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AMERICAN MEDICORP, INC. v. HUMANA

December 19, 1977

AMERICAN MEDICORP, INC. Plaintiff
v.
HUMANA, INC. Defendant



The opinion of the court was delivered by: FOGEL

 Fogel, J.

 I. FACTUAL AND PROCEDURAL HISTORY OF THE CASE:

 We noted in our first opinion in this matter, filed on November 11, 1977, D.C. Pa., 445 F. Supp. 573, that a proposed tender offer by Humana, Inc. (Humana), to the shareholders of American Medicorp, Inc. (Medicorp), pursuant to the provisions of § 14 of the Securities Exchange Act of 1934 had triggered major litigation in three United States District Courts (Southern District of New York, Eastern District of Pennsylvania, and Northern District of Illinois), as well as in the Chancery Court of the State of Delaware.

 In that prior Opinion and Order, we determined: (1) that those aspects of the case then before us which dealt with issues of securities law be transferred to the Southern District of New York; and (2) that those matters which had been brought under the so-called West Virginia "cornering the market" law be dismissed. We retained jurisdiction over those claims which stem from plaintiff's contention that a successful tender offer by Humana would violate § 7 of the Clayton Act, 15 U.S.C. § 18, and §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. We are now prepared to rule on Plaintiff's request for an injunction preliminarily enjoining Humana from making the tender offer to Medicorp's shareholders; injunctive relief is sought under § 16 of the Clayton Act, 15 U.S.C. § 26.

 To put the matter in focus, it is helpful to review briefly the chronology of events; that sequence follows:

 
(1) On September 27, 1977, Humana sent a letter to the Board of Directors of American Medicorp, which announced Humana's proposed offer to Medicorp shareholders. The Board responded by issuing two statements on September 29, 1977;
 
(2) On September 30, 1977, Humana filed a complaint in the Southern District of New York, alleging that Medicorp's press releases were fraudulent and manipulative acts in violation of the Securities Exchange Act of 1934, (Humana, Inc. v. American Medicorp, Inc., 77 Civ 4809, assigned to the Honorable Morris E. Lasker);
 
(3) On October 3, 1977, Medicorp began this action by filing a complaint which stated a claim for violation of the federal antitrust laws, a second claim for violation of the West Virginia "cornering the market" law, and asked for a preliminary injunction to block the tender offer;
 
(4) Three days later, on October 6, 1977, Medicorp filed a Motion for Leave to Amend the Complaint. The proposed amended complaint which was attached to that motion repeated the claims of the original complaint, and added five claims founded on purported violations of federal and state securities laws and state fiduciary principles;
 
(5) Following a pre-trial conference, on October 12, 1977, we issued an Order which set a schedule for briefs, oral argument and a hearing on the application for the preliminary injunction. Pursuant to that Order, Humana filed its brief on October 17, 1977, and Medicorp filed its briefs on October 19 and 20, 1977;
 
(6) On October 13, 1977, Humana filed a Motion to Transfer to the Southern District of New York, a Motion to Dismiss for Improper Venue, a Motion to Dismiss for Failure to State a Claim, and, in the alternative, a Motion for a More Definite Statement;
 
(7) On that same day, we entered an Order granting expedited discovery with priority for that discovery which was necessary to prepare for argument of the venue motions;
 
(8) On October 18, 1977, we entered a second discovery Order which spelled out the method for handling confidential materials;
 
(9) On October 21, 1977, counsel engaged in extensive oral argument of all of the motions before the Court;
 
(10) Both parties then filed supplemental briefs on October 25 and 26, 1977;
 
(11) On October 28, this Court entered an Order disposing of all pending Motions as follows: (a) defendant's Motion to Dismiss was denied as to the federal antitrust claims, but granted with respect to the West Virginia "cornering the market" claim; (b) the alternative Motion for a More Definite Statement was denied; (c) the Motion for Transfer was granted as to all securities law claims, (both federal and state), and denied as to the antitrust and breach of fiduciary duties claims; (d) the Motion to file an amended complaint was denied for mootness;
 
(12) Humana then moved the Court to reconsider retaining the Sixth Claim, which the parties argued before this Court on November 7, 1977;
 
(13) We granted the Motion to Reconsider that same day;
 
(14) The preliminary injunction hearing began on November 8, 1977, and was concluded on November 23, 1977; the hearing produced over 2,000 pages of transcript adduced from 21 witnesses, and 128 exhibits;
 
(15) At the conclusion of the evidentiary hearing, the parties were directed to file briefs and reply briefs prior to oral argument, which was scheduled and heard on December 2, 1977; and
 
(16) On that date, after oral arguments were completed, we stated that an Opinion and Order on the preliminary injunction issues would be rendered on December 16, 1977. At that time, we also said that any steps contemplated by Humana in furtherance of the tender offer before the entry of the Order on December 16 should be reported to this Court and counsel for Medicorp, prior to initiation of the steps contemplated, so that appropriate action could be taken, if we thought it necessary; Humana's counsel did keep the Court and Medicorp's counsel informed of developments; however, judicial intervention was not necessary.

 II. THE STRUCTURE OF THE HOSPITAL INDUSTRY IN THE UNITED STATES:

 Both Medicorp and Humana are investor owned business corporations; their shares are traded on major stock exchanges. They are both engaged in the operation of short-term, acute-care community hospitals through outright ownership, management contracts (in the case of Medicorp), and lease arrangements. Plaintiff contends that the combination of these two firms would tend to lessen competition substantially in the development of new and replacement hospital facilities in the nation as a whole, and would also eliminate competition in the delivery of hospital services to doctors and patients in Broward County, Florida, Jefferson County, Kentucky, and the town of Bluefield, West Virginia. Before considering these claims, and the criteria which govern the grant or denial of a preliminary injunction under Section 16 of the Clayton Act, a brief overview of the current state of the hospital industry is necessary.

 Historically, hospitals have been divided into two categories: non-profit and proprietary. Non-profit institutions include university teaching hospitals, those operated by religious orders, and those operated by some form of local or state government. Proprietary institutions, to the extent they existed, were traditionally locally owned, either by a small group of physicians or by other investors.

 Hospital management companies, (proprietary chains), began to surface about 1967, as a factor in health care delivery. This was due in part to the spiral of increased costs of health care, which created a need for organizations that could achieve cost savings through central planning, quantity purchasing, and centralized management; the advent of Medicare and Medicaid as well as new dimensions in third party payments, also were an impetus to the establishment and growth of these chains. See, Steinwald and Neuhauser, The Role of the Proprietary Hospital, 35 Law & Contemp. Prob. 817 (1970).

 In the late 1960's, public awareness of the cost of health care delivery led many states to require a showing of actual need before allowing new construction of hospital facilities, in order to control costs and prevent needless duplication of these facilities. See, Havighurst, Regulation of Health Facilities and Services by "Certificate of Need ", 59 Va.L.Rev. 1143 (1973). Because voluntary planning could only occasionally succeed in curbing the spiralling cost of health care delivery, hospitals were required to secure Certificates of Need before they could make substantial capital expenditures. As a practical matter, obtaining a Certificate of Need has become an economic necessity as a condition precedent to the construction or replacement of hospital facilities; without it, the institution is ineligible for Medicare, Medicaid and many private third party payments.

 The National Health Planning and Resources Development Act also provides for the establishment of a Health Systems Agency for each Health Service Area. A Health Systems Agency must be a non-profit corporation designed to provide expertise in health planning, development and use of health resources for the Health Service Area. To discharge this duty, a Health Systems Agency is required to develop a Health Systems Plan to assure that health care: (a) is accessible to residents of the Area; (b) is responsive to the unique needs of the Area; and (c) is consistent with national health planning policy. To implement the Health Systems Plan, a Health Systems Agency must seek public and private assistance in formulating its Health Systems Plan.

 Section 300m requires the Secretary of HEW to enter into agreements with state agencies to administer health planning and development functions. To assure that federal funds under the Medicaid and Medicare Programs are not used to support unnecessary capital expenditures, state agencies must determine whether or not a need exists for those services within the goals set by the Health Systems Plan. They are required to review and approve all proposed expenditures for health care which: (1) exceed $100,000.00; (2) change existing bed capacity; or (3) change the services of existing facilities, see 42 U.S.C. §§ 300m-2(a)(4), 1320a-1. For all practical purposes all of this means that no new or replacement hospital can be built without prior government approval.

 Given this background of the structure of the industry, plaintiff claims that the merger of the second and third largest proprietary chains, (measured by the number of licensed beds), would substantially lessen competition in one distinct line of commerce -- that which is concerned with the acquisition, development and management of short-term, acute care hospitals throughout the nation as a whole, and particularly in regions of rapid population growth; plaintiff also contends that the same result would obtain in a second line of commerce -- the delivery of hospital services in three local markets.

 III. THE STANDARDS WHICH GOVERN ISSUANCE OF A PRELIMINARY INJUNCTION UNDER SECTION 16 OF THE CLAYTON ACT:

 A plaintiff who seeks preliminary injunctive relief to restrain a proposed tender offer in the context of private antitrust litigation must show: (1) a reasonable probability of success on the merits; AND (2) irreparable harm, pendente lite, if the relief requested is not granted. Allis-Chalmers Mfg. Co. v. White Consolidated Industries, 414 F.2d 506 (3d Cir. 1969), cert. denied, 396 U.S. 1009, 24 L. Ed. 2d 501, 90 S. Ct. 567 (1970). See also, A.L.K. Corporation v. Columbia Pictures Industries, Inc., 440 F.2d 761 (3d Cir. 1971). The determination of the merits of antitrust claims frequently raise complex legal questions, and as in the instant case, invariably require a review of an extensive record. Accordingly, we will first address ourselves to the relatively straightforward issue of irreparable harm.

 Plaintiff has alleged that it will be irreparably harmed in numerous ways if Humana's tender offer is not enjoined. First, Medicorp states that it will cease to exist as a viable economic entity. Humana cannot seriously dispute this fact, for the expressed intent of Humana is to acquire Medicorp and integrate its operations into Humana's. (SEC Form S-7 at 19). However, it is almost inconceivable that plaintiff would suffer this injury before a final decision on the merits in the instant case, since we will hold an expedited final hearing commencing on January 23, 1978, (or sooner, if the parties are prepared to go forward before that date), and indeed, will issue a definitive Order within three weeks of the conclusion of that hearing, or sooner, depending on the length of the hearing, additional evidence adduced, and new theories offered, if any. *fn1"

 Plaintiff also urges that it will suffer the following immediate injury once the offer is presented to its shareholders: (1) upper-level management personnel will seek other employment because they fear they would be fired by Humana, if it is successful; (2) lending institutions will be reluctant to advance Medicorp capital funds, pendente lite ; and (3) Medicorp's ability to obtain additional development and management contracts will be impeded. In addition, Medicorp argues that Humana will have access to Medicorp's trade secrets once it obtains representation on Medicorp's board of directors. While there may be some plausibility to these contentions, it is certainly clear that the notoriety given to this litigation, in and of itself, could generate these adverse effects; obviously, we cannot enjoin media coverage of this litigation because publicity may be detrimental. Hence, we must analyze the claimed injury in light of existing realities in order to determine if a case has been made for injunctive relief.

 Humana, on the other hand, contends that it will be an injured party through its inability to "draw down" its own financing, should a preliminary injunction issue, because it contends that such a situation could result in a total loss of the money already expended in its attempt to effectuate the tender offer. Humana also claims that issuance of the injunction would sound the "death knell" of the offer, irrespective of the final resolution of the controversy by the Court.

 Although in balancing the scales we believe that Medicorp's position is more appealing than Humana's with respect to possible harm it may suffer, our inquiry cannot stop there. We must look beyond the interests of these two corporate litigants, and consider the interest of those persons who are not parties to this litigation, and also the public interest. *fn2"

 While the parties before us clearly are proper parties to join battle, we must not lose sight of the fact that the interests of the officers and the board of directors of a corporation resisting a takeover, albeit well motivated and sincere, may not necessarily be the same as the interests of the shareholders of the corporation. The tender offer presents an additional dimension to those which are present in a traditional battle between corporations for a share of the market. While we have held in our prior Opinion in this matter, that this relatively new technique is one which comes under the umbrella of the antitrust laws, we cannot lose sight of the practical economic realities which are at the very heart of this controversy. Certainly, a very significant factor that weighs against the issuance of a preliminary injunction at this time is that an injunction would deprive Medicorp's shareholders of the opportunity to express their own views about where they want their money to go, and to make their own decisions as to whether they want to opt in or opt out!

 Our awareness of the consequences of either the grant or denial of a preliminary injunction has impelled us to set a final hearing promptly, as per the Order which accompanies this Opinion, on January 23, 1978, or sooner if the parties are ready to proceed, and to issue a definitive decree within three weeks after the completion of that hearing, or sooner if the circumstances permit. This is so because the failure of courts to move swiftly after a preliminary hearing has often resulted in grave harm to the parties. The date for the final hearing has purposefully been set in order to permit the parties to have a definitive decision of this court within a few weeks of the entry of the Order accompanying this Opinion. This is a strong factor which in our view mitigates the possible irreparable harm Medicorp may suffer, pendente lite, by the denial of the preliminary injunction. *fn3"

 As noted in the chronology of events, the action before us was commenced October 3, 1977. As of the date of this Opinion and Order Humana's proxy material has not even been cleared by the Securities Exchange Commission. Thus, given the steps that must be taken, and the monitoring mechanism which we have adopted as per our Order, until ultimate disposition of the case by us, safeguards are and will be present to prevent irreparable harm to any party. We are not convinced, however, that even in the absence of these safeguards plaintiff has established the degree of irreparable harm, pendente lite, which would justify our granting a preliminary injunction; clearly, the presence of these safeguards further bolsters that conclusion.

 B. THE STANDARD REQUIRED TO BE MET TO SHOW ULTIMATE PROBABILITY OF SUCCESS:

 In Allis-Chalmers the Court of Appeals for this Circuit enunciated what would at first blush appear to be a rigid and demanding test of probability of ultimate success before a preliminary injunction may issue in this type of case. The Second Circuit, in dealing with issues of harm to third parties and the public interest in complex antitrust litigation, has enunciated a far more flexible standard. *fn4"

 IV. PROBABILITY OF SUCCESS ON THE MERITS:

 Plaintiff has alleged a violation of Section 7 of the Clayton Act which forbids corporations to acquire the stock of other corporations:

 
where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition . . . . 15 U.S.C. § 18.

 Plaintiff contends that the merger of Humana and Medicorp would substantially lessen competition in two different and distinct lines of commerce in the nation as a whole as to one, and in three localities as to the other. Although, as is understandable in a matter of this complexity, there were significant changes in plaintiff's position in defining the relevant lines of commerce during the course of the litigation, the theory which finally evolved follows; each facet will be discussed seriatim :

 
PLAINTIFF'S THEORY OF THE TWO LINES OF COMMERCE:
 
1. The development of hospitals through activities which cover the fields of: (a) construction; (b) management; (c) acquisition; and (d) replacement constitutes a line of commerce which is separate and distinct from the line of commerce in which hospitals provide medical services to patients and facilities for doctors to perform those services, for the following reasons:
 
(a) the very dynamic of intensive and successful competition, in and of itself, creates a line of commerce;
 
(b) the primary business of the proprietary chains is growth through development activities;
 
(c) the proprietary chains sell development services to community groups and hospitals;
 
(d) the exchange of development services for support from influential community groups, (the key factor without which a Certificate of Need cannot be obtained), constitutes a revenue generating transaction.
 
2. The activities of the major proprietary chains form a distinct sub-market pursuant to the criteria established in Brown Shoe Co. v. United States, 370 U.S. 294, 8 L. Ed. 2d 510, 82 S. Ct. 1502 (1962); these criteria include:
 
(a) Recognition within the industry and by the public of the existence of the proprietary chains as a distinct line of commerce, as evidenced by the following indicia of competition;
 
(1) trade association membership;
 
(2) identification of the line of competition by competitors;
 
(3) internal corporate memoranda identifying competition and competitors;
 
(4) media publications identifying the line of commerce;
 
(b) A unique cluster of services the proprietary chains provide to their customers.
 
3. The geographic sweep of the line of commerce defined by development activities is the nation as a whole, and only Humana, itself, and proprietary chains which operate on a national basis are competitors in this "section of the country".
 
4. The merger of plaintiff and defendant will substantially lessen competition in this line of commerce in the nation as a whole by giving the combined firm a market share of 29.5% in an industry in which the top eight firms control 84.2% of the hospital beds.
 
5. As to the delivery of hospital services, the merger of these two companies will also substantially lessen competition in that line of commerce, in the following three sections of the country:
 
(a) Broward County, Florida
 
(b) Jefferson County, Kentucky
 
(c) Bluefield, West Virginia

 A. Definition of the Services Market:

 1. Development of New Hospitals:

 Plaintiff seeks to define the relevant services market as the " development " of more hospitals to operate through acquisitions, construction, replacement or management, as distinguished from the market for the delivery of short term acute care hospital services to doctors and patients -- the operations market. The record establishes that the "development market " at its core, involves the construction of hospitals in locales in which there are no facilities that are conveniently available to doctors or patients before a "developer" enters upon the scene. Plaintiff urges that the mere existence of proprietary chain hospitals is a commercial reality that defines a "development market". It is noteworthy that we cannot find a single case in which "development opportunities" were held to be a line of commerce distinct from the market for the product or service which the company seeks to expand by development, and none was cited to us by plaintiff.

 (a) The Dynamics of Competition:

 Plaintiff directs our attention to "competition" as it exists, and argues that if the evidence establishes that only four or five firms actually compete with each other in seeking new opportunities to provide hospital services where none are now being provided, then these firms must form a relevant line of commerce within the meaning of Section 7. Defendant strenuously objects to this approach, because it inverts the proper order of analysis. We agree.

 We must begin with the universe of all related transactions between buyers and sellers that constitutes a market; only then can an attempt be made to define competition within the meaning of Section 7. The basic tests developed by the Supreme Court in defining product and geographic markets only have meaning in the context of transactions between buyer and seller.6

 Plaintiff contends that proprietary hospital chains are primarily in the business of developing new facilities in order to increase profits. Defendant responds that the development of new business opportunities appears to be a normal internal corporate activity in which no market transaction occurs at all. We agree. One division of Medicorp plans and develops a new hospital for another division of that company to operate. There is neither buyer nor seller, nor even the slightest trace of competition in such a transaction. This is in sharp contrast to firms geared to providing consultation services which are sold to third party customers. Neither Humana or Medicorp is interested in a project unless it will ultimately control all phases of operations once the hospital is completed. Alan Miller, President of Medicorp, testified that, of Medicorp's gross revenues of $450,000,000 for fiscal year 1977, $447,000,000 stemmed exclusively from revenues obtained from operating hospitals. Similarly, Humana's revenues of ...


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