Antitrust Treatment of State Licensing Boards in the Wake of North Carolina State Board of Dental Examiners V.f.t.c.

• Jurisdiction: United States,Federal
• Citation: Vol. 24 No. 2
• Publication year: 2015
• Author: By David Gringer
• topic: Antitrust and Competition,Administrative Law,Constitutional Law,Civil Procedure

ANTITRUST TREATMENT OF STATE LICENSING BOARDS IN THE WAKE OF NORTH CAROLINA STATE BOARD OF DENTAL EXAMINERS V.F.T.C.

By David Gringer¹

I. INTRODUCTION

In its decision formulating the state action immunity doctrine, the Supreme Court rested its holding primarily on respect for the political processes in the states: "in a dual system of government in which . . . the states are sovereign . . . an unexpressed purpose to nullify a state's control over its officers and agents is not to be likely attributed to Congress."² In light of this principle, the Supreme Court held that the federal antitrust laws were not intended to, and in fact did not reach state action.³ In so doing, the Court recognized Congress' desire to "embody in the Sherman Act the federalism principle that the States possess a significant measure of sovereignty under our constitution."⁴ A failure to recognize this principle would require the promotion of "competition at the expense of other values a State may deem fundamental" thereby "imposing] an impermissible burden on the States' power to regulate."⁵

State action immunity offers its most robust protection where the actor in question is the state acting as sovereign.⁶ In such cases, the only showing that is required is that the challenged conduct was that of the state itself.⁷ As a result, the Sherman Act simply does not apply "to anticompetitive restraints imposed by the States as an act of government."⁸ Many cases have also held that actions pursuant to state agency regulation are entitled to the same protection.⁹

Municipalities and other political subdivisions may receive state action immunity as well—but only if their conduct is undertaken pursuant to a clearly articulated state policy.¹⁰ Private parties may also receive state action immunity, but only if they are able to satisfy both prongs of the Supreme Court's state action immunity test. That is, the challenged conduct must be pursuant to a clearly articulated state policy and the challenged conduct must be actively supervised by the state.¹¹ The rationale for this distinction is:

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Where a private party is engaging in the anticompetitive activity, there is a real danger that he is acting to further his own interests, rather than the governmental interests of the State. Where the actor is a municipality, there is little or no danger that it is involved in a private price-fixing arrangement. The only real danger is that it will seek to further purely parochial public interests at the expense of more overriding state goals. This danger is minimal, however, because of the requirement that the municipality act pursuant to a clearly articulated state policy.¹²

In several decisions, the Court appeared to suggest that state action immunity was at its strongest when a state acted to regulate a profession, such as a state board of lawyers, and where the defendant was the state entity itself. Yet, in its most recent state action decision—North Carolina State Bd. of Dental Examiners v. F.T.C.,¹³ the Court held that state agencies, if controlled by active market participants, were required to not only demonstrate that they were acting pursuant to a clearly articulated state policy to displace competition with regulation, but also that in engaging in the challenged conduct, they were actively supervised by the state. That is, despite their status as state agencies, for state action purposes they were to be treated like private entities.

The decision, while not entirely surprising (prior opinions by the Court and Courts of Appeals had reached similar conclusions)¹⁴ does raise significant questions for state licensing boards regarding their future antitrust liability. And while the decision did clarify one issue under the state action doctrine, the Court, in fashioning its new "active market participant" test, added several new ambiguities in resolving state action immunity claims.

II. THE NORTH CAROLINA STATE BOARD DECISION

A. Factual Background

The facts of the Court's decision in North Carolina State Board of Dental Examiners are relatively straightforward. North Carolina, like the other 49 states, regulates the practice of dentistry. Under the State's Dental Practice Act, the North Carolina State Board of Dental Examiners is "the agency of the State for the regulation of the practice of dentistry."¹⁵ The legislature requires that six of eight Board members must be licensed dentists who actively practice dentistry.¹⁶ The dentists who serve on the Board "are elected by other licensed dentists in North Carolina, who cast their ballots in elections conducted by the Board."¹⁷The Board is subject to the State's Administrative Procedure Act, Public Records Act, and open-meetings law.¹⁸ The Board also possesses the authority to issue rules and regulations governing the practice of dentistry in North Carolina, but those rules and regulations must be approved by a State Commission comprised of representatives appointed by the State Legislature.¹⁹

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Notably, the challenged conduct at issue did not stem from the Board's authority to promulgate rules and regulations governing the practice of dentistry. Rather, the Board, responding to the rise of nondentist teeth whitening service providers, "issued at least 47 cease-and-desist letters on its official letterhead to nondentist[s]. . . . directed the recipient[s] to cease all activity constituting the unlicensed practice of dentistry; warned that the unlicensed practice of dentistry is a crime; and strongly implied (or expressly stated) that teeth whitening constitutes the practice of dentistry."²⁰ The Board also coerced another state created Board, the Board governing Cosmetic Arts, to urge its members not to provide teeth whitening services.²¹ Apparently, the Board's efforts were successful. Nondentists ceased to offer teeth whitening services in North Carolina.²²

In 2010, the FTC challenged the Board's actions under Section 5 of the Federal Trade Commission Act.²³ The Board moved to dismiss before an ALJ on state action immunity grounds, but the ALJ denied the motion. The entire FTC affirmed, holding that the Board was required to show—but could not show—that its challenged conduct was actively supervised by the State. After a trial on the merits, the Board appealed to the Fourth Circuit, which affirmed the FTC in all respects.²⁴ The Supreme Court granted certiorari to resolve the issue of whether the Board—as a state agency controlled by so-called active market participants—was, in fact, required to be actively supervised by the state.

B. Prior Legal Framework Governing Immunity of Licensing Boards

Arguably, the treatment of licensing boards for purposes of state action immunity was an issue that the Court had already resolved. In a prior case involving state licensing boards, the Supreme Court had assumed that the State Bar of Arizona was a private actor and was required to be actively supervised before claiming state action immunity for its actions.²⁵ In contrast, when a plaintiff had challenged regulations that were implemented by the State Supreme Court at the behest of the State Bar association, no active supervision was required because the Defendant there was the state itself. However, in its seminal state action decision Town of Hallie v. City of Eau Claire,²⁶ the Court had called the entire regime into question when, in the course of holding that municipalities were not subject to the state action requirement, it stated, albeit in dicta, that "[i]n cases in which the actor is a state agency, it is likely that active state supervision would also not be required,"²⁷ without distinguishing state agencies controlled by active market participants.

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In any event, some post-Town of Hallie courts assumed that all state agencies, no matter their composition, did not have to satisfy the active supervision prong. Most notably, the Fifth Circuit held that a State Board of Public Accountants did not have to meet the active supervision test.²⁸ The plaintiff in that case argued that the Board should have to satisfy active supervision to be immune because it was comprised wholly of the very parties it was regulating. The Fifth Circuit squarely rejected this argument: "Despite the fact that the Board is comprised entirely of CPAs who compete in the profession they regulate, the public nature of the Board's actions means that there is little danger of a cozy arrangement to restrict competition. So long as the Board is acting within its authority and pursuant to a clearly established state policy, there is no need for active supervision of the exercise of properly delegated authority."²⁹ The antitrust agencies clearly viewed these decisions as an unwarranted extension of Town of Hallie. Starting with its 2003 State Action Task Force Report, the FTC began urging that the identity of a governmental entity's decision-makers, rather than its mere status as a governmental entity, should control whether or not the active supervision prong applied.³⁰ In particular, the Task Force's Report approvingly cited an article by Einer Elhauge, which argued that "financially interested actors cannot be trusted to decide which restrictions on competition advance the public interest; disinterested, politically accountable actors can."³¹

C. State Agencies Controlled by Active Market Participants Must be Actively Supervised to Receive State Action Immunity

It was this difference between actors with private interests on the one hand, and political accountability on the other that formed the basis of the North Carolina State Board of Dental Examiners decision. In upholding the Fourth Circuit, the Supreme Court held that a "state board on which a controlling number of decisionmakers are active market participants in the occupation that the board regulates" were required to not only prove that their challenged conduct was pursuant to a clearly articulated state policy; but also that such conduct was actively supervised by the...