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DOJ Charges Hospitals with Illegal Agreement to Allocate Marketing Territories

Apr.20.2016

On April 14, 2016 the Department of Justice (DOJ) filed a civil suit against two general acute-care hospital systems, Charleston Area Medical Center (CAMC) and St. Mary’s Medical Center (St. Mary’s), for unlawfully agreeing to allocate territories for the marketing of healthcare services. The DOJ brought its suit under Section 1 of the Sherman Act and alleged that the territorial allocation constituted a per se violation of the antitrust laws. The complaint was filed in the U.S. District Court for the Southern District of West Virginia along with a proposed settlement that would resolve the case if approved by the court.

CAMC and St. Mary’s Alleged Conduct

The DOJ charged that the two hospitals allocated territories for the marketing of competing healthcare services through an agreement not to advertise on billboards or through print media in their respective counties. The DOJ alleged that this agreement disrupted the competitive process and harmed consumers by (1) depriving patients of information they otherwise would have had when making important health decisions; and (2) denying physicians working for the hospitals the opportunity to advertise their services to potential patients.

The DOJ’s allegations were supported by direct evidence of an agreement to allocate marketing territories. The DOJ cited one email from CAMC’s Director of Marketing referencing a “gentleman’s agreement” not to compete with St. Mary’s and prohibiting a CAMC urology group from advertising in the newspaper servicing St. Mary’s home county. The DOJ also cited another email from St. Mary’s Director of Marketing stating that a CAMC physicians’ group’s advertisement in St. Mary’s home county newspaper violated the parties’ agreement not to compete through advertisement. CAMC subsequently pulled the advertisement. Finally, the DOJ cited an instance where a CAMC-owned physicians’ group requested billboard advertising in St. Mary’s home county, which CAMC denied pursuant to its “informal agreement” with St. Mary’s.

DOJ’s Proposed Settlement

The DOJ’s proposed settlement imposes a number of behavioral remedies on the parties. Under its terms, neither hospital can “agree with any healthcare provider to prohibit or limit marketing or to allocate any service, customer, or geographic market or territory,” unless that agreement is “reasonably necessary to further a procompetitive purpose.” The proposed settlement also prohibits the hospitals from communicating with each other about their marketing, subject to three narrow exceptions: (1) communication about joint marketing if the communication is related to the joint provision of services; (2) communications about marketing that are part of customary due diligence related to a merger, acquisition, joint venture, investment, or divestiture; or (3) communications about false or misleading statements made in one of the hospital’s marketing.

The DOJ’s proposed settlement also imposes compliance and inspection requirements. Each hospital must appoint an Antitrust Compliance Officer within 30 days of the settlement’s entry. Each hospital must also confirm to its respective Antitrust Compliance Officer that it is not in violation of the settlement. The Antitrust Compliance Officer must annually brief each person required to receive the settlement on the meaning and requirements of the settlement and the antitrust laws generally. He or she must also communicate to all employees that any employee may disclose, without reprisal, information concerning any potential violation of the antitrust laws. The settlement further requires that each hospital certify annually to the government that it is in compliance with the settlement, and that each hospital notify the government within 30 days of any violation or potential violation of the settlement.

CAMC’s Prior Market Allocation

This is not CAMC’s first case with the DOJ Antitrust Division. The DOJ previously filed a complaint against CAMC in 2006 for allocating the market for cardiac-surgery services. There, CAMC entered into an agreement with another hospital system, under which the system agreed not to develop a cardiac-surgery department at one of its hospitals. The settlement, which the court entered, enjoined the portion of CAMC’s agreement that restricted the development of a cardiac-surgery department at the other hospital and prohibited CAMC from entering into other agreements that restricted the provision of cardiac-surgery services.

Other Enforcement Actions Against Allocating Marketing Territories

This is not the DOJ's only ongoing action against hospitals for agreeing to allocate territories for the marketing of healthcare services. In June 2015 the DOJ filed a complaint in the District Court for the Eastern District of Michigan alleging that four general acute-care hospitals had made agreements to restrict marketing similar to those alleged here. Three of the hospitals agreed to the settlement, and one opted to litigate the matter. That case, United States, et al. v. Hillsdale Community Health Ctr, et al., is ongoing. One issue to watch for in the Hillsdale case is whether agreements not to advertise require proof of an anticompetitive effect. The Supreme Court’s decision in California Dental Association v. FTC, 526 U.S. 756 (1999) suggests that advertising restrictions may not be per se illegal as alleged by the DOJ. We will report developments in Hillsdale as the case proceeds.

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Joseph M. Miller
Partner – Washington, D.C.
Phone: +1.202.624.2809
Email: joemiller@crowell.com
Derek W. Kelley
Associate – Orange County
Phone: +1 949.798.1353
Email: dkelley@crowell.com