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Media Alerts - Federal Trade Commission v. Penn State Hershey Medical Center - Third Circuit
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October 4, 2016
  Federal Trade Commission v. Penn State Hershey Medical Center - Third Circuit
Headline: FTC and Commonwealth of Pennsylvania granted a preliminary injunction to prevent merger of Penn State Hershey Medical Center and PinnacleHealth System

Area of Law: Antitrust Law, Mergers and Acquisitions

Issue(s) Presented: Should the Third Circuit grant a preliminary injunction precluding the merger of Penn State Hershey Medical Center and PinnacleHealth System because the proposed merger will have a "presumptively anticompetitive" effect on the Harrisburg area?

Brief Summary: Penn State Hershey Medical Center and PinnacleHealth System, both located in the Harrisburg, Pennsylvania area, proposed their plan to merge to the Federal Trade Commission (FTC) in May 2015. The FTC concluded that the proposed merger violated Section 7 of the Clayton Act. Joined by the Commonwealth of Pennsylvania, the FTC sought a preliminary injunction, alleging that the merger would "substantially lessen competition." The Third Circuit agreed.

The Third Circuit determined the effect on the Harrisburg area, which was discerned as the relevant geographic market the merger would affect, would be "presumptively anticompetitive." Due to this conclusion, the Third Circuit proceeded to weigh the equities of granting the preliminary injunction to decide if it would be done in the "public interest." Reasoning that the public's interest in enforcing antitrust laws outweighed the possible positive effects of the two hospitals merging, the Third Circuit granted the FTC's preliminary injunction.

Extended Summary: Penn State Hershey Medical Center and PinnacleHealth System (the "Hospitals"), both located in the Harrisburg area, signed a letter of intent for a proposed merger in June 2014. After approval from both of their boards in March 2015, the Hospitals revealed their plans to merge to the FTC in May 2015. After conducting an extensive investigation, the FTC alleged the merger violates Section 7 of the Clayton ACT in an administrative complaint filed on December 7, 2015. Two days later, joined by the Commonwealth of Pennsylvania, the FTC filed suit in the Middle District of Pennsylvania.
The FTC and Commonwealth (the "Government") sought a preliminary injunction alleging that the merge of the two hospitals would "substantially lessen competition in the market for general acute care services sold to commercial insurers in the Harrisburg, Pennsylvania market." The District Court denied the preliminary injunction, stating that the Government had not properly defined the relevant geographic market, which left the District Court no basis for determining if the merger would negatively impact competition.
The Third Circuit found that the District Court had applied the incorrect legal standard for determining the facts that establish a relevant geographic market. Determining a relevant geographic market is imperative in deciding whether a merger is likely to be anticompetitive and warrants injunctive relief under Section 13(b) of the FTC Act. While the District Court stated that it would use the hypothetical monopolist test, the appropriate test agreed by both parties, the Court incorrectly applied the test, instead using an economic test the FTC no longer accepts.
According to section 13(b) of the FTC Act, the FTC can seek a preliminary injunction in federal district court to prevent a merger if the FTC has reason to believe the corporation is violating or will violate Section 7 of the Clayton Act. The District Court may grant a preliminary injunction if there is a sufficient showing, once weighing the equities and considering the likelihood of the success of the FTC claim, granting this action will be in the public interest.
The Third Circuit first considered the likelihood of the success of the FTC's claim on its merits. Section 7 of the Clayton Act precludes mergers that may substantially "lessen competition" or "tend to create a monopoly." Section 7 claims are also assessed by a burden-shifting framework. Therefore, the Government needed to establish a prima facie case that the merger of the Hospitals had a high probability of being anticompetitive. The Government needed to establish this prima facie case by "(1) propos[ing] the proper relevant market and (2) show[ing] that the effect of the merger in that market is likely to be anticompetitive.
In assessing the first prong of the prima facie case, the Third Circuit found that the relevant product market was "general acute care ('GAC') services sold to commercial payors." GAC services require patients to stay overnight in the hospital for surgery or other medical procedures. Both parties agreed this was the appropriate relevant product market.
Next, the Third Circuit established that the relevant geographic market, the "area in which a potential buyer may rationally look for the goods or services he seeks," as the four-county "Harrisburg area," including Dauphin, Cumberland, Lebanon and Perry counties. In establishing the relevant geographic market, the Court had to consider the "commercial realities of the industry" and if those were "economically significant." The Third Circuit used the hypothetical monopolist test to determine the relevant geographic market, which questions "if a hypothetical monopolist could impose a small but significant non-transitory increase in price in the proposed market, the market is properly defined." If consumers would respond to an increase in prices by seeking the product outside the proposed market, then the market definition is too narrow.
The Third Circuit found that the District Court misapplied the hypothetical monopolist test, instead using a test that focused primarily on patient inflow statistics. The Third Circuit stated that patient flow data was not helpful in this case, because Hershey is a prominent hospital that attracts patients from outside of the Harrisburg area. Therefore, it is likely patients will still choose to go to Hershey due to its exceptional reputation for patient care without affecting the decisions of those patients who choose hospitals located closer to them. Explicitly, the Third Circuit stated that relying on patient flow data did not satisfy the hypothetical monopolist test. The District Court also failed to consider patient outflow which was very low for the GAC services.
Also, the Third Circuit stated the District Court did not consider the insurance companies' responses to a slight increase in pricing, which showed that the District Court failed to recognize the "commercial realities" of the geographic area. The Third Circuit clarified that in applying the hypothetical monopolist test, the view of the insurers is taken into account. Considerations such as a price increase forcing the insurers to take on hospitals outside the proposed geographic market proves that the market is too narrow.
Lastly regarding the relevant geographic market, the Third Circuit established that private contracts should not be considered for the hypothetical monopolist test, because it is a hypothetical test. The Third Circuit reasoned that if its analysis could be swayed by private contracts, any merger could try to expand its relevant geographic market by giving evidence of private agreements and escaping antitrust laws.
Having evaluated the District Court's legal error in applying the hypothetical monopolist test, the Third Circuit found that the Government had successfully defined the relevant geographic market. Noting the Government's extensive evidence regarding the bargaining power Hershey possesses due to its exceptional reputation and insurance company testimony that hospitals in York or Lancaster counties were not "suitable alternatives," the Third Circuit held the "four-county Harrisburg area" to be the relevant geographic market.
For the second prong of the prima facie case, the Third Circuit evaluated whether the Government proved the merger was likely to have a negative impact on competition in the area. Using a market concentration measurement index, the Third Circuit determined that the Government presented an excessively concentrated market which translated into demonstrating that the merger would be "presumptively anticompetitive."
While the Hospitals did have an opportunity to rebut the Government's prima facie case, The Third Circuit found that the Hospitals failed to prove that the merger would not inhibit competition or that any anticompetitive effects brought about by the merger would be "offset by extraordinary efficiencies resulting from the merger." To rebut a prima facie case of this nature, the Hospitals had to prove either of these options. The Hospitals presented two efficiencies defenses, but both failed, as the Third Circuit found that the Hospitals only presented speculative and ambiguous evidence, not clear evidence that the merger will create efficiencies which will offset the effect it will have on competition. Also, the Hospitals alleged that repositioning, "the response by competitors to offer close substitutes offered by the merging firms," would deter prices from significantly rising. However, the Third Circuit disputed this argument, reasoning that Hershey had too much power and attracted too many patients for repositioning to be successful.
Lastly before granting the preliminary injunction, the Third Circuit weighed the equities to decide whether granting the motion "would be in the public interest." This caused the Third Circuit to question if the harm suffered by the Hospitals in delaying the merger outweighed the harm the public might experience if the injunction were denied. Because Section 13(b) of the FTC Act does not specify which equities to weigh, the Third Circuit balanced the public's interest in enforcing antitrust laws with the private equities of the Hospitals seeking to merge. Reasoning that allowing the Hospitals to merge and then finding that it violates Section 7 of the Clayton would be more detrimental and costly than delaying the merge and granting the injunction, the Third Circuit concluded granting the preliminary injunction was appropriate. The Third Circuit clarified that it was weighing the equities of the injunction, as required by Section 13(b) of the FTC Act, not the merger, and found that the injunction would not deprive the public of any benefits. While recognizing the possibility for advantages to the public could result because of the merger, the Third Circuit reasoned that those advantages will still exist even though the merger is delayed by this preliminary injunction.
In conclusion, the Third Circuit concluded that a preliminary injunction precluding the merger of the Hospitals would be in the public interest after determining the Government's likelihood of success in proving the anticompetitive effects of the merger and weighing the equities.

The full opinion can be found at http://www2.ca3.uscourts.gov/opinarch/162365p.pdf

Panel: Fisher, Greenaway, Jr., and Krause, Circuit Judges

Argument Date: July 26, 2016

Date of Issued Opinion: September 27, 2016

Docket Number: No. 16-2365

Decided: Reversed and remanded

Case Alert Author: Katherine A. Osevala

Counsel: David C. Shonka, Sr., Joel R. Marcus, Deborah L. Feinstein, Michele Arington, William H. Efron, Ryan F. Harsch, Jared P. Nagley, Jonathan W. Platt, Geralyn J. Trujillo, Counsel for the Appellant FTC; Bruce L. Castor, Jr., Bruce Beemer, James A. Donahue, III, Tracy W. Wertz, Jennifer Thomson, Aaron L. Schwartz, Counsel for Appellant Commonwealth of Pennsylvania; Charles I. Artz, Counsel for Amicus Association of Independent Doctors; Richard P. Rouco, Counsel for Amicus Economics Professors; Lawrence G. Wasden, Brett DeLange, Robert W. Ferguson, Darwin P. Roberts, Jonathan A. Mark, Kamala D. Harris, George Jepsen, Lisa Madigan, Thomas J. Miller, Janet T. Mills, Maura Healey, Lori Swanson, Jim Hood, Tim Fox, Ellen F. Rosenblum, Counsel for Amici States; William D. Coglianese, Louis K. Fisher, Julie E. McEvoy, Christopher N. Thatch, Adrian Wager-Zito, Alisha M. Crovetto, Jon G. Heintz, James P. DeAngelo, and Kimberly A. Selemba, Counsel for Appellees.

Author of Opinion: Circuit Judge Fisher

Circuit: Third Circuit

Case Alert Circuit Supervisor: Professor Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 10/04/2016 12:48 PM     3rd Circuit  

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