Takeaways

• The imminent market exit of an acquisition target continues to be a defense to a suit to enjoin a proposed acquisition.
• It may not be necessary to meet the strict standards for proving a failing firm defense, at least in a preliminary injunction context, where balancing of the equities matters.
• The search for an alternate buyer that presents less anticompetitive risk may need only to be “reasonable.”
• Promises of future conduct are not credited by the FTC (or DOJ), but they might be by a judge, as they were here.

Discussion

While finding this to be the “rare case” where a hospital’s imminent failure justified its acquisition by a competitor, Judge Kenneth Bell denied the Federal Trade Commission’s motion for a preliminary injunction to enjoin Novant’s acquisition of two hospitals in the Charlotte, NC area.

On February 28, 2023, Novant Health, Inc.’s (“Novant”) agreed to purchase Community Health Systems, Inc.’s (“CHS”) Lake Norman Regional Medical Center (“LNR”) and Davis Regional Psychiatric Hospital (“Davis”) for $320 million. The FTC investigated and ultimately filed suit in January 2024 in federal court in North Carolina to enjoin the transaction pending a proceeding in its own administrative court.

On June 5, Judge Bell denied that motion. In doing so, the court found that both hospitals were likely to close soon, and thus exit the market as competitors, and that CHS had conducted a “reasonable” search for alternative buyers, but had received no bids. This decision resonates with the so called “failing firm” defense to a challenged acquisition. That defense has some very specific elements that are challenging to meet. The target must demonstrate:

1. that it is in imminent danger of financial failure
2. that it could not successfully reorganize under Chapter 11 of the bankruptcy code, and
3. that it has no reasonable alternative offer, despite good faith efforts, that would pose a lesser risk of competitive harm.

Instead of discussing the specific elements of the failing firm defense, with no discussion of bankruptcy, the court looked more holistically at whether the hospitals would be likely to exit the market, which is the real question. The underlying principle of the failing firm defense is whether, absent the proposed transaction, the assets would exit the market. If so, then there can be no harm to competition from the acquisition, with the condition that there is no less risky buyer. As the decision states, “[o]nly those bona fide economic difficulties which are so existential as to establish that the entity being acquired will no longer be a viable competitor in the absence of the proposed transaction may justify an otherwise unlawful loss of competition.”

In this case, the court found both target hospitals were likely to close. There was little discussion of Davis, which apparently was clearly closing, and the FTC even withdrew its objection to that acquisition. With respect to LNR, the court summarily rejected the argument made by defendants that LNR is a “bad hospital” that is “struggling” and “declining,” at least with respect to quality. The Court found “this doomsday characterization…mostly inaccurate and certainly exaggerated.”

Instead, the court based its finding that LNR was likely to exit soon on other factors, such as the loss of various lines of service, the unwillingness and inability of CHS to invest in LNR, the imminent opening of a nearby hospital that would be a major competitor, and an imminent change in North Carolina’s CON laws that would open the door to further new entry.

The court then determined that CHS’s search for buyers was “reasonable,” with a sufficient number of potential bidders conducting sufficient due diligence. Because CHS received no bids other than Novant’s, and there was evidence that the competitive factors facing LNR were a significant reason for that lack, the court found that there would not be a less problematic buyer.

For those reasons, the court found that the FTC was unlikely to succeed on the merits of the case, which is one criteria for obtaining a preliminary injunction. This finding alone would have been enough to deny the motion.

However, the court went on to analyze another element for a preliminary injunction – the balancing of the equities. In short, the court must evaluate whether granting the injunction would be in the public interest. Judge Bell decided it would not.

While finding that the loss of tax revenue from taking a community hospital private weighed in favor of the FTC, the court found that on balance, the equities did not support granting an injunction. First, the court found that there was no risk of immediate harm. Interestingly for future cases, the judge credited Novant’s promise not to increase rates for three years. This kind of behavioral promise is not given credence by the FTC. Second, keeping LNR (and Davis) open weighed heavily in favor of no injunction. Moreover, Novant committed to restoring medical services, adding staff, raising salaries, and making investments in equipment and infrastructure at LNR that the judge agreed would benefit patients and medical providers. Again, Judge Bell credited a defendant’s behavioral promise.

The FTC might appeal this decision to the Fourth Circuit. Whether it appeals or not, it could decide to proceed with its internal administrative proceeding. The FTC has shown a willingness to do that, even when a transaction has already closed. So, stay tuned for what comes next.