The City of LaGrange, Georgia, owns and operates a water supply system. It provides water service both within its corporate limits and beyond. In many areas outside city limits, the City is the sole provider of water service. The City also provides natural gas service. In 2004, it passed an ordinance establishing that for any new construction outside city limits, the City’s water service would only be available to customers who installed a natural gas water heater and at least one additional natural gas appliance. The City sent letters to developers informing them of this policy.
Diverse Power, Inc., is an electric utility that provides electric service in and around LaGrange. Diverse Power sued to enjoin the City’s practice, arguing that the tying arrangement violated federal antitrust laws by preventing competitors like Diverse Power from providing electric service to water heaters and other appliances that operate on either gas or electricity. Diverse Power, Inc. v. City of LaGrange, Ga., 2018 WL 9651475 (N.D. Ga. Feb. 21, 2018). The City moved to dismiss the suit, arguing that it was entitled to state action immunity. But the district court and the Eleventh Circuit found otherwise.
State action immunity applies when a city acts in accordance with a “clearly articulated and affirmatively expressed” state policy to displace competition. In reviewing the Georgia code, the district court found that the Georgia legislature authorized municipalities to provide water service; that the provision of water service beyond city limits was discretionary; and that cities could refuse to provide water service beyond their city limits. This expressed a state policy to displace competition in the provision of water service. The City argued that this policy covered the challenged ordinance because it related to water service. The district court disagreed, finding no limiting principle to this assertion: “If [the City’s position were] true, the City would have immunity to take anticompetitive actions affecting any industry so long as the demand were made as a condition of refusing water service.” 2018 WL 9651475, at *4. The court denied the City’s motion to dismiss.
On appeal, the Court of Appeals for the Eleventh Circuit stated that its “attempts to ferret out a limiting principle [in the City’s position] fared no better” than those undertaken by the district court; the Court rejected the “astonishingly vast power LaGrange would have if we adopted its read of Georgia law.” Diverse Power, Inc. v. City of LaGrange, Ga., 934 F.3d 1270, 1278 (11th Cir. 2019). In affirming the district court’s decision, the Eleventh Circuit commented that the Supreme Court’s jurisprudence regarding the clear-articulation requirement was anything but clear and questioned why its own decision in FTC v. Phoebe Putney Health Sys., Inc. was reversed by the Supreme Court in 2013. 663 F.3d 1369 (11th Cir. 2011), rev’d 568 U.S. 216 (2013). The Eleventh Circuit also commented that the Supreme Court’s “reformulated test” in Phoebe Putney did not “naturally follow” from prior Supreme Court decisions, including Town of Hallie v. City of Eau Claire, 471 U.S. 34 (1985) and City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S 365 (1991). 934 F.3d at 1275.
Under the narrower Phoebe Putney test, “state policy to displace federal antitrust law [is] sufficiently expressed where the displacement of competition [is] the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” 568 U.S. 216, 229. The “ultimate requirement [is] that the State must have affirmatively contemplated the displacement of competition such that the challenged anticompetitive effects can be attributed to the ‘state itself.’” Id. Recognizing that it was bound to apply this standard to the City of LaGrange’s tying arrangement, the Eleventh Circuit easily concluded that the tying of an unrelated service (natural gas) in a different market to the provision of water service was not the “inherent, logical, or ordinary result” of the Georgia legislative scheme. 934 F.3d at 1277. Thus, the City was not entitled to state action immunity. The Court affirmed the district court’s denial of the City’s motion to dismiss and remanded the case for further proceedings.
Having lost its principal defense, the City promptly repealed the ordinance that imposed the tying arrangement. The case was subsequently dismissed as moot.
Diverse Power was represented in this action by Jim McGibbon, James Orr, and Stacey Mohr of Eversheds Sutherland.
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