ANTITRUST AND THE POLITICS OF STATE ACTION.

• Author: Nachbar, Thomas B.
• Position: Special Issue on Antitrust Law

TABLE OF CONTENTS INTRODUCTION 1397 I. FROM PARKER TO NORTH CAROLINA STATE BOARD 1399 A. Putting the State Back in State Action 1400 1. The Parker Era: A State Actor? 1400 2. Midcal's Turn 1405 3. Cities and the Lost Public/Private Distinction 1407 B. The Antitrust Ecosystem of Political Immunities 1412 1. Protections for Private Parties 1412 2. Fitting the Pieces Together 1414 C. Applying Parker (and the Lessons of Midcal,) to North Carolina 1415 State Board II. THE POLITICS OF STATE ACTION 1419 A. Taking off Antitrust Blinders 1419 B. A Constitutional State Action Doctrine 1424 1. State Action and Nondelegation 1425 2. State Action and "State Action" 1428 3. A Federal Standard 1429 4. Problems of an Economic Solution to a Political Problem 1430 III. THE WAY FORWARD 1431 A. Toward Antitrust Accountability 1431 B. The Problem(s) with Midcal 1433 C. The Dubious Constitutionality of State Licensing Boards 1434 D. Merging Noerr/Pennington and State Action 1435 CONCLUSION 1437 INTRODUCTION

In North Carolina State Board of Dental Examiners v. FTC, (1) the Supreme Court considered whether attempts by North Carolina's dental regulatory board (the Board) to prevent nondentists from engaging in teeth whitening should be immune from antitrust scrutiny by virtue of the doctrine of "state action immunity" first developed in Parker v. Brown. (2) As established by North Carolina law, an overwhelming majority of the Board (six of eight seats) must be dentists who are elected by the state's licensed dentists. (3) The Board is charged with the regulation of dentistry in the state, which includes the prohibition of unlicensed dentistry. (4) Consequently, the state's dentists are effectively in control not only of the practice of dentistry but also of defining what constitutes dentistry. (5) This means that their regulations can have considerable effects on non-dentists, including both patients (who purchase the dental services regulated by the Board) and nondentist practitioners of similar services (who might be excluded by them). (6) That is exactly what happened in the case of teeth whitening, which the Board determined to be "the practice of dentistry" and therefore required a license from the Board to perform. (7)

When one considers the kind of regulatory power the Board wields, and its effects on nondentists, (8) it might seem a little strange to vest control of the Board exclusively in the state's dentists. Don't we all have a stake in the question of how dentistry is performed? Why should we nondentists be effectively excluded from regulating such a substantial part of our economy?

The Court in North Carolina State Board analyzed the problem from the standpoint of self-dealing; it was problematic that the Board was made up largely of practicing dentists. (9) But that misses the point. The problem is not that the dentists are self-interested; the problem is that in a republican government it is the people, not its dentists, who set regulatory policy. (10) Imagine, if you will, that the State of North Carolina had vested exclusive regulatory authority over dentistry in the state's lawyers. That would solve the problem of self-interest, but it would still be completely illegitimate, not as a matter of competition regulation but rather as a matter of political control in a democratic society. (11)

The Court's error in North Carolina State Board was not a singular event; it was the natural consequence of how the state action doctrine has developed over time, and particularly how it has come to be dominated by the two-prong test the Court announced in California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc. (12) Over time, the Court has become increasingly concerned about the competitive harms that flow from state regulations that, by virtue of the state action doctrine, are immune from review under the federal antitrust laws. (13) Although antitrust law is generally consumed with the problem of protecting competition, (14) that concern is misplaced when it comes to the state action doctrine.

The state action doctrine is not merely unconcerned with competition; the destruction of competition is a fundamental assumption of the state action doctrine. Rather than being concerned about the likely effects on competition or allocative efficiency (as are most aspects of modern antitrust doctrine), state action is concerned about the nature of governmental action. The motives of the relevant actors, self-interested or otherwise, are irrelevant. North Carolina State Board's mistaken introduction of those motives into its state action analysis, while possibly saving us from avaricious regulators and lobbyists, will only further cloud the application of the doctrine. The state action doctrine has become increasingly muddled as the Court has allowed concerns over the competitive effects of state regulation to push it toward a competition-focused analysis--the same analysis that led to the confused, self-interest approach in North Carolina State Board. Recognizing that state action is a doctrine that represents political rather than economic values will allow the Court to return to its original conception of state action, one that fits within a broader, political understanding of the federal constitutional structure. Resituating state action within its political dimensions demonstrates the connections between state action and other politically salient aspects of not only antitrust law but also constitutional law more generally. Doing so will not only rationalize state action within antitrust law, but it will also do so in a way that makes sense in the larger constitutional order.

This Article proceeds by reviewing the development of the state action doctrine from its origins in Parker as a doctrine about deference to state regulation through the Court's adoption of the modern test for state action in Midcal, tracing the shift away from a political model of state action that focused on state power toward an economic one that could be more generally applied. After explaining how state action operates differently for governmental and nongovernmental entities, this Article returns to North Carolina State Board to consider it as a matter of first principles. Armed with the lessons of Parker, this Article considers how a political understanding of state action can work and can connect antitrust to other areas of law concerned with state power, especially constitutional law. This Article then considers the implications of this new understanding, followed by a brief conclusion.

1. FROM PARKER TO NORTH CAROLINA STATE BOARD

   If the structure of the Board is indeed so odd from the perspective of political control, then why did the Court rule on the self-interest rationale, (15) rather than on the infinitely more intuitive rationale of the Board's lack of political legitimacy? When one considers the origins of the modern state action doctrine, it becomes easier to see how and why the Court veered far enough off course to adopt the rule it did in North Carolina State Board. As originally understood, state action was fundamentally a doctrine about precisely what it says: the action of states. (16) Later, when the Court attempted to extend the doctrine to private firms, it adopted a test--the two-element combination of (1) a clearly articulated state policy to displace competition, and (2) active supervision by the state that has become closely identified with Midcal. (17) That test, which focused on the economic policy underlying the regulation while requiring active state supervision in order to avoid the problems of regulatory capture, effectively hid the political origins of the test and caused the Court to focus on the economic rather than political consequences of regulation. (18) The Court then modified the Midcal test in order to reapply it to political rather than private actors in Town of Hallie v. City of Eau Claire, (19) effectively incorporating the concerns over the economic harms of regulatory capture into state action writ large, forgetting the political origins of the doctrine in the process. By the time the Court applied the doctrine in North Carolina State Board, the Midcal/Hallie framework had completely subsumed the original political understanding of state action, causing the Court to worry about problems of regulatory capture instead of democratic legitimacy. (20)

   1. Putting the State Back in State Action

      1. The Parker Era: A State Actor?

         Although state action has its canonical origins in Parker v. Brown, (21) that case was originally decided not as an antitrust case but rather as a constitutional challenge to the California raisin program (22) and was accordingly tried before a three-judge district court. (23) The Supreme Court did not even consider the antitrust question until the second time Parker was argued. (24)

         The California scheme was complicated, but the statute was designed to limit the number of raisins on the market through a system of marketing rations combined with a "surplus pool" of reserves. (25) The statute authorized the creation of a state Agricultural Prorate Advisory Commission, which consisted of eight governor-appointed members who were confirmed by the state senate along with the state Director of Agriculture serving as an ex officio member. (26) On petition of ten relevant producers, the Commission would hold a hearing and, after making relevant findings, would form a "program committee" from "among nominees chosen by the qualified producers within the zone." (27) That program committee, in turn, would formulate a "proration marketing program" that, after approval by both the Commission and 65 percent of the relevant producers, would then come into force and be administered by the relevant program committee. (28) Brown, aggrieved by the program, decided to sell raisins in excess of his ration, prompting state authorities to threaten prosecution. (29) He then sued to enjoin the...