Supreme Court Limits Protectionism by State Licensing Boards

Boards Comprised of Active Market Participants Are Not Entitled to Immunity from Federal Antitrust Law Unless They Are Actively Supervised by the State.

By Charles S. Johnson, Cody Wiggington and Robert Highsmith

From Holland & Knight Health Care & Life Sciences Alert

March 3, 2015

HIGHLIGHTS:

• A new Supreme Court decision reaffirms the two-part Midcal/Ticor test of state action immunity.
• This Supreme Court decision makes it clear that, if a state delegates its regulatory authority to a specialized board that is dominated by active market participants, antitrust immunity is available only if the state exercises a continuing role in the work of the board and actively supervises the board’s work.
• The Supreme Court held that a state board on which a controlling number of decision-makers are active market participants in the occupation that the board regulates must have active state supervision to invoke Parker immunity.

The United States Supreme Court’s recent decision in N.C. State Bd. of Dental Examiners v. Federal Trade Commission, No. 13-534, 2015 WL 773331 (S.Ct. February 25, 2015) makes clear that the anticompetitive actions of state regulatory boards controlled by active market participants not actively supervised by the state are not entitled to state action immunity from federal antitrust law.

In N.C. State Bd. of Dental Examiners, the Federal Trade Commission filed an administrative complaint against the North Carolina State Board of Dental Examiners alleging the board's concerted action to exclude non-dentists from the teeth whitening services market in North Carolina constituted an anticompetitive and unfair method of competition in violation of federal antitrust laws. After a series of administrative hearings and appeals, the case made it to the U.S. Supreme Court.

Objections to Services by Unlicensed Providers Required Filing a Lawsuit

By way of background, the state has delegated the regulation of dentistry to the board, whose principal duty is to create, administer and enforce a licensing system for dentists. The board's authority with respect to unlicensed persons, however, is limited to filing a lawsuit to enjoin a person from unlawfully practicing dentistry. Under North Carolina law, the board's eight members must be licensed dentists engaged in the active practice of dentistry. They are elected by other licensed dentists in North Carolina, who cast their ballots in elections conducted by the board.

In the early years of providing teeth whitening services in North Carolina, licensed dentists earned substantial fees for the service. Eventually, non-dentists began offering the service at lower prices. The increased competition resulted in dentists complaining to the board about the non-dentists providing teeth whitening services. Notably, most of the complaints focused on the problem with non-dentists offering lower prices – not possible harm to consumers.

In reaction to the complaints, the board issued at least 47 cease and desist letters to non-dentist teeth whitening service providers and product manufacturers, prompted the North Carolina Board of Cosmetic Art Examiners to warn cosmetologists against providing teeth whitening services, and sent letters to mall operators advising them to expel teeth whitening kiosk operators from their premises. As a result of the board’s actions, non-dentists ceased offering teeth whitening services in North Carolina.

Federal Antitrust Laws Are Designed to Promote Competition

During the administrative and court proceedings, the board argued its members were invested by North Carolina with the power of the state and that, as a result, the board's actions were immune from liability under federal antitrust laws.

Once the case was before the Supreme Court, the court noted that federal antitrust laws serve to promote robust competition. Meanwhile, the U.S. federal system empowers the states to pursue their own and the public's welfare. The states need not maintain an environment of unregulated competition. States often need to regulate their economies in ways that may be inconsistent with maintaining such an environment. For example, in some spheres states benefit from limiting competition to advance the public good. For these reasons, the court in Parker v. Brown, 317 U.S. 341 (1943) held the states, when acting in their sovereign capacity, enjoy immunity for anticompetitive conduct under federal antitrust laws. This type of immunity is frequently referred to as Parker or state action immunity. The availability of this immunity has long been measured according to the following formula: A state law or regulatory scheme “cannot be the basis for antitrust immunity unless, first, the State has articulated a clear policy to allow the anticompetitive conduct and, second, the State provides active supervision of [the] anticompetitive conduct.” FTC v. Ticor Title Ins. Co, 504 U.S. 621, 631 (1992) (citing California Liquor Retail Dealers Association v. Midcal Aluminum, 445 U.S. 97, 105 (1980)).

Supreme Court Addresses Active Supervision

However, in Hallie v. Eau Claire, 471 U.S. 34 (1985), the Supreme Court suggested that the requirement of active supervision may in some circumstances be excused. Relying on the Hallie decision, the North Carolina Dental Examination Board did not contend that it was actively supervised and further contended that it was immune even in the absence of such supervision. Rejecting this claim, the court noted a distinction between two different types of state actor:

1. a prototypical state agency that is accountable to the electorate and possesses general regulatory powers but has no price-fixing agenda
2. a specialized board dominated by active market participants

Because the second type of state actor is more akin to a private trade association with regulatory authority, and with economic incentives to restrain competition, the court determined that this type of state actor must be actively supervised.

To satisfy the requirement of active supervision, the court observed that state officials must possess and exercise power to review the particular anticompetitive acts of private parties and disapprove those that fail to accord with state policy. The “mere potential for state supervision is not an adequate substitute for a decision by the State.” Daily involvement by the state in an agency's operations is not required to satisfy the second requirement. It is only important that the state’s involvement provide a “realistic assurance” that the anticompetitive conduct of an actor such as the board “promotes state policy, rather than merely the party's individual interests.” The court accordingly identified three requirements of active supervision:

1. The state supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it.
2. The state supervisor must have the power to veto or modify particular decisions to ensure they accord with state policy.
3. The state supervisor may not itself be an active market participant.

With regard to the board’s argument that entities designated by the states as agencies are exempt from the second requirement, the Supreme Court stated the board’s assertion does not comport with the court's repeated conclusion that the need for supervision turns on the risk that active market participants will pursue their private interests – not on the formal designation given to regulators by states. The Supreme Court also stated active market participants controlling state agencies, like the board, creates the risk that the second requirement was designed to prevent.

The court noted that the board took the anticompetitive actions without active supervision by the state and without state ratification, endorsement, or other approval. With no active supervision by the state, North Carolina state officials may not have been aware that the board concluded teeth whitening constitutes “the practice of dentistry” and that the board sought to prohibit non-dentists from providing such services.

The court, therefore, held that a state board on which a controlling number of decision-makers are active market participants in the occupation that the board regulates must have active state supervision to invoke Parker immunity.

Clear Court Guidance on Retaining Protection of State Action Immunity

The Supreme Court’s decision reaffirms the two-part Midcal/Ticor test of state action immunity. While the court in Hallie had suggested that immunity was available without a showing of active supervision, several decisions after Hallie affirmed the active supervision requirement. See, e.g., Ticor supra; FTC v. Phoebe Putney Health System, Inc., 133 S.Ct. 1003 (2013). Rather than overrule Hallie, the court limited its holding by narrowly limiting the circumstances under which the active supervision requirement will be excused.

The Supreme Court established fairly clear guidance as to what regulators must do to retain the protection of state action immunity: If a state delegates its regulatory authority to a specialized board that is dominated by active market participants, the state must exercise a continuing role in the work of the board by actively supervising the board’s work in the manner outlined by the court.