FTC Challenges Consummated Transactions and Restores Competition in Cardiology Market in Reno, Nevada

On August 6, 2012, the FTC settled a case against Renown Health, the largest provider of acute medical care in northern Nevada, related to allegations that Renown Health reduced competition in the adult cardiology market in Reno, Nevada through two allegedly anticompetitive acquisitions and the use of anticompetitive non-compete clauses.
Competitive Problem

Through Renown Health's acquisitions in 2010 and 2011, respectively, of Sierra Nevada Cardiology Associates (“SNCA”) and Reno Heart Physicians (“RHP”), the two leading providers of adult cardiology services in the area, Renown Health acquired eighty eight percent (88%) of the cardiology market in Reno, Nevada. Renown acquired thirty one cardiologists through the two acquisitions. Renown purchased SNCA for approximately $3.4 million and RHP for about $4 million. Neither transaction was reported to the FTC because the value of both transactions were well below the jurisdictional threshold so they were not reportable under the Hart Scott Rodino (“HSR”) Act.

Further exacerbating the increased concentrated structure of the cardiology market in Reno was the inclusion of “non-compete” clauses within the contracts that essentially barred the acquired cardiologists from seeking employment with or joining practices that directly competed against Renown.

The complaint filed by the FTC alleges that Renown created a competitively unfair environment for the cardiology market in Reno as it held an unfair influence over price, quality of service, and other factors that could hinder attempts to establish a viable alternative to Renown's services. In particular, the FTC complaint alleges that the main barrier to entry in the cardiology market is the need to employ a sufficient number of cardiologists, and with a vast majority of practicing cardiologists working for Renown, few such professionals are left for other competing firms to employ. In this situation, it is entirely possible that Renown could raise prices for cardiology practice in Reno, and consumers would be unable to find other, cheaper choices.

Remedy

To resolve the FTC's concerns, the FTC entered into a settlement agreement with Renown. In the settlement agreement, Renown agreed to suspend its non-compete clauses for a minimum of 30 days to allow cardiologists in its employment to seek other practices without interfering with negotiations or enacting penalties in their contracts. Renown is given the right to end this suspension period should ten (10) of its cardiologists leave under this ordinance. If fewer than six (6) cardiologists have terminated their employment with Renown by the end of the suspension period, Renown is expected to keep the non-compete clauses suspended indefinitely until six (6) cardiologists terminate their employment in such a manner. The purpose of which is to shrink Renown's large presence in the Reno cardiology market while simultaneously providing other practices with the professionals that they need to operate competitively.

Lessons Learned

The challenge is noteworthy for several reasons. First, the challenge reiterates that the FTC is serious about enforcing the antitrust laws against small mergers that do not meet the HSR thresholds. Second, it demonstrates that completed deals that slip beneath the FTC's radar screen initially are fair game even if the FTC learns about them later. Third, the fact that a deal is not HSR reportable does not mean that no antitrust issues exist with the combination. Fourth, the FTC can and will challenge consummated deals if it determines that the deals are anticompetitive. Fifth, the FTC has a particular interest in post-acquisition competitive effects of consummated mergers especially in the healthcare industry.

Therefore, parties to a consummated transactions that raise significant competition issues and avoided HSR scrutiny, for whatever reason, should proceed with reasonable caution and closely monitor post-acquisition conduct. Moreover, corporate and private counsel should be aware of the likely consequences and the risks of consummating transactions that raise significant competitive issues. The risks may include: defending against costly and lengthy government investigations; reorganizing because of the FTC's demands to divest even after integration has taken place; disgorging profits gained form the alleged anticompetitive merger; and reorganizing because of the FTC's demands to suspend non-compete agreements that would allow important employees of the business to obtain other employment.

Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com

Thomas Chao
(202) 589-1834
tchao@dbmlawgroup.com