The U.S. Supreme Court on February 19th scaled back the "state action immunity" doctrine, siding with the Federal Trade Commission on an issue that had divided the lower courts and holding that a county Hospital Authority's acquisition of a competing hospital was subject to antitrust challenge by FTC. The Eleventh Circuit had held that the acquisition was immune from the federal antitrust laws because the Hospital Authority was authorized by state statute to acquire and operate hospitals. In rejecting the Authority's state-action immunity defense, the Supreme Court imposed stricter antitrust limits on anticompetitive conduct done by, or approved by, counties, municipalities, and other political subdivisions of a state. The case is Federal Trade Commission v. Phoebe Putney Health System, Inc., No. 11–1160 (2013).

What Providers Should Know

• This decision has implications for anyone considering an argument that a merger or other conduct is approved by a State or local government and therefore immune from federal antitrust law.
• Most regulation by counties, municipalities, and other political subdivisions of a state will not satisfy the Supreme Court's requirement of a "clearly articulated and affirmatively expressed" state policy to displace competition. Therefore, even if local regulators bless a transaction, that blessing generally will not prevent federal antitrust review.
• Even if the State approves anticompetitive conduct of private actors, it must “actively supervise” that conduct to confer antitrust immunity on private actors.

Background

The Supreme Court has long recognized that the federal antitrust laws do not apply to acts of a State "in its sovereign capacity," including market restraints imposed by a State "as an act of government." Op. at 6. But the Hospital Authority in Phoebe Putney was not the State; it was "a substate governmental entity," acting pursuant to authority granted by a state statute. Op. at 7. Such substate governmental entities, the Court held, are immune from federal antitrust law only when they act "pursuant to state policy to displace competition with regulation or monopoly," and any such policy must be "clearly articulated and affirmatively expressed" by the State. Op. at 7-8.

Ruling

The Authority contended (and the lower courts agreed) that the Authority's acquisition of a hospital was immune from federal antitrust law because any anticompetitive effect of that acquisition was a "foreseeable result" of the Hospital Authority's statutory power to acquire, own, and operate hospitals. The Supreme Court rejected this argument, finding "no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership." The State's grant of the general corporate power to acquire and own property did not authorize anticompetitive use of that power, because "[g]rants of general corporate power that allow substate governmental entities to participate in a competitive marketplace should be, can be, and typically are used in ways that raise no federal antitrust concerns." Op. at 10. The Court explained that "'simple permission to play in a market' does not 'foreseeably entail permission to roughhouse in that market unlawfully.'" Op. at 13.

The Supreme Court did not expressly reach the FTC's alternative argument that the Authority's hospital acquisition was not immune because it "created an unsupervised private monopoly" that "must be (but is not) 'actively supervised by the State itself.'" FTC Reply Brief, available here. The Court implicitly rejected the FTC's argument for an "active state supervision" requirement in this situation, holding that

As with private parties, immunity will only attach to the activities of local governmental entities if they are undertaken pursuant to a "clearly articulated and affirmatively expressed" state policy to displace competition. But unlike private parties, such entities are not subject to the "active state supervision requirement" because they have less of an incentive to pursue their own self-interest under the guise of implementing state policies. Op. at 8.

Thus the Court made clear, over the FTC's objection, that local governmental entities like the Hospital Authority can qualify for the state-action immunity for their own conduct without satisfying an "active state supervision" requirement. When state agencies attempt to authorize private conduct, however, they must actively supervise that conduct in order to confer immunity on private actors.

In response to the Supreme Court's ruling, FTC Chairman Jon Leibowitz issued a press release stating: "Today's ruling is a big victory for consumers who want to see lower health care costs, and the Court's opinion will ensure competition in a variety of other industries as well." The exact effects of the Phoebe Putney decision remain to be seen. The decision certainly narrows the scope of the state-action defense in antitrust cases, and will affect the antitrust analysis of hospital mergers and other conduct that is approved by a state or local government agency.