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Hogan Lovells Antitrust, Competition and Economic Regulation Alert

23 October 2012


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Court to tackle "state action" for the first time in 20 years


On 26 November, the U.S. Supreme Court will hear argument in FTC v. Phoebe Putney Health System, No. 11-1160, its first case in 20 years about "state action" immunity under the antitrust laws. Antitrust practitioners and scholars are understandably eager for the court's latest thinking on the doctrine. But it is not clear that the case will change the law in any dramatic way. A clarification of the doctrine is the most likely result, and it will be welcome.


The Federal Trade Commission (FTC) is the petitioner in the case, having lost its argument at the U.S. 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 nonprofit 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, a doctrine developed in the 1940s, most famously in the Supreme Court's decision in Parker v. Brown, where the court held that California's agricultural marketing orders in the raisin industry were immune from the antitrust laws as actions of the state. The court later extended that immunity to the actions of municipalities and other entities acting pursuant to a "clearly articulated and affirmatively expressed" state policy to displace free-market competition in a particular area.


Phoebe Putney 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 nonprofit 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.



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The Eleventh Circuit agreed that the merger was an authorized and foreseeable result of the Hospital Authorities Law and therefore outside the reach of the FTC's enforcement authority.

In its petition for certiorari 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 argument or the factual one that guides the Supreme Court's decision.


The legal argument


The legal argument attacks 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. According to the FTC, though, "foreseeability" is not enough: Citing Community Communications Co. v. City of Boulder, a 1982 decision, it argues that a grant of "general corporate powers" to a governmental entity does not sufficiently express the state's intent to displace competition. Rather, the FTC says, such a policy expresses "mere neutrality" toward 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 argues, the Georgia Legislature clearly intended that in some markets, such as 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 right where the court left off in its last two decisions on the state-action doctrine. In its 1992 decision 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, though, the court seemed to have adopted a more expansive approach to immunity in City of Columbia v. Omni Outdoor Advertising. There, 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 authorizing cities to enact zoning laws, a state authorizes cities to pre-empt certain forms of business competition.


The legal dispute between the FTC and Phoebe Putney in this case stems from a stray reference in Omni, and in an earlier case, Town of Hallie v. City of Eau Claire, 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 like "foreseeable" have made bad law, at least in the Eleventh Circuit. The Supreme Court will use oral argument, and perhaps ultimately 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.

Facts are troublesome things


Antitrust commentators are likely to follow Phoebe Putney closely. But the FTC has also given the court a number of factual bases for reversal that could help the court craft a more limited (and less interesting) ruling.


The paper trail in this case is unhelpful to Phoebe Putney, to put it gently. Documents suggest Phoebe Putney was counseled 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 in fact had "no authority" over the hospital.

Based on this evidence, the Supreme Court might decide not to wade too far into substance and simply hold that the evidence shows that the use of the hospital authority in this way was not "foreseeable" to the state when it enacted the Hospital Authorities Law. Or the court could hold that the Eleventh Circuit should have considered whether the state truly has sufficient "supervision" of the merged entity, as some earlier cases require.


In its brief, Phoebe Putney draws a great deal of attention to a different set of facts, namely the benefits of the proposed merger, in terms of increased hospital capacity. At a minimum, these facts would likely be relevant to the analysis in any future proceeding on remand if the Eleventh Circuit's decision is reversed. 




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