FTC Loses Consummated Merger Case In District Court

On February 22, 2011, Judge Andrew J. Guilford of the U.S. District Court for the Central District of California denied the Federal Trade Commission's (“FTC”) motion for a preliminary injunction and also dissolved the temporary restraining order that had been in place since mid-December. The district court ruled that the FTC had not shown that it was likely to succeed on the merits of its case.
Background

On December 1, 2010, the FTC authorized the filing of an administrative complaint, alleging that Laboratory Corporation of America's (“LabCorp”) consummated acquisition of Westcliff Medical Laboratories (“Westcliff”) would harm competition in Southern California. The FTC also filed an action in federal court to prevent LabCorp from integrating the Westcliff assets while the case is being tried in the administrative court. In June 2010, LabCorp acquired Westcliff, the Santa Ana California-based lab, for $57.5 million. The acquisition came after Westcliff filed for Chapter 11 bankruptcy protection. The FTC did not review the deal before closing. On June 25, 2010, LabCorp agreed to hold the Westcliff assets separate and apart while the agency investigated the transaction; the FTC was seeking a federal court order requiring LabCorp to continue that separation during the administrative proceeding.

The complaint alleges the acquisition would leave only two significant laboratories – Quest Diagnostics (“Quest”) and LabCorp – in Southern California to be in control of approximately 89 percent of the market. The complaint states that in California, a majority of physician groups sign contracts on a per-member, per-month (“capitated”) basis with laboratories for tests performed on patients who belong to health maintenance organizations (“HMOs”). Capitated contracts are significantly less expensive than fee-for-service (“FFS”) contracts. In FFS contracts, physician groups pay laboratories for each test. The administrative complaint alleges that in several instances, LabCorp's attempts to increase the price of its capitated contracts were thwarted by Westcliff's offer of lower rates. The complaint defines the product market as (i) the sale of capitated clinical laboratory testing services to physician groups operating under the delegated managed care model, and (ii) the sale of clinical laboratory testing services to physician groups operating under the delegated managed care model.

Commissioner J. Thomas Rosch dissented from the other Commissioners who voted in favor of challenging the consummated transaction. Commissioner Rosch criticized the definition of the relevant product market in the complaint but he noted that he agreed that Commission action was warranted.

District Court's Decision

There were several important elements to the district court's decision. First, the district court found that there was an inadequate basis to limit the market to capitated contracts and fee for service contracts had to be included. Services to physicians groups on a fee for service basis already provide the fundamental service. The district court found that expanding the defined product market to include fee-for-service contracts with independent physician associations “dramatically expands the number of competitors in the market and reduces LabCorp's and Westcliff's market shares significantly.” Moreover, the district court cited to Commissioner Rosch's dissent, which stated that the FTC's product market was misleading, and pointed to the fact that an earlier FTC consent order in the Unilab review stated that the market was both capitated and fee for service. Second, the geographic market was limited to Southern California but they did not overlap in six of the ten counties. Third, the district court found that Westcliff's expansion in the market had little impact on Labcorp's prices. Fourth, there were several small players in the market, which could impact competition. Fifth, Westcliff's ability to successfully expand suggests that expansion is not difficult. Sixth, the district found that there were over $22 million in efficiencies. Seventh, the district court believed that a decision in administrative litigation would take a long time as the decision would be made no earlier than May 2012. Finally, the district court put some weight on the fact that Westcliff was not doing well financially.

This litigation was doomed from the start as Commissioner Rosch's dissent from the issuance of the complaint and strongly stated in a publicly disseminated written dissent that he believed the FTC staff had wrongly defined the relevant product market. Accordingly, the district court agreed with Commissioner Rosch and the FTC lost in the district court.

Andre Barlow
(202) 589-1838
abarlow@dbmlawgroup.com

Robert W. Doyle, Jr.
(202) 589-1834
rdoyle@dbmlawgroup.com