United States Supreme Court to Revisit State Action Doctrine

by Baker Ober Health Law

Which exercise of safeguarding the people will prevail: a State’s regulation of professionals providing services to its citizens, or the antitrust agencies’ protection of consumers against anticompetitive conduct? The United States Supreme Court will answer this question in 2014 in The North Carolina Board of Dental Examiners v. Federal Trade Commission, No. 13-534.

In response to non-dentists offering less-costly teeth-whitening services at North Carolina salons and other retail sites, the North Carolina Board of Dental Examiners (1) issued cease-and-desist letters to the non-dentist providers, stating that they were illegally practicing unlicensed dentistry; (2) threatened and discouraged non-dentist providers from engaging in teeth-whitening services; and (3) issued letters to various retail interests stating that teeth-whitening services offered at mall kiosks were illegal.

The Federal Trade Commission (FTC) challenged the Board’s actions, alleging that the Board’s collusion to exclude non-dentists from providing teeth-whitening services in North Carolina unreasonably restrained competition in violation of the FTC Act, 15 U.S.C. § 45. According to the FTC, the North Carolina dental statute does not address whether non-dentists may provide teeth whitening services; but the Board interpreted the North Carolina dental statute as precluding non-dentists from providing any services in connection with teeth whitening and accordingly determined that this practice constituted the unauthorized practice of dentistry. The Board asserted that it was immune from antitrust liability under the state action doctrine because it is a state agency charged with enforcing North Carolina law, and further argued that its enforcement actions were not collusion, conspiracy or agreement but were taken to enforce the law and protect the public, not to suppress competition.

Under the state action doctrine, states may impose market restraints as an act of government, free from antitrust liability. Municipalities can enact anticompetitive regulations as long as they can show that their actions comport with a clearly articulated state policy. Private parties carrying out a state’s regulatory program, on the other hand, enjoy state action immunity from antitrust liability only if: (1) the challenged restraint is one clearly articulated and affirmatively expressed as state policy; and (2) the state actively supervises the policy. At issue before the FTC was whether the Board was subject to the active supervision prong, and if so, whether the Board satisfied that requirement.

The FTC ultimately found that the Board was not protected by the state action doctrine, distinguishing the Board from state actors not subject to the active supervision prong, e.g., municipalities. Municipalities, the FTC explained, unlike public/private hybrid entities, enjoy a presumption that they are acting in the public interest and there is little danger that municipalities would be involved in private price fixing arrangements. In contrast, the FTC determined, the Board is financially interested in the exclusion of non-dentists from the market because it is controlled by practicing dentists in the market and is accountable not to the public, but to the industry it regulates.

Having determined that the Board is subject to the active supervision requirement, the FTC determined the Board had not satisfied this requirement. The requirement mandates that the State actually exercise control over the challenged anticompetitive conduct; the mere presence of state involvement is insufficient to satisfy the requirement. The FTC considers the following in determining whether a state actively supervises private anticompetitive conduct, though no single factor is necessarily a prerequisite for active supervision: (1) the development of an adequate factual record; (2) a written decision on the merits; and (3) a specific assessment (both quantitative and qualitative) of how the private action comports with the substantive standards established by the legislature. The FTC determined that the Board failed to provide evidence that any of these elements were satisfied.

The Fourth Circuit agreed with the FTC’s conclusion that as a public/private hybrid entity consisting of market participants, the Board did not qualify as a sub-state governmental entity that only had to show its actions were authorized by a clearly articulated state policy. The Fourth Circuit concluded that “state agencies in which a decisive coalition (usually a majority) is made up of participants in the regulated market, who are chosen by and accountable to their fellow market participants, are private actors” that must satisfy both prongs of the state action immunity doctrine. The Fourth Circuit agreed with the FTC that when a state agency is operated by market participants who are elected by other market participants, it is a private actor subject to the active supervision requirement. The Fourth Circuit also agreed with the FTC’s conclusion that the Board had not met the active supervision requirement in this case.

Whether or not state licensing entities are protected from antitrust liability under the state action doctrine has far-reaching impact given the number of professions regulated by various states, e.g., physicians, dentists, lawyers and engineers. On the one hand of this dispute is the potential chilling effect the antitrust laws could have on state regulation designed to protect the state’s citizens; on the other is the need to protect consumers of regulated services from anticompetitive actions that unfairly drive up the cost of these services. Thus while the question before the Court is whether state regulatory agencies comprised of market participants are subject to the state action doctrine’s active supervision requirement, at its core the question can be viewed more simply as which protector of the consumer will prevail.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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