Sixth Circuit Pulls Plug on Merging Hospital’s Weakened Firm Defense

By Marlene Koury

The U.S. Court of Appeals for the Sixth Circuit has upheld a Federal Trade Commission (“FTC”) order unwinding a merger of two Ohio hospitals that unsuccessfully sought to breathe life into a “weakened firm defense.”

In a unanimous opinion, a three-judge panel of the Sixth Circuit denied ProMedica’s petition to overturn a Federal Trade Commission ruling, which ordered ProMedica to divest itself of St. Luke’s after finding that the merger of two of the four hospital systems in Lucas county, Ohio, would adversely affect competition in violation of Section 7 of the Clayton Act.

ProMedica scooped up its rival St. Luke’s in a widely-publicized merger in 2010.  A year later, the FTC deemed the merger anticompetitive on the grounds that it would lead to higher prices for consumers and ordered ProMedica to divest St. Luke’s.  ProMedica then filed a petition asking the Sixth Circuit to review the FTC order.

In what the Sixth Circuit labeled a “Hail-Mary” attempt to save the deal, ProMedica invoked the rarely used “weakened firm defense,” arguing that St. Luke’s was financially weak and that the deal should remain intact because of St. Luke’s supposedly weakened financial state.  Finding the defense unpersuasive, the appellate court on Tuesday upheld the FTC order requiring ProMedica to unwind the merger.

The weakened firm defense, unlike the failing firm defense, already has a poor track record, despite being bandied about by merging parties seeking to save a deal.  Typically, in order to save an otherwise anticompetitive merger, a firm that is sustaining losses must show that it is “failing,” that is, on the verge of exiting the market.  The situation must generally be so dire that a merger – even an anticompetitive merger – is the only way to keep the firm in the market.

ProMedica asserted what was essentially a watered-down version of the failing firm defense, arguing that St. Luke’s was “weakened,” without going so far as to say that it was being driven out of business.

The argument was a dead end.  One of the key reasons the Sixth Circuit upheld the FTC order was that St. Luke’s was not failing, or even weakened – in fact, it was doing just fine.  Despite past financial woes, St. Luke’s had reversed years of operating losses, increased its market share, and was climbing toward financial stability by the time the ink on the deal was dry.  Importantly, it had accomplished all of this without axing any of its service lines.

Judge Raymond Kethledge described ProMedica’s reliance on its weakened firm defense as “the Hail-Mary pass of presumptively doomed mergers – in this case thrown from ProMedica’s own end zone.”  Simply put, ProMedica did not even show that St. Luke’s was weak.  And ProMedica did not show that the merger would allow St. Luke’s to operate more effectively via the gain of substantial efficiencies.

ProMedica plans to take the argument to the Supreme Court, noting that it is “committed to exhausting all of [its] legal options.”  However, given St. Luke’s increasing health, coupled with the unpopular weakened firm defense, if the Supreme Court takes the case at all, it likely will uphold the FTC order to divest.

Thus, even if the Supreme Court takes the case, it may only be to take the opportunity to kick the weakened firm defense from the antitrust lexicon altogether.

– Edited by Gary J. Malone