The Antitrust Attorney Blog
Author: Luis Blanquez
The Eleventh Circuit recently rejected the City of LaGrange’s attempt to assert state-action immunity from antitrust liability in Diverse Power, Inc. v. City of Lagrange, 2019 U.S. App. LEXIS 24772 (11th Cir. Ga., Aug. 20, 2019).
And here is why.
In a nutshell, the City of LaGrange provided water services to both its residents and to users outside the city limits, and natural gas to customers both inside and outside the city.
In 2004, the city enacted an ordinance targeting customers outside the city limits. Under the new law, water would be provided for new construction––to users outside the city––only if the builder installed at least: (i) one natural gas furnace, (ii) one natural gas water heater, and (iii) at least one additional natural gas outlet sufficient for potential future use for a clothes dryer, range, grill, pool heater or outdoor lighting fixture.
Diverse Power, a company that provides electrical power that competes with LaGrange’s natural gas service, suffered competitive harm from this ordinance that tied water service to installation of gas (as opposed to electric) appliances. In response, they brought an action under the Sherman and Clayton Antitrust Acts challenging the city’s policy as an unlawful tying arrangement.
LaGrange moved to dismiss the complaint on several bases, including immunity under the state-action doctrine. The District Court denied LaGrange’s motion and held that LaGrange was not entitled to state-action immunity. Diverse Power, Inc. v. City of LaGrange, 2018 U.S. Dist. LEXIS 226681 (N.D. Ga., Feb. 21, 2018).
On appeal, the Eleventh Circuit also rejected the City’s claim of immunity and held that tying an unrelated service in a different market to the provision of water service fell outside the statutes’ grant of immunity.
If you don’t know what an antitrust tying claim is, you can read our article on tying arrangements.
At first sight, this seems to be a straightforward state-action immunity case. And in fact, it is. But there are two interesting facts worth mentioning here. First, Judge Tjoflat from the Eleventh Circuit revisited the U.S. Supreme Court landmark case FTC v. Phoebe Putney Health Sys., Inc., 568 U.S. 216, (2013). And second, Judge Tjoflat is the same judge who wrote the original Phoebe Putney Opinion FTC v. Phoebe Putney Health System, Inc., 663 F.3d 1369 (11th Cir. 2011) that the Supreme Court quashed.
Let’s jump into the legal analysis included in the Eleventh Circuit Opinion.
The Court starts by referencing Parker v. Brown, 317 U.S. 341, 62 S. Ct. 307 (1943), and how it held that the Sherman Act shouldn’t be read to bar states from engaging in anticompetitive conduct “as an act of government.” But because political subdivisions—like the City of LaGrange— “are not themselves sovereign[,] they do not receive all the federal deference of the States that create them.”
Instead, political subdivisions enjoy state-action immunity when they undertake activities “pursuant to a ‘clearly articulated and affirmatively expressed’ state policy to displace competition.” This is commonly known as the clear-articulation requirement—the first step in the two-step Midcal test (the second step is active supervision).
The Court then explains that unlike clear-statement requirements in other domains of law, the clear-articulation requirement has traditionally been satisfied by articulations that are admittedly less than clear. The US Supreme Court has, the Court explained, “rejected the contention that [the clear-articulation] requirement can be met only if the delegating statute explicitly permits the displacement of competition.” City of Columbia v. Omni Outdoor Advert., Inc., 499 U.S. 365, 372, 111 S. Ct. 1344, 1350 (1991). Instead, according to these older precedents, state-action immunity applied when a municipality’s anticompetitive conduct is the “foreseeable result” of state legislation. Town of Hallie v. City of Eau Claire, 471 U.S. 34, 42, 105 S. Ct. 1713, 1718 (1985).
The Court then turns to City of Columbia v. Omni Outdoor Advertising, Inc., 499 U.S. 365, 111 S. Ct. 1344 (1991) to illustrate that, even though the state zoning statute under which the city promulgated the zoning restrictions had nothing to do with the suppression of competition, the Supreme Court held that the city’s actions were immune from federal antitrust liability.
In both cases, immunity from federal antitrust liability was based on similarly broad state statutes that were facially unrelated to the suppression of competition. And as the Eleventh Circuit acknowledges now, it was against this legal backdrop that the Supreme Court decided the Phoebe Putney case.
In Phoebe Putney, two Georgia laws—a provision of the state constitution and a concurrently enacted statute—gave municipally created hospital authorities 27 enumerated powers, including “the power ‘[t]o acquire by purchase, lease, or otherwise and to operate projects [i.e., hospitals and other public health facilities].’”
In that case, the Eleventh Circuit raised two main points: (i) the transaction would substantially lessen competition or tend to create a monopoly, (ii) and Georgia law gave hospital authorities the prerogative to purchase hospitals and other health facilities, a grant of authority that might foreseeably produce anticompetitive results.
Because it appeared clear to them at the time that the power to acquire hospitals in markets with few hospitals reasonably anticipated the power to anticompetitively consolidate the hospital-services market, the Eleventh Circuit affirmed the District Court’s order granting state-action immunity.
But, as Judge Tjoflat explains now in Diverse Power v City of LaGrange: “We got reversed, nine-zip”.
The Eleventh Circuit highlights the fact that while the Supreme Court in Phoebe Putney reaffirmed foreseeability as the touchstone of the clear-articulation test, the Court placed narrower bounds on the actual meaning of foreseeability.
Under the reformulated test, “state policy to displace federal antitrust law [is] sufficiently expressed where the displacement of competition [is] the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” “[T]he ultimate requirement [is] that the State must have affirmatively contemplated the displacement of competition such that the challenged anticompetitive effects can be attributed to the ‘state itself.’” This standard wasn’t met in Phoebe Putney, according to the Supreme Court.
The Eleventh Circuit, acknowledging that the standard has changed, then applied the Phoebe Putney test to the facts.
The following two paragraphs from the Diverse Power v City of LaGrange case speak for themselves:
“Whatever the merits of the Court’s new and improved clear-articulation requirement, it’s hard to argue that the result in Phoebe Putney naturally follows from Hallie and Omni. To illustrate the point, consider the facts of Hallie. Was the anticompetitive tying arrangement there the “inherent, logical, or ordinary result” of a pair of statutes authorizing the construction of sewage treatment facilities and the withholding of services from areas outside cities’ limits? Probably not—most cities likely just constructed sewage-treatment facilities and limited their services to city residents. There’s nothing “inherent[ly], logical[ly], or ordinar[ily]” anticompetitive about giving cities the ability to construct sewage facilities and the right to deny service to out-of-towners. But it was still foreseeable—albeit not in the sense that Phoebe Putney uses the term—that Eu Claire would use its sewage-services monopoly to gain leverage in another market. See Hallie, 471 U.S. at 42, 105 S. Ct. at 1718 (“[T]he statutes clearly contemplate that a city may engage in anticompetitive conduct. Such conduct is a foreseeable result of empowering the City to refuse to serve unannexed areas.” (emphasis added)).
Nevertheless, Phoebe Putney is the law, and our job is to apply it to the facts of this case.
(…)
In any event, we’re in a post-Phoebe Putney world. And in that world, we have to ask not only whether the Georgia legislature could have foreseen that cities would use their water monopoly to increase their share of an unrelated market. We also have to ask if such an anticompetitive move is the “inherent, logical, or ordinary result” of the legislative scheme. The answer to that question is no.”
We have two important points to make here.
First, Judge Tjoflat, the same judge that once wrote the original opinion from the Eleventh Circuit in Phoebe Putney, reluctantly recognizes the Supreme Court’s new and higher “clear articulation standard” for state action immunity cases. There is no question about that. To the extent that other federal courts have been similarly reluctant, they should follow the Eleventh Circuit here.
Second, the US Supreme Court has placed narrower bounds on the meaning of foreseeability. Now, the anticompetitive conduct must not only be the “foreseeable result” of state legislation, but the displacement of competition must also be the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.
Third, anticompetitive conduct can be profitable for municipalities, if they are allowed to get away with it. But—in many circumstances, as the Eleventh Circuit holds in this case—the antitrust laws do apply to state and local governments.
We are constantly on the look-out for cases that provide us with an opportunity to test the state-action immunity exception in the courts, so if you have something, let us know. If you are an attorney, we can help you on appeal or during litigation.
Image by Ulrich Dregler from Pixabay