Antitrust Law Daily No state-action immunity for city that tied water service to gas service (1)
Wednesday, August 21, 2019

No state-action immunity for city that tied water service to gas service

By Nicole D. Prysby, J.D.

The city has immunity for actions directly connected to providing water and sewage services but not for the tying of the unrelated services for residents outside the city limits.

The City of LaGrange, Georgia, was not entitled to state action immunity for allegedly tying its water utility service to its natural gas service for county residents. Under a local ordinance, LaGrange would provide water service outside of the city limits, but only for customers who installed natural gas appliances. LaGrange unsuccessfully contended that so long as it was exercising a power granted by state law, its related anticompetitive actions were beyond federal antitrust liability. The city was only entitled to state action immunity if the challenged conduct was foreseeable by the state legislature such that it was the "inherent, logical, or ordinary result" of the legislative scheme (Diverse Power, Inc. v. City Of Lagrange, Georgia, August 20, 2019, Tjoflat, G.).

The U.S. Court of Appeals in Atlanta on interlocutory appeal upheld an order denying dismissal on state action immunity grounds. In so doing, the appellate court considered the U.S. Supreme Court’s 2013 decision in FTC v. Phoebe Putney Health System, Inc., 568 U.S. 216, in which the High Court "placed narrower bounds on the meaning of foreseeability," in reversing a decision of the Eleventh Circuit "nine-zip."

Alleged unlawful tying. Diverse Power Inc. is a member-owned electric cooperative that provides electric energy-related services to certain counties in Georgia, including Troup County. The City of LaGrange operates utilities that provide water, sewer, and natural gas services to residential, commercial, and industrial customers located within and outside the corporate limits of LaGrange. The City’s natural gas utility service competes with Diverse Power’s electric service in areas of unincorporated Troup County, outside of LaGrange corporate limits.

The City is the sole water utility services provider in the vast majority of unincorporated Troup County. Pursuant to local ordinance, the City requires any homeowner, builder, or developer to install gas appliances in order to receive water services from the City, outside the city limits. Diverse Power alleged that the City’s tying of the provision of water utility services to the installation of natural gas appliances has the purpose and effect of coercing builders, developers, and homeowners, and those requirements harm competition by denying builder, developer, and homeowner customers the opportunity to choose electricity for those appliances. Diverse Power asserted claims for tortious interference with business relations and unlawful tying in violation of Section 1 of the Sherman Act, as well as violations of the Georgia Constitution and state law. LaGrange asserted immunity against the antitrust claims under the state-action doctrine.

City not entitled to state-action immunity. The court considered the statutory backdrop—by state statute and constitution, Georgia municipal corporations are empowered to develop water systems and may choose to deny water services to areas outside their corporate limits. It was foreseeable that LaGrange would use those powers to gain leverage in another market. However, LaGrange’s anticompetitive move was not the "inherent, logical, or ordinary result" of the legislative scheme, the court reasoned.

Ga. Code Ann. § 36-65-2 provides that in the exercise of the powers specifically granted to them by law, local governing authorities are immune from antitrust liability to the same degree and extent as enjoyed by the State of Georgia. The power specifically granted to the City by law is the power to operate water or sewage systems. LaGrange argued that if it is exercising a power granted by state law, its related anticompetitive actions are beyond federal antitrust liability. In other words, it could condition water service on any condition.

The court rejected LaGrange’s reading of the law. The immunity granted is only immunity to operate and maintain water and sewage systems. This grant of immunity would cover some actions directly connected to the provision of water and sewage services—such as, LaGrange’s dividing up water-service territory with neighboring municipalities in Troup County. But it would not extend to the tying of an unrelated service in a different market to the provision of water service. Under LaGrange’s interpretation of the law, it would have immunity to take anticompetitive actions affecting any industry so long as the demand were made as a condition of refusing water service, and there was no evidence that the Georgia legislature intended such unlimited power.

The case is No. 18-11014.

Attorneys: James A. Orr (Eversheds Sutherland [US] LLP) for Diverse Power Inc. Teresa Bonder (Alston & Bird LLP) for City of Lagrange, Georgia.

Companies: Diverse Power Inc.

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