On November 25 2012 the US Supreme Court heard argument in FTC v Phoebe Putney Health System, its first case on 'state action' immunity under the antitrust laws in 20 years.
In Parker v Brown (1943)(1) the Supreme Court held that when a state requires or regulates a practice, principles of federalism prevent the federal laws from overriding state laws. Several recent Supreme Court cases have further refined the state action doctrine.(2)
Under the state action doctrine, a state must clearly articulate an affirmative policy to allow private parties to act anti-competitively.(3) In addition, the state must actively supervise the anti-competitive activity of the private parties.(4) It must substitute an "adequate system of regulation" and exercise "significant control" over the anti-competitive behaviour.(5) 'Active supervision' includes a review on the merits of a decision, not just on the procedures.(6) The Supreme Court held in Ticor that state action immunity "is disfavored", and that the state must exercise its authority to supervise.(7) Staffing and funding a state regulatory board are insufficient if the board is inactive. 'Negative option' schemes must show that state officials in fact take the necessary steps to supervise any price-fixing schemes.(8)
The Federal Trade Commission (FTC) is the petitioner in the case now pending in the Supreme Court, having lost its argument at the US Court of Appeals for the Eleventh Circuit that the merger of two hospitals in rural Georgia violated the antitrust laws. The acquiring hospital, Phoebe Putney Memorial, is operated by a non-profit corporation created by a regional hospital authority. The target hospital, Palmyra Park Hospital, was privately owned and operated. The FTC's complaint alleged that Phoebe Putney's acquisition of Palmyra created an absolute monopoly that could harm consumers in the region.
Phoebe Putney responded by invoking state action immunity.(9) It argued that its acquisition of Palmyra was outside the reach of the antitrust laws because it had been orchestrated through the regional hospital authority, which is a creature of Georgia state law. Under Georgia's Hospital Authorities Law, hospital authorities have special powers under state law to buy, sell, lease and operate hospitals in order to ensure that medical services are available to the poor in otherwise underserved areas on a non-profit basis. Here, the regional hospital authority acted as the nominal purchaser of Palmyra, which it then promptly transferred to Phoebe Putney through sales and lease agreements.
The Eleventh Circuit agreed that the merger was an authorised and foreseeable result of the Hospital Authorities Law and was therefore outside the reach of the FTC's enforcement authority. In another case brought by the FTC attacking the proposed merger of hospitals in Lee County, Florida, the Eleventh Circuit had previously held that the state action doctrine immunised a hospital merger from antitrust challenge because the Florida legislature foresaw possible anti-competitive effects when it authorised the public hospitals to make acquisitions.(10)
In its petition for certiorari in Phoebe Putney, the FTC made an argument from the law and an argument from the facts. The real question for antitrust practitioners is whether it will be the legal or factual argument that guides the Supreme Court's decision.
The legal argument attacked the Eleventh Circuit's conclusion that the hospital authority's participation in a two-to-one merger was a foreseeable application of its powers under the Hospital Authorities Law. However, according to the FTC, foreseeability is not enough. Citing Community Communications Co v City of Boulder (1982),(11) it argued that a grant of "general corporate powers" to a governmental entity insufficiently expresses the state's intent to displace competition. Rather, the FTC said, such a policy expresses "mere neutrality" towards competition.
For its part, Phoebe Putney has argued that the Hospital Authorities Law makes a targeted grant of authorities for the specific purpose of ensuring that hospital services be available to the poor. To that end, it argued, the Georgia legislature clearly intended that in some markets (eg, in rural areas), the regional authority would have de facto control over the provision of hospital services.
On the law, Phoebe Putney appears to pick up where the court left off in its last two decisions on the state action doctrine. In its 1992 decision in FTC v Ticor Title Insurance, the court adopted a narrow view of immunity, holding that title insurance companies could be sued for price fixing even though their rates had been specifically approved by state regulators. The court held that the states had not exercised their rate-making authority in a way that reflected intent to displace competition in the title insurance market.
Just the year before, however, the court appeared to adopt a more expansive approach to immunity in City of Columbia v Omni Outdoor Advertising (1991),(12) where it concluded that state action immunity shielded a local billboard-company monopolist from liability for allegedly conspiring with the city council to amend its zoning regulations to block the entry of a competitor. The court held that by authorising cities to enact zoning laws, a state authorises cities to pre-empt certain forms of business competition.
The legal dispute between the FTC and Phoebe Putney stems from a stray reference in Omni and Town of Hallie that a court can infer a state's intent to displace competition if anti-competitive actions will "foreseeably result" from the state's policy.
The FTC's argument is basically that bad adjectives such as 'foreseeable' have made bad law, at least in the Eleventh Circuit. The Supreme Court used oral argument, and perhaps will use its opinion in the case, to clarify when foreseeable actions are also intentional. Or it could simply adopt Phoebe Putney's position that a general foreseeability standard is essential to preserve state autonomy, and that no further elaboration of the standard is required.
Antitrust commentators are likely to follow Phoebe Putney closely. However, the FTC has also given the court a number of factual bases for reversal that could help it craft a more limited (and less interesting) ruling.
The paper trail in this case suggests that Phoebe Putney was counselled to use the regional hospital authority to effect the transaction so that it could later claim the benefit of the state action immunity. In other testimony in the record, one executive went so far as to say that the authority had in fact "no authority" over the hospital.
Phoebe Putney has emphasised other facts, such as the benefits of the proposed merger, in terms of increased hospital capacity. The relevance of such facts at this stage is unclear, but they could be relevant to the analysis in any future proceeding on remand if the Eleventh Circuit's decision is reversed.
At oral argument, several members of the court probed the parties on whether the statute at issue adequately authorised anti-competitive mergers or whether the statute was merely a general grant of authority. Some of the justices seemed sceptical of the arguments advanced by the hospital. There were also some questions directed to the issue of whether there was adequate supervision of the proposed merger, although that issue received significantly less attention from the court.
Based on the record in the case, and the justices' scepticism, the Supreme Court might decide not to wade too far into the substance of the legal argument and simply hold that the evidence shows that the use of the hospital authority in this particular way was not foreseeable to the state when it enacted the Hospital Authorities Law. Alternatively, the court could hold that the Eleventh Circuit should have considered whether the state truly has sufficient supervision of the merged entity, as required by Ticor, 324 Liquor Corp and Patrick. A decision is expected by June 2013.
For further information on this topic please contact Janet L McDavid, Neal Katyal or Judy Coleman at Hogan Lovells US LLP by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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(2) See FTC v Ticor Title Ins Co, 504 US 621 (1992); Patrick v Burget, 486 US 94 (1988); Southern Motor Carriers Rate Conference, Inc v United States, 471 US 48 (1985); and California Retail Liquor Dealers Ass'n v Midcal Aluminum, Inc, 445 US 97 (1980).