United States: Supreme Court Limits State Action Immunity In FTC v. Phoebe Putney Health System, Inc.

As we predicted during Pepper's Antitrust CLE Event, the Supreme Court has ruled in the Phoebe Putney case overturning the state action immunity defense. Below is our update.

On Tuesday, the United States Supreme Court reined in the state action immunity doctrine, which exempts municipalities from scrutiny under the federal antitrust laws when they act pursuant to a "clearly articulated state policy" to displace competition. Justice Sonia Sotomayor, writing for a unanimous Court, held that the grant of general corporate powers by the state is not enough to confer state action immunity because "simple permission to play in a market" does not "foreseeably entail permission to roughhouse in that market" anticompetitively. In short, state regulatory statutes that confer general corporate powers to municipalities are not sufficient to meet the "clearly articulated" standard and cannot be interpreted to mean that the state intended to displace competition.

The Court analyzed a Georgia law called the "Hospital Authorities Law" (the Law), which authorizes each Georgia county and municipality to create a hospital authority to operate local health care facilities. The Law enumerates 27 specific powers of hospital authorities, including the power "[t]o acquire by purchase, lease, or otherwise and to operate projects," which are defined to include hospitals and other public health facilities. In 1941, the city of Albany and Dougherty County established a hospital authority (the Authority), which promptly acquired Phoebe Putney Memorial Hospital (Memorial). In 1990, the Authority formed two private nonprofit entities—Phoebe Putney Health System, Inc. (PPHS) and its subsidiary, Phoebe Putney Memorial Hospital, Inc. (PPMH)—and gave PPMH exclusive authority over the operation of Memorial for 40 years. In 2010, PPHS presented the Authority with a plan under which the Authority would acquire Palmyra Medical Center, the only other hospital in Dougherty County, with PPHS funds and lease Palmyra to a PPHS subsidiary for $1 per year. The Authority approved the plan, which would, in effect, allow PPHS and its subsidiaries to control 86 percent of the market for acute-care services.

The Federal Trade Commission filed a complaint challenging the transaction as likely to create a monopoly in violation of Section 5 of the FTC Act and Section 7 of the Clayton Act. The Eleventh Circuit affirmed the district court's dismissal of the complaint, reasoning that the transaction was immune from antitrust liability under the state action doctrine because anticompetitive conduct was a "foreseeable result" of the Law which conferred on the Authority the right to "acquire" hospitals.

In reversing the Eleventh Circuit decision, the Supreme Court explained that the state action doctrine immunizes states from liability under the antitrust laws and allows states to extend that immunity to municipalities and even private parties, but only under certain circumstances. Immunity will only attach to the activities of municipalities if they are undertaken pursuant to a "clearly articulated and affirmatively expressed" state policy to displace competition.¹ Applying this test, the Court held there was "no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership." Instead, the Law simply grants general corporate powers, which does not include permission to use those powers anticompetitively.

Because a state legislature rarely writes a statute expressly displacing the federal antitrust laws, the Court held in its 1985 decision Hallie v. Eau Claire that the state action immunity applies where the anticompetitive effect was the "foreseeable result" of the acts the state authorized. The Court in Phoebe, however, somewhat chastised the Eleventh Circuit for applying the foreseeability test too loosely. It explained that Supreme Court cases finding a "clear articulation" without an explicit statement have uniformly involved authorization to act or regulate in ways that were inherently or logically anticompetitive (i.e., "foreseeable"). The Court clarified that just because a reasonable legislature could anticipate that a municipality will exercise its general powers in anticompetitive ways does not mean it has clearly articulated an affirmative state policy to displace competition.

The Court rejected three arguments raised by the Phoebe respondents. First, it found respondent's argument that Georgia counties are so small that acquisitions by the authorities would foreseeably have anticompetitive consequences to be "too slender a reed" to support the Eleventh Circuit's holding. Second, it acknowledged that the Law grants hospital authorities some unusual powers and obligations—including the power of eminent domain and the obligation to operate on a nonprofit basis—and that hospital authorities operate in a regulatory context that requires parties seeking to establish new medical facilities to overcome a barrier of entry by obtaining a certificate of need from the state. But, the Court explained, "regulation of an industry, and even the authorization of discrete forms of anticompetitive conduct ... does not establish that the State has affirmatively contemplated other forms of anticompetitive conduct." Third, the Court rejected respondent's suggestion that, when in doubt, the court should err on the side of recognizing immunity to avoid undue interference with state objectives. In doing so, it cited an amici brief filed by 20 states contending that loose application of the clear articulation test would effectively require states to disclaim any intent to displace competition. We decline, the Court explained, "to set such a trap for unwary state legislatures."

So for now, attempts to expand the state action doctrine through a broad interpretation of "foreseeability" will not fly. States intending to supplant the federal antitrust laws through delegations to municipalities must make their intentions known without equivocation.

Footnotes

1. When a private party claims state action immunity, it must not only show a clearly articulated and affirmatively expressed state policy, but also that the state actively supervises the private party's activities. Because the Court held that the Law did not "clearly articulate" an intent to displace competition, it did not address this second prong. The FTC had argued that state action immunity did not apply because the state failed to actively supervise, which it was required to do because the nonprofits were private entities and the Authority's involvement in the transaction was minimal.

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