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In my earlier post in the <a href="https://www.antitrustadvocate.com/blogs/are-hospital-acquisitions-with-copa-authorization-exempt-from-hsr-pre-merger-notification/">Antitrust Advocate Blog</a>, I noted recent setbacks that the Federal Trade Commission has experienced with respect to its regulatory authority. I then asked whether the FTC would suffer another regulatory setback, namely whether there is an exemption from Hart-Scott-Rodino (HSR) premerger notification when an acquisition is subject to state regulation. A district court has now answered that question in the affirmative, at least when the transaction involves a hospital acquisition with state Certificate of Public Advantage (COPA) authorization.

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Louisiana Children’s Medical Center v. Attorney General of the United States et al. involved a petition for a declaratory judgment that Louisiana Children’s Medical Center (LCMC) is not required to file premerger notification pursuant to the Hart-Scott-Rodino (HSR) Act. LCMC is a Louisiana non-profit network of health care providers that operates nine hospitals and several other locations in Louisiana and Mississippi. LCMC acquired Tulane University Medical Center, Lakeview Regional Medical Center, and Tulane Lakeside Hospital (the Acquisition) from HCA Healthcare, Inc. (HCA), consummating the acquisition without filing HSR premerger notifications. If the parties to an acquisition meet specified criteria, they must file such a notification, provide the required information and documents, and pay a filing fee. They also cannot consummate the transaction if the FTC (or the Antitrust Division of the Department of Justice) issues a “second request” typically within 30 days of the notification. If the FTC issues such a request, it typically takes many months before the parties can close the transaction, assuming that the FTC does not challenge the acquisition at the end of this second waiting period.

LCMC consummated the acquisition on January 1, 2023. On March 3, the FTC’s Premerger Office asked LCMC why it had not filed the HSR notification. LCMC’s response did not convince the Premerger Office that the parties did not have a filing obligation. The penalty for not filing could be up to $50,120 per day for most of the period after the consummation. Filing thereafter might not stop the penalty from mounting given the position of the FTC that consummation is a violation of the parties’ HSR obligations.

In response to the Premerger Office’s position, LCMC sought a declaratory judgment that it has no filing obligation in the U.S. District Court in the Eastern District of Louisiana because, before closing, the State of Louisiana Attorney General issued a COPA authorizing the acquisition. Not to be outdone by LCMC, the FTC sued LCMC in the U.S. District Court for the District of Columbia seeking to stop LCMC from integrating the three recently acquired hospitals because it did not file the required premerger notification. The FTC complaint argued that neither the FTC nor the DOJ has interpreted a COPA to exempt a party from its premerger notification obligations. After the required notifications, the FTC explained, it would investigate to decide whether the COPA shields the acquisition from liability under Section 7 of the Clayton Act. Eventually, all the lawsuits were consolidated in Louisiana Children's Medical Center v. Attorney General of the United States et al., Docket No. 2:23-cv-01305, in the Eastern District of Louisiana.

A COPA is a procedure used in several states to replace market competition with state regulatory oversight of the merged entity. If done properly, a COPA would provide the merging parties with state action immunity from Section 7 of the Clayton Act. Section 7 bars mergers that may “substantially lessen competition.” The state action doctrine resulted from the Supreme Court’s 1943 Parker v. Brown decision where the Court concluded that there is “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.” Thirty-seven years later, the Supreme Court in California Retail Liquor Dealers Association v. Midcal Aluminum clarified that even conduct by private parties is immune from antitrust liability so long as the challenged conduct is pursuant to “clearly articulated and affirmatively expressed ... state policy” and is “actively supervised” by the state. The FTC is unhappy with COPAs replacing competition as we set out in another <a href="https://www.antitrustadvocate.com/2022/10/26/hospital-mergers-future-copa-immunity/">blog entry</a>. But unhappiness alone does not undermine state action immunity. On the other hand, the state must cross its t’s and dot its i’s for the parties to obtain such immunity. See, e.g., FTC v. Phoebe Putney Health System, Inc.

In a 29-page opinion, the district court agreed with LCMC’s argument, holding there is “no reason to subject a merger exempt from Section 7 to a[n HSR] waiting period and filing requirements designed to allow the FTC to determine whether that merger may violate Section 7.” Louisiana Children's (E.D. La. September 29, 2023). The court found that the Louisiana COPA statute meets the Parker and Midcal state action requirement for an express state policy because Louisiana’s COPA statute expresses the state legislature’s policy “to ‘substitute state regulation .&nbsp;.&nbsp;. for competition’ among health care facilities.”

While there seemed to be little dispute from the FTC on this leg of the state action doctrine, the FTC hotly contended that the record before the court was not sufficient to determine whether the acquisition satisfied the second leg of the state action doctrine: whether the transaction was actively supervised by the state. The FTC argued that the court should not engage in an analysis of active supervision because it is “fact-specific,” and the determination cannot be made without an HSR notification. The FTC thus maintained that the first issue the court had to address is whether the transaction meets the requirements for a merger filing under Section 7A (15 U.S.C. §&nbsp;18a(c)(5), the HSR amendment to the Clayton Act. The district court pointed out, however, “if the transaction is exempt from Section 7, then subjecting it to Section 7A’s requirements . . . to allow the FTC to determine whether it is in fact exempt would be pointless.” So, the court disagreed with the FTC, concluding “it must first determine whether the COPA issued pursuant to Louisiana’s COPA statute exempts the transaction from federal antitrust enforcement[,]” in particular, Section 7 of the Clayton Act.

Given the court’s decision to determine the transactions exemption from Section 7 first, the FTC’s litigation strategy undermined its position. The court pointed out that the FTC did not pursue discovery to determine whether the acquisition satisfied the second leg of the state action doctrine. In addition, when the D.C. District Court in its transfer decision advised the parties that the state action question must be resolved before the 7A question, “[t]he FTC chose not to listen.” According to the court, “the FTC cannot now rely on its own litigation strategy—specifically, its choice not to brief this issue fully .&nbsp;.&nbsp;.&nbsp;.” Moreover, the FTC did not engage on the active-supervision evidence presented by LCMC. As a result, the court determined that the FTC did not “raise a genuine dispute of material fact,” resulting in the court holding that LCMC had satisfied the second prong of the state action doctrine, and it did not have to file an HSR notification.

Despite the district court’s quite reasonable decision under the circumstances, parties contemplating an acquisition may not be fully immunized from making an HSR filing by an authorization to acquire under a state COPA law. I belabored the FTC’s litigation strategy because if the FTC wants to regain the HSR authority it seems to have lost, it will engage in full discovery the next time parties do not submit an HSR filing based on a COPA exemption. In addition, even if the district court is affirmed on appeal, there are still ten other courts of appeal that could be more sympathetic to the FTC’s arguments.

UPDATE: Are Hospital Acquisitions with COPA Authorization Exempt from HSR Premerger Notification?

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