On Wednesday, June 5 a federal district judge denied the Federal Trade Commission’s (FTC) request for an injunction to prevent Novant Health from acquiring two hospitals from Community Health Systems (CHS) in a $320 million deal. The ruling, if upheld, would allow Novant to move forward with the proposed transaction before the completion of the FTC’s own antitrust review through its in-house administrative court.
Background
Novant Health is headquartered in Charlotte, North Carolina, and operates 16 general acute care hospitals in North Carolina, including Huntsville Medical Center. CHS is headquartered in Franklin, Tennessee, and operates more than 70 hospitals across 15 states, including Lake Norman Regional Medical Center and Davis Regional Medical Center in North Carolina. All three hospitals are located along a 30 mile stretch of Interstate 77 and serve the Charlotte suburbs. Novant announced an agreement with CHS to acquire Lake Norman Regional and Davis Regional in February 2023. However, the FTC voted to issue an administrative complaint and sought a preliminary injunction to block the transaction several months later in January 2024.
In moving to block the transaction, the FTC alleged that the transaction would grant Novant a dominant market share for inpatient general acute services in the Eastern Lake Norman area. Additionally, the FTC claimed that the transaction would eliminate head-to-head competition between Novant’s Huntsville Medical Center and CHS’s Lake Norman Regional, which are located only 11 miles from one another. CHS and Novant, on the other hand, argued that the transaction was necessary to improve the quality of services at Lake Norman Regional and to keep Davis Regional open following CHS’s decision to halt further investment in the two hospitals. CHS and Novant also argued that the merger would be procompetitive by allowing Novant to better compete with Atrium Health—a competitor to both Novant and CHS—which is planning to open a new hospital in the Eastern Lake Norman area in 2025.
In the order issued on Wednesday, June 5, Judge Kenneth Bell of the United States District Court for the Western District of North Carolina ruled in favor of Novant and CHS, holding that the FTC was unlikely to prove that the merger would result in a substantial lessening of competition. Judge Bell found that, absent the transaction: (1) Davis Regional would be forced to close due to CHS’s lack of further investment in the hospital; and (2) Lake Norman Regional would face an immediate reduction in services and would also likely close in the future. As a result, Judge Bell determined that the merger would be as likely to benefit competition as it would be to harm competition.
Significance of Ruling
This ruling is significant because it marks one of only a small number of cases in recent years where a “failing firm defense”—an affirmative antitrust defense that may be raised when a target company faces imminent failure that would force it to exit the relevant market but for the proposed acquisition—has been used successfully. The ruling is also notable because, in this instance, the “failing firm” argument was successfully used for a divestment of a portion of a larger firm (CHS) that is not, as a whole, failing. The FTC argued that the failing firm defense should not apply because, in the FTC’s view, CHS could have chosen to re-allocate resources to support the two hospitals. However, the court ruled that CHS’s plans for the facilities were economically rational and the failing firm defense does not require a seller to act irrationally by diverting resources from profitable locations to unprofitable ones.
The ruling, while a blow to the FTC, does not prevent the FTC from continuing to pursue its administrative complaint. Further, the FTC filed a new motion on Monday, June 10 stating its intention to appeal the district court ruling and seeking an injunction pending appeal. Judge Bell denied the FTC’s request for an injunction pending appeal, but ordered an extension of the Temporary Restraining Order that pauses the transaction until June 21 to give the FTC time to seek an injunction from the Fourth Circuit Court of Appeals.
For more information about how this ruling could affect your business or to seek assistance with navigating the complex antitrust regulatory landscape, please contact the authors or the Bass, Berry & Sims Antitrust & Trade Practices Team.