United States: State Action Doctrine Immunizes Public Hospital and the Commercial Payor From Antitrust Claim

The U.S. Court of Appeals for the Sixth Circuit has affirmed a district court’s ruling that the state action doctrine immunized a public hospital authority in Tennessee from potential antitrust liability arising out of conduct its local competitor alleged to be anticompetitive. The decision in Jackson, Tennessee Hospital Company, LLC v. West Tennessee Healthcare, Inc., Case No. 04-5387 (Sixth Cir. July 11, 2005), is significant for several reasons. First, it demonstrates the applicability of state action immunity to public hospitals that exercise the powers and authority conferred by their state legislature. Second, it confirms the doctrine, when it applies, protects both the governmental entity and the private parties with whom it collaborates. Third, the court reached its conclusion in the face of opposition by the Federal Trade Commission (FTC), the Antitrust Division of the U.S. Department of Justice and the Tennessee Attorney General. Finally, although the case arose out of a political subdivision’s ownership and operation of a hospital, the principles articulated in the court’s decision will apply more broadly to any case involving a local government’s exercise of powers conferred by its state legislature.

Jackson-Madison General Hospital District (the Hospital District) is a private act hospital authority created by the Tennessee legislature in 1949. Owned by the City of Jackson and County of Madison, Tennessee, the Hospital District is a political subdivision of the state of Tennessee.

In 1995 and 1996, the Tennessee legislature enacted legislation that conferred a broad range of powers and rights to private act hospital authorities, including the Hospital District. Pursuant to the Private Act Metropolitan Hospital Authorities Act of 1995 and the Private Act Hospital Authority Act of 1996, private act hospital authorities, like the Hospital District, were expressly given the authority to borrow, issue bonds or take on other forms of debt; own and operate subsidiaries such as outpatient departments, clinics etc.; participate as a shareholder or partner in any lawful form of business; set fees to be charged to patients; hire and fire all employees, as well as set the terms of compensation; set rules governing physicians and other providers operating within the authority; set criteria for admission of patients; sue and be sued; invest any excess funds and acquire or improve real any real property. The legislation included a "catch-all" provision stating the hospital authority shall "[h]ave and exercise all powers necessary or convenient to effect any or all the purposes for which a private act metropolitan hospital authority is organized."

The Tennessee legislation contained another provision—which ultimately became the focus of the litigation and the Sixth Circuit’s decision:

In the exercise of its powers, including, without limitation, the powers in this section, any other provision of this part and of any other law a private act metropolitan hospital authority may acquire, manage, lease, purchase, sell, contract for or otherwise participate solely or with others in the ownership or operation of hospital, medical or health program properties and facilities and properties, facilities, and programs supporting or relating thereto of any kind and nature whatsoever and in any form of ownership whenever the board of trustees in its discretion shall determine it is consistent with the purposes and policies of this part or any private act applicable to it, and may exercise such powers regardless of the competitive consequences thereof.

In 2003, Jackson, Tennessee Hospital Company, which operates a private, for-profit hospital that competes with the Hospital District, filed a complaint in federal district court alleging violations of federal and state antitrust laws by the Hospital District and Blue Cross Blue Shield of Tennessee (BCBST). The essence of the plaintiff’s complaint was that the Hospital District, separately and in combination with BCBST, monopolized the markets in which it competes in violation of Sherman Act Sections 1 and 2, the Tennessee Constitution’s prohibition against monopolies and the Tennessee Consumer Protection Act.

According to the plaintiff hospital, the Hospital District engaged in a laundry list of anti-competitive activities that were intended to exclude or eliminate competitors from the market. The categories of the District’s allegedly anticompetitive conduct included entering into exclusive contracts with payors, like BCBST; precluding them from contracting with the plaintiff hospital; entering into exclusive contracts with physicians prohibiting them from practicing at the plaintiff hospital; in combination with BCBST, preventing physicians from admitting patients to the Hospital District’s competitors; penalizing employers who contract with competing hospitals; acquiring real estate to land-lock the plaintiff hospital; charging prices that were too high or too low; acquiring other community hospitals, physician practices and ancillary providers; using the certificate of need process to expand the Hospital District and restrain the plaintiff hospital from expanding; granting most favored nations pricing to BCBST and tying or bundling its services when contracting with payors.

The Hospital District and BCBST moved to dismiss the complaint, arguing that the state action doctrine—which protects political subdivisions of the state from antitrust liability when there is a clearly expressed state policy authorizing anticompetitive conduct—barred the plaintiff hospital’s antitrust claims. The federal district court, after reviewing Tennessee legislation creating the Hospital District and the subsequent legislation in 1995 and 1996, which were enacted to enable private act hospital authorities like the Hospital District to compete more effectively with private hospitals (like the plaintiff, for example), held the Hospital District was immune from antitrust liability for all of the conduct that plaintiff challenged. The court also ruled BCBST was immune because it was the Hospital District’s decision to enter into the exclusive contract with BCBST that was the basis for the plaintiff’s claim against BCBST.

In an opinion written by Chief Judge Boggs, the Court of Appeals unanimously affirmed the district court’s dismissal of the plaintiff’s complaint. The court articulated the issue and the basis for its ruling succinctly: "The state action doctrine protects subdivisions of a state government from antitrust liability when there is a clearly expressed state policy authorizing anticompetitive acts. The issue, then, is whether Tennessee law authorizes the Hospital District to engage in anticompetitive actions. We conclude that it does and therefore affirm."

The Sixth Circuit summarized the development of the judicially created state action doctrine—which holds that the antitrust laws do not apply to states acting as sovereigns—from Parker v. Brown, 317 U.S. 341 (1943), to Town of Hallie v. City of Eau Claire, 471 U.S. 34 (1985), which held that political subdivisions of the state are insulated from potential antitrust liability when they act pursuant to a clearly expressed state policy displacing competition with regulation, to City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365 (1991), which held the state legislature did not have to explicitly authorize anticompetitive conduct, as long as anticompetitive effects would logically result from (or were the foreseeable result of) the authority granted by the state. The court then said that "[t]he issues of implied authority and ‘foreseeable’ anticompetitive effects are recurring ones in the case law, but, obviously, are relevant only when there is no express authorization for anticompetitive conduct."

Turning to the Tennessee statutes at issue, the Private Act Metropolitan Hospital Authorities Act and the Private Act Hospital Authority Act, the court said the language of the statute itself—"[hospital authorities] may exercise such powers regardless of the competitive consequences thereof"—clearly established the Tennessee legislature’s intent to create an exception to the antitrust laws. The court said:

[W]e read the legislative language and surrounding circumstances as demonstrating that the Tennessee legislature invested public hospital corporations with very broad powers to ensure their continued viability; authorized them to exercise many powers, such as contracting for services and acquiring property, that could easily lead to anticompetitive consequences; and then specifically stated that such activities could be undertaken without regard to the effects of such activity on competition. This constitutes the authorization necessary to invoke the state action doctrine.

There are hundreds of government-owned hospitals whose competitive activities could be insulated from potential antitrust liability pursuant to the state action doctrine. Similarly, private parties that engage in collaborative arrangements with government-owned hospitals—which may take the form of joint ventures, the formation and operation of provider networks, mergers or contractual relationships—also may be cloaked with immunity from damages for anticompetitive effects that result from those arrangements.

The applicability of the state action doctrine to the conduct of any particular government-owned hospital will depend, of course, on several factors. The most important is the state legislation authorizing the conduct at issue. The more explicit the legislation’s delegation of authority, the more likely it is that state action immunity will apply. In that respect, the Tennessee statutes at issue in Jackson, Tennessee Hospital Company LLC v. West Tennessee Healthcare, Inc. could not have been stronger for the public hospital authority; the legislation not only contained a lengthy list of powers—broad and specific—that were conferred on public hospitals, but it also affirmatively established the legislature’s recognition that the exercise of those powers could have anticompetitive consequences ("[hospital authorities] may exercise such powers regardless of the competitive consequences thereof.").

Another relevant consideration is the extent to which the conduct at issue conforms to the powers conferred in the enabling legislation. Again, the more closely the allegedly anticompetitive activities comport with the authority delegated by the legislation, the more likely it is that state action immunity will apply.

The Sixth Circuit’s opinion also is significant because it represents a setback to the federal and state antitrust enforcers’ effort to narrow the scope of the state action doctrine. Consistent with the report of the State Action Task Force, issued by the FTC’s Office of Policy Planning in September 2003, which called for a more rigorous application of the state action doctrine’s "clear articulation" requirement, the FTC and the Antitrust Division of the U.S. Department of Justice filed a joint amicus brief in support of the plaintiff, arguing against the application of the state action doctrine to immunize the Hospital District and BCBST from potential antitrust liability. They were joined by the Attorney General of the state of Tennessee, who also submitted an amicus brief in support of the plaintiff’s position. (Ironically, in 1995, when the Private Act Metropolitan Hospital Authorities Act was passed, the Tennessee Attorney General issued an opinion unambiguously stating that "[t]he exercise of the increased powers and privileges set forth in the Act qualifies for state action immunity from the federal antitrust law." The attorney general’s amicus brief contained no explanation for the change in his office’s position.)

The Sixth Circuit’s opinion in Jackson, Tennessee Hospital Company LLC v. West Tennessee Healthcare, Inc., will be helpful for government-owned hospitals that seek to invoke the state action doctrine to defend their allegedly anticompetitive exercise of legislatively conferred powers. More broadly, the decision will be relevant in any situation where a political subdivision of the state exercises powers and authority conferred by the state legislature. It is reasonable to assume, however, the Sixth Circuit’s decision will not deter federal and state antitrust enforcers from their continuing effort to persuade the courts to construe and apply the doctrine more narrowly. It is also likely that non-government entities and others affected by the competitive activities of government-owned "competitors" will examine more closely their state legislation and attempt to address the issue through their legislatures rather than the courts.

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