FTC Loses Bid to Block Labcorp-Westcliff Merger

On February 22, 2011, Judge Andrew Guilford, of the District Court for the Central District of California, denied the Federal Trade Commission (FTC)’s motion to enjoin a merger of rival clinical laboratory testing companies. The FTC sought to prevent Laboratory Corporation of America (LabCorp) from acquiring Westcliff Medical Laboratories, Inc. (Westcliff) pending an FTC administrative hearing on the merits. The FTC had alleged that LabCorp’s acquisition of Westcliff would raise prices in Southern California for capitated laboratory testing services. “Capitated” refers to arrangements between laboratories and doctor groups that charge groups on a monthly per-physician basis. The judge’s decision turned on two key issues: (1) market definition and (2) the equities of granting the requested injunction. The opinion is also interesting because the judge relied on prior FTC statements that appeared inconsistent with its argument in this case. First, the issue of market definition centers on whether capitated services can be separated from fee-for-service laboratory services. As Labcorp and Westcliff are two of only three significant competitors in capitated laboratory services in Southern California, the merged firm would account for 89% of this capitated market. The FTC argued that capitated services is a distinct antitrust market because capitated rates are typically lower, and capitated services are more popular for patients enrolled in health management organizations (HMOs). Judge Guilford disagreed with the FTC and concluded that capitated and fee-for-service contracts were in the same antitrust market, dramatically expanding the number of competitors in the market, and reducing the merged firm’s market share. The judge’s decision relied on the FTC’s “prior inconsistent statements.” The first statement appeared in a 2003 consent decree entered into by the FTC in connection with a similar transaction between Quest Diagnostics, Inc. and Unilab Corporation. In that decree, the FTC stated that these companies operated in the market for clinical laboratory testing services, a term that did not appear to distinguish between capitated from fee services. The second statement was in the dissent of FTC Commissioner J. Thomas Rosch at the time the FTC issued its complaint against Labcorp. Rosch’s dissent pointed to the 2003 consent decree and noted that “both as a matter of law and common sense” the relevant market includes both capitated and for-fee services. The second issue underlying Judge Guilford’s decision addressed the balancing of equities. In his opinion, the judge went to great lengths to weigh the equities, concluding that the private interests at stake deserved serious consideration. In FTC preliminary injunction cases, the public interest typically outweighs countervailing private interests, but Judge Guilford appears to have been persuaded otherwise. He concluded that the harm to Labcorp and Westcliff of enjoining the merger pending an FTC administrative hearing “heavily outweighed” the FTC’s likelihood of success because (1) the hearing would probably not conclude until early 2012, and (2) Westcliff was in formal bankruptcy.

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