In 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.
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.