Antitrust Law Daily Wrap Up, ACQUISITIONS & MERGERS NEWS: Law professors, scholars support rehearing of order unwinding St. Luke’s merger, (Apr 8, 2015)

By Greg Hammond, J.D.

Professors and scholars of law and economics have requested leave to file an amici curiae brief in support of St. Luke’s Health System’s and Saltzer Medical Group’s petition for rehearing en banc of a decision by the U.S. Court of Appeals in San Francisco, ordering St. Luke’s—the largest health care system in Idaho—to divest Saltzer—the state’s largest independent, multi-specialty physician practice (Saint Alphonsus Medical Center-Nampa Inc. v. St. Luke’s Health System, LTC., Case No. 14-35173).

The amici curiae scholars and the International Center for Law and Economics—a nonprofit, non-partisan, global research and policy center—share a common view that antitrust law should recognize efficiencies and allow defendants to demonstrate efficiencies under the same burden that plaintiffs have in making out a prima facie case. They further raise concerns that the Ninth Circuit’s decision, requiring divestiture, will prevent or undo beneficial mergers and have an adverse effect on consumer welfare.

Noting that “one of the core guiding principles of modern antitrust law is the focus on maximizing the welfare of consumers,” the brief argues that the Ninth Circuit’s decision violated this principle, which will harm consumers in the Ninth Circuit. Specifically, the scholars take issue with numerous positions on proof of efficiencies the panel took that are contrary to Horizontal Merger Guidelines and decisions in other Circuits, such as: (1) “[i]t is not enough to show that the merger would allow St. Luke’s to better serve patients”; and (2) “[a]t most, the district court concluded that St. Luke’s might provide better service to patients after the merger.” These positions, according to the brief, are inconsistent with modern antitrust jurisprudence and economics that treat improvements to consumer welfare as the “very aim of competition and the antitrust laws.”

Efficiencies defense. In their first argument, the scholars assert that rehearing is necessary in order to address the Ninth Circuit’s treatment of the efficiencies defense in Section 7 Clayton Act cases. In support of this argument, the scholars claim that an efficiencies defense should be a robust factor in antitrust analysis, as the 2010 Merger Guidelines state that “a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products.” The District of Columbia, Sixth, Eighth, and Eleventh Circuit Courts of Appeals also recognize the importance of post-merger efficiencies, according to the scholars.

However, there is little judicial guidance on the role efficiencies play in resolving antitrust litigation, the scholars note, arguing that the Ninth Circuit’s “sparse analysis” of St. Luke’s efficiency defense did little to provide further judicial guidance and diverged significantly from modern antitrust law and economics.

The scholars also argued that the Ninth Circuit’s decision misunderstands which efficiencies are cognizable under antitrust laws. Of greatest significance, the scholars assert, was the Ninth Circuit’s explicit rejection of quality efficiencies, in which the court stated, “[i]t is not enough to show that the merger would allow St. Luke’s to better serve patients.” The decision implied that only price effects can be cognizable efficiencies. However, “price divorced from product characteristics is an irrelevant concept,” the scholars argue. “The relevant concept is quality-adjusted price, and a showing that a merger would result in higher product quality at the same price would certainly establish cognizable efficiencies.”

Rehearing is therefore necessary, the scholars assert, to confirm that quality efficiencies are cognizable and to provide a framework for courts in the Ninth Circuit to analyze them.

Burden of proof. In their second argument, the scholars assert that the Ninth Circuit’s decision erroneously applied the “less restrictive alternative” analysis in a way that an alternative need only be theoretically possible in order to discount an efficiencies defense. “By placing the ultimate burden of proving efficiencies on the defendants and by applying a narrow, impractical view of merger specificity, the Panel has wrongfully denied application of known procompetitive efficiencies,” the scholars argue. “In fact, under the Panel’s ruling, it will be nearly impossible for merging parties to disprove all alternatives when the burden is on the merging party to address any and every untested, theoretical less-restrictive structural alternative.”

Instead, the scholars argue that claims under the Clayton Act should be treated the same as Sherman Act cases—that once a defendant has demonstrated countervailing procompetitive efficiencies, the burden shifts back to the plaintiff to prove that these efficiencies could reasonably have been achieved in a manner less restrictive of competition. In the instant case, however, the identified alternative was so broad that the defendants were faced with the nearly impossible situation of proving a “negative potentially covering an infinite number of possibilities.” The court did not analyze whether St. Luke’s specifically could employ an alternative method to achieve the same efficiencies or whether the alternative was likely to succeed. Instead, it merely found that other organizational structures exist and the efficiencies were therefore not merger specific, the scholars argue.

The Ninth Circuit also applied a different standard of proof for showing efficiencies than for showing anticompetitive effects, the scholars argue, claiming that the disparate standard is “unsound competition policy.” Specifically, they assert that the Ninth Circuit presumed competitive harm and then imposed excessively high evidentiary burdens on the merging parties to demonstrate actual procompetitive effects. This was “unjustified and counterproductive,” according to the brief, because it is inconsistent with merger policy designed to promote consumer welfare.

Unnecessary obstacles. In their last argument, the scholars assert that rehearing is necessary in order to prevent the creation of unnecessary obstacles to integration between physician groups and health care systems. Specifically, they argue that health care integration is a critical priority in controlling costs and improving quality of care and the Ninth Circuit’s decision ignores important health care efficiencies and will deter innovation on a national scale.

“Much like the St. Luke’s transaction, acquisitions and integrations of different health care provider groups across the country have led to improvements in quality of care and have eliminated unnecessary and costly services,” the scholars claim. “By creating a barrier to considering quality-enhancing efficiencies associated with better care, the approach taken by the Panel will deter future provider realignment and create a ‘chilling’ effect on vital provider integration and collaboration.”

Attorneys: David A. Balto (Law Offices of David A. Balto) for Amici Curiae.

Companies: Saint Alphonsus Medical Center-Nampa Inc.; St. Luke’s Health System, LTC.

News: AcquisitionsMergers Antitrust