District Court: Hospital Merger Is Exempt from HSR Filing Under State Action Doctrine

A US district court judge, in a case of first impression, recently held that Louisiana Children’s Medical Center’s acquisition of three New Orleans–area hospitals from HCA Healthcare, Inc. was exempt from both the federal antitrust laws and the Hart-Scott-Rodino (HSR) Act premerger notification and filing requirements pursuant to the state action doctrine. If upheld, the decision could have wide-ranging implications for the interplay between the federal laws and state regulatory regimes.

This is the first case in recent memory where a transaction was found to be exempt from HSR Act reporting requirements on the basis of the state action doctrine. While the decision’s impact isn’t limited to healthcare, it could be especially significant in states that are creating healthcare regulatory regimes that could affect competition. As the spate of “mini-HSR acts” shows, many states are taking an increased interest in healthcare competition.

BACKGROUND

On October 10, 2022, Louisiana Children’s Medical Center (LCMC) and HCA Healthcare, Inc. applied for a Certificate of Public Advantage (COPA) allowing LCMC to acquire three hospitals from HCA: Tulane Medical Center, Tulane Lakeside, and Lakeview Regional Medical Center. After multiple supplements, the application was completed on November 18, 2022.

Pursuant to the COPA statute, the Louisiana Department of Justice (Louisiana DOJ) reviewed the application, requested and reviewed public comments, and held a public hearing in December 2022. On December 28, 2022, the Louisiana DOJ approved the transaction and the COPA was issued. The parties closed the transaction on January 1, 2023.

Although the acquisition satisfied the HSR Act filing thresholds, the parties to the transaction did not submit HSR filings or observe the applicable 30-day waiting period. Instead, on April 19, 2023 LCMC and HCA filed separate lawsuits in the Eastern District of Louisiana seeking declaratory judgments that the transaction was exempt from HSR Act filing requirements.

The following day, the US Federal Trade Commission (FTC) filed its own lawsuit in the US District Court for the District of Columbia seeking to enjoin the parties from consummating the transaction until LCMC and HCA had complied with the premerger notification requirements.

In May 2023, the DC court granted the hospitals’ motion to transfer the case to Louisiana, noting that “the state action question must be resolved first.” [1] The three cases were then consolidated, and the Louisiana DOJ successfully moved to intervene in the action. All three parties filed motions for summary judgment.

THE DECISION

Judge Lance M. Africk of the US District Court for the Eastern District of Louisiana first addressed the state action doctrine, finding that the transaction was exempt from federal antitrust law pursuant to Louisiana’s COPA statute. Under the state action doctrine, which is grounded in principles of federalism and state sovereignty, federal laws—including the antitrust laws—do not apply to anticompetitive restraints imposed by the states.

This immunity has been extended to private parties only where the restraint is (1) clearly articulated and affirmatively expressed as state policy and (2) actively supervised by the state. [2] Judge Africk found that both requirements were met. [3]

As to the active supervision requirement, Judge Africk found that the COPA statute gave the state direct supervision and control over the transaction, including the “power to veto or modify” the acquisition. Judge Africk also found that the Louisiana DOJ had granted the COPA application only after “extensive analysis by the [Louisiana DOJ] attorneys and staff regarding the transaction, the facilities, and the likely effects on health care and competition in the state[.]”

Having found that the transaction was exempt from the federal antitrust laws, the court then analyzed whether the state action doctrine also exempted the hospitals from the premerger notification requirements of the HSR Act. The FTC argued that the enumerated exemptions in the HSR Act were the only exemptions intended by Congress, and as such the state action doctrine cannot apply.

Judge Africk disagreed, noting that, “[a]bsent a clear statement of Congress’s intent to displace a state’s ability to regulate its own commerce, courts in the antitrust context presume that Congress did not so intend.” Finding no such clear statement of congressional intent, the court held that the hospitals “need not comply with [the HSR Act’s] requirements.”

The FTC also argued that analysis of the state action doctrine was premature and that the active supervision test could not be properly analyzed in the absence of the hospitals’ HSR filing.w

In the FTC’s view, the text of the HSR Act precluded application of the state action doctrine and thus was not relevant to a determination of the hospitals’ obligations under the HSR Act. Judge Africk rejected this argument, reasoning that, if the transaction is exempt from Section 7, “subjecting it to [the HSR Act’s] requirements at this stage . . . would be pointless.”

KEY TAKEAWAYS

• Although the court’s holding is specific to the Louisiana COPA statute, the implications with respect to HSR Act reportability are potentially far-reaching. To the extent other states have similarly worded statutes and clearance processes, there is precedent for hospitals to close otherwise reportable transactions that have been approved by state regulators without submitting HSR filings. Further, other states may try and replicate the Louisiana COPA statute to shield intrastate healthcare transactions from federal regulatory scrutiny.
• In transferring the FTC’s lawsuit to Louisiana, Judge Amy Berman Jackson of the US District Court for the District of Columbia noted that analysis of the state action doctrine would require interpretation and application of state law, and thus Louisiana was the proper forum. Subsequent cases involving the state action doctrine could end up in the federal courts of the relevant state rather than the District of Columbia or elsewhere.
• The court’s analysis could be applied outside of the healthcare context. For example, a state could pass similar legislation governing mergers, acquisitions, and joint ventures between entities that tend to operate primarily intrastate, such as food and beverage producers or car dealerships. Applying the same analysis as Judge Africk, a potential merger clearance regime would be exempt from federal antitrust law, including the HSR filing requirements in Section 7A.
• It should be noted that this decision may not be the last word. In light of the far-reaching implications for the reach of the HSR Act, the FTC could appeal the decision to the Fifth Circuit, and potentially to the US Supreme Court.