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Outgrowing Its Local Roots? Fourth Circuit Tests the Boundaries of Local Government Immunity for Major Healthcare Providers

April 1, 2021

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The Fourth Circuit suggested, however, that it seemed unusual for organizations with the financial size and geographic scope of Atrium to qualify as a local government and noted that perhaps Congress could reexamine the Local Government Antitrust Act. 

A recent decision by the U.S. Court of Appeals for the Fourth Circuit could provide an important road map for analyzing local government antitrust immunity that many quasi-commercial/governmental entities currently enjoy. In Benitez v. Charlotte-Mecklenburg Hospital Authority, the Fourth Circuit affirmed the district court’s finding that Atrium Health, an operator of dozens of hospitals and thousands of healthcare locations across three states, qualifies as a special function government unit that is immune from antitrust suits seeking monetary damages. The Fourth Circuit suggested, however, that at some point in the not too distant future, such entities could become too large, too commercial or too far-flung to continue receiving local government immunity.

Local Government and State Action Immunities

For many years, municipalities, school districts and other providers of local public services only enjoyed state action immunity from antitrust suits if acting under a “clearly articulated and affirmatively expressed… state policy to displace competition.” City of Lafayette, La. v. La. Power & Light Co., 435 U.S. 389, 410, 413 (1978). These limits were based on the seemingly sensible notion that “serious economic dislocation… could result if cities were free to place their own parochial interests” above the antitrust laws. Id. But this also opened the floodgates to “[m]ore than one hundred Federal antitrust suits” against local governments, “undermin[ing] [the] local government’s ability to govern in the public interest” and often leaving taxpayers on the hook for monetary damages and settlements. Sandcrest Outpatient Servs., P.A. v. Cumberland Cnty. Hosp. Sys., Inc., 853 F.2d 1139, 1142 (4th Cir. 1988). This “paralyzing fear of antitrust suits” hindered the ability of local governments to enter into public-private partnerships to deliver services such as “garbage collection, airport concessions, and parking lots” that are often tied to government functions but outside the government’s core expertise. Id.

To correct this problem, in 1984 Congress passed the Local Government Antitrust Act, which provided in relevant part that “no damages, interest on damages, costs, or attorney’s fees may be recovered [under private suits authorized by the Clayton Act] from any local government.” 15 U.S.C. § 35(a). A “local government” can be either “a city, county, parish, town, township, village, or any other general function government unit,” Id. § 35(a)(A), or “a school district, sanitary district, or any other special function government unit established by State law in one or more States.” Id. § 35(a)(B) (emphasis added). The passage of this law largely eliminated private suits for monetary damages against local governments, although they still faced suits for injunctive or declaratory relief. And occasionally disputes arose over what counts as a special function government unit.

District Court Immunizes Atrium

In the present case, Benitez sued Atrium for a host of antitrust violations, including alleged steering provisions in its contracts with insurers. Atrium was founded in 1943 as the Charlotte-Mecklenburg Hospital Authority under a North Carolina law permitting local governments to setup and operate hospitals. Today, it operates 42 hospitals and over 1,500 healthcare locations in the southeastern United States. Following Atrium’s settlement of a long-running parallel investigation and enforcement action brought by the United States Department of Justice, where Atrium agreed not to include or enforce steering provisions in its contracts, the district court dismissed Benitez’s suit, finding that Atrium was immunized under the Local Government Antitrust Act as a special function government unit.

Fourth Circuit Affirms Immunization, but Forecasts Possible Limitations

On appeal, Benitez argued that even though Atrium was indisputably a government entity as the Charlotte-Mecklenburg Hospital Authority, it was not a special function government unit under the text of the Local Government Antitrust Act because it lacks powers such as the taxing authority traditionally held by school boards and the other types of local governments enumerated in § 35(a)(B). Atrium also argued that even if it was a special function government unit, it was no longer a local government under the act because it had grown substantially since its founding as a local community hospital and now operated in three states.

The Fourth Circuit rejected both arguments. Because Congress “pair[ed] the term ‘special function governmental unit’ with the phrase ‘established by State law in one or more States,’” the Fourth Circuit found special function government units were not limited to inherently local operations such as school districts or sanitary districts but could include any “quasi-municipal corporation… created [by state law] to serve a particular government purpose” (here, “protect[ing] the public health, safety, and welfare, including that of low income persons”), even if the entity operated beyond its original local footprint. The Fourth Circuit also noted that there were no allegations that Atrium was “operating outside the purview of its statutory authority under North Carolina law” such that it would be disqualified from being a local government for purposes of the Local Government Antitrust Act.

The Fourth Circuit suggested, however, that it seemed unusual for organizations with the financial size and geographic scope of Atrium to qualify as a local government and noted that perhaps Congress could reexamine the Local Government Antitrust Act. The court also appeared to provide a road map for future antitrust plaintiffs to attempt to plead around local government immunity for alleged violations in contravention of North Carolina law or occurring in geographic markets outside of the local market where the entity was founded.

Conclusion

Entities shielded by the Local Government Antitrust Act should be mindful of both the current, vigorous debates in Congress over antitrust enforcement and healthcare policy and whether antitrust plaintiffs will attempt to adopt the road map the Fourth Circuit provided for pleading around local government immunity. Although it is not clear that such allegations would be sufficient to defeat local government immunity given the broad statutory text of § 35(a), entities that wish to continue relying on this immunity would be well-advised to carefully structure any expansions with a link to the entity’s original government-chartered mission and monitor their ongoing activities for compliance with the state laws that formed the basis for creating the entity.

For More Information

If you have any questions about this Alert, please contact Brian H. Pandya, Sean P. McConnell, any of the attorneys in our Antitrust and Competition Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.