States and Municipalities with Federal Antitrust Immunity Unlikely to Be Affected by Market Participant Exception

Following two recent federal court decisions, states and municipalities that otherwise qualify for state action immunity from federal antitrust laws remain unlikely to lose it for allegedly acting as market participants. As a result, these government entities can continue to engage in actions such as, for example, entering into contracts or issuing grants, without fearing antitrust liability. By extension, private actors who contract or deal with government entities that are otherwise immune from antitrust liability can rest assured that their contracts or deals are unlikely to be struck down by the courts for violating federal antitrust laws.

In Paramount Media Grp. Inc. v. Vill. of Bellwood, 929 F.3d 914 (7th Cir. 2019), the Seventh Circuit noted that while the U.S. Supreme Court in City of Columbia v. Omni Outdoor Advert., Inc., 499 U.S. 365 (1991), observed a possible market participant exception to state action immunity, the Seventh Circuit had not recognized this exception, and the court refused to apply it. Also, in AmeriCare MedServices, Inc. v. City of Anaheim, 735 F. App'x 473 (9th Cir. 2018), the Ninth Circuit declined to adopt the market participant exception where Anaheim, California, entered an exclusive emergency ambulance services contract. The court held that the exception did not apply to traditional government functions.

Paramount Media and AmericaCare reflect the continuation of a trend across federal courts to reject, or at least to decline to apply, an exception to state action immunity for market participation by a local governmental entity, despite the Supreme Court’s suggestion in Omni almost 30 years ago.

Neither the Supreme Court nor the Courts of Appeals have recognized the exception or held it applicable in a particular case.

Therefore, while one cannot declare the possibility of a market participant exception dead, the danger of its being applied seems increasingly remote.

Background

In Parker v. Brown, 317 U.S. 341 (1943), the Supreme Court ruled that, by virtue of the Tenth Amendment to the Constitution, the Sherman Antitrust Act did not apply to actions by a state including regulatory actions imposed by a state. Parker involved a raisin producer’s suit under Sherman Act §§ 1 and 2 to enjoin the California Director of Agriculture from implementing California’s raisin marketing program.

The Court held that the director was immune from the raisin producer’s claims because Congress never intended the Sherman Act to “restrain state action or official action directed by a state.” The Court also observed that states are sovereign within their territory except for when they violate the U.S. Constitution or are preempted by federal law. Here, the state program did not raise any constitutional or preemption concerns.

After Parker, states acting in their sovereign capacities have “state action immunity” from federal antitrust laws.[1] Municipalities and other local governmental entities, despite being creatures of the state, do not enjoy the automatic immunity of states themselves. However, such entities created by the state do have immunity if but only if the state has authorized their conduct, and if the conduct’s anticompetitive effects are a foreseeable result of that state authorization.[2]

Thus, in Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), the Supreme Court held that the Virginia State Bar, despite being an agency created by the Supreme Court of Virginia, violated Sherman Act § 1 for enforcing a minimum-fee schedule for legal services because the anticompetitive activity was not required by the rules of the Supreme Court of Virginia.[3] Also, in Phoebe Putney, 568 U.S. at 220, a county hospital authority owning one of two hospitals in the county did not have state action immunity for acquiring the second (privately owned) hospital because the state had not clearly articulated and affirmatively expressed a policy authorizing the allegedly anticompetitive purchase.

A Possible Market Participant Exception to the State Action Doctrine

Nearly 30 years ago, the Supreme Court observed a “possible” market participant exception to state action immunity. In Omni, 499 U.S. at 367, an advertiser sued a competitor and the city of Columbia, South Carolina, under Sherman Act §§ 1 and 2 for conspiring to adopt an ordinance restricting billboards. While the Court held that the city was immune from the advertiser’s antitrust claims, the Court also noted that state action immunity may be subject to a “possible market participant exception” where a city was not acting in its governmental capacity but rather as a participant in the marketplace analogous to a private market actor.

The Court pointed to Union Pacific Railroad Co. v. United States, 313 U.S. 450 (1941), where it had affirmed a permanent injunction against a municipality under the Elkins Act for providing rebates to prospective tenants as the owner of a wholesale market. The Omni Court observed that the municipality’s actions in Union Pacific reflected behavior that was characteristic of market participation, not state action.

While the Supreme Court in Omni left open the possibility of a market participant exception, the Court did not formally adopt the exception or confirm it as anything more than a mere suggestion. Later, in Phoebe Putney, 568 U.S. at 226, the Court noted its discussion of the exception in Omni but refused to apply the exception because the parties did not argue for it at trial.

Recent Seventh and Ninth Circuit Decisions Reflect a Continuation of the Federal Court Trend Rejecting the Exception

The First, Fourth, Seventh, Eighth and Tenth Circuits have refused to recognize the exception because it is either a suggestion or unsupported by precedent.[4]

The Second, Third, and Ninth Circuits have also refused to apply the exception. These circuits essentially agree that government entities are market participants when, instead of acting in their governmental or regulatory capacities, they act as buyers or sellers competing with private actors.[5] But, in nearly every decision, these circuits have refused to apply the exception because they did not characterize the government’s behavior as market participation.

For example, in Freedom Holdings, 624 F.3d at 42, cigarette importers sued to enjoin the State of New York under Sherman Act §1 from entering a settlement agreement that required tobacco manufacturers to make annual payments to the state. Provisions governing the annual payments required manufacturers to pay more or less depending on their cigarette industry market share. The importers alleged that these provisions constituted an “output cartel” that restrained competition, and that the state did not have immunity because it was acting as a market participant.

The Second Circuit held that New York had state action immunity, and that the market participant exception did not apply because New York did not manufacture or distribute cigarettes. New York simply regulated manufacturers by requiring them to make payments so that the state would have a source of recovery if the manufacturers were proved to be culpable. The court therefore denied the importers’ motion for preliminary injunction.

One district court has applied the exception against a state action immunity claim. In Delta Turner, Ltd. v. Grand Rapids-Kent County Convention/Arena Authority, 600 F.Supp.2d 920 (W.D.Mich. 2009), an arena owner challenged an exclusive contract between a municipal-arena owner and a promoter under Sherman Act §§ 1 and 2. The court held that state action immunity was “less justified” because the municipality’s “entertainment contracts” reflected “commercial market activity,” not “regulatory activity.” The court therefore denied the municipality’s motion to dismiss. The court also denied the municipality’s motion to certify the court’s decision for interlocutory appeal.

Still, notwithstanding Delta Turner, a distinct trend exists among federal courts not to recognize or apply the market participant exception, and recent Seventh and Ninth Circuit decisions reflect a continuation of this trend. In Paramount Media, 929 F.3d at 918, a property lessee brought Sherman Act §§ 1 and 2 claims against Bellwood, Illinois, for an ordinance banning new billboard permits. The lessee claimed that Bellwood did not have state action immunity because it acted as a market participant.

The Seventh Circuit observed that while the Supreme Court suggested a possible market participant exception to state action immunity in its Omni decision, the Seventh Circuit has not adopted that suggestion. In any event, the lessee did not bring proper Sherman Act claims because it did not offer proof of anticompetitive effects, a conspiracy to restrain trade, or that Bellwood could raise billboard leasing prices despite neighboring competition. The court therefore affirmed summary judgment for Bellwood.

In AmeriCare, 735 F. App'x at 474, an emergency ambulance service provider brought Sherman Act §§ 1 and 2 claims against Anaheim, California, for entering an exclusive contract for emergency ambulance services. Pointing to Shell Oil Co. v. City of Santa Monica, 830 F.2d 1052 (9th Cir. 1987), the Ninth Circuit found that the market participant exception did not apply because emergency ambulance service contracts were “traditional government functions.” Therefore, Anaheim was entitled to state action immunity.