More hospital acquisitions may seek to avoid premerger scrutiny of the Federal Trade Commission (FTC) under the HSR Act (or any antitrust inquiry ever) if a recent federal district court decision holds up and becomes settled law.
On September 27, 2023, in Louisiana Children’s Medical Center v. Attorney General of the United States, No. 23-1305, the Eastern District of Louisiana court held that hospitals in Louisiana who receive a Certificate of Public Advantage (COPA) issued by Louisiana’s Department of Justice (LADOJ) need not submit premerger notification materials required by Hart-Scott-Rodino Antitrust Improvements Act (HSR Act), pursuant to the state action doctrine.
Case Background
The case concerned the proposed acquisition by the Children’s Medical Center (LCMC) of three hospitals from Hospital Corporation of America (HCA). The proposed acquisitions had gone through the processes required by Louisiana’s COPA statute, and the parties received the desired COPA certificate from LADOJ. The Hospitals chose not to comply with the HSR Act, which requires parties to transactions that meet certain statutory thresholds to notify federal antitrust authorities of their intended transaction and allows federal regulators an opportunity to review and possibly challenge the transaction. Instead, LCMC and HCA sought a declaratory judgment that the “state action doctrine” exempts the proposed acquisitions from the federal antitrust laws, including the HSR Act, given the issuance of the COPA.
Whether a transaction that obtains a State-issued COPA needs to comply with the HSR Act had never been determined. The State of Louisiana moved to intervene, and the court in the Eastern District of Louisiana consolidated the LCMC and HCA lawsuits with the FTC’s lawsuit (which had been transferred from the USDC for the District of Columbia) seeking declaratory and injunctive relief requiring strict compliance with the HSR Act. Prior to transfer, D.C. District Judge Amy Berman Jackson reasoned that “[g]iven the posture of the case, the state action question must be resolved first.”
Parker v. Brown and State Action in the Bayou
Longstanding Supreme Court authority, pursuant to the state action doctrine, has consistently presumed that Congress does “not intend to compromise the States’ ability to regulate their domestic commerce” absent a clear statement to the contrary. S. Motor Carriers Rate Conf., Inc. v. United States, 471 U.S. 48, 56 (1985).The Hospitals did not contend that they are immune from an antitrust lawsuit. Rather, they contended that, since their transaction is “exempt” from the federal antitrust laws pursuant to the state action doctrine, they were not required to comply with the HSR Act. Ultimately, the Louisiana district court found that the state action doctrine is neither an immunity from litigation, nor an ordinary defense but reflects “a recognition of the limited reach of the Sherman Act” and other federal antitrust laws. Thus, the district court rejected the FTC’s arguments that the state action question is “fact-intensive” and cannot be decided on the “redacted” or limited record and noted that though the D.C. District Court advised the parties that the state action question “must be resolved first,” the FTC chose not to do so in its briefs and materials.
For the state action doctrine to apply to private parties’ transactions, the challenged restraint must be (1) “clearly articulated and affirmatively expressed as state policy[,]” and (2) “actively supervised” by the state. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980). The court stated that language in Louisiana’s COPA statute easily satisfies the first requirement: “[i]t is the intent of the legislature that supervision and control over the implementation of these agreements, mergers, joint ventures, and consolidations substitute state regulation of facilities for competition between facilities and that this regulation ha[s] the effect of granting the parties to the agreements, mergers, joint ventures, or consolidations state action immunity for actions that might otherwise be considered to be in violation of state antitrust laws, federal antitrust laws, or both.”
The court further stated that Louisiana’s COPA statute made clear that its purpose is to “provide the state, through the department, with direct supervision and control over the implementation of cooperative agreements, mergers, joint ventures, and consolidations among health care facilities for which certificates of public advantage are granted.” Pursuant to this statute, the LADOJ had (a) the “power to veto or modify” the acquisitions, and for the state action doctrine to apply, and (b) the ability not to “issue a certificate unless the [LADOJ] finds that the agreement is likely to result in lower health care costs or is likely to result in improved access to health care or higher quality health care without any undue increase in health care costs.” The COPA specifically requires the LADOJ to “review the substance” of the acquisition for application of the state action doctrine. The Hospitals’ application extensively detailed the substance of the acquisition and its likely effects on health care and competition. According to the affidavit of the Director of the Civil Division for the LADOJ, the LADOJ considered the application and, “after extensive analysis by LADOJ attorneys and staff regarding the transaction, the facilities, and the likely effects on health care and competition in the state, which also included input from expert consultants who reviewed the COPA application, the LADOJ determined that the application materials satisfied the statutory requirements and that a COPA should be issued.”
The district court noted that the HSR Act is silent about whether the defined term “person” in the HSR Act required to file a completed HSR form and materials encompasses private parties who consummate their transactions pursuant to a state COPA statute or are exempted from the HSR Act pursuant to the state action doctrine. Additionally, the Court found that there is a conflict between the HSR Act and Louisiana’s COPA law sufficient to implicate federalism concerns and thus held that the Hospitals’ transaction is exempt from the federal antitrust laws and need not comply with the HSR Act’s requirements.
The Court went on to find no reason to subject a merger exempt from the HSR Act to a waiting period and filing requirements designed to allow the FTC to determine whether that merger may violate the Clayton Act since parties to such transactions are already incentivized to ensure that their transactions satisfy the state action doctrine. If they are wrong about state action doctrine application, those parties face equitable measures and steep daily fines for violating the HSR Act.
Analysis: COPA Replacing HSR, Coming to a State Near You?
There is quite a bit to unpackage in this decision. The district court relied on the Louisiana COPA as written to satisfy the “clearly articulated” state policy. Each transaction will thus be measured against the language of the state statute at issue. The district court further relied on the Louisiana COPA as written and as buttressed by a state official’s declaration concerning the transaction at the time of the transaction to satisfy the “actively supervised” by the state requirement. The Louisiana district court took the declaration—and no further evidence-- as sufficient on this point.
Contrary to other courts requiring continuous active state supervision before allowing the state action doctrine to apply, here the court was silent as to whether continuous active state supervision is required or only active state supervision at the time of the transaction is required. Many other questions also are unanswered by the LCMC decision. For example, since the Louisiana COPA requires a finding that the agreement is likely to result in lower health care costs or is likely to result in improved access to health care or higher quality health care without any undue increase in health care costs, what happens if any or all of that turns out not to be true after the COPA certificate is issued? Can Louisiana or the FTC file suit alleging an antitrust violation? What about impacted private parties? Does the district court envision that the newly combined entity is forever not subject to the antitrust laws?
Given the stakes of the dispute and the FTC’s public statements that COPA agreements can lead to higher prices and reduced quality,1 it is likely the FTC will appeal to the Fifth Circuit (where the FTC is currently awaiting a decision in the Illumina/Grail merger litigation). DOJ amicus assistance would likely follow, given the shared enforcement of the HSR Act and shared jurisdiction over hospital transactions. If the decision stands, hospitals in states with robust COPA laws may have a vehicle for avoiding additional premerger review (or maybe more) by federal antitrust enforcers.
1 FTC press release, FTC Policy Paper Warns About Pitfalls of COPA Agreements for Patient Care and Healthcare Workers (Aug. 15, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-policy-paper-warns-about-pitfalls-copa-agreements-patient-care-healthcare-workers.