State Action Immunity Does Not Apply Without Clear State Policy

by Baker Donelson

The United States Supreme Court’s recent decision in FTC v. Phoebe Putney Health System, Inc., No. 11-1160, 568 U.S. __ (2013), makes clear that a state’s authorization to act in a manner with potentially anticompetitive consequences is insufficient to confer state action doctrine immunity from antitrust liability on the actor.

At issue in Phoebe-Putney was the proposed consolidation of Palmyra Medical Center and Phoebe-Putney Memorial Hospital in Dougherty County, Georgia. The FTC challenged the transaction, arguing that the consolidation of these two hospitals, which together accounted for 86 percent of the market for acute-care hospital services provided to commercial payers across six counties, would create a virtual monopoly and substantially reduce competition.

Because the county hospital authority (the Authority) operated the acquiring hospital, it argued that the acquisition was exempt from antitrust liability under the state action immunity doctrine. The United States District Court for the Middle District of Georgia and the Eleventh Circuit Court of Appeals agreed. The Supreme Court, however, held that because Georgia’s Hospital Authorities Law — which both authorized the creation of the Authority and articulated its powers — did not clearly articulate a state policy that hospital authorities exercise their powers anti-competitively, state action immunity did not apply to the Authority.

Under the state action doctrine, states may impose market restraints as an act of government, free from antitrust liability. State action immunity from antitrust liability extends to non-state actors carrying out a state’s regulatory program if: (1) the challenged restraint is one clearly articulated and affirmatively expressed as state policy; and (2) the state actively supervises the policy. However, in the case of a sub-state governmental entity like the Authority, the active supervision test need not be met, because, the Court explained, sub-state governmental entities have less incentive than private parties to pursue their own self-interests under the guise of implementing state policies. Accordingly, the Court’s opinion focused on whether Georgia’s Hospital Authorities Law satisfied the clear articulation test.

The Hospital Authorities Law gives counties and municipalities the power to create hospital authorities and confers certain powers upon the authorities, i.e., the power to acquire and operate hospitals and other health care facilities, establish rates and charges for services and the use of authority facilities, borrow money, and make and execute contracts. The Court determined that these powers were nothing more than general corporate powers held by private corporations, and explained that the legislature’s mere grant of general corporate powers could not be read to include the right to exercise those powers anti-competitively.

The Court explained that, in order to immunize an actor from antitrust liability under the state action doctrine, a state law must do more than authorize an entity to act, it must authorize that entity to act anti-competitively. While it is not necessary that a legislature expressly state its intent that a delegated action have anticompetitive effects to satisfy the clear articulation test, the anticompetitive effect of the state law must be a foreseeable result of what the state authorized in the law.

The Court rejected the Eleventh Circuit’s loose application of the foreseeability component of the clear articulation test. The Eleventh Circuit reasoned that “in granting the power to acquire hospitals, the legislature must have anticipated that such acquisitions would produce anticompetitive effects.” The Supreme Court explained, however, that merely anticipating the potential anticompetitive effects of acquisition power falls far short of clearly articulating an affirmative state policy to displace competition. Rather, foreseeability means that the displacement of competition was the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature and, as such, the state must have foreseen and implicitly endorsed the anticompetitive effects of the law as consistent with its policy goals.

The Court found that the Hospital Authorities Law did not satisfy this standard because the law did not affirmatively contemplate that hospital authorities would exercise their powers in a manner that would displace competition. In fact, the Court noted, the law’s grant of the power to acquire hospitals is found in the broad power to acquire projects, which includes not only hospitals but office space, housing accommodations and other health care facilities. The Court explained that this power — even when focused solely on the power to acquire hospitals — does not ordinarily produce anticompetitive effects. Given that only a small subset of the powers conferred upon the Authority actually has the potential to negatively impact competition, the Court found that the law did not clearly articulate and affirmatively express a state policy that the Authority acquire hospitals in a manner that would displace competition.

With the Court’s rejection of the Authority’s state action immunity defense, the question of whether the transaction, which closed in 2011, was anticompetitive returns to the District Court.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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