Feb 1, 2019
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Third Circuit Rejects State’s Bid for Attorney’s Fees in Hospital Merger Dispute

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Category: Antitrust

On January 23, 2019, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) issued an opinion denying the Commonwealth of Pennsylvania the right to recover attorney’s fees after it had successfully blocked a hospital merger. The Third Circuit determined that the state had no federal statutory basis to be awarded attorney’s fees since the injunction had been granted under Section 13(b) of the Federal Trade Commission Act (“FTC Act”), which does not provide for attorneys’ fees, rather than Section 16 of the Clayton Act.

This case establishes binding precedent in the Third Circuit that state attorneys general will only have standing to seek attorneys’ fees in antitrust actions under the Clayton Act when the state actually litigates the case under that section. It also potentially has broader implications if other circuits decide to look to this decision as persuasive authority when deciding similar cases in their jurisdictions.

Background

In 2015, the Federal Trade Commission (“FTC”) filed an administrative action against Penn State Hershey Medical Center (“Hershey”) and PinnacleHealth System (“Pinnacle”) on the grounds that a merger between the two hospitals would violate Section 7 of the Clayton Act. The FTC and the Pennsylvania attorney general’s office (the “Commonwealth”) sought a preliminary injunction in District Court under Section 13(b) of the FTC Act and Section 16 of the Clayton Act to prevent the merger while the matter was litigated.[1] The District Court denied the injunction, but the Third Circuit reversed the ruling, relying on Section 13(b) of the FTC Act. The hospitals decided to abandon the merger, so the FTC and the Commonwealth dismissed the action against the hospitals. Subsequently, the Commonwealth moved to collect $1.2 million in attorneys’ fees from Hershey and Pinnacle. After the District Court denied the request for attorneys’ fees, the Commonwealth appealed to the Third Circuit.[2]

The Third Circuit Ruling

The Commonwealth argued that it should be awarded attorneys’ fees on the grounds that it “substantially prevailed” under Section 16 of the Clayton Act when the court granted the injunction.[3] The fee-shifting provision of the Clayton Act, however, expressly limits recovery to a party that substantially prevails in an action under the Clayton Act.[4] The Third Circuit determined that the injunction had been issued under Section 13(b) of the FTC Act and not Section 16 of the Clayton Act.[5] The rationale for this determination was that when the court had granted the preliminary injunction to stop the merger, it had applied the more lenient FTC Act standard rather than the stricter Clayton Act standard.[6]

Under the Clayton Act, courts apply the traditional injunctive relief standard, which requires the judge to consider: (1) the likelihood of success on the merits; (2) the threat of irreparable harm if injunctive relief is not granted; (3) the possibility of substantial harm to other parties; and (4) the public interest.[7] The standard for injunctive relief under Section 13(b) of the FTC Act, on the other hand, only requires “weighing the equities” and consideration of the “likelihood of ultimate success” in order to determine whether injunctive relief would be in the public interest.[8] Since the court granted the injunction under this more lenient FTC Act standard, the Third Circuit ruled that the Commonwealth had not prevailed under Section 16 of the Clayton Act and is thus not entitled to attorneys’ fees under that section.[9]

The Decision in Context

Numerous state attorneys general have historically been active in antitrust matters initially commenced by the FTC, and this is especially true recently in the healthcare space. States have a strong interest in maintaining competition in the healthcare market, and most hospital merger or acquisition transactions are sufficiently large to trigger HSR notification requirements. Certain states, such as New York, California, Michigan, Texas, and Massachusetts are well-known for their involvement in mergers, as demonstrated in prior cases.

States regularly join with the FTC to pursue antitrust actions, relating to proposed mergers. However, since only the FTC can litigate under the FTC Act, states typically add a claim under the Clayton Act, which allows the state to join such litigation. State attorneys general also often request that they be awarded attorneys’ fees under the Clayton Act. The Third Circuit’s decision is the first established precedent that state attorneys general will not be able to seek attorneys’ fees for simply joining an FTC action, utilizing Section 16 of the Clayton Act. Assuming no petition for certiorari is filed, and given the Third Circuit’s straightforward reasoning, it seems likely that going forward, in order to request attorneys’ fees, state attorneys general must not only join under Section 7 of the Clayton Act but actually litigate under the more demanding Clayton Act standard for granting injunctive relief.

[1] FTC et al. v. Penn State Hershey Medical Center et al., No. 17-2270, pp. 4 (3d Cir. 2019).

[2] Id. at 4-5; Jeannie O’Sullivan, “3rd Circ. Sinks Pa.’s Fee Bid In Hospital Merger Fight,” Law360, https://www.law360.com/competition/articles/1121416/3rd-circ-sinks-pa-s-fee-bid-in-hospital-merger-fight?nl_pk=44e1cfe8-1d78-4c79-ab63-b190fb389cc8&utm_source=newsletter&utm_medium=email&utm_campaign=competition.

[3] FTC et al. v. Penn State Hershey Medical Center et al. at 5.

[4] Id. at 13.

[5] Id. at 7.

[6] Id. at 9.

[7] Id.

[8] Id.

[9] Id. at 10.





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