In Parker v. Brown, 317 U.S. 341, the Supreme Court held that states were immune from the federal antitrust laws. This doctrine, known as state action immunity, is based on the theory that states acting in their capacities as sovereigns should not be subject to the federal antitrust laws out of respect for federalism. As originally formulated in Parker, state action immunity only applied if the specific anticompetitive activity at issue was directed or compelled by the state. Subsequent cases have relaxed the requirements for the immunity to apply, however. In California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980), the Court held that the challenged restraint should be a clearly articulated and affirmatively expressed state policy, actively supervised by the state, and that mere authorization by the state, as opposed to compulsion, constituted sufficient clear articulation. In Town of Hallie v. City of Eau Claive, 471 U.S. 34 (1985), the Court further expanded the scope of state action immunity holding that the anticompetitive activity need only be a “foreseeable result” of the state statute to satisfy the clear articulation requirement and that active supervision is not required if municipalities or other public entities are involved. In City of Columbia v. Omni Outdoor Advertising, 499 U.S. 365 (1991), the Court applied the foreseeable result standard to immunize restrictions on the construction of billboards imposed by a city, allegedly for the purpose of preserving the monopoly position of an incumbent, based on the state’s grant of zoning authority to the city. The Court reasoned that zoning laws inherently involve the displacement of competition and, as such, harm to competition was a foreseeable result of the state’s grant of zoning authority to the city. Thus, although lower courts have varied somewhat in how they have interpreted these precedents, there appears to have been a distinct trend since Parker to expand the scope of state action immunity by finding clear articulation in broad or general grants of authority to act by states.

The Sixth Circuit has recently issued an opinion consistent with this trend. In Jackson, Tenn., Hospital Co. v. West Tennessee Healthcare Inc., No. 04-5387 (6th Cir. July 11, 2005), a private hospital in Tennessee brought suit against a public Tennessee state hospital district and various other entities with which the hospital district contracted, alleging that they engaged in anticompetitive acts in order to monopolize the local health care market in violation of the antitrust laws. The anticompetitive acts alleged by the plaintiff hospital included exclusive contracting with doctors and insurance companies, acquiring real estate around the plaintiff hospital to block its expansion, charging prices that were too low or too high, acquiring other healthcare providers, and illegally bundling its services. In response, the defendant public hospital district argued that its acts were protected by state action immunity.

The Court first noted that the hospital district was created by the Tennessee legislature, that it is a political subdivision of the state, and the very broad nature of the powers granted to these public entities by the state. The state statute governing hospital districts grants them powers such as incurring debt, owning and operating subsidiaries, setting fees to be charged to patients, and acquiring or improving real property. The statute further provides that hospital authorities shall “[h]ave and exercise all powers necessary or convenient to effect any or all of the purposes for which” they were created. Finally, and crucially for the Court’s opinion, the statute also states that a hospital district “may exercise such powers regardless of the competitive consequences thereof.”

Citing Town of Hallieｸ the Court stated that, as a political subdivision of the state, the hospital district’s acts would be protected by state action immunity if they were undertaken pursuant to a clearly articulated state policy. Quoting City of Columbia, the court also noted that “‘[i]t is enough…if suppression of competition is the foreseeable result of what the state authorizes.” Applying these principles, the Sixth Circuit concluded that the hospital district acted pursuant to the clearly articulated policy contained in the statute governing hospital districts. In the Court’s view, the statutory language clearly demonstrated that “the Tennessee legislature invested [hospital districts] with very broad powers to ensure their continued viability; authorized them to exercise many powers, such as contracting for services and acquiring property, that could easily lead to anticompetitive consequences; and then specifically stated that such activities could be undertaken without regard to the effects of such activity on competition.” Thus, the hospital’s acts were immunized not only because anticompetitive consequences were a foreseeable result of the broad powers granted to hospital districts, but also because the statute explicitly instructs hospital districts to exercise those powers regardless of such consequences. Especially in light of the authorization to act “regardless of the competitive consequences,” concluded the Court, the state of Tennessee had clearly expressed a policy authorizing hospital districts to displace competition.

The plaintiff, citing sections from the Tennessee Constitution and Tennessee Code, argued that the Tennessee legislature in fact intended to promote competition in the healthcare market and favors competition generally. The plaintiff also pointed out that the statement of purpose in the Acts amending the hospital district statute to allow the hospital districts to have such broad powers expressed a desire to enable hospitals to compete with private hospitals. The court dismissed this argument by invoking the principle of interpretation that the specific trumps the general. Although Tennessee may well prefer competition as a general matter, as does the federal government, both state and federal governments regularly create exceptions to this general policy of competition. In the present case, the court continued, “the language of the statute clearly indicates the desire to create an exception to the antitrust laws, and the general preference for competition is therefore superseded.”

Finally, the plaintiff argued that the phrase “regardless of competitive consequences” was simply a recognition by the legislature that empowering the hospital districts to enter into contracts and exercise other powers that enabled them to better compete with private hospitals may disadvantage or harm individual competing hospitals, not authorization by the state to harm the competitive process itself. The Court was unconvinced by this reading of the phrase. Given that it is obvious that any government entity’s actions will affect, sometimes negatively, private actors, the plaintiff’s reading of the phrase would render it superfluous. Moreover, the phrase “competitive consequences” is commonly used in the context of antitrust and competition law; it is not commonly found in any other context. Hence, in the words of the court, “permission to act ‘regardless of competitive consequences’ is most sensibly read as an authorization to act without regard for the antitrust laws.”

The Sixth Circuit adheres to an expansive conception of the scope of state action immunity. As the opinion in Jackson, Tennessee Hospital noted, the Sixth Circuit, in Michigan Paytel Joint Venture v. City of Detroit, 287 F.3d 527 (6th Cir. 2002), had recently applied the foreseeable result standard in holding that Michigan law implicitly authorized anticompetitive conduct when it empowered prisons to grant public contracts for the provision of telephone services. In light of this broad conception of state action immunity, the Tennessee legislature’s statutory statement that hospital districts were to exercise their broad powers without regard to competitive consequences made the Jackson, Tennessee Hospital case an easy one for the Sixth Circuit.

Authored by:
Anik Banerjee
213-617-4124
abanerjee@sheppardmullin.com