Scope of antitrust immunity in government-owned hospital mergers tightened

?In a unanimous and favourable decision for the Federal Trade Commission (FTC), the Supreme Court has found that the state action immunity doctrine does not shield Phoebe Putney Health System's acquisition of Palmyra Park Hospital from antitrust scrutiny, sending the parties back to FTC administrative litigation to battle over the legality of the hospital merger. The court unanimously overturned the Eleventh Circuit's decision allowing Phoebe Putney to acquire the only other nearby hospital in Albany, Georgia for $195 million. Chastising the Eleventh Circuit for applying the state action doctrine "too-loosely", the Supreme Court clarified the specificity required of state legislation to invoke state action immunity and in turn narrowed the scope of antitrust immunity potentially available to parties contemplating a transaction with a government-owned entity.

In 2011 Phoebe Putney Health System, owned by a local hospital authority, acquired Palmyra Park Hospital in a transaction which the FTC asserted created a virtual monopoly and would severely lessen competition for hospital services in the local area. The parties argued - and a Georgia district court and the Eleventh Circuit agreed - that even if the transaction created a monopoly, it was immune from antitrust scrutiny under the state action doctrine because the acquisition and the subsequent operation of the hospital were authorised pursuant to a state legislative policy to displace competition.

Under the state action immunity doctrine, conduct is protected from antitrust scrutiny if the activities at issue are of the state itself. Where conduct is undertaken not by the state itself, but by a municipality or other political subdivision of the state, immunity is available only on a showing of a clearly articulated state policy to displace competition with regulation. The state legislature can clearly articulate a policy to displace competition if it expressly states so or if an anti-competitive effect is the foreseeable result of the legislation.

In the case at hand, because a local hospital authority owned Phoebe Putney, it was entitled to state action immunity only if it could prove that it acted pursuant to a clearly articulated state policy to displace competition. Phoebe Putney pointed to the Georgia legislature's policy granting hospital authorities the power to acquire, purchase and lease hospitals, among other things. Phoebe Putney argued - and the Georgia federal courts agreed - that while the law did not expressly state that it was displacing competition, anti-competitive hospital acquisitions were a reasonably foreseeable result of the law. Accordingly, the state action doctrine immunised the transaction from the antitrust laws.

The Supreme Court unanimously disagreed. The court explained that even if the legislature reasonably anticipated that a hospital authority might violate the antitrust laws through a hospital acquisition, that was not enough to demonstrate a clearly articulated state policy to displace competition, especially in light of the relatively small number of acquisitions that would raise antitrust concerns. Instead, there must be a showing that "the displacement of competition was the inherent, logical, or ordinary result of the exercise of authority" delegated by the legislature.

This decision is important for several reasons:

• The Supreme Court reaffirmed its previous guidance that state action immunity is disfavoured in light of the "essential national policies" underlying the federal antitrust laws.

• The opinion will likely encourage the FTC and private plaintiffs to continue to challenge assertions of antitrust immunity in light of the Supreme Court's admonition that such immunity is disfavoured.

• Private parties pursuing transactions with entities owned by a state political subdivision should look carefully at the express statutory language and legislative history before assuming state action immunity will shield the transaction from antitrust scrutiny.

For further information on this topic please contact Robert F Leibenluft or Caitlin Russo at Hogan Lovells US LLP by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email ([email protected] or [email protected]).

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