On March 22, 2016, the U.S. Court of Appeals for the Sixth Circuit allowed a claim to proceed under § 1 of the Sherman Act against four hospitals acting as a single network under a joint operating agreement. Med. Center at Elizabeth Place, LLC v. Atrium Health Sys., No. 14-4166 (6th Cir. Mar. 22, 2016). A divided panel reversed the ruling of the district court, which had granted summary judgment for the defendant hospitals on the premise that they were operating as a single entity and therefore had not engaged in concerted action subject to § 1. The Sixth Circuit’s opinion sheds light on a topic of growing importance in the health care industry: how to distinguish a lawful joint venture from a horizontal conspiracy.
To answer that question, the majority examined “the nature of the business relationship among the defendants, focusing on whether that relationship remain[ed] that of separate, competing entities or whether there [was] a single center of decisionmaking.” Id. at 10 (citing American Needle, Inc. v. Nat’l Football League, 560 U.S. 183 (2010)). Even though the joint venture was “a separate corporate entity with its own management structure” and the “joint operating agreement provide[d] for sharing revenue pursuant to an agreed upon formula,” the court decided the record supported a conclusion that defendants were separate actors capable of conspiring under § 1. Id. In support of this conclusion, the court cited evidence that the intention behind the joint venture was to prevent the plaintiff hospital from entering the local health care market. Id. at 4 (for example, evidence that defendant’s executive told plaintiff, “you are the enemy [and] this is war”). Additional facts supporting this conclusion included that the hospitals “remain[ed] separate legal entities, each with their own assets, filing their own tax returns and maintaining a separate corporate identity with its own CEO and Board of Directors.” Id. at 11. Further, the hospitals continued to compete with each other for physicians and patients and to make their own decisions regarding staffing and patient care. Id.
In recent years, as antitrust regulators have subjected mergers in the health care arena to increasing scrutiny, many have viewed joint operating agreements as an attractive alternative. The Sixth Circuit’s opinion in Elizabeth Place serves as an important reminder that courts “look[] beyond labels” in distinguishing lawful joint venture activities from concerted conduct subject to § 1. Id. at 7. In other words, a formal joint operating arrangement will not spare accused conspirators from antitrust scrutiny, particularly in the face of evidence of anticompetitive intent. Companies should exercise caution to avoid the appearance that a joint venture is being used as a tool to harm competitors or eliminate competition. In both internal documents and external communications, companies should avoid the use of war-like words that may signal anticompetitive intent or effect. It is always prudent to involve counsel in communications with competitors, as these communications pose the highest level of antitrust risk.
The Federal Trade Commission (FTC) and Pennsylvania Attorney General (AG) have challenged the proposed combination of The Penn State Hershey Medical Center (Hershey) and PinnacleHealth System (Pinnacle) in Harrisburg, Pennsylvania. The FTC complaint alleges that the combination would create a dominant provider, reduce the number of competing health systems in the area from three to two, and result in a 64 percent share of the market for general acute care inpatient hospital services.
Hospitals and health systems pursuing mergers with a competitor should be mindful of the antitrust enforcement climate in health care and incorporate antitrust due diligence into their early transaction planning. Moreover, this case highlights that providers seeking to proactively alleviate the potential anticompetitive effects of a transaction should anticipate continued skepticism by the FTC of claims of procompetitive efficiencies and its dismissal of the merging parties’ newly negotiated, post-closing pricing agreements with payors.
Summary of Administrative Complaint
Parties and Transaction
Hershey is a nonprofit healthcare system headquartered in Hershey, Pennsylvania, about 15 miles west of Harrisburg. The system has two hospitals in the Harrisburg area: the Milton S. Hershey Medical Center, an academic medical center affiliated with the Pennsylvania State University College of Medicine, and the Penn State Hershey Children’s Hospital, the only children’s hospital in the Harrisburg area. Hershey has 551 licensed beds and employs 804 physicians offering the full range of general acute care services. In its 2014 fiscal year, Hersey generated $1.4 billion in revenue and discharged approximately 29,000 patients.
Pinnacle is nonprofit healthcare system headquartered in Harrisburg. Pinnacle’s system includes three hospitals in the Harrisburg area: PinnacleHealth Harrisburg Hospital, PinnacleHealth Community General Osteopathic Hospital, and PinnacleHealth West Shore Hospital. The system has 662 licensed beds divided among the three hospitals. In its 2014 fiscal year, Pinnacle generated $850 million in revenue and discharged more than 35,000 patients.
Pursuant to a letter of intent executed in June 2014, the parties would create a new legal entity to become the sole member of both health systems. The parties would have equal representation on the board of directors of the new entity.
Relevant Markets
The FTC complaint alleges that the appropriate scope within which to evaluate the proposed transaction is the market for general acute care (GAC) inpatient hospital services in a four-county area around Harrisburg. This alleged product market encompasses a broad cluster of medical and surgical diagnostic and treatment services that require an overnight in-hospital stay. Although the effect on competition could be analyzed for each affected medical procedure or treatment, the FTC considered the cluster of services as a whole because it considers the services to be “offered to patients under similar competitive conditions, by similar market participants.”
The FTC limited the geographic market to an area which includes Dauphin, Cumberland, Perry and Lebanon Counties. These four counties, according to the FTC, are “the area in which consumers can practicably find alternative providers of [GAC services].” Consequently, hospitals located outside of this area [...]
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The long-awaited ruling on the seeking of injunctions in the context of standard-essential patents encumbered by fair, reasonable, and non-discriminatory (FRAND) terms has been delivered by the Court of Justice of the European Union, in Huawei v. ZTE C 170/130. Although the judgment lays down the legal test applicable to injunctions involving standard-essential patents, and significantly clarifies the landscape that had previously been shaped by the European Commission, a number of issues remain unresolved.
Huawei Technologies entered into negotiations with ZTE Corporation over the possibility of concluding a licence agreement in relation to Huawei’s patent that is essential to the long-term evolution (commonly known as 4G) standard, on FRAND terms. Given that negotiations between the companies were unsuccessful, and because Huawei contends that ZTE continued using the standard-essential patent (SEP) without paying royalties, Huawei brought an infringement action against ZTE, seeking an injunction to stop the sale of certain ZTE products.
In adjudicating the matter, the Regional Court of Düsseldorf considered that the outcome of the litigation largely depended on whether or not the action brought by Huawei constituted an abuse of dominance. Given this consideration, and the uncertainty surrounding the topic of SEP injunctions, the Court made a reference for a preliminary ruling to the CJEU. The Court asked in what circumstances a dominant SEP holder, who has committed to grant licences to third parties on FRAND terms, can seek an injunction to stop an infringement of that SEP, or to recall products manufactured using the SEP, is to be regarded as committing an abuse contrary to Article 102 of the Treaty on the Functioning of the European Union (TFEU).
The Test for SEP Injunctions
The CJEU decided that the following conditions must be satisfied before a dominant SEP licensor can validly bring an injunction against a party infringing an SEP, without acting contrary to Article 102 TFEU.
Notification From The SEP Holder
Prior to taking any action, a SEP holder that has given an irrevocable undertaking to a standardisation body to grant a licence to third parties on FRAND terms, must alert the alleged infringer to the infringement complained about. This prior notice must designate the SEP in question, and specify the way in which it has been infringed.
“Willingness” of The Alleged Infringer
After the alleged infringer has been informed about the infringement, it must (somehow) express its willingness to conclude a licensing agreement on FRAND terms. Presumably, this willingness refers to the alleged infringer agreeing to receive a FRAND offer from the SEP holder. It would seem, therefore, that an alleged infringer who is not prepared to enter into any sort of bona fide negotiations would be presumed to be unwilling.
Unfortunately, although the CJEU refers to the concept of “willingness”, it does not address the criteria for determining the alleged infringer’s willingness. The ruling therefore does not make it entirely clear what the potential licensee should do in order to be treated as willing.
FRAND Offer
The SEP holder must present to the alleged infringer [...]
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On March 18, 2015, the Federal Trade Commission (FTC) ordered Par Petroleum Corporation to terminate its storage and throughput rights at a key gasoline terminal in Hawaii. This action will settle FTC charges seeking to prevent Par’s acquisition of Koko’oha Investments, Inc. Notably, the market structure created as a result of this remedy mirrors a market structure that was deemed anticompetitive in a 2005 FTC action. The two differing approaches to the same market highlight a key trend in the FTC’s merger enforcement: the focus on competitive effects of a transaction, as opposed to the resulting market structure.
The Market for Hawaii-Grade Gasoline Blendstock
The allegedly anticompetitive transaction affects the market for Hawaii-grade gasoline blendstock. Gasoline blendstock is produced by refining crude oil and is later combined with ethanol to make finished gasoline. The finished gasoline is sold to Hawaiian consumers.
Prior to the transaction, there were four competitors in the market for Hawaii-grade gasoline blendstock. Par and another oil company competed by operating refineries and producing the blendstock on the Hawaiian Islands. The other two competitors, Mid Pac Petroleum, LLC, and Aloha Petroleum, Ltd., competed by sharing access to the only commercial gasoline terminal on the Islands not owned by a refinery and capable of receiving full waterborne shipments of gasoline blendstock. This terminal, the Barbers Point Terminal, was owned by Aloha, but Mid Pac shared access through a long-term storage and throughput agreement.
The two oil refiners produced more gasoline than was consumed in Hawaii. As a result, importing gasoline blendstock was unnecessary. However, Mid Pac and Aloha were able to constrain the price of gasoline blendstock purchased from the Hawaiian refiners by maintaining their ability to import gasoline blendstock through the Barbers Point Terminal.
The Proposed Transaction and the FTC Challenge
On June 2, 2014, Par agreed to acquire Koko’oha for $107 million. As part of this transaction, Par would acquire Koko’oha’s 100 percent membership interest in Mid Pac and, therefore, Mid Pac’s rights to access the Barbers Point Terminal. The FTC filed a complaint alleging this transaction was likely to substantially lessen competition in the bulk supply of Hawaii-grade gasoline blendstock.
The basis of the FTC’s action was that “[t]he Acquisition would weaken the threat of imports as a constraint on local refiners’ [gasoline blendstock] prices.” By acquiring Mid Pac’s throughput and storage rights at Barbers Point Terminal, Par would have an incentive to use those rights strategically to weaken Aloha’s ability to constrain the price of gasoline blendstock. The specific competitive concern the FTC cited was that Par would store substantial amounts of gasoline in the Barbers Point Terminal for extended periods of time. By doing so, Par would tie up the capacity at the terminal and thereby reduce the size of import shipment that Aloha could receive at the terminal. “This would force Aloha to spread substantial fixed freight costs over a smaller number of barrels of gasoline, which would significantly increase its cost-per-barrel of importing.”
On March 18, 2015, the FTC and Par [...]
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The U.S. Department of Justice (DOJ) recently reached a settlement with Coach USA Inc. and City Sights LLC, breaking up their joint venture. The DOJ also employed the rarely used remedy of disgorgement to recover $7.5 million in profits from the defendants. This case demonstrates the aggressive posture the antitrust agencies are taking to challenge and impose harsh remedies upon transactions that are not reportable under the Hart-Scott-Rodino (HSR) Act. It also highlights the need to properly evaluate and prepare for the antitrust implications of non-reportable transactions under the HSR Act.
DOJ Obtains Disgorgement
In 2009, two operators of hop-on, hop-off bus tours in New York City formed a joint venture, Twin America LLC. Prior to the formation of Twin America, Coach USA and City Sights were the two largest companies in the alleged hop-on, hop-off bus tour market in New York City, with a combined 99 percent share of the market. The DOJ alleged that the two companies’ joint venture created an unlawful monopoly and enabled them to increase prices by approximately 10 percent. The DOJ filed an antitrust complaint challenging the deal in December 2012, well after it was consummated in 2009. The case was proceeding towards trial when the parties agreed to a settlement, which they announced on March 16, 2015.
Under the terms of the settlement, the defendants must take several steps to restore competition allegedly lost through the formation of the venture. Twin America must divest all 50 of City Sight’s valuable Manhattan bus stop authorizations. The divestiture will eliminate a significant barrier to entry, as the bus stop authorizations are required by the New York City Department of Transportation to operate bus tours, and little capacity for new authorizations exists. Coach USA and Twin America must also establish antitrust training programs and provide the government with advance notice of any future acquisition in the alleged market. Coach USA must pay $250,000 in attorney’s fees to the United States in connection with claims that it spoliated evidence and did not meet its document preservation obligations.
Most noteworthy, the settlement requires the defendants to pay $7.5 million to disgorge what the DOJ viewed as excess profits obtained as a result of the combination. Prior to this settlement, the defendants had already agreed to pay $19 million to settle a related class action lawsuit. One criticism of disgorgement as a remedy in antitrust matters is that disgorgement may excessively punish defendants that are also subject to potential civil litigation in which they may pay additional damages. Here, the DOJ concluded that the defendants were unjustly enriched by an amount greater than the $19 million settlement, and the additional $7.5 million disgorgement was intended to divest the defendants of additional ill-gotten profits and deter similar conduct in the future.
This disgorgement is significant. It is a remedy that the FTC and DOJ have used very infrequently, particularly in merger cases. To the extent the Twin America case creates a precedent for the use of that remedy, it increases [...]
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Aerospace and defense contractors engage in a wide range of mergers, acquisitions and joint venture transactions, which are often subject to heightened antitrust scrutiny. This article highlights some of the leading antitrust factors that contractors should consider when contemplating M&A transactions in their unique industry.
It is a general tenet that competition serves customers well, enabling them to acquire better products at lower prices. Of course, this premise underlies the antitrust laws. In the aerospace and defense industry, the customers are often government agencies that are monopsonists with significant purchasing leverage. Government customers often have contracting mechanisms that are not generally available in the commercial marketplace, such as the ability to receive certified cost and pricing data from contractors. From time to time, contractors have attempted to rely on arguments that the government’s buyer power and contracting rights ensure that contractors cannot impose unreasonable pricing on the government, even if there is no or limited competition. The antitrust regulators and the U.S. Department of Defense (DoD) have long rejected that notion, stressing that regulation is not a substitute for competition. A recent DoD study supports that general proposition, and provides data the DoD interprets as showing that the presence of competition improves contracting outcomes for the government. See DoD 2014 Annual Report on the Performance of the Defense Acquisition System. This report provides some interesting thoughts and data that may impact future antitrust agency reviews.
This newsletter identifies when “teaming agreements” between contractors are likely to raise antitrust issues, and suggests some practice tips for evaluating or defending those arrangements.
by Nick Grimmer
How can a company legally protect its valuable interests in key employees, when a competitor can just swoop in with a more attractive employment offer? A non-poaching agreement or clause (also called a no- or non-poach, -hire, -interference, -switching or -solicitation agreement or clause, depending on the circumstances) can offer protection. In these agreements, competitors or potential competitors for skilled labor might agree not to cold call, solicit, recruit or even hire each other’s employees. The agreements usually cover specified employees or categories of employees (e.g., by title, skill area or salary level) and usually last for a set period of time.
The ancillary restraints doctrine generally governs non-poaching agreements. Under that doctrine, a restraint of trade (here, the non-poaching agreement) is permissible if it is one in which there is also a legitimate/procompetitive main agreement, and the covenant in restraint of trade is necessary and merely ancillary (i.e., collateral or subordinate) to that agreement. If it is not, then it is a “naked restraint of trade” and will be per se illegal under federal antitrust law (and the plaintiff—typically, the affected employee(s)—will need only to prove the existence of the restraint, as opposed to having to show its anticompetitive effects, which are presumed). Conversely, if a non-poaching agreement is ancillary to a legitimate/procompetitive agreement, it is judged under the rule of reason, which involves a balancing of procompetitive benefits and anticompetitive effects.
Agreements that keep employees out of competitors’ camps come in several flavors. The basic types—and their general antitrust treatment—include:
“Naked” agreements between competitors: Like an (illegal) agreement among competitors to divide sales territories, a naked agreement among competitors for labor simply to not hire each other’s employees is likely per se illegal (in essence, they both entail “you keep what’s yours, I keep what’s mine”). To avoid per se illegality, keep these points in mind:
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