• U.S. Supreme Court Reverses "State Action" Decision, Confirming Narrow Scope of Immunity
  • March 7, 2013
  • Law Firm: Jones Day - Cleveland Office
  • In FTC v. Phoebe Putney, the Supreme Court has unanimously reversed the Eleventh Circuit holding that a Georgia hospital authority’s acquisition of a hospital was covered by state-action immunity, emphasizing that "state-action immunity is disfavored."  The Supreme Court held that, as the State had not clearly articulated and affirmatively expressed a policy allowing the hospital authority to make acquisitions that substantially lessen competition, state-action immunity does not apply. The acquisition for which the hospital authority claimed immunity would have given it an 86 percent market share for acute-care hospital services provided to commercial health plans in the area around Albany, Georgia.

    In Justice Sotomayor’s first antitrust opinion since joining the Supreme Court, the Court concluded that the state-action immunity defense fails under the clear-articulation standard because there is no evidence the State affirmatively contemplated that hospital authorities would use their power to anticompetitively consolidate hospital ownership. Under the state-action immunity doctrine, federal antitrust immunity may extend to non-state actors carrying out a state regulatory program intended to displace competition. Here, the Georgia legislature granted specially created "hospital authorities" only general corporate powers, including the power to acquire hospitals. These hospital authorities may not operate or construct any project for profit and could only set rates so as to cover operating expenses and create reasonable reserves. 

    Approaching the clear-articulation standard practically, the Court has previously held that, if displacement of competition was "the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature," then the legislature has, in effect, clearly articulated a state policy to displace competition even if the State has not expressly authorized the anticompetitive conduct.

    In Phoebe Putney, the Court held that the Eleventh Circuit applied this forseeability standard too loosely. According to the Eleventh Circuit, anticompetitive conduct is foreseeable if it could have been "reasonably anticipated" by the state legislature. The Court rejected this interpretation and clarified that "the State must have foreseen and implicitly endorsed the anticompetitive effects as consistent with its policy goals."

    The Court identified two of its prior cases as examples where this formulation of the forseeability test was satisfied. First, anticompetitive effects were a "logical" result in Hallie v. Eau Claire, 471 U.S. 34 (1985), because the state law authorized the "reasonable" (and anticompetitive) "quid pro quo" of municipalities conditioning extension of their sewer services on the surrounding area’s agreement to annexation. Second, the zoning ordinance in Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 370 (1991), like all zoning ordinances, was "inherently" anticompetitive because its "very purpose...is to displace unfettered business freedom." In contrast, the acquisition and leasing powers granted to the Phoebe Putney hospital authority "mirror general powers routinely conferred by state law upon private corporations" and such general powers "typically are used in ways that raise no federal antitrust concerns." As the Court quoted, "simple permission to play in the market does not foreseeably entail permission to roughhouse in that market unlawfully." 

    The Court rejected the respondents’ argument, first expressed by the Eleventh Circuit, that anticompetitive acquisitions were foreseeable because of the existing market dynamics throughout Georgia. The Eleventh Circuit had stated that "it defies imagination to suppose the [state] legislature could have believed that every geographic market in Georgia was so replete with hospitals that authorizing acquisitions by the authorities could have no serious anticompetitive consequences." According to the Supreme Court, only a small subset of the conduct permitted by the law has the potential to negatively affect competition. Indeed, even the hospital authorities’ power to acquire their first hospital in a small market does not carry that potential "because the transfer of ownership from private to public hands does not increase market concentration." Rather, an acquisition raises anticompetitive concerns "only in markets that are large enough to support more than one hospital but sufficiently small that the merger of competitors would lead to a significant increase in market competition" and the Court determined that this "is too slender a reed" to support the inference that the anticompetitive acquisitions were contemplated by the law.

    Finally, the Court rejected the argument that the grant of "unique powers and responsibilities to fulfill the State’s objective of providing all residents with access to adequate and affordable health care" cloaked the hospital authority in immunity. The Court reasoned that "nothing in the Law or any other provision of George law" suggests that "the State intended that hospital authorities pursue that end through mergers that create monopolies," even though the State imposes limits on entry into the market for medical services and requires the hospital authorities operate on a nonprofit basis.

    The unanimous decision emphasizes that antitrust exemptions are construed narrowly. If the State’s policy does not clearly and explicitly displace competition, then non-state actors must carefully consider whether a proposed action pursuant to a state’s regulatory program would be protected. 

    The FTC’s victory comes at the end of the term of Chairman Leibowitz, who has made health care enforcement a top priority. The FTC very likely will continue to heavily focus on health care after Leibowitz’s departure. Working to meet the goals of affordable health care set by either state or federal governments will likely not be an adequate defense for actions that antitrust agencies determine could have potentially anticompetitive effects.