On February 19, 2013, the United States Supreme Court unanimously clarified the scope of antitrust immunity available to political subdivisions of states under the “state action” doctrine, giving the Federal Trade Commission (FTC) a victory in its longstanding campaign to limit such immunity. In FTC v. Phoebe Putney Health System, Inc., the Court held that the state action doctrine only applies when legislatures grant such subdivisions, which can include municipalities and other public entities, powers that inherently restrict competition or have made clear statements of intent to immunize their conduct. The Court rejected the Eleventh Circuit’s broader reading of the state action doctrine, where the Eleventh Circuit held that an acquisition by a Georgia hospital authority of a nearby rival was a “reasonably foreseeable” exercise of the authority’s powers.

Case Background:

In April 2011, the FTC sought to enjoin the acquisition by the Hospital Authority of Albany-Dougherty County, Georgia (the “Hospital Authority”), of Palmyra Park Hospital (“Palmyra”). The Hospital Authority owns Phoebe Putney Memorial Hospital, and it is managed by a nonprofit affiliate. According to the FTC’s complaint, the two hospitals provided the same services and controlled 86 percent of the market in the area surrounding Albany, Georgia. The FTC initiated an administrative proceeding alleging the acquisition would substantially lessen competition in violation of Section 7 of the Clayton Act and the FTC Act and filed suit in federal court (along with the Georgia attorney general) to obtain a preliminary injunction to stop the acquisition pending the administrative proceeding.

The Hospital Authority moved to dismiss the federal litigation based on state action immunity. The Supreme Court established state action immunity in Parker v. Brown, when it held that the antitrust laws were not intended to restrict the sovereign capacity of states to regulate their economies (such as when the state itself takes a direct action). State action antitrust immunity also has been afforded to political subdivisions of states where their actions are taken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition. The district court agreed with the Hospital Authority and ruled that the state action doctrine provided immunity for such entities where the relevant enabling statute creates grounds for a reasoned belief that anticompetitive conduct could be envisioned. The court found that the acquisition of a rival hospital was a reasonably foreseeable exercise of an authority’s power under the Georgia Hospital Authorities Law, which gave hospital authorities powers to purchase and lease hospitals. It rejected the FTC’s argument that the Hospital Authority had not sufficiently participated in the transaction to make it eligible for state action immunity, holding that the court should not look at the motivations behind the act of a political subdivision.

On appeal, the Eleventh Circuit affirmed the district court’s opinion, finding that the clear articulation standard did not require the legislature to expressly state its intent that the delegation of power will have an anticompetitive effect, and that immunity applies when anticompetitive conduct is a reasonably foreseeable result or is one that can be reasonably anticipated. Given that the Hospital Authority had the power to acquire hospitals, the Eleventh Circuit reasoned that the legislature must have anticipated the possible anticompetitive effects of acquisitions. The FTC sought review by the Supreme Court, arguing that the Eleventh Circuit took an overly expansive view of the state action doctrine compared to other circuits.

The Supreme Court’s Ruling:

The Supreme Court reversed the Eleventh Circuit and held that the state action doctrine did not apply. The Court found the Georgia legislature had not clearly articulated a policy of allowing hospital authorities to make acquisitions that could substantially lessen competition given that the broad grant of corporate powers in the Hospital Authorities Law did not reference anticompetitive activity. Absent a clear articulation of intent, the anticompetitive consequences from a grant of authority must be an inherent, logical or ordinary result of the delegation of authority. The Court found that where, as here, a state’s position is one of mere silence or neutrality and the delegated powers do not necessarily lead to anticompetitive consequences, the clear articulation standard is not met. The Court reasoned that holding otherwise would eviscerate the state action doctrine and, as suggested by 20 states that submitted a joint amicus brief, require states to disclaim any intent to displace competition to avoid inadvertently authorizing anticompetitive conduct. The Court found the legislature’s broad objectives of improving access to affordable health care and the state’s regulation of hospitals were insufficient to establish that the state intended to permit mergers that could potentially harm competition.

This holding was a vindication of the FTC’s ongoing efforts to limit application of the state action doctrine. It issued a task force report in 2003 recommending its strict application and has advocated in a variety of settings for its narrow interpretation.

Conclusions and Implications:

  1. Even though there are broader exemptions for public actors under the Hart-Scott-Rodino Antitrust Improvements Act (the federal pre-merger clearance statute), the Court’s narrow interpretation of the state action doctrine gives the FTC and Department of Justice more room to challenge transactions (even those that are HSR exempt) involving political subdivisions raising competitive issues when there is no clear legislative statement of intent or obvious purpose to displace competition. This approach is likely to be applied in many contexts other than health care mergers.
  2. In Georgia and states with similar enabling statutes, the power of hospital authorities and other political subdivisions to engage in potentially anticompetitive conduct has been severely limited to those powers clearly articulated or inherently envisioned by the enabling legislation. If the conduct does not fit into these two categories, entities risk private and public antitrust suits. Although the scope of the Supreme Court’s decision was limited to immunity for political subdivisions themselves, it is important to remember that private actors acting in association with a political subdivision also could be a source of liability. Private actors working with a political subdivision generally also must prove they are “actively supervised” by the public actor to qualify for state action immunity.
  3. States intending to grant antitrust immunity to their subdivisions likely will face increased pressure to clearly articulate this intent. States may also be asked to pass legislation clarifying their intent for past grants of authority. For example, a bill was recently introduced in the Georgia legislature to clearly articulate that hospital authorities are immune from antitrust liability for all actions that have been taken or will be taken pursuant to the state’s enabling statute. The consideration and passage of similar legislation may increase as states seek to confirm or extend antitrust immunity to their political subdivisions.