U.S. Supreme Court Narrows Antitrust Exemptions for Local Government Entities

February 22, 2013

In a decision of great interest to Washington's Public Hospital Districts, Public Utility Districts, Port Districts, and many other state and local government entities, the Supreme Court this week issued an opinion clarifying and narrowing antitrust immunity for state and local governments. As a result of the decision, public agencies will need to exercise great care when taking actions that could restrict competition.

Under the "state-action immunity doctrine," the courts have long recognized that local government entities are immune from federal antitrust liability if they act under state law intended to restrict competition. But, for immunity to apply, a local government entity must act under a "clearly articulated and affirmatively expressed state policy to displace competition." This week's Supreme Court decision, FTC v. Phoebe Putney Health System, Inc., clarifies how this "clearly articulated and affirmatively expressed" test should be applied. The Court concludes that, while state legislatures need not explicitly state that they intend to restrict competition, limitation of competition must be the natural and logical consequence of the policy adopted by the state.

The litigation arose from a Georgia public hospital district's plan to acquire by lease a private hospital operating in the same area. Because the acquisition would result in the hospital district controlling 86% of acute-care services in an area spanning six counties, the FTC challenged the acquisition as unduly restricting competition in violation of the federal antitrust laws. Both the U.S. District Court and the Eleventh Circuit rejected the FTC challenge, concluding that, because the state legislature authorized public hospital districts to acquire hospital facilities, it must have foreseen that such acquisitions could reduce competition.

The Supreme Court unanimously reversed. The Court reasoned that, while the Georgia legislature had bestowed considerable powers on public hospital districts, none of those powers involved "delegated authority to act or regulate anticompetitively." In particular, the statutory power primarily relied upon by the Eleventh Circuit, the power to acquire hospitals and other medical facilities, merely authorizes hospital districts to participate in the medical market. It does not, the Court concluded, authorize or require anticompetitive conduct.

On the other hand, the Court did not require state legislatures to explicitly authorize anticompetitive conduct. Rather, where "displacement of competition was the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature," the local government entity is entitled to antitrust immunity.

One aspect of the Court's decision may have serious implications not just for public agencies but also for regulated utilities and others operating under state regulatory regimes that displace competition with regulated rates. Georgia requires any entity intending to operate a hospital to first obtain a certificate of need from the State. In this regulatory context, the Eleventh Circuit concluded, the Georgia legislature must have contemplated that public hospital districts could obtain such a certificate of need in circumstances where reduced competition might result. But the Supreme Court reversed on this ground, as well, concluding that the certificate of need requirement contemplated only "discrete forms of anticompetitive conduct." It did not establish that state "contemplated other forms of anticompetitive conduct that are only tangentially related" to the certificate of need process. This portion of the Court's opinion suggests that, even where the state comprehensively regulates rates and charges, as with electric and natural gas utilities, anticompetitive conduct not directly tied to the state regulatory regime may still give rise to antitrust liability.

If you have any questions about the state-action antitrust immunity doctrine or this week's Supreme Court decision, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group or Municipalities and Municipal Entities practice group.