Albany and Dougherty County pursuant to Georgia law, owned and operated Phoebe Putney Memorial Hospital.  In 2010, the Authority authorized the purchase of the only other hospital in Dougherty County, Palmyra Medical Center. The Federal Trade Commission (FTC) sought to block the merger on the grounds that it would create a virtual monopoly and would substantially lessen competition in the market for acute-care hospital services, in violation of Section 5 of the Federal Trade Commission Act and Section 7 of the Clayton Act. Both the federal district court and the Eleventh Circuit denied the FTC’s request for an injunction, finding that the state-action doctrine immunized the merger from antitrust liability.

The state-action doctrine, which was first recognized by the U.S. Supreme Court in Parker v. Brown,2 exempts from the federal antitrust laws actions by a state acting in its sovereign capacity. The doctrine was subsequently expanded to cover subdivisions of a state, such as municipalities and other local governmental entities which, although not sovereign, are immune from federal antitrust scrutiny if their activities are undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition. Even anticompetitive actions of private parties implementing state policy may be entitled to immunity if the “clear articulation” requirement is met and the policy is “actively supervised” by the state itself.3

To pass the “clear articulation” test, a state legislature need not expressly state an intention for a delegated action to have anticompetitive effects. Rather, state-action immunity applies if the anticompetitive effect was the “foreseeable result” of what the state authorized.  The Eleventh Circuit found that, because the Authority was granted broad corporate powers, including power to acquire and lease hospitals, anticompetitive conduct by the Authority must have been reasonably anticipated by the Georgia Legislature and therefore was foreseeable.

The Supreme Court disagreed.  Writing for the Court, Justice Sonia Sotomayor noted at the outset that “state-action immunity is disfavored.” The Court held that the Eleventh Circuit applied the concept of foreseeability too loosely and that the “clear articulation” standard is met only where anticompetitive effects are the “inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” More specifically, the Supreme Court said that grants of general corporate power to substate governmental entities, such as the Authority, do not meet the “clear articulation” requirement for state-action immunity. The acquisition and leasing powers exercised by the Authority mirror general powers routinely conferred by state law upon private corporations and are typically used in ways that raise no antitrust concerns. As a result, a state that has delegated such general powers cannot be said to have contemplated that they will be used to displace competition, for example, by consolidating ownership of hospitals.

The Supreme Court did acknowledge that public, non-profit entities like the Authority differ materially from private corporations that offer hospital services. However, neither the Georgia Legislature’s objective of improving access to affordable health care, nor the Authority’s non-profit status, logically suggested that the State intended hospital authorities to pursue their goals through anticompetitive mergers. Even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, such as the Legislature’s certificate of need requirement, did not mean the State affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related.

The Supreme Court’s decision narrows the scope of state-action immunity and has implications for conduct of local governmental entities as well as private actors, not only involving mergers and acquisitions in the health care sector, but also in other contexts and other industries. This was noted by the FTC, which issued astatement praising the Court’s opinion and stating that it “will ensure competition in a variety of other industries, as well.” Entities acting under existing state legislation may need to re-evaluate whether the statutes that empower them offer immunity from federal antitrust scrutiny. Even legislation that explicitly allows some activities that might be anticompetitive may now need to be read more carefully. Parties seeking to get new legislation passed to protect certain conduct that may displace competition now have a clearer roadmap for the degree of specificity required in the statutory language.

1 568 U.S. ___ (2013).

2 317 U.S. 341 (1943).

3 Local governmental entities are not subject to the “active state supervision” requirement because they have less of an incentive to pursue their own self-interest under the guise of implementing state policies.

© 2013 Bracewell & Giuliani LLP

Supreme Court to Hear Arguments on Contours of “State Action” Exemption to Antitrust Laws

The National Law Review recently published an article by Steven J. Cernak of Schiff Hardin LLP regarding an upcoming Supreme Court Hearing:

 

On November 26, 2012, the U.S. Supreme Court will hear arguments in the only case this term to squarely raise antitrust issues. The case, FTC v. Phoebe Putney Health System, Inc., raises several issues related to the “state action” exemption to the federal antitrust laws. This case, along with another Federal Trade Commission (“FTC”) matter involving a North Carolina dental board on appeal in the 4th Circuit, should provide clearer antitrust guidance to doctors, dentists, lawyers, accountants and others arguably acting under the authority of a state, such as through licensure boards.

Since 1941, Georgia law has allowed counties to create hospital authorities to acquire and run hospitals. The Hospital Authority of Albany-Dougherty County was established immediately after the law’s passage and shortly thereafter acquired Phoebe Putney Memorial Hospital. The Authority has run the hospital ever since, the last several years through two wholly-owned subsidiaries. In 2010, the Authority gave permission for one of the subsidiaries to negotiate the purchase of the other hospital in the county, Palmyra Medical Center, from a private entity. The negotiations were successful and the Authority approved the transaction late in 2010.

In April 2011, the FTC initiated an administrative challenge to the acquisition as an anti-competitive merger and sought a preliminary injunction in district court. Both the district court and 11th Circuit denied the injunction request under the “state action” exemption to the antitrust laws. In particular, both courts found that the Georgia law’s delegation of powers to hospital authorities, including the power to acquire other hospitals, was a “clear articulation” of a policy to displace competition because such mergers were a “foreseeable result” of the legislation. Neither court thought that having the acquisition made through the Authority’s private subsidiaries precluded application of the exemption.

The Supreme Court has held that actions by a state as a sovereign trump the federal antitrust laws. Subdivisions of a state such as the Authority, however, are not sovereign and their actions are immune from prosecution under the antitrust laws only if the state legislature “clearly articulated” a policy to displace competition. If private parties are implementing that policy, they must be “actively supervised” by the state itself.

In this case, the FTC objects to a finding of a “clear articulation” where the action being challenged is just a “foreseeable result” of the state action. Instead, the FTC urges the Court to require that the clear articulation be made explicitly and clearly by the legislature or that the anti-competitive effect be a “necessary” or “inherent” effect of the state action. The FTC also believes that these private hospital parties were not “actively supervised”. The Authority and Phoebe parties respond that the lower courts’ “foreseeable results” standard was correct and correctly applied. In addition, the Authority and Phoebe parties argue that the “active supervision” prong is not necessary here because either 1) the Authority, not the hospitals, was taking the action; or, if rejected, 2) the hospitals were agents of the state-created Authority.

The case has attracted several amicus briefs. Perhaps the most important comes from the American Medical Association urging the Court not to rule in this case in such a way that the state action doctrine would not be available to state or local medical licensure boards that contained competitors. Here, the AMA is referring to another current FTC challenge to allegedly anti-competitive actions by a state-sponsored health care agency, this one involving a North Carolina dental licensure board with private dentist members. That case has been fully briefed for the 4th Circuit but oral argument has not yet been scheduled. These two cases are the latest examples of a decade-long effort by the FTC to obtain clear guidance from the courts on the limits of the state action exemption.

Clients acting at the behest of a governmental entity — such as serving on the local licensure board for insurance, real estate or other professionals — need to be aware of the current limits to the state action doctrine and the possibility that those limits might be further explained by the Court in this case.

© 2012 Schiff Hardin LLP