Supreme Court Antitrust Ruling Supports Public-Private Neutrality, Reduces Barriers to Privatization

On February 19, 2013, the Supreme Court handed down its decision in an important antitrust case, FTC v. Phoebe Putney Health Sytem, Inc. The Court clarified an ambiguity in existing federal antitrust law: to what extent are government entities exempt from the antitrust laws that govern private companies? This makes a difference for privatization: if government bodies are immune from a body of law that applies to the private sector, then keeping a function in-house appears cheaper for the government than contracting it out to the private sector. The asymmetric treatment of public and private operators can thus discourage privatization. In this case, the Eleventh Circuit Court of Appeals had advanced a very broad interpretation of the so-called “state action” exemption to federal antitrust law-one that would immunize a great many government operations from antitrust scrutiny. The Supreme Court reversed the Eleventh Circuit’s expansive reading, confirming a somewhat narrower view of the state action exemption.

Since 1941, an amendment to the Georgia Constitution has allowed Georgia political subdivisions to provide health-care services. In the same year, the Georgia Legislature enacted a Hospital Authorities Law, allowing cities and counties to set up public bodies called hospital authorities. Hospital authorities are allowed to run hospitals and other health-care facilities (including clinics and nursing homes), acquire hospitals, lease hospitals, set rates for hospitals, and the like; and they must run hospitals on a nonprofit basis. As soon as the law was passed, the city of Albany and Dougherty County, in southern Georgia, established a hospital authority (the Hospital Authority of Albany-Dougherty County) and acquired an existing hospital called Phoebe Putney Memorial Hospital, which had been in operation since 1911. The hospital authority reorganized its activities in 1990, creating a nonprofit called Phoebe Putney Health System, Inc. (PPHS), and its subsidiary, Phoebe Putney Memorial Hospital, Inc. (PPMH); the hospital authority leased the hospital to PPMH for $1 for 40 years. Things went on this way until 2010, when the Authority and PPHS decided to buy the other hospital in Dougherty County, Palmyra Medical Center. Palmyra would similarly be bought by the hospital authority and leased for $1 to another PPHS subsidiary.

As might be expected, such a merger had the potential to substantially reduce competition in the area. The Federal Trade Commission, one of the agencies that enforces the federal antitrust laws, thus sued to prevent the merger. The federal district court sided with the hospital authority, though, and so did the Eleventh Circuit Court of Appeals. The Eleventh Circuit (which covers Alabama, Florida, and Georgia) agreed that the merger would substantially lessen competition. But it held that the hospital authority, as a local governmental entity, was immune from federal antitrust law under the “state action” exemption: the Georgia Legislature “reasonably anticipated,” when it passed the 1941 law allowing for hospital authorities and giving them the power to acquire health-care facilities, that such acquisitions could reduce competition, and so anticompetitive effects were a “foreseeable result” of the law.

To make sense of this holding, and why reasonable anticipation and foreseeable results are relevant, one needs to go back to 1943, when the Supreme Court first created the “state action” exemption to federal antitrust law in a case called Parker v. Brown. The California Agricultural Prorate Act of 1933 had established special marketing programs for agricultural commodities to restrict competition and raise prices for producers. Porter Brown, a raisin packer, sued W.B. Parker, the California Director of Agriculture, charging, among other things, that the California statute violated the Sherman Antitrust Act. The Supreme Court disagreed: “We find nothing in the language of the Sherman Act or in its history which suggests that its purpose was to restrain a state or its officers or agents from activities directed by its legislature. . . . The Sherman Act makes no mention of the state as such, and gives no hint that it was intended to restrain state action or official action directed by a state.” States are thus exempt from federal antitrust law, even though California’s agricultural producers would certainly have been in violation had they made a private agreement to restrict production and increase prices.

What about when private parties are arguably carrying out the state’s anticompetitive policy? Consider, for instance, the case of Midcal Aluminum, Inc., a wholesale wine distributor that challenged a California statute allowing wine producers to set minimum wine prices. The basic policy of price maintenance was the state’s, but the state exercised no control over actual prices: its role was limiting to enforcing the prices set by the producers. The Supreme Court, in California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc. (1980), held that such price maintenance violated the Sherman Act and that the state action exemption didn’t apply to the private wine producers. For the state action exemption to apply to the acts of private parties, two conditions had to be met: first, “the challenged restraint must be one clearly articulated and affirmatively expressed as state policy,” and second, “the policy must be actively supervised by the state itself” (lest the private parties fix prices in their own private interest). In this case, the first prong was met; the second wasn’t.

That’s for private parties; but public entities with delegated state power, like municipalities or state agencies, are judged by a more forgiving standard: they get to skip the second prong of the Midcal test. All that’s required is that the anti-competitive act be “clearly articulated and affirmatively expressed as state policy”; active state supervision isn’t required. Thus, consider the case of the city of Eau Claire, Wisconsin, which acquired a local monopoly over sewage treatment services and then refused to provide sewage treatment to neighboring towns. The only way people in neighboring towns could take advantage of Eau Claire’s sewage treatment was by voting to be annexed by the city and thus using the city’s sewage collection and transportation services.

If a private party had made the purchase of sewage treatment contingent on the purchase of sewage collection and transportation, this might be an instance of illegal “tying” under the antitrust laws. But here, the Supreme Court found in Town of Hallie v. City of Eau Claire (1985), state action immunity applied. First, the “clear articulation” prong was met: a Wisconsin statute allowed a city operating a public utility to fix the limits of service, and provided that there was no obligation to serve anyone beyond that area. To be fair, this wasn’t quite an explicit endorsement of the particular tying conduct at issue here, but the Court rejected the argument that “clear articulation” requires an explicit statement that the legislature intends anticompetitive effects. Rather, in this case, it was enough that such effects were “a foreseeable result of empowering the City to refuse to serve unannexed areas.” The legislature contemplated this kind of action. Anticompetitive effects “logically would result.” As to the second prong, the Court held that active supervision by the state wasn’t necessary, because municipalities, as public bodies, could (unlike private parties like the wine distributors in Midcal) be presumed to be acting in the governmental interest of the state rather than in their own private interest.

Town of Hallie is an important case for two reasons. First, it establishes that public entities get state action immunity without having to show the second prong of “active state supervision”-so once the first prong of “clear articulation” is met, private parties are at a systematic disadvantage. This tends to make privatization a more expensive proposition for the state, since even an equally efficient private contractor will demand a higher contract price than the public-sector cost to cover possible antitrust liability. The cost difference will be merely apparent, resulting from the public entity’s ability to harm consumers for free, but it might make the difference for sticker-price-minded governments. Perhaps the “active state supervision” doctrine should be tweated to be more evenhanded. But given the doctrine as it is, and given its possible effect on privatization, it’s important to make sure this analysis only kicks in when the first prong is truly satisfied-when the state policy against competition is truly “clearly articulated.”

But this leads to the second important feature of Town of Hallie: the loose language that a clear articulation could be found without an express statement, even when the conduct was merely “foreseeable” from the statutory grant, created a danger that a clear articulation could be found on very slim evidence.

Thus, the significance of the Eleventh Circuit’s holding in the Phoebe Putney case becomes clear. The Eleventh Circuit had held that the hospital authority could benefit from the state action exemption merely because the 1941 Georgia law allowed hospital authorities to acquire health-care facilities, including other hospitals. Of course a hospital’s acquisition of another hospital can reduce competition, especially in rural areas where there aren’t many nearby hospitals. So of course one can argue that anticompetitive effects are a “foreseeable result” of the law.

But should this be enough to say that Georgia had a “clearly articulated” policy against competition? The Supreme Court, in a unanimous opinion authored by Justice Sonia Sotomayor, said no. The general powers conferred on hospital authorities by the 1941 law, including the power to acquire and lease health-care facilities, merely “mirror general powers routinely conferred by state law upon private corporations.” But such a general grant of power can’t imply authorization to act anticompetitively: “such an approach would wholly eviscerate the concepts of clear articulation and affirmative expression that our precedents require.” Most uses of these general powers won’t raise any antitrust concerns. So when a state delegates such powers, one can’t say that it was contemplating their anticompetitive use. Rather, it’s more plausible to say that the powers are granted to be used against the backdrop of existing antitrust law. Because there was no clearly articulated state policy against competition here, the state action exemption doesn’t apply, so the FTC lawsuit against the merger can proceed.

(Because of this holding, the Court didn’t need to pass on whether the anticompetitive acts were those of the public hospital authority, in which case active state supervision was unnecessary, or those of the private nonprofits PPHS and PPMH, in which supervision was necessary. The Court also rejected a view that the health-care context makes this case special.)

The Phoebe Putney decision is fairly narrow. The Court didn’t retreat from the Town of Hallie view that “foreseeability” of anticompetitive effects can be enough to constitute a “clearly articulated” state policy; it just tightened up the foreseeability requirement, so the anticompetitive effects must be much more logically connected to the powers granted. The FTC, as a litigating position, apparently accepted Town of Hallie as settled law, though perhaps some in the FTC would have liked to see the Court adopt the view, rejected in Town of Hallie, that “clear articulation” is limited to express statements that the policy of the state is to limit competition. Certainly the FTC has been grousing against the scope of the state action exemption for years. But, because the case could be disposed of on these narrow grounds, the Court didn’t need to, and was therefore unwilling to, go any further.

Narrow though it is, though, the Phoebe Putney decision seems to be at least a small victory for sound policy. There are certainly strong arguments against antitrust policy, at least in its current state. But endorsing Phoebe Putney doesn’t require endorsing antitrust in any form. Perhaps antitrust law is justified and perhaps it isn’t; but whichever is the case, it’s unlikely that the optimal policy would be that the private sector is subject to antitrust law while the public sector isn’t. Such differential treatment artificially lowers the cost of in-house provision relative to privatization or contracting out and thus encourages governments to keep services in-house even when the efficiencies suggest otherwise.

If public entities could be counted on to serve the public good (and if private entities couldn’t be regulated to achieve the same result), then perhaps a two-tiered approach might be justified. But public entities can be easily captured by private interests; indeed, in this case, there were allegations that the Phoebe Putney Hospital had used its near-monopoly position to engage in aggressive anticompetitive conduct; that Palmyra Hospital had sued to stop this conduct; that Phoebe Putney’s purchase of Palmyra was designed to put an end to the legal action and cement Phoebe Putney’s monopoly status; and that the hospital authority was involved merely to avoid antitrust scrutiny under the state action exemption. Moreover, Phoebe Putney’s nonprofit status provides little reason to treat it more charitably under federal antitrust law: economic theory and empirics alike suggest that nonprofit hospitals, just as much as for-profit hospitals, are willing to use their market power to increase prices. Thus, any public-interested justification for a broad exemption from antitrust laws for governmental actors but not private ones is suspect.

This, then, is a case where advocates of a level playing field for privatization should rejoice at the outcome, regardless of their views on antitrust. All nine Supreme Court Justices voted to reiterate the longstanding view that “state-action immunity is disfavored.” They cast their vote, not for aggressive antitrust enforcement, but for (a limited form of) public-private neutrality.

Alexander “Sasha” Volokh is an associate professor of law at Emory Law School.