Antitrust Law Daily Wrap Up, ANTITRUST—6thCir: Hospital Operator Timely Notified Insurer of FTC Acquisition Challenge, (Apr 30, 2013)

By Jeffrey May, J.D.

An insurer should not have denied coverage to one of its policyholders, ProMedica Health Systems, Inc., for the costs of defending administrative and civil actions brought by the FTC to enjoin an acquisition, on the ground that ProMedica failed to report the claim within the time period required by its insurance policy, the U.S. Court of Appeals in Cincinnati has ruled (Employers’ Fire Ins. Co. v. ProMedica Health Sys., Inc., April 30, 2013, Gibbons, J.). Because ProMedica notified the insurer of its claim shortly after the FTC initiated the administrative and court proceedings, notice to the insurer was timely. Summary judgment in favor of the insurer was vacated

In May 2010, ProMedica, which operates a not-for-profit healthcare system serving northwest Ohio and southeast Michigan, agreed to acquire St. Luke’s Hospital, an independent, not-for-profit hospital located in Maumee, Ohio, a suburb of Toledo. In July 2010, the FTC informed ProMedica that it would be conducting a non-public preliminary investigation of the transaction. In August 2010, the FTC informed the parties that it was transitioning its investigation to "full-phase" and expected to "authorize compulsory process shortly." During August, the FTC issued a resolution authorizing the use of compulsory process in connection with its investigation. The FTC subpoenaed employees and issued civil investigative demands (CIDs). On August 31, 2010, ProMedica and St. Luke’s completed the acquisition, subject to the Hold Separate Agreement entered into with the agency.

On January 6, 2011, the FTC commenced an administrative action against ProMedica. The next day, the agency filed a court action seeking a temporary restraining order and a preliminary injunction enjoining ProMedica and St. Luke’s from further consolidating their operations while the administrative action proceeded. ProMedica notified the insurer of the litigation on January 13, 2011. The Commission has since concluded that the acquisition was anticompetitive and has ordered ProMedica to divest St. Luke’s.

The insurer denied coverage because ProMedica failed to report the claim in a timely fashion. The insurer argued that a claim arose in August 2010 when the FTC began to formally investigate ProMedica’s acquisition of the hospital.

According to the court, four elements are required for a claim to arise:

(1) there must be a "written demand" or a "proceeding" "commenced by" "a complaint or similar pleading" or "the filing of a . . . formal investigative order";

(2) the "demand" or "proceeding" must seek "monetary, non-monetary or injunctive relief";

(3) relief must be sought "against an Insured"; and

(4) relief must be "for a Wrongful Act," as defined by the policy.

The claim did not arise in August 2010, because at that time there was no "Wrongful Act" required to meet the fourth element of a "claim," the court held. ProMedica was not on notice that it was accused of antitrust violations until the filing of the FTC’s complaints in January 2011. Shortly thereafter, ProMedica notified the insurer.

"[N]one of the actions taken by the FTC in August 2010, viewed individually or taken together, satisfy all of the requirements for a claim," the court ruled. In August 2010, the communications that ProMedica received from the FTC only indicated that the FTC sought to determine whether a violation had occurred. There was no accusation of wrongdoing, which was necessary to establish a claim.

The FTC did not "allege" antitrust violations until January 6, 2011, when it commenced its administrative action against ProMedica, according to the court. "[W]hile the FTC’s August 2010 actions may have indicated that the FTC was likely to accuse ProMedica of antitrust violations in the future, none of the FTC’s actions actually alleged wrongdoing."

The court went on to say that, even if the FTC "alleged" antitrust violations in August 2010, the agency's actions at that time failed to meet other requirements of a "claim." None of the FTC’s August 2010 actions were "written demands" or "commenced" "proceedings" seeking "monetary, non-monetary or injunctive relief" as required by the second element of a "claim," in the court's view.

According to the insurer, even if ProMedica timely notified it of the claim, the known loss and equitable estoppel coverage defenses barred ProMedica’s recovery under the policy. The court ruled that these defenses were to be considered by the trial court on remand, given the fact-intensive nature of these defenses and the undeveloped factual record below.

The case is No. 12-3104.

Attorneys: Thomas James Judge (Thompson, Loss & Judge) for Employers’ Fire Insurance Co. Douglas Russell Cole (Organ Cole + Stock) for ProMedica Health System, Inc.

Companies: Employers’ Fire Insurance Co.; ProMedica Health System, Inc.

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