On February 19, the U.S. Supreme Court issued a major antitrust decision limiting antitrust immunity for state-sanctioned conduct. The court unanimously overturned the U.S. Court of Appeals for the Eleventh Circuit’s ruling allowing Phoebe Putney Health System Inc. to acquire its only competitor. The Eleventh Circuit had previously stated the acquisition was permissible under the state-action doctrine. In its opinion, the Supreme Court ruled that the granting of mere general corporate powers to government entities under state law does not offer blanket protection from the antitrust laws. The Supreme Court emphasized that immunity from the antitrust laws is “disfavored” unless a state intended to displace competition. In so ruling, the Supreme Court has further limited the ability of health care and other entities to rely upon the state-action immunity doctrine to avoid antitrust entanglement.

In April 2011, the Hospital Authority of Albany-Dougherty County in Georgia, which owned and operated Phoebe Putney Memorial Hospital, approved a plan to acquire Palmyra Park Hospital, which was Phoebe Putney Memorial Hospital Inc.’s only competitor in a six-county geographic market. The two hospitals accounted for more than 85 percent of the acute care in that geographic market, which normally would have raised significant antitrust concerns. Indeed, the Supreme Court appeared to indicate as much in stating, “While subsequent acquisitions by authorities have the potential to reduce competition, they will raise federal antitrust concerns only in markets that are large enough to support more than one hospital but sufficiently small that the merger of competitors would lead to a significant increase in market concentration. This is too slender a reed to support the Court of Appeals’ and respondents’ inference.”

Shortly after the hospital authority approved the deal, the Federal Trade Commission sought to enjoin the acquisition. The FTC claimed that the acquisition would substantially lessen competition in the market for acute care hospital services in Southwestern Georgia. The hospitals claimed that the transaction was exempt from the antitrust laws because it was shielded by the state-action immunity doctrine. The district court agreed, dismissing the complaint and the FTC appealed the case to the Eleventh Circuit.

In December 2011, the Eleventh Circuit held that Phoebe Putney Health System’s $195 million acquisition of Palmyra Park Hospital was permitted to proceed despite antitrust issues, because the acquisition was protected by the state-action doctrine. The Eleventh Circuit agreed with the FTC’s assertion that the deal would likely create a monopoly. However, the Eleventh Circuit was equally convinced that the transaction was shielded by the state-action doctrine and ruled that the state’s 1941 Hospital Authorities Law met the criteria necessary to create state-action immunity.

Georgia’s 1941 Hospital Authorities Law established a system in which local hospital authorities have freedom to meet public health needs by buying, selling, leasing or otherwise providing health care facilities in their region. Phoebe Putney is owned and operated by the Hospital Authority of Albany-Dougherty County, which was created under this law. The Eleventh Circuit held that Georgia’s 1941 Hospital Authorities Law met the requirements of state-action immunity, including that it contemplated anti-competitive effects, and thus actions of the Hospital Authority of Albany-Dougherty County are protected by state-action immunity. Specifically, the Eleventh Circuit speculated that the Georgia Legislature must have anticipated possible anti-competitive effects when it granted general powers to hospital authorities to acquire and lease other entities, thus it was a “foreseeable result” of the legislation.

Following its loss at the Eleventh Circuit, the FTC sought certiorari with the Supreme Court. On appeal, the Supreme Court unanimously overturned the Eleventh Circuit’s decision, holding that the Eleventh Circuit applied the concept of “foreseeability” too loosely. Justice Sonia Sotomayor wrote for the unanimous court, emphasizing that although states may authorize conduct that violates the antitrust laws, the state must explicitly “delegate authority to act or regulate anti-competitively.” This was the first time the Supreme Court has reviewed a merger under the antitrust laws in decades. With the Supreme Court’s decision in FTC v. Phoebe Putney Health System, the court clarified, perhaps better to say shifted and made much tougher, a doctrine it first established 70 years ago.

In the 1943 decision Parker v. Brown, the Supreme Court established that the federal antitrust laws do not apply to certain state conduct. This controversial decision spawned what is now called the state-action immunity doctrine. Actions by the state itself, through its legislature, for example, are almost always free from antitrust scrutiny. All other state and local conduct, however, must satisfy some variation of the more narrowly defined two-pronged test developed in 1980 by the Supreme Court in California Retail Liquor Dealers Association v. Midcal Aluminum: (1) the challenged restraint must be “one clearly articulated and affirmatively expressed as state policy,” and (2) the policy must be “actively supervised” by the state itself.

Previously, the Supreme Court had applied a permissive “foreseeability” standard when evaluating the first prong of the test. State-action immunity applied if the anti-competitive effect was the “foreseeable result” of what the state authorized. That is, the legislature need not expressly state that it expects the city to engage in anti-competitive activity; it is enough that “it is clear that anti-competitive effects logically would result” from broad authority to regulate in a particular area. This, of course, allowed courts to speculate about such state intentions unless proof positive was presented.

In Phoebe Putney, the Supreme Court shifted its “reasonably foreseeable” test. Now, to avoid antitrust scrutiny, it must be shown that states must “affirmatively contemplate” that anti-competitive conduct is a possible result. The court found there was no evidence presented that the state affirmatively contemplated that the hospital authorities created by the 1941 Hospital Authorities Law would displace competition through acquisitions. The acquisition and leasing powers conferred on the hospital authorities mirrored general corporate powers routinely conveyed on private corporations. The court held that, to invoke state-action immunity, the hospital authority must show it was expressly given authority to act or regulate anti-competitively. Such evidence, the court stated, would need to involve “authorizations to act or regulate in ways that were inherently anti-competitive.” The court found that no such evidence was presented in the record.

While Phoebe Putney involved a hospital merger, the decision has far-reaching implications for industries beyond health care. The imposition of general corporate powers will not cut it anymore. Indeed, one could argue such general authority raises a presumption that the antitrust laws now apply. The Supreme Court has made clear that state-action immunity from antitrust laws is to be applied limitedly. The Supreme Court also made clear in its decision the important (and perhaps paramount) public policy goals served by the antitrust laws. As Sotomayor stated for the full court, “But given the fundamental national values of free enterprise and economic competition that are embodied in the federal antitrust laws, ‘state-action immunity is disfavored, much as are repeals by implication,’” quoting from its 1992 decision in FTC v. Ticor Title Insurance. Such basic reaffirmation of the antitrust laws and their purposes by the Supreme Court speaking as one voice could be a foreboding precursor for future antitrust cases brought before it also trying to limit the reach of those laws.

Moreover, businesses and joint ventures that previously thought they were shielded from antitrust scrutiny because of state oversight or regulation should re-examine that security and possibly shore up the intent of the state to permit the empowered entity to act or regulate anti-competitively. Such intent cannot just be assumed or the fate of Phoebe Putney may rear its ugly head in subsequent litigation and undo another costly merger. Businesses must now take a closer look at the role the state and state law is taking in their businesses and proscribed conduct and clarify that role if it is unclear going forward. What exactly did the state authorize the business to do and did the state contemplate anti-competitive consequences of the regulation in question? That question must be asked and now it must be answered and shown in the affirmative before (now more predictable) litigation ensues. Stay tuned.

Carl W. Hittinger is the chairman of DLA Piper’s litigation group in Philadelphia, where he concentrates his practice in complex commercial trial and appellate litigation with a particular emphasis on antitrust and unfair competition matters. He can be reached at 215-656-2449 or carl.hittinger@dlapiper.com.

Lesli C. Esposito is a partner with the firm in Philadelphia, where she focuses her litigation practice on antitrust and unfair competition matters. She was formerly a senior attorney with the Federal Trade Commission’s bureau of competition.