Case Information
*1 FOR PUBLICATION
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT S AINT A LPHONSUS M EDICAL No. 14-35173 C ENTER - N AMPA I NC .; S AINT A LPHONSUS H EALTH S YSTEM D.C. Nos. I NC .; S AINT A LPHONSUS 1:12-cv-00560-BLW R EGIONAL M EDICAL C ENTER , 1:13-cv-00116-BLW I NC .; T REASURE V ALLEY
H OSPITAL L IMITED
P ARTNERSHIP ; F EDERAL T RADE OPINION C OMMISSION ; S TATE OF I DAHO ,
Plaintiffs-Appellees , and
I DAHO S TATESMAN P UBLISHING , LLC; T HE A SSOCIATED P RESS ; I DAHO P RESS C LUB ; I DAHO
P RESS -T RIBUNE LLC; L EE
P UBLICATIONS I NC .,
Intervenors , v.
S T . L UKE ’ S H EALTH S YSTEM , L TD .; S T . L UKE ’ S R EGIONAL M EDICAL C ENTER , L TD .;
S ALTZER M EDICAL G ROUP ,
Defendants-Appellants . Appeal from the United States District Court for the District of Idaho
B. Lynn Winmill, Chief District Judge, Presiding *2 Argued and Submitted November 19, 2014—Portland, Oregon Filed February 10, 2015 Before: Richard R. Clifton, Milan D. Smith, Jr., and Andrew D. Hurwitz, Circuit Judges. Opinion by Judge Hurwitz
SUMMARY [*]
Clayton Act
The panel affirmed the district court’s judgment in favor of the Federal Trade Commission, the State of Idaho, and two local hospitals, holding that the 2012 merger of two health care providers in Nampa, Idaho, violated § 7 of the Clayton Act.
Section 7 of the Clayton Act bars mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” The plaintiff must first establish a prima facie case that a merger is anticompetitive, and the burden then shifts to the defendant to rebut the prima facie case.
The panel held that the district court did not clearly err in determining that Nampa, Idaho, was the relevant geographic market. The panel also held that the district court did not clearly err in its factual findings that the plaintiffs established a prima facie case that the merger will probably lead to anticompetitive effects in that market. The panel further held that a defendant can rebut a prima facie case with evidence that the proposed merger will create a more efficient combined entity and thus increase competition. The panel held that the district court did not clearly err in concluding that the defendant did not rebut the plaintiffs’ prima facie case where the defendant did not demonstrate that efficiencies resulting from the merger would have a positive effect on [*] This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader. competition. Finally, the panel held that the district court did not abuse its discretion in choosing a divestiture remedy.
COUNSEL
Brian K. Julian, Anderson, Julian & Hull LLP, Boise, Idaho, for Defendant-Appellant Saltzer Medical Group. J. Walter Sinclair, Brian C. Wonderlich, Holland & Hart LLP, Boise, Idaho; Jack R. Bierig (argued), Scott D. Stein, Charles K. Schafer, Ben Keith, Tacy F. Flint, Sidley Austin LLP, Chicago, Illinois, for Defendants-Appellants St. Luke’s Health System, Ltd. and St. Luke’s Regional Medical Center, Ltd.
Keely E. Duke, Duke Scanlan Hall PLLC, Boise, Idaho; David A. Ettinger (argued), Honigman Miller Schwartz & Cohn LLP, Detroit, Michigan, for Plaintiffs-Appellees Saint Alphonsus Medical Center-Nampa Inc.; Saint Alphonsus Health System Inc.; Saint Alphonsus Regional Medical Center, Inc.
Raymond D. Powers, Portia L. Rauer, Powers Tolman Farley, PLLC, Boise, Idaho, for Plaintiff-Appellee Treasure Valley Hospital Limited Partnership.
Lawrence G. Wasden, Attorney General, Brett T. DeLange, Deputy Attorney General, Deborah L. Feinstein, Director, Bureau of Competition, J. Thomas Greene, Peter C. Herrick, *4 Henry C. Su, Boise, Idaho; Jonathan E. Nuechterlein, General Counsel, David C. Shonka, Principal Deputy General Counsel, Joel Marcus (argued), Washington, D.C., for Plaintiffs-Appellees The Federal Trade Commission and The State of Idaho.
Barbara D.A. Eyman, Eyman Associates, PC, Washington, D.C., for Amicus Curiae America’s Essential Hospitals. Lynn S. Carman, Natallia Mazina, Medicaid Defense Fund, San Anselmo, California, for Amici Curiae International Center of Law & Economics and Medicaid Defense Fund. Joe R. Whatley, Jr., Edith M. Kallas, Whatley Kallas, LLP, New York, New York, for Amici Curiae Economics Professors.
Donald M. Falk, Mayer Brown LLP, Palo Alto, California; Robert E. Bloch, Michael B. Kimberly, Mayer Brown LLP, Washington, D.C., for Amicus Curiae The Association of Independent Doctors.
Joseph M. Miller, Michael S. Spector, America’s Health Insurance Plans; Pierre H. Bergeron, Mark J. Botti, Squire Patton Boggs (US) LLP, Washington, D.C., for Amicus Curiae America’s Health Insurance Plans.
Bruce L. Simon, Pearson, Simon & Warshaw, LLP, San Francisco, California; Alexander R. Safyan, Pearson, Simon & Warshaw, LLP, Sherman Oaks, California, for Amicus Curiae Catalyst for Payment Reform.
Kamala D. Harris, Attorney General of California, Mark Breckler, Chief Assistant Attorney General, Kathleen E. Foote, Senior Assistant Attorney General, Emilio Varanini, Deputy Attorney General, San Francisco, California; Robert W. Ferguson, Attorney General of Washington, Darwin P. *5 6 S T . A LPHONSUS M ED . C TR . V . S T . L UKE ’ S H EALTH S YS . Roberts, Deputy Attorney General, Jonathan A. Mark, Chief, Antitrust Division, Stephen T. Fairchild, Assistant Attorney General, Seattle, Washington; Kathleen G. Kane, Attorney General of Pennsylvania, James A. Donahue, III, Executive Deputy Attorney General, Tracy W. Wertz, Chief Deputy Attorney General, Jennifer A. Thomson, Senior Deputy Attorney General, Harrisburg, Pennsylvania; George Jepsen, Attorney General of Connecticut, Hartford, Connecticut; Joseph R. Biden III, Attorney General of Delaware, Wilmington, Delaware; Lisa Madigan, Attorney General of Illinois, Carolyn E. Shapiro, Solicitor General, Chicago, Illinois; Thomas J. Miller, Attorney General of Iowa, Des Moines, Iowa; Jack Conway, Attorney General of Kentucky, Frankfort, Kentucky; Janet T. Mills, Attorney General of Maine, Augusta, Maine; Douglas F. Gansler, Attorney General of Maryland, William F. Brockman, Deputy Solicitor General, Baltimore, Maryland; Jim Hood, Attorney General of Mississippi, Jackson, Mississippi; Tim Fox, Attorney General of Montana, Helena, Montana; Catherine Cortez Masto, Attorney General of Nevada, Carson City, Nevada; Gary K. King, Attorney General of New Mexico, Santa Fe, New Mexico; Ellen F. Rosenblum, Attorney General of Oregon, Salem, Oregon; Robert E. Cooper, Jr., Attorney General of Tennessee, Nashville, Tennessee, for Amicus Curiae The States of California, Washington, Pennsylvania, Connecticut, Delaware, Illinois, Iowa, Kentucky, Maine, Maryland, Mississippi, Montana, Nevada, New Mexico, Oregon, and Tennessee.
OPINION
HURWITZ, Circuit Judge:
This case arises out of the 2012 merger of two health care providers in Nampa, Idaho. The Federal Trade Commission (“FTC”) and the State of Idaho sued, alleging that the merger violated § 7 of the Clayton Act, 15 U.S.C. § 18, and state law; *6 two local hospitals filed a similar complaint. Although the district court believed that the merger was intended to improve patient outcomes and might well do so, the judge nonetheless found that the merger violated § 7 and ordered divestiture.
As the district court recognized, the job before us is not to determine the optimal future shape of the country’s health care system, but instead to determine whether this particular merger violates the Clayton Act. In light of the careful factual findings by the able district judge, we affirm the judgment below.
I. Background
A. The Health Care Market in Nampa, Idaho
Nampa, the second-largest city in Idaho, is some twenty miles west of Boise and has a population of approximately 85,000. Before the merger at issue, St. Luke’s Health Systems, Ltd. (“St. Luke’s”), an Idaho-based, not-for-profit health care system, operated an emergency clinic in the city. Saltzer Medical Group, P.A. (“Saltzer”), the largest independent multi-specialty physician group in Idaho, had thirty-four physicians practicing at its offices in Nampa. The only hospital in Nampa was operated by Saint Alphonsus 8
Health System, Inc. (“Saint Alphonsus”), a part of the multistate Trinity Health system. Saint Alphonsus and Treasure Valley Hospital Limited Partnership (“TVH”) jointly operated an outpatient surgery center.
The largest adult primary care physician (“PCP”) provider in the Nampa market was Saltzer, which had sixteen PCPs. [2] St. Luke’s had eight PCPs and Saint Alphonsus nine. Several other PCPs had solo or small practices.
B. The Challenged Acquisition
Saltzer had long had the goal of moving toward integrated patient care and risk-based reimbursement. After unsuccessfully attempting several informal affiliations, including one with St. Luke’s, Saltzer sought a formal partnership with a large health care system.
In 2012, St. Luke’s acquired Saltzer’s assets and entered into a five-year professional service agreement (“PSA”) with the Saltzer physicians (the “merger” or the “acquisition”). *7 Saltzer received a $9 million payment for goodwill. The initial PSA contained hortatory language about the parties’ [1] For simplicity, this opinion sometimes refers to St. Luke’s and Saltzer collectively as “St. Luke’s,” and Saint Alphonsus and TVH collectively as the “Private Hospitals.”
[2] The district court found that “[a]dult PCP services include physician services provided to commercially insured patients aged 18 and over by physicians practicing internal medicine, family practice, and general practice.”
[3] The parties and the district court regarded the PSA as the functional equivalent of an employment agreement, and we assume the same. desire to move away from fee-for-service reimbursement, but included no provisions implementing that goal. An amended PSA, however, contained some quality-based incentives. The merger did not require Saltzer doctors to refer patients to the St. Luke’s Boise hospital, nor did it require that Saltzer physicians use St. Luke’s facilities for ancillary services.
C. Procedural History
In November 2012, the Private Hospitals filed a complaint in the District of Idaho seeking to enjoin the merger under Clayton Act § 7. [4] The complaint alleged anticompetitive effects in the relevant markets for “primary care physician services,” “general acute-care inpatient services,” “general pediatric physician services,” and “outpatient surgery services.” The district court denied a preliminary injunction, noting that: (1) the PSA did not require referrals to St. Luke’s, minimizing any immediate harm to the Private Hospitals; (2) implementation of the PSA was to take place over time; and (3) the PSA provided a process for unwinding the transaction if it were declared illegal.
In March 2013, the FTC and the State of Idaho filed a complaint in the district court seeking to enjoin the merger pursuant to the Federal Trade Commission Act (“FTC Act”), the Clayton Act, and Idaho law. [5] This complaint alleged [4] The Private Hospitals filed an amended complaint in January 2013. The Idaho Competition Act is “construed in harmony” with federal antitrust law, Idaho Code §§ 48-102(3), -106, and the district court held that the antitrust analysis is the same for each. The parties do not contend *8 otherwise. S T . A LPHONSUS M ED . C TR . V . S T . L UKE ’ S H EALTH S YS .
anticompetitive effects only in the adult PCP market. The district court consolidated this case with the one filed by the Private Hospitals, and after a nineteen-day bench trial, found the merger prohibited by the Clayton Act and the Idaho Competition Act because of its anticompetitive effects on the Nampa adult PCP market. [6]
The district court expressly noted the troubled state of the U.S. health care system, found that St. Luke’s and Saltzer genuinely intended to move toward a better health care system, and expressed its belief that the merger would “improve patient outcomes” if left intact. Nonetheless, the court found that the “huge market share” of the post-merger entity “creates a substantial risk of anticompetitive price increases” in the Nampa adult PCP market. Rejecting an argument by St. Luke’s that anticipated post-merger efficiencies excused the potential anticompetitive price effects, the district court ordered divestiture. This appeal followed.
II. Standard of Review
We review the district court’s findings of fact for clear
error and its conclusions of law de novo.
Husain v. Olympic
Airways
,
*9
v. News Am. Mktg. FSI
,
III. The Clayton Act § 7 Analysis
A. Overview of the Clayton Act
The great Yankee catcher Yogi Berra is reputed (likely apocryphally) to have said that it’s “tough to make predictions, especially about the future.” The Perils of Prediction , Economist, June 2, 2007, at 96. [7] Yet that is precisely what this case requires. Because § 7 of the Clayton Act bars mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly,” 15 U.S.C. § 18, judicial analysis necessarily focuses on “probabilities, not certainties,” Brown Shoe Co. v. United States , 370 U.S. 294, 323 (1962). This “requires not merely an appraisal of the immediate impact of the merger upon competition, but a prediction of its impact upon competitive conditions in the future; this is what is meant when it is said that the amended § 7 was intended to arrest anticompetitive tendencies in their incipiency.” United States v. Phila. Nat’l Bank , 374 U.S. 321, 362 (1963) (internal quotation marks omitted).
Section 7 claims are typically assessed under a “burden-
shifting framework.”
Chi. Bridge & Iron Co. v. FTC
,
B. The Relevant Market
“Determination of the relevant product and geographic
markets is a necessary predicate to deciding whether a merger
contravenes the Clayton Act.”
Marine Bancorporation
,
418 U.S. at 618 (internal quotation marks omitted).
Definition of the relevant market is a factual question
“dependent upon the special characteristics of the industry
involved and we will not disturb such findings unless clearly
erroneous.”
Twin City Sportservice, Inc. v. Charles O. Finley
& Co.
,
parties agree that the relevant product market in this case is adult PCPs, St. Luke’s vigorously disputes the district court’s determination that Nampa is the relevant geographic market. We find no clear error in that factual finding.
The relevant geographic market is the “area of effective
competition where buyers can turn for alternate sources of
supply.”
Morgan, Strand, Wheeler & Biggs v. Radiology,
Ltd.
,
A common method to determine the relevant geographic
market, and the one used by the district court, is to find
whether a hypothetical monopolist could impose a “small but
significant nontransitory increase in price” (“SSNIP”) in the
*11
proposed market.
See Theme Promotions
,
Market definition thus perforce focuses on the anticipated behavior of buyers and sellers. See, e.g. , Rebel Oil , 51 F.3d at 1430, 1434–35. In the health care industry, insurance companies effectively act both as buyers and sellers. See FTC v. Freeman Hosp. , 69 F.3d 260, 270 n.14 (8th Cir. 1995); Gregory Vistnes, Hospitals, Mergers, and Two-Stage Competition , 67 Antitrust L.J. 671, 672 (2000). Noting that “the vast majority of health care consumers are not direct purchasers of health care—the consumers purchase health insurance and the insurance companies negotiate directly with the providers,” the district court correctly focused on the “likely response of insurers to a hypothetical demand by all the PCPs in a particular market for a [SSNIP].”
The district court found that a hypothetical Nampa PCP
monopolist could profitably impose a SSNIP on insurers.
[9]
Although the Merger Guidelines are “not binding on the courts,”
Olin
,
986 F.2d at 1300, they “are often used as persuasive authority,”
Chi.
Bridge & Iron
,
model.” John J. Miles, 1 Health Care & Antitrust L. § 1:5 (2014). In the first stage, providers compete for inclusion in insurance plans. See Vistnes, supra , at 674. In the second stage, providers seek to attract patients enrolled in the plans. id. at 681–82. Because patients are “largely insensitive” to price, the second stage “takes place primarily over non-price dimensions.” Id. at 682. Thus, antitrust analysis focuses on the first stage. Id. at 692.
S T . A LPHONSUS M ED . C TR . V . S T . L UKE ’ S H EALTH S YS . 15 Citing testimony that Nampa residents “strongly prefer access to local PCPs,” the court found that “commercial health plans need to include Nampa PCPs in their networks to offer a competitive product.” “Given this dynamic—that health plans must offer Nampa Adult PCP services to Nampa residents to effectively compete—Nampa PCPs could band together and successfully demand a [SSNIP] (or reimbursement increase) from health plans.”
St. Luke’s argues that the district court erred by
considering only the current behavior of Nampa consumers,
not their likely response to a SSNIP. St. Luke’s is of course
correct
that geographic market definition
involves
prospective analysis—it predicts consumer response to a
hypothetical price increase.
See FTC v. Tenet Health Care
Corp.
,
This determination was supported by the record. Evidence was presented that insurers generally need local PCPs to market a health care plan, and that this is true in particular in the Nampa market. For example, Blue Cross of Idaho has PCPs in every zip code in which it has customers, and the executive director of the Idaho Physicians Network testified that it could not market a health care network in Nampa that did not include Nampa PCPs. Evidence also indicated that consumers would not change their behavior in the event of a SSNIP. Experts testified that because health care consumers only pay a small percentage of health care costs out of pocket, the impact of a SSNIP likely would not register. Similarly, there was testimony that consumers choose physicians on factors other than price. The court was unconvinced by evidence that insurers could defend against a SSNIP by steering consumers to non-Nampa PCPs.
For similar reasons, there also was no clear error in the *13 district court’s determination that evidence that one-third of Nampa residents travel to Boise for PCPs did not prove that a significant number of other residents would so travel in the event of a SSNIP. Those who traveled generally went to PCPs near their Boise places of employment. Thus, the court reasonably found this statistic not determinative of whether other Nampa residents would be willing to travel. C. The Plaintiffs’ Case
Once the relevant geographic market is determined, a
prima facie case is established if the plaintiff proves that the
merger will probably lead to anticompetitive effects in that
market.
See Olin
,
conclusive indicators of anticompetitive effects . . . .”
United
States v. Gen. Dynamics Corp.
,
The district court held that the plaintiffs established a prima facie case because of the post-merger entity’s: (1) market share; (2) ability to negotiate higher PCP reimbursement rates with insurers; and (3) ability to “charge more [ancillary] services at the higher hospital billing rates.” The court also found that “entry into the market has been very difficult and would not be timely to counteract the anticompetitive effects of the Acquisition.” St. Luke’s does not challenge the barriers-to-entry finding; we review the others in turn for clear error.
1. Market Share
A commonly used metric for determining market share is
the Herfindahl-Hirschman Index (“HHI”).
ProMedica
Health Sys., Inc. v. FTC
,
The district court calculated the post-merger HHI in the
Nampa PCP market as 6,219, and the increase as 1,607. St.
Luke’s does not challenge these findings. As the district
court correctly noted, these HHI numbers “are well above the
thresholds for a presumptively anticompetitive merger (more
than double and seven times their respective thresholds,
respectively).”
See ProMedica
,
2. PCP Reimbursements The district court also found that St. Luke’s would likely use its post-merger power to negotiate higher reimbursement rates from insurers for PCP services. Recognizing that the § 7 inquiry is based on a prediction of future actions, see *15 Phila. Nat’l Bank , 374 U.S. at 362, this finding was not clearly erroneous.
Because St. Luke’s and Saltzer had been each other’s closest substitutes in Nampa, the district court found the acquisition limited the ability of insurers to negotiate with the merged entity. Pre-acquisition internal correspondence indicated that the merged companies would use this increased bargaining power to raise prices. An email between St. Luke’s executives discussed “pressur[ing] payors for new directed agreements,” and an exchange between Saltzer executives stated that “[i]f our negotiations w/ Luke’s go to fruition,” then “the clout of the entire network” could be used to negotiate favorable terms with insurers. The court also examined a previous acquisition by St. Luke’s in Twin Falls, Idaho, and found that St. Luke’s used its leverage in that instance to force insurers to “concede to their pricing proposal.”
3. Ancillary Services
The district court’s finding that St. Luke’s would raise prices in the hospital-based ancillary services market [12] is more problematic. The court found that St. Luke’s would “exercise its enhanced bargaining leverage from the Acquisition to charge more services at the higher hospital- based billing rates.” Because insurers and providers typically negotiate for all services as part of the same contract, the district court found that St. Luke’s increased leverage with Ancillary services, such as x-rays and diagnostic testing, are sometimes performed by doctors in conjunction with PCP examinations. Before the merger, Saltzer provided many ancillary services at its physicians’ offices. Insurance companies and Medicare often offer higher reimbursements for ancillary services performed at a hospital-based outpatient facility. S T . A LPHONSUS M ED . C TR . V . S T . L UKE ’ S H EALTH S YS .
respect to PCP services would allow it to demand higher fees for ancillary services.
The problem with this conclusion is that the district court made no findings about St. Luke’s’ market power in the ancillary services market. Absent such a finding, it is difficult to conclude that the merged entity could easily demand anticompetitive prices for such services. Perhaps the court was suggesting that St. Luke’s would engage in tying, “a device used by a seller with market power in one product market to extend its market power to a distinct product market.” Cascade Health Solutions v. PeaceHealth , 515 F.3d 883, 912 (9th Cir. 2008). Although various antitrust statutes, including Sherman Act §§ 1 and 2, Clayton Act § 3, and FTC Act § 5, address tying, Clayton Act § 7 does not expressly prohibit the practice. A leading antitrust treatise cautions against condemning a merger for potential tying effects as “superfluous and overdeterrent.” Phillip Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application (“Areeda”) ¶ 1144a (2010).
Wholly aside from these conceptual difficulties, the factual underpinnings of the district court’s conclusion are suspect. The documents cited by the district court merely state that St. Luke’s hopes to increase revenue from ancillary services, not that it plans to charge higher prices. An increase in revenue could occur in a variety of ways not involving increased prices, such as increased Medicare payments or increased volume from Saltzer referrals. The district court did not find that Saltzer physicians would inappropriately label in-house services as hospital-based, or that they would force patients to travel to the St. Luke’s hospital in Boise for services that could be provided in-house in Nampa. And the court did not identify any past actions that would allow it to predict that St. Luke’s would act anticompetitively in the future in the ancillary services market. Indeed, in post- merger negotiations with Blue Shield, St. Luke’s did not do so. We thus find that the ancillary services finding is not supported by the record.
4. The Prima Facie Case
*17
But absent the ancillary services finding, the district
court’s conclusion that a prima facie case was established is
amply supported by the record. “Section 7 does not require
proof that a merger or other acquisition has caused higher
prices in the affected market. All that is necessary is that the
merger create an appreciable danger of such consequences in
the future.”
Hosp. Corp. of Am. v. FTC
,
The extremely high HHI on its own establishes the prima
facie case.
See H.J. Heinz
,
The facts found by the district court are similar to those
in other cases in which a prima facie violation of § 7 was
established.
See, e.g.
,
Chi. Bridge & Iron
, 534 F.3d at
431–32 (high HHI, limited rivals, high entry barriers, and
customer perception);
Lucas Auto. Eng’g, Inc. v.
Bridgestone/Firestone, Inc.
, 140 F.3d 1228, 1236–37 (9th
Cir. 1998) (reversing summary judgment for defendant
because undisputed facts showed high market share and
“insurmountable barriers to entry”);
FTC v. Univ. Health,
Inc.
,
Because the plaintiffs established a prima facie case, the
burden shifted to St. Luke’s to “cast doubt on the accuracy of
*18
the Government’s evidence as predictive of future anti-
competitive effects.”
Chi. Bridge & Iron
,
Of course, some of the results of large integrated or chain operations are beneficial to consumers. Their expansion is not rendered unlawful by the mere fact that small independent stores may be adversely affected. It is competition, not competitors, which the Act protects. But we cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small, locally owned business. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization. We must give effect to that decision.
Notwithstanding the Supreme Court’s statements, four of
our sister circuits (the Sixth, D.C., Eighth, and Eleventh) have
suggested that proof of post-merger efficiencies could rebut
a Clayton Act § 7 prima facie case.
See ProMedica
, 749 F.3d
at 571;
H.J. Heinz
,
Some courts have attempted to explain why the Supreme Court cases
do not recognize an efficiencies defense,
see, e.g.
,
H.J. Heinz
,
A quarter of a century ago, we rejected an efficiencies
defense in
RSR Corp. v. FTC
,
We remain skeptical about the efficiencies defense in general and about its scope in particular. It is difficult enough in § 7 cases to predict whether a merger will have future anticompetitive effects without also adding to the judicial balance a prediction of future efficiencies. Indeed, even then-Professor Bork, a sharp critic of Clayton Act enforcement actions, see, e.g. , Robert H. Bork and Wade S. Bowman, Jr., The Crisis in Antitrust , 65 Colum. L. Rev. 363, 373 (1965), rejected the efficiencies defense, calling it “spurious” because it “cannot measure the factors relevant to consumer welfare, so that after the economic extravaganza was completed we would know no more than before it began,” Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself 124 (1978). Judge Richard Posner has regularly expressed similar views. See Richard A. Posner, Antitrust Law 133 (2d ed. 2001) (“I said back then that there should be no general defense of efficiency. I still think this is right. It is rarely feasible to determine by the methods of litigation the effect of a merger on the costs of the firm created by the merger.”); Richard A. Posner, Antitrust Law: An Economic Perspective 112 (1976) (“I would not allow a generalized defense of efficiency.”); cf . Frank H. Easterbrook, The Limits of Antitrust , 63 Tex. L. Rev. 1, 39 (1984) (“[N]either judges nor juries are particularly good at handling complex economic arguments . . . .”).
Nonetheless, we assume, as did the district court, that *21 because § 7 of the Clayton Act only prohibits those mergers whose effect “may be substantially to lessen competition,” 15 U.S.C. § 18, a defendant can rebut a prima facie case with evidence that the proposed merger will create a more efficient combined entity and thus increase competition. For example, if two small firms were unable to match the prices of a larger competitor, but could do so after a merger because of decreased production costs, a court recognizing the efficiencies defense might reasonably conclude that the transaction likely would not lessen competition. Merger Guidelines § 10 (“Merger-generated efficiencies may enhance competition by permitting two ineffective competitors to form a more effective competitor, e.g., by combining complementary assets. . . . [I]ncremental cost reductions may reduce or reverse any increases in the merged firm’s incentive to elevate price.”).
Because we deal with statutory enforcement, the language
of the Clayton Act must be the linchpin of any efficiencies
defense. The Act focuses on “competition,” so any defense
must demonstrate that the prima facie case “portray[s]
inaccurately the merger’s probable effects on competition.”
Am. Stores
,
Courts recognizing the defense have made clear that a
Clayton Act defendant must “clearly demonstrate” that “the
proposed merger enhances rather than hinders competition
because of the increased efficiencies.”
United States v. Long
Island Jewish Med. Ctr.
,
2. The St. Luke’s Efficiencies Defense St. Luke’s argues that the merger would benefit patients by creating a team of employed physicians with access to Epic, the electronic medical records system used by St. Luke’s. The district court found that, even if true, these predicted efficiencies were insufficient to carry St. Luke’s’ burden of rebutting the prima facie case. We agree. It is not enough to show that the merger would allow St.
Luke’s to better serve patients. The Clayton Act focuses on
competition, and the claimed efficiencies therefore must
show that the prediction of anticompetitive effects from the
prima facie case is inaccurate.
Univ. Health
,
The district court expressly did conclude, however, that
the claimed efficiencies were not merger-specific.
[15]
The
court found “no empirical evidence to support the theory that
St. Luke’s argues that once a defendant comes forward with proof of
efficiencies, the burden shifts to the plaintiff to show that there are ways
of achieving those efficiencies without the merger. This tracks the
Sherman Act analysis.
See, e.g.
,
Bhan v. NME Hosps., Inc.
, 929 F.2d
1404, 1412–14 (9th Cir. 1991). But, in Clayton Act § 7 cases, after a
plaintiff has made a prima facie case that a merger is anticompetitive, the
burden of showing that the claimed efficiencies cannot be “attained by
practical alternatives,” Merger Guidelines § 10 n.13, is properly part of the
defense,
see Olin
,
S T . A LPHONSUS M ED . C TR . V . S T . L UKE ’ S H EALTH S YS . St Luke’s needs a core group of employed primary care physicians beyond the number it had before the Acquisition to successfully make the transition to integrated care,” and that “a committed team can be assembled without employing physicians.” The court also found that the shared electronic record was not a merger-specific benefit because data analytics tools are available to independent physicians.
These factual findings were not clearly erroneous. Testimony highlighted examples of independent physicians who had adopted risk-based reimbursement, even though they were not employed by a major health system. The record also revealed that independent physicians had access to a number of analytic tools, including the St. Luke’s Epic system.
But even if we assume that the claimed efficiencies were merger-specific, the defense would nonetheless fail. At most, the district court concluded that St. Luke’s might provide better service to patients after the merger. That is a laudable goal, but the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations. See Proctor & Gamble , 386 U.S. at 580. The district court did not clearly err in concluding that whatever else St. Luke’s proved, it did not demonstrate that efficiencies resulting from the merger would have a positive effect on competition.
IV. Remedy
“The key to the whole question of an antitrust remedy is
of course the discovery of measures effective to restore
competition.”
United States v. E. I. du Pont de Nemours &
Co.
,
The customary form of relief in § 7 cases is divestiture.
See id.
at 330 (noting that most litigated Clayton Act § 7
cases “decreed divestiture as a matter of course”);
see also
ProMedica
,
St. Luke’s nonetheless argues that the district court erred in ordering divestiture because (1) divestiture will not actually restore competition; (2) divestiture eliminates the transaction’s procompetitive benefits; and (3) a proposed conduct remedy was preferable. We find no abuse of discretion in the district court’s choice of remedy.
Although divestiture may generally be the most
straightforward way to restore competition,
E. I. du Pont
,
The district court had ample basis, however, for rejecting that contention. Indeed, in opposing a preliminary injunction, St. Luke’s assured the court that divestiture was feasible. Moreover, Saltzer’s employees were assured by management that they would have their jobs no matter the result of the litigation, and a number of them testified that Saltzer would be viable as an independent entity. The district court also *25 noted that “any financial hardship to Saltzer will be mitigated by St. Luke’s payment of $9 million for goodwill and intangibles as part of the Acquisition . . . .”
Nor did the district court abuse its discretion in its
consideration of the costs and benefits of divestiture. The
court expressly determined that divestiture was appropriate
because any benefits of the merger were outweighed by the
anticompetitive concerns.
See Am. Stores
,
Finally, the district court did not abuse its discretion in
choosing divestiture over St. Luke’s’ proposed “conduct
remedy”—the establishment of separate bargaining groups to
negotiate with insurers. Divestiture is “simple, relatively
easy to administer, and sure,”
E. I. du Pont
,
V. Conclusion
For the reasons stated above, we AFFIRM the judgment of the district court.
Conduct remedies include “firewall, non-discrimination, mandatory licensing, transparency, and anti-retaliation provisions, as well as prohibitions on certain contracting practices.” U.S. Dep’t of Justice, Antitrust Division Policy Guide to Merger Remedies § II.B (2011); see also Areeda ¶ 990d.