Despite losses at the district and appellate levels, the Federal Trade Commission’s (FTC) fight to enjoin the merger of two hospitals in Albany, Georgia is not over. While a district court in Georgia denied the FTC’s motion for a preliminary injunction in Federal Trade Commission v. Phoebe Putney Health System, Inc., and the 11th Circuit upheld that decision, the Supreme Court announced on June 25 that it would hear the FTC’s appeal.

As a result, the court will consider whether an alleged merger to monopoly of two hospitals—Phoebe Putney Health System and Palmyra Medical Center—can be exempt from antitrust enforcement based on the “state action” doctrine, which holds that certain state-mandated or -directed actions are exempted from antitrust liability. The FTC and critics of the 11th Circuit decision fear that the application of state action immunity in this context will pave the way for future transactions to be structured in a similar way in order to avoid the reach of the antitrust laws.

The Georgia statute at issue allows a local county hospital authority to acquire by “lease, purchase, or otherwise, and to sell to others or lease to others for any number of years not to exceed forty, any land, buildings, structures, or facilities constituting any part of any existing or future project,” including “the acquisition, construction, and equipping of hospitals, health care facilities… and other public health operation by others to promote the public health needs of the community.”

Using that statute, the local hospital authority acquired Palmyra and leased it to Phoebe Putney (Palmyra’s only significant competitor) for 40 years at a rate of $1 per year. While that was the structure of the deal, the fact that Phoebe Putney was the true acquirer was no secret. Phoebe Putney guaranteed the $195 million purchase price and a $35 million breakup fee. Phoebe Putney also entered into a management agreement that gave it immediate control over Palmyra’s operations upon closing of the transaction.

The FTC filed suit to block the transaction in April 2011, arguing that the hospital authority was merely a straw-man used by the parties to circumvent the antitrust laws. The parties responded by arguing that the hospital authority had ultimate control over Palmyra and the terms of the lease to Phoebe Putney had not yet been agreed to when the hospital authority acquired Palmyra.

The district court held that, regardless of the sequence of events that led to the acquisition and the long-term lease to Phoebe Putney, the hospital authority satisfied all three necessary elements of the state action doctrine and was therefore exempt from the antitrust laws. To that end, the court found that:

• The hospital authority was a political subdivision of the state
• The Georgia statute authorized the hospital authority to acquire other hospitals
• The anticompetitive effect of the hospital authority’s acquisition was reasonably foreseeable given the power expressly given it by law

The 11th Circuit upheld this decision noting that “the legislature could hardly have thought that Georgia’s more rural markets could support so many hospitals that acquisitions by an authority would not harm competition;” and therefore “the Georgia legislature had clearly articulated a policy authorizing the displacement of competition.”

In its petition for writ of certiorari, the FTC asserted that failure to correct the 11th Circuit’s interpretation of state action immunity could lead to increased use of the doctrine to facilitate anticompetitive conduct and unlawful mergers that would ultimately harm consumers. Opponents of the FTC’s position fear that the agency’s arguments, if accepted, would annihilate the state action doctrine and foreclose states from being able to pass laws that implicitly authorize the reasonably foreseeable displacement of competition.

If the Supreme Court decides to make a sweeping statement of law rather than just an interpretation of the Georgia statute at issue, we will know whether a state’s authorizing statute needs to explicitly give authority to a state entity to displace competition or whether a grant of general corporate powers, which foreseeably could lead to the displacement of competition, is enough.