Clarifying the state action and Noerr exemptions.

• Author: Muris, Timothy J.

1. INTRODUCTION II. THE FTC AND STATE ACTION A. Current Issues with the Doctrine B. Proposed Clarifications C. Recent Commission Activity Involving State Action 1. Health Care 2. The Internet III. THE FTC AND NOERR-PENNINGTON A. Current Issues with the Doctrine B. Proposed Clarifications C. Recent Commission Activity Involving Noerr-Pennington IV. CONCLUSION I. INTRODUCTION

   I would like to thank the Federalist Society for inviting me to speak. I want to address the role of antitrust in a topic that I know concerns many of you deeply: the growth of government. The "rent-seeking" (1) society seems to manifest itself in more and more of our economy. About one-third of our gross domestic product is government. (2) Even under Republican administrations, with the exception of President Ronald Reagan's first term, federal regulation and the number of federal regulators continued to grow. (3) Federal regulatory costs are approaching $1 trillion, and the number of fulltime federal employees promulgating and enforcing regulations alone stood at nearly 136,000 in 2002. (4)

   Two antitrust exemptions help protect and foster that regulatory growth: the state action and Noerr-Pennington doctrines. Both have been broadly interpreted by some courts, and their overbroad interpretation has been widely criticized from the right and from the left. For example, as early as 1978 Robert Bork observed "an enormous proliferation of regulatory and licensing authorities at every level of government," and warned that the "profusion of such governmental authorities offers almost limitless possibilities for abuse." (5) More recently, the Antitrust Section of the American Bar Association noted that antitrust "immunity drives a large hole in the framework of the nation's competition laws." (6)

   We know much of this growth in government harms consumers. It reflects rent-seeking, pure and simple. At its core, antitrust exists to protect consumers. Antitrust law is not a cure for rent-seeking, but I want to suggest today that it can be much better tailored to address the problem. To do so, we must properly interpret the two antitrust exemptions that protect not only legitimate government activity, but also rent-seeking.

   The first exemption, for state action, was first articulated in Parker v. Brown. (7) The doctrine emerged in response to efforts to apply antitrust rules designed to regulate business conduct to the activities of state governments. The Supreme Court based the doctrine on the relatively non-controversial notion that, in passing the Sherman Act, Congress intended to protect competition, not to limit the sovereign regulatory power of the states. Thus, pursuant to the doctrine, actions that could be attributed to "[t]he state itself" would be immunized from antitrust scrutiny. (8) Since Parker, however, the doctrine has been expanded in unnecessary ways that have anticompetitive effects.

   The second, and related, antitrust exemption I will discuss involves private parties who are shielded from liability for the anticompetitive effects flowing from their efforts to "petition" the government, whether through lobbying, administrative processes, or litigation. This exemption is better known to antitrust scholars as the Noerr-Pennington doctrine. As with state action, the court opinions in this area have not been entirely consistent, and leave ample room for clarification.

   Both the state action and Noerr exemptions have long been concerns of the Federal Trade Commission ("FTC"), and both were active issues in the 1980s when I was at the Commission during the Reagan administration. This article will describe the FTC's current efforts to clarify these important areas of law. The Commission has given considerable thought to the federalism and First Amendment interests that these exemptions promote. When called upon to address the scope of the state action and Noerr-Pennington doctrines--whether through advocacy, amicus briefs, or litigation--the FTC has made every effort to articulate those interests coherently to leave ample room for competition to benefit consumers. While we recognize the importance of these two doctrines, we should still pursue the goal of proscribing anticompetitive rent-seeking.

2. THE FTC AND STATE ACTION

   1. Current Issues with the Doctrine

      In 1943, the Supreme Court created the state action doctrine in. Parker v. Brown. (9) Parker stands for the proposition that the federal antitrust laws, and the Sherman Act in particular, were not intended to restrict the lawmaking power of state legislatures. As a result, Parker treats actions of a state legislature as capable of effecting an implied repeal of the antitrust laws of sufficient breadth to accomplish the state's objective. Since Parker, the scope of state action immunity from the antitrust laws has increased considerably. At times, courts have failed to consider carefully whether the anticompetitive conduct in question was truly necessary to accomplish the state's objective. (10) Other courts have granted broad immunity to quasi-official entities, including entities composed of market participants, with only a tangential connection to the state. (11)

      To be sure, state action immunity may entail significant benefits. For example, immunizing state regulatory schemes from antitrust challenge has fostered the development of a diversity of such schemes. This process creates "natural experiments" from which regulators may learn and, when working optimally, can increase efficiency at all levels of government. (12)

      Overbroad immunity, however, entails significant costs as well. The myriad state regulatory regimes can present substantial challenges to firms engaged in interstate commerce and, if not properly managed, could pose a serious threat to the national economy. This threat is magnified by the potential for interstate "spillovers," which force the citizens of one state to bear the burden of anticompetitive regulations from a neighboring state. (13) Parker itself involved an agricultural marketing program regulating raisin production that extended to California growers only. (14) Because the vast majority of the affected raisins were sold outside California, however, out-of-state consumers bore the burden of this program. The spillover problem highlights the fact that a well-ordered federalist system cannot, and should not, focus exclusively on preventing encroachment from the national government. Preventing state governments from acting opportunistically toward one another is an important policy concern as well. (15)

   2. Proposed Clarifications

      To address the concern that some courts have interpreted the state action doctrine too expansively and have created conditions hospitable to opportunistic "spillover" regulations and unsupervised delegations of state power, the FTC convened a State Action Task Force in June 2001. The Task Force is currently evaluating the feasibility and desirability of promoting a number of specific developments in the state action doctrine, including:

      * Clarifying the proper interpretation of the "clear articulation" requirement--the first prong of the two-prong test the Supreme Court devised in 1980 in California Retail Liquor Dealers Ass 'n v. Midcal Aluminum, Inc.--to ensure that the state truly intended to displace competition by authorizing the anticompetitive conduct at issue.

      * Further elaborating the standards for the "active supervision" requirement--the second prong of the Midcal test--to ensure that the requirement has "teeth" and will prevent private entities from restraining competition free from meaningful government oversight. (17)

      * Considering explicit recognition of a "market participant" exception to the state action doctrine based on the statement in City of Columbia v. Omni Outdoor Advertising, Inc. that immunity "does not necessarily obtain when the State acts not in a regulatory capacity but as a commercial participant in a given market." (18)

   3. Recent Commission Activity Involving State Action

      1. Health Care

         The work of the State Action Task Force has provided the basis for advocacy comments on state legislation seeking to create an antitrust exemption for collective bargaining among physicians. The FTC has long opposed the broad and unnecessary grant of such antitrust immunity. Thus, when asked recently to comment on physician collective bargaining bills in Ohio, Washington, and Alaska, Commission staff reiterated that the proposed exemptions: (1) would authorize physician price fixing, and (2) would not improve the quality or care. (19)

         In each instance, the critical state action issue raised was whether the proposed oversight regime satisfied the "active supervision" requirement. In the course of articulating broader antitrust concerns about the proposed legislation, and specific failings under the state action doctrine, the staff also suggested more robust active supervision standards as potential improvements to the bill. In particular, the staff observed that the requirement of a "written decision, expressly considering the potentially anticompetitive implications of a proposed contract...