The issue raised in the title of this article should interest any private party that contracts with public entities. The immunity would indeed be hollow if such contracts could be tangentially attacked by holding the private contracting party liable for violations of the antitrust laws, while immunizing the public contracting party. On the other hand, private parties should not be free to violate the antitrust laws under the protective cloak of a contract with a public entity.

In Lafaro v. New York Cardiothoracic Group, PLLC,1 the issue was raised regarding whether the state action immunity that immunizes a public entity’s contracts from antitrust scrutiny extends to their private party contracting partners. The U.S. Court of Appeals for the Second Circuit vacated and remanded an order that dismissed, on the basis of state action immunity, the claims of a group of cardiothoracic surgeons that challenged an exclusive contract between a public hospital and a private group of cardiothoracic surgeons that competed with the plaintiff surgeons, and the private parties’ conduct pursuant to the contract.

State action immunity was established more than 60 years ago in Parker v. Brown,2 when the Supreme Court held that a state acting in its sovereign capacity is not subject to the federal antitrust laws. Further, a state subdivision (such as a public corporation operating a hospital) also enjoys state action immunity “when it acts pursuant to a ‘clearly articulated and affirmatively expressed’ state policy that authorizes its actions.”3 The “clearly articulated” standard is met if the subdivision’s anticompetitive conduct is a “foreseeable consequence” of the state delegation of authority.4

At issue in Lafaro was an exclusive agreement (the “Agreement”) between two doctors (Lansman and Spielvogel) and their professional services corporation (NYCG), on the one hand, and a public benefit corporation (WCHCC) and the medical center that it operated (WMC), on the other hand, to provide cardiothoracic surgery services at WMC. Prior to execution of the Agreement, plaintiffs Lafaro and Fleisher (both doctors) and their professional services corporation Cardiac Surgery Group (“CSG”) had provided cardiothoracic surgery services at WMC. The Agreement grandfathered the plaintiffs, excepting them from the exclusivity provision. A trigger to the dispute was the fact that Defendant Lansman was the Director of the Department of Cardiothoracic Surgery at WMC, and he allegedly directed the scheduling of operating rooms, assignment of supporting staff and equipment for heart and lung surgery at WMC to give preference to Lansman, Spielvogel and NYCG—and put the plaintiffs at a competitive disadvantage. Lansman also prevented CSG from hiring a physician’s assistant to support plaintiffs in the operating room. The plaintiffs alleged that the Agreement and defendants’ conduct violated Section 1 of the Sherman Act. The district court dismissed the claims against all defendants on grounds of state action immunity, and the plaintiffs appealed.

In vacating the order dismissing the private plaintiffs (but not the public entity), the Second Circuit stated that “[w]e have recognized that the state action doctrine ‘will shelter only the particular anticompetitive acts of private parties that, in the judgment of the State, actually further state regulatory policies.’”5 Therefore, only anticompetitive conduct of private contracting parties that is “actively supervised” by the state will enjoy state action immunity.6 “This requirement exists because absent supervision, ‘there is no realistic assurance that a private party’s anticompetitive conduct promotes state policy, rather than merely the party’s individual interests.’”7 The court noted that “a state does not give immunity to those who violate the Sherman Act by authorizing them to violate it, or by declaring that their action is lawful…[or by] becoming a participant in a private agreement or combination by others for restraint of trade.”8

The private defendants argued that their conduct was “actively supervised” by the state because they were acting pursuant to a contract with WCHCC. However, the Second Circuit noted that, while the complaint alleged that the Agreement itself violated the Sherman Act (which was immunized by the state action doctrine), the complaint also alleged that the private defendants’ conduct violated the grandfather provision of the Agreement, which allegedly protected the plaintiffs from anticompetitive behavior. The court noted that if the sole allegation had been that the Agreement violated the Sherman Act, state action immunity would immunize the private defendants from such “a ‘tangential attack’ on the operations of WCHCC.”9 However, the additional allegations “of misconduct by the private defendants are not a tangential attack on the authority of the government entity to enter into anticompetitive agreements, but rather on the authority of the private defendants to act beyond the scope of the agreement with WCHCC….”10 The Second Circuit thus vacated the order dismissing the claims against the private defendants and remanded for a factual investigation of whether the private defendants were “actively supervised” by WCHCC.

In light of this decision, private parties that enter into exclusive contracts with states or their subdivisions should be cognizant that they act strictly pursuant to their contracts. This is especially so where a private contracting party holds a position of authority within the public entity and can direct actions, as did Dr. Lansman in Lafaro.