Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Wednesday, October 24, 2012

Supreme Court Will Address Antitrust State Action Exemption

Posted by Steve Semeraro

The state action exemption to the federal antitrust laws holds that governments do not violate the antitrust laws, firms do. State laws with anticompetitive impacts thus do not run afoul of federal law when they restrain trade even though the same conduct by private actors would violate the law. The exemption is entirely judge-made and rests on the notion that Congress intended the antitrust laws to reach only private conduct.

The Supreme Court’s engagement with the exemption has been sporadic. After creating it in the mid-20th Century Parker v. Brown case – where the Court upheld California's anticompetitive regulation of the raisin industry – the Court allowed the bare bones doctrine to evolve in the lower courts for decades. A flurry of cases in the 1980s set out the current parameters of the exemption. Sovereign state action is entirely exempt from antitrust scrutiny. Agency and municipal doctrine must be undertaken pursuant to a state policy recognizing the validity of anticompetitive conduct. And private actors may rely on the exemption only when their anticompetitive conduct is both (1) pursuant to state policy, and (2) actively supervised by state actors. Critics have long questioned why the exemption permits restraints of trade that would be illegal if imposed by private actors without the imprimatur of government. Indeed, the exemption appears as a sort of reverse preemption, enabling state law to trump federal law. The best explanation for the doctrine is that the federal antitrust laws recognize the value in regulation that restrains trade, but not private restraints. Government actors are charged with a duty to act in the public interest and thus can generally be trusted to restrain trade only when the public will benefit. Private actors, by contrast, are driven by the desire to maximize profit and will thus restrain trade when it is privately beneficial but harms the public interest. On 26 November, the Supreme Court will reenter the fray, hearing oral argument in FTC v. Phoebe Putney Health System.

The case arises from a Federal Trade Commission (FTC) challenge to the merger of two Georgia hospitals. The Eleventh Circuit held that the state action doctrine exempted the merger from antitrust scrutiny even if, as the FTC alleged, the merger created an "absolute monopoly" in certain hospital services in the geographic market. The merging hospitals argued that Georgia's Hospital Authorities Law authorized regional hospital authorities to ensure that medical services are available to the poor on a nonprofit basis in otherwise underserved areas. Toward that end, the law empowers the authority buy, sell, and operate hospital assets as necessary to achieve that goal. In this case, the regional hospital authority nominally purchased Palmyra Hospital and then promptly transferred it to Phoebe Putney, a hospital providing non-profit health care services.

The Eleventh Circuit rejected two arguments raised by the FTC. First, the Commission argued that the Hospital Authorities Law did not did not anticipate anticompetitive conduct. But the lower court carefully detailed the broad powers that the state granted and convincingly explained that they fell within the scope of prior cases in which state authorization of anticompetitive conduct has been found. Unless the Supreme Court plans to revisit this prong of the test, the Eleventh Circuit’s decision (like it or not) rests on firm ground.

Second, the FTC argued that the decision was not really that of the Authority, but rather Phoebe Putney Hospital’s private interests drove the merger despite the nominal cloak of state authority. Again, however, the Eleventh Circuit properly rejected the argument. The Supreme Court made clear in Omni Outdoor Advertising that there is no co-conspirator exception to the state action exemption. Courts are prohibited from probing the minds of state actors to see whether they were perhaps improperly influenced by private actors with an interest in the government activity. Another issue that should be central to the case, however, was never addressed by the Eleventh Circuit. This is a case against private parties, the hospitals, not the state or the Hospital Authority as a regulatory arm of the state. When private conduct is at issue, the state action exemption normally requires active state supervision. It would appear to be a relevant question whether state law provides sufficient mechanisms for the Hospital Authority to supervise Phoebe Putney going forward to ensure that the state policy of access to health services by the poor is in fact the result of the merger rather than merely higher prices for health care.

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