Why antitrust matters to City 2.0 – FTC v. Phoebe Putney

U.S. Supreme Court 2010In light of the Supreme Court’s decision today in FTC v. Phoebe Putney Health System, Inc., I’d like to address why antitrust law matters to urban innovation, as I’ve done in addressing how municipal law and admin law matter to City 2.0. The Court’s decision reaffirmed some important constraints on local authority, but to explain the decision, which addresses whether a hospital authority in Georgia can acquire a competing hospital without scrutiny from the FTC (the answer’s no), I’ll need to explain some history of “state action” antitrust immunity.

In 1943, the Supreme Court in Parker v. Brown concluded that antitrust law—those laws meant to stomp out anticompetitive behavior—did not apply to municipalities, such that California regulators could not be stopped from running a program to market raisins, even though the program edged out a certain local raisin farmer. The decision turned on the local nature of this conduct, an analysis weakened, I would think, by Commerce Clause analysis since then.

But the immunity created in the decision applies only to states; cities and other local government units are not entitled to it in the same way. The Supreme Court explained this idea in 1978, in City of Lafayette v. Louisiana Power & Light Co., which addressed the ability of a group of cities to regulate electric utility systems. The Court rejected the argument that the immunity recognized in Parker applies full-tilt to cities, holding that “the Parker doctrine exempts only anticompetitive conduct engaged in as an act of government by the State as sovereign, or, by its subdivisions, pursuant to state policy to displace competition with regulation or monopoly public service.” In other words, a municipality only has immunity if the State meant the municipality to engage in anticompetitive conduct, a theory consistent with the Court’s general approach to matters of local governance: the State is supreme.

Of course, it’s not quite that simple: The Supreme Court dealt with this issue again in 1985 in Town of Hallie v. City of Eau Claire and clarified that, before a municipality is entitled to Parker-type immunity, “it must demonstrate that it is engaging in the challenged activity pursuant to a clearly expressed state policy.” The meaning of “clearly expressed” obviously leaves a lot of room for debate.

Now to today’s decision. Georgia allows local governments to create hospital authorities. Under that law, the City of Albany (together with the local county) ran a hospital for nearly 30 years until it leased the hospital to a nonprofit created by the city in 1990. Then in 2010 the city tried to acquire a competing hospital, and landed itself in antitrust trouble with the Federal Trade Commission. The city defended itself on the basis of the aforementioned cases. The case turned on whether Georgia, in authorizing hospital authorities, intended cities to engage in anticompetitive conduct, as the Eleventh Circuit decided.

As Lyle Denniston points out over at SCOTUS Blog, there were arguments in both directions:

Each side in this case was able to find language in prior Supreme Court rulings to support the central thrust of its argument, so it seems likely that the Court will find that it must think afresh about first principles: what is the virtue of allowing states to displace market competition, what risks does such a displacement pose to the functioning of the marketplace, and what public restraints — if any — should accompany the displacement of competition with potential local market monopolies?  If quotations from prior Court opinions are as malleable as the briefing in this case has suggested, then some fundamentals are getting lost in their mere reiteration.

Denniston also summarized the opposing positions:

The FTC has promoted in this case an economic model — if market competition is put aside, there has to be some regulatory regime in place.  That is fundamentally an argument against leaving the private market to function entirely on its own, even in an area of such vital economic service as that provided by acute-care hospitals.The

Putney Health Systems has promoted an alternative regime: state governments can be trusted to know what the economics of their own state demand and thus should remain free to craft their own economic regimes.   If the “state-action doctrine” is to be true to the federalism instincts that gave rise to it, then the argument is that states are deserving of considerable deference in how they choose to order the marketplace within their borders, including the market for vital public services.

My former professor, Sasha Volokh, an expert on privatization, also chimed in at The Volokh Conspiracy:

FTC v. Phoebe Putney Health System will be interesting to watch for, since it’s an opportunity for the Supreme Court to tighten up the conditions for state-action immunity. I’m not exactly what you’d call an antitrust hawk, but it’s unlikely that the optimal policy would be antitrust immunity for governmental bodies only, which puts governments in a more favored category than private entities and encourages business enterprises to be run within the public sector.

He later summarized an amicus brief by a group of prominent economics in the case.

No matter what the outcome, the decision was likely to affect how local governments handle important services, including new technologies, like faster and more-widespread Internet access.

So what did the Court say? (The full opinion is here; you can find discussions of oral argument here and here.)

The Court unanimously reversed the Eleventh Circuit. Justice Sotomayor, writing for the Court, concluded that “[b]ecause Georgia’s grant of general corporate powers to hospital authorities does not include permission to use those powers anticompetitively, we hold that the clear-articulation test is not satisfied and state action immunity does not apply.”

In other words, Georgia did not “clearly express” that its cities could engage in this type of anticompetitive behavior. The Court said that the Eleventh Circuit had applied the clear-articulation test “too loosely.”  Here’s the crux of the Court’s reasoning (as I read it):

We have no doubt that Georgia’s hospital authorities differ materially from private corporations that offer hospital services. But nothing in the Law or any other provision of Georgia law clearly articulates a state policy to allow authorities to exercise their general corporate powers, including their acquisition power, without regard to negative effects on competition. The state legislature’s objective of improving access to affordable health care does not logically suggest that the State intended that hospital authorities pursue that end through mergers that create monopolies. Nor do the restrictions imposed on hospital authorities, including the requirement that they operate on a nonprofit basis, reveal such a policy. Particularly in light of our national policy favoring competition, these restrictions should be read to reflect more modest aims. The legislature may have viewed profit generation as incompatible with its goal of providing care for the indigent sick. In addition, the legislature may have believed that some hospital authorities would operate in markets with characteristics of natural monopolies, in which case the legislature could not rely on competition to control prices. See Cantor v. Detroit Edison Co., 428 U. S. 579, 595–596 (1976).

We recognize that Georgia, particularly through its certificate of need requirement, does limit competition in the market for hospital services in some respects. But 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. Thus, in Goldfarb v. Virginia State Bar, 421 U. S. 773 (1975), we rejected a state-action defense to price-fixing claims where a state bar adopted a compulsory minimum fee schedule. Although the State heavily regulated the practice of law, we found no evidence that it had adopted a policy to displace price competition among lawyers. Id., at 788–792. And in Cantor, we concluded that a state commission’s regulation of rates for electricity charged by a public utility did not confer state-action immunity for a claim that the utility’s free distribution of light bulbs restrained trade in the light-bulb market. 428 U. S., at 596.

In this case, the fact that Georgia imposes limits on entry into the market for medical services, which apply to both hospital authorities and private corporations, does not clearly articulate a policy favoring the consolidation of existing hospitals that are engaged in active competition. Accord, FTC v. University Health, Inc., 938 F. 2d 1206, 1213, n. 13 (CA11 1991).

I’ll try to dive more into the opinion later. For now, the Court avoided redefining the “state action” doctrine, as some thought it would, but gave real teeth to the clear-articulation requirement. Thus, cities will have to be very careful to examine existing State law before running potentially anticompetitive ulility-type businesses. For more coverage of the case see here, here, here, here, here, and here.

Chicagoans can now complete most 311 tasks by text

As covered by Government Technology, Chicago has upgraded the ChiTEXT component of its 311 system to allow citizens to complete most 311 tasks via text. Texts will prompt a series of scripted questions to better identify the problem: For a pot hole, for example, you may get asked if it’s near a curb line or looks like a sinkhole.

Perhaps the most interesting feature is that 311ers can track online their ticket’s progress as it moves through the city’s internal departments. This service is unique to Chicago, says the city’s CTO.

Best of all, use of the technology added no costs, because it was already included as a feature by Motorola, the city’s customer-service vendor. Kudos to Chicago for making strides toward more open and efficient government!

Are cities America’s greatest laboratories of government innovation?

In 1932 Supreme Court Justice Louis Brandeis famously wrote, “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” And indeed, the States remain a powerful laboratory, able to innovate constrained only by the U.S. Constitution.

But the quote applies ever more to cities. Although they sometimes lack deep pockets, and their authority to regulate is derived from the state, they offer many advantages over state and federal government. I’ll list four. First, as Benjamin Barber recently argued, cities tend to be more pragmatic and less ideological than other levels of government, meaning real innovation gets done in a practical way. Second, as Edward Glaeser points out in “Triumph of the City,” cities are smaller geographically and dense with human potential, which accelerates the spread of ideas. Third, comparatively minimal bureaucracy allows cities to respond quickly to changing technology. Four, if an initiative fails, it doesn’t affect a whole state (or the whole country).

Put differently, cities are the tech start-ups of government; the federal government is Microsoft. As Arianna Huffington recently wrote, “It’s our cities, not the nation’s capital, that are the real idea factory of our country.”

I’ll give two examples.

First, one many people are familiar with: open-data initiatives. In 2007 Vivek Kundra, then Assistant Secretary of Commerce and Technology for Virginia, became Washington D.C.’s Chief Technology Officer. He created the D.C. Data Catalog, making government data available for open-source application development. He also instituted an app contest, using a pot of money to crowdsource innovation. When Obama became president, he drafted Kundra as Chief Innovation Officer, where he created data.gov, an initiative to provide an accessible online catalog of data from federal agencies. The idea has spread like wildfire, with more and more cities creating open-data sites and sponsoring app contests. And the data.gov model has now caught on in more than 13 countries. The world has been changed, with momentum generated by a city that was willing to embrace new ideas and showcase on a small scale what would eventually become a worldwide movement.

Second, an example from an area of interest to me: vacant-property registration. In 2007 Chula Vista, California, enacted an ordinance that took a novel approach in the fight to maintain vacant properties. Rather than simply requiring property owners to register vacant property, the city required mortgage lenders to register property when it went into foreclosure and then to maintain the property to stringent code guidelines. Chula Vista’s code enforcement officer, Doug Leeper, was particularly vigilant, and during the program’s first year of operation, Chula Vista raised $77,000 in registration fees (at $70 per property) and imposed around $850,000 in administrative citations. The program was such a success that Leeper was called to testify before the House of Representative’s subcommittee on Domestic Policy in 2008 in the wake of the foreclosure crisis. Again, one city’s program spread like wildfire. By my count, nearly 100 municipalities had enacted a similar ordinance by 2009, and that number has continued multiplying ever since. Recently, even Chicago modified its registration ordinance to target lenders.

This type of innovation comes only from local thinkers (and doers) living in communities, seeing local problems, and testing solutions in perhaps America’s greatest laboratories for government innovation—our cities.


Why Municipal Law Matters to City 2.0

Being a lawyer, I think it’s time I wrote a post about law. I want to address an important topic: Where does a city’s authority to innovate come from? And how much authority does it have? I’ve noticed that these questions are seldom addressed in discussions on city planning, even though they are key to a city’s ability to innovate, engage in smart growth, and respond to problems identified through open-data programs.

First, the basics. The predominant American framework for city authority comes from an influential 1872 book on municipal law by John Dillon, a state and federal judge. Dillon proposed that municipalities only have those powers expressly granted by their state legislature. (In contrast, a state has inherent power to regulate its citizens, constrained only by the state and federal constitutions.) The U.S. Supreme Court adopted Dillon’s formulation in 1891 and confirmed the rule in 1907 in Hunter v. Pittsburgh, 207 U.S. 161, which allowed Pennsylvania to consolidate the cities of Pittsburgh and Allegheny. The state is supreme, the Court said, and may “at its pleasure” change or destroy a city’s powers, even the city itself, “with or without the consent of the citizens, or even against their protest.” Within two decades, this rule—now called “Dillon’s Rule”—was so well established that academic debate about its propriety all but disappeared.

You can imagine the tension this rule might cause between innovative cities and states with outdated laws that unnecessarily constrain city power. This tension is best illustrated by an example.

Genesee County, Michigan, where I am from, is fighting a well-publicized battle with large numbers of vacant and abandoned properties. The County developed a solution: planned shrinkage. But to do that, the County needed an efficient way to gain ownership of vacant properties. The County could gain ownership through tax foreclosure, but Michigan’s archaic tax laws kept properties held up in the tax-foreclosure process for up to 7 years. Having no power to write its own tax laws, the County had to wait for Michigan’s legislature to streamline the tax-foreclosure process, an action it took in 1999. Tax-foreclosure in Michigan now takes 2 to 3 years, and the property goes to the Genesee County Land Bank, which manages the property with the goal of stabilizing and revitalizing the area.

There are ways a state can give their cities more autonomy: Some write into their constitution that cities have power to regulate local issues; other states, like California, authorize “charter” cities that are allowed to write their own local governing documents. Notice, however, that even in those states, cities are limited to addressing local, not statewide or regional, concerns. This limitation becomes significant when cities go beyond local planning and address regional problems such as transportation systems or environmental degradation.

Yet full city autonomy, permitted in Argentina and Spain, is probably not the solution in the United States, which already has two strong levels of government—state and federal—that must coordinate which each other. One source I find particularly helpful is the work of Gerald Frug and David Barron, two professors at Harvard Law, who advocate in their 2008 book, City Bound: How States Stifle Urban Innovation, that states, instead of authorizing pure city autonomy, should update their outdated municipal laws so cities can pursue specific strategic goals, including raising revenue, regulating land use, and reforming schools.

The bottom line for cities is that they must be aware of their limitations and, in charting city growth, must plan to address those areas of state law that might need to change. As for state governments, they must recognize the limited nature of city government and strive to make the changes to state law that are necessary to support the cities of the future.

As a final note, to clear up some misconceptions I’ve noticed online: Dillon’s Rule and “home rule” are not mutually exclusive. Even in states that embrace the concept of “home rule” (as almost all of them so), city power is granted by the states. Although there are variations by state, “home rule” simply means, in essence, that cities have been given broad authority over local concerns, though that authority is still granted and limited by the state constitution or legislation. Sometimes, the grant of broad authority was done so long ago, through the state constitution, that people assume the city has inherent power apart from a state grant, and that’s not true. For example, Frug and Barron list three ways that “home rule” provisions confine local-government power (even as they broaden it): states sometimes (1) limit city power to “local” concerns, (2) prohibit cities from regulating “private or civil affairs,” or (3) deny cities the power to tax.

Census Tuesdays: The Basics

The U.S. Census Bureau website is one place cities can find data about their populations. Every Tuesday, I plan to highlight some aspect of Census data that may be particularly helpful to local communities. This week, I’m going to lay out some basic information provided by the
Census Bureau.

  1. There is an impressive mapping feature that showcases data about population, race, age, sex, and housing status—all the way down to the “census block” level (and also at larger divisions, such as townships, congressional districts, or the state as a whole).
  2. There is another helpful map (go down the page to “Redistricting Data”) that charts population change for 2000-2010 by race for states and counties, and another map (same page under “Apportionment Data” that lets you see changes in population and population density every ten years since 1910.
  3. Although not on the U.S. Census Bureau website, the New York Times has used Census data (from the Census Bureau’s American Community Survey) to create beautiful infographics covering race, income, housing/families, and education. I particularly liked the data on median monthly rent, changes in mortgages consuming over 30% of income, and percentages of high school/college graduates.

This data provides a treasure trove for analyzing national and local trends. I hope to provide more in depth analysis in future posts.

What is vacant property registration?

file0001472960139As the country continues to suffer the repercussions of the mortgage crisis, one consequence to many cities is a growing number of vacant properties (other cities, like my hometown of Flint, have been dealing with large numbers of vacant buildings for years—the county where Flint is located has set up a renowned landbank to help address the problem).

Vacant Property Registration (VPR) ordinances have become an important tool in combating this rise in vacancies (and the resulting increase in costs as city governments battle blight and vandalism). The basic idea is that a local government enacts a law that requires landowners to pay a fee for registering vacant property and to maintain the property to certain standards. The fee pays for staff to monitor and enforce the maintenance of the property.

Beyond the basics, there are many differences in VPR ordinances nationwide. One distinction is when registration is required: Many cities require registration after a property has been vacant for a certain amount of time; others require registration only after a foreclosure; still others use both approaches. The foreclosure approach is aimed at mortgage lenders, who typically control a property’s maintenance when the property is in the foreclosure process (and often, the theory goes, let maintenance slip). Registration encourages them to hire local companies to maintain the property or risk incurring penalties for noncompliance.

Another way VPR laws vary is in the fine imposed. Some cities impose escalating fees for every year a property is vacant. This type of law focuses on getting rid of vacant buildings altogether. Many of these cities require property owners to submit plans to renovate or demolish buildings on the property. Other cities require a small or even no fee for registration but impose steep penalties for noncompliance with maintenance rules. The purpose of these laws is aimed more at keeping a city clean while it waits for economic recovery. Maintenance rules can be extensive, including guidelines for pools, securing a building, and the exterior of the building (even including paint colors).

The bottom line is that a city looking to manage vacant properties should consider enacting a VPR ordinance (or encouraging the county or even the state to do so), but must also figure out what the primary problems are that it wants to address:

  • For city officials facing a swell of foreclosures but confident that homeowners will return, a foreclosure-initiated ordinance (like that enacted in Chula Vista, California), may be the best bet. Those types of programs imposes strict maintenance requirements on mortgage companies when a property goes into foreclosure.
  • For cities facing long-term vacancies (like many Midwestern cities facing loss of industry) the best solution might be an aggressive program like that in Wilmington, Delaware, which imposes severely escalating fines for every year a property remains vacant.
  • Even better, many cities are adopting a combination of these approaches—targeting both longterm properties and those recently in foreclosure.

Of course, once any law is passed, the key to success is aggressive enforcement.

For a database of VPR ordinances, check out Safeguard Properties or Mortgage Contracting Services. But be aware that both these websites are associated with the mortgage industry, which is generally opposed to vacant property registration (calling the requirements unreasonable).

I will do a future post on electronic registries, such as the Federal Property Registration Corporation and Mortgage Electronic Registration Systems (MERS), and their potential pitfalls (especially MERS). For now, I wanted to lay out the basics. To see more, check out my article Vacant Property Registration Ordinances, 39 Real Est. L.J. 6 (2010), or go to the resource page for vacant property registration.

Basics of 311

I want to start this blog by highlighting a great article (though dated) about the basics of 311 data collection and how cities are moving from mere data collection to making that data actionable. (For more on that topic see this post by John Geraci of DIYCity.)

In “What a Hundred Million Calls to 311 Reveal About New York” by Steven Johnson, published in Wired Magazine and available online here, Johnson covers how New York is using 311 call lines to solve real problems. As an example, he tells the story of how city inspectors used the location of 311 callers to target the location of what was producing a strange syrupy smell in the New York City (it was a plant processing Fenugreek seeds).

Johnson springboards from that seemingly trivial story into stuff that has a big potential to influence the way cities operate. To me, the most exciting part is revealed by an annual contest held by New York City. As Johnson says it:

“New York has sponsored an annual competition called NYC BigApps, modeled after an earlier program in Washington, DC. Participants design and submit web or mobile apps that draw on information stored in the city’s Data Mine, which encompasses hundreds of machine-readable databases, including a sliver of 311 information. The first BigApps winners, announced in early 2010, were awarded cash prizes of up to $5,000 and a meal with the mayor. One winner, Taxihack, allowed users to post reviews of individual cabs and their drivers. The grand-prize winner, WayFinder NYC, superimposes directions to nearby subway stations over photos that users take on their Android phones.”

This method of drawing on the public (and encouraging competition) is both simple but groundbreaking. The potential to improve our cities is huge. Of course NYC is capable of sponsoring bigger rewards and attracting more talent than probably any other city government. But there is no reason why this model couldn’t be replicated, and, indeed, it already is being replicated (in some form) by other cities. For example, Chicago—which already has an established 311 system—announced this summer that it is trying to establish an App Contest.

Whatever the merits of App Contests, the broader point is that the more data a government collects and makes accessible to the public, the more individuals (and companies) are able to develop tools to improve city life and even government functioning. I plan to continue to follow App Contests through this blog, particularly Chicago’s.