Federal Trade Commission v. Phoebe Putney Health System, Inc. (11-1160)

Phoebe Putney Health Systems ("PPHS") leased and operated one of two hospitals in Dougherty County, Georgia. PPHS then leased the other county hospital, Palmyra Medical Center, from the Hospital Corporation of America ("HCA"). In April 2011, the Federal Trade Commission ("FTC") filed a complaint against PPHS, alleging that by leasing Palmyra, PPHS violated the Clayton Act and the FTC Act by acting with anticompetitive effect. PPHS argues that it should be exempt from federal antitrust law under the state action doctrine. The Eleventh Circuit found for PPHS, stating that a private actor falls within the state action doctrine when its anticompetitive activity is foreseeable by the state legislature. The FTC urges a more stringent standard where the anticompetitive effect must be intrinsic to the state’s authorization. How the Supreme Court decides this case will dictate how state legislatures delegate power to local government entities, and whether or not they must formally articulate authorization for such an entity to act with anticompetitive effect.

Questions as Framed for the Court by the Parties 

1. Whether the Georgia legislature, by vesting the local government entity with general corporate powers to acquire and lease out hospitals and other property, has “clearly articulated and affirmatively expressed” a “state policy to displace competition” in the market for hospital services.

2. Whether such a state policy, even if clearly articulated, would be sufficient to validate the anticompetitive conduct in this case, given that the local government entity neither actively participated in negotiating the terms of the hospital sale nor has any practical means of overseeing the hospital's operation.

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Issue(s)

Where a state legislature’s authorization leads to anticompetitive actions by a private actor, what standard will be applied to determine whether those actions are exempt from federal antitrust law?

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Facts

The Georgia Hospital Authorities law grants the power for each county and municipality to activate a “hospital authority,” which can exercise “public and essential government functions,” and possess the powers of a private corporation in the same industry. See Brief for Petitioner, Federal Trade Commission at 8. Any act undertaken by the hospital authorities must benefit the community by increasing the number of facilities available or by lowering the costs of healthcare. See id. at 8–9.

Dougherty County, Georgia has two hospitals, Phoebe Putney Memorial Hospital (“Memorial”) and Palmyra Medical Center (“Palmyra”), two miles from each other.  See Brief for Petitioner at 11. Acting under Georgia’s Hospital Authorities Law, Albany and Dougherty County activated the Hospital Authority of Albany-Dougherty County, which acquired Memorial in 1941 and operated the hospital until 1990. See id. at 9–10. In 1990, Memorial was leased to Phoebe Putney Health System ("PPHS"), one of two private corporations created by the Authority that year. See id. PPHS now has full control over Memorial, and the Authority is essentially a non-entity, with no budget or staff. See id. Palmyra is owned and operated by the Hospital Corporation of America (“HCA”), a large national healthcare service provider. See id. at 11.

In 2010, PPHS acquired control of Palmyra through a deal that used the Authority as an intermediary. See Brief for Petitioner at 11. First, the Authority was to purchase Palmyra using PPHS-controlled funds. See id. Shortly thereafter, Authority would lease Palmyra to PPHS for one dollar per year. See id. at 11–12. The deal would require the Authority’s approval, but PPHS and HCA negotiated the contracts involved prior to their presentation to the Authority. See id. at 12. PPHS and HCA, without the Authority present, negotiated three agreements that would transfer HCA’s assets in Palmyra to PPHS in exchange for $195 million. See id.These agreements were presented to the Authority in a December 2010 meeting and were approved without any revisions at the same meeting. See id. at 13.

In April 2011, the Federal Trade Commission (“FTC”) issued a complaint under the Clayton Act and the FTC Act, charging that the proposed transaction would substantially lessen competition in the relevant markets in violation of both acts. See Brief for Petitioner at 13. Joined by the State of Georgia, the FTC filed suit against PPHS in District Court charging violation of the Clayton and FTC Acts. See id. The suit was dismissed by the District Court, which found that the Georgia legislature had “articulated an intent to displace competition because ‘the Authority was foreseeably likely to acquire and lease hospitals in the manner proposed in this case.’” See id. at 14. The court further found that PPHS’s conduct would not need to survive antitrust scrutiny because “PPHS was acting ‘as an agent of the [Authority], which has received antitrust immunity.’” See id. Following an FTC appeal, the Eleventh Circuit Court of Appeals affirmed the holding of the District Court. See id. at 15. The United States Supreme Court granted certiorari on June 25, 2012. See id. at 1.

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Discussion

The outcome of this case will dictate whether a state legislature must expressly grant a local government entity the power to act with anticompetitive effect or if the foreseeability of such a result is sufficient without an affirmative articulation. See Brief for Petitioner, Federal Trade Commission at 20. As the rule stands now, local government entities can act with anticompetitive effect so long as they have been granted such a right by the legislature. See id. at 3. In the absence of an express grant from the state legislature, Courts must analyze these cases in light of the “foreseeability” of the anticompetitive effect.  See id. This case centers on the scope of “foreseeability” and what effects the various iterations of the “foreseeability” test may have.  See Brief of Amicus Curiae Illinois et al. (“States”) in Support of Petitioner at 7. How the Court rules in this case will impact the autonomy of local government entities and the practice of state legislatures in creating such entities.

COMPETETIVE MARKETS

The Attorneys General of twenty states filed an amicus brief in this case in support of the Federal Trade Commission ("FTC"), advocating that delegation of power to local government entities should not include a de facto presumption of authority to act anticompetitively. See Brief of States at 12. Their argument is premised on the belief that most states do not want these authorities to act with anticompetitive effect. See id. The Attorneys General further suggest that a court decision to uphold the “foreseeability” standard dictated by the Eleventh Circuit would make it perilous for States to delegate. See id. While this decision would create more work for state legislatures, it would also be a detriment to the residents, as they would lose the tailored actions of local government in certain areas. See id.

In reply, Lee Memorial Health System ("LMHS") notes that the express purpose of these local government entities is to provide healthcare to all patients, with special focus on those who are unable to pay. See Brief of Amicus Curiae Lee Memorial Health System (“LMHS”) in Support of Respondent at 3. In furthering that purpose, LMHS suggests that the local government entity will almost inevitably have to act with anticompetitive effect as the patients they seek to aid are underserved by private health care in a competitive marketplace. See id. LMHS believes that imposing a strict requirement of competitive activity on these local government entities would restrict their ability to benefit the state and local residents they were created to assist. See id.

STATE LEGISLATURE AUTONOMY

In their Amicus Brief in support of Phoebe Putney Health System, the American Hospital Association ("AHA") and the Georgia Hospital Association address federalism concerns, and specifically the view that federal law should not interfere with “traditional state prerogatives.” See Brief for American Hospital Association et al. (“AHA”) in Support of Respondent at 8. AHA contends that the deference granted to states in certain capacities includes delegation of power to local government entities and that in those specific areas, imposition of federal law would impinge on state government authority. See id. The AHA further concludes that requiring state legislatures to adhere to federal antitrust laws when creating local government entities would be an overstepping of federal government bounds, which Courts have traditionally viewed with “great skepticism.” See id.at 17. 

In response, the States as amici point out that when States delegate power to a local authority, they expect that authority to act in the way the legislature contemplated, but presumably while maintaining competitive markets. See Brief of States at 13. As the States see it, in the vast majority of situations where a state legislature delegates power to local authorities, they do not intend to grant the power to act anticompetitively.  See id. Thus, the stricter view of the “foreseeability” test suggested by the FTC will greatly benefit states, by reducing the possibility that the State legislature will unintentionally authorize anticompetitive conduct when no such grant was intended. See id.at 14–15.

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Analysis

This case concerns when the state-action doctrine applies to insulate private actors engaged in anticompetitive practices from the constraints of federal antitrust law. See Brief for Petitioner, Federal Trade Commission at I. In order to be exempt, an action taken by a private entity must satisfy a two-pronged test: first, the action must taken be pursuant to a policy that is “clearly articulated and affirmatively expressed” by the state to authorize anticompetitive conduct; second, the action must take place under active state supervision. See id. at 4 (citing Cal. Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980)).  The Court’s decision in this case will set the standard for determining what conduct falls within the state-action exemption. See id. at 18.

CLEAR ARTICULATION & AFFIRMATIVE EXPRESSION PRONG

Respondent Phoebe Putney Health System (“PPHS”) argues that the Clear Articulation Prong is to be evaluated under a “foreseeability” standard demonstrated in Supreme Court precedents including Town of Hallie v. City of Eau Claire, 471 U.S. 34 (1985), and City of Columbia v. Omni Outdoor Advertising, 499 U.S. 365 (1991), and embraced by the Eleventh Circuit. See Brief for Respondent, Phoebe Putney Health Systems at 17. Under this standard, it is not necessary for a state to explicitly express an intention to “authorize anticompetitive actions.” Id. at 24. Rather, the anticompetitive actions must be a “foreseeable result” of the state’s delegation of authority. See id.PPHS argues that Georgia law grants hospital authorities the power to acquire other local hospitals as part of their mission to promote public health. See id. at 11. According to PPHS, the fact that some of these acquisitions would take place in small health care markets implies that the state legislature must have foreseen that this grant of power would have anticompetitive effects. See id. at 11–12.

Petitioner the Federal Trade Commission (“FTC”) argues that, for a state law authorizing anticompetitive action to be clearly articulated, the law must express a policy or structure that is “necessarily and inherently” incompatible with free market competition. See Brief for Petitioner at 21.  According to the FTC, the interpretation of “foreseeability” asserted by PPHS and the Eleventh Circuit is misplaced. See id. at 37.  Specifically, the FTC states that “foreseeable” should be understood more narrowly than “reasonably anticipated,” as the Eleventh Circuit and PPHS understand it. See id. at 37. Rather, the FTC urges that the term “foreseeable” has the more narrow meaning of that which the state can be presumed to have endorsed. See id. at 38–39. The FTC argues that this means that the state must have specifically authorized conduct that is inherently anticompetitive, not that the conduct must merely be the result of broadly granted corporate powers. See id. at 43-44. The FTC admits that this standard is “demanding.” Id. In the present case, according to the FTC, nothing in Georgia law’s grant of powers to hospital authorities indicates that the state intended to displace competition in the hospital industry. See id. at 27–28.

Amicus American Antitrust Institute (“AAI”) argues that the Supreme Court should reject the Eleventh Circuit’s “foreseeability” standard that the AAI says has been rightly criticized by other courts and commentators. See Brief of Amicus Curiae American Antitrust Institute at 4. This rejection has come, according to the AAI, because the fact that anticompetitive practices may result from state authorization does not logically imply that the state intended to immunize those practices. See id. at 4. The AAI instead advocates a presumption against such immunity and argues that the Clearly Articulated Prong is satisfied only by a “clear statement” by the legislature, or else by a showing that state authorization necessarily has anticompetitive effects. See id. at 5–6.

PPHS responds that the interpretation advanced by the FTC conflicts with Supreme Court precedent, and represents a requirement of express authorization that the Court has thus far rejected. See Brief for Respondent at 24–25. PPHS argues that its standard, which it views as consistent with precedent, demonstrates a respectful deference to states’ ability to set policy, as well as a realistic view of how such policy is formulated. See id. at 25.

In addition, amicus Lee Memorial Health System (“LMHS”) urges the Court to reject what it sees as the FTC’s “bright-line” rule of inevitability, which is only a step away from express authorization. See Brief of Amicus Curiae Lee Memorial Health System at 16–17. In LMHS’s view, the FTC’s approach conflicts with Supreme Court precedents, such as Town of Hallie, that have rejected a requirement of express authorization. See id. In addition, LMHS argues that the FTC’s standard undermines the principles of federalism upon which the state-action doctrine is based. See id. at 17–18.

Amici American Hospital Association (“AHA”) and Georgia Hospital Association (“GHA”) invoke the plain statement doctrine in favor of the Eleventh Circuit’s “reasonable anticipation” standard. See Brief of Amici Curiae American Hospital Association and Georgia Hospital Association at 3. They argue that any alteration by Congress of the balance of federal-state power must be unmistakable in a statute’s language. See id. The federal antitrust laws, according to the AHA and GHA, contain no such unmistakable purpose to allow federal scrutiny of the scope of power delegated by the states to private actors. See id. at 5. In the AHA and GHA’s view, the FTC’s standard would upset this basic presumption against federal interference with the states. See id. at 6.

ACTIVE SUPERVISION PRONG 

The FTC argues that, even if the Clear Articulation prong was satisfied in this situation, the transaction at issue was not actively supervised by the state and thus fails to meet the second prong of the state-action test. See Brief for Petitioner at 45.  The FTC asserts that in this transaction a private party is using a public authority as a means to gain a private monopoly. See id. Here, according to the FTC, the supervision necessary to invoke the state-action doctrine to shield PPHS’s action from antitrust laws is absent. See id. at 44.

PPHS counters that the action at issue, acquiring PPHS’s competitor hospital (Palmyra) and leasing it to PPHS, was an action of the Hospital Authority of Albany-Dougherty County (“the Authority”), and that the FTC has not asserted that the Authority’s actions are to be supervised by the state. See Brief for Respondent at 47–48. Furthermore, even if PPHS’s actions are relevant, PPHS is bound to operate as a special purpose non-profit entity in carrying out the Authority’s public mission, and that this structure is authorized under Georgia law. See id. at 50–51. Accordingly, PPHS argues that whether an action was taken directly by the Authority or by its agent PPHS should be irrelevant. See id. at 51.

The FTC responds that PPHS’s status as a non-profit entity should not exempt it from federal antitrust restrictions. See Brief for Petitioner at 46. Moreover, the FTC asserts that PPHS’s distinct interests preclude a credible claim that it is acting solely as the Authority’s agent. See id.at 47–48. As a result, the FTC urges that PPHS must be under active supervision by the state to exempt it from antitrust regulations. See id. at 48. Here, according to the FTC, the necessary supervision is lacking. See id. at 48–51.

Amicus National Federation of Independent Business (“NFIB”) argues that it is irrelevant whether the action at issue was taken by a private or public entity. See Brief of Amicus Curiae National Federation of Independent Business at 28. The NFIB argues that, as market participants, both should be subject to federal antitrust law. See id. at 29. NFIB contends that introducing a state competitor should not constitute a “clear articulation” or “affirmative expression” of a state’s intention to remove competition.  See id.

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Conclusion

The Supreme Court’s decision in this case will dictate the standard for determining when the conduct of a private actor working with a local government entity falls within the state-action exemption from federal antitrust laws. The outcome of this case will prescribe how state legislatures delegate authority to local government entities, and whether or not they must formally articulate authorization for such an entity, or a subsidiary under its control, to act with anticompetitive effect. The Court’s ruling in this case will have far reaching implications with regard to federalism and more specifically, how much deference state legislatures have in creating and regulating local government entities.

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