Antitrust Alert: U.S. Federal Court Provides Guidance on Treating Joint Ventures as a "Single Entity" for Antitrust Purposes
The United States District Court for the Southern District of Ohio has unsealed its summary judgment opinion in The Medical Center at Elizabeth Place v. Premier Health Partners. The Court granted summary judgment in favor of the defendants—four hospital systems that operated pursuant to a joint operating agreement that granted operational and financial control of their hospitals to a joint operating company. The plaintiff, a 26-bed adult acute-care hospital, argued that the four hospital systems and the joint operating company should be viewed as separate entities under Sherman Act § 1 and that managed care contracts negotiated by the joint operating company on behalf of the hospital systems that allegedly harmed the plaintiff were a per se illegal group boycott.
Rejecting the plaintiff's arguments, the Court ruled that the hospitals and the joint operating company were a single entity for purposes of Section 1 of the Sherman Act. The Court's opinion provides guidance for the treatment of joint ventures as a single entity for antitrust purposes even where there is no common sharing of assets. It also provides additional authority for the conclusion that sufficient steps taken to ensure contractual control and sharing of revenues should be sufficient to establish joint economic interests and therefore a single entity.
Background
The defendants are participants in a joint operating agreement to manage the delivery of healthcare services in the Dayton area, giving the operating company (Premier Health Partners, or "Premier") operational control and oversight over four health systems, their subsidiary hospitals, and their employed physicians. The systems could not merge because one of them was a Catholic hospital that was required to retain its Catholic identity. The participants retained their separate legal identities and title to all of their assets, but they delegated operational, strategic, and financial control to Premier, including developing and overseeing implementation of the systems' strategic plans, budgets, and business plans. Critical for this case, Premier also conducted managed care contracting on behalf of the participants, negotiating and entering into payor contracts that bound all of the hospital participants. All joint venture income or loss was combined into a common bottom line and shared according to the terms of the joint operating agreement, independent of each particular hospital participant's revenue or profitability.
In rejecting the plaintiff's argument that common stock or asset ownership was required to create a single entity, the court adhered to the Supreme Court's guidance in its 1984 Copperweld decision: "substance, not form, should determine whether a separately incorporated entity is capable of conspiring under Section 1." Copperweld held that a parent and its wholly owned subsidiary always constituted a single entity for Section 1 purposes, because their economic interests are aligned, "so agreements among them do not suddenly bring together economic power that was previously pursuing divergent goals." In its 2010 American Needle decision, the Supreme Court returned to the question of plurality, examining whether NFLP, a venture among NFL teams to develop, market, and license their separately-held intellectual property, was a single entity or whether the teams were separate entities. The Court held that NFLP was not a single entity because it joined together "separate economic actors pursuing separate economic interests"—not merely because the teams were separate legal entities, but because they were "independent centers of decision making," each pursuing its own divergent economic interests. From these opinions, the Court in Premier concluded that "Supreme Court precedent eschews any bright-line rule regarding asset ownership, emphasizing function, not form, and how the parties actually operate."
Premier concluded that contractual control is sufficient to establish a single entity for antitrust purposes where each participant delegated "operational, strategic, and financial control" to the joint venture. It did not matter that Premier did not own the hospitals' assets: "The fact that Premier is 'a corporate shell with no assets, income, expenses, or liability [and thus] there is no shared ownership of assets used in the Joint Venture' is immaterial and does not create a genuine dispute of material fact."
The Court further concluded that any perception by some unidentified employees at the hospitals that the hospitals competed with each other did not matter because there was no economic competition among them: "[I]t is the economic integration of Defendants, not the form, that is determinative for the antitrust analysis." As a result, any competition ceased once they entered the joint venture, became "subject to Premier's control," and shared a "unity of economic interests," with all income and loss going to a common bottom line.
Guidance
This decision, along with a 2003 opinion from the United States District Court for the Middle District of Pennsylvania, Healthamerica Pennsylvania v. Susquehanna Health Systems, offers guidance on ways of structuring joint ventures, especially in the hospital area, to maximize a single entity conclusion. It should be enough—at least where there is good cause for a decision not to merge entirely—to delegate sufficient operational, strategic, and financial control to the joint venture, provided the participants have a unified economic interest, such as the sharing of all income and loss among the participants. Obviously, the extent and nature of that integration will always be the key to the analysis.
Lawyer Contacts
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
Thomas Demitrack
Cleveland
(T) +1.216.586.7141
tdemitrack@jonesday.com
Kathryn M. Fenton
Washington
(T) +1.202.879.3746
kmfenton@jonesday.com
Toby G. Singer
Washington
(T) +1.202.879.4654
tgsinger@jonesday.com
Peter A. Julian, an associate in the San Francisco Office, assisted in the preparation of this Alert.
Jones Day prepares summaries of significant antitrust enforcement, litigation, and policy events as a service to clients and interested readers, to provide timely insight on antitrust and competition law developments relevant to business, but not as legal advice on any specific matter. Please visit our Publication Request form to add your name to our distribution list.
