/>iThe United States Supreme Court’s February 19th decision in Federal Trade Commission v. Phoebe Putney Health System, Inc.,[1] tightens the “clearly articulated” requirement of the state action doctrine, thereby potentially limiting the immunity from antitrust liability of local governments and instrumentalities carrying out what they may believe to be State regulatory policy.
The State Action Doctrine
In Parker v. Brown,[2] the Supreme Court established the “state action doctrine,” which recognizes the sovereignty of States to regulate their economies, and provides immunity from the federal antitrust laws when a State imposes an anticompetitive restriction “as an act of government.” [3] The Court has extended this immunity to activities of local governments and “sub-state governmental entities” if undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition.[4] In order for a policy to be “clearly articulated,” the anticompetitive effect must be a “foreseeable result” of the applicable law or regulation.[5]
Factual Background
The Phoebe Putnam case involves a challenge by the FTC to a merger of two Georgia hospitals, one of which was owned by a State-authorized “hospital authority.” Georgia’s Hospital Authorities Law (the “Law”) grants local governments the power to create “hospital authorities” to operate health care facilities in the State on a non-profit basis to provide health care to the “indigent sick.” Under the Law, these hospital authorities are intended to “exercise[] public and essential government functions” and were delegated a number of powers, including the power to acquire hospitals. The issue before the Supreme Court was whether that power could be exercised without regard to any possible antitrust consequences, thereby immunizing the conduct from the federal antitrust laws pursuant to the state action doctrine.
The hospital authority established by the city of Albany, Georgia and Dougherty County (the “Authority”) created a private, non-profit corporation to operate a hospital in the city, which was owned by the Authority. In 2010, the non-profit decided to acquire a private hospital in the county, and the acquisition was approved by the Authority. Because the two hospitals accounted for 86 percent of the acute-care hospital services in the county, the merger would have created a virtual monopoly. The FTC challenged the merger as anticompetitive. The district court held that the defendants were immune from antitrust liability under the state action doctrine, and the Eleventh Circuit affirmed. The Supreme Court granted certiorari on the following question: “whether the Georgia Legislature, through the powers it vested in hospital authorities, clearly articulated and affirmatively expressed a state policy to displace competition in the market for hospital services.” The Supreme Court held that it did not and reversed.
The Supreme Court’s Decision
Justice Sotomayor, writing for a unanimous Supreme Court, declared that the Eleventh Circuit applied the “foreseeability” requirement “too loosely” when it concluded that the Georgia Legislature, in granting local hospital authorities the power to acquire hospitals, “must have anticipated” that such acquisitions could have anticompetitive effects.[6] Although Justice Sotomayor did not concede that the court was creating new law or modifying the “foreseeability” standard adopted in its 1985 Town of Hallie decision, this appears to be precisely what the court did. While recognizing that a legislature need not explicitly authorize anticompetitive effects for state action immunity to apply, the court held that “the State must have foreseen and implicitly endorsed the anticompetitive effects as consistent with its policy goals.”[7] (emphasis added.)
Thus, the court essentially may have articulated a new requirement that the State must “implicitly endorse” the anticompetitive effects of a policy for it to be “clearly articulated.” The court did not, however, explain how a State could do so, other than stating that the test is satisfied “where the displacement of competition was the inherent, logical, or ordinary result of the exercise of the authority delegated[.]” [8] As examples, the court noted that it has previously found “clear articulation” where the Legislature authorized conduct that was “inherently anticompetitive.”[9]
The court held that the Georgia Law did not satisfy the clear articulation test, because “there is no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership.”[10] According to the court, the Law only granted local hospital authorities broad, general powers “routinely conferred by state law upon private corporations,”[11] and, even though these powers included the ability to acquire hospitals, it did not “clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition.”[12] Driving home the point that mere foreseeability is not enough, Justice Sotomayor wrote that although a reasonable legislature may anticipate that general powers granted to private parties or local governments could be used in anticompetitive ways, “that (potentially undesirable) possibility falls well short of clearly articulating an affirmative state policy to displace competition with a regulatory alternative.” [13]
Finally, the court rejected the Authority’s suggestion that doubt about whether a policy has been clearly articulated should be resolved in favor of immunity in order to “avoid improper interference with state policy choices.”[14] The court determined that such a presumption is inconsistent with the principle that “state action immunity is disfavored.”[15]
Analysis
Federal Trade Commission v. Phoebe Putney Health System, Inc. seems to reflect the Supreme Court’s view that the policies of federalism and state sovereignty embodied in the state action doctrine do not justify allowing “essential national policies,” such as the antitrust laws, to be “displaced by state delegations of authority intended to achieve more limited ends.”[16] Thus, while not acknowledging that it was making new law, the court appears to have done so by tightening the “clear articulation” requirement to limit the reach of state action antitrust immunity.[17]
Local governments and instrumentalities acting pursuant to a State regulatory scheme seeking to take advantage of the state action antitrust immunity should take note that it now requires something more than mere “foreseeability” that the conduct authorized by the State could result in anticompetitive effects and that neutral corporate powers do not satisfy the “clear articulation” test. It is unclear whether the Court would apply its decision in Phoebe Putnam to private parties claiming they were acting pursuant to State regulatory policy when they engaged in the challenged conduct. Nevertheless, government enforcement agencies – as well as private litigants – can now be expected to rely on the Phoebe Putnam decision to counter claims of state action immunity. In addition, while express language that anticompetitive conduct is intended to be replaced by regulation is not required as a result of this latest decision, the conservative approach to the issue for a State legislator may be to include such language anyhow in view of the absence of specificity in the decision. In all events, it may be that the Supreme Court is retreating from the liberal approach to federalism it has evidenced over at least the last decade.
[1]Federal Trade Commission v. Phoebe Putney Health System, Inc., Case No. 11-1160 (Feb. 19, 2013), Slip Opinion (“Slip. Op.”), available at http://www.supremecourt.gov/
[2] 317 U.S. 341(1943).
[3] Id. at 350, 352.
[4] Community Commc’ns Co. v. Boulder, 455 U.S. 40, 52 (1982). In the case of private actors, the challenged conduct must also be subject to active state supervision. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980). However, the active supervision requirement does not apply to local governments or local government entities. Town of Hallie v. Eau Claire, 471 U.S. 34, 46-47 (1985). Nor does it apply to direct actions of the State or a State agency. See Costco Wholesale Corp. v. Maleng, 522 F.3d 874, 887 (9th Cir. 2008); A.D. Bedell Wholesale Co. v. Philip Morris Inc., 263 F.3d 239, 256 (3d Cir. 2011).
[5] Town of Hallie v. Eau Claire, 471 U.S. 34, 42 (1985).
[6] Slip Op. at 11.
[7] Id.
[8] Id.
[9] Id. at 12.
[10] Id. at 9.
[11] Id.
[12] Id. at 10.
[13] Id. at 13.
[14] Id. at 18.
[15] Id.
[16] Id. at 18.
[17] The Court had also granted certiorari on the question of whether state action immunity was inapplicable in this case because of the Authority’s minimal participation in negotiating the merger and its limited supervision of the hospitals’ operations. However, because the Court held that there was no “clearly articulated” state policy, it did not reach this second question.
