Jennifer A.

Thomson: State Action from the Perspective of a State Enforcer Can a state agency decision approving a merger create state action immunity? State antitrust enforcers generally do not believe so when such approval is analyzed under the antitrust laws. In these situations, the arguments generally focus on whether a state has clearly articulated a state policy to displace competition, and if so, whether the state is actively supervising the anticompetitive conduct. California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc., 445 U.S. 97 (1980). Sometimes this can result in a public battle between federal and state agencies, or even a state agency and its Attorney General, as happened in Pennsylvania when Equitable Resources, Inc. (Equitable) attempted to acquire Dominion Resources, Inc. (Dominion). Equitable and Dominion are two natural gas companies that provide service to residential and business customers in Pittsburgh, Pennsylvania. F.T.C. v. Equitable Resources, Inc., 512 F. Supp. 2d 361 (W.D. Pa. 2007), vacated (Jun. 25, 2008). While a natural gas company is a monopoly in most parts of the United States, Pittsburgh has historically enjoyed competition in this market. Several state and federal agencies reviewed this merger, most notably the Federal Trade Commission (FTC), the Pennsylvania Public Utility Commission (Pennsylvania PUC) and the Pennsylvania Attorney General. The Pennsylvania PUC approved the merger. The FTC concluded the merger would violate the federal antitrust laws and sued to block the merger. The District Court ruled against the FTC; however, the merger ultimately fell apart during the appeal process, and the Third Circuit vacated the District Courts opinion. Through the course of the litigation, several amicus briefs taking opposite positions on state action were filed by the Pennsylvania PUC and the Pennsylvania Attorney General. Both sides had differing views on the parameters of the statutory authority and whether the Legislature had clearly articulated a policy to displace competition. The Pennsylvania Attorney General argued that the Commonwealth of Pennsylvania has not clearly articulated any policy to displace competition relative to the acquisition of one natural gas distribution company by another nor has it adopted a policy making the Pennsylvania PUC the sole and exclusive reviewer of gas company transactions, Brief of Amicus Curiae Commonwealth of Pennsylvania, F.T.C. v. Equitable Resources, Inc., 2007 WL 5326078 (W.D. Pa. 2007). This was accomplished by noting the Pennsylvania PUC relied on language not in the current Code, but from an earlier Act, which had been removed by the Legislature. The Pennsylvania PUC took the opposite position, arguing there was clear state authority to review the proposed merger, including considering potential anticompetitive effect and determining the nature and extent of competition. Brief of Amicus Curiae Pennsylvania Public Utility Commission, F.T.C. v. Equitable Resources, Inc., 2007 WL 5326079 (W.D. Pa.). One interesting statement made by the Pennsylvania PUC was that it is [f]airly straightforward to say that state action immunity does not apply before the Pennsylvania PUC acts on a proposed acquisition. Id. at p. 5. The takeaway from this comment is that the antitrust enforcers need to monitor the reviewing agencies deadlines and ensure that they strike first.

In the healthcare context, active supervision is an issue in numerous pending federal antitrust enforcement actions. The FTC brought an action against the North Carolina State Board of Dental Examiners alleging anticompetitive conduct related to teeth whitening. In the Matter of North Carolina Board of Dental Examiners, 2011 WL 549449 (F.T.C.). The Board sent cease and desist letters to non-dentist providers of teeth whitening alleging those recipients were engaging in the unauthorized practice of dentistry in violation of North Carolina law. The Board also sent letters to mall operators asserting that teeth whitening services offered at mall kiosks are illegal and asked the mall operators to refrain from leasing space to non-dentist teeth whiteners. Teeth whitening can be a very lucrative service line available in dental offices. The FTC argues that given the Boards interest in the restraint, the state must actively supervise the Board and that supervision was lacking here. Crucial to the FTC case is that the Board is composed of six licensed dentists, one licensed dental hygienist and one consumer member. Further, the Board had legal process available to it through civil or criminal proceedings against alleged violators of the Act, but the FTC states that the Board did not follow this process fearing litigation risks and, thus, evaded judicial review of its decision. The Federal Trade Commission issued an opinion where it held that a state regulatory body that is controlled by participants in the very industry it purports to regulate must satisfy both prongs of Midcal to be exempted from antitrust scrutiny under the state action doctrine. Id. Not every state may face the same risks as North Carolina due to different structural and statutory schemes. A list of states enumerated in the FTCs brief permit teeth whitening; however, three do support North Carolinas view. Unlike many other states, such as Pennsylvania, the North Carolina State Board of Dental Examiners is not part of another state department. In Pennsylvania, its Dental Board, along with 28 other licensing boards, is part of the Pennsylvania Department of States Bureau of Professional and Occupational Affairs. Most licensing boards in Pennsylvania are composed of the Commissioner for the Bureau of Professional and Occupational Affairs, a representative from the Attorney Generals office and a blend of Professional and Public members who are appointed by the Governors Office, not by the professional membership. Another difference between Pennsylvania and North Carolina law that may aid Pennsylvanias Boards in avoiding a similar lawsuit is a prohibition on the comingling of investigative, prosecutorial and fact-finding duties. Lyness v. Com. State Board of Medicine, 529 Pa. 535 (Pa. 1992). A state Attorney General may be able to aid its own state boards by outreach through training, newsletters and other means to prevent the alleged selfinterested conduct that gave rise to the North Carolina case. The question was recently posited in an article as to whether a Consent Decree entered into between the Pennsylvania Attorney General and a group of urologists could provide state action protection. A Creative Fix to a Medical Monopoly Problem, Law360, October 11, 2011. Available at www. Law360.com/articles/275581/; Commonwealth of Pennsylvania v. Urology of Central Pennsylvania, Civil Action No.: 1:11-cv-01625 (M.D. Pa. 2011). The writer suggested that the Consent Decree was directly tailored to provide the active state supervision required by

the State Action Doctrine to insulate UCP from further antitrust scrutiny, and it may provide a template for future state attorney general antitrust enforcement. The gut reaction from the three drafters, however, is that there is no state action protection. Historically, the Pennsylvania Attorney Generals Antitrust Section has taken a position of narrow construction of the state action exemption, as demonstrated in its amicus brief in the Equitable matter, along with another notable action brought against the Harrisburg International Airport. Commonwealth v. Susquehanna Area Regional Airport Authority, 423 F. Supp. 2d 472 (M.D. Pa. 2006). The Consent Decree in the UCP case is a negotiated resolution to a specific violation of the antitrust laws and applies only to the conduct ascribed to UCP in the Complaint and resolved by the Consent Decree. It does not apply to any non-party or any conduct by UCP that is not addressed. It is limited in time and arguably does not rise to the level of active supervision required under case law. The Pennsylvania Attorney General has not demonstrated an intent to replace competition. Existing case law supports this reaction. Similar arguments were made in another case involving a Consent Decree negotiated between the Pennsylvania Attorney General and two hospital systems that were merging in Williamsport, Pennsylvania. In that case, brought by insurer HealthAmerica against Susquehanna Health System, the defense for the hospital claimed that HealthAmericas case was a full frontal assault on the Consent Decree. Defendants Brief in Opposition to Plaintiffs Motion for Partial Summary Judgment, HealthAmerica Pennsylvania, Inc. v. Susquehanna Health System, Civil Action No.: 3:cv-00-1525 (M.D. Pa. 2002) at 2. It argued that state action immunity applied because Pennsylvania had carefully reviewed the merger under Section 7 of the Clayton Act, the court retained jurisdiction and the Final Judgment provides for active supervision in the form of mandated savings and an annual report, among other things. Id. at 23. The plaintiffs responded that the State played no role in approving charges, the provisions of the decree had expiration dates and that in entering into the Consent Decree, the Attorney General recognized that the combination had serious anticompetitive consequences. Defendants Brief in Opposition to Plaintiffs Motion for Partial Summary Judgment, HealthAmerica Pennsylvania, Inc. v. Susquehanna Health System, Civil Action No.: 3:cv-00-1525 (M.D. Pa. 2002) at 2. Plaintiffs Reply to Defendants Opposition to Partial Motion for Summary Judgment p.5. The court in this case declined to rule on the state action arguments, finding grounds for dismissal on another basis. Pennsylvania, Inc. v. Susquehanna Health System, 278 F. Supp. 2d 423 (M.D. Pa. 2003). Another case on point is A.D. Bedell, which raised the question of whether state action immunity applied to conduct by the defendant manufacturers following the entry of a settlement with state Atorneys General. A.D. Bedell Wholesale Company v. Philip Morris Inc., 263 F.3d 239 (3d Cir. 2001). The court looked at a series of provisions in the settlement to determine whether there was sufficient active supervision to qualify for state action immunity, finding that while there were several facts that indicated active supervision. Ultimately, the state supervision did not reach the parts of the settlement that were the source of the injury. Here, the states lacked

oversight over manufacturers prices and production levels and nothing in the Settlement gave the states authority to object if the manufacturers raised their prices. Application of A.D. Bedell indicates that the Consent Decree in the UCP matter will not create state action immunity for UCP or any other litigant attempting to use this Consent Decree as a defense in an antitrust case. From a practical litigation standpoint, in many cases avoiding an enforcement action in Pennsylvania where the Attorney General or a federal enforcer believes there is harm to competition, even if another state agency has approved the conduct, is a difficult road. This is very clear under some authority, such as the Insurance Holding Companies Act (IHCA), 40 P.S. 368. The IHCA gives the Pennsylvania Insurance Department the authority to review mergers to determine if they are anticompetitive, but there is a specific carve out to preserve the authority of the Attorney General to review the transaction to determine if it is anticompetitive. With authority that may be less clear, such as the Public Utility Code in the Equitable matter or the Pennsylvania Municipality Authorities Act in the Harrisburg International Airport case, the Pennsylvania Attorney General has demonstrated a willingness to challenge the conduct and taken the position that state action immunity does not apply. There are different laws in play and usually the relevant state statute requires an analysis that differs from the antitrust laws. The outcome of the analysis may be different and potential litigants should be prepared for that event.