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26 March 2015
On February 25 the Supreme Court ruled that state professional boards controlled by private entities must be actively supervised by state governments to fall within the scope of the state-action antitrust immunity doctrine.(1) Companies and private market actors that participate on state regulatory boards as part of hybrid agencies or in trade associations should be aware of the decision's potential impact on their activities.
The North Carolina Board of Dental Examiners is charged with creating, administering and enforcing a licensing system for dentists. Its eight members include six practising dentists and one practising dental hygienist, all elected by licensed members of their profession. The final member is referred to as a consumer and is appointed by the governor. State law does not provide a mechanism for the removal of elected board members by a public official. The board must abide by the state's Administrative Procedure Act and may promulgate rules and regulations governing the practice of dentistry in the state. These rules and regulations are subject to approval by the North Carolina Rules Review Commission, whose members are appointed by the state legislature.
In 2003 non-dentists in North Carolina began offering teeth whitening services, which put them in competition with many dentists in the state – including some on the board – who also offered the procedure as well. The board responded in 2006 not by promulgating rules or regulations subject to state oversight, but by sending at least 47 cease-and-desist letters to non-dentist teeth whitening service providers and product manufacturers, alleging that they were engaged in or assisting the unlicensed practice of dentistry (ie, a misdemeanour). In 2007 the board also persuaded the North Carolina Board of Cosmetic Art Examiners to warn cosmetologists not to offer teeth whitening services and sent letters to malls asking them to expel kiosk operators that offered the service. Neither the dental hygienist nor consumer members of the board participated in these actions. This conduct, none of which was reviewable by the Rules Review Commission, eventually succeeded in preventing all non-dentists from offering teeth whitening services in the state.
In 2010 the Federal Trade Commission (FTC) filed an administrative complaint against the board for violating Section 5 of the FTC Act, alleging that its actions against non-dentists offering teeth whitening services constituted an anti-competitive and unfair method of competition. An FTC administrative law judge made an initial determination that the board was a "public/private hybrid" that was not immune from the antitrust laws because it lacked active supervision from the state and the FTC affirmed this view. The judge eventually found that the board had violated the law. The FTC sustained the finding on appeal and ordered the board to refrain from sending cease-and-desist letters and to advise prior recipients that they could seek declaratory rulings in state court that their services did not constitute the unlicensed practice of dentistry. The board appealed the FTC decision to the Fourth Circuit, which affirmed the decision.
The Supreme Court granted the board's petition for certiorari and affirmed. Justice Kennedy wrote the opinion for a six-justice majority. As he explained, general antitrust immunity for state action – originally recognised in Parker v Brown (317 US 341 (1943)) and further elaborated upon in California Retail Liquor Dealers Assn v Midcal Aluminum, Inc (445 US 97 (1980)) – arises from federalism concerns. The Midcal test for whether state action immunity extends to a state agency's conduct has two requirements:
The court assumed that the board met the first requirement, but found that it did not satisfy the second.
The court distinguished between direct actions that a state takes in its sovereign capacity (eg, passing a law) and a state's delegation of control over a market to a non-sovereign actor (eg, a board made up of active participants in the market that it regulates). The first type of action is immune from antitrust scrutiny; the second delegated type must meet the Midcal active supervision requirements. This need for supervision does not turn on the formal designation that the state gives an entity, but rather "on the risk that active market participants will pursue private interests in restraining trade". The court found that agencies such as the board in this case are more like trade associations granted regulatory authority by the state than prototypical state agencies, which are electorally accountable and without the structural risk of setting prices to further private ends. Thus, such boards are not eligible for state action immunity without meaningful state supervision. Since the board did not argue that its anti-competitive conduct was closely supervised by the state, the court found that Parker immunity did not apply:
"The clear lesson of precedent is that Midcal's active supervision test is an essential prerequisite of Parker immunity for any non-sovereign entity – public or private – controlled by active market participants."
Justice Alito, joined by Justices Scalia and Thomas, dissented. As the dissenters saw it, active supervision is necessary only when a state authorises entirely private entities to engage in anti-competitive conduct, whereas all state agencies should benefit from Parker immunity without any further inquiry. The majority rejected that bright-line rule in favour of a flexible and context-dependent standard that looks to the structure and incentives of agencies to determine whether active supervision is required. The adequacy of supervision will generally depend on all circumstances of a case, but the majority did give some guidance as to what level of supervision would be enough for a state board comprised of private participants in the market it regulates to qualify for state-action immunity. State involvement in every agency action is not required, but at a minimum there must be a realistic assurance that the agency's potentially anti-competitive conduct will be substantively reviewed by a state supervisor (which is not itself an active market participant) with power to veto or modify the action.
The bottom line of the Board of Dental Examiners decision is that a board, hybrid agency or trade association consisting of active market participants unsupervised by the state should not expect that it will be entitled to state action antitrust immunity. Companies engaged in such activity should consult with antitrust counsel to assess whether the state-action doctrine as newly clarified by the court will protect it.
For further information on this topic please contact Logan Breed, Janet McDavid or Catherine Stetson at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Hogan Lovells website can be accessed at www.hoganlovells.com.
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