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<img class="alignright wp-image-1629 size-medium" src="https://antitrustadvocate.bakerhostetlerblogs.com/wp-content/uploads/sites/14/2015/08/FTC-iStock_000065443239_Large-300x200.jpg" width="300" height="200" />The Federal Trade Commission’s recently announced proposed settlement of its challenge of CentraCare Health’s acquisition of St. Cloud Medical Group (SCMG) is doubly noteworthy. The settlement ends the challenge of a transaction that apparently was not reportable under the Hart-Scott-Rodino (HSR) Act, and the settlement is premised on a “failing firm” defense that infrequently is accepted by government enforcers.

CentraCare is a nonprofit health system in central Minnesota that includes a multispecialty physician practice group, and SCMG is a physician-owned, multispecialty practice group with about 40 physicians who operate four clinics in central Minnesota. In early 2016, CentraCare announced its planned acquisition of SCMG. According to the FTC, this acquisition would combine the two largest providers of adult primary care, pediatric and OB/GYN services in the St. Cloud area. After the Minnesota Attorney General reportedly began an investigation of the acquisition and asked for the closing to be delayed, the FTC filed a complaint alleging that the acquisition agreement was an unfair method of competition in violation of Section 5 of the FTC Act, and that the acquisition, if consummated, would substantially lessen competition in violation of Section 7 of the Clayton Act.

The FTC’s challenge is notable because the acquisition apparently was not reportable under the HSR Act. As we previously <a href="https://www.antitrustadvocate.com/2013/02/05/buyer-beware-increase-in-hsr-thresholds-does-not-mean-that-your-non-reportable-transaction-is-safe/">covered</a>, the HSR Act requires that parties to a proposed merger or acquisition in excess of a monetary threshold – presently $78.2 million – notify federal authorities about the transaction before it may be closed. However, federal authorities may challenge transactions that fall below the threshold. While only a few nonreportable transactions have been investigated in the past decade, authorities increasingly appear willing to challenge nonreportable transactions involving health care providers, as demonstrated by recent government challenges of St. Luke’s Health System’s nonreportable acquisition of Saltzer Medical Group and ProMedica Health System’s nonreportable acquisition of St. Luke’s Hospital (discussed <a href="https://www.antitrustadvocate.com/2014/01/28/ftc-victory-in-idaho-hospital-physician-acquisition-case-should-be-a-wake-up-call-for-future-and-past-deals/">here</a>). The FTC’s CentraCare/SCMG action punctuates that enforcers may challenge the smallest of nonreportable transactions – even a 40-physican business. And, this demonstrates that parties to nonreportable transactions should consider steps we previously <a href="https://www.antitrustadvocate.com/2014/05/01/to-report-or-not-to-report-your-non-reportable-transaction-is-the-question/">mentioned</a>, which may minimize the risk of an investigation, challenge and potential negative outcome.

The FTC’s settlement also is notable because it is premised on a “failing firm” defense that infrequently is accepted by government enforcers. This defense exempts an otherwise anticompetitive transaction from liability under Section 7 of the Clayton Act when failure of one of the parties to the transaction is imminent. Specifically, the defense applies when it can be proven that (1) the target company is in imminent danger of failure, (2) the failing firm has no realistic prospect for a successful reorganization, and (3) there is no viable alternative purchaser posing less anticompetitive risk. Courts have recognized this defense for nearly 100 years, but government enforcers like the FTC repeatedly have <a href="http://www.justice.gov/atr/hmerger/12881.pdf">stated</a> that the defense’s strict provisions result in its rarely being proven. In this context, it is not surprising that this defense forms only part of the FTC’s stated rationale for agreeing to settle its challenge of the CentraCare/SCMG transaction.

The proposed settlement requires CentraCare to release some physicians from “non-compete” contract clauses and to allow a number of adult primary care, pediatric and OB/GYN physicians to leave the health system and work for other local providers or establish a new practice in the area. The proposed settlement also requires CentraCare to provide $500,000 in financial incentives to these departing physicians who create a new medical practice or join a small third-party medical practice in the alleged geographic market. The FTC <a href="https://www.ftc.gov/system/files/documents/cases/161006centracareanalysis.pdf">explained</a> that it is willing to accept these settlement terms “premised on the fact that SCMG is a financially failing physician practice group that has been unable to find an alternative purchaser for the entire practice as well as concerns regarding disruptions to patient care and possible physician shortages.” Commissioner Ohlhausen, in a concurring statement, further <a href="https://www.ftc.gov/system/files/documents/public_statements/988633/161006centracarestatement.pdf">explained</a> that SCMG did not meet the stringent failing firm criteria, but the proposed settlement represented the “best opportunity” to ensure competition given the “financial challenges” and “unique” facts related to SCMG.

The CentraCare/SCMG settlement represents the possible flexibility in the antitrust laws. The government challenged a transaction that was not even reportable under the FTC Act. And the government agreed to end its challenge based on a practical physician release and incentive system, premised on SCMG potentially meeting the failing firm defense. Whether this settlement is a one-off result or signals the FTC’s new willingness to consider practical conduct remedies instead of divestitures to buyers vetted in advance by the FTC staff remains to be seen.

FTC Accepts Practical ‘Failing Firm’ Defense in Ending Challenge of Nonreportable Transaction