Distribution, Competition, and Antitrust / IP Law

Sixth Circuit Opens a Pandora’s Box of Joint Venture Challenges

Say you’re a group of hospitals that get together under a Joint Operating Agreement.   You agree to form an integrated health system. You agree to total your net incomes into a single “network net income” that is allocated to the parties based on predetermined percentages. That means that no hospital has an incentive to poach patients from another. You also agree to share losses according to the same predetermined percentages.

And you go further – you grant significant operational authority over each hospital to a central operator. That operator can, among other things, require coordination of activities. The operator has authority to manage all hospital operations and is in charge of centralized managed care and legal functions. The operator also has authority and control over strategic plans, budgets, and business plans, and controls hospitals’ debt incurrence and negotiates with insurance companies on behalf of the hospitals. The operator’s CEO has the power to remove each defendant hospital’s CEO.

All of these steps suggest that you’re an integrated joint venture and that the hospitals cannot conspire to violate Sherman Act Section 1 (at least insofar as JOA activities go). See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), and American Needle, Inc. v. National Football League, 560 U.S. 183 (2010).

However, on March 22, 2016, the Sixth Circuit, in The Medical Center at Elizabeth Place, LLC v. Atrium Health System, No. 14-4166, said that all of the above evidence is insufficient to support a summary judgment in favor of the hospitals on conspiracy claims brought by a competing hospital. Why? Because there was also evidence that the intent of the arrangement was (at least in part) to prevent plaintiff hospital from entering the local healthcare market. The Sixth Circuit also held that evidence that the defendants sought insurance exclusives – which the Court characterized as a form of “boycott” – meant that summary judgment was inappropriate.

In dissent, Judge Griffin wrote that

As the majority states, American Needle “eschewed formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.” Am. Needle, 560 U.S. at 191. Guided by the rule of reason, my colleagues interpret this directive to mean that we should ask how defendants “actually operate” with regard to plaintiff—specifically, their intent to keep plaintiff out of the market as expressed through apparent threats by Premier’s [the JOA entity] executives and the boycott defendants allegedly arranged among the insurance companies. This view is flawed. Defendants’ intent to exclude others from the market is irrelevant to determining whether defendants themselves constitute a single entity. To resolve that question, we should consider how defendants “actually operate” amongst each other.

Id. at 20. Due to the allocation of profits and losses, no single hospital had any incentive to become more profitable by attracting more patients than the other. “The majority is therefore incorrect to say ‘defendant hospitals compete with each other . . . for patients.’ They do not.” Id. at 22 (Griffin, J., dissenting). Judge Griffin then analyzed the various powers granted under the JOA and determined that they evinced more than adequate integration to defeat any conspiracy claim.

Putting aside whether the dissent was right that this particular hospital network had adequate integration, the Sixth Circuit’s decision is troubling. The majority opinion focuses on intent (which may be relevant once one gets to a Rule of Reason analysis of restraints) to analyze the preliminary question of whether joint venture defendants’ structure even allows for a Sherman Act Section 1 claim. And so, on little more than one or two slips of possibly self-serving evidence or testimony, plaintiffs may get to go to trial against joint ventures that are appropriately and conservatively structured. Needless to say, this makes designing and advising joint ventures considerably more difficult. The Sixth Circuit should have followed Judge Griffin’s dissent and disposed of the claims on structural grounds.

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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