Antitrust

On June 5, 2024, the U.S. District Court for the Western District of North Carolina denied the Federal Trade Commission’s (“FTC”) request for a preliminary injunction of Novant Health’s $320 million acquisition of two struggling hospitals in the Charlotte area owned by Community Health Systems (“CHS”). 

The district court acknowledged that the case raises an unusual question—how to reconcile antitrust law’s goal of prohibiting mergers that may substantially lessen competition when an existing competitor like CHS “decides, for entirely legitimate reasons independent of a challenged merger, to simply quit trying to compete?” The district court concluded that without the acquisition, the CHS hospitals would “most likely close in the foreseeable future.” So it declined to enjoin the merger, finding the public equities weighed in favor of keeping these facilities open and operating under Novant’s ownership. 

The FTC appealed the decision to the Fourth Circuit, arguing that the lower court misapplied both the “failing-firm” and the “weakened competitor” defenses.

On appeal, a split Fourth Circuit panel granted the FTC’s bid for an emergency injunction. Following this ruling, Novant abandoned its plans to acquire the two hospitals.

In its decision, the Fourth Circuit did not explain its rationale for granting the FTC’s motion for an injunction, which may ultimately diminish the persuasive authority of the district court’s decision.  However, that decision still provides an indication of the arguments likely to succeed with lower courts.

Below are notable takeaways from the court’s decision and the FTC appeal:

• The FTC easily met its prima facie burden but still lost the case at the district court level. Unlike most merger litigation cases, the primary dispute did not revolve around market definition. Experts for both parties agreed that the market shares and Herfindahl-Hirschman (HHI) concentration far exceeded the thresholds outlined in the 2023 Merger Guidelines and case law, thus establishing a presumption of competitive harm. Instead, the battle was over whether the defendants successfully rebutted the presumption by demonstrating the likely failure of the CHS assets if the merger did not proceed.
• The district court’s ruling in favor of the merger applies the failing-firm and weakened competitor defenses. The failing firm defense–which the Fourth Circuit has previously described as “the Hail-Mary pass of presumptively doomed mergers”–requires proof that the acquired firm would imminently exit the market but-for the merger, which the court found was likely for Davis, the CHS behavioral health facility. The district court similarly concluded that the competitive viability of LNR, the second CHS hospital, was irreversibly impaired, likening the facilities to “a car that its owner can’t afford to replace – CHS plans to just continue to drive LNR down the same road until the proverbial wheels fall off.”  This application of the weakened competitor defense relied on the fact that CHS had decided not to invest in LNR—terminating important services in cardiology, newborn care, and oncology—and faced external challenges, including the opening of a competitor nearby. Moreover, the district court found that the sales process leading to the Novant deal had not identified any plausible alternative buyers for either facility.
• The FTC’s appeal argued that the district court committed a legal error in applying the defenses. The FTC’s appeal focused only on the acquisition of LNR (conceding that Novant may acquire Davis).  The agency argued that the court conflated the failing-firm defense with the “related but distinct” weakened competitor defense and “failed to apply either defense properly.” According to the FTC, the record showed that LNR is currently profitable and “performs reasonably well on safety and quality metrics,” not that it would imminently close. The FTC also claimed the district court ignored evidence that CHS did not conduct a robust sales process—such as contacting out-of-state health systems or other in-state systems outside the Charlotte area—and failed to consider whether CHS could have addressed LNR’s weaknesses through means other than a sale, which the weakened competitor defense requires. Further, the FTC alleged the court “simply assume[d]” LNR’s market share would fall to zero without examining how much LNR’s share would drop as a result of its weakened status. 
• The district court also credited Novant’s public commitments with respect to future pricing and investments. The agencies generally take the view that so-called “behavioral remedies”are difficult to monitor and enforce over time, preferring instead to solve competitive issues with structural fixes or blocking mergers altogether. Courts, however, have repeatedly credited the merging parties’ commitments with respect to future behavior. This case is another such example. Executives testified that Novant would give insurers the option to maintain existing LNR reimbursement rates, or apply a formula-based escalator tied to an index, for three years. The district court also accepted testimony that Novant would fund capital projects, increase staffing, and replace equipment at LNR, along with various safety and clinical management programs at both facilities. In making these findings, the district court emphasized the “significant reputational harm” that would occur if Novant reneged on these commitments. 
  On appeal, the FTC argued the court “placed too much weight” on Novant’s commitment.  Consistent with its view toward behavioral remedies, the FTC argued there were no means to enforce the “promise” not to raise rates, and ignored other immediate harms that may flow from the acquisition, such as “raising of reimbursement rates at other Novant hospitals due to increased bargaining leverage.”  

Updated June 20, 2024

*Timothy Pfeifer, a legal intern at Weil, contributed to the content of this blog post.