The Department of Justice (DOJ) announced last week that it and the State of North Carolina have reached a settlement with Carolinas Healthcare System / Atrium Health relating to provisions in contracts between the health system and commercial insurers that allegedly restrict payors from “steering” their enrollees to lower-cost hospitals. The settlement comes after two years of civil litigation, and serves as an important reminder to hospital systems and health insurers of DOJ’s continued interest in and enforcement against anti-steering practices.

WHAT HAPPENED:

  • On June 9, 2016, the DOJ and the State of North Carolina filed a complaint in the Western District of North Carolina against the Charlotte-Mecklenburg Hospital Authority, d/b/a Carolinas Healthcare System, now Atrium Health (Atrium).
  • In its complaint, DOJ accused Atrium of “using unlawful contract restrictions that prohibit commercial health insurers in the Charlotte area from offering patients financial benefits to use less-expensive health care services offered by [Atrium’s] competitors.”
  • DOJ alleged that Atrium held approximately a 50 percent share of the relevant market and was the dominant hospital system in the Charlotte area. DOJ defined the relevant product market as the sale of general acute care inpatient hospital services to insurers in the Charlotte area.
  • DOJ alleged that Atrium used market power to negotiate high rates and impose steering restrictions in contracts with insurers that restrict insurers from providing financial incentives to encourage patients to use comparable lower-cost or higher-quality providers. Such financial incentives include health plan designs that charge consumers lower out-of-pocket costs (such as copays and premiums) for using top-tier providers that offer better value, or for subscribing to a narrow network of providers.
  • Atrium also allegedly prevented insurers from offering tiered networks with hospitals that competed with Atrium in the top tiers, and imposed restrictions on insurers’ sharing of value information with consumers about the cost and quality of Atrium’s health care services compared to its competitors. These “steering restrictions” allegedly reduced competition and resulted in harm to consumers, employers, and insurers in the Charlotte area.
  • Atrium allegedly included these steering restrictions in its contracts with the four largest insurers who in turn provide coverage to more than 85 percent of commercially insured residents in the Charlotte area.
  • On March 30, 2017, the court denied Atrium’s motion for judgment on the pleadings, finding that the government met its initial pleading burden. Atrium had argued that the complaint failed to properly allege that the contract provisions actually lessened competition or lacked procompetitive effects.
  • More than a year later, on November 15, 2018, DOJ announced that the State of North Carolina and DOJ had reached a settlement with Atrium, which prohibits Atrium from continuing its practices of using alleged steering restrictions in contracts with commercial health insurers. The proposed settlement also prevents Atrium from “taking actions that would prohibit, prevent, or penalize steering by insurers in the future.” The agreement lists certain prohibitions and permissions for Atrium; for example, that Atrium may not enforce existing alleged anti-steering provisions, and must allow payors to be transparent with consumers about price, cost and quality information. However, Atrium is permitted to enforce other contract provisions that protect against carve outs (where an insurer unilaterally removes a health care service from coverage in a health plan), and may restrict payor steering for any co-branded plan or narrow network in which Atrium is the most prominently-featured provider.

WHAT THIS MEANS:

  • Going forward, both DOJ and the Federal Trade Commission (FTC) are likely to investigate similar contract provisions by health systems susceptible to allegations of market power. The resolution of the Atrium matter comes just one month after Senator Chuck Grassley sent a letter to FTC Chairman Joseph Simons, asking FTC to investigate certain allegedly anticompetitive hospital system managed care contracting practices and to assess how prevalent they are in the marketplace. Senator Grassley’s October 10 letter cited to a recent Wall Street Journal article detailing various provisions said to increase health care costs and restrict patient choice, including anti-steering provisions. The letter cited to the then-pending Atrium case specifically. In the wake of the Grassley letter and the Atrium settlement, hospital systems that have entered into alleged anti-steering provisions with payors may need to expect inquiry from the FTC or DOJ.
  • The Atrium settlement follows the resolution of another DOJ challenge to anti-steering provisions. Earlier this year, in American Express, the Supreme Court rejected DOJ’s challenge to the anti-steering rules that the credit card company imposed on merchants. The cases are distinguishable in part due to the difference in market share of defendants. American Express held 26.4 percent of the credit card market, whereas Atrium allegedly holds 50 percent of the relevant market asserted by DOJ.
  • Many watched the Atrium case as an opportunity for further guidance from the courts on the competitive implications of anti-steering practices, but the settlement means practitioners and industry members must continue to wait for judicial consideration of these types of provisions in the health care industry.
  • The Atrium matter serves as a reminder of the agencies’ interest in alleged anti-steering and other restrictive contracting practices. Now is an opportune time for hospital systems to review their managed care contracting practices for potential antitrust risk under the rule of reason, particularly hospital systems with relatively high shares within concentrated service areas or that have contracting provisions with payors representing a majority of the local patient population that could be characterized as allegedly restrictive.

United States: July – September 2018 Update

Both US antitrust agencies marked the third quarter of 2018 with significant policy announcements regarding the merger review process. The announced reforms seek to expedite the review process through cooperation between the agencies and the merging parties. Moving first, the Federal Trade Commission (FTC) revealed a Model Timing Agreement that provides the FTC Staff with earlier notice of the parties’ intent to substantially comply with a Second Request. Earlier notice allows the FTC Staff to create a more effective timeline for meetings with division management, front office staff and the Commissioners. Less than two months after the FTC revealed its Model Timing Agreement, the Antitrust Division of the US Department of Justice (DOJ) announced procedural reforms aimed at resolving merger investigations within six months of filing. The DOJ will commit to fewer custodians and depositions in exchange for the merging parties providing key information earlier in the investigation. Overall, these reforms appear to be a positive step forward for parties considering future transactions, but their effectiveness remains uncertain as the agencies start a difficult implementation period. While the FTC timing agreement may provide more certainty around the process, it does not reduce the review timing and actually extends it.

EU: July – September 2018 Update

The European Commission (EC) remained quite active clearing mergers in the third quarter of 2018. Most notably, the EC cleared Apple’s acquisition of Shazam without imposing conditions despite the EC’s stated concerns about access to data as a competitive concern. The EC opened a Phase II investigation into the transaction to investigate the potential for Apple to obtain a competitive advantage over competing music streaming services by accessing Shazam’s consumer data obtained through its music recognition services. In this case, the EC did not find evidence that the access to Shazam’s data would provide Apple a competitive advantage. In addition, the EC found that there were no concerns about Apple potentially restricting Shazam as referral source for Apple’s competitors. Going forward, it is clear that access to data is an issue that the EC will continue to investigate, but it is also clear that the EC is taking a careful approach in assessing when that access will truly lead to a competitive harm.  Continue Reading Antitrust M&A Snapshot

Antitrust laws protect competition and consumers. Antitrust enforcement is prevalent in actions concerning manufacturing and consumer goods, among other things. However, recent enforcement activity by the Federal Trade Commission (FTC) and Department of Justice’s Antitrust Division (DOJ) serves as a reminder that the services industry, particularly healthcare services, is not immune to antitrust scrutiny as well.

Antitrust enforcement and healthcare policy were two priorities under President Obama. So, too, was antitrust enforcement within healthcare markets. The current administration prompted speculation on whether it would change its emphasis in any of these respects. We examine in this article whether the Trump Administration, now a year and a half into its term, has shifted focus or instead has stayed in the hunt for antitrust violations in the healthcare industry. As discussed below, the record of healthcare antitrust enforcement actions over the last five years, spanning both administrations, demonstrates that healthcare has been and remains a priority for civil and criminal antitrust enforcement by the US antitrust agencies and state Attorneys General. Continue Reading Healthcare and Antitrust Enforcement: Continuity through the Administrations

In testimony before the Senate Subcommittee on Antitrust, Assistant Attorney General Makan Delrahim from the US Department of Justice (DOJ) and Chairman Joseph Simons from the US Federal Trade Commission (FTC) staked out differing interpretations of when antitrust considerations are relevant in standard setting agreements restricted by fair, reasonable and non-discriminatory (FRAND) rates, a rare divergence of opinion between the two antitrust enforcement agencies.

WHAT HAPPENED:

  • Since AAG Delrahim took over as head of the DOJ Antitrust Division in September 2017 he has consistently hinted at a differing interpretation of antitrust law as it relates to standard essential patents and FRAND rates in the context of antitrust. 
  • Standard essential patents (SEPs) are patents that have been incorporated into a standard by a standard setting organization and industry participants to facilitate interchangeability between products. Often, to be included in a standard, patent holders agree to license a patent essential to that standard at a FRAND rate. 
  • With the proliferation of standards, more scrutiny has been devoted to SEPs and FRAND rates, and some companies have brought antitrust suits relating to “patent hold-up” or the refusal to license a patent on FRAND terms (typically seeking higher royalties or fees on patents for widely adopted standards). 
  • In testimony on October 3, 2018, AAG Delrahim indicated his view was that a patent holder’s unilateral decision not to license a patent—even if that patent is part of a standard—is not conduct intended to be reached by the antitrust laws. AAG Delrahim indicated such a dispute would more appropriately be handled by contract law. 
  • This position differs from that of the FTC, where Chairman Simons has indicated that antitrust law can be relevant in patent hold-up cases.
    •  The FTC demonstrated its view in a recent complaint filed against Qualcomm, Inc. The complaint summarizes the patent hold-up concern:

Once a standard incorporating proprietary technology is adopted, the potential exists for opportunistic patent holders to insist on patent licensing terms that capture not just the value of the underlying technology, but also the value of standardization itself. To address this “hold-up” risk, [standard setting organizations] often require patent holders to disclose their patents and commit to license standard-essential patents (“SEPs”) on fair, reasonable, and non-discriminatory (“FRAND”) terms. Absent such requirements, a patent holder might be able to parlay the standardization of its technology into a monopoly in standard-compliant products.

WHAT THIS MEANS:

  • Going forward, US antitrust enforcement with respect to SEP issues may be limited to the FTC. AAG Delrahim’s speeches indicate that it will be the rare case that the Antitrust Division pursues such cases in the future.
  • This divergence between the two US agencies responsible for enforcing antitrust laws will create confusion for SEP holders and their licensees with respect to the risks of US government intervention. Companies dealing with SEPs and FRAND rates will want to be cognizant of which agency is reviewing, as approaches may be different.
  • While there may be divergence in the US government agencies that enforce the US antitrust laws, the Antitrust Division’s new policy has no impact on the body of case law developed by US courts over the years with respect to SEPs and antitrust liability. Private parties seeking to enforce their rights with respect to SEPs and antitrust law in US courts should not be impacted by the Antitrust Division’s change in policy.

WHAT HAPPENED:

  • On August 7, the FTC published a new Model Timing Agreement. Timing agreements are agreements between FTC staff and merging parties that outline the FTC’s expected timing for various events in order for it to conduct an orderly investigation during a Second Request.
  • The FTC expects the Model Timing Agreement to be used as drafted (or in a similar form) for all transactions that receive a Second Request. The FTC has used timing agreements frequently in the past, as has the DOJ, but the FTC has now published a model, which means this is likely to become the standard practice moving forward.
  • Parties are not required to enter into a timing agreement. However, in practicality, if parties do not agree to the timing agreement, the agency will proceed as if it must be in court to block the deal within 30 days of compliance. Therefore, it will prepare for litigation and will not consider settlement options or engage with the parties on the issues in the same way it would if the agency had more time under a timing agreement.
  • Some highlights of the new Model Timing Agreement are provided below (Note: All days listed refer to calendar days):
    • Parties must provide 30 days’ notice before certifying substantial compliance, and such notice cannot be provided until at least 10 days after signing the timing agreement.
    • Parties cannot close a proposed transaction until a specified time period after substantial compliance with the Second Request. The model indicates this will be 60 days in less complex matters or 90 days in more complex matters, but could be longer than 90 days in “matters involving particularly complicated industries.”
    • Parties must provide 30 days’ notice before consummating the proposed transaction and cannot provide notice more than 40 days before the date on which they have a good faith basis to believe they will have cleared other closing conditions and will be able to complete the transaction, absent an FTC action to block the transaction.
    • The agreement includes a stipulated Temporary Restraining Order (TRO) which will be entered in the event of a challenge. The TRO prevents the parties from consummating the transaction until after five days following a ruling on a motion for preliminary injunction.
    • The timing agreement contains other timing-related provisions such as for document productions and investigational hearings as part of the FTC’s investigation.

WHAT THIS MEANS:

  • Though the Model Timing Agreement does not affect the statutory expiration of the HSR waiting period, it commits the parties not to consummate the transaction for a much longer period and, therefore, effectively extends the waiting period far longer than the 30 days specified under the HSR Act.
  • The 40-day notice required before the closing date means that if there is another condition in the way of closing, such as an ongoing investigation before the European Commission or in China, the parties cannot provide their notice of the anticipated closing date to the FTC. The FTC will not be forced to litigate until the parties are in a position to complete their transaction in the near term, absent an FTC challenge.
  • The FTC has made clear that parties either have to sign up to a much longer period for the HSR review process than the statute specifies or be in an adversarial posture that is less likely to lead to the agency closing its investigation or settling the matter and more likely to lead to a court challenge.

United States: April – June 2018 Update

The second quarter of 2018 ushered in a trial defeat for the US Department of Justice (DOJ) and the beginning of a new era at the Federal Trade Commission (FTC). In June, Judge Richard J. Leon of the US District Court for the District of Columbia denied the DOJ’s requested injunction of the AT&T/Time Warner acquisition. The case marked the first litigated vertical challenge by the Antitrust Division in nearly 40 years. DOJ filed a notice of appeal of the district court’s decision. At the FTC, four new commissioners were sworn in in May, with a fifth to join upon the approval of current commissioner Maureen Ohlhausen to the US Court of Federal Claims. With the transition nearly complete, new FTC Chairman Joseph Simons announced plans to re-examine and modernize the FTC’s approach to competition and consumer protection laws, possibly charting a new course for FTC antitrust enforcement.

EU: April – June 2018 Update

In this quarter, we saw two significant developments concerning the issue of gun-jumping. First, the Court of Justice of the European Union (CJEU) clarified the scope of the gun-jumping prohibition, ruling that a gun-jumping act can only be regarded as the implementation of a merger if it contributes to a change in control over the target. Second, the European Commission (EC) imposed a €124.5 million fine on Altice for having breached the notification and the standstill obligations enshrined in the EUMR by gun-jumping. The EC also issued two clearance decisions following Phase II investigations in the area of information service activities and the manufacture of basic metals. Continue Reading Antitrust M&A Snapshot

A recent settlement shows that the US Federal Trade Commission (FTC) will use its enforcement authority to target employer collusion in the labor market.

WHAT HAPPENED

  • The FTC brought a complaint against a medical staffing agency, Your Therapy Source, LLC, and the owner of a competing staffing agency, Integrity Home Therapy, for allegedly agreeing to reduce the rates they would pay to their staff. Simultaneously, the FTC settled the case with a consent order that forbids the parties from any future attempt to exchange pay information or to agree on the wages to be paid to their staffs.
  • This was the first FTC wage-fixing enforcement action since the FTC and US Department of Justice (DOJ) issued their joint Antitrust Guidance for Human Resource Professionals in October 2016. That guidance stated that naked wage-fixing and no-poach agreements—e.g., agreements separate from or not reasonably necessary to a larger legitimate collaboration between the employers—are per se illegal under the Sherman Act.
  • The respondents in the Your Therapy Source case are staffing agencies that allegedly provided therapists such as physical therapists, speech therapists and occupational therapists to home health agencies on a contract basis. The respondents were responsible for recruiting the therapists and paying them a “pay rate” per visit or per patient.
  • According to the complaint, the alleged unlawful agreement began when one home health agency unilaterally notified Integrity that it was going to reduce the “bill rates” that it paid Integrity for its therapists, thus cutting into Integrity’s profit margins. Integrity’s owner then reached out through one of his therapists to the owner of Your Therapy Source and the two exchanged information about their respective rates paid to therapists. The two firms then reached an agreement via text message to reduce the rates they paid therapists.
  • Once the respondents had reached the agreement to reduce therapists’ pay, Integrity’s owner allegedly reached out via text to four other competing therapy-staffing agencies to solicit their participation in the agreement.
  • The FTC’s complaint alleged that this conduct violated Section 5 of the FTC Act, which prohibits unfair and deceptive acts and practices.

WHAT THIS MEANS

  • Wage-fixing cases have been notable in the health care industry, with prior DOJ enforcement against a hospital buying group and several class actions against health care providers in the 2000s that alleged the fixing of nurses’ pay.
  • Companies should strictly avoid colluding with other firms on wages, salaries, fringe benefits or other remuneration paid to workers. Companies should also exercise extreme caution in information exchanges regarding wages and benefits, which can lead to improper agreements or result in independent antitrust liability if not properly supervised.
  • Firms should be mindful of the DOJ/FTC’s joint guidance on information sharing in the health care industry (see link at p. 50), which also provides a useful template for how the US antitrust agencies will analyze information sharing more generally. The joint guidance provides a safety zone for wage, salary and benefit surveys where:
    • The survey is managed by a third party
    • The information provided by survey participants is more than 3 months old
    • There are at least five providers reporting data on which each statistic is based, no individual provider’s data represents more than 25 percent on a weighted basis of that statistic, and any information disseminated is sufficiently aggregated that it would not allow recipients to identify the prices charged or compensation paid by any particular provider.
  • Although FTC’s settlement in this matter was civil in nature, these same facts could also have led to a criminal investigation by the DOJ Antitrust Division. The agencies’ 2016 Human Resources Guidance specified that naked wage-fixing or no-poach agreements among employers could be prosecuted criminally. More recently, the DOJ has stated that it has several criminal investigations open into employer collusion in the labor market.

WHAT HAPPENED

  • The Wall Street Journal has reported that the Antitrust Division of the Department of Justice (DOJ) is currently investigating whether advertising sales teams for competing television station owners engaged in anticompetitive conduct regarding communications on performance levels. Per the Journal’s reporting:
  • DOJ is investigating whether the purported communications led to higher rates for television commercials.
  • DOJ’s industry-wide investigation developed from its review of Sinclair Broadcast Group’s (Sinclair) proposed acquisition of Tribune Media (Tribune).
  • As part of the DOJ’s merger review, Sinclair and Tribune received a “Second Request.” Responding to a Second Request typically involves the production of a wide range of company documents regarding competition in the industry under investigation.
  • Many times in the past, merging parties’ Second Request responses have led to separate anticompetitive conduct cases. A few notable examples are provided below:
  • In April 2018, DOJ brought a civil complaint alleging that three rail equipment companies had no-poaching agreements that depressed salaries and competition for their employees. The agreements were discovered during the review of an acquisition involving two of the three companies.
  • In 2003, DOJ filed a civil antitrust lawsuit to block the acquisition of Morgan Adhesives Company by UPM-Kymmene and, at the same time, opened a criminal investigation into price-fixing conduct in the labelstock industry.

Continue Reading THE LATEST: Collateral Risk in Merger Reviews

The second quarter of 2018 proved to be an active one with a number of US Department of Justice (DOJ) investigations resulting in criminal charges against individual executives. However, the DOJ’s total criminal fines still fall below the highs reached in 2014 and 2015. In this period, the European Commission made one notable cartel decision, imposing fines on eight Japanese manufacturers of capacitors.

McDermott’s Cartel Snapshot presents the latest information about active antitrust investigations to inform defense representatives, in-house counsel and agency regulators of the latest compliance risks and private actions. Our highly rated team of competition lawyers has selected the most relevant US and EU cartel matters to support risk management assessments for international cartel defense and to provide insights for legal and business planning.

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The challenges that the government faces in litigating vertical mergers was illustrated in the DOJ’s recent loss in its challenge of AT&T’s proposed acquisition of Time Warner. The result provides guidance for how companies can improve their odds of obtaining antitrust approval for similar transactions.

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