Cartels by another name: should licensed occupations face antitrust scrutiny?

• Author: Edlin, Aaron
• Position: II. The Road to Professional Cartelization B. The Legal Landscape of Professional Licensing 2. The Common Route to Challenging State Licensing Restraints: Due Process and Equal Protection through Conclusion, with appendices and footnotes, p. 1127-1164

2. The Common Route to Challenging State Licensing Restraints: Due Process and Equal Protection

   With powerful antitrust immunities in place, the only viable avenue for consumers or would-be professionals seeking to challenge the actions of state licensing boards is to make a constitutional claim. (207) Like all state regulation, professional licensing restrictions must not violate the Due Process and Equal Protection Clauses of the Fourteenth Amendment. Due process prevents a state from denying someone his liberty interest in professional work if doing so has no rational relation to a legitimate state interest. (208) Similarly, equal protection requires that states distinguish licensed professionals from those excluded from practice on some rational basis related to a legitimate state goal. (209) The two analyses typically conflate into one question: Did the licensing restriction serve, even indirectly or inefficiently, some legitimate state interest? (210)

   That burden is easy to meet, as illustrated by the leading Supreme Court case on the constitutionality of professional licensing schemes. In Williamson v. Lee Optical, the Supreme Court upheld a state statute preventing opticians from fitting patients' existing lenses in new frames without a prescription from an ophthalmologist or optometrist. (211) The Williamson plaintiffs sued on the theory that the scheme was designed to artificially increase demand for optometry services and therefore violated the Due Process and Equal Protection Clauses. (212) The Court implicitly recognized a liberty right under the Due Process Clause to pursue one's chosen occupation. (213) But since that right is not sufficiently "fundamental" to give rise to strict scrutiny (214) and because opticians are not a protected class under the Equal Protection Clause, both claims were subject only to rationality review. (215) The Court rejected the plaintiffs' challenge, making clear that any possible justification for the restriction, however thin, was enough. (216) Other cases have further held that the proffered justification need not have actually motivated the legislature to survive rationality review; it may be post-hoc and prepared only for litigation. (217)

   The Supreme Court has only once found an occupational licensing restriction to fail rationality review, in Schware v. Board of Bar Examiners of New Mexico, (218) and then only because an otherwise valid licensing requirement was unlawfully applied to an individual. Like most states, New Mexico requires attorneys to exhibit good moral character in order to sit for the bar exam. In Schware, the Court found a rational basis for such a requirement on its face, but it held that the New Mexico Supreme Court did not have a rational justification for denying a former communist permission to sit for the exam. (219) Because of its politically charged subject matter, Schware has largely been limited to its facts. In any case, it expressly approved of a state's ability to require its bar applicants to possess a quality as subjective as "good moral character." (220)

   In applying Schware to the activity of state licensing boards, lower courts have found even extremely thin justifications for anticompetitive licensing restrictions to suffice for rationality review. In Meadows v. Odom, a Louisiana district court accepted the state board's contention that licensing florists helped promote health and safety by decreasing the risk of pricks by wires in haphazardly arranged bouquets. (221) Similarly, a California district court upheld the California Structural Pest Control Board's requirement that exterminators of rats, mice, and pigeons--but not those of skunks and squirrels--obtain a state license. (222)

   One circuit has even held that insulating professionals from competition is itself a legitimate state interest, making matters even more difficult for plaintiffs alleging harm to competition. The Tenth Circuit in Powers v. Harris distinguished intrastate protectionism, which it considered constitutionally permissible, from interstate protectionism, which it acknowledged was illegitimate under the Dormant Commerce Clause. (223)

   Contrary holdings are rare. The Sixth Circuit gave the campaign to invalidate anticompetitive state licensing on constitutional grounds (224) its most significant victory in Craigmiles v. Giles. (225) Using reasoning that was explicitly rejected in Powers, the Craigmiles court invalidated Tennessee's restriction on unlicensed casket sales. (226) The court was unusually skeptical about the justifications advanced by the state board, which argued that shoddy caskets presented a public health risk. (227) The court found that only one justification did not reek with "the force of a five-week-old, unrefrigerated fish" (228): the scheme would allow funeral directors to collect monopolistic profits in selling coffins. (229) Unlike the Powers court, the Sixth Circuit deemed such economic protectionism "illegitimate" and invalidated the restrictions because they failed even "the slight review required by rational basis review." (230)

   Powers condemnation of interstate protectionism suggests that the Dormant Commerce Clause may be an alternative means of attacking the constitutionality of occupational licensing restrictions. (231) Yet cases brought on this theory have failed. Most states do not recognize occupational licenses from other states, and plaintiffs have argued that such "nonreciprocity" violates the dormant commerce clause by discriminating against out-of-state commerce in favor of in-state interests. But courts have rejected this claim, explaining that states have a legitimate interest in applying their own particular requirements to professionals. (232) "Nonreciprocity" licensing schemes pass rationality review as long as they apply the same licensing requirements to in-state and out-of-state applicants.

   3. THE NORMATIVE CASE: WHY SHERMAN ACT LIABILITY FOR STATE LICENSING BOARDS IS A GOOD IDEA

   State action immunity for occupational licensing boards is an anachronism with an ever-increasing price tag as more professionals and more services come under board authority. Constitutional suits have done little to solve the problem. This Part makes the normative case for lifting antitrust immunity for state licensing boards. It begins by illustrating the close fit between the harms that the Sherman Act sought to combat and the economic harm from heavy-handed licensing regulation. We argue that it is antitrust law, not constitutional law, that provides the most logical and effective mechanism to evaluate the costs and benefits of occupational licensure.

   We then contend that the principal argument against broadening Sherman Act liability--that it disrupts the balance of power between the states and the federal government--is especially unpersuasive in the licensing context. As the scholarly debate flowing from Midcal reveals, concerns for federalism are at their peak when federal laws displace state regulations enacted by a locally accountable government with constituent participation. This does not describe restrictions created by practitioner-dominated licensing boards.

   1. Antitrust Liability for Professional Licensing: An Economic Standard for Economic Harm

   The Sherman Act--famously called "the Magna Carta of free enterprise" (233)--protects competition as a way to maximize consumer welfare. According to courts and economists alike, competition is harmed when competitors restrict entry or adhere to agreements that suppress incentives to compete. When these kinds of restrictions are naked and horizontal, liability attaches per se, but even when they are not, competitors must prove that they provide a net benefit to consumers in order to pass muster under the rule of reason. (234) At bottom, both the per se rule and the rule of reason ask a single question: Is competition (and therefore are consumers) harmed or helped by this activity? Because this test, unlike rationality review under the Constitution, best safeguards consumer welfare, it should be used to evaluate occupational licensing restrictions.

1. Sherman Act Policy and the Competitive Harm of Licensing: A Close Fit

   Without the veneer of "professional licensing," some board restrictions epitomize the evil at which modern antitrust policy is aimed. Like all agreements between competitors, licensing schemes can be used for competitive good or competitive evil. The normative question in both traditional cartel cases and licensing contexts should be the same: Does the combination, on net, improve consumer welfare? (235) To ensure that this important question is asked and answered in the licensing context, antitrust law and its tools for balancing pro- and anticompetitive effects should be brought to bear on licensing schemes.

   This close fit between the Sherman Act's intended target and the economic harm of excessive licensing can be seen in the functional equivalence of the restrictions promulgated by occupational boards and the business practices held unlawful under [section] 1. To cut hair legally in Tennessee, a candidate must pass a test--designed by her would-be competitors--proving she can file and polish nails. (236) But when a gas burner manufacturer was denied approval by a private standard-setting association that used a test influenced by his competitors and "not based on objective standards," the Supreme Court found Sherman Act liability appropriate. (237) Similarly, the Ohio Rules of Professional Conduct prohibit attorneys from advertising their prices using words such as "cut rate," "discount," or "lowest." (238) But when similar restrictions on price advertising are imposed by private associations of competitors, rather than as a licensing requirement, they are per se illegal. (239) Additionally, all lawyers must prove their "good moral standing" to join a state bar. (240) But when a multiple listing service (a private entity not created by the...