Opinion ID: 2778249
Heading Depth: 3
Heading Rank: 4

Heading: The Rebuttal Case

Text: Because the plaintiffs established a prima facie case, the burden shifted to St. Luke’s to “cast doubt on the accuracy of the Government’s evidence as predictive of future anticompetitive effects.” Chi. Bridge & Iron, 534 F.3d at 423. The rebuttal evidence focused on the alleged procompetitive effects of the merger, particularly the contention that the merger would allow St. Luke’s to move toward integrated care and risk-based reimbursement.13 13 The district court found that a core reason for high health care costs is the prevalent fee-for-service reimbursement model, based on the apparently uncontested opinions of expert witnesses. Experts have recommended moving toward integrated care and risk-based reimbursement. “In an integrated delivery system, [PCPs] and specialty physicians work as a team, with PCPs managing patient care and specialty physicians consulting and providing care as needed.” Risk-based ST. ALPHONSUS MED. CTR. V. ST. LUKE’S HEALTH SYS. 23
The Supreme Court has never expressly approved an efficiencies defense to a § 7 claim. See H.J. Heinz, 246 F.3d at 720. Indeed, Brown Shoe cast doubt on the defense: Of course, some of the results of large integrated or chain operations are beneficial to consumers. Their expansion is not rendered unlawful by the mere fact that small independent stores may be adversely affected. It is competition, not competitors, which the Act protects. But we cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small, locally owned business. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization. We must give effect to that decision. 370 U.S. at 344. Similarly, in FTC v. Procter & Gamble Co., the Court stated that “[p]ossible economies cannot be used as a defense to illegality. Congress was aware that some mergers which lessen competition may also result in reimbursement (also known as capitation) means that “providers receive reimbursement from insurers in the form of a set amount for each patient rather than a payment for each service rendered. The set amount is based on the average expected health care utilization for the patients given such factors as their age and medical history.” “Capitation motivates providers to consider the costs of treatment as they will share in the savings if they can keep actual costs below the set amount they receive.” 24 ST. ALPHONSUS MED. CTR. V. ST. LUKE’S HEALTH SYS. economies but it struck the balance in favor of protecting competition.” 386 U.S. 568, 580 (1967). Notwithstanding the Supreme Court’s statements, four of our sister circuits (the Sixth, D.C., Eighth, and Eleventh) have suggested that proof of post-merger efficiencies could rebut a Clayton Act § 7 prima facie case. See ProMedica, 749 F.3d at 571; H.J. Heinz, 246 F.3d at 720–22; Tenet, 186 F.3d at 1054–55; Univ. Health, 938 F.2d at 1222–24.14 The FTC has also cautiously recognized the defense, noting that although competition ordinarily spurs firms to achieve efficiencies internally, “a primary benefit of mergers to the economy is their potential to generate significant efficiencies and thus enhance the merged firm’s ability and incentive to compete, which may result in lower prices, improved quality, enhanced service, or new products.” Merger Guidelines § 10; see also Oliver E. Williamson, Economies as an Antitrust Defense Revisited, 125 U. Pa. L. Rev. 699, 699 (1977) (“Sometimes . . . a merger will . . . result in real increases in efficiency that reduce the average cost of production of the combined entity below that of the two merging firms.”). However, none of the reported appellate decisions have actually held that a § 7 defendant has rebutted a prima facie case with an efficiencies defense; thus, even in those circuits that recognize it, the parameters of the defense remain imprecise. 14 Some courts have attempted to explain why the Supreme Court cases do not recognize an efficiencies defense, see, e.g., H.J. Heinz, 246 F.3d at 720 n.18 (arguing that the “possible economies” language in Proctor & Gamble does not ban an actual efficiencies defense), but others have simply stated that the defense exists without addressing the language in Brown Shoe and its progeny, see, e.g., ProMedica, 749 F.3d at 571. ST. ALPHONSUS MED. CTR. V. ST. LUKE’S HEALTH SYS. 25 The status of the defense in this circuit remains uncertain. A quarter of a century ago, we rejected an efficiencies defense in RSR Corp. v. FTC, 602 F.2d 1317, 1325 (9th Cir. 1979). RSR, however, involved an argument that the merger would allow the defendant to compete more efficiently outside the relevant market. Id. More recent cases focus on whether efficiencies in the relevant market negate the anticompetitive effect of the merger in that market. See Univ. Health, 938 F.2d at 1222. Even after RSR, several district courts in this circuit have suggested that there could be such a defense. See, e.g., United States v. Bazaarvoice, Inc., No. 13-cv-00133-WHO, 2014 WL 203966, at , –73 (N.D. Cal. Jan. 8, 2014); United States v. Oracle Corp., 331 F. Supp. 2d 1098, 1174–75 (N.D. Cal. 2004); but see California v. Am. Stores Co., 697 F. Supp. 1125, 1132–33 (C.D. Cal. 1988) (finding that RSR barred an efficiencies defense), rev’d on other grounds, 872 F.2d 837, rev’d on other grounds, 495 U.S. 271. We remain skeptical about the efficiencies defense in general and about its scope in particular. It is difficult enough in § 7 cases to predict whether a merger will have future anticompetitive effects without also adding to the judicial balance a prediction of future efficiencies. Indeed, even then-Professor Bork, a sharp critic of Clayton Act enforcement actions, see, e.g., Robert H. Bork and Wade S. Bowman, Jr., The Crisis in Antitrust, 65 Colum. L. Rev. 363, 373 (1965), rejected the efficiencies defense, calling it “spurious” because it “cannot measure the factors relevant to consumer welfare, so that after the economic extravaganza was completed we would know no more than before it began,” Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself 124 (1978). Judge Richard Posner has regularly expressed similar views. See Richard A. Posner, 26 ST. ALPHONSUS MED. CTR. V. ST. LUKE’S HEALTH SYS. Antitrust Law 133 (2d ed. 2001) (“I said back then that there should be no general defense of efficiency. I still think this is right. It is rarely feasible to determine by the methods of litigation the effect of a merger on the costs of the firm created by the merger.”); Richard A. Posner, Antitrust Law: An Economic Perspective 112 (1976) (“I would not allow a generalized defense of efficiency.”); cf. Frank H. Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 39 (1984) (“[N]either judges nor juries are particularly good at handling complex economic arguments . . . .”). Nonetheless, we assume, as did the district court, that because § 7 of the Clayton Act only prohibits those mergers whose effect “may be substantially to lessen competition,” 15 U.S.C. § 18, a defendant can rebut a prima facie case with evidence that the proposed merger will create a more efficient combined entity and thus increase competition. For example, if two small firms were unable to match the prices of a larger competitor, but could do so after a merger because of decreased production costs, a court recognizing the efficiencies defense might reasonably conclude that the transaction likely would not lessen competition. See Merger Guidelines § 10 (“Merger-generated efficiencies may enhance competition by permitting two ineffective competitors to form a more effective competitor, e.g., by combining complementary assets. . . . [I]ncremental cost reductions may reduce or reverse any increases in the merged firm’s incentive to elevate price.”). Because we deal with statutory enforcement, the language of the Clayton Act must be the linchpin of any efficiencies defense. The Act focuses on “competition,” so any defense must demonstrate that the prima facie case “portray[s] inaccurately the merger’s probable effects on competition.” ST. ALPHONSUS MED. CTR. V. ST. LUKE’S HEALTH SYS. 27 Am. Stores, 872 F.2d at 842. In other words, a successful efficiencies defense requires proof that a merger is not, despite the existence of a prima facie case, anticompetitive. Courts recognizing the defense have made clear that a Clayton Act defendant must “clearly demonstrate” that “the proposed merger enhances rather than hinders competition because of the increased efficiencies.” United States v. Long Island Jewish Med. Ctr., 983 F. Supp. 121, 137 (E.D.N.Y. 1997). Because § 7 seeks to avert monopolies, proof of “extraordinary efficiencies” is required to offset the anticompetitive concerns in highly concentrated markets. See H.J. Heinz, 246 F.3d at 720–22; see also Merger Guidelines § 10 (“Efficiencies almost never justify a merger to monopoly or near-monopoly.”). The defendant must also demonstrate that the claimed efficiencies are “merger-specific,” see United States v. H & R Block, Inc., 833 F. Supp. 2d 36, 89–90 (D.D.C. 2011), which is to say that the efficiencies cannot readily “be achieved without the concomitant loss of a competitor,” H.J. Heinz, 246 F.3d at 722; see also Merger Guidelines § 10 & n.13. Claimed efficiencies must be verifiable, not merely speculative. See, e.g., FTC v. CCC Holdings Inc., 605 F. Supp. 2d 26, 74–75 (D.D.C. 2009); Oracle, 331 F. Supp. 2d at 1175; see also Merger Guidelines § 10.
St. Luke’s argues that the merger would benefit patients by creating a team of employed physicians with access to Epic, the electronic medical records system used by St. Luke’s. The district court found that, even if true, these predicted efficiencies were insufficient to carry St. Luke’s’ burden of rebutting the prima facie case. We agree. 28 ST. ALPHONSUS MED. CTR. V. ST. LUKE’S HEALTH SYS. It is not enough to show that the merger would allow St. Luke’s to better serve patients. The Clayton Act focuses on competition, and the claimed efficiencies therefore must show that the prediction of anticompetitive effects from the prima facie case is inaccurate. See Univ. Health, 938 F.2d at 1222 (finding efficiencies relevant to the prediction of “whether the acquisition would substantially lessen competition”). Although the district court believed that the merger would eventually “improve the delivery of health care” in the Nampa market, the judge did not find that the merger would increase competition or decrease prices. Quite to the contrary, the court, even while noting the likely beneficial effect of the merger on patient care, held that reimbursement rates for PCP services likely would increase. Nor did the court find that the merger would likely lead to integrated health care or a new reimbursement system; the judge merely noted the desire of St. Luke’s to move in that direction. The district court expressly did conclude, however, that the claimed efficiencies were not merger-specific.15 The court found “no empirical evidence to support the theory that 15 St. Luke’s argues that once a defendant comes forward with proof of efficiencies, the burden shifts to the plaintiff to show that there are ways of achieving those efficiencies without the merger. This tracks the Sherman Act analysis. See, e.g., Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1412–14 (9th Cir. 1991). But, in Clayton Act § 7 cases, after a plaintiff has made a prima facie case that a merger is anticompetitive, the burden of showing that the claimed efficiencies cannot be “attained by practical alternatives,” Merger Guidelines § 10 n.13, is properly part of the defense, see Olin, 986 F.2d at 1305 (explaining that it is the defendant’s “burden to rebut a prima facie case of illegality”). That burden, moreover, is not unduly onerous, as the defendant need not disprove alternatives that are “merely theoretical.” Merger Guidelines § 10. ST. ALPHONSUS MED. CTR. V. ST. LUKE’S HEALTH SYS. 29 St Luke’s needs a core group of employed primary care physicians beyond the number it had before the Acquisition to successfully make the transition to integrated care,” and that “a committed team can be assembled without employing physicians.” The court also found that the shared electronic record was not a merger-specific benefit because data analytics tools are available to independent physicians. These factual findings were not clearly erroneous. Testimony highlighted examples of independent physicians who had adopted risk-based reimbursement, even though they were not employed by a major health system. The record also revealed that independent physicians had access to a number of analytic tools, including the St. Luke’s Epic system. But even if we assume that the claimed efficiencies were merger-specific, the defense would nonetheless fail. At most, the district court concluded that St. Luke’s might provide better service to patients after the merger. That is a laudable goal, but the Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations. See Proctor & Gamble, 386 U.S. at 580. The district court did not clearly err in concluding that whatever else St. Luke’s proved, it did not demonstrate that efficiencies resulting from the merger would have a positive effect on competition.