This year was an active year in antitrust, particularly for the Federal Trade Commission. The FTC has aggressively pursued antitrust activity in the health care industry; challenged reportable and nonreportable transactions at a staggering rate; indicated a new desire to seek disgorgement of profits and restitution damages in all their investigations; and seen their full-steam-ahead strategy for increased authority under Section 5 of the FTC Act challenged by many in Congress and yet to see any blessing by the courts. 2012 was a busy year for the FTC in antitrust, and with the re-election of President Obama, their aggressive antitrust enforcement appears poised to continue through 2013.
The health care industry has been a hotbed of antitrust enforcement for several years now, but this year, the activity reached a fever pitch. Antitrust concerns in the health care industry span a variety of areas and affect every type of entity involved in health care. Perhaps most notably, the FTC's challenge of a hospital merger has the Supreme Court of the United States poised to hear its first notable merger case in more than 30 years.
In late March, the FTC asked the Supreme Court to review the U.S. Court of Appeals for the Eleventh Circuit's decision in FTC v. Phoebe Putney Health System and on November 26, the Supreme Court heard argument in the case. While the Eleventh Circuit agreed with the FTC's assertion that the acquisition would result in a monopoly, the court held Phoebe Putney Health System's $195 million acquisition of Palmyra Park Hospital was protected by the state action doctrine. The state action doctrine gives states and state agencies federal antitrust immunity under certain conditions. The FTC had argued that the transaction should not receive such immunity because the transaction involved two hospitals that were essentially privately run. The Eleventh Circuit's decision created a circuit split regarding the state action doctrine, and while the Supreme Court's ultimate decision in Phoebe Putney will likely center on the state action doctrine, many in the legal community are eager for any new opinion from the Supreme Court in the merger field.
Monumental shifts in merger review analysis have taken place since the Supreme Court's last landmark ruling regarding mergers in 1974, U.S. v. General Dynamics. In 1982, the U.S. Department of Justice and the FTC issued what would become the Horizontal Merger Guidelines. Those guidelines include the use of the Herfindahl-Hirschman Index to value changes in concentration caused by mergers and acquisitions. The guidelines have been periodically revised to demonstrate the shift in focus of regulators when analyzing transactions. Regulators now consider ease of entry into the market when analyzing a merger. Regulators are arguing narrower relevant markets in their analysis. These are but a few of the dramatic changes in the merger field, none of which have ever been examined by the Supreme Court, until now.
Hospital mergers have received substantial press, including even local mergers like Reading Hospital in Reading, Pa., that received FTC attention, causing the parties to recently back off that deal. However, hospital mergers are not the only conduct being scrutinized. Potentially anti-competitive conduct, particularly "pay-for-delay" agreements in the pharmaceutical industry, were also the subject of increased examination in 2012. The FTC has alleged that pay-for-delay agreements cost consumers $3.5 billion annually and has cited studies purportedly showing that the number of pay-for-delay agreements appears to be increasing. As a result, the FTC's 2012 annual highlights states, "One of the top priorities continues to be restricting anti-competitive 'pay-for-delay' patent settlements."
The FTC has taken issue with pay-for-delay settlements for years, but the issue came to the forefront this year when the Third Circuit's controversial decision in In re K-Dur Antitrust Litigation created a circuit split on the issue. Some courts have begun to follow what is called the "scope of the patent" test when analyzing pay-for-delay agreements. Essentially, these courts determine if any provisions of the pay-for-delay agreement are more exclusive than the patent at issue, and, if so, subject those provisions to further antitrust scrutiny.
On July 16, in a controversial departure from the prevailing standard, the Third Circuit rejected the "scope of the patent" test in In re K-Dur. Adopting a quick-look rule of reason analysis, the court directed the District of New Jersey on remand to treat any payment from the patent holder to the generic drug manufacturers as prima facie evidence of an unreasonable restraint of trade, which would then be rebutted by showing that the payments were made for a purpose other than delayed entry into the market, or by offering a pro-competitive benefit. What that would entail remains to be seen. This precedential decision imposes a formidable hurdle for pharmaceutical companies to clear before their pay-for-delay settlement agreements are found lawful and not in violation of federal antitrust laws. The Third Circuit's decision in In re K-Dur has now created a notable split among the circuits, and FTC Chairman Jon Leibowitz candidly stated that absent Supreme Court review, the commission will "simply be forced to bring pay-for-delay cases in the Third Circuit for years to come." Stay tuned on that one.
In addition to its aggressive approach to antitrust in the health care industry, the FTC took an aggressive approach to monetary damages in 2012. The FTC recently withdrew its Policy Statement on Monetary Equitable Remedies in Competition Cases. Many had viewed the policy statement as limiting the FTC's use of monetary equitable remedies, including disgorgement of profits and restitution damages to injured parties, to only "exceptional cases" involving "clear" antitrust violations. In withdrawing the policy statement, the FTC removed those limitations and opened the door for pursuing disgorgement of ill-gotten profits and/or damages even in cases where the anti-competitive conduct in question is one of first impression. Under the now-rescinded policy statement, the FTC infrequently sought monetary equitable remedies in competition cases. The FTC reserved such relief for "exceptional" cases and the FTC's success in the courts to date in obtaining such relief has been limited. However, rescinding the policy statement suggests that the FTC will now seek monetary equitable remedies more regularly going forward even where parallel civil litigation is pending.
By rescinding the statement, the FTC has clearly signaled its willingness to pursue monetary penalties in the form of disgorgement of profits and restitution in any competition case, particularly those involving allegations of an impact on price. Even companies engaging in behavior that a court has yet to deem anti-competitive must now weigh the severe risk of the FTC seeking monetary equitable relief. Notably, companies in cases involving conduct that courts disagree whether or not to condemn as anti-competitive will also have to consider the potential risk of disgorging profits or paying restitution, perhaps even when other related civil or criminal cases would sufficiently recover ill-gotten profits. This major development will also substantially up the ante when companies are sitting around the negotiation table with the FTC and discussing options such as consent decrees and stipulated judgments, because what was once exceptional relief may now become the rule.
While the FTC is poised to be just as active, if not more active, in 2013, particularly with regard to antitrust health care issues, it is unclear whether the FTC will continue to seek broader antitrust power in the coming year. Recently, the FTC's potential use of Section 5 of the FTC Act as a means to challenge anti-competitive conduct outside of the reach of traditional antitrust laws has received sharp criticism from both sides of the congressional aisle, the private sector and internally at the FTC. House Republicans and Democrats and Senators on both sides of the aisle have expressed serious concern over the negative impact such an interpretation of Section 5 would have on the nation's recovering economy, by punishing companies whose innovation has resulted in their market leader status.