Third Circuit: Non-pharmaceutical cases

District court decision

Federal Trade Commission v Thomas Jefferson University

Although the US antitrust enforcement agencies have an extraordinary record of success in litigation, in 2020, two district courts in the Third Circuit rejected a federal antitrust agency’s challenge to two different acquisitions between private parties.

The US Federal Trade Commission and the Pennsylvania Attorney General (collectively, the Agencies) sought to enjoin a merger between Thomas Jefferson University (Jefferson) and the Albert Einstein Healthcare Network (Einstein), until there was an administrative determination on whether the proposed merger would violate section 7 of the Clayton Act.[1] The US District Court for the Eastern District of Pennsylvania denied the Agencies’ motion because it concluded that the government failed to properly identify the geographic market at risk of anticompetitive effects should the merger proceed.[2]

Jefferson and Einstein are two of 13 healthcare systems providing general acute care (GAC) services that operate in southeastern Pennsylvania.[3] ‘GAC services include a broad cluster of medical, surgical, and diagnostic services that require an overnight hospital stay.’ [4] According to economic analyses, healthcare providers face two stages of competition: (1) selection as an in-network provider by an insurer; and (2) selection by the members of an insurer’s plan for care.[5] The court explained that the health insurance market in this region is substantially more consolidated, with only four major health insurance companies, and, thus, insurers have greater leverage or bargaining power.[6] According to testimony, the largest of the four insurance companies in the region, Independence Blue Cross (IBC), has such a strong position that neither of the merging parties can afford to be out of IBC’s network.[7]

As the court explained, to succeed in a request for an injunction, the Agencies must show that a ‘substantial lessening of competition’ is ‘sufficiently probable and imminent.’ [8] The government does not have to show that the proposed merger would violate section 7, but rather that the proposed merger is likely to violate section 7.[9] To make a prima facie case of a section 7 violation, the government must define the proper relevant market and demonstrate the anticompetitive effects from the proposed acquisition.[10] The defendants have the opportunity to rebut the Agencies’ prima facie case, and, if successful, the burden of proof returns to the government.[11]

Although the parties agreed that GAC services were a relevant product market, the court rejected the various geographic regions identified by the Agencies as putative relevant geographic markets.[12] Properly defined relevant markets must ‘correspond to the commercial realities of the industry’ and must use the most relevant buyers to identify the parameters of that market.[13]

In this case, the court explained, the insurers, not the hospital patients, are the most relevant buyers, given that patients themselves are not the direct purchasers of healthcare services.[14] In selecting the relevant geographic area, the government must be able to show that the area is where an insurer ‘may rationally look for goods or services [it] seeks,’ and then the government must show that a hypothetical monopolist in that area could impose a ‘small but significant non-transitory increase in price.’ [15]

The Agencies focused on patients instead of insurers to define the geographic market, relying predominantly on diversion ratios.[16] Although the government contended that the commercial realities and insurers’ involvement was ‘baked into the diversion numbers,’ the court noted that diversion ratios ‘only capture insurer preferences . . . where . . . insurer decisions about which hospitals to include in their networks are aligned with patient decisions about where to seek care.’ [17] Additionally, the court was unable to find a correlation between patient and insurer behavior to justify using diversion ratios because the insurers’ testimony on the potential correlation was not unanimous or unequivocal and was undercut by other evidence.[18]

In evaluating the testimony regarding whether there could be a post-transaction price increase on insurers, the court compared the evidence in this case to the evidence in Federal Trade Commission v Penn State Hershey Medical Center (Penn State Hershey).[19] In Penn State Hershey, the Third Circuit reversed the district court’s denial of a preliminary injunction, even though the government had mainly presented statistical evidence based on patient behavior, because the government also had presented ‘extensive evidence showing that the insurers would have no choice but to accept a price increase.’ [20] The extensive evidence included (1) credible testimony from insurers that, post-merger, they could not market to employers without the merged hospital system, (2) evidence showing that at least one insurer was no longer viable when it excluded both the merging hospitals, (3) testimony supporting the proposed geographic market area as distinct, and (4) testimony that other hospitals in the area were not suitable alternatives.[21]

However, here, the district court held that the Agencies’ evidence failed to reach the high bar set out in Penn State Hershey. First, there are more hospitals within a far smaller radius in Philadelphia when compared to the area in question and the number of hospitals in Penn State Hershey.[22] Second, two of the four insurers failed to testify that the absence of both Jefferson and Einstein in their network pools would result in a price increase.[23] Third, the largest insurer for the area was not credible because its witness was motivated not by antitrust concerns, but by concerns that the merger would make the combined hospital systems a ‘competitive threat in the insurance market.’ [24] Fourth, although one of the insurance company witnesses indicated that they would pay higher rates, the court discounted his testimony because the record had already established that the company does not rely currently on these hospitals.[25]

Although the market for GAC services is typically examined for anticompetitive effects in hospital merger cases, the Agencies identified a second putative healthcare services market here. Specifically, the court considered and rejected an additional product market proposed by the Agencies – inpatient acute rehabilitation services. However, because these services have only a ‘minor role in health systems’ operations and contracts,’ the court rejected the Agencies’ argument that an insurer could not offer a marketable health plan without Jefferson or Einstein.[26]

Although the government filed a notice of appeal, it abandoned that appeal after the Third Circuit declined to stay the district court’s decision pending the appeal.

This case gives more insight into development of a prima facie case under section 7 of the Clayton Act, with a focus on how to identify or challenge a proposed relevant market. For healthcare-related mergers, it highlights the importance of the selection of the correct relevant buyer (insurers not patients) in statistical analysis. In the Third Circuit, parties considering a merger, particularly in healthcare services, should recognize the importance of Penn State Hershey and use it as a framework for market definition and the importance of testimonial and other evidence. Notably, the Thomas Jefferson court, in its assessment of the record evidence, considered important the credibility of various third-party insurer witnesses, given the possibility of other motives underlying their testimony.[27]

United States v Sabre Corp

The United States Department of Justice, Antitrust Division (DOJ) filed an expedited antitrust action against Sabre Corporation and Sabre GLBL (collectively, Sabre) and related defendants to enjoin their acquisition of Farelogix, Inc (Fairlogix),[28] alleging that the transaction would violate section 7 of the Clayton Act.[29] According to the DOJ, the acquisition would harm competition because Farelogix is an ‘innovative disruptor in the market for booking services,’ which historically had been dominated by three players (including Sabre) that had tried to ‘stifle innovation.’ [30] After an eight-day bench trial, the US District Court for the District of Delaware rejected the government’s arguments and refused to enjoin Sabre’s proposed acquisition of Farelogix.[31]

Sabre is a large player in the airline travel industry boasting the largest US global distribution system (GDS).[32] The GDS accounts for most of Sabre’s revenue through airline customer booking fees. Additionally, Sabre offers information technology products for airlines, including a passenger service system.[33] Farelogix, on the other hand, is a smaller company that offers information technology to airlines and other products relating to ‘distributing and merchandising airline content.’ [34]

The district court concluded that the DOJ failed to establish a prima facie case under section 7 of the Clayton Act and did not prove a reasonable probability of anticompetitive harm.[35] The court explained that the DOJ failed to establish a prima facie case because (1) Farelogix and Sabre did not compete as only Sabre was a two-sided platform, and (2) the DOJ did not properly define relevant product or geographic markets. Moreover, it also failed to show a reasonable probability that the transaction would lessen competition.[36]

To establish a prima facie case, the government must define a relevant product and geographic market and demonstrate that the effects of the merger are likely to lessen competition.[37] Relying on a Second Circuit interpretation of the Supreme Court’s decision in Ohio v American Express Co (Amex), the District Court of Delaware determined that Sabre is not a competitor of Farelogix because Sabre is a two-sided platform that facilitates transactions between airlines and travel agencies whereas Farelogix only interacts with airlines and therefore is one-sided.[38] The district court rejected the DOJ’s attempts to distinguish Amex by suggesting that the Supreme Court precedent only applied to the credit card industry.[39] Similarly, the court was not persuaded by the DOJ’s argument that limiting potential section 7 violations to when two-sided companies acquire two-sided companies would give two-sided companies ‘carte blanche to buy any one-sided company.’ [40] Rather, the court explained that the Amex rule would allow challenges to acquisition of one-sided companies, so long as the government could show that the transaction will harm competition ‘on both sides of the two-sided market.’ [41] Here, however, the DOJ expert only looked at one side of the Sabre GDS, and the DOJ failed to produce evidence that any anticompetitive impact of the merger on the airline side of the Sabre platform would be so significant as to result in the two-sided platform becoming less competitive overall.[42]

In addition, the DOJ also failed to identify proper relevant product and geographic markets. The DOJ argued that ‘booking services’ was the proper product market.[43] The court rejected this definition, opining that the DOJ improperly excluded other services that Sabre provided through its GDS. Specifically, the government did not show that ‘booking services’ generated demand separate from that for Sabre’s other services, such that booking services should constitute their own relevant product market.[44] Accordingly, the court concluded that booking services alone had ‘no independent economic significance’ for Sabre’s customers.[45] The court similarly did not accept the DOJ’s proposed geographic area of ‘US point of sale.’ [46] It explained that the relevant geographic area must be ‘where customers look to buy a seller’s products or services.’ Farelogix’s customers are airlines located outside the United States, and it competes with foreign competitors to win bids. Sabre markets a direct connect product to airlines outside the United States. The proposed geographic market, thus, was ‘at odds with commercial realities.’ [47] By not defining proper geographic and product markets, the DOJ failed to establish a prima facie case.[48]

Even if the government had properly defined markets, it failed to present evidence of a reasonable probability of anticompetitive harm.[49] The Third Circuit has previously held that a high market concentration can establish a prima facie case or a presumption of anticompetitive harm.[50] As such, the DOJ used the Herfindahl-Hirschman Index market concentration measurements to support its theory of harm.[51] However, the DOJ expert’s calculations were flawed because he excluded airline.com, despite its competitive pressure on Sabre, and he misattributed sales by Sabre to Farelogix.[52] Once these errors were corrected, the numbers did not show a high post-acquisition market concentration, and so, the DOJ was not entitled to a presumption of anticompetitive harm.[53]

Without that presumption, the DOJ failed to prove that anticompetitive harm was likely. The DOJ also argued that there were barriers to entry that prevent adequate competition to Sabre post-acquisition and that the acquisition will harm competition or innovation.[54] The barriers to entry argument was quickly dismissed by the court, which pointed to ‘Farelogix’s vigorous competition with rival[s].’ [55] Additionally, the court found that the merger was not designed to eliminate Farelogix and its platforms from the market or to stifle innovation, but rather to ‘integrate’ Farelogix’s capabilities into Sabre’s own platform and that there was enough competition still to constrain Sabre’s ability to raise prices.[56] Therefore, the acquisition was not likely to harm competition or innovation.

Despite this win at the district court, Sabre and Farelogix ended up abandoning their deal after the UK’s Competition and Markets Authority challenged the acquisition.

In its decision, the district court carefully analyzed what constitutes a prima facie case under section 7 of the Clayton Act. The case is particularly notable because the court found Sabre’s story – that Sabre did not view the new distribution capability (a capacity that Farelogix pioneered) as a threat, even when used for bypassing their GDS – as not credible.[57] Nevertheless, the court held that the DOJ was unable to meet its burden of proof to demonstrate a prima facie case because it failed to show competition between two ‘two-sided’ platforms, did not properly define the relevant markets, and presented flawed market concentration calculations.[58]


Notes

[1] No. CV 20-01113, 2020 WL 7227250 (E.D. Pa. Dec. 8, 2020) at *1; the Clayton Antitrust Act of 1914 15 U.S.C. §§ 12–27, as amended.

[2] Id. at *28.

[3] Id. at *2.

[4] Id. at *7.

[5] Id. at *12.

[6] Id. at *5 (according to a witness, insurance providers ‘especially the big ones, United, Aetna, IBC, of course, and Cigna, they could just say fine, we won’t [keep a provider in-network]’ and not suffer negative repercussions).

[7] Id. at *6.

[8] Id. at *10 (citing United States v. Marine Bancorporation, Inc., 418 U.S. 602, 622, 623 n.22 (1974)).

[9] Id.

[10] Id.

[11] Id. at *11.

[12] Id. at *7.

[13] Id. at *11. (citing Brown Shoe Co. v. United States, 370 U.S. 294, 336 (1962)).

[14] Id. at *12 (citing Fed. Trade Comm’n v. Advocate Health Care Network, 841 F.3d 460, 475 (7th Cir. 2016)).

[15] Id. (citing Fed. Trade Comm’n v. Penn State Hershey Med. Ctr., 838 F.3d 327, 338 (3d Cir. 2016)).

[16] Id. at *13 (‘[D]iversion ratios . . . are “a measure of patient substitution patterns” to define the relevant geographic markets for GAC’).

[17] Id.

[18] Id. at *14–15. (comparing this situation to Fed. Trade Comm’n v. Advocate Health Care, No. 15-11473, 2017 WL 1022015, at *4 (N.D. Ill. Mar. 16, 2017), in which the Northern Illinois District Court similarly rejected the notion that the patients (instead of the insurers) were the most relevant buyers; nevertheless the court ultimately found a prima facie case because of unequivocal testimony from insurance executives that they ‘had to include at least one of the merging hospitals to offer a product marketable to employers’).

[19] 838 F.3d 327 (3d Cir. 2016).

[20] 2020 WL 7227250 at *16.

[21] Id. at *16.

[22] Id.

[23] One of the four insurers even testified that they had ‘no concerns’ about the merger. Id. at *17.

[24] Id. at *21–2.

[25] Id. at *22–3.

[26] Id. at *25–7.

[27] Id. at *19–22.

[28] 452 F. Supp. 3d 97 (D. Del.), vacated on mootness grounds, No. 20-1767, 2020 WL 4915824 (3d Cir. Jul. 20, 2020), 103.

[29] 15 U.S.C. § 18.

[30] Sabre, 452 F. Supp. 3d at 103.

[31] Id.

[32] Id. at 105.

[33] Id.

[34] Id.

[35] Id. at 148–49.

[36] Id. at 136.

[37] Id. at 135–36, 138.

[38] Id. at 135–37 (citing Ohio v. Am. Express Co., 138 S. Ct. 2274, 2287 (2018)) (discussing In US Airways v. Sabre Holdings Corp., 938 F.3d 43, 48-49 (2d Cir. 2019)).

[39] Id. at 137.

[40] Id. at 138.

[41] Id.

[42] Id. (citing Am. Express Co., 138 S. Ct. at 2287 (2018)).

[43] Id. at 139.

[44] Id. at 140.

[45] Id. at 141.

[46] Id. at 142.

[47] Id. at 143.

[48] Id.

[49] Id. at 143–44.

[50] Id. at 144.

[51] The Herfindahl-Hirschman Index [HHI] is calculated by summing the squares of the individual firms’ market shares. ‘In determining whether the HHI demonstrates a high market concentration, we consider both the post-merger HHI number and the increase in the HHI resulting from the merger. A post-merger market with a HHI above 2,500 is classified as “highly concentrated,” and a merger that increases the HHI by more than 200 points is “presumed to be likely to enhance market power.”’ Id. (quoting FTC v. Penn State Hershey Med. Ctr., 838 F.3d 327, 346–47 (3d Cir. 2016).

[52] Id. at 144.

[53] Id.

[54] Id. at 145.

[55] Id.

[56] Id. at 146–47.

[57] Id. at 112, 129.

[58] Id. at 149.

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