Amicus Curiae Brief — P. I. A. Asheville, Inc. v. North Carolina ex rel. Edmisten

ities - Supreme Court, US,

G3) FILED

No. 84-48 MAR 1 (985

ALEXANDER t. STEVAS.

Iu the Supreme Court of the Hni

OCTOBER TERM, 1984

P.I.A. ASHEVILLE, INC., ET AL., PETITIONERS

Vv.

STATE OF NORTH CAROLINA, EX REL.,

Lacy H. THORNBURG, ATTORNEY GENERAL

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

Rex E. Lge

Solicitor General

J. PAUL MCGRATH

Assistant Attorney General

CHARLES F. RULE

Deputy Assistant Attorney General

CATHERINE G. O’SULLIVAN

ANDREA LIMMER

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

JOHN H. CARLEY

General Counsel

Federal Trade Commission

Washington, D.C. 20580

QUESTIONS PRESENTED

1. Whether the National Health Planning and Resources

Development Act of 1974 gives rise to implied antitrust

immunity with respect to acquisitions of competing hospi-

tals, where the Act neither requires nor promotes such

acquisitions, and application of the antitrust laws would

not frustrate any health planning policy articulated in the

Act.

2. Whether North Carolina’s review and approval of a

hospital acquisition affords private parties antitrust

immunity under the “state action” doctrine of Parker v.

Brown, 317 U.S. 341 (1943), where the acquisition is not

required by state law, there is no state policy favoring

monopolies of institutional health care services, and the

parties’ activities are not actively supervised by the State

after it has approved the acquisition.

(I)

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

Bates v. State Bar, 433 U.S. 350... ccc cccceees 16

California ¥. FPC, 369 U.S. 4862 ..........0000. 8

California Retail Liquor Dealers Ass'n v.

Midcal Aluminum, Inc., 445 U.S.

ee RaW hs ee he soa.e © 4, 10, 12, 13, 14, 15, 16

Cantor v. Detroit Edison Co.,

eee pe cakeeeeeeeeeses 8, 11

City of Lafayette v. Louisiana Power &

a, SE GPL, BO cae ctesecccsccces 12-13

Community Communications Co. v. City

Of Boulder, 435 U.S. @ 2... .ccceccees 13, 14, 15

Goldfarb v. Virginia State Bar,

een cece seceed nese ee > bs oe

Gordon v. New York Stock Exchange, Inc.,

TS ice hw ARGS ON SESH OOS 6 6% 9

Hoover v. Ronwin, No. 82-1474

cee eh cba bach seed esesvecece 12

National Gerimedical Hospital & Gerontology

Center v. Blue Cross, 452 U.S.

eee vec cr eco nk nh enn k ees 3, 5, 6, 7,8

i i

IV

Page

Cases—Continued:

New Motor Vehicle Board v. Orrin W.

Pe ek, Ge es Oe baka dedecentues 13, 15, 16

Otter Tail Power Co. v. United States,

ee a aa e cece caa ea aea ie enakees 8

Parker v. Brown, 317 U.S. 341 .......... 3, 11, 14

Silver v. New York Stock Exchange,

Re gE pO rr rere es 5, 6

Town of Hallie v. City of Eau Claire,

700 F.2d 376, cert. granted, No. 82-1832

fomeied POGV. Bh, TORS) occ cccccccccscccices 14

United States v. General Dynamics

ek Se Peer er rer reece 15

United States v. National Association

of Securities Dealers, 422 U.S.

Oe ee rey EP eT Terr ery ee 5, 9, 10

United States v. Pacific Southwest

Airlines, 358 F. Supp. 1224, cert.

eS alice aan be cke ee ee 8

United States v. Philadelphia National

Co ES re 8

United States v. RCA, 358 U.S. 334 ......... 7,8

Constitution and statutes:

Pekin SO FOE, Be van cnsencvcccnasasenes 13

Coestens Bate £, 8D UG. GE occ ce canccccnenss 2

National Health Planning and Resources

Development Act of 1974, 42 U.S.C.

gf PTT Te re Te eee 2

Page

Constitution and statutes—Continued:

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Se Waeeos ED Sov Oke Ke eanaeaesneuseaa 7

GE Da SE 6. dn nee uanusekeeseaaas 6, 7

GE Ua EEE ck asccndatadanceanaes 6, 7

Sherman Act, 15 U.S.C. 1 et seq. :

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Ge is NE 6 60d oc n4cneseachackenneee 2

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Ue hk 6% x4 Ne ena db akeeeeenee a

CE Sais SD 6:4. 6.050000%0 4000005 004800es 2

1981 N.C. Sess. Lawsch. 651:

ee Kebincuankendeuncketneueensecueeae 2

£ SRP et 2

re ahanednncbee6ess o0eeeahedawee Sie 2

N.C. Gen. Stat. (1981):

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BT EV TTTT eT eee Te eT ert 2

GR ee err ee errr re yy ee 2

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$$ 131E-175 et seq. (Supp. 1983) .......... 13

Miscellaneous:

S. Rep. 96-96, 96th Cong., Ist Sess.

COFFEE ach adeade scab endebedsbeweaaescaecnee 9

Iu the Supreme Court of the Hnited States

OCTOBER TERM, 1984

No. 84-480

P.I.A. ASHEVILLE, INC., ET AL., PETITIONERS

V.

STATE OF NORTH CAROLINA, EX REL.,

Lacy H. THORNBURG, ATTORNEY GENERAL

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

INTEREST OF THE UNITED STATES

This brief is submitted in response to the Court’s invita-

tion to the Solicitor General to express the views of the

United States.!

STATEMENT

1. In December 1979, petitioner P.I.A. Asheville, Inc.

(PIA) entered into an agreement to purchase Highland

Hospital from Duke University. The agreement provided

that ownership of the hospital, which is located in Asheville,

North Carolina, would be divided equally between PIA and

a group of staff physicians (Pet. App. 24a). In January 1980,

PIA entered into an agreement to purchase Appalachian

!This brief also reflects the views of the Federal Trade Commission.

(1)

2

Hall Hospital, also located in Asheville (ibid.). The acquisi-

tions were contingent on PIA’s ability to obtain a certificate

of need (CON) from the North Carolina Department of

Human Resources, a state health planning and develop-

ment agency as defined in the National Health Planning

and Resources Development Act of 1974 (NHPRDA), 42

U.S.C. 300k et seg. See 42 U.S.C. 300m; N.C. Gen. Stat.

$$ 131-175 et seq. (1981).?

2. In February 1980, respondent, the Attorney General

of North Carolina, filed suit in the United States District

Court for the Western District of North Carolina under

federal and state antitrust laws to enjoin the Highland

acquisition. The complaint alleged, inter alia, that “[peti-

tioners] are the largest operator of acute psychiatric hospi-

tals in the private sector in the United States”(C.A. App. 7),

and that Highland Hospital and Appalachian Hall are the

only private psychiatric hospitals in the 26 counties in west-

ern North Carolina. The complaint charged that petitioners

and others had conspired to eliminate competition and to

acquire a monopoly of private psychiatric hospitals in west-

ern North Carolina, in violation of Sections | and 2 of the

Sherman Act,15 U.S.C. 1 and 2, and that the acquisition

violated Section 7 of the Clayton Act, 15 U.S.C. 18. See Pet.

App. 24a-2Sa.

?The NHPRDA conditions federal funding on the state’s establish-

ment of a CON regulatory program under which a designated state

agency must review the need for proposed new institutional health

services or capital expenditures over a threshold amount (42 U.S.C.

300m-2(a)(4)(B)). Although the NHPRDA provides that a CON is not

required for acquisitions of existing health care facilities unless bed

capacity will be increased (42 U.S.C. 300im-6(d)), North Carolina

required such approval at the time of the acquisitions at issue (N.C.

Gen. Stat. $ 131-176(5) and (17)(b) (1981)). Apparently to conform to

federal law, the State amended Section 131-176 to delete the CON

requirement for acquisitions of existing facilities, effective October 1,

1981 (1981 N.C. Sess. Laws ch. 651 $§ 2(c) and (m), 3).

3

Following the state agency’s grant of petitioners’ CON

applications,’ the district court dismissed the action on the

grounds that the NHPRDA impliedly repealed the federal

antitrust laws with respect to the acquisition in question and

that, because the acquisition was subject to the North

Carolina CON review process, it qualified as “state action”

exempt from the antitrust laws under Parker v. Brown, 317

U.S. 341 (1943) (Pet. App. 23a-37a).

3. The court of appeals, sitting en banc, reversed and

remanded for further proceedings (Pet. App. la-22a).‘

Relying on National Gerimedical Hospital & Gerontology

Center v. Blue Cross (National Gerimedical), 452 U.S. 378

(1981) , the court of appeals determined that the regulatory

'The district court had stayed proceedings pending final state action

on the applications (Pet. App. 25a-26a). After the Appalachian Hall

CON was granted, the North Carolina Department of Human Resour-

ces denied the Highland CON (C.A. App. 71-76). It found that the

proposed purchase (1) would adversely affect the cost of providing the

services under review, (2) would, in view of PIA’s acquisition of Appala-

chian Hall, seriously affect the potential for competition between the

two facilities, (3) would restrict access to the services by making them

too costly, and (4) would not have an “economical, efficient impact on

the costs of operation of the facility” (id. at 73-75). PIA obtained

reconsideration of the adverse ruling based on “new and significant”

information (id. at 98, 100), which consisted of a proposed $6-8 reduc-

tion in the daily rates submitted in the original CON application (id. at

101). On June 26, 1981, the agency reversed its earlier decision and

granted the CON (id. at 98-104). The hearing examiner reasoned that

the new rates, while greater than the existing rates, were “significantly

less than the original proposal” (id. at 102) and “within the range of

current rates at other private psychiatric hospitals in North Carolina”

(id. at 103). The change in proposed rates was the only reason given for

the agency’s reversal; it did not refer to its prior finding that the

acquisition would have an anticompetitive effect.

‘A divided panel of the court of appeals had affirmed on the ground

that the NHPRDA impliedly repealed the antitrust laws, without reach-

ing the state action issue (Pet. App. 40a-62a). Three judges dissented

from the court’s en banc decision, citing the reasons expressed in the

panel’s majority opinion (id. at 22a).

4

scheme authorized by Congress in the NHRPDA was not

SO pervasive as to constitute an implied repeal of the anti-

trust laws, and found no evidence in the language or legisla-

tive history of the NHPRDA of any affirmative congres-

sional intent to repeal or displace the antitrust laws with

respect to the acquisition at is ue here (Pet. App. I 1a-19a).

The court noted that, while the NHPRDA reflects congres-

sional recognition of the shortcomings of competition in

improving the delivery of health-care services, the Act

establishes as a national health priority the strengthening of

competition in the supply of such services (Pet. App. | la-

12a). The court also reasoned that, because the statute does

not require state CON review of acquisitions, such as those

at issue here, that entail no change in bed capacity, Con-

gress could not have intended state CON procedures to

supplant antitrust review of such acquisitions (Pet. App.

12a). There was, in the court’s view, no irreconcilable

conflict between application of both the NHPRDA and the

antitrust laws to this acquisition (Pet. App. 19a-22a). The

court reasoned that application of the antitrust laws is

consistent with the NHPRDA policy of making better

health care more widely available (Pet. App. 13a-14a).

The court of appeals also rejected petitioners’ state action

defense (Pet. App. 3a-10a). The court applied the two-

pronged test enunciated in California Retail Liquor Dealers

Ass'n vy. Midcal Aluminum, Inc. (Midcal), 445 U.S. 97

(1980). It assumed, without deciding, that the state’s CON

5Other factors relied on by the court as inconsistent with congres-

sional intent impliedly to repeal the antitrust laws include the lack of a

“pervasive” scheme entrusting competitive considerations to state regu-

latory agencies (Pet. App. 17a-18a), the failure of Congress to require

the states to enforce antitrust standards (id. at 18a), and the faiiure of

Congress to provide state agencies with adequate means to guard

against antitrust abuses or to provide adequate remedies for abuses of

power acquired through the regulatory scheme (id. at 14a-16a, 18a).

5

requiiement constituted a “clearly articulated and affirma-

tively expressed state policy to regulate health care provid-

ers’ expenditures” (Pet. App. 8a). But the court found that

the second part of the Midcal test — active state supervision

— was not satisfied, because North Carolina did not pro-

vide for any continuing review after issuing a CON (Pet.

App. 8a). The court rejected petitioners’ suggestion that the

Midcal standard be amended to delete the continuing

supervision requirement for private conduct merely autho-

rized by the state (Pet. App. 9a-10a). Finally, the court

noted that petitioners’ conduct was “voluntarily initiated”

and “not in any way advocated, much less compelled, by the

state,” a consideration “militat{ing] against a finding of

state action immunity” (id. at 10a).

DISCUSSION

The decision of the court of appeals is correct and does

not conflict with the decisions of this Court or of any other

court of appeals. Further review is therefore not warranted.

1. The court of appeals’ holding that the antitrust laws

are not impliedly repealed with respect to the acquisition at

issue reflects well-established principles. Implied exemp-

tions from the antitrust laws are disfavored, and “can be

justified only by a convincing showing of clear repugnancy

between the antitrust laws and the [subsequently enacted]

regulatory system.” United States v. National Association

of Securities Dealers (NASD), 422 U.S. 694, 719-720

(1975); see, e.g., Goldfarb v. Virginia State Bar, 421 U.S.

773, 787 (1975). Even then, repeal may be inferred only to

the minimum extent necessary to make the subsequent

regulation work. E.g., Silver v. New York Stock Exchange,

373 U.S. 341, 357 (1963).

a. In National Gerimedical, this Court held that “the

NHPRDA is not so incompatible with antitrust concerns as

to create a ‘pervasive’ repeal of the antitrust laws as applied

6

to every action taken in response to the health-care plan-

ning process” (452 U.S. at 393). In reaching this conclusion,

the Court acknowledged (id. at 392) the legislative history

on which petitioners here rely (Pet. 11-12), but determined

that Congress “made plain its intent that ‘competition and

consumer cuoice’ are to be favored wherever they ‘can

constructively serve . . . to advance the purposes of quality

assurance, cost effectiveness, and access.’ ” 452 U.S. at

392-393, quoting 42 U.S.C. 300k-2(a)(17).6 Accordingly,

the Court held that “ ‘the proper approach. . . is an analysis

which reconciles the operation of both statutory schemes

with one another rather than holding one completely

ousted.’ ” 452 U.S. at 392, quoting Silver v. New York

Stock Exchange, 373 U.S. at 357. To establish their claim .

for immunity, petitioners must show a “direct conflict

between the requirements of the NHPRDA and the Sher-

man Act with respect to the conduct at issue” (452 U.S. at

391). This they plainly cannot do.

b. The record fails to suggest any congressional health

planning objective that would be frustrated if the acquisi-

tion in this case were subjected to antitrust scrutiny. Cf.

National Gerimedical, 452 U.S. at 390. Indeed, unlike the

defendant in National Gerimedical, petitioners do not even

claim that their conduct was undertaken to further or in

response to any policy of the NHPRDA: the Act nowhere

promotes the acquisition of competing hospitals by a single

owner. The findings on which the hearing examiner based

his decision to grant the CON (see C.A. App. 98-104) did

not rest on any conclusion that the acquisition was neces-

sary to create efficiencies or to avoid unnecessary duplica-

tion of services (42 U.S.C. 300k-2(a)(2), (5) and (12)), to

‘Contrary to petitioners’ suggestion (Pet. 12), the Court’s conclusion

in National Gerimedical applies to the provision of inpatient services:

the petitioner in that case was a provider of such services (see 452 US. at

380).

7

provide new or greater access to needed services for under-

served consumers (42 U.S.C. 300k-2(a)(1)), or to improve

the quality of health care in the area (42 U.S.C. 300k-

2(a)(6), (12) and (17)). Nor did the examiner find that the

existence of Highland Hospital as a necessary health care

facility was threatened if the acquisition were not approved,

or that its acquisition by PIA would promote cost contain-

ment. The examiner found, to the contrary, that there

would be increased costs associated with the acquisition

(although he concluded that those costs were “not unreason-

abl[e]”) (C.A. App. 102). See note 3, supra. Thus, even if

the acquisition were ultimately determined to be illegal

under the antitrust laws, no NHPRDA policy would be

thwarted.’

Petitioners’ decision to purchase the Appalachian Hall

and Highland Hospitals reflects their independent business

judgment. Issuance of the CON in no way compelled peti-

tioners to go through with the acquisition: petitioners

remained free to complete the sale or not, “as their sound

business judgment dictated” (United States v. RCA, 358

’?Petitioners postulate circumstances in which an acquisition resulting

in joint ownership might further NH’ RDA concerns (Pet. 20 n.15).

That hypothetical case is not presented here, however. Moreover, if an

acquisition did produce the efficiencies that petitioners hypothesize,

that would be a defense to consider on the merits of the antitrust claim.

We recognize that there may be circumstances in which an implied

repeal of the antitrust laws must be found in order to make the Health

Planning Act work. See National Gerimedical, 452 U.S. at 393 n.18.

For instance, a state agency’s decision to deny a certificate of need in

order to curtail expansion of unnecessary inpatient facilities might

restrain competition in the offering of such services. Invocation of the

antitrust laws to override that agency decision would frustrate

NHPRDA policy. The acquisition of existing facilities in this case,

however, involves no such conflict. Indeed, Congress’s concern in the

NHPRDA over rising costs (see Pet. 14) is more likely to be met by

preventing aggregations of market power in the health care sector than

by permitting providers to obtain monopolies.

8

U.S. 334, 351 (1959)). Where conduct is governed “in the

first instance by business judgment and not regulatory coer-

cion, courts must be hesitant to conclude that Congress

intended to override the fundamental national policies

embodied in the antitrust laws.” Otter Tail Power Co. v.

United States, 410 U.S. 366, 374 (1973); National Gerimed-

ical, 452 U.S. at 390. Regulatory “approval” in such circum-

stances does not excuse compliance with the antitrust laws

as well. United States v. RCA, supra; United States v.

Pacific Southwest Airlines, 358 F. Supp. 1224, 1229-1230

(C.D. Cal.), cert. dismissed, 414 U.S. 801 (1973); cf. Cantor

v. Detroit Edison Co., 428 U.S. 579, 592-594 (1976). Con-

trary to petitioners’ suggestion (Pet. 13-14), this is so even

where the regulatory body is required to take competitive

considerations, among others, into account before approv-

ing the transaction. RCA, 358 U.S. at 351; United States v.

Philadelphia National Bank, 374 U.S. 321, 350 (1963); Cali-

fornia v. FPC, 369 U.S. 482 (1962).®

c. Nor does the certificate of need program establish a

conflict between the NHPRDA and the antitrust laws with

respect to petitioners’ acquisition. Congress intended that

state CON programs would reduce investment in unneces-

sarily duplicative facilities and equipment, thus reducing

health care costs. To this end, Congress conditioned certain

federal funds on state programs requiring CONs for the

“obligation of capital expenditures * * * and the offering

* * * of new institutional health services and the acquisition

of major medical equipment” (42 U.S.C. 300m-2(a)(4)(B)).

The NHPRDA, however, does not require state CON

* National Gerimedical cannot be distinguished by the absence of

regulatory approval in that case. Although an agency’s power to

approve private conduct may be relevant to Congress’s intent to repeal

the antitrust laws, that factor alone is not dispositive, as the Court’s

precedents, reaffirmed in National Gerimedical (452 U.S. at 388-389),

establish.

9

approval of capital expenditures for hospitals if the transac-

tion does not involve changes in “the service or bed capacity

of the facility” being acquired (42 U.S.C. 300m-6). When a

capital expenditure (such as the one at issue here) reflects a

change in ownership rather than the addition or elimination

of medical facilities, there is obviously no basis for concern

over the possibility of unnecessary duplication of facilities.

Application of the antitrust laws to these acquisitions there-

fore does not conflict with Congress’s expressed purpose of

preventing unnecessary duplication.

Nothing in the discretion afforded the states to require

CON approval for acquisitions outside the mandatory fed-

eral scheme changes that result in this case. North Caroli-

na’s statute imposing a CON requirement for the acquisi-

tion at issue (a requirement it subsequently repealed, see

note 2, supra) does not reflect any inconsistency between

the federal NHRPDA and the antitrust laws.!° And there is

%A provision expressly exempting acquisitions that result in no

change in services or bed capacity was added to the Act in 1979.

Regulations promulgated by the Secretary in 1977 had defined “new

institutional health services” and “capital expenditures” to exclude

from compulsory CON review capital expenditures for acquisitions of

existing health care facilities. See S. Rep. 96-96, 96th Cong, Ist Sess. 44

(1979).

10Petitioners’ reliance (Pet. 17-18) on Gordon v. New York Stock

Exchange, Inc., 422 U.S. 659 (1975), and United States v. National

Association of Securities Dealers, supra, is misplaced. In both cases, the

regulatory schemes expressly authorized the Securities and Exchange

Commission to oversee and regulate the activities at issue. The Court

found in the history and language of the legislation a clear congressional

awareness of and intent to permit the very anticompetitive acts com-

plained of — fixed commission rates and restraints on the transfer of

mutual! funds. Gordon, 422 U.S. at 681-682; NASD, 422 U.S. at 726-

727. The Court concluded that an irreconcilable conflict existed

between the Commission’s regulatory authority to supervise the private

conduct in question and the different standards established by the

antitrust laws. In Gordon, the Court noted (422 U.S. at 689) that

application of the antitrust laws would subject the exchanges to

10

no evidence that Congress or even North Carolina viewed

the CON requirement as inconsistent with application of

the federal antitrust laws. Indeed, the certificate of need

issued to petitioners (U.S. C.A. Br. Al) specifically notes

that it “does not supplant provisions or requirements

embodied in * * * statutes other than [the North Carolina

law]”.!!

2. The court of appeals correctly rejected petitioners’

claim of immunity under the state action doctrine. The

court appropriately identified the voluntary nature of peti-

tioners’ conduct as a factor militating against their claim

(Pet. App. 10a), although it failed to recognize that the lack

of state compulsion is sufficient to dispose of the defense.

Applying the two-part standard set forth in California

Retail Liqucr Dealers Ass'n v. Midcal Aluminum, Inc.,

supra, the court of appeals did not decide, under the first

requirement, whether the challenged restraint was clearly

articulated and affirmatively expressed as state policy,

because the court determined that the second requirement

— active state supervision — was not satisfied (Pet. App.

8a-10a). In our view, the state’s involvement satisfies neither

prong of the Midcal test.

“conflicting standards,” so that they “might find themselves unable to

proceed without violation of the mandate of the courts or of the SEC.”

Similarly, in NASD, the Court held (422 U.S. at 729-730) that “the

antitrust laws must give way if the regulatory scheme established by the

Investment Company Act is to work.” No such conflict exists between

the states’ CON authority and the antitrust laws: it is possible to comply

at once with both schemes, without frustrating the policies behind either

of them.

‘Petitioners presumably would not seek immunity under the

NHPRDA if North Carolina had not adopted rules subjecting their

acquisitions to CON review. But such a claim of immunity would follow

logicaliy from their argument (Pet. 17-20) that even the “unexercised

power” of a regulatory body to prescribe rules is sufficient to justify

immunity in all cases.

11

a. In Parker vy. Brown, 317 U.S. 341, 351 (1943), the

Court held that the Sherman Act does not prohibit “state

action or official action directed by a state.” The Court

emphasized, however, that immunity is limited to restraints

imposed as an act of government by the states and their

agents. The states do not have the power to shield privately

imposed restraints of trade: “a state does not give immunity

to those who violate the Sherman Act by authorizing them

to violate it, or by declaring that their action is lawful.” Jd.

at 351; see Cantor v. Detroit Edison Co, 428 U.S. at

592-593.

Thus, in the only two cases in which the Court directly

considered whether private conduct should be immunized

because of state involvement, the Court held that the

absence of state compulsion was fatal to the defendants’

claim. Goldfarb v. Virginia State Bar, supra; Cantor v.

Detroit Edison Co., supra. In Goldfarb, the Court held (421

U.S. at 791 (emphasis added)) that “anticompetitive activi-

ties must be compelled by direction of the State acting as

sovereign” in order for private defendants to obtain immun-

ity under the state action doctrine. The Court reiterated this

standard in Cantor (428 U.S. at 592-593 & n.28), and each

of the separate opinions endorsed Goldfarb’s compulsion

requirement. 428 U.S. at 600 & n.41 (plurality opinion); id.

at 604 (Burger, C.J., concurring); id. at 609 (Blackmun, J.,

concurring); id. at 623-626 (Stewart, J., dissenting). These

holdings follow directly from the federalism rationale artic-

ulated in Parker v. Brown, supra. Restraints compelled by

the state are properly attributed to the state itself. But

where, as here (see pages 7-8, supra), private conduct is not

compelled, the restraint is the product of private decision-

making that the state is powerless to immunize under the

Parker rationale (see 317 U.S. at 351).!”

'2For a more extensive discussion of this point, see the Brief for the

United States (at 14-27) in Southern Motor Carriers Rate Conference

12

The court of appeals interpreted this Court’s decision in

Hoover v. Ronwin, No. 82-1474 (May 14, 1984), to permit

a private party to claim state action immunity ¢ven if the

state merely authorizes or approves the activity in question

(Pet. App. 4a). The court of appeals concluded, therefore,

that the two-part Midcal standard governed. Neither Ron-

win nor Midcal, however, abandoned the compulsion

requirement for private parties. Midcal involved a chai-

lenge to a state statute that compelled resale price mainte-

nance by private liquor wholesalers. The legality of private

conduct was not at issue; the Court held the statute itself

invalid because it did not meet the active state supervision

prong of the two-part test that the Court derived from its

earlier decisions. in discussing its precedents, the Court

expressly quoted (445 U.S. at 104, quoting 421 U.S. at 791)

the Goldfarb requirement that “ ‘anticompetitive activities

must be compelled by direction of the State.’ ” In Ronwin,

the Court concluded (slip op. 14) that the challenged con-

duct “was in reality that of the Arizona Supreme Court”

— no private conduct was involved. Accordingly, the court

of appeals’ accurate conclusion (Pet. App. 10a) that the

challenged conduct in this case was “voluntarily initiated by

P.I.A., and not in any way advocated, much less compelled,

by the state” requires rejection of petitioners’ state action

defense.

b. In any event, petitioners’ claim of immunity fails to

satisfy either prong of the Midcal test. The challenged re-

straint in this case is not “ ‘clearly articulated and affirma-

tively expressed as state policy’ ” (Midcal, 445 U.S. at 105,

quoting City of Lafayette v. Louisiana Power & Light Co.,

v. United States, No. 82-1922 (argued Nov. 26, 1984)}(a copy of our

brief in that case is being served on the parties in this case). Because the

court of appeals here correctly held that petitioners are not entitled to

state action immunity even in the absence of a compulsion requirement

(see pages 14-16, infra), there is no need to hold this petition pending the

Court’s decision in Southern Motor Carriers.

eee |

13

435 U.S. 389, 410 (1978)). The court of appeals “assume[d]

* * * without deciding that there was a clearly articulated

and affirmatively expressed state policy to regulate health

care providers’ expenditures” (Pet. App. 8a (emphasis omit-

ted} However, the Midcal test requires a policy, not merely

to regulate the activity in question, but “to displace compe-

tition with regulation.” Community Communications Co.

v. City of Boulder, 455 U.S. 40, 51 (1982) (emphasis added);

see New Motor Vehicle Board v. Orrin W. Fox Co., 439

U.S. 96, 109 (1978); City of Lafayette, 435 U.S. at 413

(plurality opinion). The challenged competitive restraint

here — establishment of a monopoly over local health care

services — was quite plainly neither articulated nor affirma-

tively expressed as state policy. Indeed, establishment of

monopolies is directly contrary to state policy under the

North Carolina Constitution. N.C. Const. Art. I, $ 34.

Nowhere in North Carolina’s certificate of need statute

(presently N.C. Gen. Stat. $$ 131 E-175 et seq. (Supp. 1983))

is there expressed a state policy favoring replacement of

competition between existing hospitals with monopoly

ownership subject to regulation. The CON issued to peti-

tioners expressly states that it does not “supplant” the

requirements of federal or state statutes or regulations (see

page 10, supra).

In light of the strong disavowal by North Carolina of any

intent to displace other applicable laws with state CON

regulation (compare Midcal, 445 U.S. at 105), subjecting

this acquisition to antitrust scrutiny cannot be assumed to

frustrate any state policy. Petitioners’ freedom to abandon

the acquisition even after the CON issued also demonstrates

the lack of a state policy helpful to their claim.-Cf. City of

Boulder, 455 U.S. at 55 (“clear articulation” requirement

not satisfied where state’s position is one of “mere neutral-

ity” with respect to the challenged activity). Thus, the court

of appeals could properly have rejected the state action

14

defense on the ground that there is no clearly articulated

and affirmatively expressed state policy to displace compe-

tition with respect to the acquisition at issue.

c. The court of appeals correctly held (Pet. App. 8a-10a)

that the state’s involvement here is not sufficiently substan-

tial to satisfy the second prong of Midcal — active state

supervision of the anticompetitive policy. North Carolina

does not review petitioners’ activities once the acquisition

has taken place. There is no ongoing rate review nor any

other mechanism to check potential abuses of the market

power conferred by the acquisition and to ensure confor-

mity with the state’s policies, including cost containment.

North Carolina’s involvement ends with the issuance of the

certificate of need.

State supervision of private conduct is necessary to

ensure that such conduct furthers state policy rather than

remaining “essentially a private [restraint]” (Midcal, 445

U.S. at 106). Accordingly, petitioners’ suggestion (Pet. 22-

23) that the state supervision requirement be abandoned is

inconsistent with the fundamental federalism rationale of

the state action doctrine, which applies to “state action or

official action directed by a state.” Parker, 317 U.S. at

351-352; see City of Boulder, 455 U.S. at 53-54; Midcal, 445

U.S. at 103-104. To accept petitioners’ invitation to afford

immunity where private discretion rather than state regula-

tion replaces competition would nullify the Court’s admo-

nition in Parker (317 U.S. at 351) that a state may not

authorize private parties to violate the Sherman Act or

immunize their conduct merely by declaring it lawful.’

'3Petitioners rely (Pet. 22) on Town of Hallie v. City of Eau Claire,

700 F.2d 376 (7th Cir. 1983), cert. granted, No. 82-1832 (argued Nov.

26, 1984), which held that the active supervision requirement is unne-

cessary where a local governmental body is performing municipal servi-

ces pursuant to state policy. As we discuss more ful'y in our amicus brief

15

Petitioners’ contention (Pet. 23) that “it makes no sense

to * * * requirfe] continuing supervision of a one-time

event” fails to take account of the requirement’s purpose.

A one-time event, such as an acquisition, may violate the

antitrust laws if it affords a firm monopoly power or

increases concentration in circumstances allowing explicit

or implicit coordination by competitiors. Cf. United States

v. General Dynamics Corp., 415 U.S. 486, 505 (1974). State

approval of such an acquisition, unaccompanied by any

regulation of the subsequent use of the private market

power thereby acquired, would hardly “displace competi-

tion with regulation” (City of Boulder, 455 U.S. at 55; New

Motor Vehicle Board, 439 U.S. at 109). Rather, it would

displace competition with private power over prices.

As this Court stated in Midcal (445 U.S. at 106), “(t]he

national policy in favor of competition cannot be thwarted

by casting such a gauzy cloak of state involvement over

what is essentially a private price-fixing arrangement.” In

Midcal, the state statute compelled the posting of and

adherence to fair trade contracts. Nonetheless, the Court

held (id. at 105-106 (footnote omitted)) that the necessary

State supervision was lacking, because the state “neither

establishes prices nor reviews the reasonableness of the

price schedules; nor does it regulate the terms of fair trade

contracts. The State does not monitor market conditions or

engage in any ‘pointed reexamination’ of the program.” Cf.

(at 20-22) in that case (a copy of which is being served on the parties in

this case), the test applied to municipalities that act pursuant to a

“clearly articulated and affirmatively expressed state policy” is approp-

riately different from the test applied to private parties who are not arms

of the state and who, in the absence of governmental supervision,

cannot be presumed to act to further any public interest. In any event,

because petitioners fail to satisfy the other requirements for state action

immunity (see pages 11-14, supra), this case would not be an approp-

riate one in which to consider abolishing the supervision requirement

for private entities.

16

Baies v. State Bar, 433 U.S. 350, 362 (1977) (rules on

lawyer advertising were “subject to pointed re-examination

by the policymaker — the Arizona Supreme Court — in

enforcement proceedings”). Acceptance of petitioners’

argument that no continuing state supervision is required to

support state action immunity for the creation of ongoing

private market power can be reconciled neither with the

reasoning of Midcal nor with the purpose of the state action

doctrine. It would simply permit states to effectuate pro

tanto repeals of the federal antitrust laws at will.

Petitioners’ reliance (Pet. 23-24) on New Motor Vehicle Board v.

Orrin W. Fox Co., supra, is misplaced. That suit challenged provisions

of the California Automobile Franchise Act that temporarily delayed

— pending a full hearing by the state Board -— the opening or relocation

of an automobile franchise if an existing dealer filed a protest. The case

did not involve purely private anticompetitive conduct, as this case

does. The Court found (439 U.S. at 109) “a clearly articulated and

affirmatively expressed [state policy], designed to displace unfettered

business freedom in the matter of the establishment and relocation of

automobile dealerships.” No similar state policy can be discerned here

(see pages 12-14, supra). The Court in New Motor Vehicle Board did

not specifically address the supervision requirement it articulated two

years later in Midcal. The Court did note (439 U.S. at 110), however,

that the Board could order an immediate hearing and thus “(t]he

duration of interim restraint is subject to ongoing regulatory supervi-

sion.” Moreover, a final regulatory decision to deny permission for the

establishment of an automobile dealership conferred no enhanced

market power on any private party. Although such a decision could

erect temporary barriers to entry, continued denials over time, with

each denial requiring a fresh examination of the market, would have

been necessary to confer enhanced ongoing market power on firms

already in the market. Here, by contrast, the complaint alleges that the

state agency has countenanced the establishment of a health care

monopoly, without ongoing agency review of the monopolist’s activities.

17

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

Rex E. Lee

Solicitor General

J. PAUL MCGRATH

Assistant Attorney General

CHARLES F. RULE

Deputy Assistant Attorney General

CATHERINE G. O’SULLIVAN

ANDREA LIMMER

Attorneys

JOHN H. CARLEY

General Counsel

Federal Trade Commission

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DO)J-1985-02