FTC Granted Injunction Against Completed Hospital Acquisition

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The FTC was entitled to an order preliminarily enjoining a not-for-profit health care delivery system controlling three hospitals in the area of Toledo, Ohio, from acquiring an additional hospital in the same county, the federal district court in Toledo has ruled.

The proposed combination could be presumed unlawful based on concentration thresholds, the court found. Largely on the strength of that conclusion, the court decided that a balancing of the equities favored injunction.

Because the acquisition had already been consummated when the agency launched its antitrust challenge to the deal in January, the court issued an order requiring the health care system to preserve the acquired hospital as a separate, independent competitor during the FTC's administrative proceeding and any subsequent appeals.

Market Concentration, Share

The Herfindahl-Hirschman Index levels--a mathematical/statistical tool used by the federal antitrust enforcement agencies to measure market concentration --and market shares of the parties far exceeded levels found to be unlawful by the U.S. Supreme Court and other courts.

Moreover, a duopoly, as in the inpatient obstetrical services market involved in the case, was presumptively unlawful in and of itself, the court noted.

Likelihood of Harm

The defending health care system failed to rebut adequately the presumption of likely harm resulting from the combination. It acknowledged that prices would increase significantly post-merger. No timely, likely, or sufficient entry or expansion in the relevant markets was forthcoming.

The defendant did not meet its burden of proving that its asserted deficiencies were verifiable, not attributable to reduced output of quality, merger-specific, and sufficient to outweigh the transaction's anticompetitive effects.

Rejected by the court were contentions that the hospital it acquired constituted either a failing firm or a flailing firm. Also unavailing were arguments that recent rate negotiations proved that the defendant would seek only reasonable price increases in the future and that the acquired hospital's prices were subcompetitive or otherwise unreasonable in some way.

Likelihood of Success, Public Interest

Preliminary injunctive relief had never been denied in an FTC enforcement action in which the agency demonstrated a likelihood of success on the merits, the court observed. The public interest in effective FTC enforcement was paramount. If the benefits of a merger were available after the trial on the merits, they did not constitute public equities weighing against a preliminary injunction.

Moreover, in a preliminary injunction action under Sec. 13(b) of the FTC Act, the agency was not required to show irreparable harm. Court-ordered relief was necessary to preserve the possibility of meaningful relief and to prevent interim harm, the court concluded.

FTC Deadline

The court said that it expected the FTC to act expeditiously in completing its action. At the American Bar Association Section of Antitrust Law Spring Meeting in Washington, D.C. on April 1, FTC Bureau of Competition Director Richard Feinstein pointed out that Judge Katz had given the agency a November 30 deadline. He noted that the trial in the matter was set to begin on May 31 but was not certain what actions Judge Katz would take if the matter was not completed by the deadline.

Chairman's Comments

FTC Chairman Jon Leibowitz told attendees of the ABA Antitrust Law Spring Meeting on April 1 that he was very pleased with the decision. Chairman Leibowitz mentioned that Judge Katz cited extensively to the Department of Justice/FTC Horizontal Merger Guidelines (CCH Trade Regulation Reporter ¶13,100).

In addition, Chairman Leibowitz noted that the decision is the first preliminary injunction win in an FTC hospital merger challenge since a federal district court in Missouri temporarily blocked the merger of the only two commercial hospitals in Poplar Bluffs, Missouri (1998-2 Trade Cases ¶72,227). That decision was reversed by the U.S. Court of Appeals in St. Louis (1999-2 Trade Cases ¶72,578), however, and the FTC eventually dismissed that matter.

The March 29 decision is FTC v. Promedica Health System, Inc., 2011-1 Trade Cases ¶77,395.

Injunction Preserves McDonald’s Franchises Pending Trial of Renewal Claims

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A franchisee of several McDonald’s restaurants was reasonably likely to succeed on the merits of his claim that the franchisor had agreed to renew his three franchises with fewer than five years remaining on the agreements, a California trial court has decided. Moreover, the balance of the harms tipped strongly in favor of a preliminary injunction allowing the franchisee to continue operating the three McDonald’s franchises pending a full adjudication on his claims. Accordingly, the franchisee’s request for a preliminary injunction was granted.

A concurrent request by McDonald’s for a preliminary injunction to prevent the franchisee’s “unauthorized use” of its trademarks at the three restaurants was denied.

Offer to Extend Franchises

Shortly after purchasing seven existing restaurants from another franchisee (including the three at issue), the franchisee alleged that McDonald’s had made a written offer to extend the agreements for the three restaurants for a 20-year term and that the franchisee had mailed McDonald’s an acceptance.

A McDonald’s employee admitted that she sent a letter offering a new 20-year term for one of the franchises, but testified that she never received a response. She further alleged that she left a voicemail with the franchisee about the offer and sent a follow-up letter after the offer expired, but never received any reply.

At trial, a jury could interpret the assignment agreement by which the franchisee acquired the seven additional franchises in accordance with a broader understanding between the parties under which McDonald’s had agreed to grant the franchisee franchise extensions for those that were due to expire soon, the court determined.

In fact, the evidence indicated it would have been "extraordinary, harsh and unjust" if the franchisee had been expected to invest the $10.5 million that he invested in the acquired franchises only to have several of them expire without extension within five years.

While acknowledging that some evidence could be considered as supporting either side, the court found a reasonable likelihood that the trier of fact would accept the franchisee’s view of the evidence.

Balance of Harms

The franchisor argued that allowing the franchisor to continue operating the franchises after expiration of the franchise agreements would be “potentially damaging” to its business model, goodwill, and trademarks. However, there was no showing that the McDonald’s brand was suffering from the franchisee’s operations. The franchisee had a long history of protecting the brand and had no interest in damaging it at this point.

In contrast, there was a real possibility of serious and possibly catastrophic results for the franchisee if the three franchises were turned over to McDonald’s. Thus, the balance of harms clearly favored the franchisee, the court ruled.

The decision is Husain v. McDonald’s Corp., Superior Court, Marin County, California, CCH Business Franchise Guide ¶14,530.

Preliminary Injunction Halts Termination of Likely New Jersey “Franchise”

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

An engine manufacturer and its authorized dealer likely shared a “community of interest” under the meaning of the New Jersey Franchise Practices Act (NJFPA), a federal district court in Camden, New Jersey, has ruled in a not-for-publication decision. Moreover, the relationship satisfied the Act’s gross sales requirement that more than 20 percent of a franchisee’s gross sales were intended to be derived from the franchise before the franchisee was entitled to statutory protections, according to the court. Thus, the dealer was likely to succeed in establishing that it was a “franchise” protected by the statute, and its request for a preliminary injunction enjoining termination by the manufacturer was granted.

The dealer brought suit against the manufacturer, seeking to enjoin it from terminating their agreement. The manufacturer did not dispute that the dealer would be irreparably harmed if the injunction was not granted, and that the balance of the hardships between the parties, as well as the public interest, favored granting the injunction. The only preliminary injunction factor that the manufacturer disputed was the dealer’s likelihood of success on the merits. The manufacturer argued that the parties did not share the “community of interest” necessary to show that the relationship constituted a “franchise” under the NJFPA.

Caselaw indicated that a community of interest existed “when the terms of the agreement between the parties or the nature of the franchise business requires the licensee, in the interest of the licensed business’s success, to make a substantial investment in goods or skill that will be of minimal utility outside the franchise.

Indicia of Control

The relationship between the parties had the indicia of control that were the hallmark of a community of interest, the court decided. The dealer stood to lose all of the following tangible and intangible indicia of control if terminated: (1) the larger building the dealer moved to in order to accommodate business related to the manufacturer that it would not be able to fully utilize; (2) special tools and a computer system to service business related to the manufacturer, and its intangible investment in mastering such equipment; (3) signage, advertisements, apparel, and its investments in producing such items and in developing a customer basis that associated the dealer with the manufacturer’s products; (4) investments made in training employees in the manufacturer’s products, including approximately $20,000 in travel and expenses; and (5) a substantial inventory of parts for the manufacturer’s products that the dealer would have significantly less opportunity to sell, according to the court.

Unequal Bargaining Power

Courts defining a community of interest under the NJFPA also focused on the importance of unequal bargaining power between franchisor and franchisee, the court noted. A substantial portion of the dealer’s business came from the warranty work it performed for the manufacturer, the consumer relationships that emerged from such work, and customers who found the dealer through listings for dealers of the manufacturer’s products. In sum, the dealer relied heavily upon the manufacturer but the manufacturer could easily send its warranty work elsewhere and the dealer’s sales did not yield a substantial portion of the manufacturer’ profits.

The manufacturer pointed out that much of the dealer’s investments in the relationship were not required by the dealer agreement but were voluntary. However, the court’s inquiry was not limited to the four corners of the parties’ agreement. Business relationships evolved and, at the very least, the manufacturer assented to the dealer’s franchise-related expenses. Whether or not the agreement required such investments, it clearly contemplated such future investments, the court reasoned. For example, the agreement set extensive terms for the dealer’s use of the manufacturer’s mark in literature and advertising. The fact that the dealer sold products and services for the manufacturer’s competitors did not defeat the relationship’s character as a franchise.

Symbiotic Relationship

Moreover, the parties shared a symbiotic relationship that was characteristic of a community of interest in that the manufacturer conceded that its dealers were necessary to its profitability and satisfied customers of the dealer were likely to become repeat customers for both parties. The fact that the interests of the parties were sometimes at odds did not defeat the existence of a community of interest, the court ruled.

The July 29, 2010, decision in Engines, Inc. v. MAN Engines and Components, Inc., Civil Action No. 10-277, appears at CCH Business Franchise Guide ¶14,431.