Supreme Court Reverses 11th Circuit’s Broad Application of State Action Immunity for Local Government Agencies

On Feb. 19, 2013, the U.S. Supreme Court issued a unanimous opinion in FTC v. Phoebe Putney Health System, Inc., 568 U.S. __ (2013), holding that a Georgia law creating and empowering local health authorities to acquire and lease hospitals did not “clearly articulate and affirmatively express” an intent to allow acquisitions substantially lessening competition, and therefore did not trigger so-called state action immunity. The decision is available here.

In Phoebe Putney, the Hospital Authority of Albany-Dougherty County owned one of two hospitals in the county, Phoebe Putney Memorial Hospital, which was in turn managed by Phoebe Putney Health System, Inc. (PPHS).  The Hospital Authority decided to purchase the other hospital in the county and lease it to PPHS. The Federal Trade Commission sued to enjoin the transaction under Section 5 of the FTC Act and Section 7 of the Clayton Act. The District Court denied the FTC’s request on the basis that the transaction was immune under the state action doctrine. The 11th Circuit affirmed, holding that the state legislature would have foreseen that conduct such as the acquisition would occur and could lessen competition, given the broad powers state law granted to the local authorities to purchase and lease hospitals.Writing for the Court, Justice Sonia Sotomayor reviewed the Court’s prior state action decisions starting with Parker v. Brown, 317 U.S. 341 (1943). She explained that state action immunity is disfavored and for it to apply to a local government’s activity the action must be undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition.

In certain circumstances, state action immunity would apply if the anticompetitive conduct was the “foreseeable result” of the state action. However, the Court held that the mere grant of authority to act is not enough to confer immunity. Rather, the lessening of competition must be “affirmatively contemplated” by the state action—the local authority must show that it was granted authority not only to act, but “to act or regulate anti-competitively.” In the case of the Hospital Authority, the Court held that “while the Law does allow the Authority to acquire hospitals, it does not clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition.” Further, the Court held, the 11th Circuit “applied the concept of ‘foreseeability’ from [its] clear articulation test too loosely.” State action immunity would apply if the effect on competition is the “inherent, logical, or ordinary result” of the exercise of the state’s authority. But “‘simple permission to play in a market’ does not ‘foreseeably entail permission to roughhouse in that market unlawfully.'”

The Court’s opinion is a reaffirmation of case law holding that state action immunity is disfavored and will be applied narrowly. Private entities seeking to pursue a course of potentially anticompetitive conduct they believe is authorized under state law should review the authorizing law closely to determine whether it “clearly articulates and affirmatively expresses,” explicitly or implicitly, state policy to displace competition.

In addition, under established case law, the statutory scheme must provide for adequate supervision of authorized conduct by local governmental authority to ensure that state action immunity applies.