State Action Immunity Trumps Federal Pre-Merger Notification Requirements

The U.S. District Court for the Eastern District of Louisiana on Sept. 27, 2023, granted summary judgment against the Federal Trade Commission (FTC) in its challenge to the acquisition of three hospitals in Louisiana pursuant to the Louisiana Certificate of Public Advantage (COPA) statute that exempted their transaction from the reach of federal antitrust laws. The decision provides much-needed clarity as to the protections provided to merging hospitals subject to a COPA.

Background

The FTC argued that, in spite of the COPA adopted by the Louisiana Legislature, LCMC Health's acquisition of the three hospitals from HCA Healthcare violated the federal Hart-Scott-Rodino Act (HSR) because the parties closed their transaction without making an HSR filing. The FTC's position was that even if the COPA might prevent challenge to the transaction under substantive provisions of the Clayton and Sherman Acts, HSR imposed only procedural requirements from which the parties were not exempt. The FTC originally filed its suit in the U.S. District Court for the District of Columbia, but the case was consolidated with suits filed by LCMC and HCA in the Eastern District of Louisiana, and the state of Louisiana intervened on the side of LCMC and HCA.

The FTC argued that the parties should not be allowed to further combine operations without complying with the pre-merger notification requirements of HSR, but the court agreed with LCMC, HCA and the state that it must first determine whether the COPA exempted the transaction from federal antitrust enforcement and, whether as parties to a transaction exempt from the federal antitrust laws pursuant to the state action doctrine, the parties needed to comply with the pre-merger notification requirements of HSR. In ruling that such transactions are exempt from HSR, the decision provided support for increased use of COPAs, which exempt hospital acquisitions from federal antitrust laws. The FTC has consistently opposed the use of COPAs, and even the court recognized that its order may make antitrust enforcement more difficult for the FTC when a COPA is at issue.

The state action doctrine applies to anticompetitive acts of private parties if 1) the challenged restraint is clearly articulated and affirmatively expressed as state policy and 2) the policy is actively supervised by the state. The FTC argued that the state action doctrine does not confer immunity on private actors, but the court noted that the health systems did not assert immunity from antitrust lawsuits generally. Rather, they asserted that their transaction was exempt from federal antitrust laws pursuant to the state action doctrine because they had received a COPA from the Louisiana Department of Justice. The FTC responded by claiming that HSR is not among the federal antitrust laws from which private parties acting pursuant to the state action doctrine are exempt. According to the FTC, the state action doctrine is fact-intensive, and the enforcement agencies need information from an HSR filing to determine if the doctrine's active supervision element is satisfied.

Determining Authorization

In rejecting the FTC's position, the court found that state authorization may be determined by looking at the COPA statute's language and that active supervision could be determined based on evidence in the record – i.e., a separate HSR filing was not required to obtain that information. The court further stated that the relief sought by the FTC would be futile if the transaction were exempt in the first place. According to the court, the COPA statute was clearly articulated, affirmatively expressed state policy, included detailed active supervision requirements and reflected Louisiana's policy favoring COPA-approved mergers regardless of their anticompetitive effects.

The court determined that the Louisiana Department of Justice had the power to veto or modify the terms of an acquisition and would not issue a COPA unless it found that the transaction was likely to result in lower healthcare costs or either improved access to healthcare or higher-quality healthcare without an undue increase in costs. The state had reviewed the substance of the acquisition when it considered the COPA application, which detailed the transaction's likely effects on healthcare and competition.

The court emphasized that state action doctrine has been applied to Section 7 of the Clayton Act, which prohibits an acquisition the effect of which may be to substantially lessen competition or tend to create a monopoly. The court further noted that HSR is ambiguous with respect to its application to private parties' transactions that are exempt from federal antitrust laws pursuant to the state action doctrine. The court explained that there are conflicting timelines between HSR and the Louisiana COPA statute sufficient to implicate federalism concerns and that federal courts must be certain of congressional intent before finding that a federal law overrides the constitutional balance of federal and state powers.

The court further found that HSR is intended to subject a transaction to the precise sort of scrutiny that Louisiana was trying to avoid by issuing a COPA and that requiring an HSR filing in such a case would frustrate the state's regulatory powers. The court therefore ruled that there is no reason to require an HSR filing for a merger that is exempt from Section 7 of the Clayton Act. As more states enact COPA statutes and federal scrutiny of healthcare transactions continues to increase, the court's order is likely to cause merging parties to increase their use of COPAs in states that have such programs.

Holland & Knight's Antitrust Team is available to address any questions about this important ruling.