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Focus on Regulation

U.S. Supreme Court to Review “State Action” Doctrine in FTC Merger Challenge

Trade Commission sealDespite losses at the district and appellate levels, the Federal Trade Commission’s fight to enjoin the merger of two hospitals in Georgia is not over. The Supreme Court announced on June 25, 2012 that it would hear an appeal by the FTC to consider whether an alleged merger to monopoly of two hospitals, Phoebe Putney Health System and Palmyra Medical Center, is exempt from antitrust enforcement based on the “state action” doctrine. That doctrine holds that certain actions mandated or directed by the state are not subject to antitrust liability. The FTC and critics of the Eleventh Circuit decision fear that this case will pave the way for future transactions to be structured in a similar way to avoid the reach of the antitrust laws.

The Georgia statute at issue allows a local county hospital authority to acquire certain land and buildings, including hospital facilities, and lease them to others. The local hospital authority used that statute to acquire Palmyra and lease it to Phoebe Putney – Palmyra’s only significant competitor – for forty years at a rate of one dollar per year. Phoebe Putney guaranteed the $195 million purchase price and a $35 million break-up fee, and it received immediate control over Palmyra’s operations upon closing of the transaction.

The FTC filed suit to block the transaction, arguing that the hospital authority was merely a straw-man used by the parties to circumvent the antitrust laws. The district court disagreed, holding that the hospital authority satisfied all three necessary elements of the state action doctrine and was therefore exempt from the antitrust laws: (1) the hospital authority was a political subdivision of the state; (2) the Georgia statute authorized the hospital authority to acquire other hospitals; and (3) the anticompetitive effect of the hospital authority’s acquisition was reasonably foreseeable given the power expressly given it by law. The Eleventh Circuit upheld this decision.

In its petition for writ of certiorari, the FTC asserted that failure to correct the Eleventh Circuit’s interpretation of state action immunity could lead to increased use of the doctrine to facilitate anticompetitive conduct and unlawful mergers that would ultimately harm consumers. Commentators have long called for more clarity on the scope of the doctrine. The Supreme Court may use this case to decide whether a state statute needs explicitly to give authority to a state entity to displace competition, or whether a grant of general corporate powers is sufficient.