Understanding the “Failing” and “Flailing” Firm Defenses to a Hospital Merger

Antitrust Byte

In certain situations, a hospital merger that might otherwise raise serious competitive concerns can be defended on the basis of a “failing firm” or “flailing firm” defense. Understanding how and when these defenses apply is critical to making a successful argument.

Section 11 of the Horizontal Merger Guidelines indicates that “a merger is not likely to enhance market power if imminent failure … of one of the merging firms would cause the assets of that firm to exit the relevant market.” This is because “[i]f the relevant assets would otherwise exit the market, customers are not worse off after the merger than they would have been had the merger been enjoined.”

But to satisfy the “failing firm” defense, the parties must be able to demonstrate that:

  1. the allegedly failing firm would be unable to meet its financial obligations in the near future;
  2. it would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act; and
  3. it has made unsuccessful good-faith efforts to elicit reasonable alternative offers that would keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger.

A “flailing firm” defense may arise in unique situations where one hospital might be in financial distress but does not satisfy the elements of a failing firm, as described above. The Federal Trade Commission has indicated that it will give due consideration to the “flailing firm” defense, and the agency has done so in certain circumstances, including where the evidence reveals that the market share of the distressed firm is declining and its continuing decline would bring the merged entities’ market share below the threshold of presumptive illegality.

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For additional information about the issues discussed above, or if you have any other antitrust concerns, please contact the Epstein Becker Green attorney who regularly handles your legal matters, or one of the authors of this Antitrust Byte:

E. John Steren
Member of the Firm
[email protected]

Patricia Wagner
Member of the Firm,
Chief Privacy Officer
[email protected]