Clarifying state action immunity under the antitrust laws: FTC v. Phoebe Putney Health System, Inc.

• Author: Diveley, Angela M.

INTRODUCTION

The tension between federalism and national competition policy has come to a head. The state action doctrine finds its basis in principles of federalism, permitting states to replace free competition with alternative regulatory regimes they believe better serve the public interest. (1) In many instances, state exemption of certain conduct from the antitrust laws poses greater harm to competition than private price-fixing arrangements, (2) and the resulting decrease in competition is not offset by the achievement of the social benefits the legislatures sought in implementing the exemption. (3) Therefore, public restraints have a unique ability to undermine the regime of free competition that provides the basis of federal and state commerce policies. Nevertheless, preservation of federalism remains an important rationale for protecting such restraints. Judicial application of the doctrine has become muddled since the inception of state action immunity in the seminal case of Parker v. Brown. (4) The elusive contours of the doctrine have caused circuit splits and overbroad application that threatens to subvert the goals of both federalism and competition. (5)

The recent United States Court of Appeals for the Eleventh Circuit decision in Federal Trade Commission v. Phoebe Putney Health System, Inc. (6) epitomizes the concerns associated with misapplication of state action immunity. The United States Supreme Court recently granted the Federal Trade Commission's (the "FTC") petition for certiorari and now has the opportunity to more clearly define the contours of the doctrine. (7) The case involved a merger between private hospitals under an alleged sham authorization by a state hospital authority. (8) Allegations of a sham transaction test the boundaries of the state action doctrine and implicate the interpretation of a two-pronged test designed to determine whether consumer welfare-reducing conduct taken pursuant to purported state authorization is immune from antitrust challenge. (9)

In Part I of this Article, I set forth the current landscape of the state action doctrine. (10) In Part II, I explain the FTC's and the Eleventh Circuit's applications of the doctrine, highlighting the main points of contention that warrant clarification by the United States Supreme Court. (11) I discuss the Court's interpretive options on certiorari in Part III. (12) There, I argue the Court should impose a higher standard than the Eleventh Circuit under the first prong of the test, which asks whether a state has clearly articulated a policy of displacing competition. (13) I also explain a conflict between the FTC and Eleventh Circuit under the second prong of the test, which asks whether private parties acting pursuant to a clearly articulated policy are actively supervised by the state. (14) I explain that both incorrectly interpret the implications of a sham transaction, and I resolve the resulting conflict through the lens of federalism principles and consideration of alternative checks on unnecessarily anticompetitive state action. (15) Finally, in Part IV, I present alternative options that can be taken to ensure the state action doctrine does not lead to the joint destruction of federalism and competition. (16)

1. PRIMER ON STATE ACTION IMMUNITY

   1. THE BASIC DOCTRINE: PARKER V. BROWN AND ITS PROGENY

      State action immunity is rooted in principles of federalism and finds its basis in the 1943 U.S. Supreme Court case of Parker v. Brown. (17) In Parker, the Court held that the State of California did not violate the Sherman Antitrust Act by enacting legislation that permitted raisin growers in the state to fix prices. (18) A raisin producer challenged a California program that authorized "stabilization" of the raisin market through state-controlled output. (19) The producer argued the program constituted a "contract, combination ... or conspiracy, in restraint of trade" in violation of section one of the Sherman Act. (20) The Court rejected the claim, concluding the Sherman Act's legislative history did not suggest Congress intended to restrain state action but rather its purpose was to regulate private actors. (21) The Court held the program was immune from a Sherman Act challenge because the Act was not intended to restrain the state's actions taken in its capacity as a sovereign entity. (22) This conclusion held despite the producer's key role in the establishment of the program; ultimately, the Parker Court concluded the state adopted and enforced the program, rendering it an execution of a governmental policy and thus immune from the reach of the Sherman Act. (23)

      Parker left open the issue of whether and to what extent state-authorized private action may be shielded from the antitrust laws. In California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., (24) the Court resolved this question by setting forth a two-pronged test for determining whether private action was sufficiently intertwined with the state to warrant immunity. (25) Pursuant to California law, wine wholesalers were required to post resale price schedules for the wine they sold and were prohibited from deviating from the prices they posted. (26) Midcal, a wine wholesaler, failed to post a price schedule for some wines and sold twenty-seven cases of wine at prices below an effective price schedule. (27) Accordingly, the Department of Alcoholic Beverage Control charged Midcal with violating the pricing system. (28) Midcal sought an injunction against the pricing system, alleging the scheme violated the Sherman Act. (29)

      The U.S. Supreme Court, interpreting precedent that refined Parker's general doctrine, (30) held that state action required both a clearly articulated state policy and active supervision of that policy's implementation. (31) In Midcal, the state clearly permitted resale price maintenance and therefore satisfied the first of these requirements. (32) The state failed, however, to actively supervise the resale price maintenance; rather than establishing or reviewing the reasonableness of resale prices, the state merely authorized and enforced the prices that private parties established. (33) Essentially, the state declared conduct lawful that ordinarily violates the Sherman Act, (34) an authorization outside the scope of the state action doctrine. (35) Thus, state action immunity did not apply to the program.

      The Court later reaffirmed the applicability of state action immunity to private parties in Southern Motor Carriers Rate Conference, Inc. v. United States. (36) The Court also refined the first prong of Midcal, finding that a state action need not compel private parties to engage in anticompetitive activity in order to establish a clearly articulated state policy. (37) Accordingly, state laws that permitted motor common carriers to collectively propose rates for approval by a governmental commission--but that also permitted the common carriers to submit proposals individually--clearly articulated a policy to displace competition in ratemaking. (38) The Court similarly held in Town of Hallie v. City of Eau Claire (39) that compulsion to act in contravention of the Sherman Act is not necessary to satisfy the clear articulation prong. (40) Hallie established the often-cited proposition that clear articulation merely requires anticompetitive conduct to be a "foreseeable result" of implementation of a state regulatory regime. (41)

      In City of Columbia v. Omni Outdoor Advertising, Inc., (42) the Court declared that the existence of corruption in a private entity's obtainment of favorable treatment from a municipality does not render that treatment unforeseeable and thus unauthorized; there is no conspiracy exception to state action immunity. (43) Omni, a billboard builder, challenged city zoning ordinances allegedly designed to benefit Columbia Outdoor Advertising ("COA"), a competing billboard builder that Omni claimed unduly influenced the enactment of the ordinances. (44) COA's owner was allegedly personal friends with the mayor and various city council members and used his relationship with government officials to elicit special treatment that gave COA a competitive advantage over Omni. (45) Omni claimed state action immunity did not apply where corruption is the cause of the challenged conduct. (46) It proposed a definition of corruption that included "any governmental act not in the public interest." (47) The Court rejected the existence of a conspiracy exception to state action immunity, reasoning that such a rule would subject regulatory decisions to "ex post facto judicial assessment of the public interest." (48) The rule would be contrary to principles of federalism, permitting courts to opine on state policies and to apply a subjective test that asks whether public officials thought their actions were taken in the public interest. (49) The Court also pointed out that Congress has passed other laws designed to combat corruption in state and local governments; the Sherman Act does not create a code of ethics for political activity. (50)

      The Hallie Court also refined the requirements of the second Midcal prong, finding the active supervision requirement does not apply to actions taken by municipalities (as opposed to private parties) pursuant to state policy. (51) The Court explained that the purpose of the state-supervision requirement is to ensure the action is being taken in furtherance of state policy. (52) Where a government entity is the actor, it is presumed to be pursuing state policy; thus, there is little risk the government entity is engaging in activity designed for private benefit. (53) Therefore, the Court created a bright-line rule precluding municipalities from the active supervision requirement. (54)

      For those subject to the active supervision requirement, the Court explained in Federal Trade Commission v. Ticor Title Insurance Co. (55) that "[t]he mere potential for state supervision is not an...