In a decision broadly critical of the Federal Trade Commission’s case challenging the acquisition of Westcliff Medical Laboratories, Inc., a medical laboratory company, by Laboratory Corporation of America (LabCorp), Judge Andrew Guilford of the U.S. District Court for the Central District of California denied the FTC’s motion for a preliminary injunction under Section 13(b) of the FTC Act. The ruling lifts a hold separate order and allows LabCorp to proceed with the integration of clinical laboratory testing assets acquired from Westcliff in 2010. The FTC noticed an appeal of the decision to the Ninth Circuit and also filed under seal an emergency motion seeking an injunction pending appeal.
The district court highlights the indispensable and threshold role market definition plays in Section 7 Clayton Act cases and rejects the FTC/DOJ position outlined in the 2010 Horizontal Merger Guidelines that market definition is only one tool in the toolkit for evaluating the competitive effect of a merger. Importantly, the decision also provides guidance regarding the appropriate legal standard the FTC must meet under Section 13(b) for preliminary injunctive relief.
Background
The litigation arises in the context of a transaction that fell below the reporting thresholds of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In May 2010, LabCorp and Westcliff, both clinical laboratory testing companies that serve physician groups in Southern California, entered into an agreement whereby LabCorp would acquire substantially all of Westcliff’s assets for $57.5 million. In parallel with entering into the asset sale agreement, Westcliff filed a Chapter 11 bankruptcy action. The transaction closed in early June after the bankruptcy court approved the sale.
The FTC learned of the transaction on the day before the bankruptcy court hearing confirming the sale of the assets to LabCorp and voiced its concerns to LabCorp shortly thereafter. To allow the FTC to investigate the transaction prior to the Westcliff assets being integrated into LabCorp’s operations, LabCorp entered a voluntary hold separate agreement with the FTC requiring LabCorp to operate the Westcliff assets as a stand-alone business until 30 days after LabCorp complied with an FTC subpoena and civil investigative demand.
On November 30, a few days before LabCorp’s voluntary hold separate commitment was to terminate, the FTC commenced a Part III administrative action against LabCorp alleging violations of Section 7 of the Clayton Act and Section 5 of the FTC Act. The Commission also authorized staff to seek preliminary relief in federal court to prevent LabCorp from integrating the Westcliff assets until the conclusion of the administrative action. The FTC’s administrative complaint alleges that, after the Westcliff acquisition, Quest Diagnostics will be LabCorp’s only significant competitor in Southern California. The complaint also characterizes Westcliff as a “price-cutting maverick” and cites several instances when Westcliff’s offers of lower rates prevented LabCorp from charging higher rates to physicians groups. An expedited hearing under the FTC’s new rules of practice is scheduled to begin on May 2.
Judge Guilford’s Decision Denying a Preliminary Injunction
In rejecting the FTC’s request for preliminary injunctive relief, Judge Guilford made several findings and conclusions that highlight the challenges the FTC (and DOJ) face in its ongoing efforts to improve its chances of success when challenging transactions in court:
- Market definition remains an essential, threshold element of a government merger challenge. “Not only is the proper definition of the relevant . . . market the first step in [a] case, it is also the key to the ultimate resolution of this type of case, since the scope of the market will necessarily impact any analysis of the anti-competitive effects of the transaction.” (quoting United States, v. Sungard Data Sys., 172 F. Supp. 2d 172, 181 (D.D.C. 2001)) (emphasis added).
- The court flatly rejected (on legal and factual grounds) the FTC’s product market based on the method of payment to laboratories. The FTC sought to distinguish laboratories that contract with physician groups on a monthly per-member, or “capitated” basis from those that contract only on a fee-for-service basis. The decision held “that otherwise identical products are not in separate markets simply because consumers pay for those products in different ways.” In reaching this result, the district court cites and echoes Commissioner J. Thomas Rosch’s dissent to the Commission’s complaint that a product market limited to capitated services incorrectly excludes fee for service business.
- The decision gives little deference to the FTC’s antitrust expertise and administrative trial procedures. It comments that, notwithstanding recent changes “to speed up the administrative process” at the FTC, “that process remains a long, drawn-out ordeal.” Section 13(b) of the FTC Act “does not eliminate the FTC’s need to demonstrate a likelihood of success on the merits.”
- The decision gives significant weight to LabCorp’s costs of continuing to hold the Westcliff assets separate and to the potential for significant efficiencies to follow once the assets are integrated into LabCorp’s operations. It finds that “substantial monthly losses are expected to continue until LabCorp is able to integrate the former Westcliff business,” that “there is a real possibility that a preliminary injunction here would financially devastate or destroy [the Westcliff business]” and that “the hold separate prevents LabCorp . . . from eliminating duplicative operations and from realizing other expected efficiencies.”
Implications
The decision highlights decades of precedent requiring the FTC/DOJ to define markets that include all functionally and reasonably interchangeable alternatives. The court casts aside the FTC/DOJ view (as highlighted in the preliminary draft and final revised Horizontal Merger Guidelines)1 that market definition should play a reduced role in antitrust merger analysis (if it is to play any role at all).
Following closely on the heels of FTC v. Lunbeck, Inc., Civil No. 08-6379 (D. Minn. July 31, 2010) (appeal pending), this decision also highlights the difficulty the agencies continue to face in defining markets in health care cases. The challenge will only become more complex as the agencies begin to grapple with Accountable Care Organizations authorized by the landmark Patient Protection and Affordable Care Act, which are expected to contract with health care providers using risk sharing methods similar to capitated rates. The court’s rejection of the FTC’s attempt to define markets by payment type may preclude the agencies from singling out health care providers that contract with ACOs using risk-sharing methods of payment.
Finally, LabCorp disputes the holdings in FTC v. CCC Holdings Inc., 605 F. Supp. 2d 26 (D.D.C. 2009) and FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028 (D.C. Cir. 2008) that purport to apply a lower burden of proof when the FTC seeks preliminary injunctive relief under Section 13(b) of the FTC Act. Citing a 25-year-old precedent (FTC v. Occidental Petroleum Corp., 1986-1 Trade Cas. (CCH) 67071 (D.D.C. 1986)), Judge Guilford holds that FTC administrative proceedings remain too protracted to convince many judges that such proceedings afford a timely and fair resolution (even accounting for the FTC’s recent efforts to speed up and revitalize its processes), particularly for firms suffering financial distress.
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1 See Skadden memorandum, “Revised Horizontal Merger Guidelines: Acknowledging Current Agency Practice,” April 21, 2010; Skadden memorandum, “FTC and DOJ Issue Revised Horizontal Merger Guidelines,” August 23, 2010.
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