On February 25, 2015, the U.S. Supreme Court (Court) issued its
opinion in North Carolina State Board of Dental Examiners v.
Federal Trade Commission, 135 S. Ct. 1101 (2015), a case with
significant implications for state and local government licensing
boards. The decision establishes a new
"context-dependent" test for determining when a state
exercises sufficient supervision over a state agency or board to
confer antitrust immunity. It also establishes for the first time
that many state boards, as currently supervised, may not
be able to rely on the state-action defense to antitrust
liability.
It is important to note what the decision does not mean.
It does not mean that the mere inclusion of active market
participants on a state licensing board is a violation of the
antitrust laws or strips the board of antitrust immunity. Instead,
the decision acknowledges that licensing boards composed of active
market participants can be immune from antitrust scrutiny if
they are actively supervised.
The question then is what constitutes sufficient active state
supervision? In sum:
[T]he inquiry regarding active supervision is flexible and context-dependent. Active supervision need not entail day-to-day involvement in an agency's [or board's] operations or micromanagement of its every decision. Rather, the question is whether the State's review mechanisms provide "realistic assurance" that a nonsovereign actor's anticompetitive conduct "promotes state policy, rather than merely the party's individual interests." Id. at 1107.
We summarize the decision below and provide an overview of the current environment and key factors that are likely to drive the analysis of active state supervision for entities that rely on state-action immunity from the antitrust laws. This issue is of particular relevance for state attorneys general, whose offices are frequently tasked with advising and defending state boards. The bottom line is that state boards, with support from their attorneys general offices, should review their operations in light of North Carolina Dental to confirm that the state is exercising the requisite level of control. Until such an assessment is complete, state boards should assume that their operations are subject to potential antitrust exposure.
Summary of the Court's Decision
The North Carolina Dental case involved the Federal
Trade Commission's (FTC) investigation of the North Carolina
State Board of Dental Examiners (NC Board) and its members for
violating antitrust laws. The Board, which was established by state
statute as the "agency of the State for the regulation of the
practice of dentistry," is comprised of eight members, six of
whom must be licensed dentists engaged in the active practice of
dentistry. Because state boards often are comprised of groups of
competitors or potential competitors, there is a significant risk
of antitrust liability, particularly under Section 1 of the Sherman
Act.
Specifically, the FTC alleged the NC Board had tried to harm
competition in the teeth-whitening business by sending
cease-and-desist letters on official letterhead to nondentist
teeth-whitening service providers and product manufacturers. It
also sent similar letters to shopping malls advising them to expel
tenants that provided teeth-whitening services. The NC Board argued
that it was a "state actor" engaged in state action and
therefore immune from antitrust prosecution.
On appeal, the U.S. Supreme Court rejected the NC Board's
state-action immunity defense because "the Board did not
receive active supervision by the State when it interpreted the Act
as addressing teeth whitening and when it enforced that policy
issuing cease-and-desist letters to nondentist teeth
whiteners." Id. at 1110. Reviewing prior cases, the
Court identified certain "constant requirements" of
active supervision that must be present to qualify for state-action
immunity:
- The state supervisor must review the substance of the anticompetitive decision, not merely the procedures followed to produce it;
- The state supervisor must have the power to veto or modify particular decisions to ensure that they are in accordance with state policy;
- The "mere potential for state supervision is not an adequate substitute for a decision by the State"; and
- The state supervisor may not itself be an active market participant.
Thus, active supervision requires the state to ensure that a board's actions are in accordance with the state policy displacing competition, which is different from ensuring that a board has authority to take a specific action (e.g., deny a license). Moreover, the state supervision needs to be focused on the specific activities related to the displacement of competition, and not just general matters such as human resources, contracting, finance, etc.
Implications of the Court's Decision for State Attorneys General
The decision in North Carolina Dental is important
because many state boards have been operating on the assumption
that they are immune from the antitrust laws, based on the view
that their decisions were made pursuant to a clearly articulated
state policy displacing competition. By this decision, the Court
makes it possible for the actions of state boards to come under
antitrust scrutiny for the first time.
Moving forward, we expect states to review state board operations
in light of North Carolina Dental to confirm that the
state is exercising the requisite level of control, i.e.,
active state supervision. The responsibility for this task will
likely fall to state attorneys general, whose offices are
frequently tasked with advising and defending state boards. State
attorneys general will have to decide how to set up sufficient
procedures to ensure that actions by state boards are supervised by
appropriate personnel in order to claim state-action immunity from
the antitrust laws. Factors that would potentially impact the
analysis include:
- Composition of the board, including the degree to which members are engaged in private practice;
- Whether the board is engaged in regulating conduct that clearly falls under its statutory mandate or whether the conduct is on the periphery of the regulated area (e.g., teeth-whitening services versus traditional issues involving dentistry);
- Whether the board exercises its statutory powers or relies on other non-statutory mechanisms (e.g., the cease-and-desist letters in North Carolina Dental, which were not specified as appropriate enforcement mechanisms for the Board) to carry out its mission;
- Whether the board must submit its regulations and enforcement mechanisms to a state agency or the state legislature for review and approval; and
- The extent to which state employees or attorneys review the board's operations, including enforcement actions.
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Any state licensing board that relies on an assumption of state-action immunity should review its structure and operations in light of the North Carolina Dental decision. Unless an organization is confident that its structure satisfies the requirements of the decision, it should take care to avoid any activities that could carry significant antitrust risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.