Shearman & Sterling LLP | M&A and Corporate Governance Litigation Blog | Federal Court Declines To Enjoin Hospital Merger Finding the FTC’s Proposed Market “Impermissibly Narrow”<br >  
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  • Federal Court Declines To Enjoin Hospital Merger Finding the FTC’s Proposed Market “Impermissibly Narrow”
     

    05/23/2016
    The federal government has enjoyed a recent string of successful challenges to proposed mergers on antitrust grounds.  These have ranged from the blocking of the combination of Staples and Office Depot by the United States District Court for the District of Columbia earlier this month to the abandonment of merger plans by Time Warner Cable and Comcast, as well as Halliburton and Baker Hughes, in the wake of government scrutiny.  But this trend was interrupted when Judge John E. Jones III of the United States District Court for the Middle District of Pennsylvania denied a motion for a preliminary injunction brought by the Federal Trade Commission (“FTC”) and the Pennsylvania Attorney General against the proposed merger of two Harrisburg-area hospital groups.

    In Fed. Trade Comm’n v. Penn State Hershey Med. Ctr., No. 1:15-CV-2362, 2016 WL 2622372 (M.D. Pa. May 9, 2016), the government plaintiffs challenged the merger of two hospital groups in the Harrisburg area as anticompetitive in violation of Section 7 of the Clayton Act, which prohibits mergers whose effect “may be substantially to lessen competition, or tend to create a monopoly.”  15 U.S.C. § 18.  The parties agreed that the relevant product market comprised general acuity services—medical and surgical services requiring an overnight stay—sold to commercial payors.  But the parties disagreed sharply on the definition of the relevant geographic market.  The government argued for a limited geographic market of just a few counties, but the defendants contended that the market encompassed a much larger area.  After a five-day evidentiary hearing, the court found that the FTC and Pennsylvania Attorney General’s proposed geographic market was “unrealistically narrow and [did] not assume the commercial realities faced by consumers in the region.” 

    The court focused primarily on two factors:  First, in 2014, 43.5% of one of the hospital’s patients traveled from outside the FTC’s proposed geographic market.  Second, nineteen other hospitals were within about an hour’s drive of Harrisburg.  The court thus found that if the combined defendants were to impose a small but significant non-transitory increase in price, “these other hospitals would readily offer consumers an alternative.”  The court’s finding that the FTC’s proposed definition of the geographic market was “impermissibly narrow” meant that the FTC had not established a likelihood of success on the merits and resulted in the court’s rejection of the motion for preliminary injunction. 
    The court in Penn State Hershey nevertheless also evaluated the equities of whether enjoining the merger would be in the best interests of the public.  Notably in this regard, the court expressly recognized that the changing healthcare landscape—including mergers of other hospitals in the area—had resulted in a need for the defendants to merge in order to remain competitive.  In other words, market consolidation itself might help justify further market consolidation from a competition perspective.
     
    The FTC filed an emergency appeal of the decision to the United States Court of Appeals for the Third Circuit, which remains pending.
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