This article briefly explores the applicability of federal antitrust laws to actions taken by municipalities or other state subdivisions and, specifically, whether they have acted pursuant to a clearly articulated state policy to displace competition in the marketplace.
Federal antitrust laws are designed to prevent anticompetitive conduct in the market. Yet, the Supreme Court long ago held that antitrust laws do not apply against States themselves, even when they take actions with anticompetitive effects. Parker v. Brown, 317 U.S. 341 (1943). The Supreme Court also recognized that this state action immunity applied not only to states but also to municipalities or other state political subdivisions, and even private actors, provided they are acting pursuant to state authority.
Thus, any time a state or local government body is sued for antitrust violations, it will inevitably claim that it is exempt from liability under the state action immunity doctrine.
To obtain this immunity, the defendant will have to show, at the least, that it acted pursuant to a clearly articulated state policy to displace competition. In short, the state had to understand that the authority it was delegating to substate actors would have anticompetitive effects and that it clearly articulated such a policy in its legislative delegation.
But when is a state policy clearly articulated? That is the question the U.S. Supreme Court decided in FTC v. Phoebe Putney Health System, declaring a stricter standard than courts had been applying.
FTC v. Phoebe Putney Health System
Any antitrust lawyer who is drafting a brief on is probably going to cite Phoebe Putney. Those invoking state action immunity will probably downplay its significance and rely more heavily on earlier cases instead. Let’s talk about the case so you can understand how it dramatically raised the bar for defendants seeking immunity.
You don’t have to be an avid antitrust nerd to have noticed that the healthcare industry has undergone a lot of consolidation in recent years, with hospitals merging with or acquiring one another in already limited markets. The FTC challenges a fair number of these transactions because they reduce competition in markets that already have all sorts of competition problems. Phoebe Putney involved one of those challenges.
Phoebe Putney Health System was owned by a public hospital authority created by a city and county in Georgia. The health system owned Memorial Hospital, which was one of two hospitals in the county. The other hospital, Palmyra Hospital, was just two miles away and was owned by national nonprofit healthcare network HCA. Phoebe Putney and HCA reached an agreement for Phoebe Putney to purchase Palmyra, and the hospital authority approved.
The Federal Trade Commission scrutinized this plan and filed suit because the transaction would create a monopoly that substantially lessened competition in the local market for acute-care hospital services.
In defense, Phoebe Putney claimed that it was entitled to state action immunity because, it argued, it had acted pursuant to a clearly articulated state policy to displace competition. Specifically, Georgia state law allowed its political subdivisions to provide health care services through hospital authorities. The law authorized those hospital authorities “all powers necessary or convenient to carry out and effectuate” the law’s purpose, and more specifically granted them authority to acquire hospitals. Phoebe Putney claimed that it was foreseeable to the Georgia legislature that a hospital authority would use this power anticompetitively.
The district court agreed and dismissed the case. And since the case is FTC v. Phoebe Putney and not Phoebe Putney v. FTC, you can surmise that the Eleventh Circuit agreed with the district court. Many courts had been applying this foreseeability standard based on language from earlier Supreme Court cases like City of Columbia v. Omni Outdoor Advertising, and this case was no different. The Eleventh Circuit reasoned here, for example, that the Georgia legislature must have anticipated that granting hospital authorities the power to acquire hospitals would produce anticompetitive effects because “foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”
But the FTC had a good point: nothing about the rather basic corporate power to acquire a business suggests that a state clearly articulated a state policy allowing public hospital authorities to monopolize entire markets. Indeed, the statute did not even discuss competition. The Supreme Court granted certiorari, and ultimately agreed with the FTC in a rare 9-0 opinion: the Eleventh Circuit, like so many other courts, had been applying clear articulation “too loosely.” As a result, they had sanctioned all sorts of anticompetitive conduct by state and local government entities that the state legislature had not really intended. Federal antitrust policy should not be set aside so easily.
Instead, the defendant’s conduct must be not only foreseeable, but also the “inherent, logical, or ordinary result” of the state scheme. Courts had been seizing on the “foreseeability” language of the Court’s prior decisions while ignoring much of what else it had said:
- State law authority to act is not sufficient; the substate governmental entity must show it was delegated the authority to act or regulate anticompetitively
- There must be evidence the state affirmatively contemplated that the scheme would displace competition
- Where a state’s position is one of mere neutrality to competition, the state cannot be said to have contemplated anticompetitive conduct
- Simple permission to play in the market is not authority to act anticompetitively
The Court also addressed two additional arguments. First, Phoebe Putney pointed to Georgia’s certificate of need law as evidence that the Georgia legislature had contemplated the displacement of competition relating to hospitals. (Learn more about certificate of need laws here, here, and here). But the Court rejected this argument because “regulation of an industry, and even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, does not establish that the State has affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related.”
Second, Phoebe Putney argued that any doubt should be resolved in favor of finding immunity to avoid interference with state policy choices. But, the Court forcefully rejected this argument: “federalism and state sovereignty are poorly served by a rule of construction that would allow ‘essential national policies’ embodied in the antitrust laws to be displaced by state delegations of authority ‘intended to achieve more limited ends.’ ” So clear articulation is not a deferential rubber-stamp akin to rational basis review.
After Phoebe Putney
Phoebe Putney did not explicitly state that it was overruling any prior cases, which has given defendants claiming immunity some room to downplay its significance and to continue to rely on those older cases. But that has not worked in some courts, including the one that was reversed in Phoebe Putney: the Eleventh Circuit. In Diverse Power v. City of Lagrange, the Eleventh Circuit held that a state law granting a city a water utility monopoly did not clearly articulate a policy allowing the city to tie water service to gas service:
[w]e’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.
You can read a more detailed discussion of Diverse Power here. The short version is that the Eleventh Circuit believed Phoebe Putney moved the goal posts—making the clear-articulation test a more rigorous one—and the Eleventh Circuit was in an excellent position to make that assessment considering it was the court reversed in Phoebe Putney.
And in Chamber of Commerce v. Seattle, the Ninth Circuit rejected a claim of immunity by a city that argued its authority to regulate for-hire driver services also provided it authority to facilitate the price-fixing through mandatory collective bargaining of ridesharing fees. The court held that the clear articulation is a “precise one”: “The state’s authorization must be plain and clear.” There was no plain and clear authorization to regulate ridesharing fees, only an authorization to regulate for-hire transportation services. To “read into the plain text of the statute implicit state authorization and intent to displace competition” in a different market “would be to apply the clear-articulation test ‘too loosely.’ ”
Phoebe Putney changed the clear-articulation test for the better—it will hold cities and other substate actors more accountable and to a higher standard, which will benefit consumers, competition, and free markets. Substate governmental entities are responsible for a lot of anticompetitive conduct in the marketplace, contrary to longstanding and fundamental national policy in favor of competition. They’ve been given an inch and have consistently taken a mile, or more, long pushing the limits of any legitimate authority they’ve been granted and, indeed, frequently stepping blatantly over those lines to extract supracompetitive profits for their own benefit. The Supreme Court was correct in growing weary of this behavior, and Phoebe Putney means they’ll get away with anticompetitive conduct less often by giving other market participants more opportunities to challenge those excesses.
Now that you know about Phoebe Putney, do you want to read about other classic antitrust cases?