Next week, on October 14, the Supreme Court will hear arguments in North Carolina Board of Dental Examiners v. Federal Trade Commission. This case presents the question of when a state agency composed of industry competitors is exempt from the federal antitrust laws.
Background
The North Carolina Board of Dental Examiners regulates dentists and dental hygienists in North Carolina. According to the FTC, dentists complained to the board that non-dentists offered teeth whitening services. It should come as no surprise that non-dentists (e.g., kiosks in shopping malls) charge less than dentists for teeth whitening. The board responded by ordering the non-dentists to stop whitening teeth.
The FTC found that the board’s actions violated the Sherman Act because they constituted a “combination” or “conspiracy, in restraint of trade.” Specifically, the members of the board tried to exclude non-dentists from the market for teeth whitening services, and the dentists who sat on the board stood to gain from excluding competitors from that market.
State action immunity from antitrust laws
The board claimed as an affirmative defense that its actions constituted state action. Since its 1943 decision Parker v. Brown, the Supreme Court has extended immunity from the antitrust laws to certain types of state action. The “state action doctrine” stems from a respect for federalism and state sovereignty. The Sherman Act did not expressly purport to restrain state action that regulates the economy (including health and welfare regulation); as a result, the Supreme Court held that anticompetitive actions by a state legislature are exempt from the Sherman Act.
In the seventy-one years since that decision, the Supreme Court refined the state action doctrine through decisions in several cases. The endpoints of the doctrine are well defined. Actions taken by a state legislature or high court are exempt. Private actions taken pursuant to state policy are not automatically exempt, but instead must satisfy a two-step test. In step one, private anticompetitive action enjoys exemption only if the state “clearly articulated” the policy to displace competition with regulation. In step two, the state must “actively supervise” the policy. This two-step process prevents a state from circumventing the federal antitrust laws by, in the words of the Supreme Court, casting “a gauzy cloak of state involvement over what is essentially a private price-fixing arrangement.”
The region between those extremes remains somewhat murky. Municipalities fall in that range. On one hand, municipalities do not enjoy the same automatic exemption because municipalities are not themselves sovereign. On the other hand, we presume that municipalities, unlike private parties, act in the public interest rather than for private interests. As a result, the Court held in 1985 that a state need not actively supervise a municipality to exempt the municipality’s action from the antitrust laws; it suffices that the municipality acted under a “clearly articulated” policy by the state.
What about a state agency under the executive branch? In a footnote to that 1985 case, the Court left the question open: “In cases in which the actor is a state agency, it is likely that active state supervision would also not be required, although we do not here decide that issue. Where state or municipal regulation by a private party is involved, however, active state supervision must be shown, even where a clearly articulated state policy exists.”
This case presents the scenario from that footnote. Specifically, is a clearly articulated policy sufficient to exempt the actions of a state agency from the antitrust laws, or must the state also actively supervise the agency’s actions?
The FTC found that the dental Board is not exempt from the antitrust laws because North Carolina did not actively supervise the agency’s actions. The Fourth Circuit agreed. The dental board argues that because it is a bona fide state agency, it does not need to be actively supervised by another part of the state government. The Supreme Court granted review to resolve that dispute.
Analysis
This case comes to the Court against a backdrop of criticism of state licensing boards. Two professors summarized the state of professional licensing in an article published earlier this year in the University of Pennsylvania Law Review. The briefs for both sides cite that article, which remarkably was published in the window between the Court granting cert. and hearing argument. The article catalogs how professional licensing in many states now covers not only doctors, dentists, and lawyers, but also floral designers, fortune tellers, hair braiders, eyebrow threaders, and interior designers. These state licensing regimes frequently have the effects of excluding competitors, raising barriers to entry, reducing supply, and raising prices.
A private cartel would almost surely violate the Sherman Act if it took the same actions as a state licensing board. But the licensing boards are blessed by the states, which may be enough to exempt them from the Sherman Act even when they use the power of the state to keep out competition. No one expects the Supreme Court to strip the power of states to create professional licensing boards that can operate with antitrust immunity. Rather, the central question is whether a state may create a licensing board and set it loose, as North Carolina did, or if instead it must actively supervise the board’s actions.
The FTC picked a good target for this important case. By law, six of the eight members of the dental board in this case must be dentists with an active practice, i.e., market participants. The regulated parties (dentists) directly elect the board members; neither the governor nor any other state official has any official role in nominating, selecting, confirming, or even removing members of the dental board. And, crucially, no other state official or body reviews the types of cease-and-desist orders the dental board issued in this case. On these facts, the FTC characterizes the dental board as a “public/private hybrid” entity that has a strong incentive to restrict competition to benefit its members. As a result, the FTC argues, the agency’s actions must be actively supervised by another part of the state.
The dental board, on the other hand, asserts that the active-supervision requirement should not apply to a state agency. Under longstanding precedent, and in a way axiomatically, direct action by the state does not require supervision by the state. As the dental board argues, a state is free to decide how to wield the power of the state; here, North Carolina chose to utilize a state agency to implement its regulatory policy goals. Basic federalism principles and respect for state sovereignty suggest that federal courts and agencies should not second-guess that choice. In short, the dental board argues, North Carolina is free to implement anticompetitive policies and may do so how it sees fit, including through an agency staffed by market participants who may seek private gains.
Several important issues are not in dispute at the Supreme Court. At least before the Court, the dental board does not dispute that its actions are anticompetitive. Nor does the case focus on whether the dental board acted pursuant to a clearly articulated state policy. A state statute, after all, provides that removing stains from teeth constitutes the practice of dentistry, which presumably covers teeth whitening. Moreover, the ultimate question of liability is not before the Court, so it will not address whether the Noerr–Pennington doctrine or the First Amendment protect the dentists’ actions.
Amicus briefs
The lineup of amicus briefs in the case is striking. Only two types of amici filed briefs in support of the dental board: (1) industry trade groups, and (2) state governments.
The FTC attracted much broader support. Law professors of all political persuasion filed briefs in support of the FTC, as did both liberal and conservative policy groups. Notably, several associations and companies that routinely brush up against the boundaries of professional licensing filed briefs in support of the FTC. Legalzoom.com, for example, runs into anticompetitive policies of state bar associations, and nurse practitioners bump up against anticompetitive policies of medical boards. Those briefs point out the real-world consequences of what they characterize as state-sponsored cartels – namely, granting antitrust immunity to trade associations tends to reduce competition, reduce output, and increase prices.
Options
The Court has a number of options before it. At one end of the spectrum, the Court could hold that actions by all bona fide state agencies are exempt so long as a clearly articulated anticompetitive policy from the state justifies the agency’s action. On the other end of the spectrum, it could hold that state agency action is exempt only if another part of the state government actively supervises the agency’s action.
The Court has other options in between. It could create a presumption that the requirement of active supervision would apply to some types of agencies but not to others, based perhaps on whether a majority of the agency’s members are market participants, how the members are selected (e.g., elected by other market participants, selected by the governor, or elected by the public), how the agency is funded, or any of several other factors.
In recent years, and in particular in the last ten years, the Supreme Court’s antitrust cases have closely followed settled economic understanding of market dynamics. The Court has shown a willingness to depart from past precedent when modern economic theories rejected the lessons of older cases. In particular, the court frequently cites the extremely influential Areeda and Hovenkamp antitrust treatise. In this case, the economic literature and the Areeda and Hovenkamp treatise generally do not support the dental board’s position. After all, the state action doctrine as applied to state agencies composed of market participants could bless cartel-like behavior taking place in professional licensing boards. Although the economic results are clear, the economic analysis has little to say about federalism, state sovereignty, and how state governments must be structured in order to achieve policy goals that may impair competition in favor of other regulatory interests. As a result, this case presents a tension between those legal principles and economic principles, making this a difficult case to predict.
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