Opinion recap: A warning about competition
on Feb 19, 2013 at 5:36 pm
Analysis
The Supreme Court labored on Tuesday to indicate that it was not making new law on when state and local governments can gain immunity from federal antitrust law when they let someone else act as a public proxy and competition suffers, but it did come up with a tightened legal formula. If a set-up to perform a public task, like providing hospital care through private entities, will harm competition, the Court said in Federal Trade Commission v. Phoebe Putney Health System, it is not enough to gain immunity if the harm to competition was “foreseeable.” The state must do more to show that it sensed that the harm will occur, and that it has given an indication that it endorses that effect.
The decision, though, was somewhat opaque. On the one hand, the Court indicated that it was relying upon past precedents which had said that, to gain immunity for an anti-competitive public activity by a proxy agency or entity, a state legislature need not say — in so many words — that it intends to achieve harm to competition. On the other hand, the new formula said that “the state must have foreseen and implicitly endorsed the anti-competitive effects as consistent with its policy goals.” It did not spell out with specificity what a legislature must do either to show that it sensed the harm that is in the offing, or how it would endorse that “implicitly.”
The Court provided some hint, though, about the first part of that test — the awareness of the threat to competition. The opinion said that a state can express that awareness by some showing that “the displacement of competition was the inherent, logical, or ordinary result of the exercise of authority” delegated by the legislature.
A further complication in Tuesday’s ruling was the Court’s treatment of a 1985 opinion, in the case of Town of Hallie v. City of Eau Claire. In that decision, the Court had said that state-action immunity applies if the harm to competition was the “foreseeable result” of what the state legislature had authorized its proxy to do. The U.S. Court of Appeals for the Eleventh Circuit, in fact, had applied that very analytical approach in finding immunity in this case.
Reacting, the Supreme Court said that the Eleventh Circuit had applied that test “too loosely.” The opinion went on to say that mere foreseeability “falls well short of clearly articulating” a state policy to let a proxy displace competition.
What was fundamentally at issue in the new case was what is called the “state action” exemption to federal antitrust prosecution. In a 1943 decision, Parker v. Brown, the Court ruled that Congress in passing antitrust laws did not intend to restrict state governments in how they run their own, more local economies. So, when state action is present, anti-competitive conduct is allowed “as an act of government.”
In later decisions, the Court has said that the state also can transfer that immunity to local governments, or even to private organizations or businesses, when it designates them to perform public tasks. The Court, though, cautioned in its new decision that “given the fundamental national values of free enterprise and economic competition that are embodied in the federal antitrust laws, state-action immunity is disfavored.” Presumably, the new, somewhat more restrictive immunity formula was designed to reflect that sentiment.
The decision came in a case in which the state of Georgia had given local governments the authority to set up “hospital authorities” that would be designed to improve the delivery of health care to poor people in the state. An authority cannot operate on a for-profit basis, but it can take a corporate form and, as such, has the right to engage in many forms of ordinary business behavior, including entering contracts, engaging in building projects, or acquiring hospitals.
Under that state program, the city of Albany and surrounding Dougherty County set up a hospital authority. It bought, and operated for a time, the Phoebe Putney Memorial Hospital in Albany. The authority created two private corporations, both bearing the Phoebe Putney name. The hospital was leased to the parent of those corporations under a one-dollar-per-year lease. About two miles away from Phoebe Putney Memorial Hospital was another institution, the Palmyra Medical Center. The Phoebe parent bought control of Palmyra, and the hospitals were merged. The result was a monopoly in the county over acute-care hospital services. The arrangement had been worked out largely by the private entities, with very little supervision or input from the local hospital authority.
The Federal Trade Commission objected to the arrangement, claiming it would stifle competition for such services in Dougherty County. The Commission sought to block the merger. A federal judge refused to stop the arrangement, concluding that the Georgia legislature had clearly spelled out an intent to displace competition through local hospital authorities, and that conferred immunity on the local entities involved in the deal. The FTC took the case on to the Eleventh Circuit, but it, too, ruled that the arrangement was insulated from antitrust inquiry under state-action immunity, concluding that harm to competition was the “foreseeable result” of the legislature’s program of setting up proxies to run hospitals, with the power to acquire other hospitals.
The FTC took its challenge on to the Supreme Court. Two issues were at stake: whether the legislature had expressed its intentions clearly enough in allowing hospital proxies to operate in anti-competitive ways, and whether the local hospital arrangement did not have immunity because the hospital authority had played too little a role in the merger of the two hospitals. The Court, in a unanimous opinion written by Justice Sonia Sotomayor, answered the first, and thus said it would not rule on the second. The Court concluded that the state legislature “has not clearly articulated and affirmatively expressed a policy to allow hospital authorities to make acquisitions that substantially lessen competition.”
The practical impact of the decision on the already-merged hospitals was unclear. The Eleventh Circuit had allowed the arrangement to go through, but the Sotomayor opinion noted that the case would be returned to the district court to proceed — presumably, without an immunity shelter for the hospital arrangement. The district court, the Court said, has the power to block the combined hospitals from “taking actions that would disturb the status quo” and prevent a final ruling on the FTC’s challenge.
This decision, in plain English:
Federal laws, dating back to 1890, generally seek to promote business competition, on the premise that this protects consumers from the harmful effects of monopolies, including inflated prices and other limits on consumer choice. Such laws also seek to keep the free-enterprise system functioning in an economically health way. The focus of those laws is not on protecting competitors, but on protecting competition. But seventy years ago, the Supreme Court had ruled that Congress, in passing those laws, did not mean to block state governments from entering into business operations, as a way of pursuing their policy goals. If the resulting operations interfere with competition, state governments — unlike ordinary private business companies — would not be subject to antitrust prosecution, if it is clear that the operation is in fact serving public policy goals. That was a tribute to the states as responsible for their own local economies.
In more recent years, the Supreme Court has decided that state governments can actually choose private business firms to act as their proxies in conducting such policy-fulfilling operations. If such an arrangement harms competition, then the proxy entity is not subject to antitrust prosecution, on the theory that it is doing the state’s functions and thus helping to achieve policy goals.
The case decided by the Court on Tuesday involved a question of what a state had to do to confer antitrust immunity on such a local business proxy. The issue was tested in a case in which a local government “hospital authority” had allowed two private hospitals in Albany, Georgia, to merge, thus gaining a virtual monopoly over in-hospital patient treatment services. The Federal Trade Commission, one of the two parts of the federal government that enforce the antitrust laws, challenged this arrangement. It contended that the state of Georgia had not done enough to make the local hospitals’ operation a genuine proxy for the state, and thus the virtual monopoly in hospital services was an antitrust violation.
The Supreme Court did not settle the case in a final way, but it did rule that the state of Georgia had not done enough to confer legal immunity on the hospital merger. The case now goes back to a federal trial court to sort out what happens to the hospital arrangement.
