United States: Supreme Court Limits Availability of State Action Immunity from Federal Antitrust Liability

The Supreme Court decision in FTC v. Phoebe Putney Health System, Inc., makes clear that state action immunity from federal antitrust laws is disfavored, and local governmental, quasi-public and private entities can only qualify for the immunity under certain specific conditions.

In a unanimous decision issued on February 19, 2013, the Supreme Court of the United States limited availability of state action immunity from federal antitrust laws for local governmental entities.  In FTC v. Phoebe Putney Health System, Inc., the Supreme Court ruled that local governmental authorities are not immune from federal antitrust laws when engaging in anticompetitive conduct, notwithstanding a grant of general powers by a state.  If the state did not "clearly articulate and affirmatively express" a policy to displace competition, then state action immunity will not apply to shield the conduct from antitrust liability.  To qualify for state action immunity, the local governmental entity's conduct must instead be the "inherent, logical, or ordinary" result of exercising a state's delegated authority.  Moreover, the Supreme Court cautioned that even if a state authorizes some forms of anticompetitive conduct, such authorization does not establish that the state has affirmatively blessed other forms of anticompetitive conduct.  The Supreme Court's ruling means that local governmental and quasi-public entities must re-examine their enabling legislation to determine whether and to what extent state legislation shields their conduct from federal antitrust liability.  Similarly, private entities should carefully review any legislation that forms the basis for their claim of state action immunity.

The Phoebe Putney decision involved the Federal Trade Commission's (FTC's) challenge of a Georgia governmental hospital authority's purchase of a competing hospital.  Georgia's Hospital Authorities Law authorizes political subdivisions (i.e., counties and municipalities) to create special-purpose public entities called hospital authorities, and grants them 27 powers upon creation.  Included in this general grant of powers is the power to "acquire by purchase, lease, or otherwise and to operate projects." 

In 1941, pursuant to this law, the city of Albany and the county of Dougherty created the Hospital Authority of Albany-Dougherty County (Authority), and the Authority subsequently acquired Phoebe Putney Memorial Hospital (Memorial).  In 1990, the Authority created two nonprofit corporations to manage Memorial: Phoebe Putney Health System, Inc., (PPHS) and its subsidiary, Phoebe Putney Memorial Hospital, Inc. (PPMH).  The Authority then leased Memorial to PPMH and gave PPMH the exclusive authority to operate Memorial.  In 2010, PPHS entered discussions with HCA, Inc., to acquire Palmyra Medical Center.  Memorial and Palmyra are the only two hospitals located in Dougherty County, Georgia.  Together, they accounted for 86 percent of the market for acute-care hospital services provided to commercial health plans in the six counties surrounding the city of Albany.  PPHS and HCA agreed to a plan under which the Authority would purchase Palmyra with PPHS funds, then lease Palmyra to PPHS in the same way the Authority leased Memorial to PPMH. 

The FTC issued an administrative complaint on April 20, 2011, alleging that the transaction would create a monopoly and substantially reduce competition in the market for acute-care hospital services.  The FTC, along with the State of Georgia, also filed suit to enjoin the transaction pending the FTC's administrative trial on the merits. 

The U.S. District Court for the Middle District of Georgia denied the FTC's motion for preliminary injunction and granted respondents' motion to dismiss, holding that the respondents were immune from antitrust liability under the state action doctrine.  The U.S. Court of Appeals for the 11th Circuit affirmed that state action immunity applied to shield the transaction from antitrust liability.  The 11th Circuit explained that the Hospital Authorities Law contemplated the anticompetitive conduct at issue.  The 11th Circuit also noted the "impressive breadth" of powers the law delegated to hospital authorities, specifically the power to acquire and lease projects.  The 11th Circuit reasoned that the Georgia legislature must have anticipated that the broad powers given to hospital authorities would produce anticompetitive effects.  After issuing its decision, the 11th Circuit dissolved the temporary injunction it had granted pending appeal, and the transaction closed.

The Supreme Court granted certiorari to determine whether the Georgia Hospital Authorities Law "clearly articulates and affirmatively expresses a state policy to permit acquisitions that substantially lessen competition."  (slip op. at 1)  In reversing the lower court decisions, the Supreme Court determined that the Georgia law does not include permission for hospital authorities to use their powers anticompetitively, and that, therefore, state action immunity does not apply. 

To begin its analysis, the Supreme Court first reiterated its earlier declaration in FTC v. Ticor Title Ins. Co. that "state-action immunity is disfavored."  (slip op. at 7 (citing 504 U.S. 621, 636) (1992))  Next, the Supreme Court explained that state action immunity will only apply if the challenged activities are undertaken pursuant to a "clearly articulated and affirmatively expressed state policy to displace competition."  (slip op. at 8 (citing Community Communications Co. v. Boulder, 455 U.S. 40, 52) (1982))  Following its prior decision in Boulder, the Supreme Court "rejected the proposition that the general grant of power to enact ordinances necessarily implies state authorization to exact specific anticompetitive ordinances because such an approach would wholly eviscerate the concepts of clear articulation and affirmative expression that our precedents require" (emphasis added).  (slip op. at 10)  The Supreme Court then explained that state action immunity applies only when the anticompetitive effect was the "foreseeable result of what the State authorized."  (slip op. at 8 (citing Hallie v. Eau Claire, 471 U.S. 34) (1985))  While conceding that the anticompetitive result need not be stated explicitly by the legislature to meet Hallie's foreseeability requirement, the Supreme Court cautioned that a state policy to displace federal antitrust law is sufficiently expressed only where "the displacement of competition was the inherent, logical, or ordinary result" of the act of delegation by the state legislature.  (slip op. at 11)

Applying these principles to the Hospital Authorities Law, the Supreme Court found that "there is no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership."  (slip op. at 9)  The Supreme Court reasoned that while the Hospital Authorities Law permits the Authority to acquire hospitals, "it does not clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition."  (slip op. at 10)  Turning to the lower court decisions, the Supreme Court criticized the 11th Circuit for too loosely applying the concepts of foreseeability.  (slip op. at 11)  The Supreme Court then noted that only a small subset of conduct permitted by the Hospital Authorities Law has the potential to negatively affect competition, and that even the power to acquire hospitals does not ordinarily produce anticompetitive effects.  (slip op. at 14)  The Supreme Court found that "nothing in the [Hospital Authorities Law] or any other provision of Georgia law clearly articulates a state policy to allow authorities to exercise their general corporate powers, including their acquisition power, without regard to negative effects on competition."  (slip op. at 16)  The Supreme Court went on to caution that "regulation of an industry, and even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, does not establish that the State has affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related."  (slip op. at 17)  In holding that Georgia did not clearly articulate and affirmatively express a state policy to allow hospital authorities to make acquisitions that would substantially lessen competition, the Supreme Court reversed the lower courts' decisions and remanded the case.  (slip op. 19)  Although the Supreme Court did not directly address how quasi-public and private entities might also qualify for state action immunity, those entities presumably must meet the Supreme Court's tightened standard as well.

The Supreme Court's decision represents a victory for the FTC and the U.S. Department of Justice Antitrust Division, which both have long sought to narrow the scope of state action immunity.  Going forward, local governmental, quasi-public and private entities will have a more difficult time asserting state action immunity as a defense to antitrust allegations where the underlying enabling legislation does not clearly contemplate potential competitive effects.  Local governmental, quasi-public and private entities should also re-examine enabling legislation and applicable state regulations to determine whether and to what degree their conduct might be protected from federal antitrust liability by the state action doctrine. 

Three immediate implications flow from the Supreme Court's decision in Phoebe Putney.  First, while it arguably narrows the scope of state action immunity, it does not mean that all government-owned hospitals will now be subject to potential antitrust liability for their conduct.  Many state statutes that authorize the formation and operation of local hospital authorities or districts contain language empowering them to engage in their delegated powers "irrespective of the competitive consequences" (or language to the same effect).  In those cases, state action immunity is likely to continue to insulate those entities from antitrust liability for their authorized actions.  Second, the fight over state action immunity is now likely to shift to the state legislatures, where parties on both sides of the issue will try to induce state legislatures to either "clearly articulate an intent to displace competition with regulation" or not.  Finally, the case serves as a reminder that all competitors, even government-owned and operated "competitors," should comply with the antitrust laws first, and invoke potential immunities or exemptions only as a last resort.

The McDermott Difference

McDermott's antitrust and competition lawyers have significant experience with these issues and can be a valuable resource to local governmental entities and private parties that need to re-evaluate whether state action immunity protects their conduct from federal antitrust liability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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