Joint Ventures In The Antitrust Crosshairs At 6th Circ.
Law360, New York (May 4, 2016, 11:06 AM ET) -Antitrust counselors often find joint venture questions tricky. The limitless variety of joint venture
arrangements combined with the amorphous rule of reason standard that typically governs them render
definitive answers a rarity. In Medical Center at Elizabeth Place LLC (MCEP) v. Atrium Health System,[1]
the Sixth Circuit recently issued an opinion that will not make answering those questions any easier.
The case involves a recurring question: “Are members of a joint venture capable of conspiring with one
another in violation of Section 1 of the Sherman Act?” The short answer is: “It depends.” In the MCEP
case, the district court, applying principles laid out by the U.S. Supreme Court, determined that the
members of a joint venture had integrated to such an extent that they were not legally capable of
conspiring. It threw the case out. The Sixth Circuit reversed, reviving the litigation.
MCEP sued under Sherman Act Section 1, which prohibits contracts, combinations or conspiracies in
unreasonable restraint of trade. The first element of a Section 1 violation is an agreement. And as one
court noted, it takes two to tango and at least that number to form an illegal agreement under Section
1.[2] According to the Supreme Court, when “persons who would otherwise be competitors pool their
capital and share the risks of loss as well as the opportunities for profit ... joint ventures [are] regarded
as a single firm competing with other sellers in the market.”[3] And a single firm cannot conspire with
itself.
Medical Center at Elizabeth Place v. Atrium Health System
The MCEP case concerns an integrated health system in Ohio named Premier Health Partners. Premier
Health is comprised of four hospitals run under a joint operating agreement. Under the JOA, the
hospitals combine their income and losses into a single net income, share net income based on a
predetermined formula (which is independent of the revenue or profitability of the individual hospitals)
and have a combined budget and financial strategy. The chief executives of the hospitals report up to an
executive of Premier Health. In other words, while the hospitals did not formally merge, they “virtually”
merged[4] by virtue of the JOA. One of the reasons that the hospitals entered into the JOA arrangement
rather than formally merging was to allow one of the hospitals to retain its Catholic identity (canon law
requires the assets to remain separate from non-denominational, for-profit assets).
The plaintiff, MCEP, operates a small, 26-bed adult acute-care hospital in Dayton, Ohio. It claims that
Premier Health and its member hospitals designed and implemented an unlawful plan to deny MCEP
access to managed care contracts, physicians and physician referrals. MCEP sued in the Southern District
of Ohio alleging a per se violation of Section 1.
Premier Health and its member hospitals moved for summary judgment on the grounds that Premier
Health, having assumed operational, strategic, and financial control of the individual hospitals, acted as
a single entity depriving plaintiff’s claim of the plurality of actors necessary to a Section 1 claim. In
opposing the motion, the plaintiff relied heavily on the fact that the assets of the venture were not held
by Premier Health, but remained in the hands of the individual member hospitals. The plaintiff also
pointed to anonymous comments of hospital managers made to a consultant suggesting that they
competed with one another. U.S. District Judge Timothy Black was unpersuaded by those arguments
and granted the defendants’ summary judgment motion.[5] Judge Black began his opinion quoting from
the Supreme Court’s seminal opinion in Copperweld Corp. v. Independence Tube Corp.:[6]
[A]n internal “agreement” to implement a single, unitary firm’s policies does not raise the antitrust
dangers that Section 1 was designed to police. The officers of a single firm are not separate economic
actors pursuing separate economic interests, so agreements among them do not suddenly bring
together economic power that was previously pursuing divergent goals.
The Supreme Court in Copperweld held that a parent corporation was incapable of conspiring with its
wholly owned subsidiaries. As Judge Black pointed out, the courts have since extended the reasoning of
Copperweld to many other circumstances. It can apply to a sister corporations controlled by the same
parent, principals and agents, franchisors and franchisees, partnerships and joint ventures.
The Supreme Court has repeatedly emphasized that whether a plurality of actors exists is a question of
substance, not form. “[T]he inquiry is one of competitive reality.”[7] It doesn’t matter whether “two
parties to an alleged Section 1 violation are legally distinct entities,” nor whether “two legally distinct
entities have organized themselves under a single umbrella or into a structured joint venture.”[8] The
relevant question is whether the agreement joins together “independent centers of decisionmaking.”[9]
Applying these principles, Judge Black held that the hospitals that comprise Premier Health have
integrated themselves to such an extent that they are not separate economic actors. Instead, they
operate similar to separate divisions of a single corporation — like Buick and Chevrolet. The court
granted summary judgment in defendants’ favor. The Middle District of Pennsylvania had reached a
similar result in 2003 for a hospital alliance holding that the alliance functioned as a single entity
entitling the defendants to a judgment as a matter of law.[10] That case also involved a hospital seeking
to maintain its Catholic identity.
In the MCEP case, a divided panel of the Sixth Circuit reversed Judge Black, holding that the members of
the Premier Health network were capable of conspiring with one another. The court noted that the
hospitals were still separate corporations that separately held their assets.
The majority’s opinion, however, has problems. For one, as Circuit Judge Richard Griffin noted in his
dissent, it found that in order to determine the plurality of actors question (which is relevant to the first
element of a Section 1 violation) it had to delve into the reasonableness of the challenged restraint (the
second element of a Section 1 violation). The majority’s curious decision to commingle these inquiries
seemed to be driven by an eagerness to reach Premier Health’s alleged anti-competitive conduct. The
court was clearly troubled by evidence that demonstrated an intent by Premier Health to keep MCEP
out of the market. In one conversation, a Premier Health executive purportedly called an executive from
MCEP “the enemy,” and threatened “this is war.” As much as the court may have wanted to punish such
aggressive behavior, the court should not have even reached the issue of Premier Health’s conduct. A
Section 1 plaintiff has to independently satisfy each element of the violation, and Copperweld made
clear that the plurality question is a separate, threshold matter. A plaintiff cannot make up for a failure
on the first element with evidence, regardless of how strong, supporting the second element.
The majority also appears to have misapplied the Supreme Court’s substantive teaching from
Copperweld, Texaco Inc. v. Dahger[11] and American Needle. The court was called on to decide whether
“independent centers of decisionmaking” came together within the joint venture. If so, the Section 1
case should go forward. If, on the other hand, the participants in the joint venture had pooled their
capital and shared the risks of loss as well as the opportunities for profit, the grant of summary
judgment was likely correct. The MCEP facts support the latter. The hospitals had fully integrated
operationally, strategically, and financially. That should have knocked the legs out from under the first
element of a Section 1 claim. Even in joint ventures where the participants maintain a competitive
posture outside the venture (which rightly or wrongly gives plaintiffs a hook on the first element of a
Section 1 claim), sufficient integration within the venture relegates the analysis to the pro-defendant
rule-of-reason standard. Yet MCEP had only alleged a per se Section 1 violation.
The Sixth Circuit majority stated that the JOA brought together "independent centers of
decisionmaking."[12] The court thus invoked the right words from Copperweld and American Needle,
but the statement is really only accurate as it relates to the initial integration that formed Premier
Health. But whether independent centers of decision-making came together at the formation of Premier
Health was not before the court, the venture’s subsequent behavior was. As the Ninth Circuit stated,
“[i]f two erstwhile competitors combine to become a single economic entity ... the act of combination
may violate the antitrust laws, but their subsequent relations are generally immune from section 1.”[13]
The Federal Trade Commission, the U.S. Department of Justice or a private party could have challenged
the formation of Premier Health, but didn’t. The question for the Sixth Circuit was whether the hospitals
were separate economic decision-makers with respect to the alleged plan to deny MCEP access to
managed care contracts, physicians and physician referrals. Having integrated as much as they had it is
difficult to see how they were.
Conclusion
Antirust lawyers are sometimes asked to assess the Sherman Act Section 1 risk to participants in a joint
venture. Based on a string of Supreme Court cases, they analyze the extent to which the participants
have economically integrated. They ask: Have they pooled their capital? Have they shared their risks of
loss? Have they shared their opportunities for profit? Historically, such integration provided a strong
basis for concluding that the venture would pass antitrust scrutiny. The defendants in Medical Center at
Elizabeth Place LLC v. Atrium Health Sys. passed all of those tests, yet the Sixth Circuit reversed the
summary judgment that the district court had granted in their favor. The defendants have moved for
rehearing and rehearing en banc, so we may not have hear the last from the court. But if the decision
stands, it may cause heartburn for participants in joint ventures and the lawyers who advise them.
—By Peter Huston, Sidley Austin LLP
Peter Huston is a partner in Sidley Austin's San Francisco office and former assistant chief in the San
Francisco Office of the Antitrust Division of the United States Department of Justice.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.
[1] 2016 U.S. App. LEXIS 5214 (6th Cir. Mar. 22, 2016).
[2] Freeman v. San Diego Ass'n of Realtors, 322 F.3d 1133, 1148-1149 (9th Cir. 2003).
[3] Texaco Inc. v. Dagher, 547 U.S. 1, 6 (2006).
[4] See Stewart Cohn, “The Non-Merger Virtual Merger: Is Corporate Law Ready for Virtual Reality?,” 29
Delaware Journal of Corporate Law 1 (2004).
[5] 2014 U.S. Dist. LEXIS 169186 (S.D. Ohio, Oct. 20, 2014).
[6] Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1983).
[7] American Needle, Inc. v NFL, 560 U.S. 183, 196 (2010).
[8] Id.
[9] Copperweld, 467 U.S. at 769; American Needle, 560 U.S. at 196.
[10] Healthamerica Pennsylvania, Inc. v. Susquehanna Health System, 278 F. Supp. 2d 423, 437 (M.D. Pa.
2003).
[11] 547 U.S. 1 (2006).
[12] 2016 U.S. App. LEXIS 5214, at *12.
[13] Freeman, 322 F.3d at 1147.
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