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Supremes Nix Antitrust Immunity For Unsupervised State Boards In Dental Case

Posted  February 26, 2015

By Allison F. Sheedy

The Supreme Court sided with the FTC yesterday in North Carolina State Board of Dental Examiners v. Federal Trade Commission, a much anticipated decision that sets limits on state-action immunity from federal antitrust laws.

In a six-to-three decision authored by Justice Kennedy, the Court held that when a nonsovereign actor, such as a state regulatory board, is controlled by active market participants, state-action immunity will apply only where the challenged restraint is actively supervised by the State itself.

Under the state-action doctrine—also known as Parker immunity (from the seminal 1943 state-action case, Parker v. Brown)—state and municipal authorities are immune from federal antitrust law when regulating conduct pursuant to a clearly expressed state policy.  Private actors may also be immune from antitrust liability when they act at the direction of a State, pursuant to a State’s clearly articulated, and affirmatively expressed, policy to displace competition with a regulatory regime.  Attempting to balance state sovereignty, principles of federalism and the federal commitment to robust competition, Parker immunity recognizes that the federal antitrust laws should not impose an impermissible burden on the States’ own powers to regulate.  This doctrine, however, is not unbounded.

As articulated in the Supreme Court’s Midcal decision, the doctrine has developed to have two prongs:  an entity may not invoke Parker immunity unless first, the anticompetitive policy at issue was clearly articulated by the State, and second, the State actively supervises the implementation of the anticompetitive policy.  But to complicate things, in a later case, Hallie v. Eau Claire, the Court held that municipalities (which lack the private incentives of market participants) are excused from the second prong of the Midcal test.  In the wake of these decisions, lower courts have struggled to parse the distinction between public and private actors to determine whether the active state supervision prong of Midcal applied.  Indeed, various and conflicting approaches developed in the Circuits.

North Carolina State Board dealt with the North Carolina legislature’s creation of a board of dental examiners (the “Board”)—six of eight whose members are required to be licensed dentists—to create and enforce a licensing system for “the practice of dentistry” in the State.  Long after that act was passed, teeth-whitening came into vogue.  When non-dentists in the State began offering teeth whitening services in competition with licensed dentists and often at lower prices, the Board cracked down on the practice by issuing cease and desist letters stating that the unlicensed practice of dentistry is a crime.  Not surprisingly, this effectively eradicated the provision of teeth whitening services by non-dentists in the State.

The FTC investigated and alleged the Board’s action to be an anticompetitive because the State did not actively supervise the Board when the Board interpreted teeth whitening to fall within “the practice of dentistry,” or when it took action against non-dentist teeth whiteners.  The Board argued it was immune from liability under the state-action doctrine, and that it should be exempt from the “active supervision” prong of Midcal because it was designated by the State as an agency.  An administrative law judge (“ALJ”) of the FTC disagreed, and found the Board had unreasonably restrained trade.  After the FTC sustained the ALJ decision, the Fourth Circuit affirmed.

In yesterday’s decision, the Supreme Court clearly holds that state boards controlled by active market participants in the occupation that the board regulates must satisfy “active supervision” requirements in order to invoke state-action antitrust immunity. The Court emphasized the private interests of the market participants involved, and explained that the Sherman Act “does not authorize the States to abandon markets to the unsupervised control of active market participants.”

But the North Carolina State Board decision is in no way surprising, especially considering that the Court so recently emphasized in its 2013 decision of FTC v. Phoebe Putney Health System, Inc., that “state-action immunity is disfavored.”  Yesterday’s decision reflects a clear view that if the State does not take on the responsibility to actively monitor a grant of regulatory authority that enables a group of competitors to discriminate against their rivals, federal antitrust law should apply with full force.

North Carolina State Board is not likely to be the last word on the scope of state-action immunity.  The decision does not address what will suffice to comprise “active supervision” of a state board’s actions.  There was no need to address the issue because the Board did not claim that the State exercised any supervision over its conduct regarding nondentist teeth whiteners.  Moreover, in dissenting from the majority decision, three of the Court’s conservative Justices—Justices Scalia, Thomas and Alito—argued that the exercise of examining state agencies to determine if they have been “captured” by active market participants will be hard to apply in practice.

While North Carolina State Board provides some guidance as to the limits of state-action immunity, issues such as how “active” state supervision needs to be and whether a state agency has been “captured” by market participants may well be the main state-action battlegrounds as lower courts attempt to balance state sovereignty and federal competition laws going forward.

Edited by Gary J. Malone

Tagged in: Antitrust Litigation,